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How to really, truly calculate expected move?

Hi everybody. Hopefully this post doesn't sound too rant-y but I'm pretty frustrated by the amount of info out there that I'm not able to pick up on. There just seems to be a million ways to do calculated expected move. Here's what I've gathered so far.
There seems to be two general methods:
First Method: IV-Based
where P = price, IV = annualized implied volatility, DTE = days to expiration [0]
This means that there is a 68% probability that the stock in question will be between -1 and +1 sigma at the date of expiration, a 95% probability between -2 and +2, and a 99% probability between -3 and +3.
Sometimes 250-252 is used instead of 365, which seems to be the case when DTE refers to market days until expiration. Is that correct?
There are a number of ways to calculate IV. I would appreciate it if somebody could elaborate on which might be best and the differences between them:
  1. ThinkOrSwim uses the Bjerksund-Stensland Model [1] - I assume this is the "annualized" implied volatility aforementioned, because it is an IV value assigned to the stock as a whole ... what does that mean? I thought IV values were only calculated for a specific option contract??
    1. As an aside, ToS in particular confuses me because none of the IVs seem to correlate - Exhibit A
  2. I thought I might look into how VIX was priced off of SPY [2], as an analog, and use it as a basis for finding IV for any other stock as a whole. I don't know where they got their formula from
  3. Backsolve for IV using Black-Scholes [3]. This would only gives one value for IV, which I think only applies to that specific option contract and not to the stock as a whole??
  4. Some websites say to use the IV given that is closest to the desired time period [4] - of course I have no idea how the IV is calculated in the first place (Bjerksund-Stensland again? Black-Scholes?) What's the difference between using the IV of a weekly or a yearly option?
  5. Brenner and Subrahmanyam [5] - understood that this seems to be just an approximation. Should I be looking at formulas from 1988, however?
A very big question of mine is why there is an implied volatility for the stock as a whole and an implied volatility for every other options contract. I can kind of understand it both ways - why should a later-expiry contract have the same IV as an earlier-expiry contract? On the other hand, why should they be different? Why isn't there just one IV for the stock as a whole?

Second Method: Straddle-Based
My understanding is that this is more used for binary events like earnings, but in general I've found two methods:
I have no idea where [5] comes from and I can sort of understand 6 but not really.

In the end, I'm just trying to be as accurate as possible. Is there a best, preferred method to calculating the expected move of a stock in a given timeframe? Is there a best, preferred method to calculating IV (I'm inclined to go with ToS's model simply because they're large and trusted). Is there some Python library out there that already does this? For a retail trader like me, does it even matter??
Any help is appreciated. Thanks!
submitted by hatitat to options [link] [comments]

discussion regarding POP (probability of profit)

