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Je Augen's StandardDEV study for ToS (thinkscript)

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Jeff Augen's StandardDEV Study  Sign in to follow this   Followers 20

For ToS (Thinkscript)

By Mikael, August 3, 2013 in General Board
tos scripts

82 posts in this topic

1 2 NEXT  Page 1 of 2  

Mikael Posted August 3, 2013 (edited) Report post 

Hero Member
 Background

In Jeff Augen's Volatility edge, he often used a standard deviation

plot to look for spikes. He also discussed it in managing basic option
positions and using price spikes as triggers to enter. (it starts on
Mem_C page 113 of the actual book if you are interested in reading it). I post
 31 a brief synopsis below (straight from his book, because i have the
650 posts
eBook version).

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The Mechanics of the Std Dev Study

The following is directly from the book, to give a better idea on how
he came up with the idea of this study.

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The ToS Script

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To turn on this study you have to go to ToS program > Charts > Studies > Edit
Studies > New > thinkscript editor and paste the following code in. Then just save it
as whatever you want to call it and add it to studies on lower subgraph.

Credit to this guy who wrote the script:

http://www.thinkscripter.com/indicator/standard-deviation-price-change

# Tom Utley 3-17-2009

# Thanks to Jeff Augen
# Price Spikes in Standard Deviations
declare lower;
input length = 20;
def closeLog = Log(close[1] / close[2]);
def SDev = stdev(closeLog, length)* Sqrt(length / (length – 1));
def m= SDev * close[1];
plot spike = (close[0] – close[1]) / m;
spike.setPaintingStrategy(PaintingStrategy.HISTOGRAM);
spike.AssignValueColor(if close > close[1] then Color.UPTICK else if close < close[1] then
Color.DOWNTICK else GetColor(1));

This is how it looks like in ToS live

Example with AAPL Aug monthly 470 Call

Possible Entry on greater than 2 STD downspike

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Possible Exit on spike 25 minutes later (or set your own p/l% with a limit order)

Edited August 8, 2013 by Mikael

tjlocke99 and Gary reacted to this

PaulCao Posted August 4, 2013 (edited) Report post 

Hero Member
 Hi,

Length = The number of bars on which the standard deviation is

defined.

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Mem_C So I think what happens is depending on the bar setting you have on
 51
324 posts ToS (minute, day, hour), this line:

def closeLog = Log(close[1] / close[2]);

generates a data series of the logarithmic ratio of previous bar's

option price compared to the next one, so if it was based on hour on
a day, it would be a series of [9am to 10am, 10am to 11am ... 3pm to
4pm].

this line:

def SDev = stdev(closeLog, length)* Sqrt(length / (length – 1));

Calculates the standard deviation of this logarithmic ratio of that bar-

by-bar price over the last 20 bars (again, minute, day or hour,
whatever you had it set on) and divides that by squart root of (20/20-
1), or 1.025. Not sure what this derives, someone who's more well
versed in statistics can pipe-in, but this is basically some derivative of
the standard deviation of the last 20 bars of the price ratio.

These two lines:

def m= SDev * close[1];

plot spike = (close[0] – close[1]) / m;

M defines what is the expected move from the previous bar that's
one standard deviation away. spike in terms represents a data series
of the historical difference of the price bar changes from one to the
next vs. the theoretical or expected price bar change at the time (you
can think of it as comparing HV vs. IV except in the same sense of
comparing the real option pricing change vs. the theoretical expected
pricing change defined as being inside 1 std. deviation).

Then spike is plotted in such a way that if the historical price change
is greater than the 1 std-dev price change, it's marked as green or
less than 1 std-dev, it's marked as red.

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So basically the Jeff Augen entry method signals you to enter a

option order when the current option pricing spikes above 1 std-dev
calculated off the last 20 bars of price ratio's depending on what bar-
setting you have it on,

Best,
PC

P.S
You can refer to the ToS thinkscript reference to parse any of these
scripts.
http://demo.thinkorswim.com/manual/dark/thinkscript/reference/Functi
ons/Statistical/StDev.html
Edited August 4, 2013 by PaulCao

Mikael Posted August 4, 2013 (edited) Report post 

Hero Member
 Thanks Paul! I thought the length=20 was the same as the SMA or
EMA length (which is usually in days). i'm usually using the hourly
charts so 20 bars is just over 3 trading days. that's not a good
enough sample size. i'm going to change the length to 70 which
would work out to be about 10 trading days on the hourly bars.
Mem_C
 31 Paul do you know of a way to put it in the script where ToS would
650 posts
alert you with a sound (or pop-up) whenever the price hits a certain
Standard deviation up or down (like 2.5 or 3 for instance).
Edited August 4, 2013 by Mikael

PaulCao Posted August 4, 2013 Report post 

Hero Member
 Hi,

Looks there's a way to do it:

http://demo.thinkorswim.com/manual/dark/thinkscript/reference/Functi
ons/Others/Alert.html
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Mem_C
 51
324 posts I actually have to load the script and play around with it to figure out
the exact line to do it but the condition is something along the line of
at the end of the script,

def currentSpike = (close – close[1]) / m;

Alert(currentSpike >= 2.5, "Spike >= 2.5!", Alert.TICK,
Sound.Chimes);

The problem is I'm not sure if that's the way to represent the last
close with the last last close in the previous bar; I haven't really
played around too much thinkscript, but at least that's the idea,

Best,
PC

Mikael Posted August 5, 2013 Report post 

Hero Member
 Hi Paul,

Thanks alot for the code. I put it into thinkscript and now these
options appeared!

