Using the mathematical concepts Jeff Augen presents in The Volatility Edge in Options Trading, I am happy to present my adaptation of his “price spike” graphs. I made four indicators based on his articles and books about differential volatility. Though Augen recommends developing a database/spreadsheet system for personal research, I have developed these indicators to give a very rapid graphical representation of price change history, using pricing information already supplied by thinkorswim. This means that no database or subscription service is necessary with these indicators.
The indicator shown at the bottom plots overnight volatility (yesterday’s close to today’s open) as measured in standard deviations of the recent close-to-open price change volatility. The “recent” period I refer to is user-defined; I use a default 20-period sliding window, but it can be set to however many periods you like.
Any close-to-open price change larger than 1.5 standard deviations is indicated by an upward green or downward red spike. However, the minimum highlighted spike size is also user defined. I use a default of 1.5 standard deviations.
This indicator is used to get a graphical representation of historical volatility, but not in the conventional close-to-close measurement, but rather a more specific 17.5 hour close-to-open measurement. It is useful for finding equities or indexes that have high or low overnight volatility, and for planning your options positions accordingly. I will talk about possible strategies later.
Also, I have made an identical indicator which measures close-to-close volatility, and one for open-to-close (intraday) volatility. These are not shown in this photo.
Another feature in this indicator (not shown) is the ability to toggle on a day-of-week bubble for each large price spike. This is useful for statistical observations and possible higher probability setups based on day of week information.
The indicator above the lower one is a line graph of each volatility mentioned: close-to-close, close-to-open, and open-to-close, along with a plot of implied volatility. I created this indicator as well, using the same formulas for calculating volatility as I did in the price spike indicators.
Email me if you would like to purchase any of these indicators.
Today is the first day that the standard deviation (68% chance of expiring within a specified range) fell within my breakevens! Look at the lighter blue rectangle between the two red lines on the profit/loss graph. That area, which represents a 68% probability, is now right in the center of my P/L graph, BETWEEN the breakevens. That is a good sign! The standard deviation area will only decrease in size (narrower in width) as we get closer to expiration.
I believe we’re in the clear. SBUX traded sideways for the first half of the day, and slowly dropped to close at $0.15 below the open. But I anticipated more movement on a dividend day. I predict that SBUX will continue to bounce modestly over the next several days, and I think there’s a good chance now that it will close between my breakevens.
SBUX has held nicely the past few days, coming off of a big drop in the overall market last week. Starbucks will pay out $0.13 dividends on Monday the 13th…. we will see how that affects price. So far, with 13 days to go until expiration, I’m in good shape, as long as Monday doesn’t throw me off course.
Maybe I just don’t get it. But I don’t agree with their strategies, at least with Index Calendar strategy that I subscribed to and let them auto-trade my account for the past three months.
I lost a lot of money with them.
They seem to like to use two- or three-month wide calendar spreads, and bet on a directional bias, hoping at some point in the next 60 days that the underlying index will fall into the desired range. Well, from what I’ve learned from Dave’s Trading Pro System, we shouldn’t try to predict price, it will only get us into trouble.
So I am going back to what I know and what I’ve learned from TPS: set up strategies with neutral Delta, right in the middle of the sweet spot, with plenty of room for the stock to go up or down.
Watch for my next trade on this blog. I opened a position this morning, and will be honing my own skills according to the TPS strategies. Here’s to making money in 2011.
After analyzing some rolling trades today, I realized that I may not be in such bad shape. Yes, my long put is losing more than my short put has gained, but I am only in September, and my long put expires in November. So I guess I’ll be rolling (close out my September put) soon in order to short an October put and collect more theta. But I’m waiting on RED Option.
I woke up this morning to an unpleasant surprise. The Q’s jumped up by about $1.30, so as you can see, I’m near the breakeven, only about $0.40 away. If I were flying solo in this position, I would be stumped right now. But I’m restful knowing that the guys at RED Option are paying attention, and I just need to be patient, to see what wise trading looks like. So I’m looking forward to see what they will do.
I took a break from trading after losing for two consecutive months. The mini-crash a few months ago with the whole Greece thing… that was tough. And the markets are still very choppy. So I’ve been paper trading.
But paper trading is hard. I just don’t have the incentive get up early in the morning to check charts when I know there’s no profit involved. So I haven’t been successful at all with paper. I’ve been focusing more on my full-time job, which I love.
So I signed up for RED Option. They have an autotrading service, which links directly to thinkorswim. I’m trading with real money again, but this time on autopilot. I’m buying a house right now, so jumping into the market again would probably be disastrous. We’ll see how this goes, I’m excited. I look forward to trading on my own again, but with a few more wins under my belt.
The SPY moved up another .36 points today, which isn’t horrible, but I’ve passed the peak of the profit potential at the expiration line. I tried to move up my calls today, but I didn’t have enough option buying power! I couldn’t even move up my puts either. I definitely need to spend less than 50% of my account on my opening trades next time.
I’m pessimistic, but not crushed. The VIX is at a low, and hopefully it will spike up. But I’m not counting on it. If I lose over the next couple days, it probably will only be a few hundred bucks. I’ll close out my total position if the price continues to climb. But if it falls… that would be great. I may not profit at all this month. But I’ve learned my lesson again: don’t try to predict price!