Using POWR ratings along with technical and volatility analysis to uncover high probability trades. Then use the leverage of options to increase potential returns while reducing risk.
POWR ratings identify the best stocks using a proprietary model to put the chances of success in your favor. Since 1999, the highest-rated A stocks of POWR have outperformed the S&P 500 by more than 4X.
Couple this with in-depth technical and volatility analysis. Then layer it with the greater leverage and much lower cost of the options and the power increases to a much greater degree.
A recently completed trade on Caterpillar (CAT) may help to better understand what exactly we are looking to do in the POWR Options service.
CAT was an A – Strong Buy – rated stock in the POWR ratings. It was also part of the A-rated Industrial Machinery Industry – Strong Buy. Ranked very high at number 7 out of 78 in the industry. Strength at all levels.
Yet Caterpillar was a big underperformer against the broader market in 2023. The S&P 500 (SPY) had gained almost 10% while the CAT had fallen more than 9% so far this year. Note how, in the first two months of the year, SPY and CAT were much more highly correlated. (see table below)
We expected CAT to start moving up and closing the comparative performance gap. A return to a more traditional relationship with the S&P 500 seen earlier in the year was the most likely path. Not a guarantee, just a higher probability.
Caterpillar was also starting to show some strength technically. The shares had once again held the critical support level of $207. The 9-day RSI and the Bollinger Percent B bounced off the oversold readings. CAT broke above the downtrend line and the 20-day moving average. MACD has generated a new buy signal.
Caterpillar options were also getting cheap. The current implied volatility (IV) has only reached the 20e percentile. This means that option prices in CAT have been more expensive 80% of the time over the past 12 months.
On May 22, POWR Options went long on the call option by buying the August $240 calls at $4.00. This is a bullish trade with a defined risk of $400 per option contract purchased. The maximum you can lose is the initial premium paid.
A few weeks later (June 7), POWR Options exited CAT calls at $8.10. The net gain was $410 per contract, or just over 100%, given the initial purchase price of $4.00 ($400) on May 22.
Why go out? The techniques had moved from oversold to overbought and the comparative performance gap had converged.
Shares were stagnating at major resistance near $235. Bollinger Percent B reached an extreme well above 100. The 9-day RSI broke above overbought readings above 70. The MACD was also getting exaggerated. The shares were now trading at a steep premium to the 20-day moving average.
The chart below shows that CAT had made up a lot of lost ground against the S&P 500 (SPY). While SPY is up nearly 3% since May 22, CAT has tripled with a 9% gain.
This trade highlights both the power of POWR ratings and the power of options. Admittedly, buying CAT stock at around $215 on May 22 and selling it back at around $235 on June 7 would have been a nice trade. The net gain would have been just under 10%. Buying 100 shares would have required $21,500 cash up front. Going full margin would still have required $10,500. So not a cheap trade.
Compare that to buying the $240 August call instead of the stock.
The initial cost would have been only $400. The net gain would have been greater than 100%. So more than 10 times the gain with less than 2% of the cost compared to the stock exchange in CAT.
Combining POWR ratings with the POWR options methodology can provide traders with a powerful and safer way to reduce risk and increase potential returns. For those interested in learning more, you can read more about POWR options by checking them out below.
What to do next?
If you’re looking for the best options trading for today’s market, you should check out our latest overview How to trade options with POWR odds. Here we show you how to consistently find the best options trades, while minimizing risk.
If this interests you and you would like to learn more about this powerful new options strategy, click below to access this timely investment overview now:
All my wishes!
CAT shares closed at $235.03 on Friday, up $0.58 (+0.25%). Year-to-date, the CAT is down -0.89%, compared to a 12.84% rise in the benchmark S&P 500 over the same period.
About the Author: Tim Biggam
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Chief Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. He makes regular appearances on Bloomberg TV and is a weekly contributor to the TD Ameritrade “Morning Trade Live” network. His primary passion is to make the complex world of options more understandable and therefore more useful to the everyday trader. Tim is the editor of POWR Options newsletter. Learn more about Tim’s journey, as well as links to his most recent articles.
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