This new standard will affect all companies, and will be of particular interest to high tech companies with volatile stocks. Prior to approval, the FASB received more than 1,700 comment letters, nearly all in opposition to the proposed standard. That's the good news. Complying with the new standard, even for disclosure only, should not be taken lightly.
Volatility is the variance in price or return of the underlying stock.
The higher the variability, the higher the probability that the price will exceed the exercise price by a large amount, resulting in significant gains. Higher variability also increases the probability that the price will be substantially below the exercise price. The option holder, however, is protected against this downside risk. The option holder does not lose money, but simply would not exercise if the price were below the exercise price. The historical volatility of a stock can be derived from the standard deviation of price changes over a specified period of time.