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Fundamental and Technical Analysis for Options Trading

Patrick Ceresna
February 28, 2014
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Fundamental analysis remains the most commonly utilized investment tool available. Through its use, investors seek to filter out the strongest, or best, valued companies in the market. There is no question about the value of utilizing fundamentals, but it does present the investor with an obstacle. There is a distinct disconnect between balance sheet analysis and the high paced action of the live markets.

“Over the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine (i.e. its true value will in the long run be reflected in its stock price).” Benjamin Graham

This best describes the dilemma. No matter how good the value and fundamentals are, the market will not reflect the value in the price until all investors recognize the value (the herd is the voting machine). While there are many people beating the fundamentals drum, they rarely emphasize the psychological fortitude that investors must endure to see through a value investment or fundamental outlook.

The psychology in investing is a powerful force. More importantly, many retail investors tend to invest money that they cannot or do not wish to risk. In many cases, even if fundamentals would prevail over a longer time horizon, many investors that cannot stomach watching their investments decline succumb to selling to stop the pain.

There are two alternative solutions:

1. Develop the psychological fortitude needed to be a long term value style investor.

2. Identify the stocks that you fundamentally want to own and utilize technical analysis in an attempt to identify when a new uptrend could potentially be underway to attempt to diminish the risk being caught on the wrong side of a trend.

We are big advocates of applying technical analysis to fundamental and value based stories in attempts to identify key turning points in trend. The shortcoming of this approach is that the technicals are attempting to time the ambiguous “voting machine” part of the market. This is where options as an investment tool can be utilized.

Options represent a defined certainty, one that the stock market alone cannot give. The most basic example is the protective put strategy. If the investor has both fundamental and technical reason to buy, the investor could simply buy a short-term put protection to fix a guaranteed exit price (if the technical trend fails). The put represents an insurance policy, and more importantly, a psychological floor for risk. To learn more about using puts as protection, investors can watch many great free educational videos on the www.m-x.tv site.

Those of you that are interested in learning more on this topic, I am going to be in Vancouver April 5th to speak at the Options Education Day at the Fairmont Pacific Rim Hotel. I will be presenting a more advanced look at Fundamental and Technical Analysis for Options Trading. Other great speakers like Jason Ayres, Peter Lusk from the OIC and Richard Croft will be there. I am particularly interested to hear Richard discuss the “The Unintended Consequences of Tapering”. Click this link to learn more.

Patrick Ceresna
Patrick Ceresna http://www.bigpicturetrading.com

Derivatives Market Specialist

Big Picture Trading Inc.

Patrick Ceresna is the founder and Chief Derivative Market Strategist at Big Picture Trading. Patrick is a Chartered Market Technician, Derivative Market Specialist and Canadian Investment Manager by designation. In addition to his roll at Big Picture Trading, Patrick is an instructor on derivatives for the TMX Montreal Exchange, educating investors and investment professionals across Canada about the many valuable uses of options in their investment portfolios. Patrick is also co-host to the MacroVoices weekly podcasts. Patrick specializes in analyzing the global macro market conditions and translating them into actionable investment and trading opportunities. With his specialization in technical analysis, he bridges important macro themes with the attempt to understand when those trends are beginning and understanding where they likely to go. With his expertise in options trading, he seeks to create opportunities that leverage returns, while managing/defining risk and or generating consistent enhanced income. Patrick has designed and teaches Big Picture Trading's Technical, Options and Macro Masters Programs while providing the content for the members in regards to daily live market analytic webinars, alert services and model portfolios.

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