Volatility on an instrument can be defined in terms of the normal distribution curve, a bell shaped curve, if curve is flatter and wider, it represents the occurrences of a wider range of prices for a particular period of time. A more narrow and cylindrical (taller) curve, representing a narrower range for the price occurrences. In the first case the instrument will be considered a high volatility vs the latter case.
Lets say we have two stocks each priced at $100, we buy a $110 call expiring in 30 days. Now lets suppose the 1st stock moves only $.5 each day, while the 2nd one moves $5 each day. In 1st scenario the of the $110 call option, the stock has to move up for 60 consecutive days for the option to end up in the money. The 2nd stock with price moving $5 each day the stock has to move up only two days for the option to end up in the money. That is why volatility matters and options are priced differently.
Lets say we have two stocks each priced at $100, we buy a $110 call expiring in 30 days. Now lets suppose the 1st stock moves only $.5 each day, while the 2nd one moves $5 each day. In 1st scenario the of the $110 call option, the stock has to move up for 60 consecutive days for the option to end up in the money. The 2nd stock with price moving $5 each day the stock has to move up only two days for the option to end up in the money. That is why volatility matters and options are priced differently.
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