In the financial markets, volatility is an indication of daily market movement in relation to the past or historic movement of an asset. Volatility is a measure of risk. Assets with a low volatility show lesser movement and less risk while high volatility assets have more movement and higher risk.
How Do You Apply Volatility In Binary Options Trading?
Volatility is typically measured as historical volatility and implied volatility. Implied volatility is a measure of how an investor expects an index or security will move over a certain period on a yearlong basis. Historical volatility is the past movement of an asset and is presented as percentage standard deviation.
Both types of volatility impact on a trader’s ability to execute profitable trades. Implied volatility moves along with changes in market sentiments. Implied volatility shoots upwards when there is a lot of panic in the market. On the other hand, implied volatility reduces when market sentiments are complacent. An increase in implied volatility triggers the price of an option. The implied volatility is more of an indicator of a possible move of an asset than a change in the price of the asset.
Historic volatility is the real volatility of an asset. When the asset experiences large price movements, the historical volatility will be high. Low historical volatility is an indication that the asset is going through a consolidation. Traders are likely to profit when an asset is undergoing high historic volatility. Options with short expiries such as 60-second options are likely to do well from highly volatile markets. You can use both historical volatility and implied volatility to determine if it is suitable to trade options on the prevailing market.
One way to chart volatility is through indices such as the VIX volatility index. The VIX volatility index is a product created by the Chicago Board of Options Exchange which follows the implied volatility of the “at the money” puts and calls of the S&P 500 index. There are many other index specific volatility gauges which are calculated in a way that is similar to the VIX.
There are other types of volatility. Relative volatility is an oscillator style indicator that measure market movements relative to past price history and gives an indication of the direction of volatility.
Chaikin Volatility is another oscillator style volatility indicator. It measures volatility as the movement between the open and the close and does not include gaps as other indicators do.
Bollinger Bands are fantastic method of utilizing volatility for binary options as you can see above. The typical strategies in high volatile markets out-of-the-money (OTM) and deep-out-of-the-money (DOTM) trades.
Keeping an eye on volatility can be used to execute profitable trades. It is important to find a reliable source to attain implied and historical volatility charts, since these tools can make the different between successful options trades and trades that lose money. Generally, when volatility is low it is a prompt to buy a put or call option as the prices and the markets have stabilized.