Statistical volatility (SV) describes the rate of change (or speed) of the underlying stock or futures contract upon which an option trades.

Here direction does not matter, only ability to move either way faster or slower. Without delving into the math behind the derivation of SV, let’s think of it as a measure of the size of average daily price changes of a particular stock or futures.

For example, an SV of 18% tells us that recent price volatility of the underlying indicates (assuming this speeds remain) that the stock or futures contract has the possibility of moving +/- 18% over the next 12 month period. T

This is important because if a stock or futures contract can move faster (and thus farther) in a fixed time frame, this makes an options value go up because the potential for profit (assuming buying options).

-John Summa, PhD

Founder, OptionsNerd.com

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