[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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[10.1] time to hold cash and wait for signals again

Someone asked whether we can still buy call options and I said quite difficult. It is easier to buy put these days. As long as the stock is down trending, we can enter.
(go to the lessons in August of this blog and find out more information)

Here are some potential puts:
GE
GILD
GLW
MDT
SU
These stocks did not perform strength when most stocks rebound last night with bullish engulfing patterns or forming hammer candlestick.

The key criteria we should look for will be:
1. The bar yesterday cannot close above at least half of yesterday's bar.
2. volume may be high last night but still not enough to push a higher close, that means still weak.
3. The chart is still below the cloud (if you use Ichimoku) or still downtrending and below key moving averages or out of the last Darvas Box.

However, I think we should hold on this week as we have to see the outcome of S&P500. It is rebounding and we cannot enter put this week. TRINs are showing bullishness and VIX is lower.

For call, I can only watch these 2:
MCD
D (Dominion)
These 2 are relatively strong, still making higher high last month when all others are struggling to reach the last high.

Finally, we should watch VIX closely. VIX = CBOE VOLATILITY.
(go to the links above and find out more information)

VIX above 40 means bearish and if VIX can drop below and continue below, we may consider cutting puts and watch calls. VIX at around 25 will be good to buy calls. So, at the moment, we concentrate on puts.


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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[9.6] Dominion (D) - nice looking chart

Take a look at this chart:

Nice uptrend with a strong support around 48.95 (the base line)

There were big volumes on 11/Aug,  15/Aug, 23/Aug  and the GMMA is opening up showing a strong uptrend direction. If price can stay above 9 day line, there should be continuation.

What  looked like an evening star reversal candlestick pattern is cancelled by a strong close last night of 29/Sep @ 51.25
 
Watch the stock.
The call option should be on Jan'12 @ strike 50.00

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

[9.5] Technical analysis with Ichimoku cloud and RSI

Maybe you are still unsure or find the methods and technical analysis still a bit confusing. There is a simple indicator called Ichimoku Cloud that gives clear buy/sell signals. This indicator is comprised of 2 lines and a patch which looks like cloud and drawn over the price chart.

Before, we proceed further,

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

In this Ichimoku, when the prices are above the cloud, it is bullish and the trend continues up until the prices drop below the cloud. The cloud is a bit lagging so there are 2 lines for the shorter term. As long as the prices are above these 2 lines, the trend is still up. Once the shorter line crosses below the base line (which actually is the 26 day moving average), it is a signal to take profits. However, if you are looking at the longer term, you may hold the trade until the prices drop below the cloud. So the cloud also acts like a resistance and support zone.

Here are a few examples of strong up trending stocks that we can use this indicator. Usually people who uses Ichimoku Cloud also uses RSI (Relative Strength Indicator) or the MACD Histogram to double confirm change of trend.

Chart of ABT

From the chart above, there is an oversold situation way back in early August (see purple circle inside RSI). Sure enough, price closed above the base line (26 day) which gave a buy signal. The uptrend was confirmed by end August when the faster (conversion) line crossed above the base line. 

Until the last 2 days (23rd Sept), prices were way above the cloud and also well supported by the base line.

Chart of MCD

This is by far a strong bullish trend till today. There was a buy-sell round from mid June until end July.  A next opportunity started from early August when the RSI hit the oversold line and reversed upwards which signal a trend reversal. By second week of August, the stock closed above the base line for a buy.

One may opt to close the trade in early September when it closed below the conversion line. If you are a stronger risk adverse person, you can still hold it until it fall below the base line. In this example, the stock was well supported by the cloud and did not fall below. So, the longer term trader may hold on if he uses the cloud as a final support.

Chart of PPL

This stock had an oversold situation in early August and a buy signal came in about mid August.

Until today, there is no sell signal yet amidst all the global bearish sentiments.

This chart is extracted from Stockcharts.com. The difference is the cloud turns from green to red when market is down. At time of posting, this stock is still green (uptrend) and well supported by the base line. RSI is still above the zero line so I guess there should be more room to run above.

 Chart of SO

In this stock (extracted from freestockcharts,com) the buy signal actually came in end of second week August. A box is drawn here to show the top resistance. Even this top was broken a week later and the trend is still strongly riding higher. Notice also the cloud is very much below which is sign of strong uptrend.

Further education

If you like to learn more on technical analysis, go to these sites.

