Short-term traders need stocks to move in order to profit. There needs to be volatility, otherwise traders would not thrive. The most volatile stocks in the market make the best candidate for trading. However, volatility means extra risk to unprepared traders.
It is common for a sector to contain the most volatile stocks, over a given period. For instance, if uncertainty exists in oil markets due to geopolitical concern, oil stocks could be the most volatile for a period. That in mind, let’s take a look at some of the most historically volatile stocks. Additionally, we will look at how to take advantage of volatile scenarios.
Historically Volatile Stocks
There are a plethora of factors that could make stocks volatile. Some of the key reasons include the number of floating shares and stock price. A stock with a small float could be easily controlled by one side of the market, potentially causing volatility. Additionally, these stocks may be hard to borrow, which could further increase volatility. That in mind, let’s take a look at some stocks that tend to be volatile and some measures of volatile stocks.
Alibaba Group Holding Limited (NYSE : BABA) is one stock that tends to be highly volatile. Alibaba operates as an online and mobile commerce company in the People’s Republic of China and internationally. Moreover, the company owns a finance arm. Some analysts disagree on valuation models in such a business. Consequently, inherent volatility exists.
BABA shows an average true range (ATR) of nearly $7. When the stock reports news, it moves multiples times its ATR. For example, if BABA reports stellar earnings, traders could potentially profit from moves as large as $15+. This company shows a beta of over 2.5. This metric tells investors how much the stock moves relative to the market. In this case, for ever $1 in the market, the stock moves $2.50.
Take a look at the daily chart of Alibaba Group Holding Limited.
If you notice the daily bars, some times BABA moves over $10, and if there is news, it could move a lot more than that.
The Priceline Group Inc. (NASDAQ : PCLN) provides online travel and restaurant reservation, and related services. The company began in 1997. Since, the stock appreciated in value trades at almost $1900/share. This expensive price tag comes with an insane $50 ATR.
Conversely, the stock shows a tame valuation equaling that of the market. The low valuation makes this overly volatile name a bit more manageable. It is not a favorite among momentum traders, making moves less violent.
Check out the daily chart on The Priceline Group:
Most Volatile Stocks Today
This market has seen the longest bull market in history. Therefore, volatility is at historically low levels. However, individual names remain volatile in news situations or in changing landscapes. The Trump Administration presented new initiatives that resulted in change for many businesses. Let’s analyze some of the most volatile stocks today.
Alcoa Corporation (NYSE : AA) produces and sells bauxite, alumina, and aluminum products. It lagged the market for a period of time. Analysts sometimes refer to this name as a copper play. Copper gauges the strength of the economy, causing bears to doubt the rally. AA eventually rallied almost 30% last year.
AA recently fell out of favor, selling off from highs. Recent tariff headlines caused the stock to spike dramatically, before selling off once more. The company has realized volatility of over 5% because of these moves. Market participants battle constantly to push the stock in their direction.
United States Steel Corporation (NYSE : X) produces and sells flat-rolled and tubular steel products primarily in North America and Europe. Recent headlines have also affected X. The Trump Administration’s infrastructure initiatives made the stock pop. Shortly after, the name fell out of favor, causing swings in the stock price. Recently, investors received bullish tariff news and bid the price up to yearly highs.
Additionally, the stock realized volatility over 7% during these events. The stock is not a high priced name. It trades just under $50. Nimble traders swing large positions of this volatile name for big profits. The company dates back to 1901, making failure unlikely. A solid company that moves on legitimate headlines is a trader’s dreams.
Trading The Most Volatile Stocks
Traders gravitate toward volatility because there is greater profit potential. However, the greater the reward, the greater the degree of risk. Traders need to be extra conscious of stop loss orders. This order helps to exit a position at a predetermined price, capping losses. Traders must respect their stop loss levels if they are to make money consistently.
Furthermore, options strategies help mitigate risk in volatile names. Buying premium always has a defined risk limit. On the other hand, selling, or writing, naked call options has theoretically undefined risk. Traders who understand options could leverage their capital and cap their risk. This scenario is ideal for traders who speculate in the most volatile stocks. One maximizes returns while always experiencing limited downside.
More sophisticated traders use a bull spread to participate in up moves. This strategy involves buying one call option and selling another at a higher strike price, both expiring on the same expiration date. This helps finance the position, and lower the cost of the trade. However, this strategy caps the maximum upside gain. Take a look at an example of a bull call spread payoff diagram.
Source: The Options Guide
Conversely, bearish traders use a bear spread. This involved buying a put option and selling another at a lower price with the same expiration date. Again, this lowers the cost of the trade and caps the maximum upside. It is a profitable strategy for consistent traders. However, this strategy hinders traders who thrive on home runs. Capping the upside does not make sense in this case. Here’s a look at an example of a bear put spread.
Source: The Options Guide
Some traders are only active when volatility is heightened. What a shame it would be if these traders missed the last bull run. There are a lot of stocks some would consider to be extremely volatile. Traders who love volatility could use stop losses and options in an attempt to minimize risk, while potentially profiting from large moves.