Selecting Stocks to Buy Options On
Monday, February 25, 2008 at 01:26PM Note the title.
Now note it again.
"Selecting Stocks to BUY Options On."
I used the word buy instead of trade. That is important.
You can trade options on any stock that offers options. When I say trade, I am talking any option strategy... Verticals, Diagonals, Horizontals, Calendars, Straddles, Strangles, Ratios, Butterflies, Condors, etc.
As you well know, buying an option differs greatly from the aforementioned strategies.
As the buyer of an option you are using the option to leverage a price move. This strategy should not be used on just any stock, but reserved for only those stocks that will make the biggest and best movements out there.
Let me put it this way...there are plenty of trending stocks out there. There are even more stocks that offer good entry signals for a call or put. However, there is more to option buying than just finding stocks with good signals. A good signal and a good trade don't often coexist. There is a difference between the two.
I turn down a lot of good looking signals because the moves won't be enough to warrant the risk, or to justify my position. Anyone remember my post a while back about the 30 stocks I won't trade options on? The idea was to prove this point. Even if you know that buying an option on a stock like General Electric, Microsoft, Merck, etc.. would certainly be profitable, at some point you will come to the realization that you don't want to mess with small gains. It is an ineffective trading strategy to buy options that yield small rewards. You won't be able to pay down your losses, and depending on who you are...there might be a lot of them to pay down.
Think about it. If you are going to invest your money, don't you want the best returns?
Instead of buying options, if you like to sell them or trade them using any of the number of option strategies I mentioned above, stocks like those are perfectly fine. Using those types of strategies, usually the objective is not to pick a price move, it is to avoid a certain price move. In this case, you want to pick lifeless, uninteresting stocks...knock yourself out.
It is important to note that picking stocks that make big moves can be a bad thing. Especially for those that have no sense of timing. If you cannot time an entry appropriately, then you are likely to step into these trades in front of big losses. For those of you that cannot accept a loss, option buying can be a short lived career.
In closing, understand that the selection process for buying options is a different selection process than most other trading strategies. A volatile stock and solid timing skills are needed to enhance your results. Also, it is important that you understand that this is a low probability trading strategy. This means that you are going to be wrong a lot. If you are emotionally inept, and have a hard time taking a loss...then consider another trading strategy. I had a bad losing streak nearly two years ago that lasted about 6 weeks...and the reason I was in such a hole was because as the losses perpetuated, I altered my exit strategy. Big mistake. I started giving losses too much rope instead of cutting them quickly. Don't make the same mistake.
References (3)
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Response: Vespa ScooterGreat blog, check out our Vespa site
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Response: Stock TipsStock selection based on rigorous engineering principles applies a totally objective discipline not commonly used in most portfolio management systems.
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Response: penny stockLONDON- European stock markets...
Reader Comments (193)
Thanks Jeff,
The reinforcement is great.
VA Beach,
Agreed...
Curious as to you choice of options, if you don't mind?
Berkshire
Great Post Scooter! Thanks.
I always wondered what it was in the big picture, that helped you to figure out and overcome your losing streak back then.
and add to that, trade your signals and pull the trigger. Don't get stage fright!
Jeff, great post - the reinforcement / continued education is very helpful. Any prior post you have written that will help improve entries?
Thanks, Denver
Followup on HOLX. Is moving up on high volume almost at 62.25.(Horiz resis)Would you buy the puts or is the volume a concern? Thanks Westy
Berk,
Looking at Mar 22.5's.
Berkshire, as a carryover no need to feel sorry for me when my cost on FWLT is lower and having a great day in COIN. Save your sorry for when I need it :)
Potential H&S Top on the BDI? This could be a bad sign for they Dry Bulk Shippers.
http://investmenttools.com/futures/bdi_baltic_dry_index.htm
Denver,
You should look up the Entry at Exit (try typing in REE in the search) in the archives. It has been one thing that has changed the way a lot of us enter trades.
Jeff also just recently did a post on trading break outs. It too was golden on entries.
There is a wealth of knowledge on entries in this site.
Eddie,
ToS will match other brokers rates.
https://www.thinkorswim.com/tos/myAccounts/displayRates.tos
I called and asked them to match IAB. They wouldn't go quite that low but did offer me 1.50 a contract with no per trade fees and no minimum.
BTW
Kudos to all that recommended ToS to me.
Added MOS and MTL calls this morning. Closed out with a nice little loss on my DRYS calls.
Gecko,
I responded in the other thread.
Great entry on FWLT.
Berkshire
I step away for just a minute and the market tops without me...how rude.
Berkshire
Thanks, Jym. I'll have to give that a shot. I think TOS is clearly the best platform IMO.
Round 2...Denied!!
Do we have a 3rd offer?
Berkshire
Jeff:
Another great post.
Also, thanks for HOS. Been in since you listed it on you watch list on 2/11.
While the lower beta indexes are making highs...NQ is sleeping.
Interesting.