Mem_C Just a couple of questions:

 31
650 posts
1. Would it make more sense to set the alert for each tick or bar? I
think it should be for the bar right? (we're trying to get alerts for reach
time a bar on the study goes above or below 2.0

2. Not sure if thinkscript knows to do this but would it only alert for
positive values right now? do we have to explicitly write in alert for
both <+2.0 and >-2.0?

thanks again!

Mike

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PaulCao Posted August 5, 2013 Report post 

Hero Member
 Hi,

 On 8/4/2013 at 8:45 PM, Mikael said: 

Mem_C
 51
324 posts 1. Would it make more sense to set the alert for each tick or
bar? I think it should be for the bar right? (we're trying to get
alerts for reach time a bar on the study goes above or below 2.0

I think each tick is when every time the option price changes and
each bar is when every minute, hour passes? Since the script is
calculated based on the bars, I think it should be every bar. But not
sure if even each tick would be different.

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 On 8/4/2013 at 8:45 PM, Mikael said: 

2. Not sure if thinkscript knows to do this but would it only alert

for positive values right now? do we have to explicitly write in
alert for both <+2.0 and >-2.0?

Yea, it would be positive value. If it's negative, it'd be price drop. Not
sure what Jeff Augen's price spike dictates, but if you want the price
drop, you can modify the line where it calculates the currentSpike to
be the absolute value difference,

def currentSpike = (AbsValue(close – close[1])) / m;

Best,
PC

Mikael reacted to this

Mikael Posted August 5, 2013 (edited) Report post 

Hero Member


 On 8/4/2013 at 8:57 PM, PaulCao said: 

Hi,

Mem_C
 31
650 posts
I think each tick is when every time the option price changes
and each bar is when every minute, hour passes? Since the
script is calculated based on the bars, I think it should be every
bar. But not sure if even each tick would be different.

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Yea, it would be positive value. If it's negative, it'd be price drop.

Not sure what Jeff Augen's price spike dictates, but if you want
the price drop, you can modify the line where it calculates the
currentSpike to be the absolute value difference,

def currentSpike = (AbsValue(close – close[1])) / m;

Best,
PC

Thanks Paul.

The idea behind Jeff Augen's "Using Price Spikes as Triggers" is

actually a pretty simple. He plots prices according to # of standard
deviations away from the average prices for the past X peroids (you
define the length in the study). So basically he's saying it's a good
idea to use big up or down ticks to open or close positions.

What i have been doing with this system is looking at volatile stocks
like AAPL.

1. You still need to assess a direction. Obviously for the past months
or so AAPL is on a very clear uptrend.
2. For entry: on a downtick greater than 2 std deviations, open ratio
call backspread on AAPL using 1 short ITM call, 2 long ATM calls to
make net delta around +25-35.
3. For exit: on a uptick greater than 2 std deviations or around 50%
gains.

it's been working pretty well on paper trading. (obviously since i'm
getting the direction right).

sometimes on a really big downtick days, if you buy the calls at the
bottom, you can often make about 40-50% in a day.

Obviously the big risk is if the trend reverses and also the negative
theta.

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To mitigate the theta i have been buying 60 day outs.

To mitigate the downside risk i have been doing what Chris been
doing with the GLD and SPY ratio trades. I bought a Jan. 450 put
and been selling weeklies 2 week out to pay back the "hedge".

It's been working okay for the past 3 weeks on paper, but there's so
many parts going on in this trade it gets confusing sometimes lol.

So basically you are making short term bets based on the trend.
(since the trend is up right now i'm betting up)
As a hedge against a catastrophic stock collapse like last september,
using Chris ratio diagonal/calendar spread setup.
Edited August 5, 2013 by Mikael

PaulCao Posted August 5, 2013 Report post 

Hero Member
 Hi Mikael,

Thanks for your explanation about Jeff Augen's strategy and your
implementation of it on AAPL.

Mem_C I skimmed some of his books at the bookstore a long moon ago.
 51 However, I couldn't get sense of his strategy. Plus, he had a bunch of
324 posts
books, so it wasn't clear to me what is his core tenet of his trading
strategy. It seems a lot of people follow his style, so I think I might go
back and revisit one of his books.

Which one would you recommend and is there a core tenet to his
ideas or is it a mix-bag of techniques he lists,

Best,
PC

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Mikael Posted August 5, 2013 Report post 

Hero Member
 Haha you are using some of his strategy without knowing it. SO
earning trades is one of his strategies. (tho Kim could have came up
with it himself too lol)
Definitely recommend you to read this book by him.
http://www.amazon.ca/The-Volatility-Edge-Options-
Mem_C Trading/dp/0132354691
 31 Overall his a very mathematical and statistically driven trader. But he
650 posts
has a mix match of trading strategies so I don't see a central tenet
really.

