Low Volatility Setups In High Volatility Stocks
Looking for low-volatility setups in high volatility stocks can be a good way to identify stocks that move 40% in a week.
As you are aware, stocks that are trading well below their normal volatility eventually explode as volatility reverts to its mean. The higher the normal volatility for a stock, the bigger that move will be. If you are looking for the stocks that will make the largest moves possible from low-volatility situations, you can find them in our Trading Where The Action Is list in the Stock Traders section.
For example, NetBank [NTBK>NTBK] is nearly always ranked in the top 10 on that list. As you can see from the chart below, on May 18, 1999, the stock had both 6/100 and 10/100 low volatility readings (a), and at that time, Netbank was trading around $55 per share. Over the next five trading sessions (and as volatility reverted to its mean) the stock proceeded to implode more than 40% (b).
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| Figure 1. Netbank (NTBK), daily. Source: Omega Research.
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When highly volatile stocks produce low-volatility readings, these types of explosive moves are more the rule than the exception. Obviously, trading in these stocks are more risky because of the higher volatility. But the use of protective stops allows you to participate in extraordinary short-term moves with greater safety.
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