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 changes up and down, 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 that great.
Volatility can be derived by looking at changes in the share price over the past 30 days and calculating the standard deviation of the percentage changes in the particular share price.
Volatility Index (VIX)
A volatility index is an index that measures the expected fluctuations in the price of a stock. The index is commonly known as the VIX or 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. At the end of October of the same year, the value of the VIX soared through the roof and touched a staggering 89.53, which which raised concerns about the onset of a global financial meltdown.
India launched its own NSE VIX in 2008 based on the Nifty 50 Option benchmark prices. Determine the fluctuation of Nifty 50 stock prices over the next 30 days. “India VIX is a simple but useful tool for determining overall market volatility. The index captures the implied volatility implied in option prices. Not only is the volatility index used as an indicator of implied market volatility, but also of various tradable products, such as futures and options contracts are available in the volatility index internationally, “said the NSE website.
The peak ever recorded in the NIFTY VIX was 85 in April 2008 and the lowest recorded was 16.7 in March 2010. The lowest record ever recorded in the NSE VIX denotes the low volatility in the market where investors they can assume low fluctuation.