Using POWR rankings together with technical evaluation and volatility to uncover high probability trades. Then use option leverage to extend your potential profits while lowering your risk.
POWR rankings discover top stocks using their very own model possibilities of success in your favor. Since 1999, POWR shares with the best A rating have outperformed the S&P 500 index greater than 4 times.
Combine this with in-depth technical evaluation and volatility evaluation. Then put more leverage and a much lower option cost on top of that and the facility will go up so much more.
The recently accomplished transaction for Caterpillar (CAT) may help provide further insight into what we’re about to do with POWR Options.
CAT was A Rating -Strong Buy- shares in POWR rankings. It was also in the commercial machinery business with an A-Strong Buy rating. It ranks very high at 7 out of 78 within the industry. Strength all the best way.
However, Caterpillar underperformed the general market in 2023. The S&P 500 (SPY) gained almost 10% while the CAT fell greater than 9% this yr. Note that in the primary two months of the yr, SPY and CAT were way more strongly correlated. (see chart below)
We expected the CAT to begin going higher and shut the gap in comparative performance. A return to a more traditional relationship with the S&P 500 seen earlier within the yr was the almost certainly path. Not a guarantee, just the next probability.
Caterpillar was also starting to indicate some technical strength. Stocks once more held the critical $207 support level. The 9-day RSI and the Bollinger Percent B rebounded from sold-out readings. The CAT broke the downtrend line and the 20-day moving average. The MACD generated a fresh latest buy signal.
Caterpillar options were also getting low cost. The current implied volatility (IV) was just 20p percentile. This implies that option prices within the CAT have been costlier 80% of the time previously 12 months.
On May 22, POWR Options entered a protracted call option position, buying August calls for $240 at $4.00. This is a bullish trade with an outlined risk of $400 per purchase of an option contract. The most you possibly can lose is the initial premium paid.
A number of weeks later (June 7), POWR Options terminated the CAT calls at $8.10. The net profit was $410 per contract, which is just over 100% based on the unique purchase price of $4.00 (US$400) on May 22.
Why exit? The technicals went from oversold to overbought, and the gap in comparative performance converged.
Stocks stalled at major resistance near $235. The Bollinger Percent B went extremely well above 100. The 9-day RSI crossed overbought readings above 70. The MACD was also overrated. The stock was now trading at a big premium to its 20-day moving average.
The chart below shows that the CAT has recovered so much against the S&P 500 (SPY). While SPY is up nearly 3% since May 22, CAT has tripled that gain, gaining 9%.
This trade highlights each the strength of POWR rankings and the strength of options. Certainly, buying CAT shares for around $215 on May 22 and selling them for around $235 on June 7 can be a pleasant deal. The net profit can be slightly below 10%. Buying 100 shares would require $21,500 in money up front. Going full margin would still require $10,500. So it isn’t an inexpensive trade.
Compare that to purchasing the August Tender for $240 as a substitute of stock.
The initial cost was to be just $400. The net profit can be over 100%. So over 10x profit at lower than 2% cost in comparison with stock trading in CAT.
Combining POWR rankings with the POWR Options methodology can provide investors with a robust, safer strategy to lower risk and increase potential returns. Those all for learning further can learn more in regards to the POWR options by checking them out below.
RETURN Options
What to do next?
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How to trade options with POWR rankings
Tim Biggam
CAT shares closed at $235.03 on Friday, up $0.58 (+0.25%). Year-to-date, the CAT is down -0.89%, in comparison with a 12.84% increase within the S&P 500 index over the identical 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 three years as Market Maker for First Options in Chicago. He appears usually on Bloomberg TV and is a weekly contributor to the TD Ameritrade network “Morning Trade Live”. His overriding passion is to make the complex world of options more comprehensible and subsequently more useful to the on a regular basis trader. Tim is the editor RETURN Options Bulletin. Find out more about Tim’s past with links to his latest articles.
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