Looking for a Potential Edge? Options Stats, Pre-Sliced and Diced on thinkorswim

Looking for a Potential Edge? Options Stats, Pre-Sliced and Diced on thinkorswim

Key Takeaways

    Learn how comparing historical and implied volatility can help you choose an options strategy

    Check the Sizzle Index to see any unusual options activity

    Use options stats with other indicators to make more informed trading decisions

Are you an aspiring option trader? Or are you a stock trader looking for some extra info about the stocks you trade? Even if you’ve never ventured into the world of options trading, you can still benefit from knowing which way the options winds are blowing.

Put and call options are used by professional traders and institutional investors to help manage risk, potentially enhance returns, and speculate. Following their trading activity—active strike prices, delivery months, trading volume, and so forth—might give you an idea of how these pros view the market direction and possible pressure points. Are they, for example, eyeing the upside or downside? How much expected volatility is priced into the market, and how does that compare to actual, realized volatility? And what about options volume—has it been heating up?

The thinkorswim® platform has the answers to these questions and more, all in one place. That place is called Today’s Options Statistics, and it can be found in the platform under the Trade tab (see figure 1). Read on for a rundown of the main features, and discover how traders and investors might use all this sliced-and-diced options info.

Looking for a Potential Edge? Options Stats, Pre-Sliced and Diced on thinkorswim

FIGURE 1: OPTIONS STATS. Implied and historical volatility, the Sizzle Index, and the put/call ratio are a few of the options stats available. Chart source: the thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Keep Your Eye on the Vol

The left column of the options statistics page is devoted to measures of volatility (vol)—both historical volatility and implied volatility—and how current readings stack up against measures seen over the past year.

Implied volatility (IV) is the market’s forecast of future variability in the underlying stock. It’s calculated from the prices of currently listed options, and it’s expressed as an annualized level. For example, the stock in figure 1 shows a current IV reading of 22.81%. So the options market is essentially pricing in about a 23% variability around the current price. But again, that’s an annualized measurement. Other data on the page can help put it in perspective.

    52-week IV High/Low. Over the last year, the stock in figure 1 has seen IV as high as 37% and as low as 16.4%.  Current IV Percentile. The reading of 31% means the current IV of 22.81 is in the lowest third of all IV readings over the last year. Put another way, over the past 52 weeks, 69% of the time, implied vol was higher than it is now.

So implied vol is relatively low in this stock right now. Is it warranted? One way to help you decide is by comparing the IV data to the historical volatility (HV) data.

IV is a forward-looking measure implied by the options market. HV, in contrast, is backward-looking. It’s a moving average of actual price variability in the stock over the previous 52 weeks.

    52-week HV High/Low. Notice that, over the past year, the stock’s HV has been as high as 42.8% and as low as 7.2%. So it’s been quite volatile at times and relatively static at other times.Current HV Percentile. At 35%, the current HV reading is roughly in line with the current IV percentile.

How might a trader assess these readings? If you think IV and HV should follow each other up and down, an IV that’s lower than HV could suggest that IV is understating the stock’s potential price change. An IV that’s higher than HV could suggest the opposite. In other words, comparing the two can be a useful way to understand how much expected volatility is being priced into options versus how much it actually tends to materialize. All else equal, higher IV relative to HV suggests options are expensive, while lower IV suggests options are inexpensive. Keep in mind, however, that past performance does not guarantee future results.

For the option trader, these can be important considerations when choosing a trading strategy. Some strategies, such as buying single-leg options and vertical spreads or buying a calendar spread, can be more attractive in a low-vol environment. Other strategies, such as covered calls, selling cash-secured puts, and short vertical spreads, can favor a high-vol environment.  

If you want another data point, you could pull up the options stats for a broader market index, such as the S&P 500 Index (SPX). Simply go to the Trade tab, type in the symbol, and check the readings. How do the high/low and percentile readings compare to those of your stock? 

What’s Cookin’? 

The right column in the options stats page is devoted to volume indicators—what’s hot and what’s not. One way to measure the heat is to check the sizzle.

The Sizzle Index is a measure of unusual options activity—specifically, it’s a ratio of the current volume of a stock and its average daily volume (ADV) over the last five trading sessions. A Sizzle Index reading greater than 1.0 implies that current volume is greater than it’s been over the last five days. A reading below 1.0 implies the opposite. The further the measure is from 1.0, the more it has deviated from its daily average. A sizzle of 4.0 indicates volume 4x its average; a sizzle of 0.5 indicates volume of half its average.

For the stock trader, tracking unusual options volume can offer hints as to the strength of a directional move. For example, a spike in the Sizzle Index during a big up or down move in the stock could indicate strength in the direction. Conversely, a big move on thin volume might suggest a lack of conviction in the stock move and might even signal a reversal of the prevailing trend.

Slicing and dicing further, you’ll see there are separate sizzle readings for calls and puts. A look at where the unusual options activity is occurring might hint where the stock could go—or where the key price levels might be, according to the big option players generating all this volume.

Looking for stocks with sizzling options volume?

The thinkorswim platform can do the heavy lifting for you. Under the Scan tab, select Stock Hacker > All Optionable. Set your sizzle criteria and run the scan. 

The Theory of (Put and Call) Relativity

One final options statistic worth mentioning is the put/call (P/C ratio), one of the oldest and most recognizable options stats out there. Its beauty is in its simplicity—it’s just the total put volume divided by the total call volume during the same period. That’s it. So if the volume of calls and puts is the same, the ratio would be 1.0. If twice as many calls traded as puts, it would be 0.5; if puts had twice the volume of calls, the ratio would be 2.0; and so on.

The assumption is that the ratio implies a directional bias—higher put volume (i.e., a P/C ratio above 1.0) would imply bearish sentiment, while higher call volume would imply bullish sentiment. But a word of caution: there may be more to the P/C ratio than meets the eye. Options volume in and of itself doesn’t always indicate bias. That depends in part on who’s doing the buying and selling and why.

Like the volatility and sizzle stats, the P/C ratio is best used in conjunction with other indicators. If you follow technical analysis, for example, you might use options stats along with moving averages, breakouts, or other chart tools (see figure 2).  

Looking for a Potential Edge? Options Stats, Pre-Sliced and Diced on thinkorswim

FIGURE 2: OPTIONS STATS WITH TECHNICALS. Options stats may be most effective when used with other indicators. Chart source: the thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Alternatively, if you’re a longer-term trader who follows fundamental indicators such as company financials—earnings and revenue growth, for example—or macroeconomic data that might affect a company’s future profitability, consider following the options action. Implied and historical volatility, the Sizzle Index, and the put/call ratio might offer clues that institutional traders and other market pros are signaling a shift in wind direction.

No matter which products you trade or how often you trade them, options stats can help you make more informed trading decisions. 

Leave a comment