Welcome to yet another article regarding the advanced options trading strategy. In our previous article, we had discussed FIIs and DIIs. We had seen how inflows or outflows of funds from these institutions can change the market movement. Now, in this article, we are going to learn about the range calculator.
Do you know there is a formula that can forecast or give you a range under which the market can move? Technical Indicators can help a trader profitably sail through a period of range-bound trading, or a period in which a stock moves between an upper resistance level and a lower support level.
Another important point you have to understand that this formula doesn't give you direction. It only gives you a range like where the market can go. So, you can safeguard from both the side. It is most useful for option sellers or people who place like a steady iron condor or where they go for call option and put options.
So, this formula is very useful for option sellers, especially those who use you can say iron condor kind of strategy where they place call input both in percentage. If you are going to see that how much market is going to move upward or downward in 45 days, it tells you how the market can go up and the market can go down.
Another term I want to introduce here is the standard deviation. So standard deviation says in the normal situation how much market can move. So normal situation is 65 percent if you calculate. Tt is advanced mathematics but in simple terms, one standard deviation means in a normal situation how much market move? How much are the chances of the market moving up or down? How much percent the market can move?
So, one standard deviation is equal to 65 percent. So, there are 65 chances that the market can move up and down. One standard deviation means the market can move either 65% up or down and the remaining 35% is called SD two or two standard deviation.
Once you calculate the upper range, then if you want to sell the call, you can go above the upper range and you can sell it because as per the formula, the upper range is a safe range to sell the call and the lower range is a safe range to sell up puts. So that's one thing you can do it. So even somebody wants to put side like a neck position so they can go with strangles. Now you understand the strangles and iron condor are the same only strangles are uncovered and iron condor is covered.
If somebody wants to be super safe, then they can go for 2 standard deviations but the premium will be very low. So that you have to see whether you want to play safe or you want to earn a little bit of money and this is the trade-off between them. Now, we have to understand if we are calculating this for any stock, then we have to take at the money IV or we can take the realized vulnerability also which is a different concept.
Let’s quickly recap the implied volatility. Implied volatility (IV) is one of the most important things for options buyers or option sellers to understand for two reasons. First, it shows how volatile the stock market might be in the future. Second, implied volatility can help you find out probability.
This is a crucial component of options trading which may be helpful when trying to find out the likelihood of a stock reaching a specific price by a certain time. Keep in mind that while these reasons may guide you when making trading decisions, implied volatility does not provide a prediction concerning market direction.
Implied volatility tells us the market’s opinion of the stock’s potential moves either up or down, but it doesn’t forecast direction. If the implied volatility is high, the market thinks the stock has potential for large price changes in either up or down direction, just as low IV tells us the stock will not move as much by option expiration.
To option traders, implied volatility is more prime than historical volatility because of IV factors in all market predictions. If, for example, the company plans to declare earnings or expects a major court ruling, these tasks will affect the implied volatility of options that expire that same month. Implied volatility helps you to find out how much impact news may have on the underlying stock.
Now, range-bound trading is a trading strategy that looks to find out and capitalize on stocks trading in price movements. After finding the main support and resistance levels and connecting them with horizontal trendlines, a trader can buy an underlying asset at the lower trendline support which is the bottom of the channel, and sell it at the upper trendline resistance which is top of the channel.
A trading range happens when a security trades between consistent high and low prices for some time. The top of the underlying asset trading range often gives price resistance, while the bottom of the trading range typically offers price support.
In simple words, a stock's range is the difference between the high price and low prices on any given day. It gives information about how volatile a stock is. Large ranges tell us high volatility and small ranges indicate low volatility. The range is finding out in the same way for options and commodities (high minus low) as they are for stocks.
So, in conclusion, I would tell you that if you want to take your learning to the next level, then at least you should watch the video of Range Calculator Formula which was attached in the upper section of this article. This way, you can get the maximum benefits.