Standard Deviation Explained | Options Trading Concepts

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[@proseq7297]

Guys you’ll need to give some price examples of real stocks and options price

[@roc3429]

Dear Mike: You work so-so-so hard to make these instructional option videos!!! A text cannot express my gratitude for what you teach! It is a shame that what you do is not well known.

[@tastyliveshow]

Thanks David! Glad you like the content!

[@srcontrol11]

This is good for us that it is not well known. Those of us that seek knowledge and inspire for greatness in what we want fulfillment of, sets us apart from the rest. More fortunate that we have teachers like Mike that are able to be compensated (hopefully) to put knowledge up for free (to us anyway) for those that are will to find it.

[@chairman6652]

@@srcontrol11 what on earth are you talking about.?

[@LumleyTradingYT]

Use it myself, love standard deviation channels, helped me become a profitable trader :)

[@bradfl123]

Thanks for explaining these concepts in an easy to understand way Mike.

[@harshadevisetty2575]

WOW! I felt like the golden question has been answered to where to pick the strike price!! I'm a beginner and am just learning all the basic terminology. You guys are doing a great job!

[@codesymphony]

.16 deltas great starting place.

[@jasonniu5460]

Thank you!

[@indigo4953]

Mike - this is a brilliant series! Thanks!!

[@TraderDT]

Excellent content.

[@24rheal]

Perfect Thanks

[@musicshanky]

You are awsome..cheers from India..

[@yourdailymusic6906]

Don't understand much, but i'll keep rewatching it later. Thank you.

[@megawolf4172]

love your videos

[@david_1956]

Doesn't one standard deviation always correspond to the same deltas (i.e. 16 & 84)?

[@Maitreya888]

I finally understand what standard deviation is!

[@jacekkubiak3551]

Question... is market behavior can be described by standard diviation? Hardly to believe... ever heard about fat tails?

[@CS-ww3bs]

Just FYI, The link to learn more doesn't work in the description box

[@codesymphony]

Do you use the delta to represent these percentages?

[@traderlincolnmitchell9786]

good video

[@Cdswjp]

good work

[@karthickrajendran2510]

thank you mike from India

[@jaimeeee8589]

Karthick Raj hi

[@sunilkalla7906]

Great video. thx. Ho w do I find out One SD price for SPY on TOS plateform ?

[@TraderDT]

Mike: If I wanted to know SD levels (eg..1SD, 1.5SD, 2SD) for any given stock, index,etc...so i could plot those levels (via price levels) on my chart, how do i go about doing that? I saw the TT segment with DR Data who uses google sheets. Is there an easier way to find SD levels using TOS analytics?

[@tastyliveshow]

Not sure about TOS, but we do this automatically on dough.com on the trade page. We plot vertical dotted lines on the 1 & 2 SD points based on the expiration's volatility. Check it out!

[@sabybasu]

Hey Mike, as always great content. I am trying to understand the concept, so apologize in advance if I misspeak. According to the diagrams, there is a 68% chance that prices will vary above or below the mean (34% on either side of the mean). So, they will be In-the-Money. There is 32% (16% beyond the 1 SD boundaries on either side of the mean, where the prices will be Out-of-Money. This is the area that we should try to sell. Did I get that right? However, I heard you say a few times and at 5:09 just the opposite, which confused me. Lets take an example of a $100 stock with an IV of 20%. So, there is a 68% chance that it will vary b/w 80 (downside) and 120 (upside).If we sell in any of the strikes in this range, then there is 68% chance that we will be ITM (green area). Therefore, to be OTM (red area) we should sell below 80 or above 120 strikes, which are beyond 84th (= 1 SD) percentile (68 + (32 / 2)). Am I correct in my understanding?

[@Saahib_K]

Looks like it was never answered but your understanding is correct.

[@BharatMataKiJaiii]

Hi, when you say “If we have a stock at $100, and IV of 20%” are you referring to the Implied Vol of ATM option for the stock??

[@tastyliveshow]

IV of the stock, which can be backed into by looking at the ATM option premium.

[@joshuademoraes]

​@@tastyliveshow Thought the IV was a measurement for Options to determine the price of a stock in the future...

[@LilacTian]

I tried to replay back, but I couldn't catch where you said we could get the Excel sheet. Could you please Advise here? Thank you very much.

