The Power of Implied Volaility Charts

Read my article on The Power of Implied Volatility in July 2006 issue

The Power of Implied Volatility (IV) Charts

I have written a comprehensive article on this subject with numerous examples and this has been published in the July 2006 edition of the world respected magazine "Technical Analysis of Stocks & Commodities."

Look at the Implied Volatility Chart and the futures price. What does this tell us ?

SUGAR

Sugar has been in a bull market since 2004 and continues to move higher. As worldwide demand for sugar continues, particularly with the pressure for alternative fuels such as ethanol, we can expect the previous highs to be tested over the next few years. Sugar falls within the opportunist implied volatility area of 19% to 20%.

Sugar prices traded all the way down to 2½ cents per lb during 1985. As sugar prices started a new bull market, the 19 cents per lb (25 year high) resistance level has been taken out in 2006 (figure 2). Sugar prices are currently experiencing a pull back once the implied volatility increased to over 100% (from 25% to 52%) – figure 1

Figure 1: Sugar two years implied volatility chart. This helps explain the current bull run in sugar.

Figure 2: Sugar May 2006 daily futures prices. Following a 100% increase in implied volatility, sugar prices have pulled back.

“If there is a repeatable pattern, the market cannot be random. If it is repeatable, it must be tradable. All we have to do is build a trading and money management plan to take advantage of this type of movement."

Keith Cotterill

Risk Disclosure: Trading security futures contract may not be suitable for all investors. You may lose a substantial amount of money in a very short period of time. The amount you may lose is potentially unlimited and can exceed the amount you originally deposit with your broker. This is because futures’ trading is highly leveraged, with a relatively small amount of money used to establish a position in assets that have a much greater value. If you are uncomfortable with this level of risk, you should not trade security futures contracts.