Using Sentiment Analysis Tools in Your Trading

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.

1. Vol Index is the composite implied volatility¹ (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.