Volatility

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Volatility is a measure of the relative rate at which the price of a security or contract fluctuates. It is defined as the annualized standard deviation of daily change in price or, in other words, the square root of the security's annualized variance.[1][2][3]

A volatile market, contract or security is one whose price tends to fluctuate sharply and regularly.

One measure of the relative volatility of a particular stock to the market is its beta. A beta approximates the overall volatility of a security's returns against the returns of a relevant benchmark such as the S&P 500.

Technical Analysis

Volatility can be used in various manners to measure market activity. Traders use measures of options volatility to make decisions about changes in market direction.[4] For example, a rise in the implied volatility of options of strike prices below an underlying security's price (also known as "downside puts"), this may indicate a heightened concern of an impending decline in the security's price.

VIX

The VIX is a volatility index developed by the Chicago Board Options Exchange in 1993 to measure investor sentiment and market volatility. It is often referred to as a "fear guage," because it tends to move inversely with the direction of the stock market.

The CBOE lists futures and options on the VIX.

Resources


References

  1. Glossary. U.S. Commodity Futures Trading Commission.
  2. Glossary. CME.
  3. Market volatility explained. Fortune.
  4. Volatility. Online Trading Concepts.