Volatility is usually calculated by statistical means, it is a measure of on average how quickly a stock changes price. When the market is showing big wins or losses every day, that is high volatility. When all is quiet, the All Ords has changed only by single digit points for a few days, that is considered very low volatility.

Option prices are strongly influenced by volatility. When volatility is high, all options are on average more expensive than when volatility is low. A wildly chopping market could go either way, and could well make some really big moves soon. This means that there is a pretty good chance of many options expiring in the money, and therefore even ones that are way out from strike price will probably be a little more expensive than usual. During low volatility periods, options far from strike are considered hopeless, the chances of the market taking the option into the money are slim. Therefore the option will be very cheap.

Sophisticated traders tend to take positions on volatility forecasts, not bullish or bearish views. The next article tells you where to find out about some of the more common strategies.