As I said from the very beginning of my blog, swing trading is a confidence game. You’re putting your money at risk for a period of time, hoping your confidencein a particular stock pays off, and nothing provides more confidence than having the maximum number of factors going in your favor.
If you only trade options on stocks with strong fundamentals, as I do, the first very important question, “is this stock option worth considering in the first place?” has been answered for you.
Me, I like Investor’s Business Daily’s way of rating companies’ fundamentals, and what I want to know more than anything else is whether a company has a proven track record for earnings growth. This is a big confidence builder for me, because earnings drives price action. Other confidence builders include whether the large institutions that drive the market are accumulating shares of the stock.
From there I go to the second most important question, and that is “am I buying this option at the right time?” Here, I rely on my experience in identifying certain proven chart patterns to identify whether a stock is setting up to breakout or rebound, and for me, stocks setting up to rebound create the ultimate options trades.
Why? Because if stock XYZ carries an earnings rating 99 (which means that 99% of all other stocks are ranked lower for earnings and earnings growth) and the stock pulls back to a well-defined area of price support, generally you’ve got the ideal options trading opportunity—especially if you give the stock plenty of time to recover.
Take Priceline (PCLN), for example. Here’s a company that depends on Europe for a lot of its business, and in recently announcing its usual spectacular earnings, it was pulled down hard largely because of an uncertain outlook. Now, bear in mind this is a stock that currently carries a 99 EPS (earnings per share) rating, and a B- accumulation ranking, even after its earnings report.
Well, my confidence in Priceline led me to purchase January 560 call options on Priceline (PCLN) around the middle of August for $55.80. Now they’re up over 40%– and things might just be getting started, given the way this stock is capable of moving.
This past earnings season has seen more leaders than usual—companies that have tremendous earnings growth potential– driven back to very attractive options trading levels, usually because of uncertain outlooks. Believe me, you want to be on the ground floor when these winners come roaring back!
Do you trade options? What kind of success or failure have you experienced?