Stock screeners are useful tools to screens stocks. I use FinViz.com. I used the following criteria to select stocks for my covered call:
- Overall market condition is bullish or neutral (We take a different strategy for bear market). I use Chartadvisor.com (Weekly Summary, published every Friday) and Schaeffersresearch.com’s Monday Morning Outlook (published every Saturday) as well as technical analysis of S&P 500, DJ’s Industrials and Nadaq indexes to determine the market sentiment.
- The stock price chart must be bullish (Stock price has to be above 50 and 200 SMA, on a 1-yr or 2 yr chart, at least above 200 SMA). This makes it less likely for a stock to suddenly go down. Remember, covered call is a bullish strategy and we may lose money if the stock goes down. I usually use Stockcharts.com and also use yahoo’s interactive charts.
- Price> $10 (excluding penny stocks which are too speculative in nature).
- Sales Growth of past 5 years > 15% (suggesting growth stock with expanding business)
- Price > SMA50 and > SMA200 (indicating the stock is in a upper trend)
- Volume >500K (relatively high option volume and open interest, enabling the buy and sell of option contracts. We need to be able to get in and out of positions easily.)
- Optionable (a must for covered call) with high option premium (high time value). This is where the profit is.
- Dividend. I look for stocks that pay >5% dividends (annualized). There are more and more stocks these days that both pay a decent dividend as well a nice option premium (my favorite stock is LVS, which is relatively stable that pays a high dividend. AAPL is also on my list).
Sometimes FinViz.com will give you a very long list based on the criteria I enter. In that case, I may change the selecting criteria (e.g., increasing dividend to 10%) to narrow the list down to a manageable 10 or less. Then I use a spreadsheet to compare the percentage of option premium using at the money call to determine which stock has the most time value. Finally, I choose stocks that have the best annualized return (option time value + dividends).