Mikael Posted August 5, 2013 (edited) Report post 

Hero Member
 decided to try with just straight calls and be a little more conservative
on the profit targets (calls are all 1 strike OTM).

enter on downticks greater than 2 STD.

exit on upticks greater than 2 STD or when 20% profit has been
Mem_C reached.
 31
650 posts
For instance this morning i entered around 9:40 at 4.8 debit for the
Aug monthly 470 call option because the downtick of 2.5 STD 60
minutes before market open, followed up 7 upticks all the way until
market open. this is telling me there's going to be a strong uptrend
right after market opens.

so i bought that call as soon as it opened and it was priced at around

4.6 but couldn't get filled so i moved it up until 4.8 and it got filled.
around 9:40 there was 3 consecutive upticks with 2 of them greater
than 2.0 STD and AAPL. this is strong exit signal. AAPL ended up
around 478ish (from 476ish @ open) and the called was priced
around 5.7 so i exited my position.

in hindsight it was probably better to buy the option with a bit more
time in case AAPL is rangebound for the next few days. although if
you look at the price spikes on AAPL, you are going to get some
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movement no matter what. since it's in a pretty strong uptrend

recently i decided to be bullish along with the rest market and do it
with calls.
Edited August 5, 2013 by Mikael

Mikael Posted August 5, 2013 Report post 

Hero Member
 for anyone that's wondering, i'm using the 5 minute, 5 day charts with
the study set at 1950 periods (which corresponds to exactly 5 trading
days). So i'm measuring the standard deviation on the price spikes
based on the prices of the previous 1950 ticks (5 min per tick x 12 x
6.5 hours in a trading day x 5 days).
Mem_C
 31 1
650 posts tjlocke99 reacted to this

red_bp Posted August 6, 2013 Report post 

Jr.Member
 Thanks so much Mikael for this topic and information you are
sharing. I'm new to the forum here and just really reading/watching
what others are doing. I recently skimmed/read Augen's "Trading
Options at Expiration" but haven't read his other books. I note from
TOAE that he relies upon 2008 data. I was trading options in 2008
Mem_C (new to it in 2007) and it was pretty easy to make money TOAE that
0 year because of the high volatility in the market premiums were huge
18 posts
and declined like lightening in the last day (or two) before expiration.
Some of the TOAE strategies that worked in that market environment
wouldn't necessarily work today though.

Mikael Posted August 7, 2013 (edited) Report post 

Hero Member
 Hi Red, i haven't read that book yet but i did read his the volatility
edge in options trading. (he actually discuss pre-earnings
straddles/strangles which is also relevant to SO trades).

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he also discussed about the trading options on expiration day in this

book. not sure if he talked about the samething in TOAE, but i
suspect it might be similar.
Mem_C
 31
650 posts
basically, options lose the most value on the thursday evening and
expiration friday. and many stocks exhibit a "pinning" effect on Friday.
(he said it's because of institutional traders unwinding large complex
positions or something), anyway not too sure of the exact reasoning
behind it but he gave an example using google and said basically
stocks tend to exhibit a pinning effect on the higher option strike on
expiration fridays. (so for ex. if goog is trading at 912 friday morning,
it is likely to trade at around 915 for the entire day.) so in this case,
he's saying on friday it's good to short the expiring option to extract
the last remaining value in it. so you'd short a OTM option on this
day. Obviously if the IV is higher the more premium you are going to
get so this strat would work better in the high IV environment, but i
think it would still work in low IV environment you just won't get alot
of premium.

the std bar thing is just the way he looks at price spikes and he
describes a system to use it as an entry and exit signal. i think this
kind of signal can work in any market type. the basic premise is since
options are priced according to STD of the underlying price,
whenever your underlying spikes up or down (2+ STD) you should
use it as a entry or exit signal. most short term price ticks tend to be
mean reverting, if you have an especially large down or up tick, it
should revert back to the mean price. (not always but that's the idea).
2STD is quite a big spike (think about it, if the prices are normally
distributed a 2 std spike only should happen about 4.5% of the
times). obviously most stock prices are not normally distributed. the
point is that is a pretty big up down tick and you can take advantage
of the mean reverting trend. (you also need to assess not only based
on this study but your other technical indicators, like MACD RSI etc.)
since you have to pick a direction otherwise you can't use the spikes
as signal. the downside is it's very hard to guess medium to long
term direction, and i'm usually wrong on market predictions so i'm
kinda of adapting this system to be way shorter term. thus using the

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5m charts and trying to close trades within 1-3 days and keep
position size small).

btw this system is very directional so it's not at all similar to the SO
strategies. it's basically the same thing as trading stocks. if you have
a big account you can use 1.0 delta options, but for expensive stocks
that's too expensive for me so i'm using 30 delta otm options
instead.

as a example i have been using AAPL aug 17 470 call option.

you can see the price of the contract ranged to 3 - 7 today. that's a
huge latitude you have to work with.
then look at the jeff augen study. the entry signal would be the down
tick around 10 today. it was more than 2 std downtick.
your exit signal is up to you. you can take profit at a certain p/l% or
exit at 1 STD deviation uptick around 3:40.

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Edited August 7, 2013 by Mikael

dbh21 reacted to this

Mikael Posted August 7, 2013 (edited) Report post 

Hero Member
 by the way if you want to try paper trading this way make sure you
pick a stock that

1. very liquid, otherwise slippage will be way too high.

