Options & Derivatives

Volatility

The standard deviation of returns, expressing how much an asset's price fluctuates.

Annualise with the square-root-of-time rule: multiply daily volatility by sqrt(252) ≈ 15.9. A 1% daily move is roughly 16% annualised.

A useful mental conversion: annual volatility divided by 16 gives approximate daily volatility. A 32%-vol stock moves about 2% a day.

Not the same as risk. Volatility is symmetric and treats upside and downside identically, and it says nothing about tail shape. A strategy can have low volatility and enormous tail risk - which is exactly how several well-known blow-ups looked beforehand.

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