One of the biggest mistakes new and old investors make is not researching their own stocks. I’m sure you know many people who simply wait to hear the next big stock on CNBC and run out and buy some shares. It’s not that listening to TV analysts is inherently wrong, but you should know why you are buying a stock besides the fact that someone recommended it to you.
Even if you think someone is recommending a worthwhile stock you should have your own checklist to let you know if that particular stock is right for your strategy.
Can I Sell Options on This Stock?
Since we of course are writing covered calls it does help to narrow down the types of stock we might be interested in. It should go without saying that if you’re planning to sell calls on a stock, the stock needs to have options. No point in buying 100 shares of stock that you can do nothing with but sit and wait for the price to go up. That’s not the game we’re in here.
Another worthwhile point to note about checking to see if a stock is optionable is to check the open interest for the strike price you are thinking about selling. If you see less than 50 in open interest you may have problems opening or closing out a position.
When doing stock research you also want to check on that stock’s average volume. This does two things for you.
- One, it lets you know if this is a very liquid stock which can make it easier to buy for exactly the price you want.
- The second thing is does is to give you a guideline if something out of the norm is going on with the stock.
If you see your potential stock trade 10 million shares for the day and it usually does only 2 or 3 million, you definitely want to check the news outlets to see if its something going on with the sector or market in general or if this volume is specific to your stock.
One major point many traders and investors make is they overlook or forget about earnings reports. Most stocks fluctuate to some degree after the release of a quarterly earnings report. Part of your due diligence on a stock should be to see when the next earnings report is due out. You want to know if you should wait to buy the stock and also once you own it, will the earnings date have any affect on options expiration.
In short, you need to do your own homework when you are about to put your own money on the line. Anyone can suggest the next stock they think is hot but no one cares about your money more than you do. So don’t let someone tell you where to put it without you first checking into it.
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