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Trade Analysis Focus: The Answer Butler For Your Trades

April 1, 2014

THE ANALYZE TAB. This mysterious fountain of mathematical formulas burbles forth secret trading strategies and is said to be the deepest, darkest part of thinkorswim®. According to lore, volatilities have entered here and were never seen again. Some even say the platform was built in revenge when a trade went bad and hearts were broken. I can assure you, most of the rumors are false. But the Analyze tab is one of the most feature-packed and powerful tools you’ll find on any trading platform—professional or retail—and can be intimidating to the uninitiated.

Yet, once you understand how the various tools work, you’ll see how a small investment of time can make you a much smarter trader and help you navigate even the most daunting of market jungles.

Now, most Hollywood jungle adventures involve pith helmets, khakis, and a sketchy, inscrutable “guide.” Feel free to dress any way you want. But as I’m the guy who actually built the Analyze tab, you can trust I’ll steer you away from the crocodiles and toward the gems and jewels. In my opinion, think of the Analyze tab as a way to answer trade riddles—whether they’re easy or complex. To start with, you might ask three not-so-common questions which the Analyze tab can help you answer. But first, let’s get a lay of the land and hack through some of the underbrush.

Spears Up

The Analyze tab has four pages, or subtabs:

1. Add Simulated Trades
2. Risk Profile
3. Probability Analysis
4. thinkBack

Starting last, thinkBack lets you see end-of-day option prices going back 10 years, and lets you simulate trades based on that data. But we’ll save thinkBack for another discussion. The Add Simulated Trades, Risk Profile, and Probability Analysis tabs are divided into three sections. On the top you’ll find the main visual display of the specific functionality of the tab, like the option quotes and order entry of the Add Simulated Trades, or the profit/loss graph on the Risk Profile. Below that, in the middle of the page, is the Price Slices section, common to all three subtabs. At the bottom, you’ll see the Positions and Simulated Trades section, also on all three subtabs. I’ll be referring to those sections by name so you can find the controls you need.

Also, to prime the pump you may need to enter a few simulated trades so you can see data on the Analyze tab. To do that, click on the Add Simulated Trades page at the top and enter a symbol in the symbol field (see Figure 1).


FIGURE 1: ANALYZE TAB. Where you go to get your answers to your "What if?" questions on thinkorswim. For illustrative purposes only.

On the Add Simulated Trades page, you create simulated trades the same way you create real trades on the Trade tab. Left click on the bid or ask to create a simulated buy or sell, or right click to create a simulated spread. Now, let’s see how the Analyze page can tackle some questions. Even though these may not be your exact trading questions, you’ll glean enough Analyze tab functionality to answer your own.

1—How to Gauge the Impact of Future Volatility

Question: I trade earnings where the front month vol is much higher than the back month vol. How do I gauge the impact on my position of a larger drop in the front month vol, and a smaller drop in the back month vol after the earnings are announced?

Answer: You might be familiar with the Theoretical Price tool on the Trade tab that lets you change the stock price, date and volatility. But when you raise or lower the “Vol Adjust,” it pushes the vol of all the options in all expirations up and down equally. That’s not so handy when it comes to earnings.

You want to adjust volatility differently on one expiration from another because changes in the intermonth volatility skew—where the implied vol in one expiration is very different from the implied vol in another—can significantly impact your positions across multiple expirations. The Analyze page lets you test changes in that intermonth skew (see Figure 2).



By adjusting theoretical volatility, you can see your position legs and the position greeks (like delta) change. For illustrative purposes only.

1— Look in the Positions and Simulated Trades section for a small wrench icon on the far-right-hand side.

2—Click on the wrench icon and look for “More” in the middle of the section.

3—Click on “More” to open up the controls for the individual expirations.

Vol Adjust fields open for each expiration in which you have an actual or simulated position. You can adjust the vol lower in one month and higher in another month, or vice versa. The Vol Adjust raises or lowers all the implied vols of the options in that expiration by the number of points in the adjustment. For example, a +5 vol adjustment would move the implied vol of an option from 11% to 16%. When you do this, the adjusted vols are used to calculate the theoretical values and greeks, as well as the theoretical profit/loss of the position.

2—How to Analyze Tomorrow's Greeks Today

Question: I can see the greeks of my positions on the Monitor page, and they show me the greeks at the current stock price and days to expiration. But I’d like to know what the greeks might be with only a day before expiration. How do I do that?