2. kinda of volatile (otherwise you will never get any good price
Mem_C spikes to work with on the short term, otherwise you have to go
 31 longer term and then time decay etc. all become problems, so i don't
650 posts
want to deal with that)

so far i only tried with AAPL (best choice) because of the number of
price spikes and the options are very liquid.
also GOOG would work.

the index options like SPY etc. don't work too well because they
trade fairly flat.

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also you need really tough stop-losses in place (just like if you are
trading stock should always have stop losses in place).
and need to have a profit taking strategy. i just use 20-25% as a
guideline, don't really look for uptick price spikes as much.
Edited August 7, 2013 by Mikael

tjlocke99 Posted August 7, 2013 Report post 

Contributor
 Mikael,

I am blown away by yours post. Its great. I'd like to adjust your Jeff
Augen and your strategy to test at larger bar intervals (maybe 1 day
even) because I can't really day trade because I'm not in front of my
Mem_C broker's software most of the day.
 21
504 posts
What really blows me away though is that I never new thinkorswim
had a scripting language. That is AWESOME! Do you have any
more information on this scripting language? Does ToS let you
export any data?

you could be non-directional by trading the strangle/straddle or

Reverse Iron Condor.

I am sure Chris Welsh will find this tool VERY useful too.

bam1960 Posted August 7, 2013 Report post 

Hero Member
 I am on my second reading of Jeff Augens, "Volatility Edge in
Options Trading" I highly recommend it because it will some great
insight to our SO stategy. I am also beginning to anticipate what Kim
is thinking and use the information to check my reasoning. Still have
long ways to go. Does anyone suggest Augens other titles or books
Mem_C by other authors.
 53

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839 posts Thanks

Mikael Posted August 7, 2013 Report post 

Hero Member


 On 8/6/2013 at 11:55 PM, tjlocke99 said: 

Mikael,

I am blown away by yours post. Its great. I'd like to adjust your
Mem_C Jeff Augen and your strategy to test at larger bar intervals
 31
650 posts (maybe 1 day even) because I can't really day trade because I'm
not in front of my broker's software most of the day.

What really blows me away though is that I never new

thinkorswim had a scripting language. That is AWESOME! Do
you have any more information on this scripting language?
Does ToS let you export any data?

you could be non-directional by trading the strangle/straddle or

Reverse Iron Condor.

I am sure Chris Welsh will find this tool VERY useful too.

Hi Richard,

Glad you found it useful.

Yes, you can adapt the system to any length of time. Obviously your
strategy will be different but the general idea is the same. In his
book, he used the spikes as entry indicators for GS on a 1 day / 1
year graph.

I don't know much about the scripting language but i found some
resources which may help you if you want to write some scripts:

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http://www.thinkscripter.com/ <- writes custom scripts, some for sale

other for free. they also have a forum you can check out
https://www.thinkorswim.com/tos/thinkScriptHelp.jsp?laf=bright (ToS
offical guide)
http://steadyoptions.com/forum/topic/1130-discussion-vxx-put-
trade/page-4 (we made another script for the VXX and XIV trades,
check it out if you are interested)

Mikael Posted August 8, 2013 Report post 

Hero Member
 I reorganized the first post with additional information and
screenshots for those who are interested. The first time i was just
typing out loud so hopefully this makes grasping the idea easier.

Mem_C
 31
650 posts

Gary Posted August 8, 2013 Report post 

Member
 Awesome post Mikael thanks for sharing. I want to read all of
Augen's books and it drives me crazy not having the time ...

PaulCao I'll take a stab at the math question:

Mem_C
 20
88 posts
 On 8/4/2013 at 10:48 AM, PaulCao said: 

this line:

def SDev = stdev(closeLog, length)* Sqrt(length / (length – 1));

Calculates the standard deviation of this logarithmic ratio of that

bar-by-bar price over the last 20 bars (again, minute, day or
hour, whatever you had it set on) and divides that by squart root
of (20/20-1), or 1.025. Not sure what this derives, someone
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who's more well versed in statistics can pipe-in, but this is

basically some derivative of the standard deviation of the last 20
bars of the price ratio.

It looks like what this is doing is converting a population stdev to a

sample stdev. When you calculate the stdev of a population you take
the sum of the squared differences from the mean, divide by "length",
and take the square root. However, if you are inferring the population
stdev from a sample, you have to divide by "length - 1" to get an
"unbiased estimator" of the population stdev. The reason for this is to
adjust for a fairly esoteric mathematical concept known as the
"degree of freedom" taken up by using the sample mean as an
estimator for the population mean before computing the sample
stdev.

I did a google on ToS's stdev function and it does appear to be using

the population version, so this adjustment appears to be correct.
Here's a link to the formula for the ToS
version: http://demo.thinkorswim.com/manual/dark/thinkscript/referen
ce/Functions/Statistical/StDev.html.

Note that in Excel, the "default" stdev function is the sample version,
and you have to use stdevp to get the population version.

Mikael and PaulCao reacted to this

dbh21 Posted August 8, 2013 Report post 

Hero Member
 This is interesting timing.

