Volatility considerations are separate from price considerations.
A $20 stock with a $2 average daily range and a $40 stock with a $2 average daily range have the same profile from an absolute volatility perspective, even though one shows twice the relative volatility of the other.
Even from an overnight perspective, a higher priced stock is not necessarily more likely to gap down than a lower priced one, so there is no real reason to watch price differential there either. This is why looking at volatility is so key. Different stocks have differenct general activity levels and the activity level matters far more than the price. Only when you get to extreme outliers do the effects of price and volatility percentage begin to skew statistical expectations.
The concept of basing risk on buying power is antiquated.
This is one example where the futures markets clearly have it right- basing margin requirements on underlying volatility rather than on the dollar value of the contract, which is, for all intensive purposes, meaningless in terms of true risk for short term traders.
A $20 stock with a $2 average daily range and a $40 stock with a $2 average daily range have the same profile from an absolute volatility perspective, even though one shows twice the relative volatility of the other.
Even from an overnight perspective, a higher priced stock is not necessarily more likely to gap down than a lower priced one, so there is no real reason to watch price differential there either. This is why looking at volatility is so key. Different stocks have differenct general activity levels and the activity level matters far more than the price. Only when you get to extreme outliers do the effects of price and volatility percentage begin to skew statistical expectations.
The concept of basing risk on buying power is antiquated.
This is one example where the futures markets clearly have it right- basing margin requirements on underlying volatility rather than on the dollar value of the contract, which is, for all intensive purposes, meaningless in terms of true risk for short term traders.
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