Historical Volatility - HV
Categories: Derivatives
When we look at an asset’s historical volatility, or HV, we’re trying to answer these two questions: (1) How spastic has the behavior of this asset been over the last X trading days? (2) Is that more or less spastic than the behavior of that market in general?
Spasticity—er, volatility—isn’t necessarily a bad thing. After all, if we’re savvy enough and have good enough timing, we can make a killing buying and selling in time with a high-volatility asset’s peaks and valleys. But in order to figure out when those peaks and valleys might occur, it’s helpful to look at how, when, and why they’ve occurred in the past. In other words, it’s helpful to look at the asset’s historical volatility.
Let’s use an example to demonstrate how this works. Let’s say we’re interested in automotive industry stocks, so we have ourselves a look-see at the moving average, or MA, of automotive stocks in general over the last 90 days. For the most part, the assets seem to be moving in formation: their price and trade volume go up together, and they go down together. But there’s one company, Jalopy Motor Co., that stands out to us. When the MA moves slightly up, Jalopy’s stock jumps twice as high. And when the MA moves slightly down, Jalopy’s stock drops significantly.
This shows us that Jalopy has a higher HV than its market average. If we think that trend is going to continue, we might consider buying Jalopy stock when it’s low, with he expectation it will shoot higher than the MA in the future, making us some coin in the process.
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Finance: What is the Historical Trading ...18 Views
Finance, a la shmoop. What is a historical trading range? All right you know how [The question written on a blackboard]
some Wall Street words are arcane, uh no arcane.. they say one thing but they mean [Pong being played]
something entirely different? Yeah well this is not one of those times.
Historical trading range, darn well you could say that AT&T has had a historical [AT&T tower]
trading range at a given price largely because well here's its stock chart for
the last umpteen years and you can see that it hasn't really moved sort of [AT&T showing a fairly consistent price over time]
lived between 30 and 40 bucks a share more or less forever it seems all the
investment gains to AT&T shareholders came through the company paying massive [Definition of dividend written on a 100 dollar bill]
dividends but historical ranges aren't just about stock prices alone like
here's the historical trading range of the price to earnings ratio of the S&P
500 so this chart shows the range of p/e multiples from 1880 to today ish and [Arrows showing the date range on the graph]
note that the lion's share of multiples lived in this band from about ten times [Lion's head appears]
to about 20 times and this was the range of multiples in yes there were outliers
like down here in the dumps after the economic hangover post-world War two [Man welding in a workshop]
repair work and then up here as well where earnings were actually very low
like one-time low so the price to earnings ratio was very high right like [Arrow pointing to the highest peak on the graph]
all the companies missed their numbers horribly went negative and stuff
all right like the company used to trade for 20 bucks a share and earned a dollar
well it might have had in that short period only a dime of earnings when
everything went bad and the world was ending but the stock went down 40 percent to [Picture of a city on fire]
12 bucks and on a dime of earnings while that 12 bucks seemed like a huge
multiple at 120 times but Wall Street knew the world wasn't ending and things
did come back and well here we are doing this video, so the short lived things get
tossed out and when you look at ranges you look at their history not just one [Bag labelled 2008 recession is chucked out the door of a house]
moment in time but decades in the past and you think about the ranges and what [Highlighted area on the graph going further back in time]
it implies in the future if anything and when in doubt yes you just sing Oh home
on the range, where the price to earnings ratio [Girl sat next to a fire with a guitar singing]
plays, or something like that historical trading range that's what it
is go check it out...