INVESTOPIA
Options Trading FundamentalsThis strategy will explain exactly how successful options traders find out which stocks are in the sights of institutional traders, and of those stocks, which are the best to trade options on. There are literally thousands of stocks being traded daily on the NASDAQ and NYSE exchanges. What we want is a quick way to sift out the strongest players from the weakest. This is where fundamentals come in handy. As a review, fundamentals are metrics that help us gauge how well a company is doing. For this strategy, I need you to have an Investor’s Business Daily in front of you. Let me show you how to pick out the stocks to watch. Begin by going to the page that has all of the stocks for the New York Stock Exchange. Besides the big header on the page that says ‘NYSE Main Tables — Stocks $10 And Above,’ you can tell you’re in the right place because the ticker symbols for the stocks will have three or fewer letters. Stocks traded on the NASDAQ have four letters in their ticker symbol. Now, look at the column headers. The columns we are interested in are Earnings Per Share, Relative Price Strength, Industry Group Relative Strength, 52-Week High, Closing Price and the footnote over to the right that tells us whether or not the stock is optionable or not. Remember, not only are we looking for the stocks that catch the eyes of the institutional traders, but we want the ones that are best setup for options trading. So, let’s start. Our first criterion is that we only want to evaluate stocks that are hitting a new high today. I like to go down the 52-Week High column with my finger or an index card, and when I come upon an NH, I stop. You have to sift out the strongest players from the weakest Our next criterion is to make sure the company — the underlying bluehost.com web hosting business — is the best of the best. That means we want high marks in Earnings Per Share, high marks in Relative Price Strength and high marks in Industry Group Relative Strength. I generally look for any stock that has an Earnings Per Share over 80, a Relative Price Strength of over 90 and an Industry Group Relative Strength of A-, A or A+. If the New High I stopped at doesn’t meet all of those criteria, I move on until I find the next New High and check again. Say I do hit a New High that has high Earnings Per Share, high Relative Price Strength and a high Industry Group Relative Strength. The next thing to look for is in the footnotes. You want to see that little O that means it is optionable. If there is no O, we move on. If there is an O, it means that we can trade options on that stock. Finally, once all those criteria are met, we do one final check. See, we want expensive stocks. I use the $50 and above criteria. You might ask, “Why?” Let me explain. A stock typically moves in percentage points during a day. For instance, it is not uncommon for all of the stocks, say in the energy segment, to move up 2% in a day. In the case of a $20 stock, we’re talking about a movement of 40 cents in a day. In the case of a $100 stock, we’re talking about a $2 movement. Now, think back to Strategy One when we learned the basics of options trading. If we are trading “at the money” or “in the money” options, they will move dollar for dollar with the underlying stock. So, would we rather have our options move $2 in a day or 40 cents in a day? That’s an easy answer. So, to get the most bang for your buck with options trading, higher priced stocks are the way to go. To get the most bang for your buck, higher priced stocks are the way to go How about a review? We go through all the New York Stock Exchange stocks looking for New Highs. When we find a New High, we check for high Earnings Per Share, high Relative Price Strength and a high Industry Group Relative Strength. Then, we go on to check that the stock is optionable and that it is trading over $50 per share. For every stock we find that passes those criteria, we’ll jot it and its ticker down on our watch list. We’ll use this same filtering process on stocks trading on the NASDAQ exchange. Depending on the type of market we’re in, you may find five hosting reviews trades in one day. Typically, you’ll find one to three, and many times you’ll find none. That’s okay. Remember, we’re looking for the best of the best. After five years of filtering, the Trading Trainer Watch List has over 100 stocks that we watch on a daily basis. You might be thinking to yourself that this strategy is great for identifying stocks to trade call options in an up-trending/appreciating/bull market. But, you may also be thinking, “How can I find stocks to trade put options in a downtrending/ depreciating/bear market?” Well see, that is the best part. Remember, we are trying to ride the coat tails of the institutional traders. They invest in the best of the best. That’s why we use the fundamentals in the Investor’s Business Daily to identify the best of the best. When the market turns sour, the institutional traders still buy and sell, and sell short and buy to cover, the same set of stocks. In other words, the list of stocks we identify to trade call options on in a bull market is the same list of stocks we will trade put options on in a bear market. Once you get this down, it will take you less than 10 minutes to do this fundamentals screening process with the print version of the Investor’s Business Daily. Of course, you may choose to sit down and do it a week at a time, maybe over the weekend. You should be able to filter five days worth of tables in less than an hour. You are looking for the best of the best. Actually, for a fee, the Investor’s Business Daily newspaper will send you the stock tables in an electronic spreadsheet every day — delivered right to your email inbox. They call it their eTables product. It makes life easier on a host of different web hosting companies. Using a software spreadsheet application, you can simply sort the eTables after they are delivered to bring to the top the stocks for your watch list. Incidentally, becoming a member of the bluehost.com hosting community gives you full access to the Watch List that we manage on daily basis. By having access to the Watch List, not only will you benefit from the convenience and time savings from not having to create and maintain your own watch list, but also in the fact that you will not need to get your own subscription to the Investors Business Daily. That is a slam dunk! Stock Trading References:
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