Volatility Analysis for the CMT Exam: VIX, ATR & Bollinger Bands

Volatility on the CMT Exam

Volatility analysis carries 15% weight on CMT Level 2 and is rated the hardest topic by candidates. It connects statistical analysis with practical trading applications.

See the full difficulty breakdown in our anchor guide.

Types of Volatility

Historical (Realized) Volatility

• Calculated from past price data as the annualized standard deviation of returns
• Backward-looking — tells you what happened

Implied Volatility

• Derived from option prices using models like Black-Scholes
• Forward-looking — tells you what the market expects

The VIX ("Fear Gauge")

• CBOE Volatility Index measures S&P 500 implied volatility
• Below 15: Low volatility, complacency
• 15–25: Normal range
• Above 25: Elevated fear
• Above 40: Extreme fear / crisis

Key Volatility Indicators

Average True Range (ATR)

True Range = max(High − Low, |High − Previous Close|, |Low − Previous Close|) ATR = N-period average of True Range (typically 14) Used for stop-loss placement and position sizing.

Bollinger %b

%b = (Price − Lower Band) / (Upper Band − Lower Band)

• Above 1: Price above upper band (overbought)
• Below 0: Price below lower band (oversold)
• Related to Bollinger Bands

Bollinger Bandwidth

Bandwidth = (Upper Band − Lower Band) / Middle Band

• Narrow bandwidth: Low volatility → potential breakout (the "squeeze")
• Wide bandwidth: High volatility

Volatility Regimes

Markets alternate between high and low volatility regimes:

• Low volatility → markets trend, moving averages work well
• High volatility → markets chop, oscillators like RSI work better

Study volatility with our practice tests and the main CMT guide.