One question I get asked all the time is: what's the best way to
use the Zacks Rank with options?
The answer is to know which style your stock falls into and which
strategy best suits that style.
So here are some practical guidelines for picking the right stocks
to go with the right option strategies.
If you're bullish on a stock, you can buy a call option and make
money as it goes up.
Momentum stocks and Aggressive Growth stocks are probably the best
kinds of stocks to use for this. These are stocks that are on the
move with some of the most explosive upside potential.
When buying call options you need to be right on the direction of
the trade as well as the time allotted for it to move.
Zacks #1 Rank ('strong buy') stocks are ideal for this as these are
some of the likeliest candidates to move and profit with this
If you're bearish, you can buy a put option and make money as the
price goes lower.
Look for stocks trading at excessive valuations. Focus in on the
ones with downward earnings estimate revisions. And if they are
below their major moving averages like the 50-day and 200-day
moving averages, even better.
With put options, direction and time are important as well.
Stocks with a Zacks #4 Rank ('sell') or Zacks #5 Rank ('strong
sell') will typically underperform the market over the short-term,
which is perfect for this strategy.
Big Move in Either Direction
If you believe a big move could occur in either direction, but
you're not sure which way, you can make money with a straddle or a
strangle. This entails buying both a call and a put at the same
One of the best times to use this strategy is before an earnings
announcement. And some of the best stocks for this option strategy
are high beta stocks. These are stocks that can move big, and
that's exactly what you need to see happen with this kind of
Once again, in order for a stock to make a big move, there usually
needs to be a catalyst. One of the most reliable catalysts out
there for big moves (up or down) is earnings reports.
If you also take a look at the stock's 'earnings uncertainty', you
have the potential for the kind of volatility to make a strategy
like this work.
Slower, Moderate Move
If you're expecting a stock to go up or down, but you expect the
move to be moderate or slower, then spreads are a great strategy
For example, a bull call spread involves buying a nearby strike and
selling a farther out one.
If the stock goes up, but slowly, the nearby call you bought should
increase in value, in spite of some time decay loss. But the call
option you wrote will benefit from time decay, thus making the
spread more profitable than had you only purchased a call.
Value style stocks and even Growth and Income stocks can produce
some good picks for a bull call spread strategy. Stocks expected to
move higher, but maybe not with a big splash.
Zacks #2 Ranks ('buy') and Zacks #3 Ranks ('hold') are good stocks
to consider for this strategy.
The Option is Yours
These are just some of the ways to profit with options. And there
are many more. As you can see, options give the investor numerous
ways to make money in the market -- and in any direction. And you
don't always have to wait for the next bull market to make money.
Once you know what stock characteristics go best with what types of
options strategies, you'll quickly find yourself having more
success in your options trading.
You can learn more about different option strategies by downloading
our free options booklet: 3 Smart Ways to Make Money with Options
(Two of Which You Probably Never Heard About).
Just click here.
And be sure to check out our
Zacks Options Trader
Disclosure: Officers, directors and/or employees of Zacks
Investment Research may own or have sold short securities and/or
hold long and/or short positions in options that are mentioned in
this material. An affiliated investment advisory firm may own or
have sold short securities and/or hold long and/or short positions
in options that are mentioned in this material.
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