P/E Ratio Filter: How to Use Price-to-Earnings When Screening Stocks
What the P/E ratio measures, what ranges are reasonable for wheel strategy stocks, and how to combine it with other filters.
What is the P/E ratio?
The Price-to-Earnings (P/E) ratio compares a company's share price to its annual earnings per share:
P/E = Share price ÷ Earnings per share (EPS)
A P/E of 20 means investors are paying $20 for every $1 of annual profit. A higher P/E usually signals higher growth expectations; a lower P/E can mean the stock is cheap — or that the business is struggling.
Why wheel traders care
When you sell a cash-secured put, you may be obligated to buy the stock. If the P/E is 80 and the stock drops 30% on an earnings miss, you own an expensive stock that just got more expensive relative to earnings.
A more modest P/E (say, 10–25) suggests the stock is already reasonably priced — making assignment less painful and recovery more likely.
Recommended starting ranges
| Scenario | P/E range | Notes |
|---|---|---|
| Deep value | < 12 | Often distressed; verify fundamentals carefully |
| Fair value | 12–25 | Sweet spot for wheel strategy stocks |
| Growth premium | 25–40 | Fine if earnings are growing fast (see 5Y EPS %) |
| Speculative | > 40 | High assignment risk; use only with tight strikes |
These are starting points. Always check the P/E relative to the company's own history and its sector average.
Using the P/E filter in the screener
Set a maximum P/E to exclude stocks priced for perfection:
- Open the Stock Screener.
- In the filters panel, find P/E under Valuation.
- Drag the max slider to 30.
- Combine with a minimum Gross Margin of 20% to avoid cheap-but-declining businesses.
What a P/E doesn't tell you
- Negative earnings: If a company loses money, P/E is undefined (or negative). Use P/S or P/FCF instead.
- Cyclical companies: Energy and mining companies have very low P/Es at the top of the cycle and very high P/Es at the bottom — the opposite of what you'd want.
- Sector differences: Tech companies average 25–35; utilities average 14–18. Compare within sectors, not across them.
Common mistakes
1. Filtering P/E < 10 and calling it "cheap." Often these are value traps — companies with flat or declining earnings that deserve a low multiple.
2. Ignoring growth when reading P/E. A P/E of 30 with 25% annual EPS growth is often cheaper than a P/E of 15 with 0% growth. Use the 5Y EPS % filter alongside P/E.
3. Single-number thinking. Use P/E with at least one profitability filter (Gross %, Net %) and one growth filter to get a full picture.
A worked example
You want to find quality large-caps that aren't too expensive:
- Market Cap: min 10B
- P/E: max 25
- Gross Margin: min 30%
- Net Margin: min 10%
That combination typically returns 60–120 US names — large, profitable businesses at reasonable prices, ideal for wheel strategy entries.
Frequently Asked Questions
What P/E ratio is good for selling puts?
There's no universal answer, but most wheel traders prefer P/E between 12 and 30. This range typically indicates a profitable business that isn't priced for perfection — so if you're assigned stock, you haven't overpaid dramatically.
Should I use trailing or forward P/E?
The screener uses trailing twelve-month (TTM) P/E based on reported earnings. Forward P/E requires analyst estimates and can be unreliable. TTM is more conservative and based on actual results.