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How to Predict a Stock Move

Yo Pit Crazies,

 

While I did not predict Friday’s move in S&P 500 (Ticker: SPX) and Invesco QQQ Trust Series 1 (Ticker: QQQ), I was ready for it.

 

The options market does a fair job of predicting how that works.

 

What I look at is the expected move. I have tools like Option Pit Edge Hunter and the LiveVol analysis suite to help me, but I will talk about how that works just looking at the straddle, as well.

 

Below I have a snap from the Edge Hunter vol buy sell (VBS) for Vale SA (Ticker: VALE), a Brazilian mining company …

 

The VBS shows the upside of the range at $23.88 and the downside at $20.28. There are 21 days to expiration, including 15 trading days. 

 

With the Jun18 22 calls only $1.12 and Jun18 20 puts at .30, I think that sets up a cheap strangle well within the expected range to be profitable. If I get my expected move, I should at least double my money ,,,

 

So, trade on!

 

I want to lean long, as I expect VALE to go up, so I accept less on the downside gains to 20.28. The reason i say this is i am using the put here as a stop.  So instead of using a dollar stop on VALE i just use the put to control losses on my calls for a period of time.  At that level I estimate I will barely break even. I don’t want to lose a lot if I am really wrong for three weeks and i want to stay in since that is the time frame i established in my range calculation..

 

That is how I set up the trade: It has to pay if the outlook is correct — but incur minimal cost if wrong.

 

This is how I think about any trade:

 

      • I have an outlook on stock
      • I measure the expected move
      • I price out the trade to see if it will pay enough for the risk dollars

 

Green Light goes if the trade ideas fires on all three or Red Light  if I have to go back to the drawing board since 1 part is amiss. 

 

This is a technique anyone who is in the Trading Legion can learn.

 

The Rundown

Trading Legion:
The Trading Legion is an intermediate-level education and a long strangle trading vehicle. The goal is to teach students the best times to buy options.

I am going to cover the Married Put in the Trading Legion this week.  A married put is one long   put for every long 100 shares of stock owned.  The put serves as an effective stop for the shares dropping in price too much.

Pro Trading Room:
This is Option Pit’s live access to Mark and myself during trading hours. Our Pro students post trade ideas with Mark and me all during the trading session.

We are going to do a deep dive to measure expected ranges and how best to use the Edge Hunter sheets to make buy and sell decisions.

Sharp Bets:
Mark Sebastian runs our marquee long option strategy. SB specializes in low-implied volatility calls and puts and managing trade size for a risk-adjusted portfolio of options. 

Nike (Ticker: NKE), Nordstrom (Ticker: JWN) and Coca-Cola (Ticker: KO) have a shot at getting back to even this May21 expiration.  Big week here.

The Power Income Portfolio:
Frank Gregory and I run a portfolio approach to trading options with stocks that have good long-term prospects based on Frank’s K-Street knowledge and my option expertise.

The Power Moves Portfolio Starting Lineup
Taiwan Semiconductor (TSM) had a crazy move well over the daily expected move on Friday. I closed the short TSM May21 120 call and rolled up and sold to the TSM May21 123 call.

Here is the early Starting Lineup for the  Power Income Portfolio.21.5s.

PLTR has not recovered and I took delivery on 200 shares. I am hedged with the PLTR May21 21.5 put and will start a buy write after the 21st if I don’t get a lift in the stock.

I did not sell the other QQQ Jun18 315/330 after seeing the trade up 60% on Tuesday afternoon. Just a 10% gain total now.

Volatility Edge/Volatility Trading Club:

Mark will discuss the recent move to a Yellow Light and the parts that made up the decision.

I will cover VXX Decay for the VTC and the Jun cycle in VIX

Remember, a lot of vol strategies I use are market neutral. That means if SPX or VIX go up or down, the positions still make money. This is a technique you can learn in the Volatility Trading Club and Volatility Edge!

Robinhood Trader:
Option Pit CEO Mark Sebastian uses the Robinhood Radar to find order flow in active names.

Mark will cover the calendar spreads in the Turbo Trade this week.

Like what you’re seeing? Have more questions? Drop a comment below!

To Your Trading Success,

 

AG

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