/biz/ - Business & Finance

Pro tip for the newbs: if you want to know where the market thinks a stock's price is likely to be in the future, pull up the options chain and look for the expiration date you want to see the expected price for. Find the at the money call then double the premium you see there. Add that number to the current price and that is where the market thinks your stock will be at that time if the market goes up. Do the same but substitute the put ATM for where the market thinks there's a 50% chance the price will be should it go down.
Example: TQQQ currently trades at $139.35. The ATM call premium for Oct 16th is $16. Double that for $32. This is the arithmetic for using volatility to deduce the market thinks TQQQ has a 50% chance of reaching $139.35 + $32 or $171.35 on Oct. 16th.
If you pull up Tradingview and look at where the trajectory of the price is you'll see that $171.35 makes a lot of sense for that date. Of course a strongly trending security like TQQQ is not that hard to eyeball. Fortunately the trick also works well for stuff like, oh I don't know, GSX. Test it and see.
So, what is this good for? One thing is when you are opening bull call spreads, make sure the strike price of the short leg isn't higher than where the market realistically expects the price to go. That way you don't give away profit or short yourself on premium.