The measure of the fluctuation in the price movement in an security over a period of time. Volatility is one of the most important components in the theoretical valuation of an option price.Historical Volatility: the standard deviation of the underlying security (closing) price movement over a period of time (typically 21-23 days)Implied Volatility: the calculated component derived from the option price when using the Black-Scholes Option Pricing model. Where there is a significant discrepancy between Implied and Historical Volatility then there is the opportunity for the trader to take advantage of this.

Whereby deep OTM options tend to have higher Implied Volatilities than ATM options. Where there are discrepancies, this, again gives the trader the opportunity to make trades whose profits are determined by volatility action as opposed to directional price action.