Using expected ranges

A Tuesday Trade Edition: One of the most important concepts in trading is to review your work, and learn from the good and the bad. It’s critical to identify what’s working — to do more of it. Each week, you’ll get a trade from my trading journal, in which I explain my whole thought process from start to finish. Trading is all about finding something that works, and applying it, over and over again. That’s how you find trading success. So study up on this “Tuesday Trade” and let’s get to work.

For today’s Tuesday trade example, I wanted to talk about Nike (NKE) and how I used expected ranges to set up a trade. But first, lets talk about how to find expected ranges.

How do we find expected ranges?

When finding expected ranges, I like to consider three key numbers:

1. The market maker move (MMM)

2. The implied volatility

3. The implied move into the end of the week

After considering these three numbers, I average them out and think of it as an overlap for a target.

Now let’s use expected ranges to take a trade in Nike…

On the day of Nike’s report, I saw that the MMM was sitting at 6.71 but the expected move by the end of the week was at 7.36. This told me that the MMM move was going to be slightly smaller than the implied move over the course of the week.

I then switched over to my Hot Zone grid and saw that NKE was trading at $143. I added and subtracted the MMM of $6.71 to that, to find my range which was between $136 and $149 per share. 

Now that I had my target range in mind, I moved to the options chain. I saw that there was really high open interest at the 140 strike, both on the calls and on the puts, with high-short interest also sitting at 145 and 150.

These areas of high open interests tend to be a little bit of a magnet, so what I was trying to do was overlap those strikes with your overall analysis. I took both of those and looked back at the market maker move. From there, I decided I wanted to place an unbalanced butterfly outside of the expected move. Then, at the very minimum, if Nike did stay within this range, I would just collect the credit.

It is very important for traders to know how to find expected ranges when trading a report because it gives you a high probability of being correct. Without the MMM, implied volatility, and expected end-of-week move, trading a report would be like taking a shot in the dark.

Want to learn more about how to take advantage of quarterly gains? Join me for my free webinar on Wednesday, March 31st, at 7:00 pm Central. We will be covering setups, case studies, and more.