# How to Calculate Average Daily Stock Price Volatility

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The term "volatility" has several definitions. In a financial context, volatility means the amount a stock price changes over time. So volatility is in effect a measure of how volatile a stock is; that is, how likely it is to move up or down. Historical volatility is measured over a specific unit of time; e.g., daily volatility, monthly volatility and so forth. The more data points you have, the more robust your results, so ideally you want to average at least one month of daily volatility data to produce your average daily stock price volatility.

Record the amount a stock changes every day for at least a month. It doesn't matter whether it moves up or down. Volatility is measuring the tendency to change, not the direction of the change.

Convert the dollar amount a stock moves up or down each day into a percentage. For example, if a stock that was trading at \$50 drops by \$2 in one day, that is a 4 percent daily volatility (2/50 = .04). The next day the stock goes up by \$1, representing a volatility of 2 percent for that day (1/48 = .02).

Add up all of the daily volatility percentages for 30 days, and then divide the total number by 30 to get your average daily stock price volatility for that month. While there are no guarantees that the volatility of a stock will be the same the next month, assuming no major news, 30 days is enough data to have a reasonable degree of statistical certainty that the volatility will be similar for the next few months. Of course, the more data points the better. Three months' or six months' worth of volatility data will give you an even more reliable volatility figure.

#### Tips

• There are also ways to measure the volatility of the overall equities markets. The most well known is the Volatility Index (VIX) offered by the Chicago Board of Options Excange. The VIX provides a minute-by-minute snapshot of expected stock market volatility over the upcoming month. The Volatility Index is calculated using the premiums for stock index option prices, and is a measure of implied (expected) volatility.