I was planning in trying to integrate augen's price spikes into my

reports for earning trades (I already use them loosely with some non-
earnings trades). I was thinking that they may be useful in
Mem_C determining whether its best to go with a gamma positive or gamma
 62 negative trade. I haven't quite got my thoughts together on this
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1,319 posts though. I'm not sure if the past spikes near earnings should be
discounted in the current analysis or not. In other words, if a stock
has movement in previous earnings, but not so far with the current
one, what does that tell you...

Mikael Posted August 8, 2013 Report post 

Hero Member
 I think one way to use this tool for earnings could be to measure the
STD spikes as we get closer to earnings. If for example stock XYZ
has many spikes greater than 2 STD (more than the expected 5% of
the time based on prices being normally distributed, ) in some # of
days leading up to earnings for the past 4 cycles, it's reasonable to
Mem_C assume in the days leading up to earnings for the next cycle, we can
 31 expect the stock to move around a bit. (eg. many 2+ STD spikes
650 posts
again). So in this case, maybe we can enter the straddle using
weekly options that expires right after earnings (or close to it) to
maximize possible gamma gains from rolling. I haven't done the
math but i suspect AAPL might be a good candidate. Also maybe we
can put on the straddle earlier if it's possible to realize substantial
gamma gains. but we have to develop some kind of system where it
calculates the average # of spikes up and down (based on some
STD dev criteria, like 2STD spikes on hourly charts or something).
it's my understanding that the BS option pricing models assumes the
lognormal distribution. so prices should fall within -1.75 and +2
spikes 95.5% of the time. so maybe we can program is according to
this parameters (look for price spikes greater than -1.75 and +2
sigmas).

in terms of discounting past spikes near earnings, why do that? the

price spikes are random anyway, i don't see why you would take on a
contrarian view. if based on past earnings, the price spikes are
increasing as we get closer to earnings, it's reasonable to expect the
same to happen as we get closer to earnings this cycle as well. we
can just use it the same way we look at IM right?

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tjlocke99 Posted August 9, 2013 Report post 

Contributor


 On 8/7/2013 at 11:35 AM, Mikael said: 

Hi Richard,

Glad you found it useful.

Mem_C
 21
504 posts Yes, you can adapt the system to any length of time. Obviously
your strategy will be different but the general idea is the same.
In his book, he used the spikes as entry indicators for GS on a 1
day / 1 year graph.

I don't know much about the scripting language but i found some
resources which may help you if you want to write some scripts:

http://www.thinkscripter.com/ <- writes custom scripts, some for

sale other for free. they also have a forum you can check out
https://www.thinkorswim.com/tos/thinkScriptHelp.jsp?laf=bright
(ToS offical guide)
http://steadyoptions.com/forum/topic/1130-discussion-vxx-put-
trade/page-4 (we made another script for the VXX and XIV
trades, check it out if you are interested)

Thanks Mikael!

Too much to do, too little time!

samerh Posted August 9, 2013 (edited) Report post 

Advanced Member
 I'v done an analysis with 96 earnings on AMZN, CSCO, GMCR,
WYNN, QCOM, NFLX, BIDU, YUM. (All these stocks have a high
ratio of >3StDev moves to 1&2StDev moves as Augen suggests, in
other words they have big price earnings spikes).

Mem_C

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6 I've been finding a high correlation between profitability of a monthly

119 posts
straddle held for 5-days and the volatility premium divided by the
stock move on the day after last earnings cycle:

(IV-HV20) / LM
- where IV is IV of the straddle
- HV20 is the 20 day historical volatility of the stock.
- LM is the % move of the stock the day after earnings are announce.

The relationships is not linear, if you plot profits vs indicator you don't
get a straight line.
However, if I group the results into quartiles, and take the median
number, the correlation is striking.

Quartile: 1 2 3 4
P/L: -8.4% -1.8% 3.5% 11.7%
Indicator: 2.1x 1.9x 1.7x 1.4x

In backtesting, if you only enter a straddle when the (IV-HV)/LM ratio

is under 1.7x, the indicator gets you into profitable trades 70% of the
time in the 96 earnings trades. I'm further encouraged by the fact
that in all but 1 case, it gets you out of situations with greater that a
7% loss, and into 85% of trades with profits above 5% (i.e. it is no so
restrictive an indicator that you miss out on a lot of good trades).

I will caveat all this by saying that it's only tested on a few stocks, but
it cost $ to download historical option data (using ivolatility
downloads).

Interestingly using the last earnings move is slightly more accurate

than the average move for the last 7 earnings cycles, which
intuitively makes sense as one would assume that the "market"
weights recent performance more.

My working rationale for this, and I would be interested in people's

views, is that the IV-HV gives the volatility premium over the base
volatility (there is a better correlation than when just using IV) and
tells you how expensive the straddle is relative to expected or
implied move, and is a slight refinement of the %IM we use at SO.
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(PS not sure what happened but this seems to have posted three
times, sorry about that).
Edited August 9, 2013 by samerh

samerh Posted August 9, 2013 Report post 

Advanced Member
 I'v done an analysis with 96 earnings on AMZN, CSCO, GMCR,
WYNN, QCOM, NFLX, BIDU, YUM. (All these stocks have a high
ratio of >3StDev moves to 1&2StDev moves as Augen suggests, in
other words they have big price earnings spikes).

