Before getting to the meat of this tutorial, if you are a subscriber to PowerOptions you should consider recommending PowerOptions to your friends and acquaintances, as you can receive a subscription for a free month to PowerOptions for every friend that you recommend and that becomes a subscriber. You can send your friends and acquaintances a link which they can click on which will automatically give you a free month once someone you recommend PowerOptions to subscribes. You can find out more about the Refer-A-Friend program after logging into PowerOptions by selecting the “Home” tab and then selecting the “My Account” sub tab, followed by selecting “Tell a Friend”. Once you select “Tell a Friend”, you will be presented with your personal link which you can email to your friends or post on Facebook, Twitter, etc.
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Refer-a Friend
A lot of the questions we receive from customers regarding options investing relate to strategies and to configuring a search screen for PowerOptions. The answer to these types of questions is actually pretty easy, as “it depends”. It depends on a lot of factors including an investors risk tolerance, amount of capital, age and whether an investor is employed or retired. A brief discussion of some steps an investor might consider is given below. As an example, a search using the Collar, also known as the Protected Covered Call, strategy will be considered.
Decide on Strategy or Strategies
PowerOptions tools supports 23 different strategies. Customers of PowerOptions can view information related to the various strategies by either selecting a tab for the strategy or selecting “SITEMAP” link located at the bottom right corner of each page.
Tab:
Tabs may be added and removed from the tab menu via the “Other Strategies” tab.
Sitemap:
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Navigating
Users selecting to use a tab can then select the sub tab located to the left such as “Collars Home” in order to view additional information related to the selected strategy. Users selecting the SITEMAP link can select a strategy to learn by selecting the respective link: The “Home” page has tutorials and other information available in order to determine the specifics related to an option strategy.
Sub tab:
Sitemap:
An investor new to options might start with the Covered Call, Naked Put, Collar (Protected Covered Call) and/or Married Put strategies, as those strategies are generally less risky.
Selecting the “Search” sub tab provides an investor access to PowerOptions search capabilities with the investor being presented a search screen tool which investors can use to tailor their searches based upon their own preferences.
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Search Sub Tab:
A first-time visitor to a search page will be presented with a default search screen which an investor can modify according to the investor’s preferences which can then be saved for future searches.
Default Search:
An investor wanting to develop a search screen from scratch, can select “Clear These Settings” near the bottom of the search tool in order to clear the default search parameters and settings.
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Clearing Search Parameters and Settings:
Setting Parameters
After clearing parameters and settings an investor can begin to add parameters meeting their personal preferences. To start, an investor might consider selecting to search for options with previous volume, as it is a good idea to trade options which have some liquidity. To search for options with previous volume, the parameters “Call Prev. Volume” and “Put Prev. Volume” can be set to zero.
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The next parameter/setting to consider is the parameter to “Sort Results Table By” and whether to sort from lowest-to-highest or highest-to-lowest. As an example, a selection to search for “% If Unchanged Annual” return will be selected, as well as selecting to search from the highest-to-lowest. This enables searching for positions with the highest potential annual return.
To perform a search, the “Submit These Settings” button may be selected.
Perform Search by Selecting Submit These Settings
When performing a search with these settings, a search is presented having collar positions (protected covered call) with differing months of expiration, March and January.
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Search Results
Search results are presented in a tabular formant as shown above. Users can add and remove columns via the “See More/Less Columns” button.
Searching for positions with differing expiration months is a valid strategy, but we will search for the more standard case where the call option and the put option are for the same expiration month. This can be set by selecting Call Exp Date = Put Exp Date.
After performing the search using the setting for the same month of option expiration, some of the positions found in the search results are for companies with zero earnings as indicated by a zero in the column for P/E ratio (Price-to-Earnings).
Companies Not Generating Profit
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The stocks of companies that are not profitable tend to be very volatile. These companies can be eliminated by setting the P/E search parameter to be greater than zero.
A contrarian method for investing is to find companies that have recently recessed in price, but have upward price momentum. Companies that fall into this category can be found via configuration of the Simple Moving Average setting and the Bollinger Band parameters (learn more about Bollinger Band). Setting the Simple Moving Average in order to find companies in an uptrend can be performed by setting the one hundred day moving average greater than the two hundred day moving average or SMA100 greater than SMA200.
Additionally, companies which have recently receded in price can be found via the % BB (20) (learn more about % BB (20)). As an example, setting the % BB (20) parameter to less than 20 finds companies which are near the lower Bollinger Band.
A search using this setting presents collar positions (protected covered call) which have very large % If Unchanged Annual returns, but have small net returns which is due to the options selected having only four days until expiration.
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Large Annualized Returns and Small Net Returns due to Four Days Until Expiration
Longer-term positions can be found by setting the Call Days to Exp and/or the Put Days to Exp to greater than 4 (in this case).
Using this search presented companies with small or zero dividend yield.
Small or Zero Dividend Yield
Stocks with a nice dividend yield can be searched for via % Dividend Yield and stocks with an ex-dividend date between the current day and option expiration can be searched for by selecting “Between now and expiration”.
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Configuring % Dividend Yield
Setting “Between now and expiration” enables finding positions which may receive a dividend during the holding time for the position.
Performing a search with these parameters results in presenting some positions which are in-the-money, or in this case, the price of the stock is greater than the strike price of the call option.
For a dividend paying stock, there is a good chance a covered call position will be called away for an in-the-money position. A search for out-of-the-money positions can be found by via the “CALL % out money” parameter.
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A search performed with these parameters results in some positions with a small % If Unchanged Return. The % If Unchanged Return represents the return the position will achieve at option expiration, assuming the price of the stock is unchanged.
Positions with a small % If Unchanged Return can be removed via the % If Unchanged parameter:
A search with these parameters reveals four positions for two different companies, Cypress Semiconductor (CY) and Newmont Mining (NEM), with three different months of expiration. These positions and companies can be further examined via the “More Info” button.
The nice thing about the collar or protected covered call strategy, is the position has a defined maximum loss or maximum risk. So even if the price of the stock goes to zero, the maximum loss is a predetermined, known amount. For example, the maximum potential loss for the first position in the table for Cypress Semiconductor is 8.7%, so the maximum loss that can be sustained is 8.7%, even if the price of the stock goes to zero.
The search results can be further modified and refined as needed. Once an investor has found a position to invest in, the position can be executed for supported brokers via the BrokerLink option of the positions’ respective “More Info” button.
Importantly, a search script may be saved for later use by selecting the “Save” button.
An example of using PowerOptions tools to narrow in and find potential investments for the Collar or Protected Covered Call has been presented. A similar method can be used for other strategies an investor might be interested in pursuing.
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