Volatility and Market Trading Ranges

Last updated on August 19th, 2015

There is always a lot of discussion in the financial press when market volatility drops. When the VIX, a popular measure of market volatility, is at its lowest levels seen for several years, the price of options fall, and as a result, premium collection strategies don’t perform as well. Some traders might look to profit from the low VIX by shorting exchange traded funds that seek to track the VIX, such as the VXX. In this article I will briefly explain how the VIX and VXX are calculated, and then look at the implications of volatility and market trading ranges.

The Market Volatility Index

The VIX is the ticker symbol for what is called the Market Volatility Index and was first introduced in 1993 by the Chicago Board Options Exchange (CBOE). Today it is calculated by using the out-of-the-money call and put options prices on the S&P 500 Index. Options prices are determined using complex models that take into account a number of parameters, one of them being implied volatility. If traders are anticipating large movements in stock prices, either up or down, then the price for all call and put options will go up. Conversely, if traders believe that the markets will experience little movement, options premiums will be lower.

With all other things being equal, higher volatility of the underlying stocks of the S&P 500 Index makes the corresponding options more valuable (since there is a greater probability that the options will expire in the money) and this in turn increases the value of S&P 500 Index options.

By using a formula which weights the call and put option prices on the S&P 500 Index, a value for the VIX is calculated so that it is quoted in annualized percentage points that corresponds roughly to the expected movement in the S&P 500 Index over the next 30 days. Practically speaking, VIX values greater than 30 are associated with higher volatility, and VIX values lower than 20 are associated with lower volatility.

The VIX if often referred to as the “fear index” or “investor fear gauge”, but that is actually a misnomer because the VIX is a measure of perceived market volatility in either direction.

Exchange Traded Volatility

Over the last several years, an impressive number of exchange traded funds (ETFs) and exchange traded notes (ETNs) have become available, increasing the number of trading opportunities for investors. One of the more popular ones for trading volatility has been the VXX, the iPath S&P 500 VIX Short-Term Futures ETN. The purpose of the VXX is to allow traders to hedge portfolios against loss due to sudden changes in market volatility, or to directly profit from speculating in changes in market volatility.

Although many traders use the VXX to trade volatility, there are some important differences between the VIX and the VXX that a trader must understand. The VXX is designed to track VIX futures and provides the trader with exposure to the first and second month VIX futures contracts. This has the effect of smoothing out the moves in the VIX and captures only about half of the daily move in the VIX. The VXX tracks what the market anticipates future volatility will be and therefore generally exhibits less volatility than the spot VIX.

Volatility and Market Trading Ranges - VIX Chart

The preceding chart shows a period where the VIX and the VXX had been in a downtrend and traders had been profiting during this period by shorting VXX or buying VXX puts. It is clear that traders had been expecting lower volatility and there were therefore, smaller price movements. One would think that this would have a negative effect on day trading, since day trading relies on price movement.

Some Market Examples

In a previous post, I presented a tool that I use to help in the selection of time frames. It looks at price trading ranges for various markets and can be used to locate times of the day where price moves the most. It plots the average range that price moves in each half-hour period of the day over a selected period of time. The tool can also be used to look at trading range trends over time and compare two different calendar periods.

In this post, I will examine a number of markets and compare the daily half-hour trading ranges of the fourth quarter of 2010 with the first quarter of 2011, beginning with the E-mini S&P 500 Futures (ES) shown below.

Volatility and Market Trading Ranges - E-mini S&P 500 Futures

One would have expected that with the lower volatility expressed by the VIX and lower future volatility expressed by the VXX, there would be smaller average price movements across the trading day, but this was not the case. In fact, during the first quarter of 2011, the ES showed about a half a point increase in trading range during the market hours that we would most likely be trading.

Another popular index futures contract, the E-mini NASDAQ 100 Futures (NQ), also showed increased trading range during the first quarter. It was up by 1-1/2 points, or about 25% during the opening hours that we tend to trade.

Volatility and Market Trading Ranges - E-mini NASDAQ 100 Futures

Other stock indexes such as the E-mini Dow Futures (YM) and the Russell 2000 Index Mini Futures (TF) also showed increased trading ranges during the first quarter. Even though volatility was down, there were great day trading opportunities with the stock indexes.

Since crude oil was in the news a lot over that period, let’s take a look at how the Crude Oil Futures (CL) trading ranges have changed. Below is a chart comparing the average trading ranges of CL between Q4 2010 and Q1 2011.

Volatility and Market Trading Ranges - Crude Oil

With what happened to crude oil prices over this period, we would expect to see an increase in average trading range during the morning hours that we trade and this is exactly what we see. In fact, the average range has increased by about 40%. Also, it is interesting to note that the period between 18:00 and 19:00 saw activity that approached the activity that was normal during the morning hours of the previous quarter. Other commodities futures also showed increase in price movement during this quarter.

Volatility and Market Trading Ranges

What can we conclude from these examples? First, when it comes to looking at volatility, we cannot assume that if market volatility is low that we will not see good day trading ranges on our stock index futures. Remember that the VIX and the VXX provide a measure of expected or implied volatility: the VIX is a measure of expected price movement of the general stock market over the next 30 days, and the VXX is a measure of future volatility of the VIX. They do not tell us what the actual price movements will be, and certainly not at the daily level. Another conclusion that we can draw is that it is valuable to have some idea how volatility and market trading ranges change over time. This information can help us determine what times frames we want to trade, and what parameters we may want to adjust in our system and back test before we make potential changes to our trade plan.

Coach Bob Malinowski

5 Responses to “Volatility and Market Trading Ranges”

  1. Gert

    Hi Bob, Thanks for a very interesting article. Can you confirm the times at the bottom of the charts, please – are they GMT, EST or anything else?

    • Mark

      Hi Gert,

      I should have stated that all times on all of my charts are Exchange time, consistent with the way NetPicks reports all time frames. This also means that when I show forex time frames, I use New York (Eastern) time since forex has no central exchange.

      NQ: Chicago Mercantile Exchange (CME), Central Time
      ES: Chicago Mercantile Exchange (CME), Central Time
      CL: New York Mercantile Exchange (NYMEX), Eastern Time
      VXX: Daily Chart


  2. Eaulon

    If these indices are not reflecting what is really happening in the real market then what is the point in referring to them? Please expand as this seems a ‘none article’ to me and point out what I’m obviously missing. Thank you.

    • NetPicks

      Hi Eaulon,

      There are a couple of points to be made by these observations. Volatility as calculated by the VIX (which is implied by the market price of S&P index options in an option pricing model) or traded as the VXX (which is based on the prices of VIX futures) is a measure of expected future price movement. The higher the volatility, the greater the expected price movement. One can pay attention to these indicators, and even profit from trading them, but one should be wary about using these indicators to predict actual price movement of individual instruments in any particular time frame.

      The second point is that, regardless of what direction the market is expected to move, or how much volatility the market is projected to experience, it is always best to trust your system and to stick with your plan. One benefit of the Netpicks systems is that actual market volatility is factored into the system for each individual instrument traded. Netpicks systems use an indicator called the Incremental, which adjusts entries, stops, and targets in real time, based on current market conditions. Since current volatility is factored into the system, you can trust your system to automatically make appropriate adjustments for market volatility, regardless of the instrument, time frame, or value of market volatility indicators such as the VIX.

      Hope that helps,


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