Volatility is at once one of the more fascinating, useful — and misunderstood — topics in finance. The fascination stems from its ephemeral nature. Volatility is the markets cost of insuring against uncertain events arriving at uncertain times with uncertain impacts. Risk is quantifiable; uncertainty is not. But the world is an uncertain place, and thus we must hedge ourselves the best we can.

Why is volatility misunderstood? Too many people view a time series of volatility as if it were a continuous process, such as a stock or bond price. It is not an asset, attempts by various exchanges to make it one notwithstanding. Volatility has no natural return such as a coupon or dividend. At best, volatility is an attribute of other asset classes, not an asset class per se.