What is Volatility

Volatility is a statistical measure of the dispersion of price for a given security or market index. Volatility can be measured by using the standard deviation or variance of price from that same security.

The more volatile the price variance, the more potential risk for the security.

There are two distinct types of volatility that traders need to understand.

Historic Volatility: Is the statistical volatility, or the measured historic price volatility of the underlying security. H.V. is ”known volatility” because it is based on actual price changes in the underlying.

Implied Volatility: Is the projection or “implication” of potential volatility primarily used for option pricing. Higher estimates of implied volatility will increase options premium and lower estimates of implied volatility will decrease options premium on average.


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