Five Oversold Stocks With Option Plays

NEW YORK (TheStreet) -- As daunting as it may be at times, buying stocks when they are unloved by others demonstrates an ability to separate emotion from logic. Companies become oversold when emotion takes over in the market and drives the prices lower.

The desire to escape the pain of further losses results in many selling at the precise moment they should buy. Of course, sometimes stocks become oversold as a result of proper money-management stop-losses triggered. Having a stop loss is vital to investing survival and your exit plan must be put in place before considering an entry.

Typically, stocks do not become oversold on a daily or weekly timeframe because of stop-losses triggered. It's more often the result of emotion dictating selling, and emotional selling sets up our opportunity.

Here is a list of five stocks that are oversold on my charts. My preferred method to exploit the weakness is to sell put options or write covered calls (pretty much the same thing). The average trade lasts three to four weeks. I am boring, so I like selling time premium, but others have successfully adjusted and use call options or buy the stocks outright to liven up the party.

Hewlett-Packard Company (HPQ) trades an average of 17 million shares per day with a market cap of $38.6 Billion.

Currently, six analysts have buy recommendations, and the target price is $27.44. The 200-day moving average is about $25. The 200 MA is where HP will find the next greatest resistance. The 60-day moving average is currently about $22.69 and is the next resistance level.

The mean fiscal-year estimate price-to-earnings ratio is 4.8, based on earnings of $4.06 per share this year. Investors are receiving 53 cents in dividends for a yield of 2.71%.

In the last month, the stock has fallen 14.2%. It's interesting to see HP trigger an oversold signal. I shifted from a bullish position to bearish after HP started playing musical CEO chairs. I love HP computers; I just don't love the stock at this time. Apparently, the market doesn't care for HP either, based on the shares selling off into the $19s.

I recently wrote a couple of articles about HP on TheStreet, which you may be interested in reading: Can Anything Save HP and Does Surface Mean Another Poor Quarter for Dell and HP?

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