Equity markets had a rough year in 2022. Major indices like the S&P 500 (SPY) and NASDAQ 100 fell by double digits across the board. Still, this simple strategy showed solid double-digit gains by taking profitable positions in both good and bad stocks. This kind of balanced approach is likely to continue to outperform in what looks set to be a tough 2023. Continue reading below for more information.
2022 looks set to end up as one of the worst years for stocks in a long time. Currently, the S&P 500 is down about 15% year to date. The NASDAQ has suffered a worse fate, while the Dow Jones Industrial Average has fared slightly better.
Either way, the 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 are likely to be a headwind to stock prices, especially in the first half of next year.
The average annual return for stocks (S&P 500) over the past 150 years is about 9%, including dividends. Excluding dividend, it drops to just over 4.5%. Inflation shaves about half of that return.
A return to more historic returns could look pretty good over the next 12 months. Stock selection will be critical to performing well in 2023, rather than simply buying stocks – which until 2022 was apparently the way to make easy profits.
The POWR ratings can certainly give investors and traders a distinct advantage when selecting stocks. Over the past 20+ years, the A-rated Strong Buys names in the POWR ratings have outperformed the S&P 500 more than 23% annually.
While this level of outperformance is truly eye-popping, sales of the F-rated Strong Sell names would have beaten the overall market even more.
In fact, these lowest-rated stocks fell nearly 19% a year, while the S&P 500 gained nearly 8% a year. This corresponds to an underperformance of about 27%! This means that the bad stocks fell slightly worse than the good stocks rose compared to the S&P 500.
Many investors and traders are uncomfortable shorting stocks. Unlimited potential loss increases the fear factor even more. Fortunately, the options market offers a defined risk solution to profiting from a stock pullback. sets.
Owning a put option gives you the option to sell a stock for a certain amount of time at a certain price. The put buyer pays money up front – the so-called option premium.
For example, if you buy the Apple March $125 for $5.20, the buyer has the right to sell AAPL shares for $125 until expiration on 3/17/2023 (the third Friday in March).
The price of these bearish put options will rise if the stock falls and fall if the stock rises. The highest risk is $520 ($5.20 premium x 100)
Buying put options is a simple, yet highly effective way to take a bearish stance on bad stocks.
It is a strategy that we successfully apply day in and day out in the POWR options portfolio to take a more balanced approach by combining bearish puts with bullish calls. It worked very well in 2022 and will definitely be part of our trading toolbox in 2023.
A recent example of using the power of the POWR ratings for bearish put plays may shed some light on things. Below is a recent transaction in the POWR options portfolio at Lithium America (LAC) stock.
LAC was an F-rated stock – Strong Sell – in an F-rated industry. Also near the bottom of the industry group, so pretty much the worst of the worst.
However, shares had risen sharply (more than 30%) from the lows near $21 in mid-October before meeting serious resistance at $29. The stock was technically overbought.
LAC also had a major reversal day, trading to new recent highs only to reverse and close back near the day’s lows.
This is ideally set up for a bearish put buy. It also helped that implied volatility (IV) was only at 19E percentile meaning option prices were well below average. The POWR options portfolio bought February’s $30 puts for $5.00, or $500 per put option purchased.
That proved to be the high point for LAC stock as it fell 25% from the $8 area to just under $21. However, the stock was now oversold and approaching the support area around $21. POWR Options closed the put- play at $8.50 for a 70% profit. The trade took about a month from start to finish.
Note how while the stock fell 25%, the options gained nearly three times as much. Emphasizes the power of leverage that options have. In addition, the loss is always limited to a maximum of the total premium paid, in this case $500.
This was the third time in a row that POWR Options managed to realize a profit on LAC puts based on a loss in the LAC share price.
The ability to say nimble and be more neutral served the POWR options portfolio well in 2022. Our trading over the past 12 months showed solid gains versus deep losses for stocks in that same time frame.
Using the POWR ratings to help us select the best of the best stocks to be bullish on call buys along with the worst of the worst stocks to be bearish on put buys will likely to remain profitable in 2023.
What to do now?
While the concepts behind options trading and putting buying are simpler than most people realize, applying those 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 making a no-strings-attached start 30 day trial for my POWR Options newsletter.
Using the quantitative muscle of the POWR Ratings as my starting point, I’ve uncovered some of the best options trades in the tough markets we’ve been through this year.
That’s because I take advantage of both call and put option trades to generate big profits in ALL market conditions.
In fact, since the launch of the service in November 2021 I achieved a market-breaking return of +65.44% for my ssubscribers.
The good news is that you can become a subscriber today for just $1.
During your $1 trial, you get full access to the current portfolio, my weekly market insights, and every trade alert by text and email.
Plus, I’m adding the following 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 out!
Editor, POWR Options Newsletter
SPY shares traded at $375.38 per share Thursday afternoon, down $10.85 (-2.81%). Year-to-date, SPY is down -19.68% versus a percentage 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. Learn more about Tim’s background, along with links to his most recent articles.