Volatility Trigger™
- The Volatility Trigger™ (VT) is our proprietary indicator which detects the level below which we expect bearish feedback loops (chain reactions) to start kicking in. Above this level we expect relatively lower market volatility.
- In relation to the other levels, the Volatility Trigger is generally the last major support above the Put Wall.
- Underneath the VT, realized volatility (the expected percentage range over a period of time based on historical data with 68.3% confidence) is modeled to expand significantly.
Intermediate: Understanding the Volatility Trigger™
If the underlying security is beneath the VT (to the left of it on the above chart), then market maker hedging flows shift from supporting market prices (and suppressing realized volatility) to trading with market prices (and expanding realized volatility). If the stock is above the VT, then we anticipate lower volatility and more stable underlying movement.
While the VT functions well as support and resistance, it stands out among the other key levels as telling us something very important about the market. If you only want to keep one level in mind, then it should probably be this one.
If the market falls below the VT, then not only can it keep falling forever (as it could below any arbitrary red line) but there is hard data backing this level as a point where the realized range can be expected to expand with decent likelihood. Pictured below are realized moves measured (each day is a dot). With this view, it is plain to see how realized volatility tends to expand underneath this level (to the left).
Volatility Trigger™ Statistics
- When SPX opens above the Volatility Trigger™, the average 5-day Realized Volatility is lower compared to when the SPX fell below the Volatility Trigger™
Avg. 5-Day Realized Volatility | |
SPX Opens Above Volatility Trigger™ | 13% |
SPX Opens Below Volatility Trigger™ | 18% |
- When SPX closes above the Volatility Trigger™, the standard deviation of both the 1-Day and 5-Day Forward Return is lower than when the SPX closes below the Volatility Trigger™.
Std. Dev. of 1-Day Return | Std. Dev. of 5-Day Return | |
SPX closes above Vol Trigger | 0.9% | 2.0% |
SPX closes below Vol Trigger | 1.3% |
2.7% |