My Power Options system identifies the best candidates for option trading or short-term stock trading, and this week it’s showing two breakout buys in the tech sector. These names are both volatile and liquid, two important characteristics of profitable options trading.
Those two names are Honeywell (NYSE:HON) and NCR Corporation (NYSE:NCR). Based on my proprietary Power Stocks system that uses multiple regression analysis and other statistical tools to unearth stocks that are building momentum, these stocks are poised to make a quick burst. Either merits a buy on strength.
But NCR is a special case. Not only is it jumping up to new highs, but it has confirmed its upward trend after a temporary pullback. Such a bounceback is one of the most reliable buy signals. But with options trading just over a dollar, I don’t see the need to tie up so much capital.
Recommendation: Buy NCR Apr. 29 Call options at $1.10 or lower, when the stock price is around $27.60. After entry, take profits if the stock price hits $29.60 or the option price reaches $2.10. Exit if the stock price closes below $26.60 or the option price falls to 80 cents.
This trade has a 22% chance of reaching the $2.10 profit goal. At first glance that might seem low. However, 20% is about average for low-cost options such as these. Plus, we calculate the probability that the option will hit its target price; the probability of returning a smaller profit is higher.
Also, our computers calculate probabilities assuming a random market. That means there is a 50% chance that stocks will rise over the next three weeks, and a 50% chance that stocks will fall. The listed number is the average probability. So a call option with a 20% probability really has a 40% probability in a bull market, and a zero percent chance in a bear market. The opposite is true for a put option. It has twice the probability of reaching its target price in a bear market, and a zero percent chance in a bull market.
Of course, there are options with higher probabilities available, but those options cost considerably more to buy, and that higher cost raises your risk if the stock does not do as we expect. Paying as little as possible when you buy options is one of the best ways to keep risk low.
InvestorPlace advisor Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990. Try Maximum Options today for 2 months for only $99.