Microsoft



Derived from Online Trading Academy’s Options XLT

Student Lobby Course Documents Materials and 2012 Broadcasts

Table of Contents

Background 1

Installing Indicators in TradeStation™ 1

XLT IV Analysis Indicator 2

XLT Bollinger Band Indicator 3

XLT Floating ATR Indicator 4

XLT Options Trade Planner Indicator 5

XLT Volatility Model Indicator 6

Appendix A – Glossary of Options Terms 7

List of Figures

Figure 1 Installing XLT Options Indicators 1

Figure 2 XLT IV Analysis Indicator Example 2

Figure 3 XLT IV Analysis Input Parameter 2

Figure 4 XLT Bollinger Band Indicator Example 3

Figure 5 XLT Bollinger Band Input Parameters 4

Figure 6 XLT Floating ATR Indicator Example 4

Figure 7 XLT Floating ATR Input Parameter 4

Figure 8 XLT Options Trade Planner Example 5

Figure 9 XLT Options Trade Planner Input Parameter 5

Figure 10 XLT Options Trade Planner Installation 5

Figure 11 XLT Volatility Model Indicator Example 6

Background

The purpose of this document is to provide a simple guidebook to using the indicators provided in the Options XLT Course Documents folder in the OTA Student Lobby. In order to use this document one must be familiar with the basic properties of Options contracts, as articulated in the OTA Professional Options Trader course. These indicators are designed for TradeStation™ and include the XLT Bollinger Bands, XLT Floating ATR, XLT IV Analysis, XLT Options Trade Planner and XLT Volatility Model. Each indicator contains input parameters for customization. Some indicators for the Thinkorswim platform can be obtained by contacting XLT support (XLT-Support@).

Installing Indicators in TradeStation™

After downloading the ELD files onto your computer from the Course Documents XLT Options Trading Folder in the Student Lobby, the XLT indicators are imported in the normal fashion for TradeStation™ indicators. Under the File Menu, select Import/Export Easy Language. On the window which pops up (Figure 1) select the Import Easy Language file (ELD, ELS or ELA) option, press Next. Then browse to the location where the files are stored on your hard drive and select Open, then Next on all the ensuing screens to complete installation.

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[pic] Figure 1 Installing XLT Options Indicators

XLT IV Analysis Indicator

The “XLT IV Analysis” indicator compares the Implied Volatility (IV) with the 52 week high-low range for the Historical Volatility (HV) of the underlying asset. It plots the 5 IV zones used to define specific options strategies using the volatility “thermometers” for daily and macro trading (see Options XLT Course Documents folder in the OTA Student Lobby). The indicator description numbers quantify the levels separating the 5 IV zones, and are repeated on the price axis. With default color settings the blue line represents the HV, the actual volatility experienced during that day. Also with default settings the red line represents the IV derived from options premiums for that day.

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Figure 2 XLT IV Analysis Indicator Example

In addition to the normally modifiable line colors, weights and styles, the only parameter the user should change is the PAI flag (Figure 3). For normal options trading set the PAI flag to “False”, which produces the 5 zone plot. When set to “True” the PAI flag produces an IV plot with only high, low and intermediate volatility ranges (suitable for ProActive Investor techniques). The other parameters should not be modified.

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Figure 3 XLT IV Analysis Input Parameter

XLT Bollinger Band Indicator

The XLT Bollinger Bands (BBs) are built around a mean curve and characterize the statistical action of price. The mean curve is the 20 period Exponential Moving Average (EMA), represented by the black curve in the middle of the price action (Figure 2). The Bollinger bands (red lower, blue upper) represent the 2 σ (standard deviation) lines which contain 95% of the price action over the prior 20 chart intervals. OTA has modified the standard BB to include an inner boundary at ¼ of the price range from the 20 EMA to the 2 σ BB, which defines potential entry points to join trends or exit points for price reversions to the mean curve. The range between the mean (20 EMA) line and this ¼ mean-to-BB range is known as the Low Dollar Risk (L$R) zone in the Options XLT room. The inner ¼-range lines are color coded red when the L$R zone width is less than ½ of the daily ATR, indicating that directional options strategies would likely not withstand the risk of overnight price changes. The 3rd and 5th indicator values are the numerical values of the prices at the edges of the upper and lower L$R zones and are also color coded red when this range is too narrow for directional trades (i.e., when it is < ½ ATR). Note, an August 2012 update to this indicator also color codes those inner lines red when the potential profit (price difference between BB curve and the L$R zone edge, at the ¼-range line) is less than $1. The green outer bands are price extensions beyond the 2 σ BB (by 1% of price for daily charts, 2% for weeklies, 5% for monthlies and 0.25% for intraday charts) which define a range which should be hit by price only in extreme circumstances and would provide a reasonable target or entry areas opposite to the L$Rs, when coincident with Supply or Demand Zones.

