Volatility in the context of stocks and indices refers to the degree of variation or fluctuation in the price of a stock or an index over time. It is a statistical measure that reflects the extent of price movement, typically expressed as a percentage corresponding to the annualized standard deviation, a convention which, among other things, simplifies our understanding of and conversation regarding volatility over differing time frames. Options traders commonly refer to two types of volatility: "historical" or "realized" volatility and "implied" volatility.
Realized volatility measures the actual price fluctuations of an underlying asset, like a stock, commodity, or index, over a specific period. Calculated from observed price behavior, "realized" volatility is, by definition, backward-looking; some also refer to it as "historical." Implied volatility, on the other hand, represents the market's expectation of future volatility over a future period.
Unlike historical volatility, it is forward-looking and derived from the current price of options on the stock or index. The Cboe Volatility Index (VIX) Index is the most commonly cited measure of implied volatility, derived from a theoretical strip of S & P 500 options prices with 30 days to expiration; it represents the options market's expectation for the volatility of the S & P 500 Index over the next 30 days. Recently, the VIX Index spiked viciously, exceeding 50 during regular market hours on August 5 — the first time sinc.