The volatility of a stock is a measure of the range of a stock price about its mean level for a set period of time. Generally
when discussing volatility there are 4 types of concern: historic, future, expected, and implied. Historic volatility
is the annualized standard deviation of daily returns for a specified period. Future volatility is the standard deviation over
some future period of time. Expected volatility is the forecasted deviation by traders and is one leg of the model to determine
if a security is over or under valued. The last leg is implied volatility which is calculated by plugging the stock's current
price into a forecasting model.
To calculate the standard deviation you first need to find the moving average of the stock price
over a given period. From there the deviation from the mean can be calculated. This is the variance. To find the
variance over the specific period take the moving average of the variance. The standard deviation over this period is the square
of the variance. Do not worry about the math. The
CBOE website as well as several others will do the math for you.
When the term 'beta' is used to describe the volatility of a stock it is referencing the security against the rest of the market.
When beta equals 1 then the security has the same volatility as the market. When beta is less than 1 then the stock is less
volatile than the market.
Volatility is one of the option premium pricing considerations. The more volatile the underlying
security the riskier the option and hence the greater the premium cost. Stocks with betas greater than 1 would generally have
higher premiums than those with betas less than 1 for similiarly priced stocks.
