Daily Volatility Scaler (\(DV_{scaler}\))

Brian Lee
Jul 22, 2025

The Daily Volatility Scaler, \(DV_{scaler}\), is a key parameter used in conjunction with Daily Volatility (\(DV\)) to refine the expected daily trading range. It controls how aggressively buy and sell price levels are set, thereby influencing how quickly orders are filled and how frequently the portfolio is adjusted.

Use the Scaler to Adjust Expected Price Ranges

The scaler allows us to modulate the baseline volatility range. By applying \(DV_{scaler}\), we obtain an adjusted range that better reflects our trading preferences or market conditions:

\[ \begin{aligned} DV_{adjlow} &= UP_{opening} - (DV_{scaler} \times UP_{opening} \times DV) \\ DV_{adjhigh} &= UP_{opening} + (DV_{scaler} \times UP_{opening} \times DV) \end{aligned} \]

where

• \(UP\) is the underlying price
• \(UP_{opening}\) is the opening price of the underlying (see Underlying Opening Price (\(UP_{opening}\)))

These formulas mirror the original \(DV_{low}\) and \(DV_{high}\) calculations, but with \(DV_{scaler}\) scaling the magnitude of the daily volatility.

In practice, I use the largest \(DV_{scaler}\) value that fits my trading strategy. My preferred value is 0.8.

Effect of the Scaler

1. Increasing \(DV_{scaler}\) widens the adjusted range \([DV_{adjlow}, DV_{adjhigh}]\):
   • A value of 1 has no scaling effect (baseline range).
   • Values greater than 1 expand the range.
2. Decreasing \(DV_{scaler}\) narrows the adjusted range:
   • Values less than 1 tighten the bounds and generate more conservative signals.

Finding Bargains and Next Actions

We use \(DV_{scaler}\) as a practical filter to identify potentially favorable entry or exit points. The interpretation is subjective and should be fine-tuned based on individual strategy and risk tolerance.

1. Good Deal: Buy. Price is below \(DV_{adjlow}\) — strong bargain signal.
2. Cheap: Buy or Wait. Slightly above \(DV_{adjlow}\) — possibly undervalued.
3. Avg. Price: Wait. Trading near \(UP_{opening}\) — neutral range.
4. Pricy: Sell or Wait. Slightly below \(DV_{adjhigh}\) — relatively expensive.
5. Expensive: Sell. Price exceeds \(DV_{adjhigh}\) — high overvaluation signal.