A $10 Move in Palantir Isn't a $10 Move in a $1,000 Stock. Tom Preston Shows the Fix.

PLTR

The speaker uses implied volatility from options to estimate past and future volatility, adjusting it for the number of trading days to calculate expected price movements. By comparing the current price movement to the expected number of standard deviations, the speaker can determine whether the stock is overbought or oversold. This method allows for a more nuanced understanding of price movements, taking into account the stock's volatility and the time frame of the analysis.

Using Standard Deviation to Measure Price Movement

The speaker explains that measuring how much a stock's price has moved over a specific period can be done by calculating the number of standard deviations it has changed. Standard deviation is a statistical measure of how much something has moved away from an average price. The speaker uses implied volatility from options to estimate past and future volatility, and adjusts it for the number of trading days to calculate expected price movements.

Normalizing Price Changes Using Standard Deviations

The speaker explains how to normalize price changes by calculating the number of standard deviations a stock price has moved, which allows for comparing different stocks regardless of their price levels. This method accounts for volatility and provides a more meaningful comparison of price movements across different assets.

How do you estimate the volatility of a stock?

The speaker uses implied volatility from options to estimate the volatility of a stock. This is done by looking at the options' implied volatility and adjusting it for the number of trading days to calculate the expected price movement.

TakeawayImplied volatility from options can be used to estimate a stock's volatility, which can then be adjusted for the number of trading days to calculate expected price movements.

Can you explain how to normalize price changes using standard deviations?

The speaker explains that to normalize price changes, you calculate the number of standard deviations a stock price has moved. This involves taking the current price, subtracting the previous day's close, dividing by the standard deviation, and adjusting for volatility. This method allows for comparing price changes across different stocks regardless of their price levels.

TakeawayNormalize price changes by calculating the number of standard deviations a stock price has moved, which allows for comparing different stocks regardless of their price levels.