. The expected movement of a stock's price can be computed/deduced in several different ways. Some of my 'go to' techniques are:
(a) Use the price of the front month (week) straddle. Here we check the price of selling the ATM call and ATM put. The expected movement of a stock's price when using a straddle strategy is the sum of the midprice fills between the bidask spread for selling ATM calls and put. Example: Say the ATM call has a bid/ask spread of $1.10 and $1.20, we can assume the midprice fill of $1.15 similarly, say the ATM put has a bid/ask spread of $1.40 and $1.50, we can assume the midprice fill of $1.45 So the straddle would cost $1.15 + $1.45 = $2.60 This would imply an expected move of $2.60 from the current price. Most seasoned traders will consider 80% of this straddle price ($2.60 x 80% = $2.08) as the expected move, I'd like to be a bit more conservative in my trading. (b) Use of MMM (on ThinkOrSwim platform) MMM is the Market Maker Move displayed on the 'Trade' tab of the ThinkOrSwim platform. It's the expected move as computed by the platform. (c) Use of expected move formula: Expected Move = Stock price x IV x Square Root (Days to Expiration/365.25) (d) Use of option greeks: We look at delta to deduce the 1 Standard Deviation move in the front month. We'll look at the strike price of the options with 16 delta which equates to 68.2% probability of falling in the money or 30 delta which equates to 50% probability of falling in the money. By using these strike prices, we are deducing the probability of success.
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3/13/2019 07:29:08 pm
Stock Market will always be a complicated world. If you are not patient enough to understand the overall process, you will lose your money in an instant without noticing it! That's why if you are trying to enter this world just to warn money, you really need to be smart and patient enough for all the process to happen according to your favor. Of course, no process becomes easy especially if it has something to do with your money growth. But I am pretty sure with the idea that the process will always be worth it!
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NishaEighteenyear old trader, future connoisseur of options. Follow me on Twitter!
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