Using measured move targets to trade catalyst events can be profitable, but there are other applications for them as well. For example, if you trade income strategies you can use the measured move targets to decide which strikes to sell. Selling strikes outside of the upside and downside targets can increase the probability of success greatly.
With securities that have weekly options, you can calculate the measured move targets in every expiration and set up strategies accordingly. Volatility traders also can use the straddles in different expirations to draw conclusions about what market expectations are in each of those expirations. For example, in weekly options the week that contains a major market-moving event always will have a higher implied move than one that does not. Some traders might find the differences in these implied moves to be too wide or too tight and can set up a trade accordingly.
Traders who only trade in the underlying also can use the measured move targets for setting stop losses and profit targets. The number of applications for measured move targets are significant. Knowing what these levels are can be useful information for all traders.
There are dozens of indicators that can be used to project price targets for a given security. None of these indicators works as well as using the options market to calculate measured move targets. Technical indicators use historical price action and many are open to interpretation. Using the at-the-money straddle to calculate price targets is much more accurate because it is the truest representation of real-time market expectations.
Andrew Keene was an independent equity options trader on the Chicago Board Options Exchange for 11 years. During that time, he was a market maker in more than 125 stocks including Apple, General Electric, Goldman Sachs and Yahoo. His is author of “Keene On The Market: Trade to Win Using Unusual Options Activity, Volatility and Earnings” (John Wiley & Sons). Email him at Andrew@KeeneOnTheMarket.com.