WDB Options Model - Screen Information
Where the market pays you to take a position.

Introduction Margin Requirements The Screens Your WDB Report

What is the WDB Options Model
The model's sole purpose is to highlight stock Put options where their current market price (or premium collected if you write the option) is very high relative to the carrying cost of owning the stock on margin should you be exercised (and have to buy the stock at the exercise price).

So why bother buying stocks anyway - isn't it a trap?
The fundamental premise behind this model is that we want to own stocks for capital gains purposes. The historical argument for stock ownership has been the idea that because of the potential for growth, stock valuations can sometimes exceed the basic value of money (ie 1 + 1 = 3). The problem is, stocks come in and out of fashion - valuations get stretched and that fundamental argument can and often becomes 10 + 1 = 3. So we start our investment process with asking the question, 'what stocks do we NOT want to own?'. This is where our fundamental screen criteria always keeps us honest. By only considering stocks which are trading at a discount to what we consider intrinsic value (in this case we use the price to book value ratio) we completely avoid the classic valuation trap. Yes, we often don't participate in the sexy stocks chatted about at cocktail parties but at the same time, we know the stocks we do own actually have some intrinsic value to them.

Getting paid to take a position
So now that we have identified 'cheap stocks' we want to own the next part of our process asks, 'what is the most efficient way to become owners of these stocks?'. There have been historically two answers to that question - buy the stock with cash or buy the stock on margin (where the brokerage house lends you a certain percentage of the underlying's value). Either way, capital gains and losses where simply a function of purchase price minus sale price. The emergence of the exchange traded derivatives market over the past forty years has created a justifiable third option. Unfortunately, this is where things get a little complicated for the average investor. The incorporation of a derivative of a stock into the actual stock purchase is beyond most yet the math should speak for itself (the CBOE has more information to help you learn about the benefits of incorporating options into your portfolio). Indeed, one could argue the math is so compelling one should really never buy a stock in the open market ever again.

Why the WDB Options Model
The model was first developed by hand by an investor who understood that people sometimes get panic stricken when it comes to the market and in the face of that panic drive fear proxies (like Put premiums) to extreme levels. At the same time, he owned a rather large block of shares in a company he wasn't planning to sell. While the asset sat idle, he did see that the brokerage house he had the stock with was willing to lend him a rather large percentage of capital 'on margin' against the underlying value of the block of stock. Mr. Investor put 1 and 1 together and developed the basic underlying WDB model. Because he understood the mathematics of stock ownership on margin, he figured out that if you can write a put option where it's premium is higher than the margin requirement to own the stock (should you get exercised) you are literally getting the market to pay you to take that position. If excersised you own the stock (which is what we want) but you have a net margin liability credit (because the margin requirement from the brokerage house is less what you collected in premiums). The total carrying costs for owning the stock on margin is the current margin interest charged by your brokerage house. Who ever heard of getting paid by the market to take a position? Indeed, Mr. Investor found a very efficient way to become an owner of stocks.

The evolution of a good idea
After running the model successfully for several years, Mr. Investor found it both interesting and puzzling why more people didn't follow this strategy and why there wasn't more information about it online. His search led to few results as he learned too that getting reliable analyzed option's data online was still in its infancy. Fortunately, in late 2012, Mr. Investor found an associate who could take on such a task - mine the net for such data and present it in an articulate, usable fashion. The WDB Options Model was born! Following Mr. Investor's strict fundamental model criteria, The WDB Options Model's simple goal is to produce a list (on a daily basis) to investors of both stocks that are trading below what we would consider 'intrinsic value' and any Put options on those stocks that represented an efficient way of becoming owners of those stocks. And that is exactly what this site does. The WDB Options Model runs several algorithms that not only filter the broader stock market (our screened universe) for exceptional 'value' ideas but also finds put options where one can literally get paid to do the trade. What is interesting too, filter spikes often occur at/around market bottoms suggesting the model is also an excellent contrarian indicator in itself.

One Example - The margin calculations
If we use our example from the front page [where Company ABC is currently trading at $7.50/share and the three month $10 Put options are $3.50. The typical margin requirement (if exercised on the $10 Put) will be [($10 x 30%)x 100] = $300 (carrying cost). The premium collected for writing that Put will be ($3.50x100) = $350 (income). Our net margin liability from the day we do the trade is +$50 (where the market 'pays' us 16.7% to do the trade) regardless of where the stock moves to in the future] we see the underlying driver behind this strategy. But as pointed out elsewere, exchanges have constructed various barriers of entry to try and diswade the public from getting involved and one of those barriers is the ongoing margin requirements to carry open option positions.

When writing 'naked' Put options we must remember exchanges set minimum margin requirements while the option position remains open (CBOE margin calculator). Once the option either expires or is exercised we are left with our 'get paid' scenario. But until that event happens we must abide by the exchange set margin requirements. Continuing to work with our 3 month ABC $10 Puts written at $3.50, the CBOE's initial margin requirement to carry this trade to expiry is 100% of the option premium plus 20% of the current market price of the underlying. To consider this trade we would need to have $5.00 in total margin buying power to cover the initial margin requirement. We collect $3.50 right away in premiums and must put up another $1.50 (20% of current market price $7.50). Additionally, since we have a $10 strike price, we would need to be able to handle a maximum margin requirement of $5.50 to cover any maintenance margin requirement. This margin requirement level would be hit if the the stock went above the strike price [$3.50 (which you would receive in premium right away) + $2.00 (20% of strike price of $10.00)]. These numbers are very important to know and understand since they will determine how much margin room you will need to ride the position out to either expiry or being exercised. It is important to note too, there will never be a charge or fee associated with these margin levels, they are just a cushion the exchange wants retail customers to have on hand while holding the position.

