As a buyer of options, I am always on the lookout for powerful moves that will take price up high enough to overcome the constant decay factor. As we know, options carry two components – intrinsic and time value. The skill of the option buyer is to find a stock that will move fast and through a chosen strike and time frame. With stocks, we have to luxury of waiting and holding for as long as we wish, with options we do not have that luxury.
So, when looking for potential buy candidates I want to get on board a name that is performing well vs the market and its peers. This is called relative strength, and when it’s rising then we often see continuation. Next, the volume levels on a breakout/breakdown move. Take a look at PLKI. This company report what was considered a lousy earnings number, was hammered early and then rallied sharply to end the day near its highs. We can see the massive reversal candle, and then the important follow-through. That was the key, as this stock has kept on moving.
How about JACK? On the day earnings hit this stock was belted mercilessly, sellers were unrelenting. After posting better than expected numbers, JACK lifted higher and gapped up, consolidated for a bit and then vaulted even higher on two more gaps that cornered the bears. In just two short weeks JACK is up 40%.
As you might expect, call option buys for these two names were big winners. But when would you have climbed on board? In my experience, follow those reversal candles and take the trade on a confirmation day. More often than not buyers will continue to attack and chase these stocks higher.
