This is to inform that by clicking on the hyperlink, you will be
leaving
sc.com/ae
and entering a website operated by other parties.
Such links are only provided on our website for the convenience of
the Client and Standard Chartered Bank does not control or endorse
such websites, and is not responsible for their contents.
The use of such website is also subject to the terms of use and
other terms and guidelines, if any, contained within each such
website. In the event that any of the terms contained herein
conflict with the terms of use or other terms and guidelines
contained within any such website, then the terms of use and other
terms and guidelines for such website shall prevail.
Implied vs historical volatility: what’s the difference?
What is implied volatility?
Volatility measures price movements over a specified period.
A highly volatile stock is one that has large swings in price, whereas a low volatility stock has a more stable price. As an example, a stock that trades between $20 and $40 would be considered more volatile than another that trades between $25 and $30. For the comparison to be meaningful, however, both must be measured over the same period.
Implied volatility, often referred to as projected volatility, is simply an estimation of the future volatility of a stock or index, based on option prices. Implied volatility tends to increase in bearish markets, which is when investors believe equity markets are likely to decline. This is due to these market conditions being considered ‘riskier’ for most investors.
It’s important to note that implied volatility is not an exact science — it is a forward-looking calculation that allows investors to estimate where the market is headed.
The VIX Index is one of the most commonly-used measures of implied volatility and can be a helpful tool when formulating an investment strategy, especially if you are targeting volatile stocks.
How is historical volatility calculated?
Unlike implied volatility, historical volatility (as the name suggests) is backward looking and is calculated using the variability of prices that are already known.
Historical volatility does not consider market direction — rather, it looks at how far a price deviates from its average value, up or down, within a specified period.
Historical volatility is the average deviation from the average price of a security, expressed as a percentage, and is useful when comparing it with other stocks or indices. The higher the percentage, the higher the volatility, and thus the ‘riskier’ the security is perceived to be (and vice-versa).
When a security’s historical volatility is rising, or is higher than usual, this means prices are moving up and down to a greater degree and/or more quickly than usual. This tells investors that the market expects something to change, or that something to do with the security has already changed.
Investors in stocks with a high historical volatility tend to have a higher risk tolerance — but of course, a stock having a higher historical volatility than another is not necessarily a bad thing, as risk can mean better returns for investors too.
This article is written by Fidelity International.
Disclaimer
Standard Chartered UAE is licensed by the Central Bank of the U.A.E.
Standard Chartered Bank UAE is licensed by Securities and Commodities Authority (SCA) to practice Promotion Activity.
This article is brought to you by Standard Chartered Bank (UAE) Limited. All information provided is for informational purposes only. This information is neither an offer to sell, purchase or subscribe for any investment nor a solicitation of such an offer. This information is general and does not take into account a person’s individual circumstances, objectives or needs. Investments carry risk and values may go up as well as down. Standard Chartered is not liable for any informational errors, incompleteness, delays, or for any actions taken in reliance on information contained herein.
