Historical Volatility

Historical Volatility is a measurement of the price movement of the underlying stock over a 6-month period of time. This value can tell us what types of price fluctuations we could expect from a stock, helping us to identify stocks that fit our personal investment strategy. Highly volatile stocks are subject to wide, quick price movements. This isn’t necessarily a bad thing, if we are prepared for the consequences. Highly volatile stocks have a greater potential for quick gains, however they can lose money just as quickly. Low volatility stocks are often more stable, and less prone to wild price movements. As a result, they aren’t as likely to see heavy gains over a short period of time.

Volatility is expressed as a percentage, and represents the variance in the standard deviation of a change in the price of the underlying stock over a six month period. If that sounds like a little more than you would care to know, don’t worry about it. The definition is simply included to satisfy the curious.

Here’s what the Historical Volatility figures actually mean to us. If we have a stock with a Historical Volatility of 16%, it simply means that we should expect a stock with a price of $100 per share to fluctuate between a low of $84 per share, and a high of $116 per share over a 6-month period. As you can see, it doesn’t matter whether the stock is trading at its low range or its high range, the volatility is the same. The volatility figure does not tell us the potential direction of the stock.