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.
‘ Options Trading ’ Category
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.
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!
Looks like I need to stop trying to predict price, because it hasn’t worked. I was wrong in predicting a bearish move, at least in the short term. The SPY blasted right through the resistance line I drew and instead followed the upward channel. It’s moving painfully upward while the bears are showing a lot of resistance, but it’s still climbing upward along the lower end of the channel.
I’m not in a horrible position, but I will likely need to make an adjustment tomorrow morning. But that’s okay, I’m still 30 days out from expiration. I decided this morning that I would make an adjustment if the price reached 117.
Delta is currently at -236, Vega is -92.
This is it.
I’ve been paper trading up until now. Today is my first day using real money! This is for real.
I was going to buy a Double Calendar, but IWM and EEM had negative skews. So I sold an Iron Condor on the SPY.
I’m almost a full point above center, because I’m betting on the market being bearish soon. I sold CALLS and PUTS for at least $1, going as far OTM as possible. Looks like the market is predicting a bearish fall, because my graph is optimal when I sell puts further OTM. Current price is 114.96, and my breakevens are at 110.08 and 117.92. I’d prefer the breakevens to be a little wider, but at least the downside breakeven is close to 5 points lower than current price. If SPY goes up, I’m only 3 points from my breakeven, so I will watch this carefully.
I used half of my option power (was $5000, now $2378), hopefully leaving enough money for adjustments.
The SPY is my only position this month, because negative skews kept me from buying double calendars.