Here are Guidelines to help you when searching for a company to
purchase a stock option in;
First and Foremost: Determine if the S&P 500, Dow or Nasdaq
is in a confirmed uptrend or not.
Watch for a Market bottom: When the Market indexes signal a
market bottom look for the first attempt at a rally. If the rally
follows through anywhere from fourth to tenth day of the rally, it is
an indication of a new uptrend. For a valid follow through to occur,
look for an increase in total market volume from the previous
trading day and substantial price advances for the day, at least 2%
in either the Dow, nasdaq or S&P 500.
Look for Major Market Turns: At times you may see market
indexes moving in different directions. The Dow for instance , may
be making new highs while the S&P 500 does not. Its also
important to note if an index is advancing or declining at a much
greater rate than another. For example if the Dow rises 3% one day
as the S&P 500 rises only 1%, it indicates the rally is not as broad
or as strong as it may appear. Historically market tops occur after
the major market averages move into new high ground and show
several days of large and increased volume with either poor price
progress or actual declines in the averages.
New Products: A Company should have a new product or service
out that is selling rapidly and causing earnings to grow quickly, but
be wary of an unproven product and management with an
unproven track record.
Quarterly Earnings per share: Should be up 25% or more. Look
for accelerated earnings over the last three quarters. And the last
three years, the annual earnings should increase each year. Be sure
to check earnings consensus estimates for the upcoming Quarter to
make sure the company is still on a positive track.
Management Change: Look for especially any top management
change(at times this will push a stock higher in price).
Seek Positive Signs: Companies buying back their stock in the
open market and showing stock ownership by management are very
positive signs. And also see if management may be selling stock
excessively as this could be a sign of worse things to come.
Upgrades,Downgrades and Stocksplits: Keep your eye out for
these announcements as they can drastically affect your positions.
Quality stocks making new price highs just as they emerge from
sound chart bases on higher volume are often likely to continue
climbing, while stocks making new lows are probably heading lower.
Increasing number of Institutional Owners: A stock should show
an increasing number of institutional sponsors in recent quarters and
should have several institutuional owners. If there is no institutional
owners the stock will more than likely not perform to well. And
consider leaning more to stocks that are owned by top performing
mutual funds either as a new position or an add-on purchase.
Daily Trading Volume: One way to see if major Investors or
Institutions are purchasing stock in a company is to check its daily
trading volume. Look at the Volume percentage change for the
stock, it will show how much the stock traded against its average
daily volume over the last 50 trading days.Volume should be 50%
higher than normal. This is often the first sign institutions are
moving in or out of a stock in a major way. When a stock rallies up
in price you want to see volume rise at the same time. When a
stock pulls back in price, you want to see volume drying up which
indicates no significant selling pressure.
Look at the top 20% of Industry Sectors: Look for the Leader in
a Sector and have confirmation with there being at least one other
company in the sector showing strength. The Stocks Relative Price
Strength should be 80 or higher, this means the stock is
outperforming 80% of other companies over the last 12 months.
Buy in the money calls and puts: Limit options to the contracts
that have less than a point of time premium versus the inherent
value of the option. In other words, for calls, add up the price of
the call and the strike price, and that’s what you are really paying
for the stock. If the difference between that price and the current
stock price is more than $1, you are probably in the wrong option.
Here is an example. If I like a stock at $24, there are probably calls
with a strike price of 20,22.50, and 25. If the 25s cost $1.20, then
that’s the equivalent of paying $26.20 for a $24 stock. That’s $2.20
in time premium versus the true value. Unless that stock moves
immediately, that $2.20 is going to whittle away over time, so the
stock has to overcome that. If the 22.50s cost $2.20, that’s like
paying $24.70 for the stock, which is only $0.70 more than the
current value. That’s the option I want to own if I think the stock
will move up.
