Before jumping into a new stock investment, it's important to exercise due diligence and look at a few things-important among them is market sentiment.
Is the market recently bullish on the company? Has it taken a turn for the worse? One way to address these questions is by looking at the stock's put option / call option ratio (otherwise known as the "put/call").
This is how it works:
Selling a call option on a stock you own allows someone else (the call option buyer) to buy your stock at a higher price than today's at a future date (which the buyer would only do if the stock rises above the set price, called the "strike price"). For selling the call option, you the seller get paid a premium that can be considered additional income.
If the stock does not rise above the strike price, you keep your stock and the premium. If the stock rises above the strike price, you sell your stock at the strike price, which cuts off upward profit potential, but you still keep your premium.
Buying a call option reflects the opinion that the price of a given stock will rise (bullish).
The opposite of calls are puts. Whereas calls are the option to buy the stock, puts are the option to sell a stock in the future at a price fixed today.
A put option reflects an opinion that the price of a given stock will fall (bearish).
Put/call ratio is the total number of put options relative to the total number of call options for a given stock. If there are more put options (a put/call ratio greater than 1), then there are more investors who think that the share price will decrease than there are investors who think that the share price will increase.
To put it simply, a rising put/call ratio reflects an increase in bearish sentiment, while a decreasing put/call ratio reflects an increase in bullish bets.
Interested in analyzing stocks with bullish options sentiment?
To compile this list, we started by identifying about 200 stocks that have seen a sharp decrease in their put/call ratio over the last 20 weeks (i.e., bullish options sentiment).
From this list, we collected data on profit margins, and identified the names that have reported higher than industry average profit margins.
Options traders are bullish on these profitable names -- do you agree? Use this list as a starting point for your own analysis.
List sorted by the change in put/call ratio. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. Mobile Telesystems OJSC
2. Atlantic Power Corporation
4. Rofin-Sinar Technologies
5. Taiwan Semiconductor Manufacturing Co. Ltd.
6. Kellogg Company
7. Pall Corp.
8. Sinclair Broadcast Group
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Disclosure: Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Profitability data sourced from Fidelity, Options data sourced from Schaeffer's.