Daily Volatility Meaning | Stockopedia (2024)

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Daily Volatility Meaning | Stockopedia? ›

Stockopedia explains Daily Volatility

Daily volatility, or day-to-day volatility, is a measure of a stock's price fluctuations over a given period of time. It reflects the amount of uncertainty or risk associated with a stock's price movements. Volatility can be measured by examining the range of a stock's daily prices over a given period of time.

How Much Market Volatility Is Normal? Markets frequently encounter periods of heightened volatility. As an investor, you should plan on seeing volatility of about 15% from average returns during a given year.

Understanding Volatility

A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can move dramatically over a short time period in either direction.

What is volatility? Volatility is the rate at which the price of a stock increases or decreases over a particular period. Higher stock price volatility often means higher risk and helps an investor to estimate the fluctuations that may happen in the future.

The speed or degree of change in prices is called volatility. The good news is that as volatility increases, the potential to make more money quickly also increases. The bad news is that higher volatility also means higher risk.

With stocks, it's a measure of how much its price changes in a given period of time. When a stock that normally trades in a 1% range of its price on a daily basis suddenly trades 2-3% of its price, it's considered to be experiencing “high volatility.”

Many day traders like high-volatility stocks since there are more opportunities for large swings to enter and exit over relatively short periods of time. Long-term buy-and-hold investors, however, often prefer low volatility where there are incremental, steady gains over time.

While a commonly cited “good” IV range is 20% to 25%, the ideal IV can vary greatly depending on the specific asset, strategy, and risk tolerance level. Implied volatility (IV) plays a fundamental role in options trading, affecting pricing and the potential for profit.

How to find daily volatility of stock? ›

Implied volatility rank is generally considered to be elevated (i.e. “high”) when it is greater than 50. Extreme levels in IV rank would be 80 and above. Alternatively, when implied volatility rank is depressed (<20) that may be viewed as a potential opportunity to buy options/volatility.

Similar to the VIX Index, the Cboe 1-Day Volatility Index® (VIX1D Index) estimates expected volatility by aggregating the weighted prices of P.M.-settled S&P 500 Index (SPX℠) puts and calls over a wide range of strike prices.

If the price moves a lot in a day, especially with lots of volume, this means that a trader can enter and exit the position easily. This is one reason why volatile stocks are so popular for day trading, in particular. A volatile stock is one whose price fluctuates by a large percentage each day.

For example, a lower volatility stock may have an expected (average) return of 7%, with annual volatility of 5%. Ignoring compounding effects, this would indicate returns from approximately negative 3% to positive 17% most of the time (19 times out of 20, or 95% via a two standard deviation rule).