when you buy an option the following are the knowable factors that affect its price the current price of the underlying asset the strike price the interest rate if borrowing the type of option call or put the time to expiration of the option and any dividends on the underlying asset volatility is the one left out as the main unknown 
volatility is therefore crucial for option prices in essence volatility measures how much the underlying asset s price varies during a specific period two types of volatility are important when considering options and their contract expiration historical volatility this is the record of fluctuations in the underlying asset s price giving you a context to assess future volatility suppose you re looking at the stock of company a and you calculate that over the past 30 days the stock has been between 40 and 50 after further calculations you determine that the historical volatility for this period is 20 checking further you find that the volatility for the past week is 30 meaning it s more volatile than usual this could indicate future prices but since it s based on past behavior it may tell you only where it s been not where the stock s volatility is going implied volatility this is a forward looking estimate of how much the market thinks the underlying asset price will move in the future options with high implied volatility have higher premiums and low implied volatility goes with lower premiums of course an option s price is not guaranteed to follow the predicted pattern nevertheless evaluating what other investors are doing with the option is helpful since implied volatility is directly correlated with the market s view which affects the option price 3the higher the volatility the greater the price swings of the asset and the higher the price for the associated options when an option s underlying asset has a more volatile price the potential payoff from owning the option increases the greater the risk the greater the reward thus option buyers are often willing to pay a higher premium for options on volatile assets short term options are generally more sensitive to immediate market events causing higher volatility and premiums alternatively long term options like leaps are less susceptible to short term market fluctuations but have greater long term volatility strategies like buying options ahead of earnings announcements or during market uncertainty try to profit from volatility conversely selling options in a low volatility environment should offer lower risk though it also likely has a lower return suppose company a is scheduled to release its quarterly earnings report next week since this will likely impact its stock price the market expects more volatility in the near future which is then reflected in the options you can get on its stock looking up a call option for company a you see a strike price of 50 and an expiration one month away making the option premium relatively high using an options prices model you calculate the implied volatility at 40 which is much higher than the 20 historical volatility and even higher than the previous week s bump in volatility the increased implied volatility reflects anticipation in the market for increased stock price fluctuations surrounding the earnings report for this reason other investors are willing to pay a premium for this option given the higher likelihood that company a s stock price will move significantly thus offering the potential for a more substantial payoff investors often use options with different expiration dates to strategically hedge against volatility understanding how it affects options prices can help you manage risks better and potentially improve your options strategy expiration dates and options greeksoptions greeks or simply greeks are tools each known by a greek letter that help calculate how the price of an option is likely to change in response to different financial variables they re part of a well known method the black scholes model for calculating the value of an option and each greek focuses on a different factor influencing that value 4understanding the greeks allows traders and investors to make more exacting decisions from selecting the correct expiry date to managing risk and optimizing potential returns suppose a trader wants to buy a call option on company a s stock anticipating that it will increase in the next month the current stock price is 50 the option s strike price is 55 and the option expires in 30 days the trader uses the delta to gauge the likelihood of the option expiring itm the option has a delta of 0 4 suggesting that for every 1 increase in the stock price the option will increase by 0 40 a delta of 0 4 also implies a 40 chance that the option will expire itm the trader keeps an eye on gamma to anticipate changes in delta the option s gamma is 0 1 indicating how much the delta will change for every 1 change in the stock price if the stock moves up by 1 the new delta would be 0 5 theta is calculated as 0 05 meaning the option will lose 0 05 in value each day in time decay traders know that holding the option too long will erode its value so they should plan to reassess the position before the option s expiration the vega is 0 2 for every 1 increase in implied volatility the option price will increase by 0 20 if the trader expects volatility to increase this could add value to the option since interest rates are relatively stable the trader might not focus on rho for such a short term option given these greeks the trader decides to buy the call option the trader will closely monitor delta and gamma for price changes and theta to reevaluate time decay vega will be watched in case of changes in volatility the expiration date of an option has a significant impact on the greeks which in turn affects the option s price behavior can an option s expiration date be extended in the standardized world of exchange traded options the expiration date is a fixed term and cannot be extended once an option reaches its expiration date it either gets exercised if it is itm or expires worthless if it is atm or otm there are no provisions for extending the expiration date for these types of options 