Volatility is the measurement of the fluctuations in market prices. When the market price of the underlying increases/falls by 15 or 20 bps daily, the market is more volatile than in the case of 3 or 5 bps fluctuations. When the volatility of the underlying is 27%, then an underlying with the face value of $7.85 is expected to move between 7.85 ± 2.12 (2.12 = 7.85 x 0.27) this year. The probability of the price staying within this range is 68%. When volatility increases, share prices decrease. The following graph shows the historical volatility, the implied volatility, and the market price of the IBM shares.
Volatility and share price of an IBM share
