Everyone instinctively understands what volatility is: We have all seen the price of a stock get halved overnight on a bad earnings announcement or warning, and we have all seen stock prices double on the news or rumor of a takeover. This chapter will look at the different meanings of volatility from a relatively technical perspective, and look at which aspect of volatility is of interest to options traders, how it is calculated, and what it means for LEAPS pricing.
THE DIFFERENT MEANINGS OF VOLATILITY
If you are a bit vague as to the exact meaning of volatility, it is probably because the word, when related to options and options trading, has more than one meaning. Let us then define the four different facets of volatility ...