You may have heard the phrase, “there’s always a bull market somewhere”, referring to the idea that even though the general market is trending down there are still stock symbols of companies trending higher. The reverse can also be said, “there’s always a bear market somewhere”, referring to the idea that even though the general market is trending upward, there are still stock symbols trending downward.
We analyzed the stock symbols on the Nasdaq, NYSE and American stock exchanges searching for stock symbols with a tendency to have lackluster performance during expansive macroeconomic conditions (the current general market condition), i.e. stock symbols that act bearish or neutral when the rest of the market is bullish. The results of our search are shown below (optionable stocks symbols are shown as links):
Many options investors use bullish to bullish-neutral stock trading methodologies such as covered call strategies, selling naked puts, bull put spreads and so on. However, there are many profitable stock options methodologies for bearish markets as well, such as bear call credit spreads, bear put debit spreads and covered put strategy. There may be occasions when a person interested in stock investing desires to “short the market”, for example when the macroeconomic conditions are negative, or when the investor simply wants to hedge a bullish position.
The danger of shorting, unlike going long, is the amount of the possible loss is infinite or unbounded. A common danger in going short is when a company being shorted is bought or merges with another company, possibly realizing a very large loss on the short position. Purchasing long calls can help mitigate the unbounded loss problem of going short, but reduces the amount of profit realized. Shorting companies unlikely of being acquired (large market cap, etc.) can also aid in avoiding a large loss.
We performed a covered put strategy back test for the list of companies with lackluster performance in an expansive economy for July options expiration using PowerOptions new back testing tool SmartHistoryXL. In the search, companies with market capitalizations of less than $1B were screened out.
The list of possible candidates from the search initiated on June 29, 2006 are shown below:
|“Top 8 of 8 results for Covered Put search on June 19, 2006 ordered by % If Unchanged”|
& Days to Exp
|USG Corp.||USG||69.17 (-1.28)||USGSM||06 JUL 65.0 (33)||4.9||7.1||7.6||14.1|
|McDermott Intl. Inc.||MDR||42.13 (-0.90)||MDRSH||06 JUL 40.0 (33)||1.5||3.6||3.7||8.9|
|General Motors Corp.||GM||26.35 (+0.75)||GMSE||06 JUL 25.0 (33)||0.9||3.4||3.5||8.8|
|Temple-Inland Inc.||TIN||40.03 (-0.68)||TINSH||06 JUL 40.0 (33)||1.2||2.9||3.0||3.0|
|Foster Wheeler Ltd.||FWLT||38.47 (-1.04)||UFBSG||06 JUL 35.0 (33)||1.1||2.9||2.9||12.2|
|Cleveland-Cliffs Inc.||CLF||64.85 (-1.79)||CLFSL||06 JUL 60.0 (33)||1.7||2.6||2.7||10.4|
|Foot Locker Inc.||FL||23.82 (-0.30)||FLSX||06 JUL 22.5 (33)||0.6||2.3||2.4||8.0|
|Hexcel Corp.||HXL||16.50 (-0.57)||HXLSC||06 JUL 15.0 (33)||0.4||2.1||2.2||11.5|
The results of the back test are show below:
|“Results for Covered Put search on June 19, 2006”|
|Foster Wheeler Ltd.||FWLT||7/21/2006||34.3||2.2||35.0||11.5|
|McDermott Intl. Inc.||MDR||7/21/2006||41.1||-2.6||41.1||5.9|
|General Motors Corp.||GM||7/21/2006||29.0||-13.7||29.0||-6.3|
|Foot Locker Inc.||FL||7/21/2006||26.2||-14.1||26.2||-7.5|
# Successful positions: 6 out of 8 (75%)
Avg. % Return: 4.8%
QQQQ % Return: -6.5% (6/19/2006 to 7/21/2006)
SPX % Return: 0.0% (6/19/2006 to 7/21/2006)
The average return realized from the back test was 4.8% (33 days) with a 75% success rate. Two positions yielded a loss, GM and FL with losses of -6.3% and -7.5% respectively, but the losses were not as large as a short position without a covering put option. It should be noted a larger return would have been realized for USG with a simple short position, but the return on the covered put strategy position was still significant (12.2%).
PowerOptions provides a search engine for finding potential option income generating positions for various strategies including strategies for those option investors seeking to “go short”, bear call spreads and covered put strategy, for example.
[tags]stock investing, stock options, options trading, option income, bear call spreads, covered put strategy[/tags]