Finding the Best Stocks to Buy With Fundamental Analysis

Module 6: Trading Options
Lesson 2: Best Stocks to Buy

I'm about to reveal the method I've been using for years to find the absolute best stocks to buy, not only for covered calls, but for options trading as well.

The method is nothing new and thousands of other sophisticated traders are familiar with it. It's mainly used by stock traders since it is used to find the best stocks to buy.

Everyone wants a stock that will continue to rise in price. The hard part is finding those stocks.

As an options trader, you're not in the market to buy stocks. You just want to find good stocks to buy because you're going to trade options on those stocks.

The stocks that are the best to buy are ALWAYS the best stocks to trade options on.

That's why the focus of this lesson is on finding these types of stocks.

Before I reveal the method, let me explain why having a list of good stocks to buy is so important.

Why Fundamental Analysis
is so Important

Fundamental analysis is the process of looking at the inner workings of a company. You're looking at how well the company is managed. Do they produce a profit; are they drowning in debt; will they be around 10 years from now?

One very important point to keep in mind during this process is that stock options mirror the movement and quality of the company stock it represents.

You want to find companies that will attract the attention of institutional investors (mutual funds and hedge funds). The buying and selling of institutional investors are what move the stock market.

The stock options on these types of stocks are usually the best kind to trade because of their attractive price movement.

That's why we aren't looking for just any stock to buy; we're looking for the best stocks to buy!

If you recall from one of the earlier lessons, stock options are derivatives. They are derived or come from the existence of stocks. "IBM stock options" are created or derived from "IBM the stock".

Technically speaking, the term "derivative" refers to how the price of these contracts is derived from the price of the stock. Their value is dependent on the price of the stock it was created for.

Generally, the option's value will rise and fall in sync with the stock price.

Hedge funds as well as mutual fund companies have a large staff of employees to perform the actual process of fundamental analysis. They essentially sift through the thousands of stocks listed on the stock market and pull out only the best.

I'm going to show you how to perform this task in a fraction of the time.

It would suck to be in a trade only to find out that the company is filing for bankruptcy. This would essentially render your stock options worthless.

Using fundamental analysis will reduce the chances of this happening to you.

Fundamental Analysis
What Are the Most Important Components?

Terms such as...

• Earnings Per Share (EPS)
• Relative Price Strength
• Industry Group Strength
• Profit and Loss, etc.

If those terms make your head spin and give you a headache, don't worry. The system I use simplifies the process to a point where a 12 yr old could research stocks for you!

There are far too many stocks available to trade and researching company fundamentals can be quite time consuming, so I leverage the efforts of someone else.

The method I use was taught to me by a multi-millionaire stock trader who has been trading for 20+ years.

I remember the days of scouring through company websites trying to do fundamental analysis the good old fashioned way, performing a gazillion calculations just to find out if this one company was worth my time.

Time IS money and as the wise old trader shared with me, "work smarter not harder. Your time is valuable, so don't waste it if there is a faster way of doing things!"

By now you're probably saying, "Bla Bla Bla get on with the method will you." Ok here it goes...

Finding the Best Stocks to Buy with Fundamental Analysis

It's the ultimate time saver...

I use the Investor's Business Daily (IBD) digital edition to find my stocks.

The Investor's Business Daily has a proprietary (top secret) rating system that they use to evaluate stocks. Once all the stocks are ran through the system they are compared to each other and assigned a rating for each of five categories.

Did you catch that? They run all stocks through a screen for you and rate them.

Why spend hours trying to find the best stocks to buy when someone else can do the fundamental analysis for you? Work smarter not harder!

The 5 categories they rank are:

1. Earnings Per Share
2. Relative Price Strength
3. Industry Group Relative Strength
4. Sales + Profit Margin + Return on Equity(ROE)
5. Accumulation/Distribution

After all the stocks are evaluated according to these categories, each category is separately assigned a rating from worst to best (either 1-99 or A-D).

A rating of 99 or "A" would mean the stock is rated in the top 1% of all stocks listed on the stock market.

If that wasn't research enough, IBD then combines the 5 weighted ratings and compares the results to all other companies in the stock market and gives the stock one final overall rating (again from worst to best).

Now using these ratings you're going to pick the "best of the best." Once you find a good stock, you will look in the column for a small "o" and this lets you know the stock has listed stock options.

The list you create using this method is, in my opinion, the best stocks to buy for stock investing and option trading.

Once you sign up for the Investors Business Daily, you will see how historically their list of stocks has outperformed the average gain of the entire stock market.

I used to spend hours researching company fundamentals looking for good stocks to buy. Now it only takes me about 20 minutes to sift through the stock tables to find good stocks that I can trade options on.

I shared this method with a friend and he was extremely skeptical. Especially when I explained that finding the best stocks to buy will only take 20 minutes.

He opted to keep his method and I opted to follow the advice of someone who was richer than me.

I think I made $21,000 that year trading options on my IBD stocks and he lost money using his method.

When I first signed up for the Investor’s Business Daily, I had every intention of canceling after the free trial.

After about a month I opted to keep the subscription because they have a wealth of other information available on their site that makes my job as a trader a whole heck of a lot easier.

Everyone wants to discover a method of pinpointing the best stocks to buy. The method I've laid out for you is by no means the Holy Grail or true path to riches. It's merely what has worked for me as well as my mentor.

There are as many ways to find stocks as there are stocks to trade, so do what works for you. I'll stick with the Investor's Business Daily because it has been too good to me.

Using fundamental analysis to find the best stocks to buy is the key to long term success as an options trader.

You can't find quality trades on a consistent basis unless you have quality stocks that produce these trades.

Sign up for the paper version of the Investors Business Daily OR...

You can use the online digital version of the Investors Business Daily. This is the one I use.

Try it out for yourself and if you don't like it then feel free to cancel your subscription. They are very good at returning your money if you are not satisfied.

Please proceed to lesson 3: Stock Watch List

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