A Simple Screen for Call Options
by Eric ChamberlainFebruary 09, 2012 | Comments : 0 Recommended this article: (0)
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So you've just opened your first trading account and you're ready to buy your first call option. Let me guess, you're not sure where to start. You're having a difficult time locating some stocks to play, and you're not sure which month and which strike price to select. Likewise, you don't know how much money to put at risk. Don't panic! All option traders at one point in their trading career have felt just like you!
Get started with a trading approach! After trading options for fourteen years, I have met hundreds of option traders. It seems that every trader has his or her own twist on trading the market. I would submit that no two traders follow the exact same set of rules. This is normal. This is natural. Don't worry! I'm sure you too have your own personal experiences and biases!
Perhaps you're a trader that believes in technical analysis and you prefer to trade trends, price patterns and indicators. Or perhaps you're a fundamentalist that was taught the classical approach to stock valuation using financial statements. I don't have the answer to which approach is better or worse, so let's just take a piece from each discipline and build a simple and effective trading strategy for call options.
- Fundamentally sound companies, i.e., stocks with a Zacks Rank 1 or 2
- Upward trends over the past three months and six months
- Enter on the short term pullbacks
- Sell one week after purchase
- Avoid stocks nearing earnings announcements
To uncover a potential play, you'll need to build a screen in the Research Wizard. Don't panic, I've attached a screenshot for your reference. You may notice that I've added a few additional filters to eliminate illiquid and non-optionable stocks.
Since this is a short term momentum strategy, I would suggest that you pick a near term expiration. Recall from the rules the five day holding period, consequently, it is superfluous to purchase a long term option contract. Moreover, don't wrangle over the strike price. Just pick the at-the-money strike price.
You can learn more about different types of option strategies by downloading our free options booklet: 3 Smart Ways to Make Money with Options (Two of Which You Probably Never Heard About). Just click here.
And be sure to check out our Zacks Options Trader.
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.
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