A.I.M. Users Bulletin Board

[lrp42]

Hi Tf,

For me the use of the ATR is a discretionary judgment call. When used it is an absolute number that is shown in dollars and cents. I just eyeball it get a sense of the volatility for the stock or ETF.

There is an overlay you can put on a chart which uses the ATR bands much like the Bollinger Bands overlay which uses the Standard Deviation. That overlay is called the Keltner Channel.

http://stockcharts.com/school/doku.php?st=keltner+channels&id=chart_school:technical_indicators:keltner_channels

The default for the Keltner Channels bands are a 20 day moving average, 2 ATRs above and below the 20 day moving average, and the 10 day ATR absolute value. These can be adjusted however one pleases. I usually stay with the default settings.

I have used the Keltner Channels in the past in the following manner. Whenever I see something with which I want to begin a new LD-AIM program, and that stock or ETF has recently been in a downward trend I will begin tracking it using the Keltner Channels. If the stock or ETF is presently below the lower channel band I wait until a reversal occurs and the stock begins an upward movement above the lower band. Then I buy.

With respect to using the ATR for options, personally I don't feel it has as much utility value as using an Option's Implied Volatility (IV) and comparing the IV with the Historical Volatility (HV). As you know, there are several factors which need to be considered for buying or selling options such as the Delta, Vega, Theta and whether the option strike is in the money or out of the money, expiration dates, etc. In my opinion, the ATR doesn't give nearly as much value to the investor for options as the Implied Volatility does when compared to the Historical Volatility.

The one thing the ATR shows me with your example on the S&P 500 is that the more recent ATR is more volatile than it has been over the entire past year.

One example I can give is that I am presently considering a new LD-AIM program with DRN. It is currently flirting with the lower band of the Keltner Channel. Its current 50 day ATR is $3.43. With a current price of $73.59 this means a daily volatility movement of around 4.7%. Using a strictly judgment call I would probably use LD-AIM settings of a 10% SAFE with a 10% Minimum Transaction on the Buy side. Would probably use a 0% SAFE with a 10% Minimum Transaction on the Sell side. I usually use a 10% Minimum Transaction amount for my LD-AIM programs to make the trades more meaningful.... and only adjust the SAFE amount for the initial purchase and larger SAFE adjustments for consecutive purchases.

Using your example of the S&P 500 Index, if I were to enter a new LD-AIM program for SPY I would probably use a smaller SAFE than if I did a new program in DRN. The current price for SPY is $210.02. Its 50 day ATR is $2.106 or $2.11. This has been an approximately 1% daily movement for the last 50 days....not much volatility. In order to generate some trades for SPY I would probably use a much lower SAFE than I would with DRN, which has a daily volatility movement of almost 5% a day. If I did use a SAFE with SPY I would not begin with one any higher than a 5% Buy SAFE. It is going to be difficult to generate many trades with settings higher than that.

I apologize for not giving you a more definitive answer. I guess the reason is that for me using the ATR for AIM settings is more or less a judgment call, much like using ZigZag overlays.

To sum up....for me the Keltner Channels can be used to help determine the point of entry, and the 50 day ATR can be used to help me determine the SAFE settings I use for the LD-AIM program after I make my purchase.

As I said, for me the ATR is much less useful for Options than is the Implied Volatility when compared to the Historical Volatility. That is because a lot more Option factors have to be used when making decisions for which Strike price to use and which Expiration Date. The ATR just doesn't help me there. It only helps me in setting up new LD-AIM programs.

Sorry I couldn't be of more help.

Best regards,

Ray