Volatility and options

Volatility is a measure of uncertainty of the future price of a security

Options could be defined by three parameters from physics – distance, time, and velocity. The relationship between those is well known: distance = velocity * time. I covered distance and time last week. Today's write-up is about the third variable, velocity, known as volatility in financial markets.

In a previous article, I examined the paradox that even though the price reaches our target, we are still losers. The price reaches our stop loss, reverses the direction of movement, and shamelessly goes through our take profit. This is the principle of path dependency, i.e., the outcome depends on the path traveled.

The arrow of time turns the future into the present and the present into the past.  We are all equal before time. A conclusion that is valid in life and financial markets. When investing, we wager on future events. Therefore, the outcom…