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Option Volatility Question

post #1 of 3
Thread Starter 
As I understand, the larger the price fluctuations (volatility), the riskier the option and the more expensive the options price. Why is this so? Makes no sense to me because it would seem that the more volatile an option, the less likely the option will be in the money at expiration.

Furthermore, why is the DIRECTION in which an options price fluctuates irrelevant? This is what I've read and this makes no sense either because if I owned a call option for example, the DIRECTION the underlying stock moves sure as heck IS relevant.

Can someone please clarify?
post #2 of 3
If you see for example, the stock move and the option doesn't.
You are experiencing the "volatility trap" or the option starts to decline at the end of the day or soon after. and the stock hasn't moved in comparison.
post #3 of 3

Volatility

A Huge factor in deciding wheather or not to purchase an option rests on the expected volitility verses the stock's volatility.
Volatility measures the stock move, though it does not look at the direction of the move. If the stock had high volatility over the past six months, this indicates the willingness of investors to quickly buy or sell the stock. This means you should expect to see high volatility in the future and some higher priced options.

If the stock has had low volatility over the past six months, this indicates the willingness of the investors to hold onto the stock and not buy and sell. This means we should see low volatility in the future and lower priced options
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