[10.2] How to screen for stocks to buy put options

The best and free stock filter on the web is of course FINVIZ.COM

This article shows the technique to screen for stocks to buy put options. First, the key criteria:-

1. One year downtrend and also continuous downtrend the past month
2. Fundamentally still profitable – positive ROE (return on equity)
3. Optionable stocks with market prices above $20.00
4. Trading volumes high – many interested parties and maybe institutional players
5. Omit mega market capitalization – select those less than $200 billion.   

A stock which is still profitable will ensure it is still around and not forced into bankruptcy or possible delisting. However, a one year downtrend criteria is selected as we want stocks that perform weaker than the index. S&P500 peaked in end April and has been lower than a month ago.

From the screener, 3 stocks are selected as they show signs of weaknesses from their chart patterns.

Screener link: http://finviz.com/screener.ashx?v=111&f=cap_largeunder,fa_roe_pos,sh_avgvol_o2000,sh_curvol_o2000,sh_opt_option,sh_price_o20,ta_perf_52wdown,ta_perf2_4wdown&ft=3&o=-volume

JPM (JP Morgan)

Last candlestick is a bearish marubozu. This bar closed just above the conversion line and if it breaks down, it may drop back at least 8.5% to 2 year’s low.

RSI is still below the 50% line and GMMA is downwards with a big gap between the fast and slow averages.

DOW (Dow Chemical)

Similarly, RSI is below the 50% line and GMMA is downwards with a big gap between the fast and slow averages.

There is a possible 11% to 12% drop in price if overall market down next week.

CAT (Caterpillar)

The chart looks stronger than the above 2 examples. However, RSI is below the 50% line and GMMA is downwards with a big gap between the fast and slow averages.

It may drop below one year’s low again. The stock has been trading below or around the last lowest of $76.78 on 28^th October 2010.

Disclaimer: This article is for education only and not a proposal, invitation or advice to buy or sell shares or options. 

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