How Volatility Affects The Options and Binary Options Markets
Market volatility comes in two forms, implied volatility and historical volatility, both which can affect an investor’s ability to be successful in trading Binary Options. Implied volatility is similar to a financial security as it fluctuates with market sentiment and is an estimate of how much options trader perceives a financial security or index will move over a specific period of time on an annualized basis. Historical volatility is the actual past movement of a security and can be defined as the standard deviation of a time series, reflected in percentage format.
Implied volatility affects the price of a Binary Option, but it influences standard vanilla options much more than it effects Binary Options. Implied volatility changes as market sentiment changes. Generally as fear and trepidation increase, implied volatility increases, while increases in complacency are generally highly correlated to declines in implied volatility.
The price of an option is based on a number of factors which include the current prices of the underlying security, the strike price of the option, the time to maturity, current interest rates, as well as, the chance that the underlying security will be above or below the strike price prior to the expiration of the option. The chance that the underlying security will move a specific distance over a certain period of time is measured by implied volatility. Increases in implied volatility will increase the price of an option whether it’s a standard vanilla option or a Binary Option.
The price of a Binary Option changes with two factors. The first is the payout, and the second is the amount of capital returned to the investor on a losing trade. Given the payout profile for Binary Options generally remains constant and the return is nearly always the same, implied volatility acts as more of a guide of a potential move in an underlying asset than a change to the price of Binary Options. For example, if implied volatility is moving higher, the chance of a dramatic move in an underlying security increases. Monitoring volatility can be used to a trader’s advantage when trading short term Binary Options with pre-determined expiries and higher payouts, even though higher volatility generally implied an adverse move in a security is imminent. Predictions of the actual direction can be measured using technical analysis which is taught by professionals at Magnum Options.
Historical volatility is the actual volatility of a security or index. High historical volatility means that a security is experiencing large swings were low historical volatility means that a security is experiencing consolidation. When a security is experiencing high historical volatility there is a better chance that an investor will benefit from Binary Options trades. Options with short times to maturity such as 60 second options will benefit from choppy volatile markets, as the moves will often be dramatic allowing investors to take advantage of short quick market movements. Historical volatility (rather than implied can still be used to its highest profitable potential through the use of a 60 second trade in Binary Options, something our advisers also teach traders at Magnum Options.
Binary Options traders can use both implied volatility and historical volatility as guides to determine if the current market environment is ripe to trade Binary Options giving them an edge prior to trading a specific security. For the highest payouts and most controlled trading experience, encompassing 1 on 1 training for technical analysis, graphing, strategies, and trading methodology – as well as the tools and support to ensure the highest profitability and profitable opportunities. Open an Account at Magnum Options today – to get a Free Trading Education from the No #1 Trusted Broker For Binary Options Education.
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