Average True Range (ATR)

Average true range (ATR) measures the average daily price range of a stock over a specified period, typically 14 days. Unlike a simple high-minus-low calculation, ATR accounts for gaps by using the "true range," which is the greatest of three values: current high minus current low, current high minus previous close, or current low minus previous close. The result is a single number expressed in dollars that tells you how much a stock typically moves in a day.

Why It Matters

ATR tells you how much a stock actually moves, which directly affects options pricing and strategy selection. A stock with a $2 ATR moves differently from a stock with a $0.50 ATR, even if both trade at $100. The high-ATR stock demands wider strikes for credit spreads and offers more opportunity for directional plays. The low-ATR stock may be better suited for selling premium in tight ranges.

Options traders use ATR to set realistic profit targets and stop-losses. If a stock's ATR is $3 and your option needs a $10 move to be profitable by expiration, you know that is more than three average days of movement — the probability is low without a catalyst.

How It Works

True range calculation (for one day): The greatest of:

• Today's high minus today's low
• Absolute value of today's high minus yesterday's close
• Absolute value of today's low minus yesterday's close

ATR: The 14-period moving average of daily true range values.

Practical applications:

• Strike selection: For a credit spread, place your short strike at least 1 to 1.5 ATR away from the current price to give yourself a buffer against normal price noise.
• Expiration choice: If a stock's ATR is $2 and you need a $6 move, you need at least three or more trading days. Choose an expiration that gives you enough time.
• Stop-losses: Many traders set stops at 1.5x to 2x ATR from their entry. This avoids getting stopped out by normal volatility.
• Comparing volatility across stocks: ATR in percentage terms (ATR / price) lets you compare a $500 stock to a $50 stock on equal footing.

ATR and implied volatility: ATR measures realized (historical) movement while IV measures expected future movement. When ATR is low but IV is high, the market expects a move that has not happened yet — often before earnings or events. This divergence creates opportunities.

Quick Example

Stock XYZ trades at $100 with a 14-day ATR of $2.50. You are selling a put credit spread and want the short strike to be beyond normal fluctuation. You place the short put at $95 — two ATRs below the current price. Under normal conditions, a $5 decline in a single session would be a 2x ATR event, which is uncommon. This gives your spread a statistical edge from positioning alone.