ODDS Optionable Stock/ETF One-Day Percent Price Movement Help

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ODDS Optionable Stock/ETF One-Day Percent Price Movement Help

To see how this tool is designed to be used, let's look at an example using my favorite tractor company: Deere (proud owner). If you're already a registered user, you can follow along by opening another browser window with the tool itself, and entering the information as I describe here. If you're not a registered user, registering couldn't be easier. Just register your email address, and that's it.

Besides this help section, additional help can be found in the ODDS Movement Utility itself. There are question marks next to each field. You can see the question marks in the images below. If you move your mouse over to the question mark, instructions will pop up. Note that there are only images in this help section; links, buttons and pop-up windows only work in the ODDS Movement Utility itself.

First, begin typing in the stock symbol. You should see a drop-down list appear. You can type in the symbol, or select it from the list. You should see something very similar to the image below.

Next plug in a Percent Movement of 3.

Next, type in a Volatility of 40.

Now click on the Update button.

When you do that, a table and a graph will appear. Go ahead and enter the information and click the Update button.

You should now see a table of columns and rows. Each row represents a year, except the bottom row, which is Theoretical. The values in the Theoretical row should say 11.64% in the UP column, 11.64% in the DOWN column, and 23.28% in the UP and DOWN column. The question is, what does that mean?

What those numbers give you is the probability that the stock will move 3% the next day. There is an 11.64% chance that the stock will be up 3% or more, an 11.64% chance that the stock will be down 3% or more, and a 23.28% chance that the stock will be either up or down 3% or more.

Now to the rows with the years. When you hit the Update button, our computers went back for all the years that we have data and literally counted how many times DE shares moved up or down more than 3% in a day. In 2007, there were 12 days where DE shares moved down more than 3%. That represent 4.78% of all the trading days that year. There were 21 days where DE shares moved up more than 3%. That represents 8.37% of all trading days that year. There were a total of 33 days where the stock moved more than 3% in a day. That is only 13.15% of all trading days that year.

Looking at that one year, DE made far fewer 3% moves than a 40% volatility would suggest. Generally speaking, that means a 40% volatility would have been too high, at least for that year.

Now look at the year 2000. In 2000, there were 30 days where DE shares moved down more than 3%. That represent 11.90% of all the trading days that year. There were 37 days where DE shares moved down more than 3%. That represents 14.68% of all trading days that year. There were a total of 67 days where the stock moved more than 3% in a day. That is 26.59% of all trading days that year.

For 2000, DE made far more 3% moves than a 40% volatility would suggest. Generally speaking, that means a 40% volatility would have been too low for that year.

While it may not be clear to everyone at this point, what this tool does is give us the capability of stress testing options. That is, we can plug in a volatility, and see how it stacks up against prior periods. For instance, if you were thinking of selling DE options that had an implied volatility of 40%, you now know that if we get a repeat of 2000, the likelihood of the stock moving beyond your breakeven point is higher than the theoretical bell curve suggests. If you're an option seller, that is bad.

If you were thinking of buying DE options, you would realize that the probability of getting a 3% one-day move in DE shares is less likely than the volatility suggests, except for a few years. To me, the analysis says that buying DE options expecting a 40% volatility is not very likely to be successful unless you get a rare year like 1987 or 2000.

You can do this analysis for any optionable stock or ETF. And in the very near future we will have a version that lets you set your own duration of analysis. That is, what if you want to see the magnitude of a stock's movement over the course of a week, two weeks, or a month? With our paid version, you'll be able to do that analysis.

-- Don Fishback

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