Fundamental Analysis For Option Traders

It is the author’s belief that fundamental analysis can help option traders. While option traders typically rely on charts to predict price performance of the underlying security, it is important to understand that price changes as a result of a number of factors.

If a company has got 2 divisions and it’s stock market performance has not been exactly fruitful, a company may sell its assets of to recapitalize the firm. The company may pay down debt for a number of years, before eventually rewarding shareholders with a dividend.

The entire process described here will likely result in share price appreciation if the price of the company is especially cheap and undervalued. These corporate changes, recapitalization, changes in capital structure, resource conversion potential can only be found in the financial statements of the company, the underlying security. The charts may not tell a trader anything in such an instance, and all of a sudden, the underlying’s price shoots up significantly, resulting in a spike in the premiums of the call options.

Hence, with fundamental analysis, an options trader can detect changes in the underlying which are not noticeable in the stock market. The above scenario is but one instance of that. Options traders should have at least a basic understanding of the topics below and how they affect each other.

1. Cashflow
2. Current assets
3. Current Liabilities
4. Deferred Taxes

5. Depreciation
6. Dividends
7. Earnings per share
8. EBITDA(operating cashflow)

9. Interest cover
10. Inventory
11. Long term liabilities
12. Market capitalisation

13. Minority Interest
14. Net Assets
15. Net Earnings

16. Net EPS
17. Ordinary shares/common stock
18. Preference shares
19. Revenues
20. Share price
21. Share split
22. Shareholders’ equity

23. The balance sheet
24. Total liabilities
25. Total assets
26. Total Return
27. Book value of equity per share

28. Current Ratio
29. Dividend Cover
30. Dividend Yield
31. Earnings per Share and Earnings per share growth
32. Forward PE

33. Interest Cover
34. Leverage or Financial gearing
35. Payout Ratio
36. PEG Ratio
37. PE Ratio
38. Price to book value

39. Price to Cash flow
40. Price to sales ratio
41. Quick Ratio

42. Return on assets
43. Return on Equity
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