How to Increase Returns and Reduce Risk Using POWR Ratings and Options
Investors are constantly looking for ways to increase their returns and reduce their risks. One way they can achieve these goals is by using POWR Ratings in conjunction with technical and volatility analysis to discover high probability trades. Furthermore, using options leverage can provide even greater potential returns with reduced risk. This article will explore the benefits of combining these strategies, using a recent trade on Caterpillar (CAT) as an example.
Understanding POWR Ratings
POWR Ratings are a proprietary model designed to identify the best stocks and put the odds of success in the investor’s favor. The highest A-rated POWR stocks have outperformed the S&P 500 by more than four times since 1999. By combining this with technical and volatility analysis, investors can further improve their chances of success.
The Benefits of Using Options Leverage
Options leverage is a powerful tool that allows investors to control a larger amount of stock for a smaller initial investment. This can increase potential returns and reduce risk compared to trading stocks alone. For example, a recent trade on Caterpillar (CAT) using options leverage resulted in a net profit of over 100% compared to a less than 10% profit for trading the stock directly.
Using CAT as an Example
CAT was a stock rated A – Strong Buy – on POWR Ratings and in the A-rated strong buy industrial machinery industry, with a ranking of #7 out of 78 within the industry. However, CAT had underperformed the broader market in 2023, with the S&P 500 (SPY) gaining nearly 10%, while CAT had fallen more than 9% year to date.
After analyzing technical indicators, such as the 9-day RSI, Bollinger B Percent, and MACD, it was determined that CAT was beginning to show some technical strength. Additionally, CAT options were becoming cheaper, with the current implied volatility standing at only 20th percentile. This indicated that option prices on CAT had been higher 80% of the time over the past 12 months.
On May 22, POWR Options entered a long call option position, buying the August calls for $240 at $4.00. A few weeks later (June 7), POWR Options broke out of the CAT calls at $8.10, resulting in a net profit of $410 per contract, or just over 100%.
Lessons Learned: Combining POWR Ratings and Options
This trade highlights both the power of POWR ratings and the power of options. Combining these two strategies provides investors with a powerful and safer way to reduce risk and increase potential returns. By using options leverage, investors can control a larger amount of stock for a smaller initial investment, resulting in more significant potential returns with reduced risk.
Conclusion: Using POWR Ratings and Options to Increase Returns and Reduce Risk
POWR Ratings and options leverage are powerful tools that can help investors increase their returns and reduce their risks. By combining these strategies, investors can put the odds of success in their favor and control a larger amount of stock with a smaller initial investment. The recent trade on CAT is an excellent example of how combining these strategies can result in substantial potential returns with reduced risk.
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Using POWR Ratings in conjunction with technical and volatility analysis to discover high probability trades. Then, use options leverage to increase potential returns and reduce risk.
POWR Ratings identifies the best stocks using a proprietary model to put the odds of success In your favor. Since 1999, the highest A-rated POWR stocks have outperformed the S&P 500 by more than 4 times.
Combine that with in-depth technical and volatility analysis. Then layer it with the higher leverage and much lower cost of the options and the power increases to a much greater degree.
A recently completed exchange at Caterpillar (CAT) may help provide more information on what we look for in POWR Option Service.
CAT was a stock rated A – Strong Buy – on POWR ratings. It was also in the A-rated strong buy industrial machinery industry. Ranked very high at #7 out of 78 within the industry. Strength in all areas.
However, Caterpillar underperformed the broader market in 2023. The S&P 500 (SPY) had gained nearly 10%, while CAT had fallen more than 9% year to date. Notice how in the first two months of the year, SPY and CAT were much more correlated. (see graph below)
We expected CAT to start moving up and closing the benchmark performance gap. A reversion to a more traditional relationship with the S&P 500 seen earlier to start the year was the most likely path. Not a guarantee, just a higher probability.
Caterpillar was also beginning to show some technical strength. Stocks had once again held the critical support level of $207. The 9-day RSI and Bollinger B Percent bounced off oversold readings. CAT broke above the downtrend line and the 20-day moving average. MACD generated a new fresh buy signal.
Caterpillar options were getting cheap, too. The current implied volatility (IV) stood at only 20he percentile. This means that option prices on CAT had been higher 80% of the time over the past 12 months.
On May 22, POWR Options entered a long call option position, buying the August calls for $240 at $4.00. This is a bull trade with a defined risk of $400 per option contract purchased. The most you can lose is the initial premium paid.
A few weeks later (June 7), POWR Options broke out of the CAT calls at $8.10. Net profit was $410 per contract, or just over 100%, given the original purchase price of $4.00 ($400) on May 22.
Why go out? Technical data had gone from oversold to overbought and the comparative yield gap had converged.
Stocks stalled at major resistance near $235. Bollinger B Percent hit an extreme well above 100. The 9-day RSI broke above overbought readings past 70. The MACD was also getting overhyped. Stocks were now trading at a large 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 it with a 9% gain.
This trade highlights both the power of POWR ratings and the power of options. Certainly buying CAT shares at around $215 on May 22 and selling them at around $235 on June 7 would have been a good trade. The net profit would have been a little less than 10%. Buying 100 shares would have required $21,500 in cash up front. Going at full margin would still have required $10,500. So it’s 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 profit would have been over 100%. So more than 10 times the profit with less than 2% of the cost compared to trading stocks on 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 learn more about POWR options by checking it out below.
power options
What to do next?
If you are looking for the best options trades for today’s market, you should check out our latest presentation. How to trade options with POWR ratings. Here’s how to consistently find the best options trades, while minimizing risk.
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
All the best!
tim bigham
Editor, POWR Options Newsletter
CAT shares closed at $235.03 on Friday, up $0.58 (+0.25%). Year-to-date, CAT is down -0.89%, versus a 12.84% rise in the benchmark S&P 500 index 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 Market Maker for First Options in Chicago. He makes regular appearances 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 day trader. Tim is the editor of the power options Newsletter. Learn more about Tim’s background, along with links to his most recent articles.
The charge How to Profit by Combining the Power of POWR Ratings and the Power of Options first appeared in stocknews.com
https://www.entrepreneur.com/finance/how-to-profit-by-combining-the-power-of-powr-ratings-and/453911
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