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Volatility as described here refers to the actual volatility, more specifically: . actual current volatility of a financial instrument for a specified period (for example 30 days or 90 days), based on historical prices over the specified period with the last observation the most recent price.
The VIX traces its origin to the financial economics research of Menachem Brenner and Dan Galai. In a series of papers beginning in 1989, Brenner and Galai proposed the creation of a series of volatility indices, beginning with an index on stock market volatility, and moving to interest rate and foreign exchange rate volatility. [1] [2]
Bottom line. The VIX is an index that measures expectations about future volatility. It tends to rise during times of market stress, making it an effective hedging tool for active traders.
Volatility is up, and the S&P 500 chalked both its best and worst day of the year this past week. And that you can have both in the span of a few days is an important market lesson.
The price of this option is influenced by multiple factors, including the stock’s current price, the option’s strike price, time to expiration and implied volatility.
, is the current (at time 0) forward volatility for the period [,] σ 0 , j {\displaystyle \sigma _{0,\,j}} the spot volatility for maturity j {\displaystyle j} . To ease computation and get a non-recursive representation, we can also express the forward volatility directly in terms of spot volatilities: [ 1 ]
Volatility index (VIX): Often referred to as the “fear index,” the VIX measures market expectations for future volatility. It is calculated based on the prices of options on the S&P 500 index.
An important factor is the underlying instrument's volatility. Volatility in underlying prices increase the likelihood and magnitude of a gain in IV, thus enhancing the option's value and stimulating option demand. Numerically, this value depends on the time until the expiration date and the volatility of the underlying instrument's price.