Stock options are interesting because they can provide a glimpse into the future -- or at least what investors predict the future holds. Because options pay off at a future date from the time of purchase, stock option trends can indicate where investors expect stocks to move.
The two major stock options are call options and put options, and they represent optimism and pessimism respectively. Call options are the option to buy a stock at a future date and at a price set today -- calls become profitable when the stock rises, so buying a call indicates the investor expects the stock to rise.
Put options are the exact opposite. 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. This becomes profitable if the stock falls over that time period, so investors buy puts when they become pessimistic on the stock's outlook.
The put/call ratio
The put/call ratio is the number of put options relative to the 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.
Simply put, a high put/call ratio reflects a bearish sentiment about a given stock while a low ratio reflects a bullish sentiment. For this article we focus on stocks with low put/call options.
To demonstrate this idea, we screened for stocks for that are seeing significant decreases in their put/call ratios over the last 10 trading days, indicating bullish changes in sentiment from the options market.
To further refine the list, we screened for companies that have significant cash holdings relative to average quarterly operating expenses -- a sign of strong liquidity. All of the companies mentioned below have cash holdings that exceed 4 times the average quarterly operating expense.
In other words, besides experiencing bullish option sentiment, all of these companies could function for more than four quarters without generating any revenue.
Options traders are bullish on these highly liquid names -- do you agree? Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. Repros Therapeutics
6. MELA Sciences,
7. Two Harbors Investment Corp.
8. Thompson Creek Metals Company
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. Options data sourced from Schaeffer's, accounting data sourced from Google Finance.
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