Using Sentiment Analysis Tools in Your Trading

August 28, 2023 Advanced
Consider adding sentiment analysis tools to your stock trading toolkit to help narrow the time horizon around an underlying security's move.

Sentiment analysis tools are helpful resources for traders when analyzing time horizons. Sentiment analysis attempts to track the potential velocity of a move. In large part, sentiment measures—including the three thinkorswim® platform tools discussed below—are estimated ranges for a security during a certain time period.

So, what's the point? Simply put, a stock trader can often use these values to help determine when a security might encounter a bumpier ride (thus signaling a time to hedge), it's time to build a position, or it's time to expect a potential reversal.

Tracking volatility on thinkorswim

Image shows three ways traders can track volatility and probabilities on thinkorswim: Vol Index, Market Maker Move™, and Expected Move.

Source: thinkorswim platform

1. Vol Index is the composite implied volatility(IV) for an underlying security. IV is a percentage that represents the market's expectation of a security's price range in the future. From the thinkorswim Analyze tab, the probable range of a security's price can be determined for any given date—meaning a trader can see the expected stock range between any present and future time they select. As shown in the image above, the Vol Index can be found on the Watchlist located on the far left as a snapshot within the Probability Analysis section or on a day-by-day basis within the Risk Profile section (both are located on the Analyze tab). To add Vol Index to the Watchlist, use the gear to bring up a search bar. Once located, a trader can add different volatility measures to the display columns. 

2. Expected Move shows stock traders the dollar value of an expected move by a specific options expiration date as priced in by option traders. This is the non-percentage value shown on the far right of each options series header. Although the expiration date doesn't affect traders directly, this kind of benchmark is a great forward-looking indicator to complement traditional charting methods.

3. Market Maker Move™ (MMM) is a value that's displayed when the volatility2 of the front-month options expiration is higher than the volatility of the next expiration. When those conditions are met, the MMM appears at the top right of the Trade All Products page in a yellow box when a stock symbol is loaded.

When MMM is present, it implies there's some event in the near term, such as earnings, that might shift the price of the underlying security. The MMM is a derived figure that separates the volatility implicit to time from the "extra" volatility attributed to the upcoming event—potentially giving traders the amount of movement the market anticipates the event may cause.

These three tools cannot predict price movements, but they can help traders fold in sentiment analysis to help forecast the magnitude and timing of an underlying stock's move. These tools can complement the fundamental or technical analysis traders use in their decision-making process.

1The market's perception of the future volatility of the underlying security directly reflected in the options premium. Implied volatility is an annualized number expressed as a percentage (such as 25%), is forward-looking, and can change.

2Volatility (vol) is the amount of uncertainty or risk of changes in a security's value. This concept is based on supply and demand for options. Higher demand for options (buying calls or puts) will lead to higher vol as the premium increases. Low demand or selling of options will result in lower vol. Vol in its basic form is how much the market anticipates the price may move or fluctuate.

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Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options." Supporting documentation for any claims or statistical information is available upon request.

All security symbols, names, and market data are shown for illustrative purposes only, and should not be considered an offer to sell or a solicitation of an offer to purchase any security, or a recommendation of any strategy.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.