What is normal volatility for a stock? (2024)

What is normal volatility for a stock?

Volatility averages around 15%, is often within a range of 10-20%, and rises and falls over time. More recently, volatility has risen off historical lows, but has not spiked outside of the normal range.

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.

This measures the average volatility of the S&P 500 on a rolling three-month basis. Some traders consider a VIX value greater than 30 to be relatively volatile and under 20 to be a low-volatility environment. The long-term average for the VIX has been just over 20.

As a reference, the volatility limit of 10% is about two thirds of the volatility, or risk, of the SPDR S&P 500 (SPY). As such it is a conservative Portfolio suited for risk adverse investors with moderate growth expectations.

VIX of 13-19: This range is considered to be normal, and volatility over the next 30 days when the VIX is at this level would be expected to be normal. VIX of 20 or higher: When the VIX gets to be above 20, you can expect volatility to be higher than normal over the next 30 days.

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.”

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.

A highly volatile security hits new highs and lows quickly, moves erratically, and has rapid increases and dramatic falls. Because people tend to experience the pain of loss more acutely than the joy of gain, a volatile stock that moves up as often as it does down may still seem like an unnecessarily risky proposition.

For example, if options on a stock correspond to an implied volatility of 20%, it means the market expects the stock price to move up or down by 20% over the course of a year. However, this annual implied volatility can be converted into a daily or weekly expectation using standard deviation.

What is a good volatility index number?

In general, VIX values of greater than 30 are considered to signal heightened volatility from increased uncertainty, risk and investor fear. VIX values below 20 generally correspond to more stable, less stressful periods in the markets.

Volatility is a statistical measure of the dispersion of data around its mean over a certain period of time. It is calculated as the standard deviation multiplied by the square root of the number of time periods, T. In finance, it represents this dispersion of market prices, on an annualized basis.

If the price of a stock fluctuates rapidly in a short period, hitting new highs and lows, it is said to have high volatility. If the stock price moves higher or lower more slowly, or stays relatively stable, it is said to have low volatility.

Crude volatility estimation

This would constitute a 1% daily movement, up or down. To annualize this, you can use the "rule of 16", that is, multiply by 16 to get 16% as the annual volatility. The rationale for this is that 16 is the square root of 256, which is approximately the number of trading days in a year (252).

Implied Volatility

A ratio of 1.0 means that the price is fair. A ratio of 1.3 implies that the option is most likely overpriced, and is selling at a price that is 30% higher than its real value. A ratio of 0.5 implies that the option is undervalued and is currently selling at 50% lesser than its real value.

Similarly, when traders do not protect themselves vigorously against strong market changes, their IVs fall. The majority of traders are comfortable with IVs of 20% to 25%. Since traders are not expecting any events that could trigger volatility, IVs on ATM Nifty options have recently decreased to roughly 14%.

Common strategies to trade volatility include going long puts, shorting calls, shorting straddles or strangles, ratio writing, and iron condors.

Volatility is determined either by using the standard deviation or beta. Standard deviation measures the amount of dispersion in a security's prices. Beta determines a security's volatility relative to that of the overall market. Beta can be calculated using regression analysis.

IVP of 0 to 20 is regarded as extremely low IV, 20 to 40 is low, and here, traders look for buying options. IVP above 80 is regarded as extremely high IV, and traders typically look for selling options.

Low IV environments equate to lower priced options due to a lack of extrinsic value; and high IV environments equate to higher priced options due to the abundance of extrinsic value. IV and extrinsic value in options prices always share a positive relationship.

How to check IV of a stock?

This is a statistically proven fact by running a test called Co-Integration. If you do not have access to calculated historical IV values use a proxy of INDIA VIX (index of Nifty VIX IVs). Just by looking at it one can make this fact out that IVs are range bound across time.

However, in a volatile market, where prices are moving rapidly, an upside breakout can be followed by an immediate and substantial run to higher prices. This type of potential is the primary reason to trade breakouts in a volatile market environment.

Bad volatility may increase in a market upswing and likewise may crash during a downturn. Good volatility, however, may increase in a market upswing, but may possibly remain steady in a market downswing.