Stochastic volatility (SV) is a measure of the variability of an asset's price. It is commonly used to quantify the risk of investments, such as stocks, bonds, and options.
The term "stochastic" refers to the fact that the asset's price is not known with certainty. The asset's price can be thought of as a random variable that is governed by a probability distribution. The volatility of an asset is a measure of how much the asset's price changes over time.
There are a number of different ways to measure an asset's volatility. The most common is the standard deviation, which measures the dispersion of the asset's price around its mean.
The standard deviation is a good measure of volatility when the asset's price is normally distributed. However, when the asset's price is not normally distributed, the standard deviation is not a good measure of volatility. In such cases, the asset's price may be more accurately described by a different probability distribution, such as the Student's t-distribution.
The volatility of an asset can also be measured by its beta. Beta is a measure of the volatility of an asset in relation to the volatility of the overall market.
An asset with a beta of 1.0 is just as volatile as the market. An asset with a beta of 2.0 is twice as volatile as the market. And an asset with a beta of 0.5 is half as volatile as the market.
The most common way to measure an asset's volatility is by its standard deviation. However, in some cases, the asset's price may be more accurately described by a different probability distribution, such as the Student's t-distribution.
What does SV stand for?
There are a few different interpretations of what SV could mean when referring to options trading, but the most common one is "strike price plus premium paid". In this case, SV would represent the total cost of buying an option.
Another potential interpretation is "spread value". In this case, SV would represent the difference between the bid and ask prices of an option.
Finally, SV could also stand for "short interest". In this case, SV would represent the number of shares that have been sold short, but not yet covered.
What is the best measure of volatility?
There is no definitive answer to this question, as there are a number of different measures of volatility that can be used, each with its own advantages and disadvantages. Some of the more popular measures of volatility include the standard deviation of returns, the volatility of implied volatility, and the CBOE Volatility Index (VIX).
What are types of options?
Option types can be classified in a number of ways. The most common classification is by the option's expiration date, which can be either European or American. European options can only be exercised on the expiration date, while American options can be exercised at any time up to and including the expiration date.
Another common classification is by the option's underlying asset, which can be either a stock, a commodity, a currency, or a basket of assets. Each type of option has its own unique characteristics and risks.
Stock options are the most common type of option, and they give the holder the right to buy or sell the underlying stock at a specific price on or before the expiration date.
Commodity options are similar to stock options, but they are based on commodities such as oil, gold, or silver.
Currency options are options on foreign currencies, and they give the holder the right to buy or sell the underlying currency at a specific price on or before the expiration date.
Basket options are options on a basket of assets, and they give the holder the right to buy or sell the underlying assets at a specific price on or before the expiration date.
What does SV mean selling?
There are a few different ways to think about what "SV" might mean when trading options, but the most common interpretation is "structural value." Structural value is the portion of an option's price that is attributable to the underlying security's price volatility. In other words, it is the amount of an option's price that is due to the fact that the underlying security's price is expected to move up and down over time.
One way to think about it is to imagine two different options with the same strike price and expiration date. One of these options is on a stock with a very low volatility, while the other is on a stock with a very high volatility. All else being equal, the option on the stock with the high volatility will be more expensive than the option on the stock with the low volatility. The difference in price between these two options is the structural value.
Another way to think about it is in terms of the option's "intrinsic value" and "time value." The intrinsic value is the amount of the option's price that is due to the underlying security's price being above or below the option's strike price. The time value is the amount of the option's price that is due to the fact that the option has time left until expiration.
The time value of an option declines as expiration approaches, while the intrinsic value remains the same. The structural value is the portion of the option's price that is due to the time value.
Some option traders use the term "SV" to refer to the time value of an option, while others use it to refer to the structural value. In general, though, the most common interpretation is "structural value."
What are option pricing models?
Option pricing models are mathematical models that are used to determine the theoretical value of an option contract. The most popular option pricing model is the Black-Scholes model, which was first published in 1973.
Other popular option pricing models include the Binomial model and the Trigeorgis model. These models are less complex than the Black-Scholes model and are often used to value options with unusual or complex features.