Every moment stock prices rise and fall. When you measure the speed and extent of stock prices changes then this is known as volatility. Investors use volatility for a number of purposes, such as figuring out the price to pay for an option contract on a stock. Only you need to figure out a stock’s standard deviation, which is a measure of how widely stock prices are spread around their average value if you want to calculate volatility. Here, the calculations can be done on a spreadsheet or with a calculator. Following are the essential steps to calculate volatility.
Firstly, you need to gather stock price information. The trader must have at least a month of daily stock price data. But, you will get the best results by using at least six months of data. Now, copy and paste this information directly into a spreadsheet. Also, you may mark Column A to represent historical stock price trading dates and Column B to show daily closing stock prices.
Then you need to find the average price over the length of time you chose. Consider, you pulled out six months of information, take the average price over 183 days. It can be set up as the average function or by taking the sum of all daily prices and dividing by 183.
Now, calculate the difference between the daily price and the average over the range of data. If you are making use of a spreadsheet, create a Column C, which refers to this difference, by subtracting Column B from the average. Now, copy and paste this function down the length of the data on your spreadsheet.
Take the results and square the difference. Also, create a Column D into which you put the square of Column C. if you want, you can do this by multiplying the Column C value by itself. Now, it’s time to find the sum of Column D and divide by your day’s range. It is called the variance.
Find the square root of the variance, using the SQRT function. The final result shows the stock’s standard deviation for the entire sample of price data. This number represents a measure of stock-price volatility.
You can check your results with a historical-volatility calculator.