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Figure 4 XLT Bollinger Band Indicator Example

As is usual with indicators line colors, weights and styles can be modified. Modifiable parameters (Figure 5) include ShowTrendEntry, ShowTrendEntryAlerts, ShowReRntryBasedOnQuarterATR and Price. ShowTrendEntry turns the L$R boundaries on (“True”) and off (“False”). ShowTrendEntryAlerts turns the color-coding of the L$R boundaries on (“True”) and off (“False”).

ShowReRntryBasedOnQuarterATR turns the color-coding of position Re-entry indications on (“True”) and off (“False”) – highlighting re-entry opportunities from a neutralized position. While the Price parameter can be modified consistently with TradeStation™ conventions [e.g., High, Low, Close, (H+L+C)/3] instead of the default “Close”, this is not recommended.

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Figure 5 XLT Bollinger Band Input Parameters

XLT Floating ATR Indicator

The “XLT Floating ATR” indicator places numbers in the upper right hand corner of charts which quantify the smoothed (averaged) ATR for the chart interval, along with ¼ and 1/10 of that ATR.

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Figure 6 XLT Floating ATR Indicator Example

In addition to the normally modifiable text colors, the only relevant modifiable parameter for the indicator (Figure 7) is the averaging length, set to 14 periods of the chart interval by default.

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Figure 7 XLT Floating ATR Input Parameter

XLT Options Trade Planner Indicator

The XLT Options Trade Planner (Figure 8) indicator for the OptionStation Analysis window provides the normal Greeks, as well as analysis of fair prices to open and close each leg of the options based on shaving the spreads in accordance with the fraction defined in the SpreadSplitRatio (Figure 9).

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Figure 8 XLT Options Trade Planner Example

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Figure 9 XLT Options Trade Planner Input Parameter

To install the XLT Options Trade Planner, right-click on the Options Station Analysis window and select Insert Indicator from the pull-down menu. On the resulting window, Add the XLT Options Trade Planner (Figure 10) and delete the other indicators, as they are redundant with the XLT Options Trade Planner.

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Figure 10 XLT Options Trade Planner Installation

XLT Volatility Model Indicator

The XLT Volatility Model indicator provides special calculations for volatility. It is available under the Format pull-down tab within the Models selection. It has no modifiable parameters.

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Figure 11 XLT Volatility Model Indicator Example

Appendix A – Glossary of Options Terms

|Term |Abbreviation |Meaning |

|Bollinger Band |BB |A moving average mean curve combined with a statistical characterization of the price action|

| | |away from the mean, generally expressed as 2σ (standard deviation) from the mean, containing|

| | |95% of the price action around the mean |

|Delta | |Greek denoting sensitivity of Options premium to price of the underlying asset |

|Historical Volatility |HV |Actual daily volatility experienced in the underlying asset’s price |

|Implied Volatility |IV |Daily volatility determined from the actual premium demanded by sellers by solving a |

| | |mathematical formula which relates options premium to volatility, interest rate and |

| | |underlying asset price |

|Low Dollar Risk Zone |L$R |Region between the 20 EMA Bollinger Band mean and ¼ the range from that mean to the |

| | |associated BB boundary; identifies potential entry regions for options trades or potential |

| | |target regions for reversions to the BB 20EMA mean. |

|Options position | |A combination of options contracts which have the desired aggregate behavior |

|Theta | |Greek denoting sensitivity of Options premium to time-to-expiration for the options contract|

|Vega | |Greek denoting sensitivity of Options premium to Implied Volatility of the underlying asset |

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HV 52 week high

HV 52 week low

Numbers quantify the levels for each line and curve at the terminus of the plot

Upper Half Zone 2

Upper Half Zone 1

Red Curve is Implied Volatility (IV)

Blue Curve is Historical Volatility (HV)

Lower Half Zone 1

Lower Half Zone 2

IV Zone 5

IV Zone 4

IV Zone 3

IV Zone 1

Normal options trading setting

¼ range from 20 EMA to 2sð BB curves

95% of priσ BB curves

95% of price action within

outer BB (2 σ, standard deviation)

Values for each curve at the last interval on chart

3rd and 5th values red when L$R < ¼ ATR (directional trade not recommended)

Red line = directional trade criteria not met (L$R too narrow to withstand overnight risk)

Low dollar risk (L$R) zone from 20 EMA to 0.1 σ (standard deviation)

20 EMA mean

Extreme price excursion zone (BB +1% of price)

Displays Green Re-Entry regions

Displays L$R curves

Color codes L$R curves Red for “no trade”

Number of chart intervals to average

XLT Options Trade Planner

Fair price & Greeks

Fraction of spread to shave for fair value

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