Here is a screen shot of a typical option screen. It happens to be from the bigger screen shot used on both the login page and the help page below:

Here MR refers to the margin requirement to buy this stock on margin at the given strike price. This is our base rate and represents what it would cost us to carry the stock on margin (plus interest) indefinitely. OP refers to the current Option Premium. This is the amount we will collect today if we write this option. As per CBOE margin requirements, we will need to keep this cash in the account (and goes into both the intial option margin requirement and the maintenance option margin requirement calculations) until either expiry or exercise. WDB is our proprietary indicator and represent the premium or discount the market is giving investors to write that particular option vs. the ongoing margin requirement to carry the stock in your account (WDB = OP - MR). IMR refers to the initial margin requirment set by the exchange to put the option position on and carry it. MMR refers to the maximum possible margin requirement set by the exchange to carry the open option position.

So as you can see, finding an option that has a high WDB% score is just one part of the analysis process. If you have a lot of excess margin room and plan to carry the option to expiry then your analysis may end there. However, for those wishing to use the model to help time purchases most efficiently, the next step is finding options where their initial margin requirement (IMR) is very close to the maximum margin requirement (MMR). This would imply the strike price and current market price are very close. This event is often marked as the most volatile for an option's price as it transitions from being a purely speculative play (being 'out-of-the-money') to one having intrinsic value (being 'in-the-money'). In this ideal 'trade' scenario, the Put is written with the IMR and the MMR being the same while the WDB% is over 100%. The best case scenario for this 'trade' is to see the stock price move back above the strike price (into expiry) thus making the Put option itself expire worthless and go un-exercised.


WDB fundamental stock screens
The following fundamental stock screens all are based on buying publicly traded companies below their intrinsic (or book) value. If we always buy assets below their 'intrinsic value' we are not only using the historical argument (1 + 1 = 3) in our favor, but we also know that others (far larger than us) may also take an interest in acquiring those discounted assets too. From there we insist the company has plenty of cash on hand to handle either take over attempts or a quarter or two of rough sailing. The filters for middle to aggressive stocks are still bound by their book value and cash requirements but have less strict requirments regarding their P/E ratios and what the average Wall Street analyst rating is.
Conservative - SRL (Stock Risk Level) is 1
These would be considered very low valuation stocks. They are trading below their book value, their current income stream has them trading less then 10 times earnings, they are trading at less then three times the cash the company has on hand and the average analysts rating of the company is 'buy' or better.
Filters
P/B < 1, P/C < 3, Market Cap. > $300 million, P/E < 10, Average analyst rating 'buy' or better.
Middle - SRL (Stock Risk Level) is 2
These would be considered low valuation stocks. They are trading below their book value, they are trading at less then three times the cash the company has on hand and the average analysts rating of the company is 'buy' or better. We have removed the P/E requirement and as such, current earnings may be questionable.
Filters
P/B < 1, P/C < 3, Market Cap. > $300 million, No P/E req., Average analyst rating 'buy' or better
Aggressive - SRL (Stock Risk Level) is 3
These would be considered low valuation stocks that are not in favor with analysts. They are trading below their book value, they are trading at less then three times the cash the company has on hand. We have removed the P/E requirement and as such, current earnings may be questionable. We have removed the Avg. analysts rating of 'buy or better' requirement and as such these companies while trading at very low valuations have yet to capture the average analysts' attention.
Filters
P/B < 1, P/C < 3, Market Cap. > $300 million, No P/E req., No Analyst recommendation req.

WDB Percentage Premium Option Screens
WDB's options screens are based on what percentage of the margin requirement (if excersised) the current market premium covers. WDB percentage screen readings above 100% imply the premium collected is more than what a typical brokerage house is going to expect a client to post to maintain that position on margin. Because these companies are deemed 'option eligible' they typically fall subject to a 30% margin requirement and is the basis for WDB Option Model's margin calculation.
Conservative - ORL (Option Risk Level) is 1
These would be options that are paying a very high premium relative to the carrying cost of owning the stock on margin. If you can hold the stock on margin (should you be exercised) until the time when you will ultimately sell the stock, then that premium represents the market paying you very well to do the trade.
Filter
WDB percentage > 125%
Middle - ORL (Option Risk Level) is 2
These would be options that are paying a small premium relative to the carrying cost of owning the stock on margin. If you can hold the stock on margin (should you be exercised) until the time when you will ultimately sell the stock, then that premium represents the market paying you to do the trade.
Filter
WDB percentage > 100% but < 125%
Aggressive - ORL (Option Risk Level) is 3
These would be options that are NOT paying a premium relative to the carrying cost of owning the stock on margin. While these options do not represent a 'get paid to do the trade' scenario, they are at very close levels and worthy of attention in themselves.
Filter
WDB percentage > 75% but < 100%


Your WDB Options Model Report
On any given day, more than 100 different options pass WDB's various screening criteria. From very conservative (OLR=1/SLR=1) to very agrresive (OLR=3/SLR=3) there are always trades to consider. The WDB Report Matrix is your road map to that screened universe and by clicking on any of the various cells, you can examine the specific results in detail. Additionally, if one selects 'All' one sees every stock or option from the respective category. Based on your desired level of information your report can be very short or very long and detailed. Once you have found a screen that fits well with your personal style, you can set those preferences as your default and have your reports always look the same.

Screen capture from February 9th, 2013: