Take a casual stroll through the stock markets
How to calculate the expected movement of a stock
This formula leaves out some important parts.
- This gives an absolute number that doesn't mention or care whether the stock goes up or down that number.
- It is completely useless in predicting the future value of the stock. It is used to rate derivatives such as options and to show how risky / volatile the stock is.
- The second part is missing, which is about the interest rate and how much we expect the value of the stock to rise.
The formula assumes that the stock price moves a little each day. The more days you have, the more it moves. The number of calendar days is provided for this. Some of these movements cancel each other out, that's what the square root is for. What remains is really just a magic number.
The stock price and sqrt (365) are there because that is how it defines implied volatility. Implied volatility is a number that measures how much / often a price changes, in this case over a year (hence the 365) and relative to the value of the stock (so we multiply by the value of the stock). .
Implicit Volatility rather than just volatility means that we infer the volatility by sticking to past stock prices. One way to do this is to use the same formula backwards.
The missing part about the interest rate is really just a prediction of how much we will go up on average besides the value of the stock, which is just a standard high school compound interest calculation.
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