Mem_C I've been finding a high correlation between profitability of a monthly

6 straddle held for 5-days and the volatility premium divided by the
119 posts
stock move on the day after last earnings cycle:

(IV-HV20) / LM
- where IV is IV of the straddle
- HV20 is the 20 day historical volatility of the stock.
- LM is the % move of the stock the day after earnings are announce.

The relationships is not linear, if you plot profits vs indicator you don't
get a straight line.
However, if I group the results into quartiles, and take the median
number, the correlation is striking.

Quartile:
Straddle P/L: -
In backtesting this is accurate 70% of the time in 100 earnings trades
using

What I like about this indicator is that in all but 1 case, it gets you out
of situations with greater that a 7% loss, and 85% of trades with
profits above 5%.

dbh21, Gary and Mikael reacted to this

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Mikael Posted August 9, 2013 Report post 

Hero Member
 hi Samerh, thanks for sharing. Just to clarify do you mean entering
into ATM straddle positions 5 days before earnings and holding it
until day of earning on the stocks you listed? Or are you talking
about a signal or ratio based on (IV-HV20) / LM?

Mem_C
 31
650 posts

samerh Posted August 9, 2013 Report post 

Advanced Member


 On 8/9/2013 at 1:33 PM, Mikael said: 

hi Samerh, thanks for sharing. Just to clarify do you mean

entering into ATM straddle positions 5 days before earnings and
holding it until day of earning on the stocks you listed? Or are
Mem_C you talking about a signal or ratio based on (IV-HV20) / LM?
6
119 posts

yes entering into ATM straddle 5 days before and exiting on the eve
of the announcement when the indicator is less than 1.7x
And it works well for stock with big standard deviation prices spikes
on earnings, as per Augen's book.

Mikael Posted August 9, 2013 Report post 

Hero Member
 what time frame do you have the chart set on? so entry on the 5th
day before earning if spike (either way) < 1.7 STD

Mem_C
 31

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650 posts

samerh Posted August 9, 2013 (edited) Report post 

Advanced Member


 On 8/9/2013 at 1:44 PM, Mikael said: 

what time frame do you have the chart set on? so entry on the
5th day before earning if spike (either way) < 1.7 STD

Mem_C
6 Nope: enter trade 5 days before earnings if (IV-HV)/LM indicators is
119 posts <1.7, don't enter if >1.7

tested on a range of stocks with good price spike behavior (lots of

>3stdev spikes around earnings)
Edited August 9, 2013 by samerh

Mikael Posted August 9, 2013 Report post 

Hero Member
 okay i see it now, i didn't see the first post before. this is very
interesting and can directly affect our earning plays, maybe Kim can
chip in if he gets around to reading this.

Mem_C
 31
650 posts

dbh21 Posted August 9, 2013 Report post 

Hero Member


 On 8/9/2013 at 1:47 PM, samerh said: 

Nope: enter trade 5 days before earnings if (IV-HV)/LM

indicators is <1.7, don't enter if >1.7

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Mem_C tested on a range of stocks with good price spike behavior (lots
 62
1,319 posts of >3stdev spikes around earnings)

Do you average the past n earnings cycle to get your indicator, or

just look at the last cycle for LM?

tjlocke99 Posted August 9, 2013 Report post 

Contributor


 On 8/9/2013 at 12:56 PM, samerh said: 

I'v done an analysis with 96 earnings on AMZN, CSCO, GMCR,

WYNN, QCOM, NFLX, BIDU, YUM. (All these stocks have a
high ratio of >3StDev moves to 1&2StDev moves as Augen
Mem_C suggests, in other words they have big price earnings spikes).
 21
504 posts
I've been finding a high correlation between profitability of a
monthly straddle held for 5-days and the volatility premium
divided by the stock move on the day after last earnings cycle:

(IV-HV20) / LM
- where IV is IV of the straddle
- HV20 is the 20 day historical volatility of the stock.
- LM is the % move of the stock the day after earnings are
announce.

The relationships is not linear, if you plot profits vs indicator you

don't get a straight line.
However, if I group the results into quartiles, and take the
median number, the correlation is striking.

Quartile: 1 2 3 4
P/L: -8.4% -1.8% 3.5% 11.7%
Indicator: 2.1x 1.9x 1.7x 1.4x

In backtesting, if you only enter a straddle when the (IV-HV)/LM

ratio is under 1.7x, the indicator gets you into profitable trades

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70% of the time in the 96 earnings trades. I'm further

encouraged by the fact that in all but 1 case, it gets you out of
situations with greater that a 7% loss, and into 85% of trades
with profits above 5% (i.e. it is no so restrictive an indicator that
you miss out on a lot of good trades).

I will caveat all this by saying that it's only tested on a few
stocks, but it cost $ to download historical option data (using
ivolatility downloads).

Interestingly using the last earnings move is slightly more

accurate than the average move for the last 7 earnings cycles,
which intuitively makes sense as one would assume that the
"market" weights recent performance more.

My working rationale for this, and I would be interested in

people's views, is that the IV-HV gives the volatility premium
over the base volatility (there is a better correlation than when
just using IV) and tells you how expensive the straddle is
relative to expected or implied move, and is a slight refinement
of the %IM we use at SO.

