Three Optionable Tech Stocks for Traders

Once upon a time not too long ago, trading and tech stocks went together like peanut butter and jam. And while much of the passion that traders felt toward tech stocks has been lost in recent years, these stocks still tend to have the sort of growth and volatility that continues to make them often excellent candidates for short-term trades.

The three stocks in today's discussion have an additional feature that may make them attractive to traders: all three -- O2Micro International (OIIM | Quote | Chart | News | PowerRating), FLIR Systems (FLIR | Quote | Chart | News | PowerRating), and Dolby Laboratories (DLB | Quote | Chart | News | PowerRating)-- are all optionable, meaning that traders can buy calls on any one of these names rather than buying common stock.

Option trading can be risky, including the possibility of an option expiring worthless if it is not sold in time. But many traders like the idea of the fixed risk involved when buying options, as well as the leverage that can make options trades quite lucrative when sold at a profit. Be sure to consult your broker to find out whether or not trading options is for you.

Nevertheless, whether you prefer options or common stock, these three 8-rated stocks are among the best opportunities for traders in the current market. Importantly, all three stocks began the day on Wednesday with 8-ratings and those ratings have held up in the first few hours of trading. This means there is still time to buy the temporary weakness in these names, with the goal of selling on strength as other traders catch on to the value of these plays.

How do traders take advantage of short-term plays like these? How do traders "buy weakness and sell strength" in these names?

Our PowerRatings Strategy Guide provides a number of excellent hints and tips for traders looking to buy in the green, high PowerRatings stocks and sell the low PowerRatings stocks that are in the red. And among these hints and tips is an excellent strategy for buying stocks like OIIM, FLIR and DLB: good stocks suffering the kind of temporary weakness our research tells us is better bought than sold.

Specifically, the strategy calls for placing a limit order for the stock below the previous day's closing price. This helps keep traders from chasing stocks, paying more for them than they should. Again, the idea is to buy weakness, not to buy strength. By using a limit order, the trader can pinpoint the price he or she will pay for the stock.

Traders using options to trade these stocks can use contingent orders to buy a call, for example, when the price of the underlying stock falls below the level of the previous day's closing price.

This method establishes our entry. Once we are in, how do we get out?

There are a variety of methods for exiting a winning trade. Our preference, however, is to use dynamic exits that take into account the market's movement when letting us know that it is time to take profits. We use a 5-day moving average of the close and wait for our stock to close above that 5-day moving average. Once it has done so, we exit at the market on the open of the following session.

With options, this exit approach remains fairly simple and straightforward. By waiting for the open of the day following the close above the 5-day moving average to exit the position, options traders do not have to worry about watching the market all day to see when the 5-day moving average is penetrated to the upside. Simply examining all positions in the hours after the close is all a trader using options need do to know whether or not it is time to place the order to sell at the market on the open of the following day.

Click here to read more about this strategy of trading high PowerRatings stocks in the short-term.

David Penn is Senior Editor at TradingMarkets.com