Volatility parity equalizes the ticket; implied volatility is a regime dial

Fixed lots let some markets dominate

Using the same share count or a single futures contract on every trade lets higher-priced or more volatile markets dominate a multi-market book. Volatility parity sizes each trade so its volatility, and therefore its risk contribution, is brought into line with the others. Each trade then has a more equal chance to affect results.

Under a volatility-based size rule, quieter markets get larger positions and more volatile markets get smaller ones.

Historical volatility lags; implied volatility jumps

Historical volatility is computed from realized prices and, in this account, uses a 20-day average that lags. Implied volatility is taken from options pricing and can jump on news then fade when the news is empty.

A long 2000 to 2016 comparison of the two volatility series looks broadly similar. The 2008 window shows realized volatility still rising after implied volatility has flattened.

Five size rules on the same timing

Five sizing rules were applied to the same 120-day moving-average timing on a broad equity exchange-traded fund: a fixed 100-share lot, a 100-share lot capped at 10,000 of exposure, a constant 10,000 exposure divided by price, unbounded average-true-range size, and size scaled by one minus implied volatility.

A fixed 100-share rule lets later higher-priced years weigh more than earlier lower-priced years unless a cash cap is applied. Uncapped lot size is not the same risk unit over a long sample.

Price-based sizing keeps each trade at a fixed dollar exposure by dividing that budget by the current price. Names priced under 5 produce rapidly expanding share counts and more erratic volatility.

Unbounded average-true-range sizing equalizes risk trade by trade. Average true range is a price-range measure that includes gaps from the prior close. Because the rule expands sharply when volatility is low, it can push exposure far above a fixed cash budget.

Inverse implied-volatility sizing of the form 100 minus the volatility index, floored at zero, cuts size when implied volatility is high and goes to zero if the index is above 100. The same account notes the index averaged about 21 and usually lived between 13 and 30.

How large and how small the adjustment should be

The remaining design question is how large and how small those volatility adjustments should be.

Editorial reading: answer that question at the ticket with Volatility position sizing, so the loss or exposure decision is bounded before entry. Keep implied volatility on the separate Volatility targeting dial so the book stays stress-aware.