[@SpiritualJourney...]

nice1

[@krishsoundar3857]

Looks like the BIG assumption here is the underlying obeys Gaussian/Normal distribution, to arrive at 84% and 97.5% for OTM, and others.. Even the basic Black-Scholes model assumed Log-Normal or Geometric Brownian motion, with fatter tails. So these % will be lower.

[@saikatdg]

Plz tell corresponding delta vs SD

[@TheSushiandme]

Wow so taking calculus and stats and probability was meant to be. :)

[@brandonvillatuya9539]

That's when I realized "when I was going to use this in life." Lol

[@jonathangonzalez3827]

I busted out my freshman year stats notes lol

[@jeffshackleford3152]

You will not necessarily use Calculus everyday, but think about how much better you are at numbers than your friends who did not take those classes... I hangout with engineers all day and when I am with my regular friends, it is astounding how bad they are at numbers, not trying to insult them, I have pushed a lot more pencils than they have.

[@kamran6336]

What delta is considered 1.5 SD?

[@jaik-investmentsandwealthc4266]

I think above explanation would still be confusing for certain users... Here is my explanation Math part - One SD = 68% probability of something happening. This 68 % can be considered as 34% probability on each side.... Plotting this on a line, would look like this ------16%-----34%----l------34%----16%----- Now lets come to selling a naked OTM Call. Lets assume underlying stock is at 100 and we are planning to sell a naked OTM call... Of course any future price below 100 will ensure call is OTM. Now refer back to the plotted line, 16% + 34% = 50%. In other words underlying can go anywhere below 100 (16% + 34%) and the call will remain OTM Now focus on right side of the plotted line. On the right side there is a 34% probability that call remains OTM. So adding 50% on the left of plotted line and 34% on the right side gives you 84% probability of call being OTM. Now when you sell a strangle, you can lose money on both sides equally.... So for a strangle look at the plotted line....you just have 34% OTM probability on both sides (34%+34%) ie 68% OTM probability for the strangle as a whole.

[@mrithun15]

this is all assuming prices follow a normal distribution curve, but realistically speaking how often does that occur

[@ashishagrawal8275]

Mike: If we are selling weekly options, then should we see weekly SD or daily SD

[@tastyliveshow]

I wouldn't be doing this, but if I were and I planned on staying in the trade the whole week I'd sell the weekly. If I only planned to trade that day then I'd look at the daily SD. Regardless this is a very binary way of trading so I stick to the 45 DTE cycle. Much more credit and much further OTM strike risk.

[@pankajkumarsanwaria7192]

could you provide me excel sheet or any stuff that i can calculate 1SD and 2SD thanks regards

[@tastyliveshow]

kzbin.info/www/bejne/bpXUeWWcqrV_r6M

[@tastyliveshow]

This should help!

[@duckduckgo358]

Would percent otm be pop of a short option?

[@codesymphony]

depends on the delta

[@MyRook]

Ok you had me a Led Zeppelin.

[@SexyMFPoker]

How does volatility contraction affect those probabilities?

[@tastyliveshow]

If VOL contracts AFTER we sell a strangle, the probability of those strikes expiring ITM decreases. In other words, the probability of the strikes expiring OTM decreases. The expected move, or standard deviation would collapse in this case, which is how we find our percentages in the first place.

[@ANKITRAJ-fe8dh]

How to find strike prices if they are 1sd Or 2sd?

[@codesymphony]

look for .16 delta for 1sd, or 0.025 delta for 2sd

[@zerototalenergy150]

skewness(+ive or -ive ) ??

[@tastyliveshow]

If that is the case, then the 1SD and 1SD lines will be further away on one side than the other - standard deviation still exists, the strikes that represent it would just be different.

[@NorthwestKastaways]

Does the %ITM change depending on Skewness and/or Kurtosis?

[@americanIDOLfan11111]

lol, it’s supposed to be “without further ado”, not “without further to do”.

[@mangao4334]

so 1/2 standard deviation strangle would be around 30 delta? (17%+16% 33 delta)not sure if i am right . thanks for all the work guys!

[@naufeltajudeen3769]

I don't think so. One standard deviation is 68%. Two is 95% and three is 99.5%. it's non-linear. I don't know what half standard deviation is but I feel like it be less than 50%. The Delta would be a large number because it's close to ATM.

