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The Skinny On Options Data Science

How Often Within Expected?

The Skinny On Options Data Science

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

A question commonly asked is how often do stocks stay within their expected moves? This is what Michael Rechenthin, PhD (a.k.a. Dr. Data) decided to tackle today in his research.

The expected move calculation is first provided and walked through. Users that would like more information on this can use the spreadsheet that Dr. Data created, found here.

A study was done that looked at each stock in the S&P 500 -- how often do stocks stay within the expected ranges? In theory we would expect prices to fall within the range 68% of the time.

In a large scale backtest, Mike found that stocks in the S&P 500 tended to fall within the expected at a much greater probability than theoretical -- close to 79%. This is even higher in indices such as SPX, RUT, and NDX. This is what represents opportunity for seller of premium.

Next, Mike drilled deeper into the numbers -- does the level of implied volatility matter? In testing he found the answer to be 'no'. Stocks are not more likely to stay within the expected, but higher implied volatility does present more opportunity due to higher premiums received.

For more details, watch the show!

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