June 18, 2019

All of This Talk of Implied Volatility, What Is It Really?

Implied volatility is a parameter that is part of an option pricing model, typically some derivation of the Black-Scholes model, which gives the theoretical price of an option. Implied volatility shows how the marketplace views where volatility should be in the future. Since implied volatility is forward-looking, it helps us gauge the sentiment or expectation about the volatility of a stock or the market. However,  and this is very important, implied volatility does not forecast the direction in which an option is headed.  It gauges magnitude, not direction.

If you would like to watch a video of this, Khan Academy is always a fantastic resource.  Click the video below.

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Disclaimer: This video does not imply any endorsement of Prosper Academy by Khan Academy and the information contained herein is not intended to be a source of advice and the information and/or documents contained in this website do not constitute investment advice.

about the author:

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

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