Over the past month, we’ve introduced you to two different strategies that we call the “Low Risk Runners”. Both strategies take advantage of stocks moving from the Stock State Indicator (SSI) Yellow Zone back into the SSI Green Zone.
The first strategy was introduced here. It continues to use the SSI Stop as its exit point. By using the SSI Stop, you’re taking about half of the risk you’d be taking had you bought the stock at its high.
The second strategy was introduced here. The exit point is at the end of holding the stock for eight months. There is no trailing stop with this strategy. The risk is a little greater, but the percentage of winning trades is greater as well.
Here are the statistics for these two Low Risk Runner strategies:
This second strategy is perfect for an options play. Recently, TradeSmith presented the Low Risk Runner Option strategy here. Very simply, if a stock has moved back into the SSI Green Zone and the options available for the stock have sufficient liquidity, using options could be an attractive alternative.
The rules to use options are simple. Though we’ll exit the trade after eight months, we want to find an option that expires at least 10 months out. As most options traders know, the decay in the time value of an option is the greatest over the last two months until expiration. This is a stock replacement strategy, so in most cases, we’ll want to look for a strike price that is close to the stock’s price.
We created a Watch portfolio titled “Low Risk Runners” and entered some of the most popular stocks with SSI Alerts so that we’ll be notified when a potential Low Risk Runner stock is triggered.
Teva Pharmaceuticals (TEVA) looks interesting here. We wrote about TEVA three months ago. This was one of Warren Buffett’s new stock picks in the fourth quarter of 2017, and he added to the position in the first quarter of 2018.
The stock triggered an SSI Entry signal on February 12 and entered the SSI Yellow Zone on March 14. It moved back into the SSI Green Zone on May 8. On May 9, TEVA had options that expire on 1/18/2019 and on 1/17/2020. The options that expire in 2019 are eight months out, not 10 months out, so we want to look at the options that expire in 2020.
TEVA closed at $18.90 on May 8. At the end of the day on May 9, the stock was trading near $19.30. The strike prices on the 2020 expiration include $17.50 and $20.00. Here’s a screenshot from thinkorswim showing the closing prices on May 9.
We could have bought the call for the $17.50 strike at $5.45, or we could have bought the call for the $20.00 strike at $4.15.
The last trade for the $20 strike price was $4.16, so we’ll use that for our cost basis.
Keep in mind that the entire risk here is the premium you’re paying for the option. If TEVA moves higher, then most any of the options will be good. But if TEVA moves back down, it’s possible to lose all of your investment in the option.
After you buy the call, you can track it easily in TradeStops. Here’s how we enter the trade:
Now we wait. The exit date of this trade is January 9, 2019. We know that the most we can lose is $416. If TEVA moves 1 VQ higher, it will be trading close to $25. That would make this option trade nicely profitable.
We’ll discuss the Low Risk Runner Option strategy in greater detail and show some live examples during our next presentation on Wednesday, May 30 at 1 p.m. Eastern. Click here to register for the event.
Education and Research Specialist, TradeStops