When is a Volatility Change significant?

An important tool for gauging stock movement is the Historical (or Realized) Volatility of the underlying. Generally this gauge looks back to the 10 or 30 day moving average of the volatility of the underlying stock. In Aqumin’s  AlphaVision landscape (www.aqumin.com) you can easily rationalize a move in many stocks (in this case the S&P 500) with the current trend in Historical Volatility to see if a move is acting “out of character” with market conditions.

First I use the HV10 less HV30 view in AlphaVision for Bloomberg to organize the S&P 500. In this view I use the Absolute Value of the 1 Week Total Return to put all of the recent movement in context (both up and down moves). Very Tall, Dark Green buildings have the HV10 (10 Day Historical Volatility) trading at least 15 pts higher than the HV30 (30 Day Historical Volatility). The light green buildings are closer to even for a change in Historical Volatility. A dark green move had a shock to the stock (most likely a gap on news).

Note Radio Shack (RSH) which announced reduced Earnings Guidance and the stock got nailed. The percentage move for the week was much more out of character. The stock is most likely dead money for the short term. Contrast that move with DeVry Inc (DV). DV had a much bigger move for the week on a percentage basis but the actual HV10 was only a slight uptick over the HV30. DV was already exhibiting higher Historical Volatilities and the current move is just a mild uptick, but if I was positioning the name I would want to stay out of the way on the upside. No sense fighting the tide. Let’s see if the shorts start to cover.

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