I got a text from my little brother the other day.
Now, he isn’t a stock market guy like me.
He doesn’t follow stocks. He doesn’t follow options. He didn’t even have a brokerage account until a couple weeks ago.
After seeing a few stocks explode higher, my brother — with no trading experience — just told me what the next GameStop is and which stocks to buy.
And his source was Google…
Suddenly, today, people believe they are stock market experts. But they don’t realize they’re basing their decisions on luck … and trading blind. Friends, this is not a good idea.
Good traders know it requires more than luck.
That’s why we think it is important to educate people through the Weekly Options Corner, to make sure you don’t fall into traps when you are just starting out.
Today, we’ll go over the most important part to any trade — the expected move of a stock.
What Is the “Expected Move”?
This is one of the key things to know on your journey to understanding options: how far you expect a stock to move over the course of the option.
To be simple, the “expected move” is how much you expect to see that stock’s price move.
Trust me, my little brother could see a stock jump 10% or drop 10% … and he wouldn’t know whether it was still a buy, or a trade he needed to exit.
That’s why it’s important to know the expected move of the stock before you jump in. That way you’ll know what to do next.
I mentioned last week that we would use the GameStop (GME) implied volatility as an example, because this stock is such a widely covered topic right now and its price swing was so extreme in such a short period of time.
My example was that the $100 put option — which bet that GME would fall below $100 — charged a 45% premium (the implied volatility from last week).
In other words, the stock would have to be under $55 a share, a 45% move in the stock, for you to be profitable. It would have to fall to $10 for you to double your money (a 90% drop).
Now, the stock did fall, but anyone who took that trade was essentially paying through the nose to get it.
A better way to pick trades in the options market is to make sure that the stock is expected to move at least double the premium charged for the option.
This sets you up for the potential for a triple-digit gain if you’re right. It also lets you pass on trades that are just too expensive.
That’s the minimum target for any options trade I recommend on the upside or downside.
This is where the GameStop put option didn’t make the cut.
I knew to pass on this trade. But other traders easily looked at the stock, expected it to fall and bought those put options.
The problem is they were flying blind.
Don’t Go Flying Blind
They didn’t have the options education to benefit from a move like this.
Because when they realized the stock had to fall 90% for them to have a chance at doubling their money, they didn’t give it a second thought.
See, most stocks only need to see a 5% or 10% move for the option to deliver a 100% gain or more.
Just think about it.
Let’s say you expect a stock to climb about 10% over the next two months. If the at-the-money option (when the strike price is equal to the current price) is trading at a 5% premium, then you have a shot at doubling your money if it plays out as expected. (At-the-money options are what I recommend.)
This move happens all the time.
To know the expected move, I always follow a proven strategy that is profitable over time and can weather volatile periods in the market.
One or two bad trades don’t faze me because, over time, history has shown my proven strategy will bounce back.
But without a guide, just one or two losses would land me in the same spot as everyone else.
You need something, or someone, guiding you every step of the way to show you only the best trades.
So that I don’t get sucked into trading blind myself, I use one of my favorite options trading strategies to spot mispriced stocks after they announce their quarterly earnings report.
It’s my copilot that shows me a stock’s next expected move.
I do the heavy lifting that spots these potential triple-digit opportunities (we just closed out two this week).
And I’m currently working with my colleague Charles Mizrahi to put together a special presentation that reveals all the details about it. We’ll be sharing everything later this month.
To make sure you don’t miss out, you can sign up today to be one of the first to see the details.
Chad Shoop, CMT
Editor, Quick Hit Profits