EVALUATING OPTIONS

Derivatives

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Volatility is a statistical measure of the tendency of a market price or yield to vary over time. Put simply it is the relative rate at which the price of a security moves up and down’. Volatility is found by calculating the annualised standard deviation of the daily change in price.

It is one of the most important elements in evaluating an option, because it is usually the only valuation variable not known with certainty in advance.

An objective measure
Implied volatility is a subjective meas

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