Another Volatility Smile

Few indicators are as reliably relevant as volume. Here is a scatter plot showing SPY‘s daily returns (on the x-axis) against SPY’s daily traded volume (on the y-axis). While the first volatility smile referred to something very different, this smile has been just as important to volatility traders as the original.

High volatility is usually paired with high volume days. Lower volume keeps volatility in check. The biggest moves tend to occur with the biggest volume. 

Note the range on the x-axis: there hasn’t been a large decline in the stock market in quite some time.

Volume means volatility, based on 1/2014-Now  log daily changes vs traded volume

Volume means volatility, based on 1/2014-Now log daily changes vs traded volume

Categories: Quantitative Trading

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