of the time, and + 3 and - 3 standard deviations
99% of the time. Vol is a standard deviation of
returns, and theoretically follows Chebyshev.
AND THE NUMBER OF DAYS?
Do you use trading days (approximately
262) or calendar days (365)? For an annual
number, it doesn’t matter. The square root
of 262/262 is one, as is the square root of
365/365. But to convert vol to a one-day
estimate, it makes sense to use trading
days. For example, if it’s Tuesday and you
want to see how much NDX might move on
Wednesday, multiply VXN (the CBOE volatility index for the NDX) by the square root
of 1/262, then multiply that by the NDX’s
value. That is: 0.19 x (square root of (1/262))
x 7,300 = 85.69. Theoretically, NDX could
be between 7,214.31 and 7,385.69 68% of the
time in one day.
But if your time frame includes weekends,
you may want to use calendar days to account
for changes even when the market is closed.
If you want to see how much NDX could
change in 90 days, take 0.19 x (square root of
(90/365)) x 7,300 = 688.73. The NDX might
theoretically be within 6,611.27 and 7,988.73
68% of the time in 90 days.
As a rule of thumb, within a trading week—
Monday through Friday—use trading days.
For more than a week, use calendar days.
YOU CAN YANK OUT A CALCULATOR to
do this and impress your friends. But it’s simpler to look at the Probability Analysis page
on the Analyze tab on the thinkorswim®
platform from TD Ameritrade. And now you
understand some of the theory behind those
numbers. —Words by THOMAS PRESTON
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.
For more on the risks of trading and trading
options, see page 37, #1– 2.
Past performance of a security, strategy or
index is no guarantee of future results or investment success.
THINK TANK • EASY
Cool Tools You
BIG IDEA: WE GET STUCK USING THE SAME
FEATURES ON OUR TRADING PLATFORM
OVER AND OVER AGAIN AND DON’T GIVE A
THOUGHT TO FEATURES WE NEVER USE.
HERE ARE SOME USEFUL TOOLS ON THE
THINKORSWIM® PLATFORM THAT COULD
SPICE UP YOUR TRADING DAY.
So you have a couple symbols on your watchlist that you like to
trade. Maybe you’re bullish on one but not sure why price isn’t moving. One tool that can help you analyze price behavior more closely
is OnDemand for thinkorswim. You see how price behaved when it
reached a certain point such as a support or resistance level by going
back in time.
Say you pull up a price chart of a stock you want to trade and see
that price came close to a support level and has started moving up
(Figure 1). But price is stalling, and you’re not sure if the uptrend
will continue. You look back on the chart and see price hit that support level on July 31, 2018.
What was the price action in the options at that time? Here’s how
you can watch a replay of that price action using the OnDemand
feature on thinkorswim (Figure 2).
1 – Click the OnDemand button on the top right of your screen.
2 – Select July 31, 2018 on the calendar, then click the Go! button.
3 – Now go to the Trade page and view the options chain.
4 – Click the step forward button to see how options prices change
as you move closer to expiration.
Once you’re done using OnDemand, click on the OnDemand button
and it takes you back to prevailing prices. OnDemand is effective for
understanding how time decay or volatility impact options prices,
especially during major events such as earnings releases, as options get
close to expiration, or price action at technical levels. This can take you
one step closer to making more educated trading decisions.