Expected Trading Range

[romSPG]

Quote from trefoil:


You're going to need to thoroughly explore all the different strategies there are out there. That CBOE site has a lot of good educational stuff on it.
Paper trade before going live. You'd be amazed how quickly you can lose money if you haven't done your homework.

I have a pretty good knowledge of the various spreads but I don't seem to find a strategy to play expected range on less than monthly time frame.

Could you please give me an example?

If for instance my opinion is that next week's range will be distributed around the open with a std less than what the market expects, which option construct should I get in order to maximize profit (assuming that my opinion is right)?

Thanks

 

[wave]

Have a look at iron condors.

 

[trefoil]

Quote from wave:

Have a look at iron condors.

Yep.
With an IC, you'd sell a put vertical somewhere below the lowest price you expect, and sell a call vertical somewhere above the highest.
For the IV number to use for what the market is expecting, the IVs on the nearby OTMs on each side are the most realistic numbers from what research I've done. Beyond that they get too high for the puts and too low for the calls. (I get tempted sometimes to just sell put verticals and be done with it. They look overpriced, but you know they're not; no one's giving anything away.)

 

[trefoil]

Also, Iron Butterfly..
Basically, the sells are both ATM instead of OTM, as they are in an iron condor. For the timeframe you're looking at, this might be better. Someone on here suggested this in another thread.
I've never done it.

 

[stevenpaul]

Quote from romSPG:

Hello,

From the option price how can I compute how much the market expects the underlying to move over the next quarter, the next month, the next week, the next day... ?


Thanks

IV by definition refers to the expected price range of the underlier over a given time-frame. It's not necessarily anything to hang your trading on, however. Just take a look at how predictive the VIX tends to be. It seems to refer only to the present moment, even though it is supposed to track the expectations of a future trading range.

The Monte Carlo calculator can tell you the statistical probability that the underlier will trade within a given range. I know McMillan doesn't put on a long straddle unless the "ever" probability of exceeding both breakevens is above 80% within the life of the trade. That's something the Monte Carlo can tell you: The chance the underlying will tag a given price point at any moment within a time frame. It also tells you the probability of an underlying market remaining within a given range throughout a given time-frame. That's useful for time-spreads. For example, I felt more comfortable putting on a recent calendar spread knowing that the Monte Carlo rated the probability of profit (that is, that the underlying would stay within the breakevens) at 98.9 %.

 

[ammo]

Quote from romSPG:

I meant absolute move!

look at the at the money strike....nov 118 calls and puts added is roughly 2.95 add or subtract from 118.50 current price...max move..rule of thumb

 

[OddTrader]

Quote from stevenpaul:

IV by definition refers to the expected price range of the underlier over a given time-frame. It's not necessarily anything to hang your trading on, however. Just take a look at how predictive the VIX tends to be. It seems to refer only to the present moment, even though it is supposed to track the expectations of a future trading range.

The Monte Carlo calculator can tell you the statistical probability that the underlier will trade within a given range. I know McMillan doesn't put on a long straddle unless the "ever" probability of exceeding both breakevens is above 80% within the life of the trade. That's something the Monte Carlo can tell you: The chance the underlying will tag a given price point at any moment within a time frame. It also tells you the probability of an underlying market remaining within a given range throughout a given time-frame. That's useful for time-spreads. For example, I felt more comfortable putting on a recent calendar spread knowing that the Monte Carlo rated the probability of profit (that is, that the underlying would stay within the breakevens) at 98.9 %.

According to McMillan, time-spreads for futures options involve trading of two spreads: not only the IVs of options , but also the basis of ULs (that can be fairly significant). Time-spreads' risk could be potentially unlimited, as per Baird.