Spread Trading: An Introduction to Trading Options in Nine Simple Steps

CHAPTER 27

Choosing Stocks

“Obviously, picking stocks is one of the first things you have to do when you begin trading seriously. Once you gain experience you will have more ways to think about how to choose stocks, but for now I just want to get a few fundamentals on the ground.”

“The first principle,” Aaron jumped in, “is to find companies that you believe are bullish long term. This isn’t because you expect to buy shares and hold them forever. That’s a different strategy altogether, and a risky one. No, you’re going to be more active than that; you’re going to be trading options on a regular basis.”

“Right,” added Nate. “Some people trade options frequently, others much less so. But we’re never just buying and holding shares, hoping the stock goes up enough over the long haul to make money. As Aaron said, that strategy is risky. Every stock, no matter how bullish, goes through periods that are nonbullish, and a buy-and-hold strategy leaves us helpless during those times. Trading options, on the other hand, helps us make money even then.”

“But none of this means that company quality doesn’t matter.” Aaron said it with emphasis. “The backbone of your trading activity should still be strong companies that will grow over time. That at least gives you long-term growth potential, and it allows you to predict how your companies will perform over time.”

“Now as you look for companies, there’s more than one way to evaluate their quality,” added Nate, “but it’s pretty common to focus ...