Tuesday, December 28, 2010

Volatility

Volatility is a measure of price movements over a certain time frame. This metric tells you how often and how much markets have been moving, as an example during a quiet period where prices don't move much volatility is relatively low, however during a market crash where prices drop significantly the volatility is higher; likewise a market which faces a lot of uncertainty and conflicting news (i.e. positive and negative) will likely see large swings in price i.e. high volatility. Technically speaking volatility is measured as the standard deviation of price movements. Volatility is also embedded in options prices - due to the impact that volatility plays on option valuation - thus you can derive an implied volatility measure from options prices (generally speaking higher volatility leads to higher option prices). The CBOE Volatility Index or VIX is calculated based on the prices of options on the S&P 500. This index will tend to rise during periods of high uncertainty.

Synonyms: Standard deviation, Sigma, Vol, Risk, VIX, Variability, Implied volatility

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