One of my favorite trades is my LottoX 10x setups.
These high risk/high reward setups offer me a chance at options returns of nearly 1,000% sometimes.
So you can see why I like them*
*See disclaimer below
But without knowing how to read the expected move priced into the options market, I couldn’t make these happen
I want to show you how to determine the expected move from an options chain.
How cool would it be to be able to look at an options chain and say “Aha! Traders are pricing in a 13% move for earnings on this stock.”
Pretty soon, you’ll be able to find opportunities of your own that you never thought possible.
While most of you have seen an option chain, bear with me for a moment while I explain it for those who aren’t as familiar.
An option chain shows you all the option contracts available by strike price and expiration for a stock.
Here’s a quick look at an option chain.
In this Stitch Fix (SFIX) option chain, you can see the dates of each expiration down the lefthand side.
When you expand that section, you see the various strike prices available. The same strikes will exist for both calls and puts. The distance between strikes depends on the stock.
Up at the top, you’ll notice that the stock’s price.
The option prices will often be quoted as the midpoint between the bid and the ask for each option contract.
Depending on how often that stock trades, the spread between the two can be wider or narrower. The more often a stock and the options trade (liquidity), the tighter the spread.
Tighter spreads improve your chances of obtaining better prices for the option contracts.
So now that you’ve got the basics, let’s move on to the implied move calculations.
Calculating implied move
The implied move for a stock will be different for each expiration. In general, the farther out in time you go, the higher the implied move.
Option sellers expect with more time, a stock has greater odds of getting to farther out strikes.
To determine the implied move of a stock, you need to figure out the price of an option straddle.
An option straddle is the simultaneous selling of a put and call at the same strike price that corresponds with the current stock price (at-the-money).
This dollar amount is the expected move priced in by options traders for that expiration.
Let’s use Stich Fix again as our example.
The current price of the stock is $28.13. That roughly matches the strike price of $28 (it doesn’t need to be exact in most cases).
At the bottom, you can see that by selling the SFIX October 23rd $28 put and call, I would receive $3.45.
This is saying the option market believes that shares of SFIX will stay within $3.45 of the current price by October 23rd 68% of the time.
Note: The 68% comes from one standard deviation. It’s a statistical term used to measure distribution. You don’t need to remember much more than implied moves always measure one standard deviation, and one standard deviation means the average will land in the range 68% of the time.
Turning this into trades
Knowing how to read the implied move is great and all, but how can we turn it into trade ideas?
For starters, you can use the weekly options right before earnings on a stock to see where the market expects the stock to trade.
For example, if Apple is about to report earnings, the expected move based on the options chain that expires on Friday may come out to $5.
Here’s the cool part.
You can look at historical moves for that stock based on earnings and see how they stack up.
Quite often you’ll find that the options market overstates the actual move. That means the implied move is generally higher than the actual move.
Sometimes the opposite happens. Every so often the market may expect a move of 5% and the stock shoots up 15%.
That’s where my favorite LottoX 10x setup comes in.
I know option market makers sold some out-of-the-money call options that they didn’t expect to hit. So, they only hedged a little bit.
When they wake up like the rest of us and see the stock shooting higher, they have to cover their butts and buying up the stock.
This is an oversimplified description of how this trade works.
That’s why I lay out my trading plan for these and other trades before the market opens each day for LottoX members.
Not only that, they get real-time trade alerts and live access to my portfolio.
I want to teach you not just how to pick out setups but create a sustainable trading plan.
*Results presented are not typical and may vary from person to person. Please see our Testimonials Disclaimer here: https://ragingbull.com/disclaimer