Charting How Current Volatility Compares to Past Big Moves

Aug 10, 2011: 9:01 PM CST

We’ve all been trading in a high volatility market, but how does the current surge in volatility compare to the past few surges in volatility since the 2007 market peak?

Let’s take a look at what’s happening now and put it in the context of 2007 to present in the S&P 500:

To measure volatility, I wanted to show two specific indicators:

Average True Range (ATR) – the popular measure of average daily price movements.

Bollinger Band Width – a measure of Standard Deviation (subtract the Upper Bollinger Band line from the Lower Bollinger Band Line).

Starting with the 2007 market peak, there have been three major spikes in volatility which altered the trading environment for weeks.

The most significant spike was during the September/October crash of 2008.

Fortunately or not, the current move from 1,350 to 1,100 ranks as the second highest sudden spike in volatility over the last few years.

The other major point I wanted to highlight was the “Flash Crash” fall-out from May 2010.

Though not specifically referenced, you can see how volatility rose as the market transitioned from Bull to Bear in 2008.

Using these measures, volatility peaked with a Daily ATR of 78 and a Bollinger Band Width (BBW) of 455 S&P 500 points during October 2008.  That’s almost double the current readings in our current ‘crash.’

At the moment, the Daily (14 Period) ATR rests at 36 while the current BBW distance is 280 S&P 500 points.

During the Flash Crash period of May 2010, the Daily ATR reached 35 while the BBW indicator registered 172.

You can also compare historic and present volatility in terms of the VIX (Volatility Index), Standard Deviation, Linear Regression (width), etc.

It’s important to measure volatility so you can adjust your trading strategies accordingly, which may include reducing position size along with increasing both stop-losses and targets as needed (depending on your style and vehicle).

Volatility cycles from high to low and back to high; like the prior periods of high volatile spikes, this period too will subside into a new normal.

Keep these measures of volatility in mind and update them as needed.

Corey Rosenbloom, CMT
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7 Responses to “Charting How Current Volatility Compares to Past Big Moves”

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  2. guest Says:

    Interesting how the volitility spike did not translate to the ultimate low of the move in either of the 2 prior moves.

  3. Option Market Maker Says:

    the reason for this is people buy puts when they become afraid pumping up option implied vol, then as the market breaks and we cross through their strikes they sell out their puts for a profit and implied vol goes down.  I've seen this happen many times, this is why options rarely trade along their implied skew/vol path. 

    -Option Market Maker

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