Best Choice Software

Option Projections

To view this screen, click on this button on the upper toolbar.

This screen is only available for long term charts, and it allows you to view the future projections for the stock price, earnings, and put and call option prices. If you have not gone through our Options tutorial, we highly recommend you click here and do so first before continuing this help file.

Overview

The stock below is called Omnivision Technologies (OVTI). This currently is a great company and its stock is growing at an incredible 300% compounded annually in both price and earnings. The yellow and green lines (price and earnings) are projected into the future. If the earnings continue to grow at this rate, then so should the stock price, which means in this case a minimum of $1,600. Obviously as the stock price continues to increase, the stock price will most likely split along the way, so our projection of $1,600 for simplicities sake will be un-split adjusted.

The light blue lines are the call option prices plotted for each contract month into the future. The magenta lines are the put option prices. The centerline is the at the money strike price, the upper line is the nearest out of the money strike and the lower line is the nearest in the money strike. Technically, the little squares are the strike price plus the premium for the options at different expiration dates. The light blue lines represent what you would pay if you wanted to take delivery of a stock from an option purchase.

Plotting the option prices on our charts show where the options prices project the price of the stock to be in one and two years. An option price (premium) is based upon five different pieces of information. Volatility, interest rates, current stock price, option strike, and number of days till expiration. Notice that the option prices do not take into account the growth rate of the stock.

When it comes to trying to predict where a stock price might go, what two variables of an option price do you think would be the best? The current stock price and the volatility. If you start with the current stock price, and factor in the average volatility of the last x days, that would give you a good idea of where the stock price could go, either up or down. That is how options are priced. This is where we have an advantage, because we know something that the prices of the options don't. The growth rate of the earnings and the stock.

Going back to our chart, the yellow lines show where the expected price path will be. Also notice that the option price do not reflect this. They can't. All they can reflect is the current stock price and its average volatility. So if we have a good reason (and we do) that the stock could be much higher in the next two years, buying a current leap call option would allow us to lock in a price of around $70. Even if the stock only went half way to $800 in the next two years, that is over a 1,000 percent gain. The idea is to find stocks with good earnings growth rates. You will see this picture over and over again on these types of stocks, because the option prices do not take into account the growth rate of the stock.

You want to see where you have the greatest divergence between where the option projection lines are and the price projection lines for the stock. That is the most important factor. Remember, this is only for a longer term view of a stock. It is not a short-term oriented view because we are taking into account the earnings and stock growth rate over a year or more.

The idea behind any trade that you make should include risk versus reward. The stock market is a game just like any other game, albiet a large one at that. Odds very much come into play, and you want to put as much of the odds in your favor as possible. That is what we show you on our option projection charts. In the case of OTVI in the chart above, we show you want you want to look for. In this case, we are putting the odds in our favor by finding stocks that have a high growth potential that is not being reflected in the option prices. Very small risk, versus very high reward. This is what you want to do, over and over.

Now that we have shown you what a great trading opportunity looks like, we want to show what what a bad trading opportunity looks like. Below is a projection chart for HCA.

Notice the option projections are around the same area as the earnings and the stock projected prices. There is no advantage here. This is the type of stock to stay away from.

Options Prices

Many options are very thinly traded and the last trade may have been days ago and does not reflect the current market. You should always rely upon the data from your broker for actual trading. But to view 20 minute delayed option chains for any stock, click on the option chain button in the upper toolbar next to the option projection buttons. Click here for more information.