Volatility Explained: Standard Deviation, VIX, and What They Mean for Investors

What is volatility?

Volatility measures the degree of variation in a stock's price over time. It is most commonly expressed as the annualized standard deviation of returns. A stock with 30% annual volatility will see roughly twice the typical price swings of one with 15% volatility. Importantly, volatility measures movement in both directions -- it captures upside as well as downside.

Implied vs realized volatility

• Realized (historical) volatility measures actual past price movement over a defined period
• Implied volatility is derived from options prices and reflects the market's expectation of future movement
• When implied volatility exceeds realized, options are relatively expensive (and vice versa)
• The spread between implied and realized volatility is a key metric for options traders

The VIX: market fear gauge

The VIX index measures 30-day implied volatility on S&P 500 options. It is often called the "fear index" because it spikes during market stress. A VIX reading below 15 suggests complacency, while readings above 30 indicate significant fear. Long-term investors can use VIX extremes as a contrarian signal -- high VIX readings have historically preceded above-average forward returns.