Contract Volatility

Volatility is a key concept in options trading that refers to the amount of risk associated with the price movement of an underlying asset. A contract’s volatility is a measure of how much its price is expected to fluctuate over time. The higher the volatility, the greater the price swings and the more risk involved.

There are two types of contract volatility: historical and implied. Historical volatility is a measure of how much an asset’s price has fluctuated in the past and is calculated using past data. Implied volatility, on the other hand, is a forward-looking measure that uses current market prices to infer how much an asset’s price is expected to move in the future.

While historical volatility can be helpful in gauging how volatile an asset may be in the future, it’s not always accurate. That’s because implied volatility takes into account all known factors that could affect an asset’s price, such as upcoming events or news releases. As such, it is often considered a more accurate predictor of future contract volatility.