Assess a Stocks Future Potential Price Move Based on Options Pricing

Tom Gentile

Posted in
Education

By: Tom Gentile
April 27th, 2023

4 mins read

Today’s education is on how to anticipate a potential future price move for a stock or ETF based on the pricing of that security’s option pricing.

Many times, people use fundamental analysis projections to assess a percentage number a stock’s price may appreciate.  The fundamental analysis is more often than not used for long-term price projections for a security, say for 6-months to a year out or longer.

Some folks use technical analysis.  They look at charts and various indicators and or oscillators to project a potential future price move for an underlying say less than 6 months out.

If on does not have the time or they don’t want to take the time to pore over a security’s financials or let’s say they don’t feel strong in their technical analysis prowess or they don’t want to spend a bunch of time going through chart after chart or don’t even know which indicator / oscillator to choose from there is a way to gauge where a future price of an underlying security may be in the short-term.

Look at an Options Chain

One can look at the options chain for the underlying they are researching.

The price on the call and put options are to be used in one’s analysis.

I typically look at the current and or next month out option expiration.

It may not be known which direction the security will trade, higher or lower, but the anticipated amount of the price move is something that can be derived.

To see where or how much the price may move take the near money / At the Money (ATM) strike price for both the call and the put, add them together and that is what the options traders / market makers are seeing as how much the security may move.

Apple, Inc. (NASDAQ: AAPL) Options for May Expiration

AAPL has earnings coming on May 4.  I will look at the third Friday of the month options expiration options, which is May 19.

The price of AAPL at the time of this writing was $168.30.

The near or ATM options are the ones whose strike price is closest to the stock price (whether it be technically in or out of the money).

That would be the $167.50 strike prices.

Add the two together and that can be one’s anticipated price move for the stock.

Here are the images of both the calls and the puts with a May 19 expiration.

Call: AAPL May 19, 2023, $167.50 Call
Call: AAPL May 19, 2023, $167.50 Call
Put:  AAPL May 19, 2023, $167.50
Put: AAPL May 19, 2023, $167.50

The price circled is the ‘ask’ price.  Typically, what one pays to buy the option.  One can try and work the spread and buy at a price in between the bid and ask price or even ask for a cheaper price than that.

For the sake of emphasizing the educational point of this article we will just use the ‘ask’ prices.

The sum of both options is $9.35.

This is not determining whether AAPL will trade higher or lower, but it does show whichever way it trades the options traders are anticipating a 9.35-point move.

Straddle

If one is not comfortable picking a direction which then leads them to picking which of the two types of options to trade, the call or the put, one can opt to trading what’s called a straddle.

The concern with a straddle is it is paying for both, which adds to the cost of the options trade.

It may be deemed less risky to pay for both since one can lose all of their money choosing one and the stock goes the opposite direction, but one will be paying up for that deemed security.

If one believes the security will be able to make that combined price amount move and more then a straddle may be a good way to go.

It is as always, best to discuss any option trade with your broker before making one’s decision.

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