[@naufeltajudeen3769]

They pick the 1 standard deviation for their strike. It's the 30delta for a strangle because that would be 13.6% + 2.1% when you add the tails for two and three standard deviation. You double that sum because their are two sides. It comes out to 31.4% of being In The Money, so their Delta is 30. Those options have a 68.6% chance of being Out The Money which as ab option sell is ideal. I'm learning myself from TT and this is what I've understood it to be. I might be wrong so please double check me. Stay Tasty!

[@awkb777]

its called white board session but you aren't writing on the white board enough. can you write down the strikes ? you said "imagine that the strike is this number" i wouldn't have to imagine if you wrote the number down on the white board.........

[@aizazaheer8995]

when do we use 1 standard deviation and when 2 standard deviation ?

[@tastyliveshow]

We're almost always using 1SD - 2SD examples might be an earnings announcement with really high IV, or just really high IV in general.

[@aizazaheer8995]

tastytrade is high volatility commandable in business or low?

[@Oratordio]

Ooh

[@captainruffles5990]

For clarification is one standard deviation inside the 68%? Or is one standard deviation the 32% outside of the 68%. Is two standard deviations inside the 95% or the 5% outside? So if I understand you correctly one standard deviation is 32% and two standard deviations is 5%. I would then divide each of these percentages by two to find the percentage of being in the money for the bearish and bullish position.

[@dwiii1635]

The main issue with this is market makers aren't stupid, they priced options like these so you are getting destroyed with commission on trades.

[@NorthwestKastaways]

So what's the solution?

[@setrotoxin1146]

Would 1 SD strikes also be recommended for selling iron condors?

[@tastyliveshow]

In some cases, we can certainly do this. We like to collect 1/3rd the width of our strikes with IC, and in a low volatility environment, like we have now, that means we may have to move within 1SD. Totally up to you though!

[@setrotoxin1146]

@@tastyliveshow thanks!

[@acorn1744]

Mike: with short strangle, probability of ITM is still 16% as stock can only be at one place at any given time.

[@Saahib_K]

34% you mean

[@codesymphony]

@@Saahib_K 32%

[@noahschmartz2354]

As Einstein said: If you cant explain it to a 4 year old child, then you probably dont understand it yourself.

[@tkkt3605]

is not one standard deviation 64%, not 84?

[@tastyliveshow]

When encompassing both sides of the standard deviation curve, 68% is roughly 1 Standard Deviation - however, if we are only looking at one side and selecting a prob. ITM for that side, it would be 84% OTM, which is 16% ITM 16 on put side + 16 on call side = 32% prob ITM, 100-32 = 68%

[@Bokgat]

Only one half of the tail, so it’s 100-16, not 100 - 32. That’s why he contrasts to strangle. But you are correct in that you need to apply evenly to determine your strike prices for either, call, put or call and put. Look at the first minute of the presentation. That is the most important.

[@adityaparange6311]

How abt some examples ? the theory is fine but u should have used actual strikes

[@tastyliveshow]

1SD strikes are around the 16 delta mark, so those marks will vary depending on the stock price.

[@adityaparange6311]

tastytrade hey, u guys are awesome. Tasty trade has opened my eyes to this opportunity of selling options. My earlier question was because in India we don’t have broker software’s which readily gives us the probability, Greeks etc. happy to tell u, I have since then found a software which I am currently using on my journey to became a tasty trader

[@Ankitme1]

@@adityaparange6311 can u share the name of that sofrwarw mate for india

[@Bokgat]

Actually, your presentation is not entirely correct. Normal distribution implies that the graph stays constant, and the occurrences remain within the 68 percent for 1 std. if the distributions are not considered normal due to Skewness for example or Kurtosis for example, then the entire model falls flat.

[@cronos987]

Studies has been developed were it has proven that the one of the closest model of the stock price distribution is “normal with fat tails”, so as introductory this normal distribution is perfectly fine

[@r1.454]

Ok is it me or is he assuming we know way more then he believes. I'm assuming the flat line is a stock priceline reading left to right?

[@chrisg4433]

This channel always makes me feel stupid

[@Sanathvarma]

What a mess