What trader hasn’t dreamed of having a copy of next year’s newspaper today? Getting a peek at next year’s market prices so you can buy below that price and sell above it, then raking in the money. That’s a fantasy, but although we can’t see the future, maybe we can get some hints about what the market is cooking up. How? There are some tools on the thinkorswim® platform from TD Ameritrade that might help inform your decisions about future trades. Let’s try to unlock the mystery.
Not a Magic Trick
When you look at a stock’s price chart, the current day’s data is usually on the right-hand edge. Of course, there’s no way to fill in future days with price data. But you can expand the chart to the right to see future dates. The chart can’t predict the future, but it can show items such as earnings and dividends.
To do that, go to the Charts tab, click on the Style button in the upper right-hand corner, then scroll down and click on Settings. That opens up the Chart Settings box (Figure 1).
From the tabs on the top of the Chart Settings box, click on Time Axis. There you’ll find the “Expansion Area: __ bars to the right” control. This is the key to unlock the tools.
The number of bars you enter will be the number of future days the chart will display. You won’t see any price data, but it’ll give you room to display other information like probability, earnings, dividends, and option prices. In Figure 1, we’re setting the chart to show the next 60 days. Now that you know where the fun stuff is hidden, let’s put it to work.
The Cool Cone
One popular way to use the expanded chart is to review the possible theoretical range of future stock prices. Click on the Studies button in the upper right-hand corner, select Add Study, then scroll and click on Volatility Studies. From that menu, click on Probability of Expiring Cone to display a cone on the right-hand side of the chart that gives you an idea of where the stock price might be in the future (Figure 2). The cone, which is a standard deviation bell curve, combines the current implied volatility of the stock’s options with the number of future days displayed, then shows the upper and lower range of prices where the stock might theoretically land 68% (default value or one standard deviation) of the time for each expiration Friday. Price could be above or below the cone 32% of the time.
By default, you’ll see upper and lower numbers corresponding to future option expirations. But you can also scroll over the probability cone line to highlight a specific date, and see the upper and lower prices for that date at the top of the chart.
The probability cone is for informational and educational purposes only, and is no guarantee the stock price will be inside that projected cone at a future date. But it provides some context for bullish, bearish, or neutral opinions.
For example, let’s say you’re looking at a stock that’s $100, and you have a hunch it might rise to $120 in three months. First, set the number of bars to 90 days or more. Then, using the 68% probability cone, you might see that it has an upper value of $115 and a lower value of $85 in 90 days. Your $120 target is above the upper bound of the cone, which means it’s outside the stock’s 68% theoretical range. That’s not to say the stock can’t rise to $120 in 90 days. But the current volatility suggests the chances are low.
The probability cone is set to 68% by default. But you can edit the study to show any percentage up to 99%.
Things That Move Prices
Next, let’s display future corporate actions like earnings and dividends on the chart. Go back to the Chart Settings box, select the Equities tab, and check Show Corporate Actions. Now you see upcoming earnings announcements and dividends in the expanded chart area (Figure 3). Blue lightbulb icons indicate upcoming earnings announcements, red phone icons indicate conference calls, and green dollar icons indicate ex-dividend dates.
How can this be helpful? Some stocks can exhibit increased price volatility before and/or after earnings announcements. If a stock beats or misses expected numbers, its price could have a big move up or down, with a similarly big impact on a potential trade. If you hover your cursor over the blue question mark or red phone icons, you’ll see the date and time (typically before the open or after the close of trading) of earnings releases. This will help you adjust your strategy accordingly.
Options for Your Expanded Future
Now for the third tool on the expanded chart. Go to the Chart Settings box, select the Equities tab, and check the Show Options box. While you’re there, notice how you can change the number of strikes that are displayed on the chart’s expanded area.
In Figure 4, the chart shows eight strike prices for all the expirations within the expanded chart area. You can hold the cursor over the “C” or “P” (call or put) to see the option’s strike price and expiration as well as its current theoretical value.
One way to use this option information is when selecting a covered call strategy. If you’re long stock and want to sell a call against it, you can compare your premium for available calls at different strikes above the current stock price, as well as for different expirations. This can even be combined with the probability cone to select a call that’s outside the stock’s theoretical price range, and so may have a high probability of expiring worthless.
Probability analysis results are theoretical in nature, not guaranteed, and do not reflect any degree of certainty of an event occurring.
So yeah, we’re trading nerds and we think this stuff is pretty fun. These handy tools aren’t next year’s newspaper, but they can provide context for potential trades. After all, trading is all about what might happen in the future. These chart tools on thinkorswim just might help you envision that future a bit more clearly.
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