VWAP stands for Volume Weighted Average Price. It is a benchmark calculation used by finance professionals that gives the average price a security has traded at throughout a given period, often a day or week and is calculated from both the volume and price. The figure is preferred over a simple average as it gives additional weight the prices in the average that associated with increased volume as opposed to a simple equal weighted average. It also avoids the (sometimes misleading) view of the closing price as this is subject to distortions at the end of day trading.
The data is difficult for private investors to come by however. Many services will charge a fee for this additional level of detail or it may be cumbersome for many to calculate on a daily basis and then analyse. Popular stocks, or even low price stocks such as Fitbit (FIT) may trade many thousands of times a day causing an endless cycle of calculations to be made.
The VWAP is sometimes referred to in a merger agreement as a reference price calculated prior to the merger announcement that is used when calculating the control premium offered by the acquirer. Traders and arbitrageurs can calculate a crude VWAP figure using the mid price during the day (the average between the high and the low) and the total volume for the day. Merger Arbitrage Limited has found this technique of calculating a floor price prior to the announcement of a deal often provides a sufficient level of accuracy when compared to the more precise measure.
Trading Strategy
Many trading strategies have evolved which rely heavily on the calculation of the VWAP. However, the variety and nuances of many of these approaches make their performance extremely difficult to quantify. For this reason, Merger Arbitrage Limited urges traders to exercise EXTREME caution when researching these methods.
VWAP Calculation Example
We use the following numbers in the calculation example. These figures are the last 5 trades for a fictitious stock. Of course, in practice data would be collected over a much longer period as required for the situation at hand
- 800 @ $49.26
- 100 @ $49.29
- 600 @ $49.32
- 1,000 @ $49.42
- 200 @ $49.39
By multiplying the individual trade volume and the price at which the trade occured, we get the dollar values associated with these trades
- $39,408.00
- $4,929.00
- $29,592.00
- $49,420.00
- $9,878.00
Which gives a total value of $133,227.00.
This value is divided by the total number of shares traded (800 + 100 + 600 + 1,000 + 200) =2,700.
This gives a VWAP of $133,227.00 / 2,700 = $49.3433