Ok, there seems to be some confusion about POP, making it way more mystical or even "proprietary" than it needs to be, but option PRICING and positioning is crucial in understanding the fundamentals.
First, the actual POP formulas (you can skip this, I'll show you the quick math below in lieu of these, but it's simple formulas for Pete's sake):
Credit Spread: 100 - [(the credit received / strike price width) x 100]
Debit Spread: 100 - [(the max profit / strike price width) x 100]
Iron Condors: 100-((credit received/width of spread)*100)
Naked Options: Strike Price - Premium = breakeven. 100 - (probability of breakeven ITM)= POP
So what is POP? It's the risk/reward weighed over a probability (bell) curve at the time you place your trade. This is reflected in the premium price received weighed against the likely risk or capped max loss.
What is delta? Amount of directional risk.
"Back of the envelope" POP calculation: 100 - delta = POP% (e.g., short 0.30 delta put has 70% POP, an iron condor with 0.16 delta put and 0.16 call is 68% POP) If you do the math, this gets you darn close to the formulas above)
1) The price doesn't set the market, the market sets the price. Just like the Cowboys are 9-1 odds to go to the superbowl, or paying $750 a month for insurance because you smoke cigarettes, it's marketplace, it's statistical. It's definitely not blind magic.
2) Let there be range! Distribution, standard deviations, distribution curves and yes, even variance! It's how the world of options are PRICED and modeled. Price is derived from supply and demand driven by speculation, leverage, binary events (earnings) and fear (hedging)! Implied Volatility (IV) expands and contracts affecting both delta (directional risk) and premium pricing, which in turn affects POP calculation. (Think of the distribution curve expanding and contracting in width and what that means to premium prices and POP) Keep in mind, as the underlyings change, so does delta, so does the risk profile, so does POP. It's dynamic after all. But at the time I place a trade there is a statistical range and liklihood, risk/reward, expressed as POP. That's all. Nothing more. Doesn't mean I'm guaranteed a 70% success rate over 45days, ship it!! All it's saying is what the current marketplace is willing to pay at a given likelihood at that moment vs the accepted risk. (odds)
3) The markets are priced to perfection, fear is overstated. When markets tumble, firms buy up puts for protection and the IV shoots up (demand driven). Another example, when earnings comes around the buying demand goes up, the uncertainty rises, the IV expands, the delta curve widens. IV can be overstated in its rise, and even exploited during binary events in it's collapse, given that IV ALWAYS reverts back to the mean. This edge is not huge, but is figured to be 2-3% in favor (outside of binary). IV influences price, which affects POP.
4) The art of adjustment. If delta moves too high (risk), adjustments can be made by rolling (up or out) or with offsetting positions (i.e.,opposing spreads or pair trades) to reduce the position's overall delta... while often collecting additional premium while doing so! You can not do that cheaply or easily buying options...and guess what? Adjustments have POP! Furthermore, Tastytrade studies are showing that managing winners aggressively (i.e., 50%) increases POP even further, in that, we are reducing the number of days the trade is on and therefore eliminating risk increasing win rate. We can see 70% POP trades actually become 80% POP by adjusting at 50% profit.
5) Why does TastyTrade coin the term POP? First of all, every trader and brokerage platform models the probability of profit in similar form, it's just terminology. IB calls it "percentage of profit" for example. But moreso, your brokerage doesn't know how to trade options, doesn't give a fuck to teach you about trading options. Buy calls, pay 1.50-$8 a trade, and wait until expiration helplessly. TastyTrade is free. Ad free even (how refreshing). And if you want, they offer the cheapest brokerage fee out there in TastyWorks, if you so oblige.
Keep in mind this discussion did not touch on theta (time decay/acceleration) or gamma (delta velocity) which further affect price movements.
References: Start at 8:30mins: http://ontt.tv/2cdvnF7
Start at 4:30mins: https://www.tastytrade.com/tt/shows/best-practices/episodes/probability-and-standard-deviations-06-12-2017
Start at 0:00 (MUST WATCH IN MY OPINION) https://www.tastytrade.com/tt/shows/market-measures/episodes/delta-and-probability-06-15-2017
submitted by Realdeal43 to options [link] [comments]

Learning options... can you answer these questions please?

Hello, I'm transitioning from Binary options to Options. With binary it was simple: Call or Put. With options its more complex which is appealing to me because of its "flexibility." Now I am new and plan to trade with a small account (when i start). For now I study and paper trade. Here are some questions I hope to have answered:
1) Difference between a NAKED call, a COVERED call, and any other call i should know about?
2) Is it me or do options traders NEVER just Call or put? In other words, if i think XYZ is going to trend upward strongly.. why sell a put when i can just buy a call?
3) how do you learn all the spreads? I know i can youtube the different options spreads and learn about them.. But what i want to know is what spreads should every noobie options trader definitely understand? I'm not expected to know how to set up an iron condor or any of those complex spreads off of the top of my head, as a noobie trader, am I?
4) I've studied the basics of options.. the black scholes model... the greeks... i've watched videos on spreads.. i've learned about the importance of liquidity.. but i feel like i need to start applying (by paper trading and then going live)... but i have never seen anyone trade before. I have only read about the art. I dont have any friends that trade. So when I open TOS and i want to look for options to trade, I don't even know where to start looking as far as underlyings go.. I've read people suggest with just trading SPY options as a noobie. Should i just learn by trading options with one underlying at a time only? or Should i just take on a couple different underlying options at the same time to learn how to manage?
I''d appreciate your responses and ANY additional suggestions you may have.. thanks in advance!
PS - I spend a lot of time watching Tastytrade videos and other options related videos on Youtube. any better suggestions to speed up my learning?
submitted by hacaframa to options [link] [comments]

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