How About Some Implied Volatility to Compliment Your Futures Trading?

When trading futures it helps to frame out the current day before the open. One thing I have found useful is using the Implied Volatility (IV) of the at the money options to create the zones where moves may exhaust and reversion becomes more likely.

The easiest way to show how I use IV for this estimate is by way of example using the S&P E-mini contact and the VIX. I am using the VIX as my estimate of IV because it is easy for anyone to get and track. The current VIX from the CBOE website on June 2nd was 13.63. So convert this to one day figure and multiply by the settlement for the day (2104.00) to get the standard deviation.

13.63% /sqrt of 256(trading days) = .1363/16=.0085

.0085*2104=17.16= 1 standard deviation.

Now add and subtract from settlement and get our first standard deviation envelope and second standard deviation envelope.

2104.00+17.16 =2121.25


65% chance of settling between 2088.00 and 2121.25 +- I Std dev

95% chance of settling between 2070.00 and 2138.50+- 2 Std dev

There we have it, an estimate of what market participants think coming into the next day.

This may not seem earth shattering, but putting a frame around the market can help you visualize possible scenarios as the day develops. Ranges can be more easily be estimated, reversal patterns may be taken with more confidence as well as cautioning against some continuation moves.

Remember to always keep an eye on the VIX throughout the day if you incorporate this tool. You may need to adjust the envelope if the VIX moves by a large amount. Caution should also be taken after moves from consolidation and after exceptionally small range days.

Be creative and use this concept on a variety of markets with liquid options contracts. I have certainly benefited from the added confidence gained by framing the market with options math.

Craig Garbie, Trader

Trader Education