About Historical Distributions
We compile an interval-based historical price return distribution for the underlying stock
If there are 20 days to go until expiration, we go back historically and look at intervals with a 20-day holding period for changes in stock price
If there is an earnings date coming up before expiration, we look at only those historical periods that included an earnings date
Similarly, if there is no earnings date before expiration, we look at only historical periods without earnings
We use those intervals to calculate a theoretical value for the spread based on those historical changes in stock price
Click on the Analysis link for a more detailed breakdown
Theoretical Value:
Example: The stock price is $100, and we have a debit call spread of Buy 105 strike and Sell 110 strike, with 25 days to go before expiration.
We know that if the stock finishes below $105 (up +5%), the spread will be worthless ($0 value). If the stock finishes above $105 (up +10%), the spread will
be worth $5.00.
Our historical return distribution could tell us, for example, that for 25-day holding periods in the past, the stock has finished +5% or below 75% of the time,
and +10% or above 25% of the time.
To calculate the theoretical value then, we would add the value of the first part [25% of returns x $0 value = $0.00] to the value of the second part
[25% of returns x $5.00 value = $1.25] to get the result, $1.25.
Theoretical Edge:
Using the historical distribution,
we calculate a theoretical value of the current spread based on these past changes in stock price.
To determine the edge, we take that value and compare it to the current market price of the spread.
If the theoretical value is greater than the cost paid to buy the spread (Debit), then the theoretical
edge will be positive. If it is lower, it will be negative.
Theoretical Win Rate
Using the historical distribution,
win rate represents the percentage of these historical observations where the current spread would
have resulted in a positive return (given the observed change in stock price over the specified holding period).
This means that the end value of the spread would have been greater than the initial cost of the spread (Debit).
Dynamic IV Range Modeling
For the historical distribution, we've implemented a new model utilizing dynamic implied volatility ranges to narrow results around the symbol's
current volatility environment. The implied volatility (IV30) is recorded at the start of each historical interval.
We only select the 50% of historical observations where the IV30 at the time of the observation is the closest
to the current IV30 -- 25% above and 25% below.
This way, if the current IV30 is exceptionally high or exceptionally low, we are focusing only on other historical observations that showed similar volatility.
We only utilize this method if we can ensure at least 16 observations. Otherwise, we continue to use all historical observations,
as was the case prior to this method being applied.
About Historical Seasonality
We look at seasonal changes in stock price for up to the last 12 years (with a minimum of 8 years)
If today is May 1 and the option expires May 20, we look at the stock's price change for each year from May 1 to May 20
It finds the start and end value of the stock price for those date ranges, and calculates statistics from it
We use those values to calculate the average return and % positive observations for the stock over those results
Click on the Analysis link for a more detailed breakdown
Table Notes
Note:
E
indicates earnings within expiration
Tip:
Click on the Expiration link to go directly to the option chain
