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What is 'volatility'?

NJ
Written by Nodar Janashia
Updated 3 months ago

Volatility is a measure of how large an asset's prices swing around the mean price within a given timeframe.

More volatility means less price predictability hence more volatile assets are often considered risker. 

In options, volatility is used to calculate premium fee pricing for call/put option contracts based on their strike price and expiration.

For liquidity pooling on AMMs such as Uniswap, volatility could help us estimate risk of possible impermanent loss as .

By combining liquidity pooling on Uniswap with an option straddle (buying a call+put option with the same strike price) we are purchasing insurance against possible impermanent loss. Volatility could estimate if pooling fees earned will be greater than option premiums paid.

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