Generating income in retirement is massively important but many people struggle when it comes to finding the right stocks. Maybe you do as well. Sometimes it can feel like trying to find a needle in a haystack. Too many stocks, don’t know what to look for and so you spend way too much time looking for that one trade and just as you are ready to give up in frustration, you pick one and it ends up going against you.

This happens a lot. People make mistakes, but if you know what to look for and how to fix mistakes quickly, you are more likely not to give up and will find more success than failure. Giving up is not an option. Trading Options for income is the best option.

There are two main income sources we teach to generate income with your trades. Dividends and option trades. The options trades are broken down into two strategies, covered calls and credit spreads. The options trades tend to be the main contributor to the income system. Surprised? Most people are, just because many of them view finding option trades as complex and intimidating.

5 Principles to Identify the Right Stocks for Option Income Trades

1. Match the Trend. Consider the overall market direction and match your stock to the market’s direction. When the market is in an uptrend, focus on bullish trades and only look at stocks that are also in an uptrend. When the market is in a downtrend, focus only on bearish trades and look for stocks in a downtrend.

Here’s a look at what it means to match a stock to market direction. At the top you see the overall market trend, and, on the bottom, you see a stock graph. Notice how the stock follows the trend of the market. When the market is trending down, the stock you select should also be trending down.

When the market is trending up, the stock you select should also be trending up. This stacks the probability of success in your favor. When the market is going down, your bearish income trades have a higher probability of winning. When the market is going up, your bullish income trades have a higher probability of winning.

You’ll want to avoid mismatches like the graphs below. A stock that isn’t following the trend of the market adds a layer of unpredictability to your trade and thus, increases the risk. Always start by matching a stock to the overall market trend.

2. Price Passes the Gopher Test. Gophers poke their head out of the hole to make sure the coast is clear before leaving their den. On bullish trades, you want the price of the stock to be higher than the past. On bearish trades you want the price to be a low point. Look at a 1-year graph and a 3-month stock graph and ensure that the last bar of the graph is HIGHER than the first.

PRO TIPS: Your entry point would be if today’s price is higher than yesterday’s high. In this case, the gopher cleared the way for a go signal. On bearish trades, the most important point is that the stock is falling in price. On a 1- year graph and 3-month graph, the last bar should be lower than the first.

3. Check the Earnings Engine. Earnings is the engine that drives stock prices higher or lower over time. If earnings are strong, the stock price is likely to rise over time and helps assure the stock price won’t move against you. If the earnings engine is weak, the stock price is more likely to fall over time and is susceptible to quick moves down. You can look at our Earnings per Share (EPS) indicator, which is applied to every stock in our database. It is a leading 12-month EPS forecast, combining recent earnings performance and traditional fiscal and/or calendar year earnings forecasts. For bullish, you want to see the EPS to be steadily rising. The opposite would be true in Bearish, EPS would be falling.

4. Look for High Volume. Heavily traded stocks are likely to have heavily traded options. It’s an important factor because the Bid and the Ask are closer, and it makes it easier to have more timely entries and exits. So, by looking for stocks with high volume, you’re helping to ensure the options are more heavily traded and thus it helps you get in and out of a trade at the price you desire.

5. Screen Your Stocks. Narrow your stock search to the best candidates. The VectorVest Unisearch tool allows you to filter them based on the exact criteria I laid out here today. A built-in search available to our coaching clients finds stocks that are in an uptrend and uses our Comfort Index (CI) to sort the stocks. This finds stocks in an uptrend and resistant to price declines. It also finds stocks with a high earnings engine and looks for stocks that have a high Relative Safety rating. And, it makes sure the stocks have an average daily trading volume over ½ million shares.

I’ve given you the 5 principles to find and identify the right stocks for option income trades. It’s just one part of the options income system but it’s an important part to get your plan in place to create your income stream. It’s a place to start the conversation. It’s the time to start your options for income plan for a better retirement.

What you should do next…

  1. Get our latest blogs delivered right to your inbox, subscribe to our newsletter.
  2. The market moves fast! Get our most current evaluation of this stock with our FREE stock analysis tool.
  3. Looking for stock picks? Not sure if now is the right time to buy/sell? For a limited time, enjoy the full benefits of a 30-day subscription to VectorVest for only $0.99 (usually up to $148/month) . Get access to our full list of screeners showcasing our top stock picks that tell you exactly what to buy, when to buy, and when to sell.