Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility Management, 2nd Edition

Chapter 2

Making Sense of Volatility in Options Trading

Volatility is a measure of instability. A volatile substance will tend to change its form easily—for example, a liquid with a low boiling point readily turns into a gas. Gasoline is volatile; this doesn’t mean that gasoline can catch fire easily (although it can), but rather that gasoline gives off fumes even at low temperatures. The volatility of gasoline increases its flammability because in its vapor form, it is much more likely to be ignited by, say, static electricity than it is as a liquid.

In the financial markets, volatility refers to the likelihood that securities or indexes will change in value over time, which can be determined on the basis of either past events or implications ...