Dan Passarelli, CEO - Market Taker Mentoring

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Did you ever wonder, hey, how much is the stock likely to move today? Well, I've got a little tip for you. We can take options volatility data and simply translated from the units that it's in into a one day volatility, a one day standard deviation.

Both historical and implied volatility are both the annualized standard deviation based on the past month of price movements. So we can take either historical or implied volatility. Those would give us different results, and we can talk about that maybe in another video. For today, let's just use historical volatility.

We can say, hey, historical volatility is 26.7%. We'll just round it to that. And because that's the annualized figure, if we divide by the square root of the number of trading days in a year, that will give us the one day expected volatility move. So there's a couple of things to unpack that are really important. First of all, how do we get the square root of the number of trading days?

How many trading days are there in a year? Well, there's basically about 256. We're rounding there, but the square root of 256 just happens to come out to a pretty little 16. So if we take 26.7 divided by 16, that's going to give us 1.67. Now, recall that volatility figures are percentages, so that means we would expect, on an annualized basis, the stock to move 26.7%, but in one day, we would expect it to move 1.67%.

Now, when we say expected move, what exactly does that mean? We're talking about a one standard deviation. So that's not some guarantee that it's going to move that much. What it means is that about two thirds of the price movement over time would fall up 1.6% or down 1.6%. 

So that gives us sort of a likelihood of where most of the time the price is going to be. And it becomes very, very useful information whether you're trying to manage your delta versus theta or you're trying to manage your theta versus your gamma, if your short options and lots and lots of really useful techniques there. So we can talk more on that in the future in some of our classes, I hope that helps.