Is ATR a Good Measure of Options Premium?
December 16, 2022
ATR is very commonly used by equities traders for use in sizing their positions and setting stops. I’ve used it often for this application.
However, ATR won’t help us determine if the options premiums are “high” or “low.” This is because ATR is backward looking. It is a reflection of past volatility. It doesn't accurately reflect the amount of premium that market makers are pricing in the options. This is because premiums and therefore implied volatility are forward-looking.
Volatility and ATR are often correlated, but you can't rely on ATR to give you a true sense of whether or not options are "cheap" or "expensive."
I hope you found this instructive.