We’d like to introduce you to a new concept that we revealed to a select group of traders on February 5, 2014, namely Volatility Spikes.
Volatility Spikes are an upward movement in “implied volatility” or IV. In simplest terms, IV is an expression of the market’s expectation of the future volatility of the stock price. This upward movement in implied volatility has accurately timed the short-term movement of the S&P 500 for 20 consecutive years.
Volatility Spikes occur for a number of reasons but it usually ties into one main reason: protection is being sought.
Protection is often sought as prices drop, but (and this is a key point and one which so many others do not take into account) protection is also sought:
- Ahead of Economic Reports
- Ahead of Fed Announcements
- Oftentimes ahead of long weekends
- After the market moves significantly higher, buying short term protection from a pullback
- Ahead of anything out of the ordinary which is causing any type of angst, especially to institutional investors.
- Any condition that causes implied volatility to rise coincides with some portion of buying drying up
When buying dries up, it doesn’t permanently disappear. A large portion of the time, money temporarily goes to the sidelines. It is then put back to work once the angst has been lowered (the concern has dissipated or passed). When this buying returns (oftentimes immediately) prices move higher.
The key is to be able to precisely measure when the angst is occurring. When you are able to do this, you are then able to identify when the buying has stopped for the time being. The holy grail in trading is to be buying just ahead of the next wave of buying
If you are interested in learning more about Volatility Spikes, please call us at 888-484-8220 ext.3 or 973-494-7311 for International.