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The Skinny On Options Data Science

Expectations vs Reality

The Skinny On Options Data Science

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

In today’s Skinny on Options Data Science, Michael Rechenthin, Ph.D. explained the expected move cones that are seen in each Cherry Picks -- how often do they work in practice?

The calculations suggest that prices fall between the lower and upper bounds 68% of the time. But a large scale backtests performed on all 500 stocks in the S&P 500 found that the vast majority fell within the 30-day expected around 78% of the time.

Further analysis found that when IV Rank is low, stocks tended to stay within their expectation a slightly greater percentage of the time than when IV Rank was high. This is offset though in a loss in profitability since options also tend to be less profitable during lower IV Rank environments.

Additionally, stocks tend to breach to the downside when IV Rank is low and breach to the upside when IV Rank is high.

See the Skinny for more information.

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