of future stock prices. Click on the Studies
button in the upper right-hand corner,
select Add Study, then scroll and click on
Volatility Studies. From that menu, click
on Probability of Expiring Cone to display
a cone on the right-hand side of the chart
that gives you an idea of where the stock
price might be in the future (Figure 2). The
cone, which is a standard deviation bell
curve, combines the current implied volatility of the stock’s options with the number of
future days displayed, then shows the upper
and lower range of prices where the stock
might theoretically land 68% (default value
or one standard deviation) of the time for
each expiration Friday. Price could be above
or below the cone 32% of the time.
By default, you’ll see upper and lower
numbers corresponding to future option
expirations. But you can also scroll over the
probability cone line to highlight a specific
date, and see the upper and lower prices for
that date at the top of the chart.
The probability cone is for informational
and educational purposes only, and is no
guarantee the stock price will be inside that
projected cone at a future date. But it provides some context for bullish, bearish, or
For example, let’s say you’re looking at a
stock that’s $100, and you have a hunch it
might rise to $120 in three months. First, set
the number of bars to 90 days or more. Then,
using the 68% probability cone, you might
see that it has an upper value of $115 and
a lower value of $85 in 90 days. Your $120
target is above the upper bound of the cone,
which means it’s outside the stock’s 68%
theoretical range. That’s not to say the stock
can’t rise to $120 in 90 days. But the current
volatility suggests the chances are low.
The probability cone is set to 68% by
default. But you can edit the study to show
any percentage up to 99%.
THINGS THAT MOVE PRICES
Next, let’s display future corporate actions
like earnings and dividends on the chart.
Go back to the Chart Settings box, select
the Equities tab, and check Show Corporate Actions. Now you see upcoming
earnings announcements and dividends in
the expanded chart area (Figure 3). Blue
lightbulb icons indicate upcoming earnings
announcements, red phone icons indicate
conference calls, and green dollar icons
indicate ex-dividend dates.
How can this be helpful? Some stocks
can exhibit increased price volatility before
and/or after earnings announcements.
If a stock beats or misses expected numbers,
its price could have a big move up or down,
with a similarly big impact on a potential
trade. If you hover your cursor over the blue
question mark or red phone icons, you’ll
see the date and time (typically before the
open or after the close of trading) of earnings releases. This’ll help you adjust your
OPTIONS FOR YOUR EXPANDED FU TURE
Now for the third tool on the expanded
chart. Go to the Chart Settings box, select
the Equities tab, and check the Show Op-
tions box. While you’re there, notice how
you can change the number of strikes that
are displayed on the chart’s expanded area.
In Figure 4, the chart shows eight strike
prices for all the expirations within the ex-
panded chart area. You can hold the cursor
over the “C” or “P” (call or put) to see the
option’s strike price and expiration as well as
its current theoretical value.
One way to use this option information
is when selecting a covered call strategy.
If you’re long stock and want to sell a call
against it, you can compare your premium for
available calls at different strikes above the
current stock price, as well as for different
expirations. This can even be combined with
the probability cone to select a call that’s
outside the stock’s theoretical price range,
and so may have a high probability of expiring
Probability analysis results are theoretical
in nature, not guaranteed, and do not reflect
any degree of certainty of an event occurring.
SO YEAH, WE’RE TRADING NERDS AND
we think this stuff is pretty fun. These
handy tools aren’t next year’s newspaper,
but they can provide context for potential
trades. After all, trading is all about what
might happen in the future. These chart
tools on thinkorswim just might help you
envision that future a bit more clearly.
FIGURE 3: Future corporate actions. When will earnings be released? When will
dividends be distributed? This information can be displayed on the expanded
areas of your charts. Source: thinkorswim® from TD Ameritrade. For illustrative purposes only.
FIGURE 4: Comparing premiums for different strikes and expirations. A few
mouse clicks and you could see the strike prices for all expirations in the expanded
chart area. Source: thinkorswim® from TD Ameritrade. For illustrative purposes only. Past performance is no
guarantee of future results or investment success.
calls Upcoming earnings
over “C” or “P”
to see strike price,
Thomas Preston is not a representative of
TD Ameritrade, Inc. The material, views, and
opinions expressed in this article are solely
those of the author and may not be reflective of
those held by TD Ameritrade, Inc.