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Generating and Using Selection Lists


Use selection lists to find the best choices for investing in call options or stocks, or for hedging with put options or short sales.


Price trends persist and low-priced stocks are treacherous (tests). Selection lists should include only stocks with strong trends and should exclude low-priced stocks. Selection lists are limited to twenty stocks to prevent the number of positions from becoming cumbersome.

Generating the data

The master list

A master list of stocks is needed as a starting point. The stocks should be optionable to provide investing and hedging alternatives.

Using all stocks in the Dow Jones Industrial Average for the master list would yield 30 optionable stocks. A list this short would be too confining.

Using all stocks in the S&P 500 Index for the master list would yield about 500 optionable stocks. But the index excludes stocks of foreign companies, which slightly degrades diversification possibilities.

Using all stocks with LEAPs (long-term options) in the most distant complete series of the CBOE Symbol Directory for the master list would yield over 600 optionable stocks, and some would be stocks of foreign companies. A series becomes complete when the final tranche is introduced in November.

For option buyers, a master list comprising only stocks with LEAPs is advantageous. Some LEAPs are underpriced (tests). All expire on the third Friday of January, making comparison easy.

Generate the master list from the most distant complete series of the CBOE Symbol Directory, and then generate the selection list from the master list. These lists should be generated just before the trading day because relevant data changes every day.

Downloading prices and calculating trends

YLoader was able to download from MSN, Yahoo, QuoteMedia, and Google. MSN became inaccessible. Stock Quotes Pro was able to download from Yahoo or Google.

The Yahoo database changed in May, 2017 and became inaccessible for a while. Updated versions of YLoader are able to access Yahoo, although it might be necessary to use YLoader during quiet hours to obtain all available files. Stock Quotes Pro cannot access Yahoo.

Yahoo can provide unadjusted or adjusted prices. Analysis found QuoteMedia and Google provided unadjusted prices.

Results for Yahoo Unadjusted and QuoteMedia were almost identical, validating both databases. Results for Google differed significantly from Yahoo Unadjusted for no apparent reason, invalidating Google.

Selection lists before and after the Yahoo database change were very similar. Yahoo no longer adjusts for dividends, which decreases uptrends and increases downtrends. Some uptrends that previously would signal a trend reversal will not do so now. Some downtrends that previously would not signal a trend reversal will do so now.

Updated versions of YLoader provide adjusted results from both Yahoo and QuoteMedia. The Google database, always slow, became unresponsive if the number of symbols is large.

Results from QuoteMedia and Yahoo differed more than before. Nevertheless, the 50 stocks with the strongest trends were similar enough to validate both databases.

I recommend using Yahoo with adjusted prices. If Yahoo becomes unavailable, use QuoteMedia. Use daily closing prices for the best resolution. Download as much data as possible to minimize the possibility some of the current trend is omitted.

After downloading, remove symbols from the master list that failed to download. Calculate current trends and last closing prices with BULKLOAD.BAS. Remove every stock with a price less than $10 (tests).

You can use DOSBox to run BULKLOAD.BAS, but this could take over an hour. For much faster processing, run BULKLOAD.BAS in Windows XP.

YLoader works only in Windows. I recommend using a computer with Windows 7 Professional and a spreadsheet. Install the free downloads Windows Virtual PC and Windows XP Mode. The spreadsheet is a convenience for sorting and editing.

Alternatively, you can download individual files from finance.yahoo.com, but this is a slow and frustrating process. The files should be processed with YAHOO.BAS, not BULKLOAD.BAS, with the procedure described in the Qbasic manual.

Investing

The best time to buy is the first trading day before the 26th, except before the 16th in December. The best time to sell is the first trading day before the 7th (timing). See the tranche table (buy) to determine the number of call options or shares to buy.

It might be necessary to repeat the selection process because there is no qualified stock. When repeating, do not disqualify a stock just because it is already an investment but do disqualify the stock if the market exposure is above the current tranche size. Assume the market exposure of an option is half the market value of the underlying security (buy). If there is still no qualified stock, you must forego the monthly investment.

Call options

Preselect the fifty stocks with the strongest uptrends. Calculate the merits (tests) for the most distant complete series.

Select the twenty stocks with the highest merits. Start with the stock with the highest merit. If it is disqualified, proceed to the stock with the next highest merit.

Disqualify a stock if:

Buy the strike just out of the money. Covered call writers tend to make this option relatively more active, so more likely to produce favorable execution. When an option nears expiration, sell on the first trading day before January 7.

Stocks

Select the twenty stocks with the strongest uptrends. The disqualification procedure is the same as for a call option investment, except start with the stock with the strongest uptrend instead of the stock with the highest merit. If it is disqualified, proceed to the stock with the next strongest uptrend.

Hedging

Hedging is done only during a January Barometer defensive period. The initial hedging is done on the first trading before April 19. All hedges are closed on the first trading day before October 11.

After the initial hedging, the best time to open a hedge is the first trading day before the 7th and the best time to close a hedge is the first trading day before the 26th (timing). See the tranche table (buy) to determine the number of put options to buy or shares to sell short.

Maintaining neutrality

To reduce risk, maintain neutrality. The market exposure of the hedges should match the market exposure of the investments. Assume the market exposure of an option is half the market value of the underlying security (tests).

The exposure of the investments is the market value of the stocks plus half the market value of the underlying stocks in the call options. The exposure of the hedges is the market value of the shorts plus half the market value of the underlying stocks in the put options.

If hedging with put options, estimate before a hedge opening day if you will have enough cash for the purchases. If cash might be inadequate, sell investments to raise cash and reduce investment exposure. If hedging with short sales, very little cash will be required.

For the initial hedging, determine the number of hedges required by dividing the exposure of the investments by the tranche size. Subsequently, check for neutrality just before the hedge closing days and the hedge opening days.

Before a hedge closing day, include in the market exposure of the investments any investment slated to be bought, using the current tranche size as an approximation. Close hedges if this will improve neutrality.

Before a hedge opening day, exclude from the market exposure of the investments all investments slated to be sold. Open hedges if this will improve neutrality, except do not open hedges in October because all hedges will be closed in a few days.

If there are not enough qualified stocks for the initial hedging, double up on the qualified stocks highest on the selection list. If there are not enough qualified stocks for subsequent hedging, repeat the selection process, except do not disqualify a stock because it already a hedge, and then select the stocks with the lowest market exposure.

Consider tax consequences when closing investments or hedges in a Regular brokerage account, which usually means closing those with the biggest losses. There are no tax consequences in an individual retirement account, so close those with the strongest uptrends or the weakest downtrends.

Put options

Preselect the fifty stocks with the strongest downtrends. Calculate the merits (tests), for the options expiring next January.

It is necessary to use the most distant series to generate the master list, even though merits are calculated for options that expire a year earlier. LEAPs expiring next January become ordinary options after April.

Select the twenty stocks with the highest merits. Start with the stock with the highest merit. If it is disqualified, proceed to the stock with the next highest merit.

Disqualify a stock if:

Buy the strike just out of the money. Cash-secured put writers tend to make this option relatively more active, so more likely to produce favorable execution.

Short sales

Problems with short selling are explained on the sell page. Do not sell short unless you are an expert trader.

Select the twenty stocks with the strongest downtrends. The disqualification procedure is the same as for a put option hedge, except start with the stock with the strongest downtrend instead of the stock with the highest merit.