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Expected moves Vs One standard deviation ?


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Expected moves Vs One standard deviation ?

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  #1 (permalink)
 Volt 
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I've been discussing with other TOS users in the TOS forum and even Think or Swim can't seem to answer this. That number in parenthesis to the right of the implied volatility on an option chain is suppose to be a one standard deviation move according to Don Kaufman and other people in the TOS forum. The problem comes when you go to the analyze tab or look at the deltas and add or subtract that EXPECTED move number it doesn't hit a minus 16 or plus 16 delta all the time but the analyze tab doesn't come close to the numbers. This isn't a discussion about skew right now.

With 2 days to go the SPY Friday expiry closed at 244.56 today so adding and subtracting that 1.744 expected move gets you to
246.3 on the upside and 242.8 on the downside yet the Analyze tab show 241.50 and 247.12.......these difference get bigger when you go further out in time....what gives ? What should we use for a one standard deviation move ? I've watched tasty trade videos and theotrade but nothing seems to come together. Here is a screen shot of the analyze . Try this same thing going out to September 20th for example and the numbers are way off




any help out here ? Thanks

Volt

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 choke35 
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For SD calculations on underlyings like the S&P 500 - which isn't a performance index but a simple
free-float cap-weighted price index - and its derivatives (like the SPY) you can choose between the
devil and the deep blue sea:

In the absence of payout research, the naive method is deriving the SD from past prices.
The error is obvious and raises with differences in earnings. Since most S&P constituents show
seasonalities, that method is second-rate (at best).

The theoretically "correct" method is estimating (or knowing) the payouts until the relevant date and
adjusting the SDs accordingly. Here the major problems arise from the necessary overhead and earnings
surprises, i.e. differences between the estimates and the actual values.

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 Volt 
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Thanks and I don't mean to be rude by any means but I'm not sure I understood your answer....this option stuff may be beyond me !!

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 choke35 
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Let's put it in absolute layman's terms:

In September the SPY has an expected (e) consensus payout of $1.17e, in December $1.37e.
Past paypouts were e.g. $1.0821 in 9/2016 and $1.3289 in 12/2016.

These amounts don't fall into your lap at the pay dates but accrue over time and also must be
reflected in projected ETF and options prices.

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mattygoal
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Thanks Choke for putting in the effort.......but I am still struggling with you answer. Any change you can put it in even more layman terms. Thanks

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 Volt 
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yeah, I'm not so sure he understood the question or maybe doesn't use the TOS platform..... it's certainly possible that his mind thinks way behind the ordinary so I'm certainly not complaining but it just doesn't answer the question in a way I can understand it....anyone else want to take a crack at this one ?

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mattygoal
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I do remind myself, that don (theotrade) once said on this topic, that for index products use the option chain ex move, for equities use the analyze tab.
Something to do with different calculations on volatility in the analyze tab

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 Neo1 
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mattygoal View Post
I do remind myself, that don (theotrade) once said on this topic, that for index products use the option chain ex move, for equities use the analyze tab.
Something to do with different calculations on volatility in the analyze tab

My guess - IV Vs IV Rank.

To OP, have you looked at the calculation for how expected move is calculated? I think that should answer most of your question.

"Free markets work because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or incentives for skill. The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can"
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 suko 
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I think there is a Jacob video in the TT archive that discusses the difference between 1SD and expected move. It depends on how the model was jiggered in the platform.

In short, expected move should be somewhat smaller than 1SD is the gist of it.

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 choke35 
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Volt View Post
I've been discussing with other TOS users in the TOS forum and even Think or Swim can't seem to answer this.


choke35 View Post
...

In the absence of payout research, the naive method is deriving the SD from past prices.
The error is obvious and raises with differences in earnings. Since most S&P constituents show
seasonalities, that method is second-rate (at best).

The theoretically "correct" method is estimating (or knowing) the payouts until the relevant date and
adjusting the SDs accordingly. Here the major problems arise from the necessary overhead and earnings
surprises, i.e. differences between the estimates and the actual values.


Volt View Post
yeah, I'm not so sure he understood the question or maybe doesn't use the TOS platform..... it's certainly possible that his mind thinks way behind the ordinary so I'm certainly not complaining but it just doesn't answer the question in a way I can understand it....anyone else want to take a crack at this one ?

If even ToS cannot answer your question in form and content, a logical answer is pretty obvious, isn't it?

Normally vendors are using a combination of self-calculated data and data that they buy on addition.
Since noone (not even a retail customer) needs any help for the naive method 1, but the research for
method 2 is expensive, it is common in the industry to buy these data. And only by chance the results
of method 2 would match the naive results of method 1 ...

P.S.: You can get the same effect if you compare e.g. 2 naive methods like SD and ATR/ADR for the same period.
Both of them tell you something about the "expected" move / range, but only by chance they are matching.

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 Neo1 
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Volt View Post
I've been discussing with other TOS users in the TOS forum and even Think or Swim can't seem to answer this. That number in parenthesis to the right of the implied volatility on an option chain is suppose to be a one standard deviation move according to Don Kaufman and other people in the TOS forum. The problem comes when you go to the analyze tab or look at the deltas and add or subtract that EXPECTED move number it doesn't hit a minus 16 or plus 16 delta all the time but the analyze tab doesn't come close to the numbers. This isn't a discussion about skew right now.

With 2 days to go the SPY Friday expiry closed at 244.56 today so adding and subtracting that 1.744 expected move gets you to
246.3 on the upside and 242.8 on the downside yet the Analyze tab show 241.50 and 247.12.......these difference get bigger when you go further out in time....what gives ? What should we use for a one standard deviation move ? I've watched tasty trade videos and theotrade but nothing seems to come together. Here is a screen shot of the analyze . Try this same thing going out to September 20th for example and the numbers are way off




any help out here ? Thanks

Volt

I think everyone is overcomplicating this.

The expected move in TOS will be a basic calculation. I have seen this covered multiple times before on the likes of Tasty Trade from the God father himself( Tom Sosnoff).

The reason for the discrepancy will be due to a different calculation method or a different expiration date.

The analyze tab is likely using:
Stock price x IV/ 100 x √ days to expiration/ 365) to calculate a 1STD move.

The expected move (1.733), could be calculated using a different estimation method: eg
(ATM call price + ATM Put price)x 1.25( usually 0.85-1.25 is used here)
^This is arbitrary. I think TOS originally used 0.85 for the expected move, and 1.25 for the 1STD move.

*The other explanation could be that the expected move 1.733 is based on the expiration date when the analysis tab could be from now to the end of the week etc

I don't use TOS, but this should be easy to get to the bottom of.

"Free markets work because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or incentives for skill. The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can"
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