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Strategies & Market Trends : Waiting for the big Kahuna
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To: James F. Hopkins who wrote (15153)3/19/1998 3:11:00 AM
From: paulmcg0  Read Replies (4) of 94695
 
Since we're talking about options, how do you choose which company to play in the options market?

I subscribe to a database service, that gives me information on all the stocks on the NASDAQ, NYSE, and AMEX. I've been developing a automated model to search the database for stocks to buy puts on.

Here are a couple of criteria I've come up with, and the rationales:

(1) Try to avoid stocks where the put premium is too high compared to the Black-Scholes price.

(2) Find stocks with a sales-to-price ratio < 0.1 -- it's just plain crazy to have a market cap more than 10 times annual sales -- private businesses purchase each other typically at prices only 2 or 3 times annual sales.

(3) Make sure the debt-to-equity ratio is more than 100% -- a company deep in debt is a big risk for a sudden earnings drop, because they will have to spend a good deal of money paying the interest and principal on their debts.

(4) Look for a stock that's already declining, i.e. look for stocks with declining prices lower than 95% of their 52 week high. A stock whose price has peaked and is going down is a safer choice for a put than a stock that just keeps going up, no matter how ridiculous the stock price.

(5) Finally, go for stocks with a high or non-existent P/E ratio.

Some of the companies I might buy puts on, based on these criteria, are:

* Sepracor (ticker: SEPR)
* Catellus (ticker: CDX)
* Wind River Systems (ticker: WIND)

Paul McGinnis
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