By: Tom Gentile
on April 27th, 2023
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.
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.
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.
App: Toms Option Tools
Toms Option Tools scan the markets for bullish and bearish trade opportunities using our proprietary scans and strategy algorithms. TTR Darknet finds bullish entries based on triple stack channel collisions. Money Calendar identifies seasonal patterns with at least 90% accuracy looking back 10 years. Weekly Cash Clock finds short term opportunities that last a week on average. Microcurrency Trader applies Darknet technology and moving averages to cryptocurrencies. Velocity Trader utilizes volume spike and Velocity indicators on custom stock lists. Quantum Scripts scans the markets for momentum acceleration signals and employs Quantum noise filters. Optimal Trader finds directional pre-earnings opportunities that are optimized for entry date, stock movement, and volatility surge. My Trades tracks the profit/loss of your trades, displays stock charts and risk graphs, creates new trades, and edits existing trades. Morning Report provides top 10 option rankings in 6 categories each day.
Stock and options trading has large potential rewards, but also large potential risk.
You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.
This is neither an offer to buy/sell/ or recommend a particular stock or option.
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.
No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
Disclaimer of Warranties and Liabilities Tom Gentile and TomsTradingRoom, LLC including employees, consultants, and editors (“Publisher”) cannot and do not warrant the completeness or accuracy of the content found in our areas, or its usefulness for any particular purpose.
Tom Gentile and TomsTradingRoom, LLC also make no promises that our content or the service itself will be delivered to you uninterrupted, timely, secure, or error-free. Under no circumstances will Tom Gentile and TomsTradingRoom, LLC be liable for direct, indirect, incidental, or any other type of damages resulting from your use or downloading of any content on our site.
This includes, but is in no way limited to, loss or injury caused in whole or in part by our negligence or by anything beyond our control in creating or delivering any portion of Tom Gentile and TomsTradingRoom, LLC.
You are agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that Tom Gentile and TomsTradingRoom, LLC will not be liable for any I, investment decision made, or action taken by you, or others based upon reliance on news, information, or any other material published by Tom Gentile and TomsTradingRoom, LLC.
Tom Gentile and TomsTradingRoom, LLC relies on various sources of information that we believe to be accurate and reliable. However, we make no claims or representations as to the accuracy, completeness, or truth of any material contained on our site.
Tom Gentile and TomsTradingRoom, LLC are educational portals, providing content for educational and informational purposes only. Neither Tom Gentile nor TomsTradingRoom, LLC are a broker/dealer. Investors need a broker to trade stocks and options and must meet certain requirements. All securities, futures, and investments data and ideas are offered to self-directed investors. All prices in USD unless noted otherwise.
A full disclaimer can be found here: http://www.tomgentile.com/legal_disclaimers.html.