Understanding the Four Measures of Volatility

Type 4: Intraday Volatility

Finally, we have intraday volatility. This represents the market swings during the course of a trading day and is the most noticeable and readily available definition of volatility. Intraday volatility is the Justice Potter Stewart type of volatility because it's hard to define but you know it when you see it. A common mistake is equating intraday volatility with the implied volatility index. Both of these forms of volatility are not interchangeable, but do carry their own importance in ascertaining investor sentiment and expectations.

I have calculated two measures of market volatility using data from the S&P 500. The first is intraday volatility which reflects the difference between the high and low on the day divided by the closing price of the day for the SPX. The second, LakeView Asset Management VDEV, is a proprietary measure of volatility that I created using historical trends in the SPX to predict future volatility. The VDEV will be discussed in a future installment of this series.

Click here for a larger view the intraday volatility chart.

In summary, here is a recap of the four types of volatility:

• historical volatility -- the movement of an asset or asset class relative to itself;
• implied volatility -- volatility that is embedded in an option price;
• volatility index -- a weighted average of implied volatilities for options on a particular index;
• intraday volatility -- the price movements in a stock or index on or during a given trading day.

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