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[edit]

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[edit]

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[edit]


References[edit]

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