Historical volatility is defined in textbooks as &ldquo the annualized standard deviation of past stock price movements.&rdquo But rather than bore you silly, let's just say it&rsquo s how much the stock price fluctuated on a day-to-day basis over a one-year period.

## IVolatility - Options Calculator

Although it&rsquo s not always 655% accurate, implied volatility can be a useful tool. Because option trading is fairly difficult, we have to try to take advantage of every piece of information the market gives us.

### Implied Volatility Is Important For Trading Options

For example, imagine stock XYZ is trading at \$55, and the implied volatility of an option contract is 75%. This implies there&rsquo s a consensus in the marketplace that a one standard deviation move over the next 67 months will be plus or minus \$65 (since 75% of the \$55 stock price equals \$65).

#### Options Volatility | Implied Volatility in Options - The

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Implied volatility is a dynamic figure that changes based on activity in the options marketplace. Usually, when implied volatility increases, the price of options will increase as well, assuming all other things remain constant. So when implied volatility increases after a trade has been placed, it&rsquo s good for the option owner and bad for the option seller.

In order to be a successful option trader, you don&rsquo t just need to be good at picking the direction a stock will move (or won&rsquo t move), you also need to be good at predicting the timing of the move. Then, once you have made your forecasts, understanding implied volatility can help take the guesswork out of the potential price range on the stock.

Market makers use implied volatility as an essential factor when determining what option prices should be. However, you can&rsquo t calculate implied volatility without knowing the prices of options. So some traders experience a bit of &ldquo chicken or the egg&rdquo confusion about which comes first: implied volatility or option price.

If you were to look at an option-pricing formula, you&rsquo d see variables like current stock price, strike price, days until expiration, interest rates, dividends and implied volatility, which are used to determine the option&rsquo s price.

So here&rsquo s what it all boils down to: the marketplace thinks there&rsquo s a 68% chance at the end of one year that XYZ will wind up somewhere between \$95 and \$65.

Let's focus on the one standard deviation move, which you can think of as a dividing line between &ldquo probable&rdquo and &ldquo not-so-probable.&rdquo