High Volatility Stocks: 10 Tickers to Track

2023.04.20 2023.04.20
High Volatility Stocks Today

Oleg Tkachenkohttps://www.litefinance.org/blog/authors/oleg-tkachenko/

In the first three months of 2023, high-volatility stocks could generate more than 25-50% returns for investors. For example, SoundHound’s stock has returned over 280% during the above mentioned period. Some blue chips grew a little slower (by 20-25%). But even these profitability indicators turned out to be higher than the S&P 500‘s return, which grew only by 10-12% during this time.

If traders know how to calculate the volatility of stocks relative to an investment portfolio or indices, then they can rebalance the portfolio, reverse the position, increase volumes or close trades.

This article will help you find answers to the following questions:

• How to compare the volatility of stocks with other assets and what tools are available for this?

• How to use stocks with high daily volatility in different trading strategies?

• What stocks have been the most volatile in the last few years?

This information will be useful to stock traders and investors using different strategies.

What is volatility in stocks?

Stock market volatility is the frequency and magnitude of price movements in stocks, indices, and other financial instruments. The volatility value is determined by the amplitude of the price movement for a fixed period. It is calculated as a percentage of the stock price.

Volatility in the stock market is measured by the standard deviation of prices over a given period of time. To evaluate the parameter, the price changes of different assets or the change in the price of an asset for different periods are compared. The larger the standard deviation, the greater the volatility.

Low volatility occurs when the price of a stock fluctuates around the same level for a long time, or is in a narrow range, or moves very slowly in one direction. In such conditions, trading volumes are relatively small. The growth of volatility is accompanied by an increase in trading volumes and an increase in the price movement corridor.

Example 1. The price of stock A fluctuates on average by 1% per day, and the price of stock B by 4%. Thus stock B is more volatile than stock A.

Example 2. The stock price, most of the time during the day, deviates from the median value by 3%, but yesterday the price movement corridor was 7%. Thus, yesterday the stock price showed increased volatility.

It will look like this in the chart:

From June to October 2021, Tesla stocks rose by 30% from 213-216 USD to 280-290 USD. Over the next two months, the asset’s price exceeded 400 USD, increasing by more than 40%. Then there was a deep drawdown, and the price again tried to test the previously set high. Section 1 is marked by a period of low volatility with shallow drawdowns. Section 2 shows high volatility with sharp multiple price spikes and deep drawdowns.

Another good example of hyper volatility is the rise in GameStop stock prices in January 2021. Thanks to the Reddit community, the price has risen over 1500% in two weeks.

Tools that can be used to evaluate volatility or compare it with the volatility of other assets, indices, and portfolios include standard deviation, maximum drawdown, and beta coefficient.

What is Standard Deviation?

Standard deviation is the measure of market volatility. It is calculated as the square root of the standard deviation (SD). The SD measures how much values ​​in a sample deviate from the mean. If the values ​​in the sample are more scattered, then the standard deviation will be higher. If the values ​​are more narrowly distributed around the mean, then the standard deviation will be lower.

Schematically, the spread of price values ​​in the sample and the value of the standard deviation looks as follows:

For 12 months, both stocks rose at the same rate. But the standard deviation of stock B and the amplitude of its price movement is higher than the standard deviation of stock A. Therefore, stock B is more volatile than stock A.

Below are signals indicating an increase in volatility:

• An increase in the body of candles and/or their shadows indicates that over the same period, the range of price dispersion, the corridor between the maximum and minimum prices, has increased.

• An increase in trading volumes indicates an increase in interest from investors who will push the price in one direction or another.

• An increase in the angle of price movement relative to the horizontal indicates a sharper price change.

Traders can also focus on the volatility of interrelated assets. For example, with the growth of volatility in the oil market, the volatility of energy companies’ stocks automatically increases.

What is Maximum Drawdown?

Maximum drawdown is one of the key performance indicators of a trading system. This is the maximum decrease in the deposit relative to its maximum value for a certain period. This is the largest loss for the investor, defined as the difference between the maximum and minimum value of capital, expressed as a percentage of the maximum value.

Example. Your initial deposit is 1000 USD. As a result of trading, the deposit increases to 1200 USD, then drops to 600 USD and recovers to the level of 1300 USD. At a fixed time interval, the maximum that was before the subsequent minimum is taken into account. Therefore, the maximum drawdown is (1200-600)/1200 = 50%.

The drawdown level indirectly characterizes the volatility value. The greater the amplitude of the price movement, the greater the volatility and the greater the possible drawdown if you are going to hold a trade in the market.

Relation between volatility and maximum drawdown. The maximum drawdown for a trade opened at point 1 and closed at point 2 will be the distance between the horizontal lines. Rising volatility means the distance between the lines will increase, so the drawdown will be greater. If the trade remains open, the Margin level and Free Margin values will decrease, resulting in a stop-out.

