Is it better to be stubborn or bearish? Being both is the best approach

How to strengthen your POWR Pairs Trades to lower your risk and increase your return to a large extent without changing the market environment.

After a turbulent start to 2023, the stock has returned to almost unchanged levels over the year.

The NASDAQ 100 (QQQ) continues to grow nicely in 2023, just over 8%, but it is down more than 50% from its highs in early February. The S&P 500 (SPY) and Russell 2000 (IWM) indices have fallen further and are holding modest gains this year. The Dow Jones Industrials (DIA) Index is now heavily in the red in 2023.

The roles reversed in 2022, where DIA was by far the best (down just under 14%) of the four indices, while QQQ (down over 25%) was the worst.

This type of large range and unchanging market environment makes it difficult to buy stocks and provides a definite stock picking bonus. Using the POWR ratings to discover the best stocks to buy and the worst stocks to sell will give you an even edge in 2023.

This is exactly the approach we have used with great success at POWR Options. Trading POWR pairs to coin the term.

We start by looking at bullish calls for the highest rated stocks and bearish calls for the lowest rated stocks. This eliminates much of the overall market exposure and brings relative performance to the power of the POWR ratings. Higher rated stocks greatly outperform lower rated stocks as shown in the chart below.

We then identify situations where lower-rated stocks significantly outperform higher-rated stocks and are able to take advantage of the expected convergence of the two back to a more traditional historical relationship. In the past, we have consistently followed this philosophy of pairing two companies in the same industry to further reduce risk.

We always take implied volatility (IV) into account with any trading decision. POWR Options buys relatively cheap options to further increase the overall odds in our favor.

However, for our latest POWR pairs trading, we have decided to forgo the same industry requirements and just look at buying good stocks that perform poorly and shorting bad stocks that perform too well.

This has proven to be a very profitable additional approach to our pairs trading philosophy. A quick overview of our latest POWR pairs trading will help shed some light.

While this is not “traditional” pair trading as the two stocks operate in different industries, it is still POWR Ratings performance pair trading.

Buying a bearish bid bets on the much lower but much better performing Alcoa (AA) and buying a bullish bid on the much higher but much less performing Bristol-Myers Squibb (BMY).

Grade D – Sell – Alcoa (AA) is trading at annual highs in 2023, up 22%.

Rated -Strong Buy-Bristol Myers (BMY) is near annual lows, down about 3% since the start of the year.

The chart below shows the comparative performance so far in 2023. Notice how AA fell sharply in February, while BMY approached a flat line. However, since late February, AA has exploded upwards again, while BMY has fallen. The difference in performance reached 25%.

In the coming weeks, expect AA to perform relatively worse than BMY as the price performance between the two stocks will converge as it has done in the past.

On March 3, the POWR Options portfolio bought June AA’s $50 puts for $3.90 ($390 per option) and simultaneously bought BMY’s June call options for $67.50 for $4.20 ($4.20 per option). The total combined circulation was $810.

Fast forward to Friday March 10th. You can see how the AA has dropped over 17% since starting pair trading (marked in red). BMY also fell, but only by just over 3.5%.

This led to the close of the pairs trade as the spread converged sharply. The original performance difference of more than 25% on March 3 shrunk or converged by more than half to just over 11% on March 10.

Equally important, implied volatility increased over this time frame. This resulted in an increase in both our long bets on AA and long calls on BMY. AA positions increased from 53.81 IV to 56.30 IV. BMY calls increased from 21.14 IV to 22.28 IV.

It left bullish BMY calls with a loss of $120. He broke out of the bearish AA positions, gaining $290. Total net profit was $170 ($290 – $120). Actual trading data shown below.

The percentage net gain on the deal was just over 20% ($170 net profit / $810 initial total spend). The detention period was only a week. In on Monday, out on Friday.

Investors and traders who want to generate similarly low risk but solid returns in the short term may consider using the POWR Pairs Trade approach to significantly reduce downsides but still leave plenty of opportunities to earn profits.

What to do next?

While the concepts of options trading are simpler than most people realize, applying these concepts to consistently making winning options trades is no easy task.

The solution is to let me do the hard work for you by starting the 30 day period to receive my POWR Options newsletter.

I have been discovering the best options trades for over 30 years, and based on POWR Ratings quantitative indicators, I have achieved 82% win rate over the last 17 trades closed!

During the trial period, you will have full access to the current portfolio, weekly market commentary and every trade alert via SMS and email.

I will add another 2 exciting option trades (1 call and 1 put) when the market opens this Monday morning, so start your trial today so you don’t miss out.

There are no obligations other than a 30-day trial period, so there’s no risk in getting started today.

About POWR options and 30-day trial >>

Here’s a good trade!

Tim Biggam
POWR Option Newsletter Editor

the stock closed Friday at $385.91, down -$5.65 (-1.44%). Year-to-date, it has gained 0.91% compared to the percentage increase of the 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 Chief Options Strategist at ThinkorSwim and 3 years as Market Maker for First Options in Chicago. He appears regularly on Bloomberg TV and is a weekly contributor to the TD Ameritrade network “Morning Trade Live”. His overriding 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. Find out more about Tim’s past with links to his latest articles.


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