Finding Value With Options Trading

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• OPTIONS TRADING

Finding Value With Options Trading
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• Hi, My name is Steve and Im with Options Trading
  Research, today were reviewing our recently
  published article

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• Finding Value With Options Trading

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• There are many different reasons to invest in
  stocks. For example, some buyers are looking for
  growth, others income. Ultimately everyone is
  looking to make money but how we get there is
  clearly open to interpretation.

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• One popular method of investing is value
  investing. That is, when investors look for an
  undervalued stock to purchase which is expected
  to gain relative to other stocks.

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• Of course, there are many reasons a stock may
  become undervalued. So, investors need to
  determine which undervalued companies are likely
  to regain value in the not-too-distant future.

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• The biggest advantage of value investing is it
  has years of statistical backing in its favor.
  Over the last 100 years or so, buying undervalued
  stocks has pretty consistently led to better
  gains than a standard index buy and hold strategy.

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• So where does options trading come in?

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• Lets look at an example.
• Heres the chart of MOS

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• Mosaic MOS is a perfect example of a value
  stock. The fertilizer giant is an 11 billion
  company with over 1 billion in profits for year.
  Nevertheless its trading at just 9.7x earnings
  cheap by any comparison.

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• As you can see, MOS was trading relatively
  sideways for most of the year but then fell off a
  cliff during the August correction. While many
  stocks have regained lost ground since then, MOS
  has not, and remains near 52-week lows.

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• Whether you believe Mosaic is going to go back up
  soon or not, its hard to argue the stock doesnt
  provide value at these levels.

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• So what are the benefits to using options?

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• As long as your time horizon is two years or
  less, theres really no reason to ignore options
  when value investing. Like most other scenarios,
  options provide leverage and flexibility you
  cant get with standard stock buying.

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• For instance, buying value stocks is a great
  opportunity to use bullish call spreads. As a
  reminder, a bull call spread is a type of debit
  spread.

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• In this case, youre buying a call and
  simultaneously selling an OTM call against it in
  the same expiration. Because it costs money,
  its a debit spread.

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• While long call spreads cost money, they cost
  less than buying an outright call. This lowers
  your risk, while still giving you the potential
  to earn outsized returns.

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• Call spreads work well with value investing
  because there tends to be a defined exit point.
  That is, you believe your undervalued stock has a
  point it needs to reach to regain a more
  reasonable value.

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• For MOS for instance, you can see that the stock
  isnt likely to climb above the 44-46 range it
  was trading in for the most of the year. That
  gives us a very easy upper end to a potential
  call spread.

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• Since you have a ceiling on your value stock, you
  arent likely giving up potential returns by
  selling the upper strike. Thats the level you
  would have sold your stock/call at regardless.

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• As such, it makes perfect sense to lower you call
  trade cost by using a spread. In other words,
  youre getting even more value out of your value
  investing by using options.

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