This segment contains a discussion and explanation of data which, while not directly related to options, is an important concept for options traders to understand. This segment should be of value to all traders.
Dr. Data (Michael Rechenthin, Ph.D.) began with a brief explanation of what Beta is. A few examples were given to help explain the concept.
A slide was shown with the calculation for Beta. The S&P 500 is commonly used as the baseline against which a stock is measured for Beta. One can calculate Beta using a spreadsheet but the thinkorswim platform provides the information for free.
The importance of the correlation as to the “credibility” of the Beta was also explained. A chart was shown plotting data points of the DIA compared to the SPY. Dr. Data explained how to fit a line using “regression” and supplied the simple calculation. He then briefly explained how the correlation was measured. The July 16, 2015 segment of the Skinny on Options Math was all about correlation.
A slide was shown with charts showing the correlation of the DIA to the SPY (same as earlier), Diamond Offshore (DO) to the SPY and the 2x Bear ETF SDS. The actual correlation and Beta were listed beneath each. The DIA has a high correlation and Beta, DO has a low correlation but moderately high Beta and SDS has a high negative correlation and negative Beta.
Anyone with a free Google email address can use Googlesheets to make the calculations themselves and pull in the data. Dr. Data explained how to do that. The relevance to a pairs trade was explained.
Watch this segment of "The Skinny On Options Data Science" with Tom Sosnoff, Tony Battista and Dr. Data for a great explanation of Beta and how it can help your understanding of the markets and your trading.
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