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Options traders spend a lot of time picking strikes and expirations, but the most important input often sits one layer below the options chain: the underlying stock. Because options strategies may have leverage, convexity and path-dependence, the “right” underlyings express a repeatable edge that can be measured as a factor — something systematic about the stock that improves the odds of favorable forward returns, volatility behavior, or both. Sometimes the edge can be found relatively simply by measuring the price of options (implied volatility, or “IV”) and how the stock typically behaves. Underlyings that persistently price implied volatility (IV) above realized volatility (RV) may support premium-selling approaches, for example. Interestingly, the relationship between implied and realized volatility alone has been demonstrated to exhibit alpha even when looking at the total returns of the stocks themselves. In the chart below, over the past year, U.S. stocks with a very low IV/RV spread significantly outperformed those with a very high spread by more than 20%. The bulk of that outperformance occurred in the post-“liberation day” period, but nine of the past 12 months, long stocks with narrow spreads outperformed those with wide ones. Classic equity factors can also be applied to options trading: momentum, revisions (analyst estimate changes), sentiment/positioning, and events. The goal isn’t to forecast every tick; it’s to bias your universe toward names where the next several weeks have historically favored your direction or structure. You may also notice that I am not incorporating deeper fundamental analysis at this stage because factors such as “quality” or “value” do not tend to exhibit statistically meaningful performance over one-month periods — although of course it can be very important over long-term investing horizons (several years or more). Consider, for example, that over the past 10 years, stocks in the top quintile of free cash flow/enterprise value (FCF/EV) in the Russell 1000 generated a total return of > 320%, whereas the Russell 1000 itself generated a total return of just over 260%. So value matters, particularly over the long term, and therefore shouldn’t be ignored, but don’t expect it to have good predictive abilities from one month to the next. While the cumulative outperformance from the chart below is meaningful, the 1-month returns of the top quintile outperformed those of the bottom quintile about 52% of the time. Let’s examine how some other common factors relate to equity performance. Each factor’s “quality” was evaluated with simple, repeatable portfolio tests. Stocks were ranked by the factor value at a rebalance date. For example, dividing the current price by the 50-day moving average. Those ranked stocks were divided into five groups, or quintiles, and the returns over the subsequent one-month period were calculated. The spread between the top quintile and the bottom quintile (called a “Q-spread”) measures the difference in performance, and it’s intuitive: did the factor actually separate winners from losers? How often (which we refer to as the “hit rate”), and by how much? Many factor studies are most robust at roughly monthly horizons because fundamental and positioning data updates occur on that cadence, and because mean reversion is more likely to occur over weeks than over days, the duration aligns naturally with options trading frequency and maintenance. For example, even if a trade is 45-90 days to expiration, traders frequently reassess, adjust, or close options positions before expiration due to upcoming catalysts, or because most of the money in an existing position has been made, or the risk/reward relationship looking forward favors another strategy. Underlyings chosen with factors that demonstrate strong one-month efficacy can therefore improve both trade selection and trade management: you start with a tailwind, and you have a rational schedule to resize, roll, hedge, or exit as the factor’s signal decays or rotates. It’s important to realize that imposing filters on a large set of stocks can quickly winnow the candidates. For example, if I want to start with a universe of securities in the top quintile of the Russell 1000 in terms of EBITDA/EV, I’ve already trimmed 80% of the universe: 200 stocks. Cutting out any that have negative revenue revisions over the past month cuts that in half again to 100 stocks. Looking for those with trailing 12-month sales growth greater than the past five years leaves only the 29 stocks listed in the table at the end of this article. You’ll notice that Janus Henderson , which is being acquired by Nelson Peltz’s Trian Fund, is on this list. Perhaps not that surprising, given that higher EBITDA/EV facilitates the use of debt to acquire a company. Frontier Communications is another name on the list and it’s being acquired by Verizon . Eliminating those and filtering for stocks above their 50-day moving averages leaves just 15 candidates. Of those the first to report quarterly earnings this season is Alcoa , which is expected to report on January 22. The options market is implying a pretty big move of $6.70 higher or lower (~10.5% of the current stock price) by Jan. 23. While Alcoa is demonstrating positive momentum — a good thing — it is quite extended relative to the longer-term moving averages. In fact, over the past 45 years, when Alcoa has been in the top decile of Price to 50 DMA, average returns have actually been negative over the subsequent 30 calendar days, with the stock trading lower 56% of the time. As this histogram illustrates. A trader who is long Alcoa into earnings, but is concerned it is overextended, might therefore consider a protective put spread against their long stock as follows. Or a longer-dated put/spread collar such as The results of the screening discussed above are included in the following table. DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. 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