Stock markets have had a tough year in 2022. Major indices such as the S&P 500 (SPY) and NASDAQ 100 fell by double digits across the board. However, this simple strategy has shown solid double-digit gains, taking profitable positions in both good and bad stocks. This type of balanced approach is likely to continue to be effective in the second half of 2023, which looks challenging. Read below to find out more.
2022 has been one of the worst years for stocks in a long time. After a strong start to 2023, stocks have failed to break recent highs. What will happen in the rest of the year is still unknown. The recent rise in interest rates, along with the ongoing earnings recession, is likely to be a redundant factor that will continue to dampen stocks in the last two quarters of 2023.
The average annual return on stocks (S&P 500) over the past 150 years is approximately 9%, including dividends. Without dividends, it drops to just over 4.5%. Inflation cuts about half of these revenues.
A return to more historic earnings could look pretty good in the next 12 months. Stock selection will be critical to good results in 2023, not just buying any stock, which seemed to be the way to make easy profits until 2022.
POWR ratings can certainly give investors and traders a clear advantage when choosing stocks. Over the past 20+ years, strong A-rated buying in the POWR has outperformed the S&P 500 by more than 22% per year.
While this level of superiority is indeed astonishing, selling highly salable F-rated stocks could outperform the market as a whole by an even greater degree.
These lowest-rated stocks were actually down over 21% a year, while the S&P 500 was up nearly 7% a year. This corresponds to a lag of about 28%! This means that the bad stocks fell slightly worse than the good stocks rose against the S&P 500.
Many investors and traders are uncomfortable shorting stocks. Unlimited potential loss further increases the fear factor. Fortunately, the options market offers a risky solution for profiting from stock pullbacks. Puts.
Holding a put option gives you the ability to sell shares at a certain price up to a certain time. The buyer of the put pays the money up front – the so-called option premium.
For example, buying a $155 Apple July option at $4.30 gives the buyer the right to sell AAPL stock at $155 before expiration on July 21, 2023 (the third Friday of July).
The price of these bearish put options will increase when the stock is down and decrease if the stock is up. The highest risk is $430 ($4.30 x 100 premium).
Buying put options is a simple but very effective way to get into a bearish position on a bad stock (in Apple’s case, it’s not a bad stock).
To help offset this bearish view, Powr Options pairs it with a bullish trade that is made to buy a call.
Holding a call option gives you the ability to buy a stock at a certain price up to a certain time. The buyer of the call again pays the money up front—the so-called option premium.
For example, buying Apple’s $175 July call at $4.50 entitles the buyer to buy AAPL shares at $175 before expiration on July 21, 2023 (the third Friday of July).
The price of these bullish calls will increase as the stock rises and decrease if the stock falls. The highest risk is $450 ($4.50 x 100 premium).
But instead of just combining puts and calls on the same stock, POWR options use the power of POWR ratings to combine puts on the lowest-rated stocks (D and F) along with bullish calls on the highest-rated stocks ( A and B).
Sell the worst and buy the best, but identify the risk.
Combining a bearish put and a bullish call together is called a “pair trade”. These two trades together give a much more neutral outlook.
This is a strategy we use successfully day in and day out in the POWR option portfolio to take a more balanced “pair trading” approach by combining bearish puts with bullish calls. It performed very well in 2022 and continues to perform very well in 2023.
A recent example of this approach with POWR pairs, using the power of POWR ratings for a bearish put game and a bullish call game, may help shed some light on the situation.
Below is a recent trade in POWR pairs made in a portfolio of POWR options on Acuity Brands (AIY) and Roblox (RBLKS).
AYI stock was rated as an A-rated active buy in the C-rated industry. Number one in the industry. Strong stock in a strong position.
RBLX was an F-rated stock – Strong Sell in the industry with a D rating. It also ranks last in the industry group, so pretty much the worst of the worst.
However, over the past few weeks, the much lower-rated Roblox has vastly outperformed the much higher-rated Acuity.
In fact, since the start of the year, the A-rated AYI has been down almost 5%, while the F-rated RBLX has been much higher – by 60%!
This is ideal for trading Powr pairs. Buying bullish calls on strong lagging strong buying AYI and bearish puts on strongly leading strong selling RBLX.
The spread between the two was expected to return to more normal comparative performance once AYI outperformed RBLX.
So it was. RBLX fell sharply while AYI traded sideways. The spread has converged from over 60% at the start of the trade (red) to 25% at the close (green).
POWR Options closed the POWR pair trade for a total profit of $210. $40 loss on AYI calls and $250 profit on RBLX puts. The trade took 16 days from start to finish. Over 20% return on $970 invested in both AYI calls ($500) and RBLX puts ($470). It’s good to work on a neutral deal for a few weeks.
The table below shows the last six closes for POWR options. All 6 trades were overall winning trades and the average holding period was only a few weeks. Everything is very similar to trading AYI/RBLX POWR pairs.
The ability to speak more fluently and be more neutral has served the POWR options portfolio so far. Our trading has shown solid gains since inception compared to losses for stocks over the same time period.
Using POWR ratings to help us pick the best of the best stocks to be bullish with call buys, as well as the worst of the worst stocks to be bearish with put buys, is likely to continue to be profitable in 2023.
What to do next?
If you are looking for the best option trades in today’s market, you should definitely check out this key presentation. How to trade options with POWR ratings. Here we will show you how to consistently find the best option trades while minimizing your risk.
Using this simple but powerful strategy, since November 2021, I have achieved a higher market return of +55.24%, while most investors were mired in large losses.
If you like it and want to learn more about this powerful new options strategy, click below to access this up-to-date investment presentation right now:
How to trade options with POWR ratings
Here is a successful trade!
POWR Options Newsletter Editor
Shares of SPY fell $0.44 (-0.11%) after the close of trading on Friday. Since the beginning of the year, the SPY has gained 8.31% compared to the percentage gains in the underlying S&P 500 over the same period.
About the author: Tim Biggham
Tim spent 13 years as a chief options strategist at Man Securities in Chicago, 4 years as a lead options strategist at ThinkorSwim and 3 years as a market maker at First Options in Chicago. He appears regularly on Bloomberg TV and is a weekly contributor to TD Ameritrade Network’s “Morning Trade Live”. His main passion is to make the complex world of options more understandable and therefore more useful for the everyday trader. Tim – editor Power Options Newsletter. Learn more about Tim’s past, as well as links to his latest articles.
Fast Profit from the best and worst stocks! appeared first on stocknews.com