How to avoid stop-out (forced closing of trades by the broker):

• Use stop loss and follow risk management rules. It makes no sense to set a stop loss at a short distance, as it will be often triggered by the volatile price moves. But it’s also not worth moving it or putting it obviously far away.

• Open trades with a volume commensurate with the size of the maximum drawdown.

• Don’t use leverage too often. Leverage is a tool for reducing margins with the same position size and not for increasing transaction volumes.

The maximum drawdown value can be seen in the backtest after testing the strategy.

Try to close the trade earlier, avoiding the maximum drawdown.

What is Beta?

Individual stocks may rise and fall faster or slower than the market, or follow the market. The beta ratio allows traders to compare how much stocks are volatile in comparison with an investment portfolio or the market.

The beta coefficient is a statistical parameter that shows how volatile an individual asset is compared to the average volatility value. When calculating the beta coefficient, the following are compared:

The coefficient formula considers the return of an asset in a certain period, the return of an index/portfolio, and dispersion. If you want to calculate the coefficient manually, use the covariance function in Excel. But it is easier to find this indicator on the website of exchanges or analytical portals. Below is an example of a filter from the Finviz stock screener.

Beta values:

• β = 1 means that the percentage stock price change is the same as the change in the index price. For example, the NASDAQ index rose by 10%. Thus, the Meta stocks included in it also grew by 10%.

• β > 1 means that the stock is more volatile than the market. If the ratio is 1.3, then if the index price changes by 10%, the stock price will change by 13%.

• β < 1 means that the stock is less volatile than the market. If the ratio is 0.8, then if the index price changes by 10%, the stock price will change only by 8%.

The higher β, the more volatile the stock price. A negative β indicates an inverse correlation, meaning that if the profitability of an index or portfolio increases, the stock’s return goes down.

The coefficient β of a portfolio is the sum of the bets of the stocks it contains, multiplied by the weight of each stock.

Is High or Low Volatility Better for Stocks?

The higher the volatility, the higher the return, but also the higher the risk. So the answer to this question depends on your trading strategy.

1. Long-term investment strategy

For the buyer, high volatility is better on a growing trend. Low volatility is better if the market is falling.

In a growing market, a high beta value of an investment portfolio indicates that the portfolio is growing faster than the market and your stocks are generating more income than stock indices. But in a falling market, the situation is the opposite, and the loss is greater. Therefore, in such a situation, during an uptrend, make a portfolio of stocks with a beta greater than 1. As soon as a reversal occurs in the long term (as during a pandemic), change the portfolio structure to stocks with a beta of less than 1. A portfolio with a beta below one is considered defensive since its stocks depreciate more slowly than indices.

2. Scalping

In scalping, it doesn’t matter what the beta is for a year or a month. With this strategy, seconds and minutes are important. Therefore, high volatility is a key indicator for scalpers when choosing an asset. A large amplitude of price fluctuations and a high frequency of reversals are important for scalpers. If the amplitude is small, the spread will reduce traders’ profit. If the reversal frequency is small, traders will waste time. Therefore, high volatility is beneficial for scalpers.

3. Intraday Strategies

Moderately volatile stocks with relatively clear intraday trends without sharp fluctuations are more suitable for intraday strategies. High volatility can trigger traders’ stops while moving stops will increase the risk of getting a stop out. On the other hand, low volatility means lower returns. Stocks with a beta of around 1 are fine with these strategies. The price movement of the stock index will be the benchmark.

How Do Stocks Become Volatile?

The main reasons for the increase in volatility are listed below.

Economic news, macroeconomic and industry data

The greater the discrepancy between the news and the preliminary forecast, the faster the volatility increases. For stocks, one of the main triggers is financial reporting, including financial results, changes in production volumes, etc.

Geopolitical events

Conflicts, wars, terrorist acts.

Unexpected news about companies

Changes in management, litigation, bankruptcy or financial problems of large companies in the industry.

Changes in legislation

Changes in industry legislation affect sales volumes and financial results in the countries where the company operates.

Changes in related markets

Changes in the commodity or currency markets indirectly affect the stocks’ volatility.

Short squeeze

A short squeeze is a situation when the price begins to rise sharply due to the need for sellers to close short trades ahead of schedule or forcibly. Slow price growth forces sellers to buy stocks, thus increasing demand, volume, and volatility. The price then drops sharply during the wave of sales after the price has reached its peak.

Actions of market makers

Institutional market participants are deliberately singing the market with volumes of transactions. Such an increase in volatility often takes place on short-term timeframes.

In stable markets, volatility is low. The stock price is in a flat or moves slowly up or down without sharp fluctuations.

