Using the power of the POWR stock screener along with technical and volatility analysis to find a low risk trade with an edge in ArcellorMittal (MT).
One of my favorite tools in the POWR Stocks toolbox is the Stock Screener. It does a lot of the heavy lifting that is crucial in my day-to-day trade selection and building process. As an options trader and analyst, I try to combine the elements of fundamental, technical and volatility analysis with the POWR Screener to identify trade ideas with a probabilistic advantage.
A walk through one of the most recent potential trading ideas will shed some light on how to better harness the power of the POWR stock rankings.
I have the POWR Stock Screener to identify only A-rated – Strong Buy stocks in A-rated – Strong Buy – sectors. In addition, the screen only showed those stocks with a value component of A. Finally, I only wanted to see those stocks that were trading below their 20-day moving average.
The thinking process was to lower risk by focusing more on value and stocks that haven’t risen too much given the recent rally in the general market over the past few days. Chasing performance is usually not a good idea, especially in this market environment.
This narrowed my list of potential trading candidates to 18. Since we are looking for potential options trades, low-priced stocks are not nearly as viable for options strategies. $20 is the minimum level I would consider for a bona fide low-cost options strategy rather than buying the stock outright.
As a result, only six candidates remained. Five of those six really didn’t have enough option volume to justify trading options on that stock. Always important to consider liquidity when trading options. For example, Veritiv (VRTV) traded just 8 options contracts on Friday and had extremely wide bid-ask spreads.
That left us with one potential candidate: our old friend ArcelorMittal (MT). The POWR options portfolio has traded MT options four times with solid success in the past.
After identifying this A-rated stock in an A-rated sector with an A value class that is trading below the 20-day moving average, it’s always a good idea to perform technical analysis.
MT stocks are the most oversold in the past two years. The 9-day RSI went below 20 but has improved. MACD also reached an extreme before moving higher. Bollinger Percentage B printed negative and then regained positive territory. Shares are trading at a huge discount from the 20-day moving average. There is looming support at $22.50.
Back in the day, all of these indicators aligned in a similar fashion, marking significant short-term lows in MT stocks (marked in aqua). I have also added in the previous four times that the POWR options portfolio took a position in MT calls.
Interesting to note on the chart that implied volatility (IV) is now well below the highs of recent months. This means that option prices are relatively cheaper, which is a good thing when buying options.
IV is at the 53rd percentile, meaning option prices are about average in price. However, they are cheap compared to actual or historical volatility (HV), at 64%.
It’s helpful to do some peer group analysis as well. The POWR Stock Industry Ratings are another very useful tool for traders and investors alike. The Steel industry ranks number 5 overall and ranks 96e percentile. MT is near the top of the list at number 11.
In comparison, Commercial Metals (CMC) is just a C-rated – neutral – stock. It ranks near the low end at number 26 within steel inventories.
Still, CMC has been a big out-performer for MT in recent months. Over the past year, the CMC is up 17% while the MT is down just over 21%. Before February, both stocks were highly correlated. Logical, because they are both steel stocks. Since then, however, the CMC is up about 5% while the MT is down more than 32%.
Watch for this divergence to begin to converge, with the Strong Buy MT being a relative outperformer against the Neutral CMC in the coming weeks. It is very possible that we will soon add some MT calls to the POWR option portfolio.
By combining the POWR Stock Screener with additional analysis, a comprehensive trade identification system can be created to find the edge and increase the odds in your favor. That’s what we try to do every day with the POWR options portfolio. Remember that trading is about probability, not certainty.
What to do?
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All the best!
Editor, POWR Options Newsletter
MT shares closed at $23.92 on Friday, up $0.61 (+2.62%). Year-to-date, the MT is down -23.94%, compared to a -17.26% rise in the benchmark S&P 500 index over the same period.
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 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. Read more about Tim’s background, along with links to his most recent articles.
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