Implied Volatility As Measure of Relative Value
Often, the implied volatility of an option is a more useful measure of the option's relative value than its price. The reason is that the price of an option depends most directly on the price of its underlying asset. If an option is held as part of a delta neutral portfolio (that is, a portfolio that is hedged against small moves in the underlying's price), then the next most important factor in determining the value of the option will be its implied volatility.
Implied volatility is so important that options are often quoted in terms of volatility rather than price, particularly between professional traders.
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Famous quotes containing the words implied, measure and/or relative:
“The citizen who criticizes his country is paying it an implied tribute.”
—J. William Fulbright (1905–1995)
“What will our children remember of us, ten, fifteen years from now? The mobile we bought or didn’t buy? Or the tone in our voices, the look in our eyes, the enthusiasm for life—and for them—that we felt? They, and we, will remember the spirit of things, not the letter. Those memories will go so deep that no one could measure it, capture it, bronze it, or put it in a scrapbook.”
—Sonia Taitz (20th century)
“Personal change, growth, development, identity formation—these tasks that once were thought to belong to childhood and adolescence alone now are recognized as part of adult life as well. Gone is the belief that adulthood is, or ought to be, a time of internal peace and comfort, that growing pains belong only to the young; gone the belief that these are marker events—a job, a mate, a child—through which we will pass into a life of relative ease.”
—Lillian Breslow Rubin (20th century)