Should Investors Buy Volatile Stocks?

Long-term investors prefer low-volatility assets. They are interested in slow but stable growth without sudden fluctuations and deep drawdowns.

It is also better for beginner traders to avoid periods of abnormal volatility. They may occur during the release of macroeconomic statistics or the publication of financial statements. If traders do not yet know how to react quickly to market changes and do not know how to quickly calculate the risks when trading constantly volatile stocks, they risk losing money on a stop-loss.

For short-term traders, high volatility is an ideal market condition, during which it is possible to make money on trades in both directions. This strategy is often used when trading CFDs, including short trades, and when it is possible to reverse a trade in one click. The “Buying the dip” strategy is more common in exchange stock trading.

What is “Buying the Dip”?

“Buying the dip” is a strategy that involves buying a stock at its lowest price after a bearish trend ends, with the expectation of a further price rise. This is similar to swing trading, that is, opening trades at the end of corrections.

The advantage of this strategy is that traders buy securities at a lower price. It works in the following cases:

• When there is a growing trend in the market with a positive news background. For example, stock indices have been growing from 2009 to 2020. Accordingly, the stocks of most companies rose in price. Their drawdown was local while the uptrend continued.

• If stocks have great growth prospects. Otherwise, even the rise of the entire market will not help. For example, General Electric stocks fell in 2017 with no hope of recovery.

If these conditions are not met, the investor risks buying stocks that will fall in price even more.

How Can I Trade Changes in Volatility?

It depends on what strategy you follow:

1. Long-term strategy

In this case, it is better for traders to ignore the high short-term volatility. If you understand that there is a strong uptrend in the stock market (it can be determined by indices), then it is better to close the chart and not get nervous at each local drawdown. It is also important to insure the trade with a relatively long stop so that the trade does not close ahead of schedule during price jumps.

2. Volatility trading

There are two approaches:

• Sell when volatility decreases because you are interested in quick profits from price spikes. If the price goes flat, the market is calm or growth slows down, it makes sense to look for more volatile stocks.

• Catch every moment of the reversal. Reverse position when there is a signal. The greater the amplitude of the price movement, the greater the earnings, provided that you get the most out of each movement.

Tools to help identify a reversal include key resistance and support levels, Bollinger Bands, and Fibonacci retracement. In scalping, you can insure a position with a short trailing stop so that the trade is immediately closed at the slightest sign of a reversal.

When to Sell Volatile Stocks?

Rising volatility is often perceived as uncertainty. Therefore, if it is not possible to wait out this period, it is better to sell the stocks. Use the following signals to enter sales:

• The current daily volatility has gone beyond the weekly average.

• There is news that is causing mixed reactions, and there is a risk that a downtrend will begin.

• There are signals from oscillators and trend indicators about an imminent trend reversal. Reversal patterns appeared.

If your goal is to make quick money on sharp moves, sell stocks as soon as their volatility has dropped, and look for other similar instruments.

Why Is Stock Volatility Important?

Volatility is an indicator of most traders’ sentiment. If there are sharp price spikes in a calm market and the dynamics of price changes are growing, this can mean the following:

• Uncertainty. Traders do not know how to react to this or that event, so they rush from one extreme to another, changing the direction of their trades. In the chart, this is displayed as a frequent change in the direction of price movement in a short period.

• Fear. Force majeure and forecast discrepancies often cause massive sales of securities. In such a situation, the factor of market makers and insiders is involved. Those who have more information can provoke private traders to start a mass sale, after which they buy up stocks that have fallen in price. The price recovers, after which the chart displays a deep sharp drawdown and a quick recovery.

• Delayed reaction. For example, before the news release, trading is not very active. As soon as traders get the news, they immediately open trades. A sharp increase in volumes causes a sharp change in prices.

The deviation of the current price volatility from its average value is a reason to look for its causes and change the strategy. The mean value can also be found on Finviz or other analytical resources.

List of High Volatility Stocks in 2023

The 2020-2022 pandemic, Russo-Ukrainian war, US military and trade conflicts, SVB and Silvergate bankruptcies had a significant impact on the list of stocks that fluctuate the most. Those securities that were relatively stable until 2020 topped the list of the most volatile in 2023:

• In 2022, the value of NVIDIA (NVDA) stocks grew faster than the S&P 500, but then also quickly declined. NVIDIA’s beta ratio as of early 2023 (2.4) was one of the highest. The company’s stocks have many growth drivers, but there are also some problems that are negatively perceived by investors. The company has reached significant financial results and also announced good business prospects in the gaming segment and in the development of cloud servers. However, investors are anticipating a decline in sales volumes due to restrictions in Asian markets.

