Option Volatility
In simple terms, volatility is how much a stock price fluctuates and the likelihood that the price will be within a specific price range at some moment in time. Large average daily price swings means much higher volatility. Higher the volatility means wider swings in price, with correspondingly more expensive options. The option trader’s goal should be to buy options with low volatility and sell options with higher volatility. At a minimum, traders should be aware of the cost of volatility in the option and understand that during times of high volatility, the trader is paying a premium for that trade.
Measuring volatility is a complex mathematical process. Fortunately many broker trading platforms will measure this value automatically.
Volatility can greatly expand the spread in options, as it may in some stocks. So on a strong rally day in the markets or stock, when shorts are trying to cover and longs are trying to get in, option spreads are going to increase and the market makes money.
On a quiet day, the spread on your call or put may be .10 or .20 cents. On a huge up or down day, where traders are running to sell or buy options, that spread can jump to .30, .40 cents or more!