Stock markets have suffered from a tough year in 2022. Major indexes like the S&P 500 (SPY) and NASDAQ 100 are down double digits across the board. Yet, this simple strategy has shown a solid double-digit gain by taking profitable positions in both good AND bad stocks. This kind of balanced approach will likely continue to outperform in what looks to be a tough 2023. Read below to find out more.
2022 is shaping up to be one of the worst years for stocks in quite a while. Currently, the S&P 500 is down about 15% year-to-date. The NASDAQ fared worse while the Dow Jones Industrial Average fared slightly better.
Either way, stocks are generally down across the board.
What will happen in 2023 is anyone’s guess. The recent rise in interest rates and slowing earnings growth will likely be a headwind for stock prices, especially in the first part of next year.
The average annual return on stocks (S&P 500) over the past 150 years is around 9% including dividends. Without dividends, it drops to just over 4.5%. Inflation roughly halves these returns.
A return to more historic returns may look quite good in the next 12 months. Stock picking will be key to performing well in 2023, rather than just buying any stock – which was apparently the way to easy gains through 2022.
POWR ratings can certainly provide investors and traders with a distinct advantage when picking stocks. Over the past 20+ years, solid buys rated A in POWR ratings have outperformed the S&P 500 by more than 23% annually.
While this level of outperformance is truly telling, selling off the strong selling F-rated stocks would have beaten the overall market even further.
These lower-rated stocks have actually fallen nearly 19% annually, while the S&P 500 has gained nearly 8% annually. This equates to an underperformance of around 27%! This means that bad stocks have fallen a little more than good stocks have risen against the S&P 500.
Many investors and traders are not comfortable shorting stocks. An unlimited potential loss increases the fear factor even more. Fortunately, the options market offers a risk-defined solution to take advantage of a pullback in equities. Met.
Owning a put option gives you the ability to sell a stock at a specific price before a certain time. The buyer of the put option pays the money up front – called the option premium.
For example, buying Apple March at $125 at $5.20 gives the buyer the right to sell AAPL stock at $125 until expiration on 03/17/2023 (the third Friday in March) .
The price of these bearish put options will rise as the stock declines and decline if the stock rises. Most at risk is $520 ($5.20 premium x 100)
Buying put options is a simple, yet very effective way to take a bearish position on bad stocks.
This is a strategy we use successfully day in and day out in the POWR options portfolio to take a more balanced approach by combining downside puts with upside calls. It worked very well in 2022 and will definitely be part of our trading toolkit in 2023.
A recent example of using the power of POWR odds for bearish puts may help shed some light. Below is a recent trade made in the POWR options portfolio on Lithium Americas (BAC).
LAC was an F-rated stock – Strong Sell – in an F-rated industry. Ranked near the bottom of the industry group as well, so pretty much the worst of the worst.
Stocks, however, had rebounded strongly (more than 30%) from lows near $21 in mid-October before encountering serious resistance in the $29 area. The stock was becoming overbought on a technical basis.
LAC also had a key reversal day, trading up to new recent highs only to reverse and close near the day’s lows.
This setup is ideal for a bearish put buy. It also helped that the implied volatility (IV) was only at 19E option prices in the percentile sense were well below average. The POWR Options Portfolio bought the February $30 put options for $5.00, or $500 per put option bought.
This turned out to be the best for LAC stock as it fell 25% from the $8 area to just under $21. Shares, however, were now oversold and approaching the support zone around $21. POWR options closed the sell game at $8.50 for a 70% gain. The trade took about a month from start to finish.
Note how, while the stock fell 25%, options gained nearly three times that amount. Highlights the leverage power of options. In addition, the loss is always limited to the maximum of the total premium paid, in this case $500.
This is the third consecutive time that POWR Options has been able to realize a gain on LAC’s put options based on a loss in LAC’s stock price.
The ability to say nimble and be more neutral has served the POWR options portfolio well in 2022. Our trading has shown solid gains over the past 12 months versus significant losses for equities over the same period.
Using POWR ratings to help us pick the best of the best stocks to be bullish on with buy buys, as well as the worst of the worst stocks to be bearish on with sell buys, will likely continue to prove profitable in 2023.
What to do next?
While the concepts behind options trading and buying puts are simpler than most people think, applying these concepts at the right time to consistently make winning trades is no easy task.
The solution is to let me do the hard work for you… by starting a 30 day no obligation trial of my POWR Options newsletter.
With the quantitative muscle of POWR ratings as a starting point, I’ve seen some of the best options trades in tough markets we’ve seen this year.
This is because I take advantage of both call and put option trades to generate big gains in ALL market conditions.
Indeed, since the launch of the service in November 2021, I delivered a beating market +65.44% return for my ssubscribers.
The good news is that you can subscribe today for just $1.
During your $1 trial, you will have full access to the current portfolio, my weekly market news, and all trade alerts via text and email.
Plus, I’ll be adding the next 2 exciting options trades when the market opens this Tuesday morning (closed Monday for holidays), so start your trial today so you don’t miss a thing!
About POWR Options and $1 Trial >>
Editor, POWR Options Newsletter
SPY shares were trading at $375.38 per share on Thursday afternoon, down $10.85 (-2.81%). Year-to-date, SPY is down -19.68%, versus a % rise in the benchmark S&P 500 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 a Market Maker for First Options in Chicago. He makes regular appearances on Bloomberg TV and is a weekly contributor to the TD Ameritrade “Morning Trade Live” network. His primary passion is to make the complex world of options more understandable and therefore more useful to the everyday trader. Tim is the editor of the POWR Options newsletter. Learn more about Tim’s journey, as well as links to his most recent articles.
The post office How to profit from picking the worst stocks… appeared first on StockNews.com