• Align Technology (ALGN) is one of the leaders in the innovative medical technology industry. The volatility of its stocks is caused by sales performance in foreign countries. In 2023, ALGN stocks were far from the all-time high of 2021. However, their price has risen by more than 25% in the first three months.

• Etsy (ETSY). This P2P e-commerce platform has been a confident leader during the pandemic. From March 2020 to November 2021, the stock price increased almost ten times. By early 2023, the price had returned to mid-2020 levels. Although ETSY is already far from historical highs, analysts advise monitoring these stocks.

• Stocks of gaming and hospitality company Caesars Entertainment (CZR) are sensitive to revenue and customer demand changes. The trend movement for three months brought investors more than 35% profit. Swing traders may also be interested in trading CZR stocks.

• Adobe (ADBE). The stocks of the software developer in the first three months of 2023 rose in price by 20%, then fell by the same amount. Then they rose by 10% and again fell by the same amount. Finally, they rose by 16%. Adobe papers are well suited for medium-term trading.

• ServiceNow (NOW) is a cloud computing software company. Although its stock drawdowns are less deep and less sharp than Adobe’s, the long-term trend has generated over 40% profit in the first three months of 2023.

• Bath & Body Works (BBWI). The stocks of this retail cosmetics chain are ideal for scalping. With a relatively stable trend, the BBWI price movement is characterized by frequent jumps in both directions.

• DexCom (DXCM). Another company engaged in the development of medical equipment. In 2022, the DXCM beta coefficient was 1.89. In 2023, the situation has not changed much. The price moves in a relatively narrow range of 100-125 USD but with a high frequency. Therefore, DexCom stocks are perfect for scalping.

• SoundHound AI (SOUN). The stocks of this audio and speech recognition company have been in free float since 2022. While investors determine the competitive advantages of the platform and study its financial performance, the price actively fluctuates in both directions. The return from growth in the first three months of 2023 was 280%.

• Virgin Galactic (SPCE). Space tourism is not yet very popular, but investors love promising innovations. Therefore, in 2-3 months, stocks can grow by more than 85%. In a week, they can fall in price by 25% and rise by the same amount over the next ten days.

High volatility now does not mean that it will continue in the future. Therefore, this is a reason to take a closer look at these stocks.

List of high-volatility stocks of 2023

It is impossible to accurately name stocks with constant volatility since in different periods, stocks of different companies perform in completely different ways. Below is a list of some of the most well-known companies with high-volatility stocks over the past few years.

1. Citigroup (C). The financial industry has been heavily affected by the pandemic and geopolitical conflicts. The risks increased after the failure of SVB and Silvergate banks, the largest since 2008. Below is the price chart for the last 10-12 years.

In 2007, the bank’s stocks were worth more than 550 USD (10+ times more than now), so Citigroup can be called one of the most volatile blue-chip assets in the last 20 years.

2. Meta (Facebook) (META) is one of the most volatile companies in the technology sector. Its stocks rose rapidly during the social media boom. However, due to a series of scandals related to information leaks, the social network has a lot of problems.

Rebranding with change in the vector of development did not help, and Meta stocks declined by more than 50% in 2022 due to the negative news background and the increase in the loss of the Reality Labs division to $4.3 billion. Nevertheless, in some short-term periods, stocks have risen in price by 15-20% amid the growth in AR/VR equipment sales.

3. Tesla (TSLA). Until 2020, Tesla was a steadily growing company with low volatility. Over the next two years, the stock price increased by more than 15 times. Then it fell just as quickly.

The reason for such high volatility was, among other things, the actions of Elon Musk. Even though the stock price is far from the historical high, traders can take advantage of strong fluctuations with deep drawdowns and sharp rises.

4. Amazon (AMZN) stocks have been very volatile lately. Even in the horizontal sections of the chart, the price jumps reached more than 20%.

The corporation develops many radically different departments, including e-commerce and cloud computing technologies. Therefore, volatility is explained by multiple fundamental factors.

5. Boeing (BA). In 2021, Boeing’s beta ratio for three years was 2.3, marking it as one of the highest-risk stocks in the US stock market.

Little has changed since that time. Corporation’s stocks are either recovering or declining again. Use the opportunity to earn on the reversal.

Conclusion

• Volatility is a measure of the rate of fluctuations in the price of a security over time.

• The level of volatility is determined by the standard deviation of the price, the beta coefficient, the maximum drawdown and the VIX volatility index.

• It is better to choose low and medium volatility stocks for long-term strategies. Stocks with a value of β>1 are suitable for buying during an uptrend. To form a “protective” portfolio, choose stocks with a value of β

• In the short term, high volatility helps traders who change the direction of the trade during every reversal regardless of the underlying direction of the price.

High volatility stocks can bring more than 50-80% profit in a few months. But they can also bring the same loss. Be careful when trading volatile instruments.