Answer: Lucky for you, the Analyze page’s native language is greek! (Just don’t get it started on how “vega” isn’t a Greek letter.) And there are a couple ways to do this—with numbers or pictures.

The Numbers—Price Slices

1— Referring to Figure 1, type the underlying’s symbol of one of your positions in the symbol field in the upper-left-hand corner of the Add Simulations page. This will load the position in the Analyze page.

2— Referring to Figure 3, under the Price Slices section, you’ll see the greeks of your position based on the current stock price, volatility, and date. You might also see other stock prices—or “slices”—plus and minus 10% from the current price. And for each of those slices, you’ll see the greeks of your positions calculated for both the higher and lower stock prices.


FIGURE 3: GREEKS BY NUMBERS. In the Analyze tab, by adjusting the date forward you can analyze your trade’s current and theoretical greeks (under Price Slices), as well as cur rent and theoretical future P/L (under Positions and Simulated Trades). For illustrative purposes only.

3— Next, look in the right-hand corner of the Position and Simulated Trades section for the Date field. That’s the date the models on the Analyze page use to determine the number of days until the options’ expiration. The expiration dates are fixed in the future, so by changing that date on the Analyze page you can simulate a different number of days to expiration. By default, it’s set to the current day. However, you can adjust to any date in the future you want. You’ll see the greeks in the Price Slices section, as well as the profit/loss graph on the Risk Profile change to reflect the new date.

You can also see what the greeks would be at a different stock price by adjusting the prices in the Price Slices section.

You can either click on the price and type directly over it, use the up/down arrows, or click on the drop-down arrow of the “Offset” and select a different value. You can also click the Add Slice or Set Slices buttons and have the price slices set to a percentage higher or lower, or a number of standard deviations higher or lower.

The Pictures—Risk Profile

Now, if the numbers confuse you and you prefer pretty pictures instead, switch from the Add Simulated Trades page to the Risk Profile page. By default, the Risk Profile shows you the profit/loss graph of your position. But instead, you can display the individual greeks (see Figure 4).


FIGURE 4: GREEKS BY PICTURES. If the numbers confuse you, try at a chart of a greek and advance the date forward. For illustrative purposes only.

Click on where it says “P/L OPEN” at the top of the Risk Profile, and select one of the greeks from the drop-down menu. That shows the values of that greek for your position across a range of stock prices.

Change the date in the right-hand side of the Positions and Simulated Trades section, and it will change the date used to calculate the greeks on the Risk Profile, in addition to the ones in the Price Slice section.


Question: I have options that are approaching expiration and are currently close to being in the money. I also have positions in further expirations. How can I see what my position will look like after expiration if the near-term options are in the money (or not)?

Answer: When stock-settled options are in the money at expiration, they deliver long or short stock, depending on the position. Long calls and short puts deliver long stock. Short calls and long puts deliver short stock. But if the current stock price is at a point where it’s hard to tell if the options will be in the money at expiration, you don’t know what the position’s delta, for example, will be after expiration. Maybe you’ll have stock, maybe you won’t. And the deltas from the stock can have a big impact on the risk of your position. Have no fear: the Analyze page has you covered.

1— See Figure 5. Click the wrench icon on the right-hand side of the Positions and Simulated Trades section.

2— Click the arrow to the left of “More” in the middle. That displays the options’ expiration dates in your position.

3— Look for the Exercise Price for each expiration, which is the current stock price by default. The Exercise Price is the stock price the Analyze page uses to determine whether to evaluate your expiring options as stock (in the money) or nothing (out of the money) at expiration. You can set a different Exercise Price for each expiration in your position, creating the stock price’s simulated “path.”

4— If you advance the date on the right-hand side of the Positions and Simulated Trades section to a day past the expiration date of any of your options, you can see the impact of the Exercise Price.

Figure 5 shows a shot taken on 1/27/14 of the “future” P/L of Feb (near-term) and Mar put vertical spreads where the stock finished in the money the first trading day after expiration of the Feb options (2/24/14). With the stock in the money at $780. The P/L reflects a loss of $3,000 on the remaining position.


FIGURE 5: TIME-TRAVELLING P/L. You can look at a theoretical P/L of multiple positions at once based on the stock price at expiration of the near term options, such as the Feb/Mar vertical spreads pictured here. This shot was taken on 1/27/14 with the Date box changed to 2/24/14. For illustrative purposes only.

Well, we made it through without a scratch. And even though we didn't explore every corner of the Analyze page, you know enough to click on a few buttons yourself and feel certain you won’t be dinner for a band of tigers.

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