One question I get asked all the time is: what's the best way to use the Zacks Rank with options?
The answer is to know which style your stock falls into and which strategy best suits that style.
So here are some practical guidelines for picking the right stocks to go with the right option strategies.
If you're bullish on a stock, you can buy a call option and make money as it goes up.
Momentum stocks and Aggressive Growth stocks are probably the best kinds of stocks to use for this. These are stocks that are on the move with some of the most explosive upside potential.
When buying call options you need to be right on the direction of the trade as well as the time allotted for it to move.
Zacks #1 Rank ('strong buy') stocks are ideal for this as these are some of the likeliest candidates to move and profit with this strategy.
If you're bearish, you can buy a put option and make money as the price goes lower.
Look for stocks trading at excessive valuations. Focus in on the ones with downward earnings estimate revisions. And if they are below their major moving averages like the 50-day and 200-day moving averages, even better.
With put options, direction and time are important as well.
Stocks with a Zacks #4 Rank ('sell') or Zacks #5 Rank ('strong sell') will typically underperform the market over the short-term, which is perfect for this strategy.
Big Move in Either Direction
If you believe a big move could occur in either direction, but you're not sure which way, you can make money with a straddle or a strangle. This entails buying both a call and a put at the same time.
One of the best times to use this strategy is before an earnings announcement. And some of the best stocks for this option strategy are high beta stocks. These are stocks that can move big, and that's exactly what you need to see happen with this kind of strategy.
Once again, in order for a stock to make a big move, there usually needs to be a catalyst. One of the most reliable catalysts out there for big moves (up or down) is earnings reports.
If you also take a look at the stock's 'earnings uncertainty', you have the potential for the kind of volatility to make a strategy like this work.
Slower, Moderate Move
If you're expecting a stock to go up or down, but you expect the move to be moderate or slower, then spreads are a great strategy for this.
For example, a bull call spread involves buying a nearby strike and selling a farther out one.
If the stock goes up, but slowly, the nearby call you bought should increase in value, in spite of some time decay loss. But the call option you wrote will benefit from time decay, thus making the spread more profitable than had you only purchased a call.
Value style stocks and even Growth and Income stocks can produce some good picks for a bull call spread strategy. Stocks expected to move higher, but maybe not with a big splash.
Zacks #2 Ranks ('buy') and Zacks #3 Ranks ('hold') are good stocks to consider for this strategy.
The Option is Yours
These are just some of the ways to profit with options. And there are many more. As you can see, options give the investor numerous ways to make money in the market -- and in any direction. And you don't always have to wait for the next bull market to make money.
Once you know what stock characteristics go best with what types of options strategies, you'll quickly find yourself having more success in your options trading.
Want to apply this winning option strategy and others to your trading? Then be sure to check out our Zacks Options Trader service.
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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.