Determining volatility is one of the central concepts in deciding whether a stock option is priced higher than a fair value, lower or at a fair value. Generally, the higher the volatility, the higher the price of the stock option. On the other hand, the lower the volatility, the lower the price of the stock option.

There are different types of volatility associated with stock options. The most important type of volatility in decision making is implied volatility. Depending on the value of implied volatility a trader is able to make decisions about what approach to take with stock options trading.

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