Volatility Clustering

Tendency for volatility to persist in clusters

What is Volatility Clustering?

Volatility Clustering The empirically observed tendency for large price changes to be followed by large price changes and small changes to be followed by small changes, regardless of direction. This means volatility is autocorrelated and tends to persist in regimes. Options traders can exploit clustering by selling options during declining volatility periods and buying during rising volatility.

Complete Definition

The empirically observed tendency for large price changes to be followed by large price changes and small changes to be followed by small changes, regardless of direction. This means volatility is autocorrelated and tends to persist in regimes. Options traders can exploit clustering by selling options during declining volatility periods and buying during rising volatility.