STOCKCHARTS.COM

CHART PATTERNS Try this: http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns CANDLESTICK Refer to: http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:introduction_to_cand TECHNICAL INDICATORS Try stockcharts.com chart school. It is free education.  http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators

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[9.4] How to buy options with aid of charts and technical indicators

In the last article, I shown a technic named Darvas Box and used 2 indicators – the GMMA and Momentum(10). These are useful tools to check entry and exit signals but only for trending stocks. If the market is in a sideway phase, or some called it the accumulation or distribution phases, then these indicators may be difficult to confirm an affirmative signal.

Anyway, we will continue to use the same example – ALTR. But first,

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

Base on the chart of ALTR, there were 2 buy signals and the momentum of the chart is still above the zero level. However, as the global market is not in a strong bullish trend yet, this stock is still bouncing inside the box.

Chart of ALTR

As long as it does not break below the box, there is no worry to sell yet. So, say we decided to buy the call option instead of the mother stock; we could have entered on 14^th Sept.

The highest price below the top of the box was $37.50 (since 15^th Aug.)

ALTR call option criteria:-

Period: about or > 90 days so we choose DEC’11

Strike: 37.00 (in the money)

Qualifying criteria:

(1) Open interest > 300. As the O/I in the range of strikes 34 to 38 are all over 500, this option passes our test.

(2) implied volatility < 60% and all passed as the range of strikes have I/V less than 50%

Chart of ALTR call Dec’11 @ 37.00

The premium to buy call was about 2.90 which went as high as 4.00 when mother share peak at 38.97 on 16 Sept.

For stop loss or sell order, we can place it about 2.10 or 2.20 (which is about 25% down from entry premium price of 2.90).

Note: the current strike is out of money as the mother share price dropped to $35.58

However, for example purpose we can consider that if we had chose to buy call at strike 35.00 on Sept.14

Chart of ALTR call Dec’11 @ 35.00

From the chart above, we could have entered and bought call at 4.37and last closed was 4.87 as the strike 35 is in the money compared to mother stock price close of 35.58

But then, if the stock has not dropped from 37.00 zone, we can make more profits at strike 37.00 instead.

The above is a simple buy call option base on mother share movement and use of a few easy to read indicators.

How to read the option chart?

 

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[9.3] Technical Analysis – use of Darvas Box, trend indicators & chart analysis

In the last post, I discussed some common indicators in use by many traders. Basically, a trend trader will like to know the market direction and also signals to buy (or sell). Trend trading is easier as it does not require time to check price movements in the day. Trend trading rely on end-of-day price results.

Disclaimer: This is for education only and not a proposal to buy or sell shares.

In this post, I share with you a set of simple methods that a beginner to stock trading can use easily. This is the Darvas Box. We draw a box from the last pivot high to the last pivot low (see blue box in chart). The box indicates to us the last resistance and the last support. Any price bar violates the top is a signal to buy. Of course it must also qualify the trend indicator.

• Indicator to check bullish or bearish move – Momentum (10)
• Buy/sell signal – Darvas Box

In the example, ALTR, the stock has been down since July 7. Though 6 months down trend, it has shown signs of reversals.

First sign of trend reversal – August 9, a hammer formed. Volume high. Price opened higher than previous day, then forced downwards but closed higher. Sign of selling diminishing.

On August 23, price bounced up strongly after another flush of selling to kick out weak traders. The day ended higher on high volume. Momentum(10) indicator moved up 0, green line point up.

 ALTR Aug 23

August 30 signal to buy.

GMMA indicator showing red lines converged and pointing up.

Momentum indicator above 0 and point up. Signs of trending up.

Last 3 bars have higher lows.

Buy when price bar hit above top of box. Protect loss at bottom of box.

ALTR August 30

Another box formed (black) overlap on the blue box. Loss protection moved up to bottom of black box.

Strong buying volumes follow up. Bullish engulfing bar on Sep 12 (3 days prior to this).

Price hit above black box on Sep 15, signal to add positions.

Buy when price bar above black box.

ALTR Sep 15

 

 

In the example above, we have a few basic criteria:-

Is the trend up or down? – we use Momentum and GMMA as indicators to show us the direction.

What is the price-volume action? – we need to confirm break higher of prices must be on higher volumes. Volume indicates the interest of other traders to join in or stay out.

What is the signal to buy? – We use Darvas Box. Breakout is a sign of breaking resistance.

How do we protect our trade? – we use low of the box as a guide to stop loss.

 

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