Standard deviation is generally used in discussing statistics and probabilities. Recently there were few tweets on using standard deviation ranges in options trading. On the top of that, we got few queries, do OptionsOracle supports or shows Standard Deviation range.
Yes, OptionsOracle shows standard deviation range and that can assist you to decide strikes and take trading decision.
The standard deviation of a probability distribution.
Standard deviation is based on price, volatility and days to expiry.
Let's take some examples in OptionsOracle and understand meaning of standard deviation.
Let's download option chain for NIFTY and try to identify standard deviation range.
Once option chain data is downloaded, from template add any strategy (this is not requirement, we did it to get expiry date, as standard deviation is based on days to expiry).
Now click on "Show StdDev" button on status bar of Graph.
Range is from 10851 to 11723 considering expiry as August 30, 2018. Chances of price price remaining within this range is 68.2%.
Range is from 10440 to 12845 considering expiry as August 30, 2018. And chances of price remaining in this range is 95.2%.
Assume we have trader, he/she believes in shorting standard deviation 1 range. In this case, he/she will short PUT of 10850 and short CALL of 11750.
ICICIBANK short strangle at our strikes looks higher probability trade as protections levels are within standard deviation 1 range.
USDINR strikes we selected is just okay kind of trade. Protection levels are just touching standard deviation 1 range.
It is not as ICICIBANK. Personally I will avoid this for other reasons too.
Thanks Santosh Sir for lucid explanation as always.
Beautifully explained Santoshji. Appreciate if the SD lines and values could be defaulted in the graph instead of having to select it see it each time.