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Using Fundamental Analysis To Screen For Option-Selling Stocks

Published 04/12/2015, 01:16 AM
Updated 07/09/2023, 06:31 AM

Fundamental analysis, technical analysis and common sense principles make up the 3-pronged screening system used in the BCI methodology for locating option selling stocks. We start with the IBD 50 and move to the other screens from there but I always encourage the use of additionalther resources to locate elite candidates to serve as the underlying securities. Over the years, the BCI team has identified a database of over 3000 stocks that have been, at one time, excellent option-selling securities.

Fundamental analysis is all about earnings and revenues growth and the associated ratios gleaned from corporate financial statements (see Chapter 3 in the Complete Encyclopedia for Covered Call Writing). An excellent free site to generate this information is: www.finviz.com

In the figure below, there is a screenshot of fundamental screens that generated 45 candidates. Adjustments in the screening criteria can be made to be stricter of less challenging to pass:

fundamental screens for covered call writing and put-selling

FINVIZ screen for fundamental analysis

In this screen, I set up 3 descriptive screens and 6 fundamental screens highlighted in the “yellow cells”:

Descriptive screens (avoid thinly-traded and penny stocks)

  • Market cap: mid-cap and larger
  • Price: over $15
  • Average volume: over 300k shares/day

Fundamental screens

  • Price/Book ratio: under 4
  • Earnings/share growth past 5 years: positive
  • Earnings/share growth projected over next 10 years: over 10%
  • Sales growth the past 5 years: over 10%
  • Return on equity: over 15%
  • PEG ratio: under 2

The criteria set up in this screen can be adjusted but I’ve shown several elite requirements from a fundamental perspective and it generated 45 candidates some of which are shown below the screening criteria. The next step would be to add in the 50 stocks from the IBD 50 (minus those that have no options) and move on to the technical and common sense screens. Ultimately, we will create a watch list of high-quality candidates for our option-selling strategies.

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The screenshots below demonstrate the screening process used to craft our premium reports and a sample of a partial watch list (generated a few months ago) developed from the process:

covered call writing and put-selling candidates

Premium report screening process

stock screening for option selling

BCI Premium Watch List

Conclusion

In the BCI methodology we begin the screening process for option-selling candidates using fundamental analysis. This is done for BCI Premium members on a weekly basis and can be accomplished without membership with such free sites as finviz.com.

Market tone

Corporate merger & acquisition activity has been on a roll and on a pace for the 2nd busiest year since 2007. This is a bright spot for the US stock markets. This week’s reports:

  • The minutes of the March FOMC reflected a bias NOT to raise interest rates in June, a short-term positive for the stock market
  • The Market Services Purchasing Manager’s Index rose to 59.2 in March, the best level since August, 2014
  • The ISM Services gauge fell from 56.9 to 56.5 but still reflecting signs of expansion
  • The US jobs openings report hit a 14-year high in February despite a week jobs report last week

For the week, the S&P 500 rose by 2%% for a year to date return of 2.1%, including dividends.

Summary

IBD: Uptrend under pressure

GMI: 5/6- Buy signal since market close of January 23, 2015

BCI: This past week off the next earnings season which I believe is especially significant because the weekly economic reports have been leaning slightly negatively of late. Corporate earnings is what may determine how nervous the institutional investors become in the near-term in addition to possible FED action in June. Let’s keep a close eye on earnings surprises. In the interim, I am taking a defensive posture and favoring in-the-money strikes 2-to-1. An alternative would be to sell out-of-the-money cash-secured puts. This site remains long-term bullish and expects a resurgence of our economy in the second half of the year.

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