After a really tough start to the year for the overall market, we've seen some crazy dips across the board. With uncertainty still looming regarding rate hikes, inflation, and a potential recession, the big question now is which stocks have bottomed and which stocks still have room to drop? There has been some solid volatility in the market but which stocks should we be lining up for the next time we see a dip in the market?
One of the best ways to answer that question is through earnings. The following is a list of 14 stocks which have buy-ratings and topped recent earnings:
So this is a great list to start from and of course I'm partial to it because it has DKNG in it, but let's take it a step further. I think these stocks all meet the criteria of a decently objectively solid investment, but which stocks best fit our option selling strategies? To figure this out, I compiled the list and threw it into Thinkorswim to get a better idea of what option premiums, IV, RSI, etc. look like.
Apologies for the tiny table, but had to squeeze all of the good info in. Here are the superlatives and the top 3 in each category. We will use these to score the best investment options
Lowest RSI: RSI, or relative strength index, is a really great way of measuring if a stock is overbought or oversold. 50 is neutral while anything below 30 is considered extremely oversold and everything over 70 is considered extremely overbought. Here are the 3 lowest from the list, which implies the 3 best entries:
1) DKNG - 42.7
2) TTD - 47.08
3) VRNS - 47.53
% above 52w low: Some stocks on this list have already bounced a decent bit. This measure should help us weed out the stocks which have been particularly beaten down without relief yet. The lower % the better here.
1) VMC - 6.01%
2) EFX - 7.96%
3) KMT - 14.16%
IV percentile: Those of you who follow us should be pretty familiar with this one. This measures how the current IV compares to IV over the past trading year. The higher the better here because it means that we can sell greater premiums.
1) FND - 64.04
2) VMC - 62.58
3) KMT - 57.32
RoR: The final measure, and one which I feel is the most important for option sellers, is RoR. This is the Return on Risk of an at the money June 17 expiry option. While IV percentile gives us some hints as to whether option premium is historically high for a particular stock, RoR is the one true metric that gives us an idea of the profitability.
1) DKNG - 7.12%
2) TTD - 6.71%
3) FND/VRNS - 5.2%
To holistically evaluate the list, we've created a scoring matrix below where stocks get points based on how they rank in the list. The best of a given category will receive 14 points while the worst will receive 1. I've also included a column to show profitability. It's worth one point and is mainly intended to be supplemental information, but figured it would be helpful. The final results are below:
So congratulations to Floor & Decor for rising to the top of these 14 stocks. The option chain is pretty low volume for some of these stocks but if you can find a limit price at a price level that works and offers a nice return, these should be decent options over the next few months. Will definitely have these stocks at top of mind the next time we see a big red day in the market and are looking to add some positions.
Also if you enjoyed this post, please let me know. Been working to get more content up on our website and thought this was a useful exercise and nice change of pace since we focus mainly here on strategy as opposed to stock picking.