Reasons for buying in the money options: In particular for front
month options, are that it offers you a relatively conservative
approach to option investing by giving a stock option trader more
control over time value and intrinsic value components of the
option. An important component of deep in the money options is
their substantial intrinsic value, which is equal to the stock price less
the strike price for a call or the strike price minus the stock price for
a put. As options move deeper into the money, the delta(the
amount by which an options price will change for a one point move
in the price of the underlying stock) approachs 100 percent for call
options. Thus the option behaves like the stock by giving a point for
point move with the underlying equity. Front month deep in the
money options lower the effects of time decay on your position
because most of the option premium is linked to the intrinsic value.
For example, assume that a stocks price is at 61, the 55 and 60
strike calls are priced at 6 1/2 and 2 respectfully, and the options
expire in 30 days. The deep in the money buyer is paying 6 points
of intrinsic premium and 1/2 point, or 7.7% of the total premium, in
time value. However the slightly in the money buyer, is paying 1
point, or 50%, in time premium. If the stock closes at 61 at
expiration, both buyers keep the intrinsic value but lose the time
value of their positions. Thus the deep in the money buyer loses
only 7.7% while the slightly in the money buyer loses 50%.
Let your profits run: When buying options the most you can lose
is 100%. While this seems obvious, the flip side is that you can gain
far more than 100% on your wins. Since 100% is what you have at
risk, this is the smallest gain you should target, as your reward
should outweigh your risk. The key to success is to ensure that the
average win significantly exceeds the average loss.
We strongly suggest subscribing to The Investors Business Daily
Paper, as it has lots of valuable information for you the investor and
they already have done most of the calculations and screening of
stocks for you to purchase options on.
Trading Options and Futures involves risk and is not suitable for all
investors, you are not guaranteed to make money. Never put at risk
more money than you are willing lose.
purchase a stock option in;
First and Foremost: Determine if the S&P 500, Dow or Nasdaq
is in a confirmed uptrend or not.
Watch for a Market bottom: When the Market indexes signal a
market bottom look for the first attempt at a rally. If the rally
follows through anywhere from fourth to tenth day of the rally, it is
an indication of a new uptrend. For a valid follow through to occur,
look for an increase in total market volume from the previous
trading day and substantial price advances for the day, at least 2%
in either the Dow, nasdaq or S&P 500.
Look for Major Market Turns: At times you may see market
indexes moving in different directions. The Dow for instance , may
be making new highs while the S&P 500 does not. Its also
important to note if an index is advancing or declining at a much
greater rate than another. For example if the Dow rises 3% one day
as the S&P 500 rises only 1%, it indicates the rally is not as broad
or as strong as it may appear. Historically market tops occur after
the major market averages move into new high ground and show
several days of large and increased volume with either poor price
progress or actual declines in the averages.
New Products: A Company should have a new product or service
out that is selling rapidly and causing earnings to grow quickly, but
be wary of an unproven product and management with an
unproven track record.
Quarterly Earnings per share: Should be up 25% or more. Look
for accelerated earnings over the last three quarters. And the last
three years, the annual earnings should increase each year. Be sure
to check earnings consensus estimates for the upcoming Quarter to
make sure the company is still on a positive track.
Management Change: Look for especially any top management
change(at times this will push a stock higher in price).
Seek Positive Signs: Companies buying back their stock in the
open market and showing stock ownership by management are very
positive signs. And also see if management may be selling stock
excessively as this could be a sign of worse things to come.
Upgrades,Downgrades and Stocksplits: Keep your eye out for
these announcements as they can drastically affect your positions.
Quality stocks making new price highs just as they emerge from
sound chart bases on higher volume are often likely to continue
climbing, while stocks making new lows are probably heading lower.
Increasing number of Institutional Owners: A stock should show
an increasing number of institutional sponsors in recent quarters and
should have several institutuional owners. If there is no institutional
owners the stock will more than likely not perform to well. And
consider leaning more to stocks that are owned by top performing
mutual funds either as a new position or an add-on purchase.
