Three Better Ways To Put Profit Probabilities In Your Favor With A POWR Pairs Approach
Managing pairs trade the POWR Options way will likely manage to increase the probability of profit.
We have discussed in several previous articles the benefits of a pairs trade approach. A pairs trade is simply taking a bullish position on the stock you feel will do better than a similar stock that you take a bearish stance on. Buy Ford/Sell General Motors the classic example if you think Ford will outperform GM.
Instead of using simple stock to express the viewpoints, it is in many ways better to use options. Why? Limited risk, lower upfront cost along with three somewhat less known, but very important, benefits.
A quick walk-through our recent trade in the POWR Options portfolio will help shed some light on understanding these “under the radar” trade management benefits we employ.
The pairs trade we selected was a recently completed bullish call on Cheniere Energy Partners (CQP) and a bearish put on Sunoco (SUN) . Both oil related names so highly correlated stocks-meaning they move up and down together on a regular basis.
Initial trade February 27 shown below:
Action To Take
Buy to open SUN 6/16/2023 $50 put for $4.10 w/.20 discretion
Each option will cost around $410 per contract.
Action To Take
Buy to open CQP 6/16/2023 $50 call for $4.00 w/.20 discretion
Each option will cost around $400 per contract.
Reasoning on the trade was this: Cheniere Energy Partners (CQP) was an A-rated (Strong Buy) stock while Sunoco (SUN) was a C-rated (Neutral) stock. Both in the same industry-MLP Oil& Gas.
You would expect these two stocks to move in a similar fashion given they are both oil related names. Indeed, they did for pretty much all of 2022.
However, much-lower rated SUN had dramatically out-performed the higher rated CQP in 2023 by over 17%. The graph below shows how these two normally related stocks diverged. The pairs trade was put on with the expectation of CQP subsequently outperforming SUN over the following few weeks and for the spread to narrow. This outperformance would cause the spread to converge, leading to a profit.
This did occur, but not to a large degree. The spread did converge by about 3.5%, narrowing from 17.7% to 14.15% as both stocks fell sharply.
Our pairs trade, however, did quite well. Closed out on March 15 as seen below.
We gained $490 on the SUN puts and lost only $290 on the CQP calls for a net gain of $200 as shown in the table.
The initial cost on the pairs trade was $810. The net gain of $200 equates to a 24.69% return. Holding period was a little more than two weeks. Plus, we were hedged at trade inception with a bullish call and bearish put on two highly correlated stocks.
So, while the two stocks that comprised the pairs trade did start to converge as expected, that convergence certainly didn’t account for the majority of the profit.
Instead, the three things listed below-gamma, time decay management, and implied volatility analysis-are the hidden benefits to the POWR Options Pairs Trade approach.
Options move in a curved, not linear, fashion. The bigger the favorable move in the underlying stock the more favorably the option moves in comparison. Conversely, the bigger the unfavorable move in the stock the less the options will move against you.
The initial delta at trade inception will change as the stock price changes. This rate of change in the option delta compared to the stock price is called “gamma”.
Gamma is an options metric that describes the rate of change in an option’s delta per one-point move in the underlying asset’s price. Delta is how much an option’s premium (price) will change given a one-point move in the underlying asset’s price.
Buying options puts you long gamma. This means you are more right if you are right in picking direction. It also means you are less wrong when you are wrong on direction. Sounds to good to be true? Well, it kind of is-because time decay is the bad part about buying options.
Options are a wasting asset. Each day that passes they lose a little more of their overall value. This notion is called time decay, or theta to use the Greek term. While gamma is the good side of buying options, theta is unquestionably the bad side. POWR Options is acutely aware of time decay. This is why we almost invariably elect to exit the options well before expiration (usually 30 days or so).
The illustration below shows how option time decay really hits up hard in the final 30 days or so before option expiration. Exiting before then and salvaging time premium, or the remaining value of the option, is crucial to long-term success.
Certainly exiting the CQP/SUN pairs trade in just a few weeks made time decay less relevant.
Having options you bought expire worthless, or for zero value, is something that needs to be avoided-at all cost. We have accomplished that so far in POWR Options.
