How to Use the "Greeks" to Predict Option Prices

How to predict an option

If you've traded options before, you've probably heard someone mention the "Greeks. Fortunately that's all done automatically by your brokerage. But, understanding how these calculations effect the price of an option can be infinitely useful in understanding what makes an option tick… and where it could be headed next.

Click here to get them now. We have an expectation that the stock will move, but to set up the trade, first, we need to fill in a few more details.

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In particular, we want a forecast that answers two questions: How much could the stock price rise or fall? What is the time frame for that expected rise or fall?

By Justin Kuepper Updated Apr 3, The famous physicist Niels Bohr once said that "prediction is very difficult, especially about the future. Oftentimes, these tools are derivative financial instruments that can help provide an aggregate picture of future market sentiment - tools like options. Such predictions can be particularly useful for active traders during earnings season when stock prices are most volatile. During these times, many traders and investors use options to either place bullish bets that lever their positions or hedge their existing positions against potential downside.

To answers these two questions, we can forecast the expected move of the stock. The expected move is a specific prediction that the stock price could rise or fall a certain number of dollars within a certain number of days.

Having this expected move will help to create a trade with a higher probability of success. Increasing probabilities are at the core of all successful trading and trading is a business of probabilities.

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  • We all know options are derivatives, and their prices are derived from the underlying stock, index, or ETF.
  • Options market data can provide meaningful insights on the price movements of the underlying security.
  • Use Options Data To Predict Stock Market Direction

The answers to these questions will guide us in creating our plan of action for the trade. Once which option trading strategy is safe have a specific prediction for the expected move of the stock, we can choose our profit stops and stop loss for the trade setup.

Some are more obvious than others, as press releases can put the spotlight on certain stocks and impact shares before or after the market is open. Of course, news is also released during the day. But unless you are glued to a screen and have a quick-trigger finger, you will most likely miss out on any significant moves the news creates.

The Options Technique There are a few ways to go about finding answers to these two questions to help predict the stock price move and time frame. One approach is to use Fibonacci levels.

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Another good way, the one we discuss in this article, is to use options data. The advantage of this technique is that it is quick and easy to apply.

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NVDA as a stock with good potential for making a price move upward in the near future. For how to predict an option purposes of this demonstration, today is March Now we want to move ahead and set up a trade on this stock. Here is how it looks on the ThinkorSwim platform: Down the left, we see the list of expiration dates for the options in the series.

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For example, we see March 15, which is 1 day away; March 22, which is 8 days away; March 29, which is 15 days away; and so on down the list. Off to the right on the option chain screen, the number in parentheses is the straddle cost associated with that option.

For example, the third line down outlined in yellow corresponds to the March 29 option 15 days away. The close alignment of these two values is a good sign that our price expectation is a realistic one.

Use Options Data To Predict Stock Market Direction

The 2 Crucial Answers to Help Predict Stock Prices So, using the options technique, we have found the answers we needed to the two crucial questions mentioned at the beginning of the article.

This will be our basis for setting profit stops and a stop loss for the trade, and we will then have a sound plan of action and can proceed with the trade.

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