Volatility Quote Trading

Volatility quote trading is a method of quoting option contracts in which bids and asks are quoted according to their implied volatilities rather than actual prices.

Volatility quote trading commonly involves trading based on the anticipated volatility in the future of a particular index or security.

Traders are determining their strategy based not on prices, but on their assessed volatility of the underlying asset. These investors are more concerned with whether the price will go up or down, and by how much, as opposed to focusing on the actual dollar amounts of the price. So rather than the focus being placed on a specific figure, price or dollar amount, the focus instead is on fluctuations and activity.

This process of volatility quote trading and the concepts involved in executing this strategy are rather challenging, and is something that is not generally recommended for novice investors.

Used mainly by sophisticated investors, volatility quotes benefit those investors who trade upon volatility rather than price. These investors are typically interested in the likelihood of a contract moving up or down in price rather than in its actual cost.

Volatility with relation to stocks and other securities refers to the variations in pricing formulas for options, which illustrate the range in which the underlying asset’s value will fluctuate between the current time and whenever the option expires. Volatility in an investing lingo can also be used to mean the measure, in statistical context, of the dispersion of returns for a certain security, or for a market index.

Typically, analysts would look at the standard deviation as the common way to measure volatility. That is a data point that measures the variances from the average. In a formula, it is calculated by taking the square root of the average variance from its mean. That’s a complicated calculation that would likely be intimidating to the average investor.

For most investors, the concept of volatility boils down to something much more basic and simple: the more volatile a security is, the more unpredictable its performance. In other words, the higher the volatility, the greater the level of risk. So the appeal of this type of investing would depend in large part on the investor’s comfort with increased risk.

A related concept is the strategy of volatility arbitrage, which involves trying to figure out the difference between the anticipated future volatility of a stock or other asset and the implied volatility of options that are connected to that underlying asset.