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Volatility

Market volatility, or just volatility, is a term that indicates unpredictable and sometimes sharp short-term price movements of a security. Riskier assets are generally more volatile than other assets because they are less predictable. 

In general, market volatility increases when prices go down and vice versa. Unless there’s a single catalyst that suddenly forces market volatility to surge, volatility tends to be generally low. This is especially the case with bull markets as they tend to go hand-in-hand with relatively low volatility. 

Moreover, market volatility is considered to be an important input in calculating option prices. Analysts use several methods to gauge market volatility, like beta coefficients, option pricing models, and standard deviations of returns. 

Chicago Board Options Exchange’s Volatility Index (VIX) is considered to be a go-to indicator for gauging market volatility. VIX represents the market's expectations for volatility over the coming 30 days. In simple words, a high VIX signals a risky market that is likely to drop.

Implied volatility (IV) is another metric that is widely used by traders and investors. IV practically attempts to determine how volatile the market is likely to be in the future. Historical volatility (HV) is the opposite of IV as it gauges the market volatility over a certain time horizon in the past. 

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Author: Mircea Vasiu Updated: July 8, 2022