Looking for Trades? Introducing New Stock Trading Filters
Stock Stats Trading filters are here. You may be wondering why the screening platform looks a bit different. That’s because the team has been hard at work sizing up new features for traders and implementing them into the system.
Investors using the Option Party platform still have access to the same great features they had before. Using probabilities to model highly accurate trades is still there. A plethora of implied volatility metrics are still available. Even earnings and ex-dividend filters can be used for ETFs and individual stocks.
So what did we come up with? There’s a long list, so let’s break a few of them down. To find the new filters were about to discuss, users can head over the the “Screening” tab on the upper left side of the home screen once logged in. After selecting a given strategy, head over to the filters on the right and find the tab that says “Stock – Stats.” The first few options we’re familiar with, like excluding or exclusively searching for ETFs. In the order that they appear, here are the new ones.
One of the more popular back-of-the-envelope calculations used in the stock market is the price-to-earnings ratio or P/E ratio. This ratio is quickly generated by dividing the stock price (P) by the company’s last 12 months of earnings (E). As a result, investors can quickly get a look at whether a stock is overvalued, undervalued or trading near fair value.
The P/E ratio could have an article all to itself. That’s because it depends on how far below the surface investors want to to go. First, the P/E ratio isn’t a one size fits all. For instance, it doesn’t work very well with unprofitable businesses. Second, due to certain accounting metrics or the way earnings are shown on the income statement, the actual EPS of a company may be over- or understated. This can alter the P/E ratio. The P/E can also be used on a trailing basis or a forward-looking basis based on earnings estimates for the future.
However, the P/E ratio acts as a solid starting point for investors because it can be used to equally compare different entities. For instance, it can be used to compared Pepsi vs. Coke, helping to figure out if one is more expensive than the other. It can also be used against a specific stock’s historical P/E average to find out where the current stock valuation stands vs. its average valuation. Finally, it can be compared to its respective industry or sector average, as well as the broader market’s valuation.
For the use of an Option Party filter, the P/E Ratio has four filters: “Very low,” below 5, “low,” below 10, “moderate,” below 20, and “high,” less than 50.
Investors can now filter trades by market cap. This one is fairly self-explanatory. Users can now search by three criteria: Small cap, mid cap and large cap. Small cap includes stocks that trade with a market capitalization below $2 billion, while mid cap covers stocks with a market cap between $2 billion and $10 billion. Large cap includes all stocks above $10 billion.
This feature works well for investors who have a specific preference for certain stocks. Some may only want large cap stocks, as the option volume can be relatively thin on small cap stocks, thus making the bid/ask spread too wide for comfort. Others like the large move small cap stocks tend to come with, and may prefer these stocks despite a wider spread. Additionally, some may prefer sub-large cap stocks, but want to exclude small cap holdings. Thus, a mid cap filter may be most appropriate.
We just talked about how volume can impact the bid/ask spread of an option. The more volume that the underlying stock trades, the larger the market cap and the closer to money that the option is trading, generally speaking the tighter the spread.
That’s not always the case, but it does serve as a good rule of thumb. In this case, the Average Volume filter is talking about total trading volume for the underlying stock — not the option. Scanning by volume can be misleading. That’s because low-priced stocks tend to trade a ton of volume, but can often times have very low market caps. That may not be what investors are looking for.
But when the Average Volume filter is used in conjunction with the Market Cap filter as well as the Minimum/Maximum Stock Price filter, investors can filter down to quite a specific pinpoint should they desire to do so. For Option Party users, they’ll be able to filter stock volumes by “very heavy,” which trades more than 10 million shares, “heavy” which trades more than 1 million shares, “moderate,” which trades over 500,000 shares and “thin,” which trades over 100,000 shares.
Beta is another great filtering option. It measures how volatile a stock is against the broader market. The market trades with a beta of 1. So for example, if shares of ABC trade with a beta of 2.0, that stock is roughly twice as volatile as the market. That means when the broader market is up 1%, ABC is usually up 2%. The blade cuts both ways though, as when the market is down 1%, ABC is generally down 2%.
A beta of 0.5 works in the opposite manner, meaning it is half as volatile as the market. If the market rallies 4% in a month, XYZ, with a beta of 0.5, would likely rally 2%. How do you get negative beta? Negative beta can occur with a few different assets. Inverted and/or leveraged ETFs, along with gold and other assets can have a negative beta against the market, although it is not common for individual stocks to have negative beta.
In the case of the Option Party platform, it has eight different filters for beta ranging between “Over 4” and “Under -4.”
This is an interesting filter, because it means different things to different investors. Put simply, institutional ownership is expressed as a percentage between 0% and 100% and measures how much of the stock is owned by large funds (institutions). A stock that has more institutional ownership could be more stable, thanks to larger, potentially longer-term investors. In essence, there could be a “bid under tghe stock,” helping it to levitate higher.
However, at the same time this can make the stock more volatile. For instance, if a negative, secular event occurs (earnings problems, an accounting scandal, etc.) these large funds tend to exit in droves, causing massive losses in the stock price. So like we said, depending on the investor, they may be looking for that type of exposure or they may be looking to avoid it.
On the Option Party platform, there are five choices to filter by: Over 75%, between 50% and 75%, between 25% and 50%, between 10% and 25% and below 10%.
52-Week High and Low
This is another obvious filter, being able to scan for stocks trading at or near an annual high or low. On the Option Party platform, this means scanning for stocks that hit a new 52-week high or low “within the last week” or “within the last month.”
Reasonably, investors could scan for both simultaneously — that is, stocks making new highs or new lows. It shows which names have momentum and which ones are completely lacking it. That’s why investors can scan for both bullish and bearish plays. One thing to note, though, is that 52-week lows don’t always mean investors have to look for a bearish setup. In fact, bullish setups can be found within 52-week lows, as a bounce could be imminent.
The opposite applies to stocks making new highs, although many traders may be looking for those trends to continue, rather than reverse. That’s why Option Party’s scanning preferences can be tailored to each individual trader and their strategy.