Implied volatility refers to how much a stock is expected to move away from its underlying price with the coming year. It is measured in standard deviations and traders with risk management, especially in options trading. When implied volatility is low the market is not expecting much price movement and when it is high the market expects large price movements up, down, or both within the coming twelve months. A common measure of volatility for the market is the CBOE VIX index. When a stock has low volatility, its options prices are typically low. How to find stocks with low implied volatility is a useful skill in trading.

Why Are Stocks More Volatile Than Bonds?

Stocks can go up or down significantly in a year. The rate of return on a bond does not change although the immediate traded value of a bond will fluctuate with changes in interest rates. If a company goes bankrupt, bondholders are paid first and stockholders are paid afterwards if at all. That having been said, the investment potential for a growth stock can be significantly greater that for a bond with the same company. But if the company gets in trouble the downside risk for that company can be significant for stocks while holders of bonds commonly get paid the same no matter how the company is doing, provided that they don’t go totally out of business.

Why Is There So Much Volatility in the Stock Market?

The stock market looks forward to what prices will be an hour, a day, a week, a month or a year hence. Investor and trader sentiment can vary widely over short spans of time. Thus in the short term the stock market can be quite volatile as participants “bet” on where prices are going either by buying or selling stock, trading options, or buying or selling futures. The price of a stock and the return on investment can vary with the economy and factors unique to an individual stock that stock can be substantially more volatile than a bond.

How to Find Stocks With High Implied Volatility

As a rule options traders buy options when implied volatility is low and sell when it is high. One could calculate implied volatility by using options prices and a binomial pricing model but in the real world of trading, one uses a screener that does the calculations automatically. At DayTradeSafe we suggest the NInjaTrader platform which includes implied volatility calculations in the package. When choosing stocks to trade successful traders commonly consult implied volatility but not to the exclusion of the other technical indicators that they commonly rely on.

Is High Volatility Good in Stocks?

Profit in the stock market generally comes from price changes. Long term investors profit when stock values appreciate over time. Options and futures traders can profit no matter which direction prices go. In both cases, more volatility provides more profit potential but it also introduces more risk. Successful traders learn how to profit from volatile stocks by exercising discipline in how they enter, manage, and exit their trades as we teach our students at DayTradeSafe.

What Is the Most Volatile Stock Today?

The answer to this question will vary day by day. Thus, traders who want to profit from trading extremely volatile stocks need to screen daily. Profiting from these stocks generally requires having done your homework in advance. Thus you will have picked a stock that had the potential for extreme volatility which is now playing out. A common example of this situation is a biotech stock with a potential blockbuster drug going through FDA trials. When it passes a trail stage the stock will shoot up and if it fails the stock will plummet. Having done your homework will prepare you to trade profitably in such situations.

How to Find Volatile Stocks for Swing Trading

The VIX is an effective tool for measuring near term volatility. It looks at puts and calls for the coming 30 days. Thus this measure of volatility fits for swing traders who will expect to enter and leave trades within a few day or a few weeks. As with any measure of implied volatility one uses a screener such as provided by the NinjaTrader platform instead of trying to hunt down individual stocks and do the calculations by hand.

How to Find Volatile Stocks for Day Trading

Stocks that may not move much in price from one year to the next can often provide profitable day trading opportunities due to their intraday price movement. Large cap stocks trade in high volume and liquidity making them ideal for application of technical analysis. As with swing trading it pays to have done one’s homework in order to predict trends but for very short entry and exit trades the best course of action is to use a screener to choose the stock in question and trade strictly using technical indicators managing with discipline as one enters, manages, and exits trades.

Leave a Reply

Your email address will not be published.