We are much indebted to David L. Caplan whose work shapes much of the
vocabulary we use.
| actual volatility |
is the measurement of the volatility that occurs from the forecast
to the expiry. Trader's compare their forecast volatility against
the actual volatility that occurs to gauge the accuracy of their
prediction methods. |
| delta |
is the rate of change in the price of an option relative to the rate
of change in the price of the underlying security. Also known as the 'hedge ratio'. |
| forecast volatility |
is the individual trader's perception of what volatility will be in
the future. Also Known As 'future volatility'. |
| gamma |
is the rate of change of the delta given a unit change in the underlying price. |
| hedge ratio |
See delta |
| historical volatility |
is the volatility implied in the price paid for same option for the
same time frame. For example, historical volatility compares the
price or implied volatility of an option thirty days from expiration
with options in previous periods that were the same distance from the
money at the time they were thirty days from expiration. |
| implied volatility |
is the volatility implied by the price of the option. If the
price of an option goes up, then the implied volatility has also gone
up. |
| premium |
is the price paid for an option. |
| ratio spread |
is a spread created by buying a close to the money option while
selling two or more further out of the money options for the same security. |
| realized volatility |
is the historical volatility calculated using a short period (one to
five minutes) time series. |
| theta |
is the daily time decay. |
| vega |
is the change in an option's price relative to a one percent change
in the implied volatility. Vega is commonly expressed in ticks
(minimum price fluctuations). |
