Bryan Perry

   

You see, even on down market days there's still plenty of money flowing in the markets. Money is constantly leaving troubled industries (e.g., housing and the financials), and moving into high-demand areas (e.g., commodities and healthcare).

By following the money, you can isolate the hottest sectors, and by finding the hottest companies in those sectors and then buying the best call options on each, you can build your own options ETF.

Searching for Gems

Now I know it is easy to say "just find the best companies in the sector," but sometimes finding those companies is easier said than done.

Here's a short list of some of my favorite techniques for picking the best of the best in a given industry. Follow my advice and you will be able to discover the brightest gems in the stock market.

• Find companies that are reporting blowout earnings and guiding the Street higher for the coming quarters, and even for the year ahead.
• Pick first-tier names that not only are breaking out to new highs, but also those that have no overhead resistance to keep them from pushing higher.
• Uncover those companies positioned in the "catbird seat" -- setting themselves apart from their competitors in sales, innovation and market penetration.
• Buy "in the money" calls with plenty of time left before expiration so that you can take advantage of the time premium and give yourself time to ride out any rough patches on the road to profitability.

Buying call options on three to five names in a particular sector not only increases your leveraged exposure in a sector, but it gives you an opportunity to make three to five times the profits as each stock starts to take off.

Even if a stock or two decides not to join their brethren on any significant sector run-up, you've done yourself a favor by being in several strong names. And if some of your picks don't make it, you can sell them with most of their remaining value and then take your money and move on to a new basket of trades.

As with any investment, you always have to do your homework. Your reward comes from carefully selecting those names with the best potential to make money on your terms and in the time frame of your choosing. That's really what options trading -- and building your own options ETF -- is all about.

Bryan Perry is the editor of Tactical Trader, an options trading advisory newsletter, and author of "The 25% Cash Machine."

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