What It Means
Volatility measures how much and how fast a stock or index's price fluctuates. A highly volatile stock swings sharply in short periods; a low-volatility stock moves gradually. It's used broadly as a gauge of risk and uncertainty, not just for options pricing.
How It Works
Volatility comes in two flavors traders track separately: historical volatility, calculated from a stock's actual past price moves, and implied volatility, backed out from current option prices as the market's forward-looking estimate of future volatility. The two don't have to agree — implied volatility often rises ahead of a known event (earnings, a big policy announcement) even if the stock hasn't moved much yet, because the market is pricing in uncertainty about what happens next. High volatility isn't inherently "bad" — it means bigger potential moves in both directions, which is exactly why option premiums are more expensive on volatile stocks.