The Expected Move
The Expected Move is the amount that a stock is expected to move up or down from its current price, as derived from current options prices.
Options AI uses 85% of the cost of the at-the-money (ATM) straddle for each expiration date to calculate the Expected Move(s).
The Options AI platform also uses the Expected Move to help guide initial strike selection when generating option spreads using the Fast (Compare All) feature.
This method provides a way for option buyers to trade the view that the underlying stock will move according to market expectations and for option sellers to trade the view that the underlying stock will move less than the market expects.
Using the Expected Move is just one way an investor might approach strike selection and resulting strategies are meant for comparison purposes only and are in no way intended as recommendations.
Open Interest
Open Interest measures the total number of option contracts for each strike and expiration date that are currently open, and have not yet been closed, exercised or assigned.
Options AI highlights option contracts with higher open interest through it color gradient chart layer. This visual insight into option contract liquidity can be helpful in selecting contracts with tighter bid/ask spreads and identifying opportunity through unusual options activity.
Skew
Skew refers to the difference in implied volatility (IV) between option strikes with the same expiration date. Rather than being constant across strikes, equity stock options typically see downside strikes with higher IV an at-the-money strike and upside strikes with lower IV an at-the-money strike. Put another way, a downside out-the-money Put option is typically more expensive (higher IV) than an upside out-the-money Call that is equidistant from where the stock is currently trading.
Options AI depicts IV skew through it color gradient chart layer. This visual insight can be helpful with strike selection when looking to buy lower IV options and sell higher IV options either individually, or as part of a spread.
Options Volume
Option volume is the total amount of option contracts traded on a particular day. It may refer to the volume of all option contracts available for a specific symbol, or for a specific contract. Unlike Open Interest, which is reduced when option contracts are closed, Option Volume is cumulative, counting both opening and closing trades.
High volume (relative to historic averages) in options on a specific symbol may indicate heightened interest, fear or uncertainty in that stock. While high volume in a particular contract on that symbol is often referred to as “unusual options activity” and may be indicative of a certain view or sentiment. Therefore, detecting elevated option volume can be useful for both market insight and trade inspiration.
Put Call Ratio
Put/Call Ratio is the number of Put options divided by the number of Call options traded in a particular day (or other time period). Therefore, a number greater than 1.00 indicates that more Puts than Calls have traded and a number less that 1.00 indicates more Calls than Puts have traded.
Put/Call Ratio may be used by investors to gauge overall market sentiment or sentiment in a particular stock. For example, if traders are buying more Puts than Calls and therefore has a relatively high Put/Call ratio (well above 1.00), this may indicate a rise in bearish sentiment.
Implied Volatility (IV)
Implied volatility is one of the key metrics that may be derived from option prices, with higher IV reflecting a higher cost of options. When the market has increased uncertainty around future stock moves and/or the demand for options increases, options become more expensive based on this higher implied volatility. Conversely, when market expectations of future stock moves decrease, so too does implied volatility, resulting in lower option prices. Put simply, IV can be seen a measure of the future expected price movement in a stock or ETF.
Knowing IV levels and knowing how relatively expensive current option prices are can be powerful for investors in a number of ways. By providing insight to overall market sentiment or perceived ‘fear’ by investors. In helping to identify more expensive options that may provide a selling (or income) opportunity or lower cost options that could present a buying opportunity. And, in strategy selection, for example when determining whether to fade or trade an expected move.
Probability of Profit
The likelihood of a stock reaching an implied Breakeven level, as derived from options delta (Δ). Used as a proxy for the probability of an option expiring in-the-money, the delta of options with strikes at or close to the user price input is one way to gauge how likely the market views such a move (or how unlikely when selling options or credit spreads).