Hello, traders.
I'm Dan Suvulak.
Analyzing the risk and reward of a position
is crucial for every trader, and in this video,
I'm going to show you how to use the Risk Profile on thinkorswim
to do that.
Let's jump in.
The Risk Profile on thinkorswim's Analyze tab
is one of the most powerful tools on the platform.
This tool helps you calculate probability
of profit on positions within your portfolio and strategies
that you're looking to implement and analyze.
First I'm going to show you how to simulate
a trade within the Analyze tab's Risk Profile.
Let's jump over to the Trade tab.
In this example, I'm going to use Amazon.
Suppose I want to sell a five-point-wide vertical
expiring November 15, 2019.
I'm going to open up the option chain, right click on the 1,780
put, select Analyze, Sell Trade, and then Vertical,
and the above graph is your risk-parity graph.
You'll notice two lines.
The blue line that is a little bit more dynamic
is your profit and loss at expiration,
and the pink or magenta line represents
your theoretical profit and loss at the time
input entered in the bottom calendar of the Analyze tab.
The above calendar input is your probability date.
You're going to want to set this to the expiration
of your options strategy.
However, if you plan on executing your strategy prior
to expiration, you may consider setting the probability date
to that desired exit.
Along the left side of the Risk Profile is the y-axis--
this is our profitability and loss potential in dollars--
and along the x-axis, stock price.
We can grab the x-axis, drag to the left to contract
price to see more, or drag to the right to see less.
In this example, I'm going to track those stock prices
so we could see a little bit more real estate
of our risk-parity graph.
In doing that, you'll notice a lightly shaded area
in the middle of the risk-parity graph
and a darker area outside of that.
The lightly shaded area represents
a future expected price range based
on a one-standard-deviation probability between our time
input in the bottom calendar and our probability date selected
in the probability-date input.
In the middle of the Risk Profile page,
you'll notice price slices.
Think of price slices as the price input
within the option-pricing model, price points
in which you could analyze your strategy against.
Suppose that I wanted to see the break even of this
$1,780-$1,775 vertical.
I'm going to navigate to the right side
and click on the three horizontal menu button.
Hover over Set Slices, Break Even,
and select the break even of our analyzed strategy.
As you can see, the orange hash lines
snap to the break even of our options strategy,
cutting through the risk-parity graph and the probabilities
associated with that.
There is a 54% chance of probability inside of our break
even and a 45% chance of probability
outside of our break even.
If you want to go back to the default setting,
simply go back to the three-horizontal-line Action
menu and select Reset Slices.
You'll notice that the stock setting
is three price slices, 10% up, the live stock price, and 10%
down from the current level.
We can adjust the price slices from percentage move,
standard deviation, EPR, which stands for Expected Price
Range, or notional dollars.
Let's go ahead and reset our price
slices one more time by navigating over
to the Action menu and selecting Reset Slices.
Along the bottom of the Risk Profile chart
you see this gear icon.
This represents something that's customizable.
And again, the Risk Profile is a visualization
of the option-pricing model.
Within this area, we can adjust volatility up or down
and see the effects of probability.
We could change the time input within the option-pricing model
and analyze what our theoretical profit and losses would
be should we move closer to expiration.
We can use the plus or minus arrow to move that up or down
or click the Calendar icon to select your desired date.
In doing so, you'll see the effect of the lightly shaded
area as there's less time between the time it
entered in the bottom and our probability date up top.
As we walk our time input closer to expiration,
you'll see the magenta line converge with our parity graph
at expiration.
To get our time input back to today,
simply click on the calendar and select Go to Today.
I'm going to set our slices back to break even one more time.
If you're comfortable with everything
in terms of probability and the risk associated with it
and want to place the trade, simply
go down to the simulated trade.
You can either double click on the simulation or right
click and Confirm and Send.
Suppose you wanted to make an amendment
to the analyzed trade.
Simply click Edit, and the trade will go to your order editor.
From here you could edit the trade
as you please and place the trade when
you're ready by hitting Confirm and Send.
And that's how you use the Risk Profile in thinkorswim.
For more information, head over to the education center
on tdameritrade.com and check out the videos
on our YouTube channel.
For more in-depth videos on how to use thinkorswim,
visit the thinkorswim learning center at tlc.thinkorswim.com.