TRADING BLIND: Fair Market Value & Probability

80% of option buyers lose on their positions every time they go long on a contract. This
is a staggering and accurate statistic. We will show you how to trade like the other 20%.

There are two common mistakes that traders make consistently that cause them to lose on
their positions. These mistakes must be identified and corrected before a trader can start
making money in the options market.

The first mistake is that they are buying options with premiums that are overvalued.
What this means is that even if you are correct about the direction of the underlying stock,
you may still lose on that option before expiration because the premium was overvalued
when you bought it. It is very common to have overvalued option premiums in the
market and most people are trading blind not even knowing what the fair market value of
the premium should be. Once you can determine what the fair market value is, then it's
very simple to compare that to the current premium to see if it's at fair value, under or
over valued.

The second mistake is not determining if the underlying stock has enough potential to
move “in the money” prior to expiration to make a profit on the option. Remember, you
may be right about the direction of the stock, but if the timing is off, that option will
expire worthless and it's losing value every day the underlying stock is not moving in
your favor. The probability of the stock moving has to do with many factors including
volatility of the stock, current price, strike price of the option and time left on the
contract.

In this short tutorial, we will show you step by step how to determine fair market value of
an option and probabilities. This will improve your trading returns by huge proportions.
Also included are links to free fair market value and probability calculators that you can
use during your research to easily find the information you need.

Fair Market Value

Fair market value will show the “normal” value of a call or put when considering the
following factors:

1. Expiration date of the option

So, follow the research steps that you normally do and once you have narrowed it down to
a few trading opportunities, we will determine the fair market value. To do this quickly,
click below for a free fair market value calculator:
FAIRVALUE

Let's fill in the sections of the calculator one by one:

Type of Underlying: Stock should already be filled in. If you are calculating an index or
futures contract, simply change this value from the drop down menu.

Type of Option: American is pre-filled, just leave it.

Expiration Date: The expiration for equity options is the Saturday following the third
Friday of the month. Simply, look on the calendar for that date and that is the expiration
for the month you are trading.

Days to Expiration: This will fill in automatically once you enter the expiration date.

Option Strike Price: Fill in the strike price of the option here.

Underlying Price: Fill in the current price of the underlying stock here.

Volatility: Enter the volatility here. Do not put %, only enter numbers. Ex: 50.2 or 45,
etc.

Dividend Yield: Leave this field blank

Risk-Free Interest Rate: This field should already be pre-filled. Do not change the value.

Then, hit the GO button and underneath “Call Value” and “Put Value”, it will display
what the normal fair market value of the options should be.

Simply compare this fair market value to the current premium of that option.

Example: Let's say the expiration date on our option is 4/17/04. The option strike price
is 15 on the April Calls and the underlying price of the stock is $16. The volatility is
56.8.

When we enter the values, it calculates the following:

Call Value Put Value

So, let's say the option premium is currently at $1.20. We now have determined that the
current premium is undervalued compared to the normal fair market value by .38 or 24%.
Obviously if it was at $1.58, the premium would be at fair market value and if it was
above $1.58, it would be overvalued. We do not want to trade options at or above fair
market value.
Probability

Now, we will look at the probability of a certain stock moving enough for us to make a
profit on the options at some point in time before expiration.

The probability is determined by these factors:

1. Current price of the underlying stock

Click below for a free probability calculator:

PROBABILITY

Let's fill it out with the example from above. Current Price is $16. Future Date is
04/17/04. Volatility is 56.8. Now, to pick your price targets, you should always start out
with a 10% move in the stock price. So, in this case, our first target will be $17.60 ($16
current stock price + 10% move). Then, pick another price target further out, let's say
15% or $18.40 ($16 + 15%).

Fill in the first target of $17.60 and the Second Target of $18.40

Click the Go button.

In our example, we have a 96.5% chance of the underlying stock hitting the lowest target
of $17.60 sometime before expiration and a 76.6% of it hitting the highest target of
$18.40. So, we have a high percentage chance of this stock moving 10-15% on the
upside sometime before expiration. This much movement in the underlying stock would
give us plenty of upside return on the option.

So, this would be a good trade to make considering the option is undervalued and the
probabilities of the underlying stock moving in our favor is high. We would want the
probabilities to be at least 70% for the highest target.
If you would like to learn our option strategies that have consistently made huge returns
for over 10 years, we have our #1 Options Trading Course available.

This course will take you step by step through all the research that will narrow down
trading opportunities daily including determining the volatility of a stock used in the fair
market value and probability calculators above.

Some features of the #1 Options Trading Course include:

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