The measure of volatility gives an idea of the potential profitability of a financial asset, but also of the risk associated with it.
There are many indicators for calculating the level of risk of a financial asset, and the return that can be made. However, in finance, if risk were to have a synonym, it would be price volatility. Volatility can be observed directly on the graph of a stock price (this is called chartist analysis). It represents the extent to which the price of a financial asset changes over time. Thus, high volatility implies a higher opportunity for gain, but also a higher risk of loss.
Volatility can be measured through historical price data (historical volatility) or through the valuation levels of certain financial products such as options (implied volatility). Regardless of how it is measured, volatility is usually expressed using two closely related statistical concepts: standard deviation and variance.
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At the root of any spike in volatility is context that is important for investors to know. For example, the stock price of a fast-growing company (or, on the contrary, a company with a lot of debt) will be more volatile than that of a stable company.
It makes sense to use volatility calculations to :
The main indexes used to measure the volatility of stock market indexes are the VIX (American "S&P 500" index) and the VCAC (CAC40 index). The latter can be used in hedging strategies. Indeed, knowing that volatility increases during stock market crashes, many investors choose to open long positions on the volatility indexes so that the losses of their stock portfolios are covered by the gains made on the volatility indexes.
Be aware that while a strategy of betting on the rise in volatility ican be appealing, you shouldn’t forget the effects of the "time value" which will gradually make your positions betting on the rise in volatility lose value. The timing with which you enter a position on the VIX or the VCAC is therefore essential.
