Stocks are mixed today after Dow component 3M disappointed Wall Street with its latest quarterly earnings release. However, large-cap tech stocks like Facebook and Microsoft are helping the Nasdaq out.
Now, if you know anything about me, I stay in my lane…
I focus on penny stocks that have the potential to move 15-20% (or more) in a few days. You can find these stocks if you pay attention to catalysts and find a good chart setup (I have three, find out what they are here)
However, that doesn’t mean there aren’t other opportunities in the market. For example, Nathan Bear, a student of mine who has gone on to become a mentor in Millionaire Roadmap, primarily trades options… something I’ve sworn off.
(Nathan Bear took a $37K trading account and turned it into $1.75M in trading profits under my coaching. He now teaches others how to trade his winning style in Millionaire Roadmap)
And you know what?
Despite Nathan being an options trader, his trading style is actually more conservative than mine. In fact, I often recommend to new clients to follow and learn from him first (after they’ve done enough paper trading and feel comfortable)
(Nathan was consistently losing money until 2016, this year he is up to a whopping $300K plus, if you’d like to learn more about his trading secrets, here you go.)
So what kind of trader is Nathan?
A trend trader. In other words, he likes to buy call options on strong stocks in a bullish market… and buy puts on weak stocks in a bearish market.
Now, with the market teetering at all-time highs… we know Nathan is looking at long setups at the moment…
But that leaves us with thousands of stocks…how does he filter to find the best stock setups?
Nathan, posted a video for Millionaire Roadmap clients last night, outlining his filtering process. You can find that video in the member’s section.
Now, Nathan uses a free website called finviz.com to narrow down his stock selection. That said, the first step he takes is to eliminate stocks that are not trending.
Finviz.com offers a free screener, and that’s what Nathan uses to find his trade ideas.
Step One: The trend is your friend
Since stocks are trending higher, Nathan wants stocks that are slightly off their 52-week highs. He’s looking to find stocks that are resting or consolidating near highs, hoping to catch them before they break-out.
That said, on the finviz screener, there are three tabs- descriptive, fundamental, and technical.
In the technical tab, you’ll want to select stocks that are 0-10% off their 52-week highs.
This eliminates all stocks that aren’t trending and bullish.
Step 2: Eliminate stocks that aren’t optionable
Since Nathan is looking to put on these trades with options, he wants to make sure there are options available in them.
If you go to the descriptive tab in the screener, you’ll find a section called option/short, click on the optionable selection.
Step 3: No cheap stocks
Since Nathan is trading options, he wants to avoid low priced stocks. More expensive stocks ($30 and above) tend to have juicer premiums, and offer better liquidity. That said, Nathan will go to the descriptive tab and highlight stocks that are $30 and above.
Step 4: Turn up the volume
There can be a ton of slippage when you’re trading options if you choose illiquid options. That said, options are derivatives of stocks.
In other words, if the stock doesn’t move much, the options will move less. So we want to trade options on stocks that have a decent amount of trading volume. Nathan likes to select stocks that trade at least 100K shares per day.
In the descriptive tab, he’ll highlight stocks over 100K in average volume.
Step 5: It’s all about the squeeze
A short squeeze occurs when a large number of shorts in a stock are forced to cover their position because the stock is trading higher. The combination of longs trying to get in and shorts buying (to close out) creates immense buying pressure that pushes stocks to “squeeze higher”
That said, Nathan believes that stocks with high short interest are some of the best to play. Furthermore, he filters for them by going to the descriptive tab in finviz and highlighting float short over 20%
After you’ve highlighted these filters, you’re left with just a small number of stocks to select from. In fact, based on this criteria, you’re left with only about 6 stocks.
That might be too narrow of a list. So what Nathan suggests is you play around with the Float Short tab. Instead of over 20%, you can try over 15% or even over 10%
Once you’ve narrowed your stock universe from a few thousand to maybe 5-30 names, it becomes a lot easier to do a more in-depth analysis. Nathan is sort of a chart junkie, so his work isn’t finished after the filter.
His next step is to examine the chart. His ideal set up is finding stocks that are forming a “bull flag/pennant, like this setup in UBNT.
(If you want to hear about Nathan’s story, you can read about in theMillionaire Maker Blueprint)
Nathan’s TPS system: trend, pattern, squeeze:
(if you’d like to learn more about this actual trade, click here)
The purpose of showing you the charts above is to let you know that filtering is just the first step of the process. Next time, I’ll share with you what the TPS system is all about and how Nathan uses it to consistently profit in the market.