Using Fundamental Analysis to Screen for Option-Selling Stocks

04/20/2015 9:00 am EST

Focus: OPTIONS

Alan Ellman

President, The Blue Collar Investor Corp.

Alan Ellman, of TheBlueCollarInvestor.com, highlights the fundamental analysis process he goes through as part of a 3-pronged screening system—along with technical analysis and common sense—to ultimately create a watch list of high-quality candidates for his option-selling strategies.

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 additional 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. Each week, we screen that database plus the IBD 50 for our Premium Members. In this article, I will demonstrate one way to form your own database of fundamentally sound stocks which are then ready to continue through our technical and common sense screens. (Premium members need not go through this process as we do it for you.)

Fundamental analysis is all about earnings and revenues growth and the associated ratios gleaned from corporate financial statements. 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 or less challenging to pass:

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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.

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:

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By Alan Ellman of TheBlueCollarInvestor.com

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