Stock Option Investment Advice

Always a Bear Market Somewhere

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):

ABY BLD FDI HYI MXM REXMY
ACG BNP FIA HYP NAV RML
ACP BNT FJC IAF NCA RWC
AGII BOOM FL IAL NEU RYI
AGL BRN FLE ICB NGAS SCR.B
AIRM BRY FMT IHT NMA SIZ
ALCO BSET FUR INGR NMI SMP
ALOT CARN FWLT JH NNP SNF
AMAG CAW GAP JHI NNY SPA
AMCE CCC GDP JHS NPI SQA.A
AMF CEM GF KF NPP SYM
AMS CH GGC KHI NU TFC
AMSWA CH GIM KMM NUT TIN
ANL CIF GLK KSM NUV TKF
ANLT CIK GM KT NWK TNB
AOF CIK GMP KTF NXXI TTF
APB CLF GNI LEO OIA TTG
APFC CMK GRA LFB OIB TWN
APPA CMO GRB LYO PAI TYL
APX CMU GT MCR PBY UNS
APY CRD.B GVT MDR PCF USG
ARTL CSH HDL MEE PCH VIN
ARTW CTB HE MF PDF VLT
ASA CV HEC MFM PGM WLM
ATAXZ CXE HIS MGF PHY WOC
ATX CXH HL MHF PIM WR
BBA CYTR HMX MIN PKD XOMA
BDF DSM HSF MMT PMM ZAP
BHO EBF HTR MTS POM ZF
BIF EDE HURC MUO PPT ZIF
BKR EEA HXL MWV PTC ZIXI
BKT EMF HYB MXF PYM ZTR

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”
Company Name Stock
Sym
Price
& Chg
Option
Sym
Expire/Strike
& Days to Exp
Bid %Dnsd.
Prot.
% If
Unch.
% If
Asgnd.
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”
Co. Name Stock
Sym
End
Date
Stock
Price
% In
Money
Net
Value
%
Ret
USG Corp. USG 7/21/2006 45.0 44.4 65.0 12.2
Foster Wheeler Ltd. FWLT 7/21/2006 34.3 2.2 35.0 11.5
Hexcel Corp. HXL 7/21/2006 14.7 2.4 15.0 11.0
Cleveland-Cliffs Inc. CLF 7/21/2006 34.4 74.6 60.0 9.8
McDermott Intl. Inc. MDR 7/21/2006 41.1 -2.6 41.1 5.9
Temple-Inland Inc. TIN 7/21/2006 40.5 -1.1 40.5 1.8
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)

Analysis

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]

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