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Trading Realities: The Truth, the Lies, and the Hype In-Between by Jeff Augen

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Chapter 6. The Importance of Volatility

Introduction

Option traders understand the central role of volatility because it is the principal component of every option price. Ask an option trader to compare different stocks trading at different prices, and he will immediately ask what the underlying volatility is for each. Traders routinely use this information to predict the likelihood of certain size price changes in specific time frames.

Recent years have seen an explosion in the use of volatility calculations as a measure of risk across individual sectors and the broad market. As a result, the Chicago Board Options Exchange Volatility Index (VIX) has evolved into one of the most closely followed indicators available today. Most traders can ...

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