Probability is a very important concept when it comes to options trading or investing. It is a measure of the likelihood of an event occurring. In terms of options trading, it is either a winning or losing trade that traders are concerned about. The basic idea is to increase the probability of a trade turning a profit. This is a general checklist that an options trader can use to make trades that have a high likelihood of turning a profit.
This is a general checklist of what a trader should look out for to increase the winning percentage of trades.
State of the economy
The trader should understand the state of the economy and look at factors that determine the general direction of the stock market and the bond market. The trader should analyse indicators such as the CPI, PPI, interest rates, unemployment figures and retail sales to forecast the direction of the stock market. Please read [Find Out How Options Trader Can Identify Factors That Affect The Direction Of The Market]
For example, in a period of decreasing interest rates, the stock markets will generally rise.
Sales revenue
With all things being kept constant, when the sales revenue of a company increases, a higher net income may be reported.
Earnings growth
It is no secret that earnings growth is a major determinant in causing the price of a stock to increase. For example, if a company had a PE multiple of 15 and had a $2 per share earnings, the stock will trade at $30. Assuming earnings grew by 25%, the earnings per share would become $2.50. With the same PE multiple applied to the stock, the stock will trade at $37.50. Hence earnings growth is a determinant of price moves to the upside.
Dividend hike
A company that is experiencing earnings growth may announce a dividend hike. An options trader that is forward looking may choose to buy a long term call option in expectation of an increased dividends. Because the markets generally love dividends, increased dividends paid out per share generally have a positive effect on the stock price.
Technical analysis
The charts may paint a bullish or a bearish picture of a stock. Technical analysts may study charts to determine buy or sell decisions.
Release of a new product
If a company releases a new product and the market perceives it to be a positive on the earnings of the company, the price of the stock will increase significantly.
Insider actions
Insiders may sell shares in the company for a variety of reasons. They may be selling stock to raise money to buy that dream home or that dream car. However, when insiders buy the stock of the company they are involved in, they are generally bullish about the company for no insider would want to lose money on an investment. Of course, there are always exceptions to this. A trader can studying the actions of insiders within the company, a trader should analyse the insider purchases and sales of the C-level officers such as CEO, CFO, COO and CTO.
Commodities prices
Reduced commodity prices may affect the stock prices of companies that trade them. For example, reduced crude oil prices have drastically affected the stock prices of oil producers such as BP and Shell.
Reduced cost of raw materials
If a company such as Coca Cola uses sugar as its raw materials, the net profit should rise in general. In general, with all things being equal, lower expenses of raw materials will lead to increased profits.
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