Using POWR ratings together with technical evaluation and volatility to uncover high probability trades. Then use option leverage to increase your potential profits while lowering your risk.
POWR ratings discover top stocks using their very own model probabilities of success in your favor. Since 1999, POWR shares with the highest A rating have outperformed the S&P 500 index greater than 4 times.
Mix 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 power will go up quite a bit 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 ratings. It was also in the industrial machinery business with an A-Strong Buy rating. It ranks very high at 7 out of 78 in the industry. Strength all the way.
Nevertheless, Caterpillar underperformed the overall market in 2023. The S&P 500 (SPY) gained almost 10% while the CAT fell greater than 9% this yr. Note that in the first two months of the yr, SPY and CAT were way more strongly correlated. (see chart below)
We expected the CAT to start going higher and close the gap in comparative performance. A return to a more traditional relationship with the S&P 500 seen earlier in the yr was the most probably path. Not a guarantee, just a better probability.
Caterpillar was also starting to show 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 recent buy signal.
Caterpillar options were also getting low-cost. The present implied volatility (IV) was just 20p percentile. Because of this option prices in the CAT have been costlier 80% of the time in the past 12 months.
On May 22, POWR Options entered an extended call option position, buying August calls for $240 at $4.00. It is a bullish trade with an outlined risk of $400 per purchase of an option contract. Probably the most you may lose is the initial premium paid.
A couple of weeks later (June 7), POWR Options terminated the CAT calls at $8.10. The online profit was $410 per contract, which is just over 100% based on the original 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. 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 quite a bit 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 ratings and the strength of options. Definitely, buying CAT shares for around $215 on May 22 and selling them for around $235 on June 7 could be a pleasant deal. The online profit could 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 buying the August Tender for $240 as a substitute of stock.
The initial cost was to be just $400. The online profit could be over 100%. So over 10x profit at lower than 2% cost compared to stock trading in CAT.
Combining POWR ratings with the POWR Options methodology can provide investors with a strong, safer way to lower risk and increase potential returns. Those desirous about learning further can learn more about the POWR options by checking them out below.
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What to do next?
In the event you are on the lookout for the best options trading in today’s market, it is best to try our latest presentation How to trade options with POWR ratings. Here we show you the way to consistently find the best options trades while minimizing your risk.
If this appeals to you and you would like to know more about this powerful recent option strategy, click below to access the current investment presentation:
How to trade options with POWR ratings
All the best!
Tim Biggam
CAT shares closed at $235.03 on Friday, up $0.58 (+0.25%). 12 months-to-date, the CAT is down -0.89%, compared to a 12.84% increase in the S&P 500 index over the same period.
About the Writer: 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 Market Maker for First Options in Chicago. He appears often 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. Discover more about Tim’s past with links to his latest articles.
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