Historical Volatility - HV

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.