(PS not sure what happened but this seems to have posted
three times, sorry about that).

Samerh,

What name do you go by? Sam?

Mikael and you are rockin' on these scripts! Did you do this analysis
somewhat automated through thinkscript? Would you mind sharing
your code? I am going to try and learn this language and platform
over the next month.

Richard

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samerh Posted August 9, 2013 (edited) Report post 

Advanced Member


 On 8/9/2013 at 1:58 PM, dbh21 said: 

Do you average the past n earnings cycle to get your indicator,

or just look at the last cycle for LM?

Mem_C
6
119 posts I did both. results slightly better for last move than for average move.
My hypothesis would be that the "market" weights most recent
earnings more.

This was the sort of analysis I was suggesting when I commented on

your "tools to analyze earnings trades" post, as I think that looking at
the last few cycle's performance is a great start but dissecting
reasons behind when the strategy worked and didn't is the next step.

Like I say, this is not too different from the SO strategy of looking at
implied move vs historical move, but adds a slight refinement of
taking the IV premium over base volatility.

Would love for Kim, Marco etc to tell me if this analysis holds water
of if i'm force fitting the data to a preconceived theory
Edited August 9, 2013 by samerh

samerh Posted August 9, 2013 Report post 

Advanced Member
 tj - Sam is fine
this wasn't a script, it was a filemaker database I put together and
paid a few $100 for the data to sort pick out end of day options prices
for straddles during last 7 earnings cycles.

Mem_C
6
119 posts

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dbh21 Posted August 10, 2013 Report post 

Hero Member


 On 8/9/2013 at 2:05 PM, samerh said: 

I did both. results slightly better for last move than for average
move. My hypothesis would be that the "market" weights most
Mem_C recent earnings more.
 62
1,319 posts
This was the sort of analysis I was suggesting when I
commented on your "tools to analyze earnings trades" post, as I
think that looking at the last few cycle's performance is a great
start but dissecting reasons behind when the strategy worked
and didn't is the next step.

Like I say, this is not too different from the SO strategy of looking
at implied move vs historical move, but adds a slight refinement
of taking the IV premium over base volatility.

Would love for Kim, Marco etc to tell me if this analysis holds
water of if i'm force fitting the data to a preconceived theory

This is similar to something I was starting to build in already. I wanted

to use IV-HV to decided whether to choose long gamma or short
gamma. I never thought of also looking at the last move. I might
trying backtesting this in a couple weeks (going on vacation) to see if
I get similar results.

Kim Posted August 11, 2013 Report post 

Founder and Head Trader
 Samer, how did you perform the analysis? Was it manual? Could you
give some examples, maybe from last cycles?

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Admin

 4,736
29,692 posts

Yowster Posted August 11, 2013 Report post 

Contributor
 Question on the IV values you use in your calculation - are you using
the IV of the option series set to expire first (probably weeklies in
most of these cases) or some average of IV similar to what is shown
on www.ivolatility.com??? I'm just wondering because the IV of the
series set to expire in a few days will rise a lot in the last couple of
Contributor days before the earning announcement to keep up with the theta
decay so that the ATM straddle price does not decrease drastically.
 3,550
6,699 posts
Just wondering because my thought is that the front series IV
changing so much day to day could cause your numbers to vary
greatly as well, and comparing the IV for a given stock from one
earning cycle to the next could vary based on the number of days to
expiration for the front series.

samerh Posted August 12, 2013 Report post 

Advanced Member


 On 8/11/2013 at 12:26 AM, SteadyOptions said: 

Samer, how did you perform the analysis? Was it manual?

Could you give some examples, maybe from last cycles?

Mem_C
6 Here is my results table. I got the data for closing prices for straddles
119 posts 5 days before and 1 day before announcement, and used the ATM
straddle in each case in order to account for IV gain and not gamma
gain. I then organized into quartiles (losers, slight negative, slight
positive and winners) and found the median statistics for each group.

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In the attached the table at the top left gives the quartiles summary
results, with bar charts showing the same results graphically to the
right.
Below is a larger table with each of the 96 trades, and to the right of
that is a backtest.
Workbook1.zip

samerh Posted August 12, 2013 Report post 

Advanced Member


 On 8/11/2013 at 11:18 AM, Yowster said: 

Question on the IV values you use in your calculation - are you

using the IV of the option series set to expire first (probably
weeklies in most of these cases) or some average of IV similar
Mem_C to what is shown on www.ivolatility.com??? I'm just wondering
6
119 posts because the IV of the series set to expire in a few days will rise
a lot in the last couple of days before the earning announcement
to keep up with the theta decay so that the ATM straddle price
does not decrease drastically. Just wondering because my
thought is that the front series IV changing so much day to day
could cause your numbers to vary greatly as well, and
comparing the IV for a given stock from one earning cycle to the
next could vary based on the number of days to expiration for
the front series.

I see what you mean, but I used monthlies and so I hope the results
are less affected by the number of days to expiration.

samerh Posted August 17, 2013 Report post 

Advanced Member
 Any further thoughts on this?

