Hello all! I have been reading many of the threads on ET for some time (mostly options related), and I am very new to trading (I was unsure if this section, or with the Options threads would have been better to post this in). I am generally cautious, so I have questions whenever I see something "too good to be true" and recently, playing around with the Think Or Swim analyze tab, I was getting the sense that it just seemed too easy to set up to be accurate throughout the life of the trade with so many changing variables. Of course I played with adjusting a lot of those variables (volatility adjustments, etc) throughout the life of a few simulated trades, and seems that they would have ended up profitable, but I am curious to hear some experience with the reliability/accuracy of the initial risk profile compared to the actual outcome before I start putting any more money into the market (I have only made 2 very small real money trades so far with success.) From what I hear, ToS is one of the best platforms for analytics (my brokerage is IB due to the lower commissions) and creating an accurate risk profile seems to me the most important step in developing a consistent and profitable strategy... just curious about how close to "reality" (whatever that is), you find ToS to be in terms of forward analysis.
ANY platform will be as good as the calculations that it uses. It's a tool. YOU provide the inputs -- not ToS, not Black/Scholes/Merton, nor anybody else. You question conflates the tool and the inputs, as adjudged by the outputs. "Bzzzzzt!"
I (think I) get what you are saying and I realize that I provide the inputs for the analysis starting with the strikes/spread, expiry, desired buy/sell bid/ask, etc, etc, and from there the calculation is made using a multitude of parameters (basic price inputs & interest, dividends, volatility, etc, etc). As I understand it, this allows the plotting of the basic risk profile, and can be adjusted from within the analyze tab, resulting in an "expected outcome" at various points in time throughout the duration of the position, shown on dates selected, and can be modified using adjustments to position size, volatility adjustments, etc. Please stop me if I am misunderstanding the bigger picture. I suppose I am asking, in short, how accurate have you found your initial risk profile (that you created in ToS) compared to the actual outcome of the position, and what adjustments to your inputs have you made to subsequent positions, that have helped to fine tune the initial calculation to generally be a more accurate reflection of the actual outcome? Example - the creation of a risk profile prior to earnings. Has adjusting the volatility down improved the accuracy of the risk profile compared to the actual outcome? Specific example, I am looking at a position on MFC. Am I permitted to post screen shots here?
I haven't looked at the options analysis tools in ThinkorSwim for several years, so I may be out of date on this. But the last time I used it, I noticed the IV was wrong for major equity indexes like the S&P. It was using a model to calculate IV instead of the actual figures, so it missed the skew entirely. By comparison, other options tools like OptionVue and LiveVol used the actual market prices. As I said, it's been awhile so all this might be fixed by now in ThinkorSwim. I know they were trying to beef up their analytics so brokerage customers would have a unified analysis and execution platform to trade options.
PnL profiles get more precise the closer you get to expiration because then it becomes a simple exercise of the debit/credit you put into the initial position vs. the bleeding out of the extrinsic values of the option legs as it moves towards expiration day. Anything before 1-2 days before expiration, a little harder as skew shifts,etc.
I've attached a screen shot of the type of profile I was looking at. This is the sort of thing that, although not entirely the same "too good to be true" appearance like the perceived "total zero risk" of some Box Spreads I've compared, if I am seeing this correctly it looks like a profitable trade unless MFC jumps UP 30% over the next week.
without even getting into the actual spread. I can tell you off the top. You will not get this pnl Profile without taking on leg risk. The reason is the spreads. The NBBO for MFC Nov 20 call which is the most liquid being at-the -money is .65/.80 ! You might try to split the diff and end up paying 75 cents but you do this on a box sprad which is 4 legs and the entire graph you took a snap off is still the same shape BUT below the zero line.