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?

Only 2.3% of shares are short. Not enough to create a short squeeze, but is validation the shares are crushed more than they should be.

I like the July $18 strike price puts for a sale of 20 cents or more to fade the current oversold status.


RadioShack Corporation (RSH) is one of the nation's largest consumer electronics retailers in the United States.

Short interest is the first thing raising a red flag with RadioShack. More than one out of three shares are shorted. The average analyst target price is $5.39.

The trailing 12-month price-to-earnings ratio is 8.3, and the mean fiscal-year estimate price-to-earnings ratio is 13.62, based on earnings of 30 cents per share this year. Investors are receiving 50 cents in dividends for a yield of 12.28%. Real Money Pro's Tim Melvin wrote an interesting article that included RSH, High on the New Lows(You need a Real Money Pro subscription, which is something you want if you're investing real money.)

It doesn't take a Masters in Finance to know a company can't pay out a 50-cent dividend with only 30 cents of income for very long. Plus, the shares are not all that cheap on a price-to-earnings basis.

RadioShack has missed in three out of the last four earnings and the one it didn't miss was an "even." Hardly impressive, but the reason stocks become oversold is because the market loses faith. I search for stocks that the market hates (but is wrong about).

There are two schools of thought when fading RadioShack's move lower. The first is to sell puts in the front month and collect less, albeit faster decaying options. The second is to sell August options for greater premium and lower monetary risk. I prefer the second school of thought. RadioShack is oversold, in my opinion, based on the weekly chart, and I want to give it time to regain its footing.

Another approach is to buy the shares directly. At $3.85 each, owning RadioShack is like owning an option that never expires. I don't care for this approach as much, because money can't be made if the stock doesn't appreciate (yes, perhaps dividends, but as stated earlier, I would not bank on it without improving earnings).

Arch Coal (ACI) is engaged in the mining, processing and marketing of low-sulfur bituminous coal. Arch Coal trades an average of 13 million shares per day with a market cap of $1.3 billion.

The trailing 12-month price-to-earnings ratio is 7.8, the mean fiscal-year estimate is for a loss of 47 cents per share this year. Investors are receiving 12 cents in dividends for a yield of 1.99%. In the last month the stock has fallen -12.73%.

For the same fiscal-year period, revenue has improved to $3.19 billion last year compared to $2.58 billion in the previous year. The bottom line has rising year-over-year earnings of $158.85 million last fiscal year compared to $42.16 million in the previous year.

Short interest is very high. Over 18% of the float is short and short sellers are generally the smart money. You need to really know what you're doing to bet against them.

Longer term, I like coal. While some coal use has moved to natural gas recently, don't expect it to last. Oil products like gas and diesel are much more expensive than coal, and natural gas can displace them in time. It's a mistake to believe natural gas prices will stay this low when demand for natural gas will rise and supply is not growing at the current price level.

I like fading the oversold status by selling the August $6 strike put options for 55 cents or more by the end of next week.


Peabody Energy Corporation (BTU) is the largest private-sector coal company in the world. It offers a broad portfolio of coal supplies and trades an average of 7.7 million shares per day with a market cap of $6.1 Billion.

In the last month, the stock has fallen -6.98%.

The trailing 12 month price-to-earnings ratio is 5.6, the mean fiscal-year estimate price-to-earnings ratio is 8.39, based on earnings of $2.65 per share this year. Investors are receiving 34 cents in dividends for a yield of 1.53%.

For the same reasons stated with Arch Coal, I like BTU. Of the two, I like BTU more, but it's a horse appease.

I like fading the oversold status by selling the August $22 strike put options for 75 cents or more by the end of next week.

The Procter & Gamble Company (PG) manufactures and markets a broad range of consumer products in many countries throughout the world. The company was founded in 1837 and is based in Cincinnati, Ohio. The Procter & Gamble Company trades an average of 15.3 million shares per day with a market cap of $164.4 billion.

Short interest is relatively low at 0.72%. Smart money didn't jump to short PG, even after the first lower guidance announcement. Yes, short interest did move up from the start of April, but off a very small basis. It's too early to know what the second revised guidance impact is.

The trailing 12-month price-to-earnings ratio is 15.3 and PG pays $2.25 in dividends for a yield of 3.75%.

I like fading the oversold status by selling the July $60 strike put options for $1.10 or more by the end of next week.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time of publication, the author held no position in any of the stocks mentioned, although positions may change at any time.

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