Volatility is a statistical measure of the degree of variation or fluctuation in the price or returns of a financial asset, such as a stock, derivative, or market index, over a specific period of time. It quantifies how much and how quickly the price of an asset moves around its average price, often measured by the standard deviation or variance of returns.

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Higher volatility means the asset's price can change dramatically in a short time, indicating greater uncertainty and risk, while lower volatility suggests more stable price movements. Volatility is a key factor in assessing the riskiness of an asset, though it is not the same as risk itself, and it is crucial in pricing options and other derivatives.

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Imagine an asset is priced at a certain value, and over the course of a month, its price fluctuates between a much higher and lower range than expected. If it swings drastically up and down multiple times that shows high volatility. In contrast, if the price only moves slightly within a narrow range, that’s considered low volatility.

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