TipSheet #10 - Optimized Long Option Finder...
PowerOptions has long offered its subscribers the capability to search, track, and analyze Long (Buy) Option opportunities. Now we have a new, powerful tool on the PowerOptions site that helps investors optimize their Long Option returns for any optionable stock.
Speculating with Long Calls or Long Puts can be very rewarding but complicated. What strike price should an investor pick? Is it better to buy a call At-the-Money? Is it worth it to pay a higher premium to go deeper In-The-Money and have a higher probability of profit? Is it worth it to buy Out-of-the-Money and try to hit the big gain and have a lower probability of profit? The answers to these questions all depend on one factor: The investor's estimate of the stock price at some point in time.
Although PowerOptions cannot predict future stock price movements, we can do the next best thing. Based on your projection of where the stock will be over time and the total amount you wish to invest, the new Optimizer tool will calculate the potential returns for the different strike prices across several months. This will help you quickly choose which Long (buy) Option opportunity will yield the greatest return.
Let's start by simply entering in a stock symbol into the required field and clicking the submit button. The Optimizer will now display the return results for the profitable Long (buy) Call opportunities. The other fields will automatically be filled in for you as mentioned above. The results table will have the potential trades sorted by % Return from highest to lowest. The strike price with the highest calculated return based on the expected stock price and investment amount will be highlighted at the top of the list.
Once the list appears, you can now go back and enter in your own projected stock price, a different investment amount, a different target date and a different volatility (SIV) to adjust the expected price of the options at the target date. The Optimizer will now compute the returns using the new numbers. The option that has the highest calculated return based on your estimated numbers will be highlighted.
Sample Long Option Finder Tool Results
At this point the Put buyers might be asking, "Hey, what about us?" Well, we haven't forgotten you. If you enter in an estimated target price that is currently above the stock price naturally it would not be profitable to purchase a Put. However, if you enter in an estimated stock price that is below the current trading price, only Long (Buy) Put opportunities will come up in the results table. Just like the calls, the Put with the highest calculated return based on your target stock price and investment amount will be highlighted at the top of the list.
The default settings are NOT a forecast or projection. They are merely pre-set values to get the program started. The strike price highlighted at the top of the list should NOT be taken as a recommendation of which option to purchase. It is merely the option with the highest return based on the estimated stock price, investment value and time horizon. If the highest return is the most important criteria for you, then you may consider it the best option to purchase.
How the returns are calculated...
The calculated returns on the Optimized Long Option Finder are based on the position cost and the estimated value of the position at the selected target date. You might notice that the different strike prices listed on the table show a different # of contracts for each trade. The # of contracts that you can purchase on each strike is based on the investment amount and the current ask price of that particular option. If we plan to invest $5,000 we could buy 10 contracts of an option with an ask price of $5.00, or we could purchase 100 contracts of a strike with an ask price of $0.50. In both cases, we only invest $5,000.
For options that would naturally expire on the target date selected, the estimated price is equal to the intrinsic value that the option would retain at expiration. The intrinsic value times the number of contracts (times 100 shares per contract) gives us the estimated value at expiration. The estimated value at expiration minus the original position cost divided by the position cost is the % Return.
% Return = (Estimated Value - Original Position Cost) / (Original Position Cost)
Using a certain stock symbol and using the defaults estimating an increase of 10% and an initial investment amount of $5,000 we see the Optimized Return:
Detailed returns from the Long Option Finder Tool
The % Return of 101.2% was calculated as:
% Return = (Estimated Value - Original Position Cost) / (Original Position Cost)
% Return = ($9,747.00 - $4,845.00) / ($4,845.00)
% Return = ($4,902.00) / ($4,845.00)
% Return = 101.2%
For the positions in the list that are further out in time from the selected target date, the estimated price is calculated using the Black-Scholes pricing model. This gives a theoretical price of the option based on the intrinsic value plus any remaining time value. You can check the estimated price of the longer-term options by using the Black-Scholes theoretical calculator on PowerOptions and adjusting the numbers to match your speculated stock price and target date.
The Volatility (SIV) will have an important effect on the estimated price of the option. As the volatility (SIV) increases, the risk related part of the option price will increase and the estimated bid price will become inflated. The inflated estimated price will naturally yield a higher % return on the Long Option investment. If you think that the SIV value is higher than it should be, simply adjust the value that is listed in the SIV parameter field. You can use the implied volatility numbers in the Optimizer results table to compare the value of the SIV. If the SIV is several points higher than the listed implied volatilities for either the calls or the puts, you may want to recalculate the estimated bid prices using a lower SIV. Likewise, if you notice that the calculated SIV is several points lower than the implied volatilities on the listed options you may want to increase the SIV and recalculate the returns. By setting the SIV to the implied volatility for a particular option you can test the sensitivity of return based on a change in the volatility (SIV). Take some time to adjust the volatility settings and note how the bid prices and returns are affected.
You have been tracking a certain stock. You think it is going up and you would like to purchase a call (or, you think it is going to drop and you would like to purchase a put). You enter the symbol into the Optimizer and you view potential returns based on the default values. But now you want to research the history of the stock, when the earnings are coming out, you would like to look at the cash flow and balance sheet as well as other fundamentals to determine where the stock might go. As with any other search or analysis tool on the PowerOptions site, you can do this research with one click ease form the tool.
In the header of the Optimizer tool, the stock symbol and current price are shown. You will also notice the More Information button (little blue button) next to the stock symbol. The More Information button will link you directly to the stock chart for this company. You can choose to view the 1 Year Snapshot or link directly to Big Charts. Looking at the past stock performance will help you determine support or resistance levels. This can help you determine an estimated price for the underlying security. You can also select to view Company Info that will link you to news, estimates, insiders and earnings events for the company you are researching. This can help you avoid or target a specific month based on future events. The Research link on the More Information menu will display the detailed stock fundamentals and data from the PowerOptions Research tool.
There are also More Information buttons next to each one of the option positions listed in the results table. The More Information buttons next to the option symbols will link you directly to the PowerOptions OptionChain, the Detailed Research tool for that specific option, the Profit and Loss graph for that particular trade and a link to the Profit / Loss Position Portfolio tool so you can easily add the position into the portfolio fro tracking. These links will help you research the specific options listed or perhaps find other possible trades that may be further out in time than those shown on the Optimizer results.
Using the More Information buttons can help an investor strategically select a target price for the stock and a time frame for that estimated price.
The Optimized Long Option Finder is a powerful tool that will help any investor quickly find the most profitable option buy for a stock based on: investment amount, time frame, and estimated price. This can eliminate the need for an investor to continuously punch numbers into a calculator and waste valuable time trying to determine possible returns for long options.
The Optimized Long Term Stock Options Finder is not an advisory tool. PowerOptions does not advise investors regarding which long term stock picks or long term stock options to buy or sell. This is simply a tool that can point out possible calculated returns based on a specific company that an investor chooses and the investor's projection of a future stock price. You should not enter any position without doing your own research or consulting with a professional. Long term stock options involve risk and are not suitable for all investors.