Posted in Options Trading
By: Tom Gentile on August 7th, 2021 • 3 mins read
Option prices are based upon sophisticated math. In fact, the mathematical model at the heart of option valuation, the Black-Scholes model won the Nobel Prize in 1997. The math is elegant, even beautiful to some and affords us the ability to reduce risk and make money in multiple directions.
Some of the moving parts used to calculate an option’s value include: stock price, strike price, time until expiration, and risk-free interest rate. Fischer Black and Myron Scholes introduced the Black-Scholes model in 1973 and were awarded the 1997 Nobel Prize in Economics for their efforts.
The bottom line is that if you have an opinion about stock direction, you can structure an option trade to profit if you’re right.
Now, if I were to tell you that using the Black-Scholes model we could structure an options trade that would double in value if the underlying stock moved only 2%, would you be interested?
Of course, you would!
I do it all the time with a scanner that scours hundreds of option trades and finds the ones that will double with the smallest move in the stock. At the heart of the scanner is the Black-Scholes model.
I call it the “Double Finder” scanner.
On July 19, 2021, I had a bullish prognosis on the Select SPDR S&P 500 ETF (NYSE: SPY).
Double Finder revealed that if I were to buy a SPY Aug 6, 2021 $430 Call, the call would double with a mere 1.96% move up in the stock.
With the SPYs trading at $425.11, this meant that the stock would only have to rise to $433.44 to double my money.
Two days later, the SPYs rose 2.1% to $434.52 leaving the SPY Aug 6, 2021 $430 Calls worth $8.02, a nice 112.7% return.
Welcome to the power of options. Welcome to the power of the Black-Scholes model.
Now, doubling your money with a 2% move in the stock is all well and good.
You still need to have a directional prognosis on the stock before buying any call option.
I have many systems that do a great job of predicting direction. Be sure that you use your own systems to find stocks that are moving either up or down.
If you don’t have my Double Finder, here are some basic rules that will get you close to the best double:
- Use shorter term options (15-30 days).
- Buy 1-3 Strikes Out-of-the-Money (OTM)
- OTM Calls: Strike > Stock Price
- OTM Puts: Strike < Stock Price
I’ve run Double Finder to find the best doubles for the most bullish stocks of the week and here they are:
Notice all of them double with no more than a 2.05% move up in the stock.
Of course, do your homework and only take a trade if you are bullish on the stock.