I’ve read a few option books.
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Sunday, September 11, 2011

Historical Volatility – Part 7: Comparing HV

Go back to Part 6: Interpretation.

One other way to use the HV data is by comparing the values among different stocks, as well as for a particular stock.
Here are some of the possible ways and its purpose/use:

1) Comparing the HVs among different stocks.
Although the volatility always fluctuates, it tends to oscillate around some “normal” value over long period of time, which can be deemed as its “average” value. When the volatility is relatively high or low, it would then move back or reverse towards its average value.
Therefore, we can use the average value of HV to compare between the volatility of one stock with the other, in order to estimate whether the stock is relatively “more volatile” or “riskier” than the other.
A stock with higher HV is considered to be a “more volatile” or “riskier” stock than that with lower HV.

2) Comparing the HV of a particular stock a particular point of time with its own average HV value.
As mentioned earlier, the volatility of a stock will always keep fluctuating.
Comparing the HV of a particular stock a certain point of time with its own average HV value will allow us to what has happened to the stock price.
When the HV is high, that means the stock has been showing extreme fluctuations in price during the period.
When the HV is low, that means the stock has been in quiet or sideways trading during the period.

3) Comparing the HV of a particular stock in different period used for calculation.
Comparing the HV of a particular stock in different period can help to determine whether the volatility is rising or falling.
For example:
If the 30-day HV of a stock is 50% and 10-day HV of a stock is 15%, it suggests that the stock has recently experienced a sharp decline in volatility.

To view the list of all the series on “Historical Volatility”, please refer to: “More Understanding about HISTORICAL VOLATILITY

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2