At POWR Options, we always look very closely at implied volatility (IV) when considering trade possibilities. It is, in our opinion, one of the most crucial elements to option trading.
Implied volatility is a measure of how much the options market expects the underlying stock to move. Higher IV means bigger moves are expected and lower IV equates to smaller anticipated moves. IV is also in essence the price of the option. Higher IV makes options more expensive. Lower IV cheapens options.
Since we are always buying options, we focus on purchasing those options that have a comparatively low implied volatility. Low comparative IV means option prices are somewhat cheap-always a good thing.
The current IV percentile ranks where the implied volatility is right now as compared to IV range over the past year. The lower the percentile the lower the IV is right now. 100% would mean IV is at the highest readings in the past year. 0% would be the lowest. 50% would be about average.
We look to buy options that are trading well below the 50% level-in other words comparatively cheap options. A look at the options on both SUN and CQP below shows that both were well under the 50% IV percentiles when we bought them on February 27.
You can see below how the implied volatility (IV) jumped from 20.85% when we purchased the SUN puts to over 36% when we closed out the position. Another advantage to buying cheaply priced, or low IV, options. Also shown is how the delta on these bearish puts moved from -65 to -80, the positive effect from gamma.
The same scenario played out in the CQP calls as well.
The power of the POWR Ratings plus the expected convergence of related stocks can be a decided edge when constructing pairs trades. Understanding the somewhat hidden benefits of gamma, time decay management, and implied volatility analysis turns the pairs trades into POWR Pairs trades. Put the odds further in your favor with this approach.
What To Do Next?
If you’re looking for the best options trades for today’s market, you should check out our latest presentation How to Trade Options with the POWR Ratings. Here we show you how to consistently find the top options trades, while minimizing risk.
If that appeals to you, and you want to learn more about this powerful new options strategy, then click below to get access to this timely investment presentation now:
How to Trade Options with the POWR Ratings
All the Best!
Editor, POWR Options Newsletter
SUN shares closed at $41.60 on Friday, down $-0.32 (-0.76%). Year-to-date, SUN has declined -1.79%, versus a 1.98% rise in the benchmark S&P 500 index during 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 a 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 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. Learn more about Tim’s background, along with links to his most recent articles.
The post Three Better Ways To Put Profit Probabilities In Your Favor With A POWR Pairs Approach appeared first on StockNews.com
Tax Credits You Might Qualify For
No matter where you are, taxes are a nebulous yearly commitment with seemingly endless secrets to uncover for ultimate savings. The U.S. federal government institutes tax credits to help Americans ease their burdens. Eligible benefits cut taxable income and provide other incentives that invest in the nation’s betterment.
It helps to understand what’s out there and what taxpayers must do to get the rewards. New credits are added and taken away seemingly every year, but some have remained staples. Here are the requirements for each tax credit and how much they’ll save you on your returns.
What Are Tax Credits and Why Should You Use Them?
Tax credits reduce liability. Federal and local governments award them to lessen financial burdens, especially for lower- to middle-income households. Tax credits are not the same as deductions, which reduce what’s considered taxable income.
For example, if you made $35,000 in a year but had deductions equalling $12,000, you will be taxed on $23,000. Tax credits work slightly differently, as they decrease the amount of taxes filers owe. They eliminate what you must pay, which varies depending on your tax bracket.
Everyone should take advantage of tax credits — some intentionally seek them throughout the year to maximize their returns. Credits ensure a more considerable return, especially if you consciously progress toward earning them. However, more diverse and niche deductions can be used to get the most out of your tax year.
Their strict requirements reflect their value. Not every family can qualify for credits related to their dependents, especially if they’re higher-earning. Governments designed tax credits to empower lower-income households in a financially stressful time of year, leveling out class disparities as much as possible. Eligibility criteria allow awards to hit homes in greatest need.
States offer credits depending on current legislation and initiatives. For example, a state may offer more diverse sustainability benefits than the federal government if it has metrics to meet by a specific date. These are the available credits for varying situations and stages of life.
Are There Tax Credits for Students?
Despite myths surrounding student tax responsibilities, they should still file taxes if they work, regardless of their tuition or loan situation, or if their parents claim them as dependents on their tax return. Every worker must report income. Nevertheless, being a student has its benefits come tax season because there are educational credits and other perks to note when filing.
