Volatility

Market Mechanics

Volatility measures how sharply and often a price swings; it is usually calculated as the standard deviation of returns and quoted as an annualized percentage.

Historical volatility comes from past prices, while implied volatility is backed out of option prices. High volatility says nothing about direction, only about the size of moves.

Example

For a stock with 20% annualized volatility, a typical daily move is about 1.3% (20 divided by the square root of roughly 252 trading days in a year).

Related Terms

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