2015issue C0216-21
Constructing touch plans from modified true range
Most listed option contracts are closed before expiration, so a touch plan is built from realized range and the implied one-day move rather than from the chance of finishing in the money. Average modified true range sets the strike gap first, then that same gap is ranked against the options market's priced move.
- Most listed option contracts are closed before expiration, so probability of touch is a separate planning input from the chance of finishing in the money.
- Modified true range keeps the larger prior-close-to-high or prior-close-to-low move and drops intra-bar high minus low, so the period mean can bound wing width or adjustment room before entry.
- Percent of goal achieved is the share of lookback bars that already covered a chosen dollar gap; that two-sided rate is halved for a one-direction plan.
- The same gap is ranked against the one-day implied-volatility standard deviation through a mean-to-implied ratio, after checking that earnings clusters have not dominated the hit count.
Touch rate is not the same as finishing in the money
Most listed option contracts are closed before expiration, so a touch-before-expiry rate is a separate planning input from the chance of finishing in the money. A 2015 exchange estimate put 55 to 60% of option contracts as closed prior to expiration.
Probability of touch is the historical rate at which the underlying reaches a chosen price any time inside the lookback. It is distinct from the chance of finishing in the money at expiration.
Measure the gap with modified true range
Editorial interpretation: treat strike distance as a construction problem first, then place that same gap in a weeks-to-months volatility regime.
Modified true range keeps only the larger of the move from the prior close to the current high or to the current low. It drops current high minus current low so intra-bar range does not overstate a bar-to-bar price change.
Option traders often use a 20-bar lookback when measuring historical volatility, treated as about one month of daily bars.
Convert hits into a one-direction plan
Percent of goal achieved is the count of lookback bars whose modified true range met a chosen dollar goal, divided by the period length. That two-sided rate is halved for a one-direction plan.
Use the average to space strikes before entry
Average modified true range is the period mean of those gap-inclusive ranges. It can set strike spacing or adjustment levels so planned exposure is bounded before entry.
Compare realized range with the implied one-day move
A one-day implied-volatility standard deviation can be formed as close times implied volatility divided by the square root of 252, then compared with average modified true range as a mean-to-implied ratio.
Editorial interpretation: ranking the constructed gap against that implied one-day move puts one structure in a weeks-to-months volatility regime instead of an expiration-only probability.
Treat a touch as an instant trigger
Because a touch can last only an instant, a plan that treats a chosen price as the decision trigger needs alerts or conditional orders placed at the start of the trade.
All readings on this track · 36 readings
- 1988Constructing unsigned true range for directional models
- 1989Evaluate an always-in ATR breakout as one procedure
- 1992Variable lookback and average true range as a trend-filter construction
- 1993A random-walk index that uses true range as its scale
- 1993A shared harness for trend-filter construction
- 1998Finish a trend with a volatility trail, wave permission, and a slower-frame veto
- 1999A trend filter that switches tactics and scales ATR targets
- 2001Filter higher lows with linear regression, then judge the exit
- 2003A Mechanical trading system is a maintained procedure, not only an entry trigger
- 2005Construction of a volatility-bounded long entry
- 2005Six-zone encoding of open, high, low, and close
- 2006Normalized average true range as a pre-entry volatility bound
- 2006Chandelier exits, ATR position sizing, and trailing stops
- 2007Constructing a rule-based entry with Relative Strength Index and ATR position sizing
- 2008Constructing a zero-lag TMA and heikin-ashi crossover as a complete rule set
- 2010Use the session-range percent stop as a pre-trade filter
- 2011OCA exit groups, trailing limits, and ATR stops
- 2011ATR bands around support and resistance for stops and targets
- 2013Algorithmic head-and-shoulders construction with bounded exits
- 2013Constructing ATR-scaled swing pivots and linear-regression divergence
- 2013Constructing volatility bands from typical price
- 2014Constructing true-range contraction filters before expansion
- 2015Constructing touch plans from modified true range
- 2015One checklist for breakout entry and ATR risk
- 2015Percentage true-range construction for cross-market volatility filters
- 2015Construct a percentage true range for cross-market volatility
- 2015Percentage true range as a pre-entry exposure filter
- 2016Constructing ATR-filtered breakout entries
- 2017A dividend date as a pairs-trading classroom
- 2018Range-based volatility as a true-range construction
- 2018Moving average support and volatility-band construction
- 2018Construct a lifecycle breakout from compression
- 2018Pair the book first and let volatility or range set the size
- 2019Trend systems need a no-trade rule
- 2020Average true range as a shared unit for size, pairs, and stops
- 2020Volatility sizing and target-risk leverage as a pre-trade gate