This tutorial explains how to use the Stock Hacker tool in the ThinkorSwim Trading Platform by TD Ameritrade. By the end of this article, you should be able to scan stocks and options for potential trades and understand how to scan implied front and back volatility in order to make complex option strategies.
Are you ready to see with your eyes how options trading works?
Understanding Options Trading Potential
The Stock Hacker is a ThinkorSwim scanning tool. You can use it to literally scan through over 25000 underlying and ThinkorSwim does all this scan activity in real time for you. Traders can choose to scan every single stock in the universe or make their scan better by selecting specific public stock lists (S&P, NASDAQ, RUSSEL, etc) or personal stock lists.
How to utilize the Stock Hacker in ThinkorSwim
In ThinkorSwim, you can find the Stock Hacker tool in the “Scan” tab on the top. Click on it and you will have three different sections: Stock Hacker, Spread Hacker and Spread Book.
First, go to the Stock Hacker section and choose a list to scan. Click on the “Scan in” or “Search” menu and look for specific categories depending on what you need to trade. Let us suppose you are interested in scanning the S&P500 Index. At this point, you have to select your scan criteria. You can simply do that by clicking on “Add Fundamental Filter” and set as many new scan criteria as you would like to utilize.
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You can choose amongst numerous criteria. Some are typically related to stocks (e.g. Last, Net Change, Volume, % Change, Bid, Ask, Yield, PE and many more); others are specific for options (Volatility Index, Front and Back Volatility, Volatility Difference and Put Call Ratio). The criteria you should select are the ones that suit your investing strategy the best. The Stock Hacker tool allows you to set up specific scan queries and save them if you are happy with your search.
Scan Criteria related to Options Volatility
Let me go a little more in detail about options criteria related to volatility. You can scan:
Volatility Index (Vol Index), if you are looking for a specific percentage of volatility.
Front Volatility (Front Vol), it represents the front month volatility.
Back Volatility (Back Vol), it represents the back month volatility.
Volatility Difference (Vol Diff), it represents the difference between the front month volatility and the back month volatility.
If you are trading options strategies such as calendar spreads, you may be well interested in looking for options at 30 days from expiration with a high level of volatility to receive a higher credit when you sell it. In the same time, you may look for options at 90 – 120 days from expiration with a low level of volatility to pay a lower debit when you buy it. The difference between the high volatility of the option sold and the low volatility of the option purchased is called volatility skew.
How to choose your Scan Criteria
In order to make sure you understand how to set your scan activity, below you find two useful examples on how to scan stocks or options related to a particular strategy.
Example 1 – Scan Stocks in the S&P500
First criteria – If you are looking for a stock traded at a price higher than 20$, but not greater than 50$ you should select as criteria “last” and simply type in the “min” field 20 and in the “max” 50.
Second criteria – You may be interested in trading stocks with high volume in order to have enough liquidity to support your trade and avoid to get stuck in your position or to pay higher commissions. Then, you should select as second criteria “volume” and type in the “min” field 1.000.000.
Third criteria – You may even be interested in looking for volatility. You should select as third criteria “Vol Index” and type in 80%.
With the three above criteria in place, you are looking for any underlying in the S&P500 being traded between 20$ and 50$, whose volume is over 1.000.000 shares a day and that has more than 80% implied volatility for its options.
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If you like this particular scan, simply click on the “scan” button on the right side of the screen. On the bottom of the page, the section “Search Result” will be immediately populated with your scan query. You can name and save this scan by clicking on the button on the top “Save Scan Query” and use it over and over again.
You can run and save any kind of search you like. When you finish your scan activity, you can just click on the Reset button on the top right of the screen to come back to the default screen.
Example 2 – Scan Options Calendar Spread in the S&P500
A calendar spread is an option strategy formed by buying and selling two options of the same type (calls or puts) with the same strike price (ATM) and different expiration date. Your goal is to benefit from the presence of a volatility skew (difference between the volatility of the option sold and purchased).
First criteria – Once again, you are interested in trading stocks with high volume in order to have liquidity to support your option strategy. Select as first criteria “volume” and type in the “min” field 1.000.000.
Second criteria – You are interested in selling a front option (with expiration date at roughly 30 days) with high volatility. You should set the “front vol” at min 30%, because you are selling and you want to receive a huge credit.
Third criteria – You are interested in buying a back option (with expiration date at roughly 90 -120 days) with low volatility. You should set the “back vol” at max 30%, because you are buying and you want to keep the debit low.
With the three above criteria in place, you are looking for any underlying in the S&P500 with volume over 1.000.000 shares a day and whose options present an implied volatility skew.
Following these examples, the same kind of research can be done for any option strategy. What matters is to set the scan criteria correctly and you will get all the potential trades were looking for.
Flavian Barrett is a self-made stock options trader who is dedicated full time to options trading. He has spent several years mastering the art and science of advanced options strategies and concepts such as options pricing and volatility, greeks and time decay.
In his website www.FromZeroToOptions.com he shares tips, techniques, tutorials and insightful articles and resources options related.
If you want to get instructions on how to place the most rewarding options strategies from scratch! .. go to Options Strategies – The eBooks.