Volatility RiskStock Market Price VolatilityVolatility risk information. Stock price volatility definition. CBOE volatility index. Fear and volatility in the stock market. Volatility risk has to do with the level of threat to your stock market holdings (actually, any investment vehicle but I'm going to confine my discussion of it to stocks) because of market volatility.
Stock Price VolatilitySimply put, this is a measurement of the difference between the highest and lowest price that a given security trades for during a single session.But just because stocks demonstrate intraday volatility during one session does not make those securities high volatility stocks. You would need to look at the historical volatility data for those securities before you could classify them as high volatility investments. During periods of high volatility in the stock market, all stocks experience wider price swings than they normally would. In the markets, fear and volatility walk hand in hand. Any worrisome economic news can cause volatility spikes. Expected volatility is not a risk to you as a stock market trader. Your trading strategy will have taken any price movement you expect into account. It's the sudden downside volatility spike that triggers your stop loss orders and causes you to take unexpected losses which constitutes volatility risk. Expected excess volatility is your friend as it can be used to take large gains.
Relative VolatilityThis is the measurement of price volatility in one investment against that in another. It tells you which equity is more risky which helps you with volatility management.So how do you determine stock volatility? There are several mathematical formulas by which you can make a volatility calculation. These make my eyes roll back in my head, so I won't bore you by discussing them. I am way too lazy to do the calculations myself--even with the help of an online calculator. I just pull up a chart of the CBOE volatility index which is also known as the VIX.
CBOE Volatility IndexVIX volatility is probably the most frequently relied upon barometer of stock market volatility used by traders.Its volatility calculation is based on real-time S&P 500 index option quotes.
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