How to Maximize Your Returns with Oversold Options


Some of the best options trading opportunities can be found in wildly oversold stocks.

Look at Activision Blizzard (ATVI), for example.

options trading

ATVI gapped from a high of $91.40 to a low of $78 on fears of litigation and a potential Chinese crackdown on video games.

To me, that pullback was overkill—especially at a time when the video game industry is surging.

We could also tell ATVI was severely oversold by looking at relative strength (RSI), moving average convergence divergence (MACD) indicator, and Williams’ %R, which is calculated based on price over several periods. In fact, the last time these three indicators became as oversold as they are now, ATVI ran from a low of about $45 to a high of nearly $105.

With the latest pullback, let’s say we believe the stock could refill its bearish gap and get to around $91 from a current price of $84. If I were to buy 100 shares of ATVI at $83.75, it would cost me $8,375. Then, if ATVI ran to $91, I stand to make $725, or 9%.

However, with options, I could potentially make much more.

If I were to have picked up the ATVI September 17, 2021 82.50 call option, which last traded at $3, the cost of that one option contract would be $3 x 100 shares in the contract, which would be $300. Let’s also use that option’s current delta of $0.540, which would tell us that for every $1 move higher in the price of the underlying ATVI stock, the option price will increase by $0.54.

Using that current delta, should ATVI move to $91 from $84, the option could gain about $3.78 of value, or $0.54 x $7. Adding $3.78 to my option buy price of $3 now gives me an options price of $6.78. That means I could see a return of about 126%.

Or, to give you the TL;DR version: With the stock, I could make up to 9%; however, using options leverage, I could make up to 126%—and spend far less doing so.

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