In its simplest form, volatility refers to the variation in a stock price. Measuring stock-price volatility is particularly useful for an option trader looking to make short-term bets on the direction of a stock or for a portfolio manager who is trying to hedge against stock-price fluctuations. If you buy a call/put option, or an option to buy or sell a stock at a particular price, you want more volatility. More volatility increases the likelihood your "bet" on the direction of the stock price will be profitable. You can chart stock-price volatility using a calculator or a spreadsheet.
Gather stock price information. You will need at least a month of daily stock price data (or 20 days); however, you will get the best results by using 6 months of data. If you don't know how to do this, go to Yahoo! Finance, input the ticker symbol for your particular stock into "Get Quotes," and click on "Historical Prices." Copy and paste this information directly into a spreadsheet. Column A will refer to historical stock prices and Column B to daily stock prices.
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Calculate the standard deviation.Take the average price over the length of time you chose. If you pulled out 6 months of information, take the average price over 183 days. This can be set up as an average function or by taking the sum of all daily prices (Column B) and dividing by 183.
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Calculate the difference between the daily price (Column B) and the average over the range of data. If you're using a spreadsheet, create a Column C, which will refer to this difference, by subtracting Column A from the average. Drag this function down the length of the spreadsheet.
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Square the difference. Take the square of Column C and call that Column D. Now find the sum of Column D and divide by your days range (183 days for 6 months of data). This is the variance. Take the square root of the variance. This is the standard deviation. In the investor world, this number represents a measure of stock-price volatility.
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Check your results with an historical-volatility calculator. Use the same data referred to in the calculations above. See Resources for a link to an historical-volatility calculator.
Tips & Warnings
Do not confuse stock-price volatility with implied volatility. Implied volatility calculates the future volatility of a stock and involves the use of the Black Scholes option pricing model, which is complex. For a good explanation of the model, see Resources under Black Scholes Option Pricing Model.
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