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In the financial world, the term ‘Volatility’ refers to the measurement of the fluctuation in prices over a certain period of time.

Volatility is often used to quantify the risk of an investment, and the value of volatility is expressed in either of two ways: one as a definitive monetary value and the other as a percentage of the mean average value. It is calculated from the annualized standard deviation of an option’s daily change in price. Essentially, if the price of an option fluctuates rapidly over short periods of time, it is said to have a high volatility. Conversely, if the price remains relatively static it is said to have low volatility.

In essence, options which possess high volatility mean their value can change dramatically over a short period of time, either upwards or downwards, while a lower volatility means the value will not fluctuate wildly but rather changes in value at a steady pace across a longer period of time.

Volatility is often used to represent an options uncertainty and level of risk. However, in certain circumstances volatility can be good due to its profit-making potential and short-term traders often buy into volatile markets in contrast to those who look towards long-term buy and hold investments.

Market volatility changes can often warn of impending changes in price trends however it is usually on calculable with any degree of certainty for the past. For traders, however, previous historical volatility trends can give clues to an option’s implied volatility for the future.