Stock markets faced a bad year in 2022. Major indexes like the S&P 500 ( SPY ) and the NASDAQ 100 were down double digits across the board. Yet this simple strategy shows solid double-digit gains by taking profitable positions in both good and bad stocks. This kind of balanced approach will continue as the second half of 2023 looks to be difficult. Read below to know more.
2022 was one of the worst years for stocks in a long time. After a strong start to 2023, stocks have failed to break recent highs. It remains to be seen what happens in the rest of the year. The recent hike in interest rates along with the continued earnings slowdown is likely to be an overhang that will continue to drag the stock down for the final two quarters of 2023.
The average annual return for stocks (S&P 500) over the past 150 years is about 9%, including dividends. Without dividends it drops to just 4.5%. Inflation wipes out about half of that return.
A return to more historical returns over the coming 12 months could look great. Stock selection will be key to doing well in 2023, rather than buying just any stock – which looked like a path to easy profits through 2022.
The POWR rating can definitely provide investors and traders with a clear edge while selecting stocks. Over the past 20 plus years, POWR Ratings rated A Strong Buys have outperformed the S&P 500 by more than 22% annually.
While this level of outperformance is truly eye-opening, selling F rated strong selling stocks will outperform the overall market to a greater extent.
These lowest-rated stocks actually fell more than 21% year-over-year while the S&P 500 gained nearly 7% year-over-year. This equates to an underperformance of approximately 28%! This means that the bad stocks did slightly worse than the good stocks rose relative to the S&P 500.
Many investors and traders are not comfortable shorting stocks. The unlimited potential damage further increases the fear factor. Fortunately, the options market provides a defined risk solution to profiting from pullbacks in stocks. puts
Owning a put option gives you the ability to sell a stock at a specific price before a specific time. The buyer of the put pays money in advance – called the option premium.
For example, buying Apple July $155 for $4.30 gives the buyer the right to sell AAPL stock at $155 until expiration on 7/21/2023 (the third Friday in July).
These bearish put options will increase in value as the stock moves lower and decrease if the stock moves higher. The highest risk is $430 ($4.30 premium x 100).
Buying put options is a simple, but very effective way to take a bearish stance on bad stocks (using Apple for example, it’s not a bad stock).
To help offset this bearish scenario, POWR options pair it with bullish trades that are made with call purchases.
Owning a call option gives you the ability to buy a stock at a certain price before a certain time. The buyer of the call again pays money in advance – called the option premium.
For example, buying an Apple July $175 call at $4.50 gives the buyer the right to buy AAPL stock at $175 until expiration on 7/21/2023 (the third Friday in July).
The value of these bullish call options will increase as the stock rises and decrease if the stock falls. The highest risk is $450 ($4.50 premium x 100).
But instead of combining puts and calls on just one stock, POWR options use the power of POWR ratings to combine puts on the lowest-rated (D and F) names and bullish calls on the highest-rated (A and B) stocks.
Sell the worst and buy the best—but define risk.
Pairing a bearish put and a bullish call together is called a “pairs trade”. These two trades combine for a more neutral outlook.
It’s a strategy we successfully use day in and day out in the POWR Options Portfolio to take a more balanced “pairs trade” approach by combining bearish puts with bullish calls. It worked very well in 2022 and continues to work very well till now in 2023.
A recent example of this POWR pair approach using the power of POWR ratings for bearish put plays and bullish call plays may help shed some light on things.
Below is a recent POWR pair trade in the POWR Options portfolio Acuity Brands (AYI) and Roblox (RBLX).
AYI was an A rated-strong buy-stock in a C rated industry. Number one in the industry. A strong stock in a strong position.
RBLX was an F rated-strong sell – stock in a D rated industry. Also ranked at the bottom of the industry group, so worst of the very worst.
Yet over the past few weeks, the much lower rated Roblox has been outperforming the much higher rated Acuity by a wide margin.
In fact, A rated AYI was down about 5% since the start of the year while F rated RBLX was up over 60%!.
This is ideally set up for trading a POWR pair. Buy bullish calls on big-time underperforming strong buy AYI and heavily outperforming strong sell RBLX on bearish puts.
The expectation was that the spread between the two would return to a more general comparative performance than the AYI RBLX.
It proved so. RBLX fell sharply while AYI traded sideways. The spread turned from over 60% (red) at the start of the trade to close to 25% (green).
POWR Options closed the POWR pair trade for an overall gain of $210. $40 loss on AYI calls and $250 gain on RBLX puts. The trade took 16 days from start to finish. Over 20% profit on $970 invested in both AYI calls ($500) and RBLX puts ($470). Not bad for a few weeks to work on a neutral trade.
The table below shows the six most recent closeouts for POWR options. All 6 were overall winning trades with an average holding period of just a few weeks. All are similar to trading the AYI/RBLX POWR pair.
The ability to be nimble and more neutral has served the POWR options portfolio thus far. Our trading showed solid gains from the start versus losses in stocks over the same time frame.
Using POWR ratings to help pick the best stocks to stay bullish with call buys, along with the worst stocks to be bearish with put purchases, will continue to prove profitable in 2023.
What to do next?
If you’re looking for the best options deals for today’s market, you should definitely check out this keynote presentation. How to trade options with POWR ratings. Here we show you how to consistently find top options deals, while minimizing risk.
Using this simple but powerful strategy I have beaten the market and returned +55.24% since November 2021, when most investors are stuck with huge losses.
If that appeals to you, and you want to learn more about this powerful new options strategy, click below to access this timely investment presentation now:
How to trade options with POWR ratings
Here’s to good business!
Tim Biggum
Editor, POWR Options Newsletter
SPY shares traded down $0.44 (-0.11%) in after-hours trading on Friday. Year-to-date, SPY is up 8.31%, the % gain of the benchmark S&P 500 index over the same period.
About the Author: Tim Biggum
Tim spent 13 years as Chief Options Strategist at MAN Securities in Chicago, 4 years as Lead Options Strategist at Thinkerswim, and 3 years as a Market Maker for First Options in Chicago. He appears regularly on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network “Morning Trade Live.” He is passionate about making 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 background with links to his most recent articles.
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