Understanding Volatility
Len Yates

Volatility is often the most neglected of the major factors that influence option prices. But we make sure never to make that mistake when we consider possible trade recommendations. Every asset has quiet periods when its options are cheap, and volatile periods when its options are expensive, so understanding volatility is a vitally important consideration in options trading.
 
Professional option traders are always aware of current volatility levels in relation to their historical context. To gain that perspective, they view historical volatility charts. The figure below shows a sample Volatility Chart from OptionVue 6:
 

Volatility Chart

 
The Volatility Chart displays two lines - one for statistical volatility (SV) and the other for implied volatility (IV).   The red SV line represents, at each point the actual volatility of the stock’s daily price volatility. Statistical volatility is often referred to as “historical” volatility, but we prefer the term statistical since volatility charts contain historical data for both SV and IV. The blue IV line represents, at each point, the average implied volatility for the stock.
 
In other words, the SV line shows you the actual volatility of the stock, while the IV line shows you the volatility implied by the prices of the options of that stock. They should normally be fairly close together. If they are not, it would indicate the price of the options is not reflecting the actual volatility of the stock. At the bottom of the chart is a table that summarizes the average SV and IV for various time periods.
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