Use POWR assessments along with technical and volatility analysis to discover high probability trades. Then use the leverage of options to increase potential returns while reducing risk.
POWR ratings identify the best stocks using a proprietary model to determine the chance of success in your advantage. Since 1999, the highest A-rated POWR stocks have outperformed the S&P 500 more than 4x.
Combine that with in-depth technical and volatility analysis. Then juxtapose it with the greater leverage and much lower cost of options and the wealth increases to a much greater degree.
A recently completed transaction on Caterpillar (CAT) may help to better understand what exactly we want to do in the POWR Options service.
CAT was an A Rated -Strong Buy stock in the POWR Ratings. It was also in the A Rated -Strong Buy-Industrial Machinery Industry. Ranked very highly at number 7 out of 78 within the industry. Power across the board.
Still, Caterpillar was a major underperformer compared to the overall market in 2023. The S&P 500 (SPY) had gained nearly 10%, while CAT was down more than 9% so far this year. Notice how in the first two months of the year the SPY and CAT were much more strongly correlated. (see chart below)
We expected CAT to start higher and close the relative performance gap. A return to a more traditional relationship with the S&P 500 that we saw earlier at the start of the year was the most likely path. No guarantee, just a higher chance.
Caterpillar also started to show some strength on a technical level. Stocks once again hit the critical $207 support level. 9-day RSI and Bollinger Percent B bounced off oversold values. CAT broke above the downtrend line and the 20-day moving average. MACD generated a fresh new buy signal.
Caterpillar options also got cheap. The current implied volatility (IV) was only 20e percentile. This means option prices in CAT have been more expensive 80% of the time over the past 12 months.
On May 22, POWR Options entered a long call option position by buying August’s $240 calls at $4.00. This is a bullish 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 exited the CAT calls at $8.10. The net profit was $410 per contract, or just over 100% given the original purchase price of $4.00 ($400) on May 22.
Why get out? Technicals had turned from oversold to overbought and the relative performance gap had converged.
Stocks stalled on major resistance near $235. Bollinger Percent B hit extremely far above 100. The 9-day RSI surpassed overbought readings past 70. MACD also became exaggerated. 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 had tripled that with a 9% gain.
This trade highlights both the power of the POWR ratings and the power of options. Sure, buying CAT stock for around $215 on May 22 and selling it around $235 on June 7 would have been a nice trade. Net profit would have been just under 10%. Buying 100 shares would have required $21,500 in cash upfront. To go completely marginalized would still have required $10,500. So no cheap trade.
Compare that to buying the August $240 call instead of the stock.
The initial cost would have been just $400. The net profit would have been more than 100%. So more than 10 times the profit with less than 2% of the cost compared to stock trading CAT.
Combining the POWR ratings with the POWR options methodology can provide traders with a powerful, safer way to lower risk and increase potential returns. For those interested in learning more, you can find out more about POWR options by checking it out below.
What to do now?
If you’re looking for the best options trading for the current market, check out our latest presentation How to trade options with the POWR ratings. Here we show you how to consistently find the best option 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 current investment presentation now:
All the best!
CAT shares closed Friday at $235.03, up $0.58 (+0.25%). Year-to-date, CAT is down -0.89%, versus a 12.84% increase 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 Lead 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 the TD Ameritrade Network “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 is the editor of the POWR options newsletter. Read more about Tim’s background, along with links to his most recent articles.
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