Statistical Volatility

Note From The PitMaster:
This measures the relative amount of movement in the price of a futures contract. It is a mathematical computation, stated as a percentage, which summarizes how much the price of an asset has been moving up and down recently.

The statistical volatility of an asset is always changing, so it must be computed daily. It can be erratic from one day to the next, so in order for it to be useful, you need to use a 10 or 20 day moving average of the statistical volatility. This moving average is then:

	Used in option pricing models to determine the fair value of an option. In general, the bigger the statistical volatility, the more an option is worth.
	Used to calculate the probability of a given price move occurring (or not occurring).

Probability Based Trading

It is very helpful to know what the odds are that a given price move will occur. If you know the statistical volatility of a futures and its current market price, you can calculate the probability that a given target price will be reached or exceeded before a given target date. Your broker can be very helpful in assisting you with taking advantage of the statistical volatility when trading options.