Saturday, May 20, 2006

We Gotta Hot One Today!

You always know when Randy Jackson, American Idol judge, is excited about a performance. "America," he shouts, "we gotta a hot one tonight!"

Well, how do we know when we got a hot trading day today? Hot for the trader means volatility. "I'll trade anything," one successful trader recently told me, "as long as it moves."

Since March, 2003 (N = 812 trading days), we've had 95 occasions in which the S&P 500 Index (SPY) has opened with a gain or loss exceeding .50%. That same day, the high-low range has averaged 1.46%, quite a bit higher than the 1.01% range for the rest of the sample.

Since 2005, we've only had 14 days in which SPY has opened with a move of .50% or more. The average range that day has been 1.20%, wider than the .90% average range for the rest of the sample. In current S&P point terms, that translates to a range difference of close to 4 points.

For similar reasons, since March, 2003, when VIX opens 4% or more from its previous closing level (N = 143), that day's high-low range averages 1.20%. The average range for the remainder of the sample has been 1.04%.

But how about when SPY opens with a move of .60% or greater *and* VIX opens with a move of more than 5%? Then, America, we got a hot one today! The average range (N = 15) has been 1.87%, which means that we have almost 90% more movement than the average market day. Even Simon might like that performance.


Later this AM, I will post the update to the Trading Psychology Weblog.