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Standard Deviation and Trading Options



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 1 encompasses approximately 68.2% of outcomes in a distribution of occurrences
  • Standard deviations 2 encompasses approximately 95.4% of outcomes in a distribution of occurrences

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 Graph


Now click on "Show StdDev" button on status bar of Graph.

Finally it is showing us 4 green dotted vertical lines. Those are our standard deviations (-2, -1, +1, +2 standard deviation value)

Moving mouse cursor over 2nd green line (i.e standard deviation -1 value, it is showing us 10851)

Moving mouse cursor over 2nd green line (i.e standard deviation +1 value, it is showing us 11723)

Standard Deviation 1 range 1 (-1 to +1):
Range is from 10851 to 11723 considering expiry as August 30, 2018. Chances of price price remaining within this range is 68.2%.

Standard Deviation 2 range (-2 to +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. 





Let's quickly see Standard Deviation range in stock option (e.g. ICICIBANK):





ICICIBANK short strangle at our strikes looks higher probability trade as protections levels are within standard deviation 1 range.

Finally, let's see in currency option too (E.g. USDINR):


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.


Santosh Kumar Pasi, Options Trader and Trainer: Standard Deviation and Trading Options

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5 comments:

  1. Thanks Santosh Sir for lucid explanation as always.

    ReplyDelete
  2. Thanks santosh sir... very good explaination

    ReplyDelete
  3. 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.

    ReplyDelete
  4. sir can u organise some basic training program Right from ABC of option trading

    ReplyDelete

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