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Mem_C
6
119 posts

tjlocke99 Posted August 18, 2013 Report post 

Contributor


 On 8/9/2013 at 2:12 PM, samerh said: 

tj - Sam is fine
this wasn't a script, it was a filemaker database I put together
and paid a few $100 for the data to sort pick out end of day
Mem_C options prices for straddles during last 7 earnings cycles.
 21
504 posts

thanks samerh. if you don't mind me asking, where did you

purchase the data and was it only end of day?

tjlocke99 Posted August 18, 2013 Report post 

Contributor
 I read briefly through the thinkscript documentation. I see there are
alerts, but does anyone know you can you can have your script
screen a set of stocks by looping through a set of stocks given a set
of rules like, price > X, avg daily volume > x, . . . Then do deep
analysis in the script based on the results of that that initial screen?
Mem_C
 21 Thanks.
504 posts

samerh Posted August 18, 2013 Report post 

Advanced Member
 Richard - I got end of day data from ivolatility

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Mem_C
6
119 posts

Gary Posted August 21, 2013 (edited) Report post 

Member
 Samer - let me first say thank you for sharing your analysis. I have
learned a lot by studying it.

You have taken the ratio (IV - HV) / IM (I will refer to this as SQ -
Samer Quotient) and regressed this measure against median returns
Mem_C for 4 categories of trades ranging from losers to winners. The R-
 20 squared was 98% (pretty amazing). The SQ sure seems to be telling
88 posts
us something important.

This was certainly exciting to see but something strange happened

when trying to translate these categorical medians into concrete
trading rules. It turns out the median of the "worst" category (median
SQ 2.08) seems to be the close to the best trading rule (average
3.5% return vs. 2.06 best of 3.8% return), and the median of the best
category (median SQ 1.42) seems to be a relatively poor trading rule
(average 2.4% return). By trading rule I mean "if the SQ is less than
X, then do the trade, otherwise skip the trade." Of course I
understand that average return is not the end of the story (you have
to take capital availability into account) but it is informative
nonetheless.

See the attached spreadsheet for details. The "trading rule" sheet
builds on your analysis. I used excel "data tables" to test the effects
of numerous trading rule thresholds. You can see that the numbers
jump around a lot (suggesting a sample size too small to infer from)
until you get to a SQ of 2.0-2.5. 2.06 is the optimal threshold (from
an AVERAGE return perspective) for this sample. If you look at the

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numbers further (see the "profitable" column) the trades seem

profitable enough to be worthwhile all the way up to SQ's of 3.5 - 4.0.

Long story short, this is what IMHO I think we can infer from this
analysis of this sample:

1. We should be leery of trades with SQ's in excess of 3.5 - 4.0

2. The SQ is clearly a powerful metric that warrants further study
as our sample dataset grows

Thanks again Samer for sharing your knowledge with us! This is just
my opinion... looking forward to hearing what others think.

p.s. Kim - is there a way to configure the site so we can upload *.xlsx
files. Currently we have to zip the file before the site will let us upload
it.

Gary
SO Samer Analysis.zip
Edited August 21, 2013 by Gary

dbh21 reacted to this

Kim Posted August 21, 2013 Report post 

Founder and Head Trader
 I added xlsx files support.

Admin

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Kim Posted August 21, 2013 Report post 

Founder and Head Trader

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
Could you please share how do you calculate the data and what is
the source (TOS?) How about doing it on some of the next week
candidates (TIF, CRM, OVTI, JOY)?

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samerh Posted August 21, 2013 Report post 

Advanced Member
 Source is Ivolatility. I download their RAWIV data which gives option
values, IV and greeks. I have a filemaker database which simply
finds the straddle price, greeks and IV 5 days before earnings and
day of earnings. I then put into a spreadsheet to calculate the results
table which I posted above.
Mem_C Costs me about $30 per stock for 2.5 years worth of data.
6
119 posts

samerh Posted August 21, 2013 Report post 

Advanced Member
 Garry - I think your analysis is great, thanks for taking the time! I
think that small sample size could indeed be an issue, because
better returns were also generated at 0.8 and 1.1 quotients, but that
restricts the number of trades and leads to a lot of missed
opportunities. Like you I feel it's interesting but needs some
Mem_C refinement.
6
119 posts

dbh21 Posted August 21, 2013 Report post 

Hero Member
 Samerh - might be able to help you out on backtesting on a larger
data set. If you were given all stocks, how would you filter what to run
the test on? (i.e. S&P500 stocks, stocks over $20, etc)?

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Mem_C
 62
1,319 posts

samerh Posted August 21, 2013 (edited) Report post 

Advanced Member


 On 8/21/2013 at 1:41 PM, dbh21 said: 

Samerh - might be able to help you out on backtesting on a

larger data set. If you were given all stocks, how would you filter
what to run the test on? (i.e. S&P500 stocks, stocks over $20,
Mem_C etc)?
6
119 posts

That would be fantastic.

I think to start with the ones Kim mentions above. then one could
probably expand to the SO hit list (I can't find the link in the forums).
Attached is a sample of input data with the column headings. I can
do that and put up the results for the community to see.

Untitled.xlsx
Edited August 21, 2013 by samerh

Kim Posted August 21, 2013 Report post 

Founder and Head Trader
 http://steadyoptions.com/forum/topic/43-resources/

This was posted a year ago and we added few candidates to the list
since then, but it's a good start.

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