Saturday, 31 March 2018

SAVI - T40

Many participants are aware of the popular TV series “fear factor” and the various challenges the participants are required to overcome.
What is volatility? When we look at the share market, the traded volatility is a measure that describes the tendency of the market to move either up or down and to what extent the anticipated move could be. In essence it is a fear factor. If the price jumps large amounts in a short space of time then the volatility of the market will be high. If the market movement is small, steady and predictable then the volatility will be low.
The intension is that this index becomes a benchmark indicator for economists and market participants to gauge the fear in the market. This index could therefore assist with any forward planning decisions to ultimately ensure price risk management for your white maize business.
The SAVI was launched, in 2007, as an index designed to measure the market's expectation of the 3-month implied volatility.
The SAVI was updated three years later, in 2010, to reflect a new way of measuring the expected 3-month volatility. The new SAVI is also based on the FTSE/JSE Top40 Index, but it is not only determined using the at-the-money volatilities but also using the volatility skew.
As a result of the new SAVI calculation method the following benefits are present:
  • The new SAVI calculation includes information of the volatility skew which is in line with the fact that volatilities do not only depend on the time dimension, but it also depends on the strike level dimension. The new SAVI therefore fully incorporates all the dimensions of volatility.
  • The new SAVI calculation method is a weighted average of traded option prices, and thereby abandons using the Black-Scholes implied volatility directly. The result of the modification is a model-free volatility index.
How to Play Market Volatility
And like a thermometer, there are specific numbers that tell the market's story.
A level below 20 is generally considered to be bearish, indicating that investors have become overly complacent. Meanwhile, with a reading of greater than 30, a high level of investor fear is implied, which is bullish from a contrarian point of view.
The smart thing to do then is to wait for peaks in the SAVI above 30 and let the SAVI start to decline, before placing your buy. As the volatility declines, stocks in general will rise and you can make big profits. You see it time and time again.
In fact, the old saying with the SAVI is, "When the SAVI is high, it's time to buy." That's because when volatility is high and rising, that means the crowd is scared. And when the crowd is scared, they sell, and stock prices fall dramatically, leaving bargains for money making traders.
But it's not just a reading of "under 20" or "over 30" that works with the SAVI.
That's a bit too simple.
On top of those levels, smart traders also add the price movement within the Bollinger Bands into the mix or apply Moving Averages. Of late, that has been one of the key tells in predicting the market action.

As fear and greed are relative concepts, it can not just be defined by a number 20 or 30. Therefor make use the median or moving average cross-overs.
Looking at 2016, the fear factor was above the moving average and at high numbers on the SAVI index. Comparing the same time frame with the Top 40 J200 index, the market has traded sideways with heavy volatility (in a large range).
Doing the same analyses for 2017.  The fear was past tens, SAVI dropped below these numbers, median and moving average and the market was on the run.

Trade with caution as the markets are very unstable and uncertain.
Contact me @Duplo123 or join us on Skype

No comments:

Post a Comment