Berkshire
I was about to comment this morning that I'm accepting pre-orders for my book "How to Buy Options on Stocks That Don't Move". My first case and point was going to be Merck.
Jodi, I searched the obvious (entries, enrty...), but not what I should have known as the real obvious REE. I read the recent post and you are right it was golden, but I know I need to keep working on it.
Thanks for the direction. I will go search REE.
Berkshire
Do u see MTL will break 52 week high today ? Thanks
PCLN screaming buy here. Beautiful breakout and retest.
KBH is a good example of patience paying off.
"I called and asked them to match IAB. They wouldn't go quite that low but did offer me 1.50 a contract with no per trade fees and no minimum."
I guess they don't match others fees. False advertising?
Interactive brokers charges .70 per contract. Add it up and you are paying a lot more on commissions. Not sure why your would do that.
What is SOHU doing retest of resistance at bottom end of symetrical triangle ?
Any thoughts
VA Beach Girl,
2nd that motion on KBH. I was beginning to wonder about that one. Looks like the XBH is up big time today.
Wonder why USG is not following. Maybe because of Lowes and Home Depot reporting less than stellar earnings.
George
VA Beach Girl:
I named the anchor on my pontoon boat "SANDISK". It's never disappointed me. Every time I pick it up and drop it over, "it always finds the bottom". Your spot on but the long term @24.8 appears pretty strong. Once it goes what about the MAR 20's...............
Jim
ownputs,
Quote from ToS site
"New customers can choose any major web-based broker's rate plan. You'll receive the lowest available rate for which you qualify."
Note the "MAJOR web-based broker's" (emphasis added).
I guess that covers them.
They gave me a spiel about how they have much better service that IAB, all they do all day is just sit around waiting for ME to call etc. and IAB wasn't in their league etc. Then they offered me the 1.50. That was the rate I was looking for anyway (the lowest I found besides IAB) so I took it. I tried out both platforms and I was more comfortable with ToS.
BTW,
It seems they weren't kidding about their service. I have been extremely happy so far.
ACI is movin' on up.
Daid in NH,
Looks like it.
I'm keeping an eye on ALB sitting right at resistance ($40.25) on decreasing volume over this month-long rally. It told me that it's thinking of heading back down. Any takers?
Dude, check out CREE hitting new highs today. Niner?
VA Beach Girl/CEOJWS,
Looking at SNDK, I see the breakdown around 24.8, but for the target, do you see this as a descending triangle with a potential target of $6 to the downside? Just trying to follow along...
Kate
Jim D,
Check out my post on the last thread about HOLX. I am worried about the volume and need to see it close below 61.3 for an entry.
Kate,
Are you going to end up with Jack or Sawyer? I'd appreciate a heads up. Got an office pool goin'.
For TOS users .... anyone listen to Shadowtrader ?
Beats the crap out of having to hear all the CNBC crap all day....good realtime info I just got turned on to it yesterday.
Does anyone think its weird that the "Market Lifts on IBM stock buy-back" is the most bogus reason for the market to go up.
Two terrible economic reports today, and an f*ing stock buy back announcement trumphs them.
Greed-o-meter is high today!
Need some advice on exiting a trade. Got into puts on CAM and SRCL yesterday and they are gone past my planned exit point. Do you wait till the end of the day to exit an unprofitable trade or when it crosses the mark in the sand? Appreciate any and all advice.
Smiley,
Welcome to my hell.
Sledge,
A little Lost, are we? ;)
Kate
Westy,
Not as bad as yesterday's reason...
S&P reaffirms MBIA and AMBAC's "AAA" status.
Talk about bogus.
Berkshire
Westy, the MACD on all of the indicies is also bullish. This can have more power than economic news. We are in a miniature bullish period in an overall bear market. All news is good news for now.
Again,
The market starts to top while I walk away.
It is getting to me...
Berkshire
Totti,
I think that if MTL isn't there yet, I wouldn't expect it today.
However, I am sure you can find some to disagree.
Berkshire
CMED Down on strong volume. Pre earnings jitters? Thoughts?
Does anyone know how to get the average volume line in the volume pane on prophet charts?
TraderJH,
Define bullish for MACD's.
Is that above the zero line? pointing up? oversold? overbought?
On all of my MACD's the zero line hasn't been crossed.
Though your thoughts of bull run in bear market speaks well.
Berkshire
PBNJ:
Kate, I see it retesting trend restistance from 09-28 for the second time with a strong long term support (5yr chart) at 24.8 and a target at 20.0. Just my "nickel-ninety-eight".
Jim
Poundcake,
Studies | Apply Studies..., Drag the study you want from the left onto the volume box on the right.
Jeff
Thanks again for another great post. Your willingess to share such a great store of knowlege and experience has made all the difference to me and my accounts. You make us think beyond our "typical" mind set. And of course you do a great job of monitoring and directing this blog!
FXE moving to new highs. Thanks, Jeff!