Lifetime Learning Credit (LLC)
The LLC helps students pay for tuition — no supplies, room and board, or transportation. There is a predetermined list of eligible institutions, so ensure your university is included. It could exclude smaller or private schools. However, it can reduce tax liability by $2,500 for four years of higher education, encompassing associate or graduate degrees and professional development courses like trades. Using credit for job skills reduces the benefit to $2,000, but there’s no time restriction.
American Opportunity Credit (AOTC)
The AOTC also rewards students pursuing post-secondary education, specifically undergraduate. It has a price tag similar to the LLC — $2,500 at max — but students must qualify for part-time enrollment at a minimum. The AOTC also covers course materials, like books and supplies, alongside tuition, but only for up to four years. Trade education or professional development does not qualify.
Other Important Notes
These credits are subject to income limits, and students can’t obtain both. The income limit for a household must be under $80,000 for single filers and $160,000 for joint payers. Enhance benefits from educational tax credits to make the value skyrocket:
- Student loan interest
- Educational savings plans
- Employer debt repayment
- Tuition reimbursement
Are There Tax Credits for National Betterment?
The federal government wants citizens to obtain tax credits because it incentivizes them to achieve national goals.
Incentives for Energy Efficiency
The nation has sustainability benchmarks to meet to mitigate climate change and as a current signer of the Paris Agreement. It’s vital to note that additional legislation, like the Inflation Reduction Act of 2022, can boost or reduce existing tax credits — lucky for environmentalists, this tax credit got more appealing for Americans. There are multiple ways to bank on it.
First, Americans can switch to energy-efficient appliances. The credit will cover 10% of the cost of every eligible expense up to $3,200, including:
- Heat pumps
- Electrical upgrades
- Energy Star appliances
Another way is switching to renewable energy generation, also known as the Residential Clean Energy credit. Installing geothermal, wind, biomass or solar systems could net households a 30% tax credit on eligible clean energy improvements. The benefit will reduce to 22% after 2033, providing a sense of urgency for citizens wanting to get the most out of their dollars.
There is also an electric vehicle tax credit, subject to specific cars set forth by the Department of Energy of up to $7,500.
Those impacted by disasters, like hurricanes and wildfires, will receive federal assistance to promote healing and growth in affected communities. It’s advantageous for governments to care for these areas to maintain economic stability. FEMA will declare areas as federally declared disaster areas, and if your site is on the list, ensure to file taxes accordingly. The credits for disasters are different from an outright dollar amount.
The first benefit is a tax extension. Many in disaster situations do not want to worry about taxes when rebuilding their livelihoods. The government understands how much natural incidents uproot lives and included that consideration as part of the credit. People can also file an amended return for the previous year to expedite federal aid instead of waiting a year after the disaster happened to get assistance. This is called casualty loss deduction.
Businesses can assist employees by providing tax-free gifts to help them get back on their feet.
Are There Tax Credits for Parents and Guardians?
Most countries award adults for starting families, as increasing populations indicate healthy national progress and advancing economies. Families have multiple avenues for federal credits.
Child and Dependent Care Credit (CDCC)
Child care is a national issue, causing parents to scramble weekly for outsourced help so they can return to work. The CDCC hopes to solve some of these concerns by helping pay for day care for dependents under 13. It also includes caring for family members and partners who are ill or cannot care for themselves anymore, so keep track of related expenses. You should get 35% back from $3,000 in eligible costs for one dependent and $6,000 for two or more.
Child Tax Credit
Families with children under 16 can bank $2,000 per eligible child, but only $1,500 may be refundable. Not all tax credits will result in cashback, so read the fine print. Parents and guardians claiming half of the individual’s care can file for this credit, assuming they fall under the $200,000 income limit for single filers and the $400,000 limit for joint filers.
The credit is another example of an amendment triggered by legislation. During the COVID-19 pandemic, it assisted families faster through the American Rescue Plan of 2021 by giving households advances, increasing the credit amount significantly.
Adoption fees are expensive, and the process is labor-intensive. The adoption credit helps families by offering a nonrefundable $14,890 per child in assistance with anything related to the adoption process. Families cannot earn more than $223,410 if they want the entire award.
