S&P Intraday Range and VIX

[Frank 10]

Brett Steenbarger yesterday did something very similar to what this blog is about:

 

TraderFeed: VIX and Average Daily Volatility in the Stock Market

 

"What we see is that the average daily range is closely related to VIX levels"

[Tams 20]

Brett Steenbarger yesterday did something very similar to what this blog is about:

 

TraderFeed: VIX and Average Daily Volatility in the Stock Market

 

"What we see is that the average daily range is closely related to VIX levels"

 

 

he's reading TL !

 

LOL

[Frank 10]

Just updating this for recent data points as of April 21, 2009...

 

Note that the horizontal line drawn at 0.80x on the chart is to represent a 80% confidence interval for the minimum range expected on the subsequent day --- ie, a 1-tailed test that statistically implies that any given day has a 80% chance to achieve this range at a MINIMUM (long term average minus 0.84 standard deviations for a 1-tailed test = 80%). 80% is a strong probability over time.

 

though we had a 4 day run where range fell short of this estimate (which is highly unusual), the trailing 30 & 60-day periods are still running at 80%+... also, you can see the inherent problems of using a trailing average to try to predict the next day --- as this is very spikey on a day-to-day basis (so any trailing average is inferior to a forward looking estimate, which is what VIX represents).

 

[AgeKay 10]

Have you tried comparing certain days of the week? I am looking at another market where 85% of the time, Monday's range is smaller than that of the previous Friday. If you combine this with your analysis you might increase your confidence interval to 90% or more. Just an idea.

[NoSquigglyLines 10]

Frank, Have you ever done any similar work with other indices e.g. NQ?

[Frank 10]

I began to look at NQ but didn't follow through. I have too much other stuff on my plate I am working on... my preliminary findings were that NQ was quite a bit MORE volatile than what VXN (the NQ vix) implied.

 

Personally, my view is the S&P futures of the center of everything in the equity markets -- so I then began to look at the other contracts: NQ, RUS and EMD vs VIX... that could be a future avenue of study as the VIX is very well-known and followed barometer.

[Frank 10]

think this is nicely complementary analysis so will show it here...

 

range is related to VIX --- but range is also highly correlated to volume (money flow).

 

so while you might start out with idea that range should expand to XX pts, this is also dependent on volume... here is chart of todays volume and intraday 30-min bar range....

 

bottom line, be skeptical for range to get its target when there is no volume

 

[AgeKay 10]

I noticed the same in other markets. I have compared volume and number of trades to daily range and had the feeling that number of trades is an even better measure than volume. Have you looked at that?

[Xuanxue 10]

I think you'll find if you account for the square root of the initial balance and weight average the variance as volatility expands and then couple the data by squaring the variance, VIX compared to the market is as precise as mathmatically possible spanning the spectrum.

 

There's found some practicality with concern to trading in the above also.

[SunTrader 10]

Or how about just looking at MFI Market Facilitation Index?

 

MFI = Range/Volume or Range/Ticks

[BlowFish 10]

I think the MFI hides the information you are looking for by dividing the two variables. That's not to say it's not an interesting indicator but it highlights anomalies in the price volume relationship. I think Williams goes on to compare the MFI with MFI[1] and Volume with Volume [1] which seems kind of convoluted. You could just as easily look at volume and range directly!

[Frank 10]

today volume was better and we got the range target as predicted by VIX

[knocks420 10]

I had 2 thoughts or questions actually:

 

1) Has anyone looked at utilizing ATM IV for individual stocks to forecast range of individual equities?

 

2) And is there any studies on forecasting future range contraction/expansion? In particular perhaps combining IV (VIX) with Static Vol to determine if IV expanded range leads SV or vice versa?

 

My questions come from a new trading idea to utilize something like probability maps in Tradestation or perhaps a NN forecasted range to trade options and specifically flys. My thought is if one can predict consolidation (at the very least) then you should be able to design a nicely profitable system.....

[Frank 10]

I started this thread in February and thought I may update some of what has happened since.

 

One concept from this is that on any given day, the odds are that the market does not close far away from the previous close -- and that this can be quantified (and related to) the level of VIX.

 

Here are the trailing 65 days beginning 3/31/09 and ending 7/2/09. Note that the close fell short 52/65 times (that is, the ratio is less than one -- indicating the market fell short of the VIX implied move).

 

 

Here is histogram showing the same data points and showing the frequency of the distribution (how many days of the 65 in each zone). This distribution is divided though into 2 buckets --- days where the high or low for the day is made in opening 30 minutes (B made first) and days where the high or low for the day is NOT made in the opening 30 minutes. The point here is that pretend there is a gap down to start the day and it is sizable --- then say the market takes out the high of the opening 30-minute bar. It is not quite unlikely that the market will close FAR away from the previous close. I stated this a few months ago and since then, we have new data which supports that concept.

 

[bakrob99 11]

"The point here is that pretend there is a gap down to start the day and it is sizable --- then say the market takes out the high of the opening 30-minute bar. It is not quite unlikely that the market will close FAR away from the previous close. I stated this a few months ago and since then, we have new data which supports that concept."

 

Could you please rephrase the highlighted words (It is not quite unlikely). The double negative has me a bit confused.

[Frank 10]

oops, it should say 'quite unlikely'

 

I mean this as a general concept, be skeptical that market will close far away from the previous close --- most times it does not. On the other hand, this is a 'frequency distribution' --- so it measures the number of times a close does NOT close far away from the previous close --- not the extent of the downside when it DOES happen. it is up to the trader to control risk and figure out how to work bigger concepts into their trading plan to take advantage of the tendency but not get run over when the outlier occurs.

[Frank 10]

updating the 'other' angle for thinking about the expected range

 

this chart shows the difference in each days actual pit session range vs the VIX implied range --- so, a reading of +20% means the actual range for that particular day was 1.2x what VIX implied. Also plotted on the chart is the absolute level of VIX.

 

I think this chart is a nice way to force yourself to not get too greedy. If you have a nice win on a trade and you are unsure how far it may go, you can think about how often it has gone X points more historically and factor that in.

 

[NoSquigglyLines 10]

Frank, Just wondering if you've done any work using the IV of the ES options instead of VIX?

 

Thanks

[santoshdts 10]

Hi...

 

Just jumped in this informative post(Ive recently joined),

I trade in NIFTY Futures (Indian stock Index)

i calculate the probable range for the Next day based on the Ranges of N days with its Returns & square returns & Iam finding the results to be close to 90% accurate..

 

I would like to know any other methods to estimate Trading range..

 

regards

 

Santosh

[brunotata 10]

Hi. Joined not too long ago.

 

Was just wondering if the VIX could be traded spot, rather than through options or futures or ETNs, etc.

Tx:crap: