Think or Swim Tutorial - Risk Graph Analysis

This tutorial explains how to analyse the Risk Graphs in the ThinkorSwim Trading Platform. By the end of this article you will be able to analyse on your own the Risk and the probability of success related to your investment. If you find this tutorial interesting read also: ThinkorSwim Tutorial - Setting Price Slices on Risk Graph and Stock Chart.

How to place the most rewarding options strategies from scratch? Visit my website at www.FromZeroToOptions.com to get tutorials, instructions, articles and much more stocks and options related.

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The “Analyse” TAB in Think or Swim is a powerful tool that help you understand the rate of risk you can stand and choose the combination of assets that best fits your needs. It is absolutely a great instrument and the Think or Swim brokerage firm offers it to you for absolutely free.

In order to make you understand how analyse and manage the Risk related to an Option, let’s do together a simulation on the Analyse tab. At this point, I invite you to log into your Think or Swim platform and follow carefully the instruction you find here (if you have not done yet, download your free Think or Swim Desktop software directly from the brokerage’s firm website www.thinkorswim.com).

For more information, take a look at the tutorial Think or Swim Tutorial - Analyse TAB and Options Risk Profile to find all the information you need about this amazing tool in ThinkorSwim.

Let’s get started. In the Think or Swim platform click on the Analyse tab on the top and the on the section Add Simulated Trade. In this section tape in a Ticker from your keyboard in the “Symbol box” below. Clicking on any of the expiration date you find right there, you will have a list of all Options available (for that expiration date) at different strike prices. On the left side you can see all Call Options and on the right side all Put Options. You will notice that they are showed with different colours. This is because of their “Moneyness”.

Free Tutorials - Stocks, Options and ThinkorSwim. Click Here.

Let’s suppose you are interested in the AAPL Options with expiration date at SEP 10 (37) (You can see this option if you simulate a trade at the time I’m writing - 10/08/2010). The Stock at that time was at $259,41 and, as you can see from its chart, was experiencing a sideways trend. You can also draw trendlines on the chart (in Think or Swim click on the “Chart” Tab above and then the “Drawings” button on the right side) trying to identify any point of support or resistance. That can help you in choosing the correct strategy of investment. After doing this, you can notice that AAPL is moving in a trend range between $230,04 and $279,00. So there might potentially be either a support and a resistance at these prices.

Let’s go back to the Analysis Tab. If you believe that the stock will move longer in the same trading range, you can try to simulate a Neutral strategy called Calendar Spread in which you earn money either if the underlying stock carries on moving in the same trading range. In other words, you earn money either if the stock rises or falls within your breakeven points.

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Do not forget to visit my website at www.FromZeroToOptions.com to get tutorials, instructions, articles and much more stocks and options related.

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To create this strategy you have to buy and sell two different Put Options at the same ATM strike price, but with different expiration date. You have to sell an ATM Put closer to expiration (about 30 days to exp.) and buy an ATM Put with expiration date included between 90 – 120 days.

With the stock at $259,41, the ATM strike is a $260. In Analyse, Add Simulated Trade (or ThinkBack if you are operating on the past), Option expiration SEP 10 (37), look at the right side (Put Options) and go straight to the strike 260. Here click the right button of your mouse on the asking price. In the menu that appears, select buy and then Calendar. You will have your strategy below on the “Positions and Simulated Trades” space. Make sure that the expiration date of your strategy is at about 30 days for the Put Option you sell and at about 90 - 120 days for the one you buy by selecting the correct months. When your strategy is ready go straight to the “Risk Profile” to check the Risk Graph of your selected investment. For further information you can also take a look at the Tutorial “The Analyse TAB and Options Risk Profile”.

Free Tutorials - Stocks, Options and ThinkorSwim. Click Here.

In the next GroWithYou Trading Tutorial:

• Options In-the-money (ITM)
• Options At-the-money (ATM)
• Options Out-of-money (OTM)
• The Options’ Intrinsic Value

Keep learning about Exercising Stock Options by going to: ThinkorSwim Tutorial - Options ITM, ATM, OTM and the Intrinsic Value.

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