Five Oversold Stocks With Option Plays

RadioShack Corporation (RSH) is one of the nation's largest consumer electronics retailers in the United States.

Short interest is the first thing raising a red flag with RadioShack. More than one out of three shares are shorted. The average analyst target price is $5.39.

The trailing 12-month price-to-earnings ratio is 8.3, and the mean fiscal-year estimate price-to-earnings ratio is 13.62, based on earnings of 30 cents per share this year. Investors are receiving 50 cents in dividends for a yield of 12.28%. Real Money Pro's Tim Melvin wrote an interesting article that included RSH, High on the New Lows(You need a Real Money Pro subscription, which is something you want if you're investing real money.)

It doesn't take a Masters in Finance to know a company can't pay out a 50-cent dividend with only 30 cents of income for very long. Plus, the shares are not all that cheap on a price-to-earnings basis.

RadioShack has missed in three out of the last four earnings and the one it didn't miss was an "even." Hardly impressive, but the reason stocks become oversold is because the market loses faith. I search for stocks that the market hates (but is wrong about).

There are two schools of thought when fading RadioShack's move lower. The first is to sell puts in the front month and collect less, albeit faster decaying options. The second is to sell August options for greater premium and lower monetary risk. I prefer the second school of thought. RadioShack is oversold, in my opinion, based on the weekly chart, and I want to give it time to regain its footing.

Another approach is to buy the shares directly. At $3.85 each, owning RadioShack is like owning an option that never expires. I don't care for this approach as much, because money can't be made if the stock doesn't appreciate (yes, perhaps dividends, but as stated earlier, I would not bank on it without improving earnings).

Arch Coal (ACI) is engaged in the mining, processing and marketing of low-sulfur bituminous coal. Arch Coal trades an average of 13 million shares per day with a market cap of $1.3 billion.

The trailing 12-month price-to-earnings ratio is 7.8, the mean fiscal-year estimate is for a loss of 47 cents per share this year. Investors are receiving 12 cents in dividends for a yield of 1.99%. In the last month the stock has fallen -12.73%.