#793 - What Makes A Stock Volatile?
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “What makes a stock volatile?” The simple answer to this question is just changes in expectation and when changes and expectation are not in alignment with what people had thought previously, that’s what causes stocks to become volatile. If you really think about how stocks get really volatile particularly around earnings events, it’s only driven by the fact that we have new information that changes our future expectation of where the stock is going to go. And so, if that new information is really good for example for a stock and people have assumed that the stock was going to have a bad year and it turns out, the stock might have a good year, then we see a dramatic change in the stock’s price. We have lots of volatility as market participants re-price the stock into a new territory. The same thing happens in reverse. If a stock’s having a really good year and then we have this new information that comes in, it could be earnings, it could be something else related in the industry, a breaking new story that’s really bad for the security and changes the outlook or the expectation, then the market participants dramatically re-price the stock into a lower territory and that’s where we see really big volatile stock moves. Again, what makes a stock really volatile? It’s just the expectation in the market. And so, if you have a company that’s new or just started up or that’s starting to gain market share or lose market share and all of this is happening very fast and the company is changing dynamically very fast, the stock naturally is going to be more volatile. The one right now that I think of all the time is Tesla because Tesla recently went through almost a 50% drawdown this summer and almost a 30% rebound since then and the company is really volatile because the company is still very much a new company. It’s very much a startup company that’s developing its brand and starting to get exposure and mass-market appeal and so, as a result, its earnings are fluctuating pretty quickly and so, as expectations in Tesla change, so does the stock price pretty violently. Compare this to something more stable like the SaP or IWM which is the Russell 2000, it’s not going to change that much because all of the components are not really that heavily weighted, so as a result, small changes in the components really don’t change the major indexes that much as far as expectations go. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.