Bottom Fishing Stocks Using Options
Bottom fishing stocks is a term used to describe a stock purchasing strategy that focuses on shares in a company whose stock has taken a large and decisive price dive accompanied by notably increased volume.
The general idea is that the explosive volume tends to wash out the sellers from the market, leaving it ready for the buyers to come back in and take the share price to higher levels. Hence the term “bottom fishing stocks” – you’re fishing for stocks at what you believe may be the bottom levels of its price action and ready for a turnaround.
Buying These Stocks at a Discount
If you know anything about options trading then you’ll realize that you can both buy (go long) or sell (go short) option contracts. You’ll also know that in the USA one option contract covers 100 shares while in other countries such as Australia, they cover 1,000 shares – so you’ll need to bear this in mind when it comes to the level of capital you wish to invest. Do you intend to purchase multiples of 100 or 1000 shares?
The best way to illustrate bottom fishing stocks for a discount using options is to take an imaginary example. Let’s say XYZ company stocks have recently fallen dramatically to around $17 on high volume – sometimes referred to as ‘capitulation volume’. The stock has since been trading in a range and you believe it can’t fall much further so it’s a good buy if it goes as far as the $15 price level. You also have sufficient capital to purchase 500 shares.