Dykstra: Best Buy Options Are a Better Buy

Now, as we do every Friday, it's time to take a look at what the readers have to say.

Being new to options, I have been trying to duplicate the DITM strategy, and I wonder how you screen for your picks. What criteria do you use when selecting stocks?

Thanks for all your hard work, and I love the column.

-- Michael

Dear Michael,

When selecting a stock for a DITM call, I will choose one that fits the following criteria:

1. Strong financials: Look for low price-to-earnings ratios with a high return on equity; money machines that seem to print cash and keep it, resulting in year-over-year earnings growth and little or no debt -- in a nutshell, companies that have the resources to weather any storm.
2. Stocks that are undervalued or oversold. This will result in a stock that has a better chance to rise in the short term.
3. Stocks that have brand recognition and/or are the best in their industry. No. 1 companies are that way for a reason, and it never hurts to go with the best.

Once you have made your selection, you need to be aware of what is happening in the overall market, the stock's sector, and of course what is happening at the company itself. I like to run my selections through Value Engine and Stockpickr as well.

It's also a good idea to see who else likes the company and who the major shareholders are. It is important to know when the company will be reporting earnings, go ex-dividend or implement or end a share-buyback program. And it's good to compare the number of shares outstanding vs. the number of shares in the float.