How do you predict market volatility? Some traders simply use the implied volatilities. Others look at a combination of the historical, seasonal, and implied to derive an estimate of future volatility. Others look at price levels and believe markets become more or less active at various price levels. Some use technical or fundamental analysis for estimates. A good estimate of volatility is essential in successful options trading and predicting volatility.

Future Volatility

If we can figure out the future market volatility, we will know the proper price of an option and whether it is under- or overvalued. This would be somewhat equivalent in outright trading of knowing where the price of the commodity will be in the future.

Volatility and Price

Another relationship is how volatility changes with price. A market may become more volatile as the price increases and large price swings occur. Other times a market may become more volatile after a decline in prices. Many option traders base their volatility estimates on price levels in a market, raising the volatility for pricing if markets rise and lowering it if markets drop