Are There Tax Credits Based on Spending?
Sometimes putting money in the right places or earning the proper income helps net your tax credits. Here are some of the most popular circumstances.
Earned Income Tax Credit (EITC)
The EITC exists to help low earners with or without children. Earned income refers to wages, self-employment or other taxable income from other sources. These are the current requirements for obtaining this tax credit according to the IRS, though special rules apply for military, clergy and people with disabilities:
- For zero children, have an AGI between $17,640 and $24,210, single and joint, respectively
- For one child, have an AGI between $46,560 and $53,120, single and joint, respectively
- Have less than $10,300 in investment income
- Prove citizenship or resident alien status
Qualifications are subject to change and fluctuate depending on the number of children.
Are you over 18, claim yourself and are not in school? Then you qualify for this credit if you’re contributing toward retirement. The percentage of your contribution you receive as a credit depends on household income, but it applies to most accounts, including 401(k)s and IRAs. Here is the breakdown for joint filers:
- 50% if AGI is less than $43,500
- 20% if AGI is between $43,501 and $47,500
- 10% if AGI is between $47,501 and $73,000
These amounts regularly change from year to year.
Foreign Tax Credit
Take the foreign tax credit if you earn foreign income or invest in international mutual funds. The federal government offers this if your salary is subject to multiple countries’ taxes, so you don’t have to pay twice. The tax credit also applies to investments, so speak with brokers on the fine details.
Premium Tax Credit
The premium tax credit was born after the Affordable Care Act catalyzed former President Obama’s health care initiatives. Those receiving insurance through this program can receive tax credits toward premiums based on income. These are refundable, but the amount varies by state because premiums are standardized nationwide.
Getting the Most Out of Credits This Tax Season
Credits are one of the ways to get the most out of every tax season. Some guide their financial decisions by available credits alongside clever deductions, whereas others take what they can get. Now that you know the requirements, you can maximize your savings and lower your tax bill to more realistic amounts.
Though some of these benefits seem too good to be true, they are instances where the government is attempting to help its citizens. Take advantage of as much as possible, and stay updated with national events and sweeping legislation that might increase your tax credits in subsequent years.
The post Tax Credits You Might Qualify For appeared first on Due.
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The WORST Stock Market Ever!
It’s been a while since I talked to anyone enjoying the recent stock market action. Too volatile. Too illogical. No real trend. All true. However, the more we understand why this is happening the easier to diagnose what will happen from here and how we can trade our way to profits. (Spoiler Alert) I am still bearish. Gladly I still see 7 timely trades to use to make money as the S&P 500 (SPY) heads lower from here. Read on below for the full story….
I woke up 2 days ago already knowing the theme for this article:
The WORST Stock Market Ever!
That’s because this ride is more Tilt-A-Whirl than Merry-Go-Round thanks to all the volatility. Pretty soon the corn dogs, cotton candy and elephant ears are coming up. (sorry for the visuals…but needed to drive home the point 😉
Gladly if we pull back to the big picture, we can make sense of it all to chart our way to calmer shores. That is what is in store in today’s commentary.
OK…I might be kidding about this being the worst stock market ever…but it’s certainly not fun. That’s because most people are rational and want things to move ahead in a more orderly fashion. This stock market of late has been anything but that.
Up, down and all around. Not just across weeks and months…but INSIDE of a single session. This candlestick chart of the past month tells that story in spades:
So much to point out on this chart starting with us being absolutely flat month over month. This would seem to indicate that nothing of significance happened.
Now look deeper. Note how short lived all the rallies are…as well as the quick duration of the sell offs. And finally notice how big some of those candles are with tremendous intraday moves.
All that action over the past month…and nothing to show for it in the market average.
That’s where it makes sense to now look at things on a Sector level where we see a lot more diversity between winners and losers.
The obvious part is the weakness of the financials thanks to all the bad news in the banking sector. Real estate is so intra related with the banks that it’s pretty obvious why that group has taken it on the chin as well. The rest of the weaklings are a fairly Risk On groups which talks to growing fears of future economic health.
