Using implied volatility to estimate range

[Grantx]

Total options beginner here.
Platform = Interactive Brokers TWS (delayed data)
Instrument = SPX

When I set the chart to display 2 standard deviation it plots the range (the blue pattern on the right of the chart) which in this case is between 2775 and 3100.

The calculation I am using is (Price x IV x SQRT(days left in year) / sqrt(365)

I end up with unrealistic numbers. What is a good way to determine the expected range for the remainder of the year?

Building on that, how would I determine the expected range for expiries this week?

Cheers.

 

[bloomberg1]

Good question, and better yet how about the day
Since there's mostly day traders here or should say a lot of them shouldn't they know?

 

[newwurldmn]

Total options beginner here.
Platform = Interactive Brokers TWS (delayed data)
Instrument = SPX

When I set the chart to display 2 standard deviation it plots the range (the blue pattern on the right of the chart) which in this case is between 2775 and 3100.

The calculation I am using is (Price x IV x SQRT(days left in year) / sqrt(365)

I end up with unrealistic numbers. What is a good way to determine the expected range for the remainder of the year?

Building on that, how would I determine the expected range for expiries this week?

View attachment 227650

View attachment 227651

Cheers.

Iv* sqrt(trading days/255)* price

 

[Grantx]

Iv* sqrt(trading days/255)* price

trading days = presume excluding weekends
* price = Current option price of the strike Im looking at?

IV = 25.6 (screenshot)
Trading days = 162 (remaining for 2020)
Price = 124.10 (Ask price at 2880 strike)

25.6*sqrt(162/255)*124.10 = 2532.206

What am I doing wrong here? I would expect something like 50, or 100 points or whatever. Then add and subtract to/from the current price level to determine the expected deviation.

 

[newwurldmn]

trading days = presume excluding weekends
* price = Current option price of the strike Im looking at?

IV = 25.6 (screenshot)
Trading days = 162 (remaining for 2020)
Price = 124.10 (Ask price at 2880 strike)

25.6*sqrt(162/255)*124.10 = 2532.206

What am I doing wrong here? I would expect something like 50, or 100 points or whatever. Then add and subtract to/from the current price level to determine the expected deviation.
View attachment 227654

.256*sqrt(162/255)*underlying price

 

[Grantx]

Good question, and better yet how about the day
Since there's mostly day traders here or should say a lot of them shouldn't they know?

If I have this right then the calculation works by substituting in the remaining days until expiry. Going on the data from barchart :
1 = 38 days to expiry
2 = 23.6 IV
3 = 2920 strike

.236*sqrt(38/255)*2920
= 266 points.

So according to the options world, a single deviation range on ES between now and 38 days into the future falls somewhere between:
Upper range = 3193
Lower Range = 2661

Now presumably the next thing I need to look at to confirm or disprove any calculations is to look at the open interest ratio....thats next

 

[jamesbp]

The calculation I am using is (Price x IV x SQRT(days left in year) / sqrt(365)

I end up with unrealistic numbers. What is a good way to determine the expected range for the remainder of the year?

Building on that, how would I determine the expected range for expiries this week?

1 standard deviation implied move for the Expiry you are looking at can be approximated by ATM Straddle Price x 1.25

 

[Grantx]

1 standard deviation implied move for the Expiry you are looking at can be approximated by ATM Straddle Price x 1.25

I cant figure that one out. Here is a screenshot of TWS with a straddle setup.
Current price = 2926
Straddle price = 2970
IV at 2970 = 22.2%

By that formula:
2920*1.22 = 3562

3562-2920 = 642

That seems too big. Even if I divide by 2 I get a 321 range. For a 2 day range this doesnt look right.

 

[guru]

I don’t believe in estimating the range using IV. It’s a false lead, it’s bs. I never understood why people even look at it and try to conclude the expected range.
Imagine that everyone in the world was using some way to estimate the range and then priced the options accordingly. So then the options would be priced based on estimated range, but what would be used to calculate that estimated range in the first place? They’d have to use something to estimate the range first and then price the options. But it’s the opposite: no one knows anything about expected range and options aren’t priced based on some imaginary expected range.
The “expected range” exists only because some guy noticed that IV can be used to calculate “something” that he proudly named “expected range”. Then everyone started using this term as if it meant anything.
While the actual expected range is based on historical volatility (historical ranges) that is actually used to calculate a base price of an option, before incorporating IV. IV is just a result of supply and demand, and some future events with unknown outcome. The IV can still be used to calculate some things including "some ranges" and to trade better, but not to calculate the actual expected range you're thinking of.

 

[never2old]

@Grantx, its not always black & white or follows an exact science/probability

as guru posted below, great info BTW

I don’t believe in estimating the range using IV. It’s a false lead, it’s bs. I never understood why people even look at it and try to conclude some ranges.

IV is just a result of supply and demand, and some future events with unknown outcome.

^^agree

there are several high IV that are 400%+ along with the 25%, 50% that premiums are not correlated.

one I posted about April 29 was MYOK at $65 because of its high IV could be a speculative DOTM naked put or for an ATM call 15 DTE the 15 May option the premium was $13

a week ago 3-4 May (before all heck broke loose) MYOK was trading in the $62-$64 range, the ATM 15 May call was $400%+, the premium was approx $10. Today the stock is in the $115 the IV has dropped to approx 100%. The ATM 19 June IV is half again at approx 65%

where is the TA or SD logic, there isn't one because as Guru posted its based on historical & other unknown factors.

TQQQ is $~77 look at the ATM options expiring 15 May, see if the SD or probability is 99% correct, then see if the option premium fits the slot ....

compare for TQQQ the IV on the ATM calls expiring May 15, 22, 29