Volatility Charts

Volatility Charts lets you chart movements in both historical and implied volatility over varying timeframes. It provides a valuable "second perspective" for chartists to confirm or negate technical signals, or it can be used alone as a concise summary of an underlying stock's movements, as reflected in the options marketplace.

How Volatile is Your Stock?

Stock and options traders alike can benefit from a "bird's eye view" of their underlying stock's volatility over time. To get your overview, simply enter your stock symbol at top and click "Go".

Volatility Charts then generates a summary table of key figures, plus a one-year chart comparing 30-day historical volatility to the 30-day weighted average of implied volatility.

The summary table at top compares the stock's current price and today's price change with its 52-week high and low, for a full annualized context.

The underling price is a daily quote based on the pervious days close. To receive a real-time quotes please use the button  in the upper right corner of the screen.

You can also review key volumes over the previous year here: total stock volume for the pervious day, the average daily volume of options contracts, and the average daily open interest for options (all classes, strikes and series). Comparing the current option volume to the daily averages will help determine if the volume is relatively high or low on any given trading day.
Open interest refers to the number of outstanding contracts on a particular option class, series or in total that are still open; in this table the number is an annual daily average. Higher open interest figures tend to translate to more activity in the options market for that underlying stock or ETF, which can further translate to tighter bid/ask spreads for the options generally.

The line chart itself defaults to an annualized view of historical and implied volatilities, expressed as 30-day weighted moving averages. An IV index has been created to make a more actual 30-day weighted average of volatility, giving you an apples-to-apples comparison of the two.

Historical volatility refers to actual volatility that's occurred in the underlying security during some past time period, in this case the previous 30 days. In other words, historical volatility is calculated using 30 days' worth of previous trading in the security to show the actual volatility, or up-and-down movement in percentage terms, over that historical period.

Implied volatility, on the other hand, is the market's estimate of future volatility. It's derived from the option's price and projects potential future swings up or down.

Note: Keep in mind that, in both cases, volatility doesn't predict whether prices will go up or down; it just implies a percentage swings in either direction the security can make or has already made. Volatility measures the potential size of price swings, not their direction.

To change implied volatility views in the line graph, click on the text links above the chart. You can switch between 3-month, 6-month or one-year views. You can also isolate the Implied Volatility Index for just puts or calls, or show it for both puts and calls as overlapping graphs, or you can use the default IV Index mean, which is an average of the puts and calls IV Index.

The chart shows you movements graphically, or you can refer to the numerical table at the bottom. These summarize the key figures that the line graph represents in a picture: annual highs and lows, comparison points between today's volatility and that of one week or one month ago. The Implied Volatility table also breaks out the individual put and call volatilities in comparison to the mean figure.

Finally, take a look at the volume chart in the middle. Just like stock chart reading, it can be useful to compare volumes during key swings in the volatility graph to get a closer read on how many traders participated in those moves.

Confirming Technical Signals: An Example

For this example, we've chosen to chart Rambus (RMBS), a semi-conductor company owning many patents and, consequently, many ongoing legal defenses whose results make for often dramatic volatility in its options.

Because volatility only indicates the size of a price swing, not its direction, it's sometimes known as the "fear factor". A high-volatility stock or option has the potential to make big moves up or down, even swing back and forth repeatedly before expiration, and its final price is quite uncertain as a result - not a comfortable position for every investor.

If you're looking to interpret a large price move on your chart using technical analysis, how could Volatility Charts help you?
Take a look at the big volatility moves in RMBS in January and late April 2006 respectively. Comparing those spikes with volume bar chart below, it's readily apparently that big volumes in options trading accompanied each volatility move. It's also apparent that both upward spikes collapsed downward shortly thereafter.

If volatility can suggest the levels of fear in the market, a sudden swing towards higher volatility fueled by many market participants (as measured by the volume chart) often spells trouble. Many times on a large price moves up, implied volatility will act inversely to the price swing, and the options will start trading at lower implied volatility levels. This is obviously not the case in this example.
Let's compare this Volatility Chart with a traditional stock chart over the same timeframe. Did high volatility combined with high options volume indicate a price drop for the stock, as our theory suggests?

The answer is yes. In late April the stock price dropped precipitously, a move potentially signaled by the combined volatility spike with high options volume.

The options and equity markets overlap more and more. Using clues from options and implied volatility activity can give you one more tool to add to your arsenal before placing trades.

While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility there is no guarantee that this forecast will be correct.

The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any of the securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of TradeKing or its employees. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment advice. You alone are responsible for evaluating the merits and risks associated with the use of our systems, services or products. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. Your use of this service is conditioned to your acceptance of the terms of TradeKing disclosures. 2006 TradeKing.