In the stock market, volatility is a term that describes how a stock’s price behaves over a period of time. Statistical volatility is this actual change, while implied volatility is how the market expects a stock to behave. There’s a lot of math that goes into volatility, but thankfully buyers have several tools to help their decision making; the Black-Scholes Formula, and the Greeks. While the formula is a set mathematical equation, the Greeks are values that act as indicators.
- A buyer uses volatility to good use when deciding what kind of stock options to buy or sell, especially historical volatility which reflects the stock price fluctuations.
- There are two types of volatility. One is statistical volatility which shows asset price changes over a period, and implied volatility which is the volatility the market implies.
- Computing volatility mathematically is difficult but one can let the market compute market volatility by using implied volatility as a strategist.
“The Greeks are a collection of statistical values that give the investor a better overall view of option premiums change given changes in pricing model inputs. These values can help decide what options strategies to use.”