Objectives: The objective of this is to gain knowledge about the Average True Range (ATR) and an Option’s Strike Increments. Typically stocks under $25 will trade in $2.50 increments, $25 to $200 stocks would be $5, and stocks above $200 per share would be $10 strike increments. When getting ready for your market day, you will want to check the index futures as well as important economic news for the day. By knowing what direction the futures are moving, you can better gauge which direction to possibly trade. This can increase the probability of success when choosing an option.
I. Theory of Average True Range (ATR)
The average true range is a moving average of a stock’s true range for the day. A stock’s true range is the high of the day minus the low of the day, if we pretend that yesterday’s close was part of today’s range. This is a very simple way to estimate the volatility of a stock without using intra-day data or complicated formulas. Simple put, a stock experiencing a high level of volatility will have a higher ATR, and a low volatility stock will have a lower ATR.
Finding Trading Candidates
In researching this I found that Financial Visualizations website FINVIZ.com does a good job in creating a list based on a set criteria, the Average True Range (ATR) is on a Daily Ranges, so you will have to run it Daily or on a weekly basis. To make a very simple list go New Weeklys now available for trading export the list to excel, then copy into FINVIZ website and sort Highest to the lowest ATR. All you can add adjust for Average Daily Volume to add strength to the list of your creation.
Trade Equities offering Weekly Options and/or Front Month Options
Average Daily Trading Volume Over 500K or better
Average True Range (ATR) close or greater than increments between strike prices, will allow the option to move at a greater rate of return.
Apply Average True Range to a Daily Chart to determine if its Average move is more than the increments between Strike Prices on the Equity’s Daily Chart.
Current Top 20 – Average True Range List
**Charting and Spotting Weekly Options Trade Opportunities.