Investing 101: Oversold S&P500 Large Caps with Bullish Option Sentiment

By
A A A

(List compiled by Danny Guttridge. Put/Call data sourced from Schaeffer's, all other data sourced from Finviz.)

After seeing several large drops in the market over the past few weeks, there is a lot of uncertainty about the market's direction from here. Volatility is still very high, but there might be some stocks that have seen, or are getting close to seeing their bottom. One way to find these stocks is to screen for a decreasing Put/Call ratio. Let's take a closer look.

Options: Options are contracts that are traded like regular stocks. There are two types of option contracts: Calls and Puts.

In general, buyers of call options believe a stock's price is going to rise, while buyers of put options believe that a stock's price might decline.

A call option gives the buyer the right, but not the obligation, to buy a stock at a certain price at some point in the future. In other words, the buyer of a call option pays a small premium that gives him the right to benefit from potential upside in the future (i.e. he might be able to buy at a lower price, and immediately sell at a profit if the price of the stock rises significantly).

Similarly, a put option gives the holder the right, but not the obligation, to sell a stock at a certain price in the future. If the stock declines sharply, the put option holder can buy the stock at a depressed price, and sell it at the higher price agreed to in the contract.

Put/Call ratio is the total number of put options relative to the total number of call options for a given stock. If there are more put options (a put/call ratio greater than 1), then there are more investors who think that the share price will decrease than there are investors who think that the share price will increase.

To put it simply, a put/call ratio higher than 1 reflects a bearish sentiment about a given stock. A put/call ratio below 1 reflects bullish sentiment about a stock.


Similarly, a rising put/call ratio indicates investor bearishness, while a declining put/call ratio indicates bullishness.

RSI(14) is a technical indicator that measures the speed and magnitude of price movements. It can be used to indicate momentum on a scale of 0 to 100. In general, levels above 70 indicate that a stock is overbought, while levels below 40 signal that a stock is oversold.

Now that you're armed with this knowledge, take a look at this list.

Options traders seem to believe these stocks have hit their bottom, and might be on their way up. Do you agree? Use the list below as a starting point for your own analysis.

Analyze These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. Visualize annual returns for all stocks mentioned

1. Ecolab Inc. (ECL): Cleaning Products Industry. Market cap of $10.92B. RSI(14) at 37.77. Put/call ratio has decreased 28.24% over the last ten trading days (from 0.85 to 0.61). The stock has performed poorly over the last month, losing 15.18%.

2. Xerox Corp. (XRX): Business Equipment Industry. Market cap of $11.24B. RSI(14) at 32.83. Put/call ratio has decreased 28.21% over the last ten trading days (from 0.78 to 0.56). Might be undervalued at current levels, with a PEG ratio at 0.67, and P/FCF ratio at 9.63. It's been a rough couple of days for the stock, losing 6.1% over the last week.

3. General Dynamics Corp. (GD): Aerospace/Defense Products & Services Industry. Market cap of $22.13B. RSI(14) at 35.63. Put/call ratio has decreased 27.08% over the last ten trading days (from 0.96 to 0.70). It's been a rough couple of days for the stock, losing 5.06% over the last week.

4. Time Warner Cable Inc. (TWC): CATV Systems Industry. Market cap of $22.04B. RSI(14) at 36.25. Put/call ratio has decreased 23.85% over the last ten trading days (from 1.09 to 0.83). The stock has performed poorly over the last month, losing 15.43%.

5. Coach Inc. (COH): Textile Footwear & Accessories Industry. Market cap of $15.97B. RSI(14) at 35.56. Put/call ratio has decreased 22.52% over the last ten trading days (from 1.11 to 0.86). It's been a rough couple of days for the stock, losing 6.39% over the last week.

6. Parker Hannifin Corporation (PH): Industrial Equipment & Components Industry. Market cap of $11.28B. RSI(14) at 38.84. Put/call ratio has decreased 22.41% over the last ten trading days (from 1.16 to 0.90). The stock has performed poorly over the last month, losing 19.62%.

7. Devon Energy Corporation (DVN): Independent Oil & Gas Industry. Market cap of $28.32B. RSI(14) at 34.22. Put/call ratio has decreased 22.34% over the last ten trading days (from 0.94 to 0.73). The stock has performed poorly over the last month, losing 12.69%.

8. Charles Schwab Corp. (SCHW): Investment Brokerage Industry. Market cap of $14.83B. RSI(14) at 26.48. Put/call ratio has decreased 21.21% over the last ten trading days (from 0.99 to 0.78). It's been a rough couple of days for the stock, losing 9.57% over the last week.

9. Alcoa, Inc. (AA): Aluminum Industry. Market cap of $13.05B. RSI(14) at 34.18. Put/call ratio has decreased 20.83% over the last ten trading days (from 0.96 to 0.76). This is a risky stock that is significantly more volatile than the overall market (beta = 2.07). The stock has performed poorly over the last month, losing 20.54%.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks


Kapitall

Kapitall

More from Kapitall:

Related Videos

How to Fire Your Adviser
How to Fire Your Adviser            

Stocks

Referenced

Most Active by Volume

75,750,465
  • $16.77 ▲ 0.36%
59,791,764
  • $101.58 ▲ 0.71%
38,720,622
  • $42.59 ▼ 0.28%
37,416,417
  • $46.52 ▼ 0.51%
35,101,793
  • $16.28 ▲ 0.74%
34,987,975
  • $99.53 ▲ 0.15%
33,760,830
  • $3.63 ▲ 0.69%
32,148,671
  • $17.61 ▲ 0.57%
As of 9/17/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com