There is some confusion regarding whether volatility (in finance) is a percentage or “just a number”.
Is Volatility a Percentage?
The simple answer is:
Yes, usually volatility is a percentage. But it does not always need to be.
Percent per annum is the most common unit of volatility in finance. It is a direct implication of the way volatility is usually calculated.
Alternatively, you can also quote volatility in other units:
- Percent per day, week, or any other time period.
- Dollars, euros, or other currency units (no percent).
Nevertheless, when you hear a trader say that volatility is 25, it usually means that volatility is 25% p.a.
Volatility vs. Volatility Indices
The VIX (CBOE Volatility Index) and other volatility indices typically reach values in low double digit numbers. You may hear something like “The VIX increased to 17 today”. It means that implied volatility of the S&P500 index (which is measured by the VIX) increased to 17% p.a.
However, there are no percentages in the indices themselves. The units of the VIX index for example are usually referred to as “VIX points”. One VIX point represents one percent per annum in the implied volatility of the S&P500 index.
It is no big deal, but the distinction between points and percentages becomes important when you are trading derivatives (futures and options) on volatility indices. 17% mathematically means 0.17, but if you trade a futures contract on the VIX, which has a multiplier of 1,000, the value of a contract priced 17 is 17,000 dollars (17 x 1,000) and not 170 (0.17 x 1,000).