Daily Trading Volume: One way to see if major Investors or
Institutions are purchasing stock in a company is to check its daily
trading volume. Look at the Volume percentage change for the
stock, it will show how much the stock traded against its average
daily volume over the last 50 trading days.Volume should be 50%
higher than normal. This is often the first sign institutions are
moving in or out of a stock in a major way. When a stock rallies up
in price you want to see volume rise at the same time. When a
stock pulls back in price, you want to see volume drying up which
indicates no significant selling pressure.
Look at the top 20% of Industry Sectors: Look for the Leader in
a Sector and have confirmation with there being at least one other
company in the sector showing strength. The Stocks Relative Price
Strength should be 80 or higher, this means the stock is
outperforming 80% of other companies over the last 12 months.
Buy in the money calls and puts: Limit options to the contracts
that have less than a point of time premium versus the inherent
value of the option. In other words, for calls, add up the price of
the call and the strike price, and that’s what you are really paying
for the stock. If the difference between that price and the current
stock price is more than $1, you are probably in the wrong option.
Here is an example. If I like a stock at $24, there are probably calls
with a strike price of 20,22.50, and 25. If the 25s cost $1.20, then
that’s the equivalent of paying $26.20 for a $24 stock. That’s $2.20
in time premium versus the true value. Unless that stock moves
immediately, that $2.20 is going to whittle away over time, so the
stock has to overcome that. If the 22.50s cost $2.20, that’s like
paying $24.70 for the stock, which is only $0.70 more than the
current value. That’s the option I want to own if I think the stock
will move up.
Reasons for buying in the money options: In particular for front
month options, are that it offers you a relatively conservative
approach to option investing by giving a stock option trader more
control over time value and intrinsic value components of the
option. An important component of deep in the money options is
their substantial intrinsic value, which is equal to the stock price less
the strike price for a call or the strike price minus the stock price for
a put. As options move deeper into the money, the delta(the
amount by which an options price will change for a one point move
in the price of the underlying stock) approachs 100 percent for call
options. Thus the option behaves like the stock by giving a point for
point move with the underlying equity. Front month deep in the
money options lower the effects of time decay on your position
because most of the option premium is linked to the intrinsic value.
For example, assume that a stocks price is at 61, the 55 and 60
strike calls are priced at 6 1/2 and 2 respectfully, and the options
expire in 30 days. The deep in the money buyer is paying 6 points
of intrinsic premium and 1/2 point, or 7.7% of the total premium, in
time value. However the slightly in the money buyer, is paying 1
point, or 50%, in time premium. If the stock closes at 61 at
expiration, both buyers keep the intrinsic value but lose the time
value of their positions. Thus the deep in the money buyer loses
only 7.7% while the slightly in the money buyer loses 50%.
Let your profits run: When buying options the most you can lose
is 100%. While this seems obvious, the flip side is that you can gain
far more than 100% on your wins. Since 100% is what you have at
risk, this is the smallest gain you should target, as your reward
should outweigh your risk. The key to success is to ensure that the
average win significantly exceeds the average loss.
We strongly suggest subscribing to The Investors Business Daily
Paper, as it has lots of valuable information for you the investor and
they already have done most of the calculations and screening of
stocks for you to purchase options on.
Trading Options and Futures involves risk and is not suitable for all
investors, you are not guaranteed to make money. Never put at risk
more money than you are willing lose.
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Unauthorized reproduction of any solo enterprises
Inc. publications is strictly prohibited. Copyright
2006, Solo Enterprises Inc. All rights reserved.
Inc. publications is strictly prohibited. Copyright
2006, Solo Enterprises Inc. All rights reserved.
Options involve risk. Prior to buying or selling an
option, an investor must receive a copy of
Characteristics and Risks of Standardized Options.
Investors need a broker to trade options, and must
meet suitability requirements. Past results are not
necessarily indicative of future performance.
option, an investor must receive a copy of
Characteristics and Risks of Standardized Options.
Investors need a broker to trade options, and must
meet suitability requirements. Past results are not
necessarily indicative of future performance.
Solo Enterprises
Inc.
Inc.