Higher volatility will mean that higher premiums are demanded by options sellers. Any commodity trader does well to notice that regardless of a pricing model, or theoretical reasoning, an option is only ever worth what the market will bear. A model relies on inputs, and is not responsible for the market differing in its valuation of options.

Of course, the effect of higher volatility on an options price is similar to that of time. Where an increase in days to expiry will lead to higher premium value, there remains a quantified period of time for options to perform, while an increase in volatility does nothing to allow more opportunities; it merely increases the price.

It is for this reason that higher volatility will directly increase the time decay of options. This in turn demands a higher level of performance from options – regardless of its role as a hedge, an outright directional position or one based simply on value. Irrefutable proof of this contention is found in the common experience of a favourable move in the underlying, finding an exasperated trader still suffer a loss due to the higher premium that was paid.

In order to realize a profit or loss, one needs to be realistic about the exit points of the strategy. Particularly with the stock market, it is historically established that markets rise at a slower rate to that when they fall. For this reason, a bull market will routinely (but not exclusively) find a rising market consolidate at each breach of resistance, and volatility will fall. Conversely, when the market is infused with fear, the fall is dramatic and volatility is prone to escalate almost immediately. Quite simply the reason for this is the proposition alluded to earlier; the competing arguments of theory versus reality.

An options model not only bases its calculations on input, but it also assumes that those inputs will remain unchanged till expiry. This will often explain the discrepancy between implied volatility and historical volatility, as the market simply does not envisage the underlying madness (or lack thereof) to remain constant till expiry. A trader may contemplate an exit point, an options model does not.

To protect against these latent risks, every entry trade needs to take into account the most likely scenario at its exit point, and this will not only involve consideration of time decay, but anticipated volatility direction also. It also needs to be borne in mind that the pricing model does indeed have its relevance in moderating the passions of mankind, and that enormous value opportunities are available to a trader cognizant of this fact.

Another contingency that attaches to increased volatility is the cost of holding a position. Clearing houses to this end, are concerned with maintaining security in respect of the risk inherent in open positions. In the execution of this objective they charge a premium margin which will bear some relevance to the most recent market price of options, and therefore implied volatility, but will supplement this with a risk margin reflecting the contingencies of volatility moving up and also down.

Ideally this security will be reflective of the cost incurred in closing the position out, however this is rarely the case. Usually, open positions in their entirety will be considered and a series of offsets will be affected however, per option add-ons are not uncommon. Effectively a guarantor, a clearer will prefer to err on the side of caution and require a risk premium on the reversal cost of the position to compensate for the anomalies between the model and the market that was referred to above. Further still, clearers will also possess an element of subjective concern, which in climates of high volatility, will only increase the cost of trading, a contingency that needs some measure of forethought  on the part of the trader.