Thread by @SubhadipNandy16

Currently we are in a low volume post the new margin rules and a low volatility zone. (Defined volatility as basic daily range ( high -low))
It's apparently obvious the trading volume should be highly correlated with volatility, though it's difficult to establish causality

A good argument can be that heavy trading volume moves the underlying price more thus increasing volatility OR
volatility induces traders to trade more thus increasing volume.

I tried to test this hypothesis

The above chart shows volume and volatility data on Nifty fut since inception. Volume on the X axis and volatility on the Y axis. The correlation coefficient since inception is 0.54. But initial days on Nifty fut were of low volume, so I tested for last 5 years and it's 0.78

So the assumption going forward can be that as long as this low volume continues, intraday volatility will be low.

How does one use this data ?

1. Intraday option selling can generally be a good strategy, option buyers will suffer ( decay > delta)
2. Intraday support resistances based on ranges will mostly hold rather than breakouts/breakdowns

Generally all daytrading strategies are of broadly two types, either mean reversion or breakouts. This seems to be a market where mean reverting strategies on intraday should work much better than breakout trading

Inspiration came from these two papers :

1. econpapers.repec.org/article/ecmeme…

2. econpapers.repec.org/article/eeejbf…