Variance Ratios using 5-min intraday vol sampling
Using divergences in the intraday / open-close volatility ratio's to improve Long / Short 1-(0) DTE SPX Straddle performance
Follow up for the previous post:
The logic behind the initial attempt at using Variance Ratios was quite simple, find divergences between various volatility estimators and trade the straddle long/short based on these divergences resolving.
Initially we’ve looked at various cl-cl and range based volatility estimators. In this post we will look at sampling the S&P intraday 5-min volatility and hopefully improve the performance of the long/short straddle strategy based on previous volatility estimators.
Lets look at some familiar characteristics of the higher frequency intraday returns:
Looking at daily 5 min SPY data between Jan 2020 and Dec 2024 we get the ‘classic’ U-shape in squared returns. Opening & closing 5 min volatility is highest, with volatility putting in a trough around 1pm.
What we are primarily interested is identifying periods of high mean reversion & periods of strong trend. We define the ratio as follows:
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