Options Education

OIC401C: Volatility

Course Objective:

The course objective is to explain different aspects of volatility and how volatility is used. Volatility’s impact and flexibility when hedging market exposure, how to use volatility information to speculate on a specific market move, or allow investors to put on simple to complex option positions called spreads.

Who Should Take This Course:

Advanced students

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Course Description:

This course is designed to give students the introductory understanding of what volatility is, how it works, and why it is important to understand. Even though volatility is an extremely complex subject, this course breaks it down in simple to understand terms without getting bogged down in the complex calculus. Most investors have heard of volatility but few know what it is. Get started now learning how for better or worse volatility effects all option investors.

Course Chapters

Chapter 1 - Introduction

The introduction for the volatility class establishes the basic principle of volatility-probability theory.

Chapter 2 - What is Volatility

This chapter defines volatility and its components including historical volatility and annualized standard deviation of returns. This chapter also has helpful interactive examples that display standard deviations over a variance of hypothetical stock prices.

Chapter 3 - Past vs. Future

Chapter 3 introduces the student to the fundamental theory of current / implied volatility derived from an option's theoretical value. This chapter discusses how over or under priced options can be calculated using current implied volatility when measured against historical volatility. This chapter provides interactive examples with a hypothetical stock position.

Chapter 4 - Effect on Pocketbook

The "Effect on Pocketbook" chapter is designed to use the previous content from this course and tie it into the dollar effect on an option trader. The student will find an excellent interactive volatility calculator in this chapter. This customizable calculator allows the user to load a real-time position and calculate implied volatility along with the effect of passage of time, change in stock price, and all other option price variables. This chapter also illustrates how the ebb and flow of implied volatility can act independently of the passage of time and other option price variables.

Conclusion

The conclusion briefly recaps the components of volatility and importance of understanding the critical effect volatility has on a given option position. The final point in the conclusion is the importance of distinguishing the difference between forecasting stock movement and volatility movement and how the two can act independent of each other.

Final Quiz

Test your knowledge.

Course Resources:

Webcasts

OIC401W: Volatility for Options Investors

OIC503W: What's Happening in the Market - February 2008

OIC506W: What's Happening in the Market - October 2008

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