Market volatility comes in two forms, implied volatility and historical volatility, both which can affect an investor’s ability to be successful in trading Binary Options. Implied volatility is similar to a financial security as it fluctuates with market sentiment and is an estimate of how much options trader perceives a financial security or index will move over a specific period of time on an annualized basis. Historical volatility is the actual past movement of a security and can be defined as the standard deviation of a time series, reflected in percentage format.
Implied volatility affects the price of a Binary Option, but it influences standard vanilla options much more than it effects Binary Options. Implied volatility changes as market sentiment changes. Generally as fear and trepidation increase, implied volatility increases, while increases in complacency are generally highly correlated to declines in implied volatility. [Read more...]