Fundamental Analysis: Picking the Right Underlying Assets

One of the most crucial elements of successful options trading is selecting the right underlying asset. Your choice of stock or ETF can make or break the trade, regardless of how well-constructed your strategy may be. While many options traders rely heavily on technical indicators, incorporating fundamental analysis can give you a serious edge—especially if you're aiming to be a self-sufficient trader on the path to financial freedom.

In this article, we’ll explore how earnings reports, market news, and broader sentiment impact options decisions. You’ll learn how to evaluate a company’s fundamentals to time your trades more effectively and filter for quality assets worth trading options on.

Whether you’re selling puts for income, playing earnings with a straddle, or hedging a long-term position, fundamental analysis is the strategic lens that helps you see the bigger picture.

What is Fundamental Analysis?

Fundamental analysis is the process of evaluating a company’s financial health, industry position, and macroeconomic context to determine its intrinsic value. While stock investors use it to identify undervalued or overvalued equities, options traders can leverage it to:

• Time bullish or bearish strategies more accurately
• Identify catalysts (e.g., earnings beats, product launches)
• Avoid trading on poor-quality stocks with unpredictable moves

Fundamentals help validate or challenge your technical outlook. For example, a bullish chart pattern on a company that just slashed guidance might not hold up. By blending both technicals and fundamentals, you create a more well-rounded, confident trade setup.

Key Factors That Influence Options Trading Decisions

1. Earnings Reports

Quarterly earnings announcements are some of the most powerful short-term drivers of stock price movement.

What to look for:

• EPS (Earnings Per Share): Is it beating or missing expectations?
• Revenue growth: Is the company growing top-line sales?
• Forward guidance: Is management optimistic or cautious?

Options strategy insight:

• Use straddles or strangles if you expect big post-earnings volatility
• Use credit spreads if you expect implied volatility to drop post-announcement
• Avoid buying options too close to earnings without a volatility edge—IV crush can hurt you

2. Macroeconomic Data and News

Broader economic data can impact entire sectors and markets:

• Interest rate decisions (Federal Reserve)
• Employment reports
• Inflation metrics (CPI, PPI)

Options strategy insight:

• Consider macro trends before initiating trades. For example, in a high-inflation environment, consumer discretionary stocks might underperform.
• Favor put spreads or bearish trades on companies exposed to macro headwinds.

3. Sector and Industry Performance

Strong sector performance often drives individual stock movement.

Examples:

• Tech stocks rising due to AI advancements
• Energy stocks climbing with oil prices

Research tip: Use sector ETFs (like XLK for tech or XLE for energy) to gauge momentum. If the sector is under pressure, even fundamentally sound stocks can decline.

4. Analyst Ratings and Sentiment

Analyst upgrades/downgrades and sentiment trends can create short-term trading opportunities.

What to track:

• Price target changes
• Institutional activity
• Options flow and unusual volume

Options strategy insight:

• A stock with improving sentiment may be ripe for bullish vertical spreads
• Negative sentiment may support bear call spreads or long puts

5. Company Fundamentals

Beyond headlines, dig into:

• Profit margins
• Debt levels and cash flow
• Insider buying/selling activity

Use platforms like Yahoo Finance, Finviz, or Morningstar to screen companies. A stock with strong fundamentals is more likely to trend predictably, providing better context for directional trades.

Research Tips: How to Pick the Right Underlying

1. Use Earnings Calendars

Plan your options trades around earnings seasons. Tools like EarningsWhispers or MarketBeat help you monitor dates and expectations.

Example: You may want to buy a long straddle on a stock with a history of sharp earnings moves and rising implied volatility.

2. Read the 10-Q and Conference Calls

Earnings reports provide granular insight into company performance. Look for:

• Revenue segments that are growing/shrinking
• Operating income trends
• Forward-looking statements

Conference calls often reveal management tone. A confident CEO might signal a bullish setup—even if the numbers are flat.

3. Monitor Volatility Metrics

Use implied volatility (IV) and historical volatility (HV) to assess:

• Whether options are overpriced or underpriced
• If a volatility strategy like a calendar spread or iron condor is appropriate

IV Rank and IV Percentile are especially helpful for timing premium-selling strategies.

4. Compare Stock vs. Sector/Index Performance

Look at how a stock moves relative to its sector and the S&P 500. A stock outperforming its peers in a weak market may be a strong candidate for bullish trades.

5. Track News Trends and Themes

Keep tabs on recurring themes in the news:

• AI innovation
• Regulation in healthcare
• Electric vehicle adoption

These themes influence sentiment and options pricing. Stocks aligned with positive trends may offer better opportunities.

Illustration: Comparative Charts of Stock Performance and Earnings

Visuals play a big role in understanding how fundamentals impact price movement. Here’s what to include in your charts:

• Earnings beats/misses highlighted with icons on price charts
• Volume spikes on earnings days
• Comparison lines for stock vs. sector or index performance
• Implied volatility overlays before and after earnings

You can use tools like:

• TradingView
• Finviz Elite
• Thinkorswim

Example:

• Chart 1: AAPL’s price movement around earnings (noting IV crush and price spike)

Chart 2: NVDA vs. XLK (Tech sector ETF) showing relative strength

 

Wrapping Up: Why Fundamentals Matter to Options Traders

In a world where options can expire worthless, picking the right underlying asset is the most important part of your trade.

Fundamental analysis:

• Helps you align your strategy with company and market context
• Gives you confidence to size up trades and hold through noise
• Filters out low-quality, speculative setups in favor of stable, high-potential trades

If you dream of escaping the 9-to-5, becoming a self-sufficient trader, or creating multiple streams of income through options—fundamentals are your foundation.

When you understand what’s driving a stock beyond the chart, you trade with precision.

Curious about Option Stranglers?

At www.optionstranglers.com.sg we offer:
• In-depth live 1-1 sessions / group classes
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• Community mentorship and support

👉 Ready to upgrade your strategy and trade like a pro? Visit www.optionstranglers.com.sg and start your journey to financial freedom today.

Your future is an option. Choose wisely.

Disclaimer: Options involve risk and are not suitable for all investors. Always consult with a financial advisor before investing.