Read More
volatility
finance
Written by
Fact-checked byDoug Ashburn
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.
The Editors of Encyclopaedia Britannica
Encyclopaedia Britannica's editors oversee subject areas in which they have extensive knowledge, whether from years of experience gained by working on that content or via study for an advanced degree. They write new content and verify and edit content received from contributors.
Updated:
Read More
Open full sized image
Like any security, the S&P 500 sees periods of high and low volatility.
Source: Barchart; Annotations by Encyclopædia Britannica, Inc.
Volatility is a measure of the frequency and magnitude of changes in the price of a stock, exchange-traded fund (ETF), cryptocurrency, 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.