Calcula:ng Stock Expected Moves

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Alannah Craig
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1 Calcula:ng Stock Expected Moves Today, we will talk about calcula:ng expected moves in stock prices based on op:on data. This formula is not only the center of many of our Market Measure segments, but also provides context to our trade decisions. 1 of 10

2 Calcula:ng Stock Expected Moves Implied vola:lity (IV) is an annualized number it gives us the market's expecta:on of the stock's poten:al move over one year. When we use IV to model probabili:es of expected moves, we are assuming a normal distribu:on (i.e. bell curve) of stock prices. 2 of 10

3 68% should fall between - 1σ and 1σ Since we are assuming a normal distribu:on, we expect most prices to fall within - 1 and +1 standard devia:ons of the current price. In this example of Coca- Cola, with an IV of 16.5%, we can expect prices to fall between the current price ±$6.74, by the end of 1 year. $34.09 $40.83 $ of 12 10

4 However, as op:on traders, we are rarely concerned with prices at the end of the year instead we seek what the market is expec:ng 5, 10, 45, or n calendar days in the future. For example, with a 68% probability, Twi^er (TWTR) is expected to be between $43.58 and $60.24 at the end of 30 days: 4 of 12 10

5 =B1*B2/100*SQRT(B3/365) =B1- B5 =B1+B5 5 of 12 10

6 Calcula:ng Stock Expected Moves Two other methods of es:ma:ng expected 1- standard devia:on price moves: Find the nearest out- of- the- money call and put strike prices closest to 16 delta (ATM Call price + ATM Put price) x of 10

7 With further modifica:on of the model, we can calculate the probability that the stock will be above (or below) a certain price at the end of n days. $50 Probability of closing above $50? For example, with the last sale at $51.91 and IV at 56.2, what is the probability that TWTR will close above $50 at the end of 30 days? 7 of 12 10

8 =NORMSDIST((LN(B3/B1)/(B2/100*SQRT(B4/365)))) =1- B6 8 of 12 10

9 Calcula:ng Stock Expected Moves Takeaways: The higher the IV, the greater the expected move in the stock We discussed two models for es:ma:ng the probabili:es around a stock move 9 of 10

10 To find implied vola:lity on dough.com, first click here. The implied vola:lity is label IMP VOL Coca- Cola in this example has an implied vola:lity (IV) of 16.5%. 10 of 12 10

11 DISCLAIMER: The purpose of this material is to demonstrate market trading techniques and strategies designed to give you the skills and confidence to manage your own investments. The risk of loss in trading securi:es, op:ons, futures and forex can be substan:al. You must consider all relevant risk factors, including your own personal financial situa:on, before trading. Op:ons involve risk and are not suitable for all investors. You are assuming the en:re risk of any and all trades placed in the stock market. Due to the :me- cri:cal nature of trading, the varying fees charged by brokerages, and the ac:vity of other market par:cipants, we cannot guarantee that similar trades you place will mirror the exact performance of our porholio. dough, Inc. is the copyright and trademark holder of all tastytrade branded proper:es. dough is not a licensed financial advisor, registered investment advisor, registered broker- dealer or FINRA SIPC NFA- member firm. dough does not provide investment or financial advice or make investment recommenda:ons. dough is not in the business of transac:ng trades, nor does dough agree to direct your commodity accounts or give trading advice tailored to your par:cular situa:on. Nothing contained in our porholio demonstra:on cons:tutes a solicita:on, recommenda:on, promo:on, or endorsement of any par:cular security, other investment product, transac:on or investment. BY USING THE TASTYTRADE WEB SITE AND ACCESSING THE TASTYTRADE MATERIALS, YOU AGREE, AT ALL TIMES, TO INDEMNIFY, DEFEND, AND HOLD DOUGH (INCLUDING ANY OF ITS AFFILIATES, OR ITS RESPECTIVE SUCCESSORS AND ASSIGNS, OR ANY OF ITS RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, REPRESENTATIVES, LICENSORS, OPERATIONAL SERVICE PROVIDERS, ADVERTISERS, OR SUPPLIERS) HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, ACTIONS, DEMANDS, SUITS, LOSSES AND COSTS (INCLUDING ATTORNEYS FEES) RESULTING FROM TRADES YOU PLACE IN THE MARKET. DOUGH SHALL NOT BE LIABLE FOR ANY LOSS OR DAMAGE, OF ANY KIND, DIRECT OR INDIRECT, IN CONNECTION WITH OR ARISING FROM USE OF EDUCATIONAL SERVICES PROVIDED AS PART OF THIS PORTFOLIO DEMONSTRATION dough, Inc. All rights reserved. Terms of use apply. Reproduc:on, adap:on, distribu:on, public display, or exhibi:on for profit in whole or in part without dough s express wri^en permission is prohibited under penalty of law. 11 of 12

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Delta. March 6, of 16 Δ 1 of 16 As one of the four primary op9on Greeks, delta is perhaps the most important as it can tell us four essen9al pieces of informa9on. 2 of 16 The four important figures told by delta are: 1. The