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1994issue C051-3

Implied volatility as a band-defined regime filter for index options

The archive builds an implied-volatility-index from an oex-option-basket and places that series in a band-defined-regime so an OEX option can be judged expensive or inexpensive without a full repricing. A macd-overlay on the same series adds momentum context, and an option-overlay-screen withholds a conservative long stance when the reading already sits in the expensive zone.

  • The implied-volatility-index is a weighted blend of implied values from an oex-option-basket and is used as a real-time valuation check, not as a price forecast.
  • A band-defined-regime labels readings near the upper band as expensive-option conditions and readings near the lower band as inexpensive or roughly fair.
  • A macd-overlay on the same volatility series adds momentum context to that band classification.
  • The option-overlay-screen withholds a conservative long OEX-option stance unless the implied-volatility-index sits near the lower band.
Entries in this reading3 entries
Implied volatility analysis70 readingsCurrent trackBollinger Bands84 readingsMACD115 readings

A real-time check on option premium

The volatility index in the source is a weighted blend of implied values from eight S&P 100 options, the oex-option-basket. That implied-volatility-index is presented as a real-time valuation check so an OEX option can be judged expensive or inexpensive without repricing the contract from first principles.

The write-up treats the path of implied volatility as equally material to option outcomes as the path of the underlying price. In that framing the index is a market-wide reading of how expensive option premium is, rather than a forecast of the cash market.

Implied volatility index from the OEX option basket

Implied volatility, read from the lower curve against the figure's left-hand scale, opens near 36 and works down into the low 20s. A trader sees option premium leaving the expensive zone over the window. These weekly waypoints were lifted from the printed plot, not from a table.
Implied volatility, read from the lower curve against the figure's left-hand scale, opens near 36 and works down into the low 20s. A trader sees option premium leaving the expensive zone over the window. These weekly waypoints were lifted from the printed plot, not from a table.OEX · Daily

Read from the lower series against the printed left-hand scale marks at 16, 25 and 35. The raster supports about one-point accuracy; the daily wiggles were not traced point-for-point.

How the bands classify the series

Daily index values were framed with 20-day Bollinger bands defined as two standard deviations around a 20-day moving average. That placement is the band-defined-regime: a classification of the volatility series as stretched or compressed around a short moving average.

Proximity to the upper band was labeled an expensive-option regime. Proximity to the lower band was labeled inexpensive or roughly fair.

Momentum context on the same series

MACD was named as a complementary reading on the same volatility series, used to add momentum context to the band classification. The archive therefore applies the macd-overlay to the implied-volatility-index itself.

Editorial reading: the overlay tests whether a band extreme is also a momentum extreme. It is not, in the archive, a separate buy or sell mark printed on the cash index.

When the screen withholds a long stance

The index is also framed as an option-overlay-screen that withholds a conservative long OEX-option stance unless the reading sits near the lower band. The stated premise is that the risk-reward balance is adverse in the expensive zone.

A September 1993 political confrontation is cited as a case in which a falling market and a rising volatility index moved option prices into the expensive zone. A companion chart note states that the underlying market often changed direction when the volatility index reached the upper band.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
2 of 45 in the Bollinger Bands track
19951-10 pp.Next on Bollinger BandsConstructing projection bands from least-squares slopesA projection envelope is built in three steps: fit a least-squares slope on a lookback period, project each observation in that window to the current bar, and take the highest and lowest projected values as the band edges.
All readings on this track · 45 readings
  1. 1992Constructing volatility-scaled bands with relative strength index confirmation
  2. 1994Implied volatility as a band-defined regime filter for index options
  3. 1995Constructing projection bands from least-squares slopes
  4. 1995Constructing regression projection bands and range oscillators
  5. 1996Constructing Bollinger bands, percent-b, and stochastics
  6. 1996Constructing mechanical rules from Bollinger Bands and stochastics
  7. 1996Constructing a standard-error envelope around a linear regression
  8. 1996Dual-horizon ratio envelopes and regression error channels
  9. 1997Rational group structure with a trend screen, RSI, and bands
  10. 1997Asymmetric volatility band construction
  11. 1998Constructing three-state filters from Bollinger band envelopes
  12. 1999Combination filters with Bollinger Bands and the relative strength index
  13. 1999Constructing stochastic timed exits and band-RSI reversals
  14. 1999Evaluating Bollinger Bands against fixed-width and range-based envelopes
  15. 2000Constructing a Bollinger Band target as a forward price
  16. 2001Numeric candlestick encoding with local size bands
  17. 2001Ranked candlestick sentiment to band-cross entries
  18. 2002Combining Bollinger Bands, RSI, and a stop-loss
  19. 2002Bollinger Bands remain filters, not forecasts
  20. 2002Constructing a stochastic RSI with Bollinger bands
  21. 2002Constructing a StochRSI and Bollinger mechanical system
  22. 2003Constructing volatility-scaled Bollinger envelopes
  23. 2003Why tick breadth fails as a market personality
  24. 2005Constructing Bollinger bands versus fixed trading bands
  25. 2006Squared versus absolute deviation in envelope construction
  26. 2006Confirming yen crossovers with implied volatility and bands
  27. 2006A daily candle reversal is a hypothesis until shorter sessions fail at the same zone
  28. 2008Rebuild the Relative Strength Index as price-scale bands
  29. 2008Reading Relative Strength Index extremes on one price axis with Bollinger Bands and moving averages
  30. 2011Three-filter confirmation for short-swing futures
  31. 2011Constructing an inverse Fisher stochastic with bands and averages
  32. 2012Constructing a Bollinger Band indicator suite
  33. 2012Stacking price extremes, crossovers, bands, and MACD
  34. 2012Adaptive Bollinger band impulse, trend, and momentum filters
  35. 2013Rescaling stochastic, percent-B, and wave-count parameters
  36. 2014Industry-group quartile pivots as a Bollinger Bands case study
  37. 2014Bollinger Bands as adaptive price envelopes: a 2014 classroom case
  38. 2016Trend-channel entry rules from stacked moving averages
  39. 2016A permission stack for Bollinger, RSI, and the 50-period average
  40. 2017Constructing weighted Bollinger bands and volume averages
  41. 2017Four swing-entry rules that share a timed exit
  42. 2017Two-wave monthly cycles as a regime filter
  43. 2019Constructing exponential-deviation-bands from a midline-average
  44. 2020Critiquing exponential variants of Bollinger Bands
  45. 2020Constructing selectable volatility and moving-average bands
By fieldOptions and volatility171 readingsBy year199483 readings
All 84 readings tagged Bollinger Bands
Also on Bollinger Bands5 readings
2006Confirming yen crossovers with implied volatility and bandsImplied volatility analysis2011Three-filter confirmation for short-swing futures2012Stacking price extremes, crossovers, bands, and MACD1985Putting listed option premiums in volatility-regime contextImplied volatility analysis1988When volatility, not direction, selects the option spreadImplied volatility analysis