What is volatility?
Volatility is the rate at which the price of a certain security moves. A security with high volatility has bigger fluctuations in price compared to a security with low volatility. The more quickly 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 the change in prices as compared to a stock whose change in prices is not that large.
The volatility can be derived by looking at the changes in price of the stock for the past 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 which measures the expected fluctuations in the price of a stock. The index is commonly known as the VIX or the fear index as a high VIX determines more volatility in the market and thus more fluctuation in stock prices.
In the United States, before the financial crisis, the highest point the VIX touched was 38 in August, 2008. Late in October of the same year, the VIX value shot through the roof and touched a staggering 89.53, surfacing concerns of the start of a global financial meltdown.
India launched its own NSE VIX in 2008 based on the benchmark Nifty 50 Option prices. It determines the fluctuation in prices of Nifty 50 stocks for the next 30 days. “The India VIX is a simple but useful tool in determining the overall volatility of the market. The index captures the implied volatility embedded in option prices. Not only is the volatility index used as an indicator of implied volatility of the market, various tradable products, such as futures and options contracts are available on the volatility index internationally,” said the NSE website.
The peak 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 recording on the NSE VIX denoted the low volatility on the market where investors could assume low fluctuation.