The "daily Call" From Option Alpha: Options Trading | Stock Options | Stock Trading | Trading Online

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “How does volatility affect option prices?” Volatility is this thing that most people really don’t understand when it comes to option pricing in the options market. And it’s really as simple as this. When implied volatility or the expectation of volatility in an underlying stock increases, option prices on both sides, calls and puts, increase as well. When implied volatility or the expectation that the underlying stock is going to see a decrease in volatility, then the underlying option contracts on both sides, calls and puts, decrease as well. And another way of just looking at this is just to use maybe a real estate analogy. And if you’re going to buy a property in New York or San Francisco or Miami or one of these hot markets right now, there’s a pretty good chance that you’re going to see a wild swing in the price of that property and therefore, the price of that property