Chapter 3

Working with Volatility to Make Investment Decisions

The subject of volatility, as any experienced trader will attest, is itself a volatile subject. Volatility has undergone remarkable changes during the past couple of decades in terms of how it’s calculated, predicted, and utilized by investors and traders alike.

In the financial markets, volatility refers to the likelihood that securities or indexes change in value over time, either measured as a series of past events or implied for the future. Usually, the term is applied to stocks and to the options contracts based on those stocks. The share price for a volatile stock will tend to go up and down a lot over time. Traders seek to predict the future volatility of a stock or options ...

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