(VOL)ATILITY PIVOTS
The math to compute theoretical DAILY price movement or range = underly price * underlying implied volatility / square root of 252 trading days, or 16
Example: SPX 1243.91, VIX 16.11%, so 1243.91 * .1611 / 16 is 12.5 SPX points. So as of Friday’s close, the market is pricing in a DAILY range of 12.5 SPX points. You can also compute weekly theoretical range using the same math, but instead of the square root of 252 trading days, you would substitute 52 trading weeks. The math for the theoretical WEEKLY range as of Friday’s close is 1243.91 * .1611 / (52^.5), or 27.8 SPX points, so the volatility market is pricing in a theoretical range of 1244 +/- 28 points for the next week.
You can use the market pricing information to then derive your own volatility pivots, by dividing the theoretical daily (or weekly) range into thirds, fourths or whatever seems suitable to your trading timeframe. Using the daily with 3rds to compute (R)esitance1, R2, R3 pivots, we get 1248, 1252 and 1256, respectively. For (S)upport1, S2 and S3, we get 1240, 1236 and 1231. Whenever R3 is taken out, I consider it a homerun day; conversely, whenever S3 is breached, I consider it a strikeout day. Of course, the normal use of the support/resistance levels is to look for entries/exits as each of them is challenged.
