Volatility Ratio

The volatility ratio is a technical trading indicator used by day traders to spot potential reversals. The ratio is calculated by dividing today’s true range by the true range over x number of days. The true range on a given day is the greater of: a) the difference between the current day’s high and low; b) the difference between the previous day’s close and the current day’s high; c) the difference between the previous day’s close and the current day’s low. A volatility ratio above 0.5 is seen as a signal that a security is trading outside of its trading range and is likely to move back into the range. In options, the volatility ratio measures implied vol (on which options premiums are determined) against historic vol over a required time horizon. Implied vol significantly above or below historic vol may indicate options are overpriced or underpriced