volatility
Doug is a Chartered Alternative Investment Analyst who spent more than 20 years as a derivatives market maker and asset manager before “reincarnating” as a financial media professional a decade ago.
Before joining Britannica, Doug spent nearly six years managing content marketing projects for a dozen clients, including The Ticker Tape, TD Ameritrade’s market news and financial education site for retail investors. He has been a CAIA charter holder since 2006, and also held a Series 3 license during his years as a derivatives specialist.
Doug previously served as Regional Director for the Chicago region of PRMIA, the Professional Risk Managers’ International Association, and he also served as editor of Intelligent Risk, PRMIA’s quarterly member newsletter. He holds a BS from the University of Illinois at Urbana-Champaign and an MBA from Illinois Institute of Technology, Stuart School of Business.
Jennifer Agee has been editing financial education since 2001, including publications focused on technical analysis, stock and options trading, investing, and personal finance.
Volatility is a measure of the frequency and magnitude of changes in the price of a stock, exchange-traded fund (ETF), or other security. The larger and more frequent the price changes, the more volatile the underlying security. Volatility is of particular importance in the world of options trading, as it’s one of the key components of Black-Scholes-Merton and other option valuation models.
In the options world, volatility is measured in two ways:
- Historical volatility (HV) is backward looking and measures the magnitude of the actual fluctuations of an underlying security over a specific period of time. A common HV look-back period is one year, which traders call the “52-week HV.”
- Implied volatility (IV) is forward looking and estimates the magnitude of fluctuations over a specific future period. IV looks at the current prices of listed options on a stock, ETF, index, or other security and runs them through a valuation model to see what level of volatility is “implied” by those current prices.
Historical volatility is generally more stable over time. Implied volatility is in constant motion as it responds to changes in market sentiment, company earnings, news events, and other factors.