Presented By:-

Rukhsar S Gadkari – PG08

Namita S. Dhuri - PG21
Pratiksha Vijay Pawar – PG30
Omkari H. Nikam – PG32
Introduction
 Volatility refers to the amount of uncertainty or risk related to the size of changes in a
security's value.

 A higher volatility means that a security's value can potentially be spread out over a
larger range of values.

 This means that the price of the security can change dramatically over a short time
period in either direction.

 A lower volatility means that a security's value does not fluctuate dramatically.
 Cont….
 volatility is the measure of the variation of a financial instrument over time.

 Volatility can either be measured by using the standard deviation or variance between
returns from that same security or market index. Commonly, the higher the volatility,
the riskier the security.

 In the securities markets, volatility is often associated with big swings in either
direction. For example, when the stock market rises and falls more than one percent
over a sustained period of time, it is called a 'volatile' market.
Types of volatility

Historical
volatility
volatility Vega
Implied volatility
 Implied Volatility (IV)
 IV is commonly used in the pricing of the option.
 IV approximates the future value of an option and the option’s current value takes this into
consideration.
 The higher the IV the greater the magnitude of movement expected and greater the
premium of the option.
 In built in option price.
 Anticipation of the future volatility.
 Criteria –
 IV goes up - which leads to an increase in the option premium price component.
 IV goes down – which leads to a decrease in the option premium price component.
Factors affecting to implied volatility –
1. Supply and demand –
 When high demand – price will rise – IV leads to higher option premium – it is risky nature of
the option.
 When plenty of supply – not enough market demand – IV fall – option price become cheaper.

2. Time value –
 short dated option results in low implied volatility.
 Long dated option results in high implied volatility.
 HISTORICAL VOLATILITY
 Historical volatility is a statistical measure of the dispersion of return for a given security
or market index over a given period of time.
 Historical volatility measures how far traded prices move away from a central average or
mean value.
 This measures is frequently compared with implied volatility to determine if options prices
are overvalued or undervalued.
 Stocks with high historical volatility usually require a high risk tolerance.
 A stock or other security with a very high volatility level can have tremendous profit
potential but at a huge cost and its loss potential would also be tremendous.
 Therefore volatility levels should be somewhere in middle, and that middle varies from
stock to stock.
 Historical volatility is calculated with the help of close price and it based on historical data.
Difference between Historical and Implied
volatility
Historical Volatility Implied Volatility
Historical volatility is calculated from the Implied volatility is derived from option
previous price movement in the stock. pricing model.

Can be calculated for any stock Can be calculated only for stocks that trade in
options segment

Not a reliable estimate of future volatility as Better estimate of the future volatility of the
the factors influencing price could change. stock, takes into consideration the current
scenario i.e. based on present demand and
supply in options
 Summary
 Volatility is a double-edged sword.

 Volatility does not measure direction; it just measures how much the securities price
is deviating from its average.

 Investors can make higher profits when volatility is higher.

 Traders make use of historical volatility to estimate the future movement, but there
is a chance that the future volatility could deviate from the expected value.

 Option premiums rise when market participants expect greater stock volatility.