Determining volatility is one of the central concepts in deciding whether an option is priced higher than a fair value, lower or at a fair value. Generally, the higher the volatility, the higher the price of the option. On the other hand, the lower the volatility, the lower the price of the option.

When trading options, it is important to keep in mind there are different types of volatility associated with options. The most important type of volatility in decision making is implied volatility. Depending on the value of implied volatility a trader is able to make decisions about what approach to take with options trading.