Zacks.com featured expert Kevin Matras highlights: Archer Daniels Midland, Reliance Steel & Aluminum, and Tsakos Energy Navigation.
Screen of the Week written by Kevin Matras of Zacks Investment Research:
A good stock screener is the best tool you have for picking the right options. Regardless of whether you're buying options or writing them, you not only have to be right on the stock's direction, but also the timing. Even the most sophisticated of options strategies requires you to have an idea as to what the stock will or won't do within a certain period of time.
Many times, people who play it safe and buy options with more time are forced further out-of-the-money because of the cost, which ultimately reduces their chances of profitability. But by backtesting a stock-picking strategy to see if your stocks typically go up as soon as they're identified, you can buy less time and closer-to-the-money options. Simply put, you can make better decisions as to which options to get into.
For example, let's assume we're buying calls. If you know your stock-picking strategy has a high probability of picking stocks that rise within the first few weeks they come across your screen, you won't have to waste your money on purchasing options with excessive time. (As you know, 'time' does indeed cost money when it comes to options, i.e. time value or extrinsic value.) And the less 'needless' time you buy, the more money you'll have to spend on buying an option that's closer to the money or even in-the-money.
I won't get into an options lesson in this article, but too many people treat option buying as a lottery ticket. They'll buy the cheapest options (usually meaning several strikes out-of-the-money) and hope for an explosive move (which they'll need if they're too far out-of-the-money). Unfortunately, these moves often never come. And even when they do, often times by expiration, their time value has eroded with no intrinsic value at all.
Let's say stock XYZ is trading at $50. And the options are expiring in five weeks. There's a $45 in-the-money call at $5.60 (which means it costs $560). A $50 at-the-money call going for $2.20 ($220). A $55 out-of-the money call going for $1.50 ($150) and a $60 call going for $.75 cents ($75).
The 45 call has $500 of intrinsic value (the difference between the underlying stock's price and the strike price) and $60 of time value or extrinsic value draws near. In other words, as time goes by your option is losing its time value.
So what does all this mean?
Make sure you screen for good stocks!!!
And make sure you know the probability for those stocks to move, say within the next week or month, etc. The only way to really know is to backtest your screening strategies. This way, even a crummy option strategy will have a better chance of profit. But with better knowledge of your stocks' movement potential, you can employ a better option strategy for even bigger gains.
Here's an easy way to get started. In the Research Wizard, some of our best and winningest strategies come loaded with the program. Simply add the filter; 'optionable' (meaning these stocks have options). Add the optionable filter to these strategies and then go find the best options.
Here are three optionable stocks, from some of my favorite stock screening strategies (for the week of 3/6/06):
ADM Archer Daniels Midland Co.
(from the EPS Growth Past and Present screen & the Upgrades and Revisions2 screen)
RS Reliance Steel & Aluminum Co.
(from the Upgrades and Revisions2 screen)
TNP Tsakos Energy Navigation
(from the Winning Ways screen)
Get the rest of the stocks from each one of these screens and start making better stock and option decisions today.
And remember, the key to successful stock picking is in discovering those screens that have produced profitable results in the past. And the key to better option selections, is in knowing what to expect from your stocks (and when). And how will you know? By backtesting! Click here to find out more about our free trial to the Research Wizard stock picking and backtesting program. http://at.zacks.com/?id=111
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
About Screen of the Week
Zacks.com created the first and best screening system on the web earning the distinction as the "#1 site for screening stocks" by Money Magazine. But powerful screening tools is just the start. That is why Zacks created the Screen of the Week to highlight profitable stock picking strategies that investors can actively use. Each week, Zacks Profit from the Pros free email newsletter shares a new screening strategy. Learn more about it here http://at.zacks.com/?id=112
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 to compile, analyze, and distribute investment research to both institutional and individual investors. The guiding principle behind Zacks work is the belief that investment experts, such as brokerage analysts and investment newsletter writers, have superior knowledge about how to invest successfully. The goal is to unlock these pros' profitable insights for individual investors hard-pressed to find this valuable information in one source. A free subscription to "Profit from the Pros" weekly e-mail newsletter provides the best way to use these experts' insights for more profitable investing. Register for a free subscription to the Profit from the Pros newsletter at http://at.zacks.com/?id=113
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Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.
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|Date:||Mar 8, 2006|
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