What is direct volatility?

Future volatility is the future implied volatility of a financial instrument. As future volatility is unknown, several techniques can be used to determine the probability of future implied volatility. Historical volatility is a measure of standard deviation. Historical volatility data can be analyzed in an effort to predict future volatility. Direct volatility predictions can be a useful tool for options trading and general trading of financial instruments.

Implied volatility is itself an indication of the future volatility of an asset. Implied volatility is calculated using theoretical price models. The anticipated rate of change in the price of an asset can be interpreted as the market's expectation of future volatility. Future volatility is an estimate of the anticipated change in implied volatility.

Historical volatility can be plotted. Past implied volatility can also be plotted. Many traders compare historical volatility charts with past implied volatility charts. This comparison can reveal the future direction of volatility. Technical analysis of these charts can allow the trader to predict the future volatility of any financial instrument.

Volatility trading can be used to hedge the volatility risk of an asset position. The ability to speculate on future volatility is available through the use of options contracts as well as volatility trading. A volatility swap is a forward contract on the volatility of an asset realized in the future. A variance trade is another form of volatility trade.

Realized volatility is actually the current historical volatility. Implied volatility is rarely equal to historical volatility. Future volatility is generally considered to increase if market conditions anticipate a bear market. Bear markets are considered riskier and therefore more volatile markets.

Technical analysis charts can use various indicators to determine the volatility of an asset. The standard deviation is an estimate of historical volatility. Analysis tools called Bollinger bands can indicate the volatility of an asset. Moving averages and other indicators can be used to predict the future performance of realized volatility.

Most options brokers provide tables and graphs of the historical and past implied volatility of individual assets and indices. It is up to the trader to analyze these charts in an effort to predict future volatility. The increase in volatility may be due to economic and political events. Individual stocks may have increased volatility due to earnings announcements and other company-related announcements.

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