Volatility is one of the most important aspects of options trading. Volatility is a measure of the fluctuation of an asset over time. When analyzing volatility values, a trader can find whether the current market volatility is below average, average, or above average by comparing the current volatility value relative to past values. There are two different types of volatility measures that we use: Historical Volatility and Implied Volatility.
Historical volatility is backward-looking, it uses a historical quantitative measure of market fluctuation. Implied volatility is forward-looking, as it represents how volatile the market is forecasted to be relative to a multitude of factors on the underlying asset as well as the option contract itself.
The uses of both types of volatility are quite versatile. Volatility can be used to set the price for various options, can be used for probabilistic price forecasting, and can be traded for speculative purposes.