The practice involves the buying and selling of instruments related to the expected magnitude of price fluctuations in an underlying asset. A common example includes options trading, where participants speculate on, or hedge against, potential market movements, irrespective of direction. Understanding the dynamics of volatility provides opportunities to profit from the rate at which prices are anticipated to change.
Its importance stems from its capacity to provide portfolio diversification and risk management strategies. By utilizing instruments focused on instability, investors can protect their holdings during periods of market turbulence. Historically, these strategies gained prominence following events that caused significant and unexpected price shifts, leading to increased demand for tools to mitigate potential losses.
