What is volatility?
Volatility is the rate at which the price of a certain security moves. A security with high volatility has greater price fluctuations compared to a security with low volatility. The faster a price rises and falls, the more volatile it is. As such, volatility is often used as a measure of risk.
Basically, a stock is said to be more volatile if it has a larger difference in price change compared to a stock whose price change is not as large.
Volatility can be derived by looking at changes in the stock price over the last 30 days and calculating the standard deviation of the percentage changes in the price of the particular stock.
Volatility Index (VIX)
A volatility index is an index that measures the expected fluctuations in a stock’s price. The index is commonly known as the VIX or the Fear Index, as a high VIX determines more volatility in the market and therefore more fluctuation in stock prices.
In the United States, before the financial crisis, the highest point the VIX touched was 38 in August 2008. In late October of the same year, the value of the VIX shot through the roof and touched a staggering 89.53, which which raised concerns about the start of a global financial crisis.
India launched its own NSE VIX in 2008 based on Nifty 50 Option reference prices. Determine the price fluctuation of the Nifty 50 shares over the next 30 days. “The India VIX is a simple yet useful tool for determining overall market volatility. The index captures the implied volatility embedded in option prices. The volatility index is not only used as an indicator of implied market volatility, various tradable products such as futures and options contracts are available on the volatility index internationally,” the NSE website said.
The highest ever recorded on the NIFTY VIX was 85 in April 2008 and the lowest ever recorded was 16.7 in March 2010. The lowest ever recorded on the NSE VIX denoted low volatility in the market where investors could assume a low fluctuation.
