Archive for February, 2012

New Price Spike indicators!

8 Comments // Written on Feb 02, 2012 // Options Trading, Uncategorized

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.