The counterpart to that is to discover that most of the Risk Off groups are near the top of the list: Consumer Defensive, Utilities, and Healthcare. The oddity is the strength of Communication Services and Tech. However, when you think of Tech as being dominated by FAANG…and they often act as a defensive group people often cling to…then you understand that the totality of this picture says it was a Risk Off month even if overall market breakeven.
Everything discussed so far explains WHAT is happening…now let’s shift to WHY.
The simple answer is to say the outlook for the economy (and thus the stock market) is unclear. Thus, each new day brings new headlines that tilt bearish today and bullish tomorrow.
Certainly, people see the threats that could lead to recession…but it keeps not happening. And that is what confuses the odds on what happens next and that lengthens this tug of war between the bulls and bears.
For example, a lot of economic data was weakening at the end of 2022. Like ISM Manufacturing under 50. And Retail Sales actually shrinking after removing inflation. This led to a large cut in corporate earnings expectations for Q1 of this year where Wall Street is currently looking for -9% earnings loss.
That steep loss doesn’t look as much in the cards when you appreciate that many thought Q1 GDP would also be in negative territory…perhaps marking the start of a new recession. And yet now as we look at the most revered GDP prediction model (GDP Now from the Atlanta Fed) that stands at +3.2% for the current quarter.
Reity, you are starting to contradict yourself. I thought you were bearish on the market?
Yes. That is true. I just wanted to make it clear WHY the market was so volatile. That being the mixed signals on the economy making bulls and bears tussle for control.
Now we have to turn our attention to the future and what is likely to happen. Here again, I want to share this simple, yet effective equation to quickly explain why I am still wearing the bear cloak. (It includes an important new addition in bold)
Higher Rates on the Way (5%+)
+ In Place AT LEAST til End of 2023
+ 6-12 Months of Lagged Economic Impact from Fed Policy
+ Banking Credit Crunch
= Fertile Soil to Create a Recession in the Future
Fed Chairman Powell talked about all of the first 4 factors at the recent rate hike announcement and press conference on 3/22. In fact, stocks were going up during the speech til he hit folks with a 1-2 hawkish punch staring with:
“It’s possible that this [banking crisis] will turn out to have very modest effects – these events will turn out to be very modest effects on the economy, in which case – and inflation will continue to be strong, in which case, you know, the path will look – might look different. It’s also possible that this potential tightening will contribute to significant tightening in credit conditions over time, and in principle, if that – that means that monetary policy may have less work to do. We simply don’t know.”
This was followed by a statement that the credit crunch IS happening and is relatively equivalent to a 25-50 point basis cut on its own. This got stocks coming down from nearly +1% session to about breakeven. And then came punch #2.
That being when a reporter stated that current surveys show that the average investor expects just one more rate hike of 25 basis points and then rate CUTS every meeting thereafter. So, are investors wrong?
It wasn’t just the words he used. It was how Powell said it. Like a disappointed parent when his kid brings home an F on the report card. (what are you not understanding here!!!).
And then he reiterated quite emphatically that their forecast still calls for NO CUTS this year. From there the S&P 500 gave up the 1% gain and tumbled all the way to -1.65% into the close.
For me the aforementioned equation starting with a hawkish Fed ends with recession at some point in the future. Clearly not Q1…but Q2 and the rest of the year are still very much into play.
Unfortunately, until investors see more PROOF of a recession unfolding then the recent trading range and extreme volatility will continue. That is why I recommend investing based upon what you predict will happen beyond that range. Again, that leans decidedly bearish in my book.
What To Do Next?
Watch my brand new presentation, REVISED: 2023 Stock Market Outlook
There I will cover vital issues such as…
- 5 Warnings Signs the Bear Returns Starting Now!
- Banking Crisis Concerns Another Nail in the Coffin
- How Low Will Stocks Go?
- 7 Timely Trades to Profit on the Way Down
- Plan to Bottom Fish for Next Bull Market
- 2 Trades with 100%+ Upside Potential as New Bull Emerges
- And Much More!
If these ideas concern you, then please click below to access this vital presentation now:
REVISED: 2023 Stock Market Outlook >
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return
SPY shares . Year-to-date, SPY has gained 3.88%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
The post The WORST Stock Market Ever! appeared first on StockNews.com
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