|Assess the likely direction of stock movement.|
Much has been written about predicting the stock market. Investment professionals, news services, financial publications, brokerages, and financial web sites abound with strategies, tips, and resources that will lead you to success in the stock market.
Why is Optionistics any different? At Optionistics, we don't try to steer you into believing a stock will move in a certain direction with obscure interpretations of the latest chart or by tailoring news to tout a stock's merits. Nor do we promote a single strategy that will work until it doesn't. Instead, we follow the money. At Optionistics, the options market is examined to see where the bulk of traders are putting their money.
We start by looking at a stock's volume and option volume to determine if there is unusual activity. Unusual changes in volume and open interest are strong precursors to movement in a stock price. Relatively expensive options also precede a change in stock movement, and also indicate how much as stock is likely to move.
Next the options market is examined to determine where the sentiment lies. Are calls being bought or sold? The Volatility Skew chart shows the volume and relative volatility of option trades for each stock, which indicates whether calls and puts are being bought or sold and at which strike prices. This is an invaluable tool for assessing where the bulk of option traders are putting their money.
The Strike Pegger shows the point where the writer of option contracts stands to lose the least amount of money, and can be helpful in projecting target stock prices, especially around expiration when professional market makers are forced to adjust their hedges for the next expiration.
Strong signals of impending price movement often correspond to a significant anticipated event. Earnings reports, litigation settlement, FDA approvals, management changes, or other significant events will drive up option prices. Supplement the information at Optionistics with your own independent research. Try to discount the biases of paid news stories, analysts recommendations, or the talking heads, and focus on tangible information, like specific dates of upcoming events.
Once the likely direction and magnitude of a stock move has been made, the resources available at Optionistics can be used to pick the best trade.
After identifying the likely direction, go to Step 3: Find the Best Trade.