Technical Analysis and Covered Call Decisions: Looking Back At …
Technical analysis is an integral part of our covered call writing decisions for both stock and option selections. It also impacts our exit strategy decisions. KORS has been a favorite of Blue Collar Investors for quite some time as a frequent member of our Premium Stock List. For the week of September 16th through the 20th, KORS was ‘bumped” from our Premium Watch List because of weakening technicals and BCI members were wondering whether to roll the option at expiration Friday. Here is a look at the bearish-leaning price chart that week:
Technical analysis and covered call writing
Since the price of this equity had been rising, most of our members were faced with the decision to either roll the option or allow assignment. The earnings were not due out until November 5th. One of our BCI guidelines is to roll out rather than out-and-up if technicals are mixed. Here is a screenshot of an options chain I created when KORS was trading @ $74.30 and considering rolling out to the $72.50 strike:
KORS options chain as of 9-17-13
When feeding this information into The Ellman Calculator we generate a 1.7%, 1-month return (21% annualized) with 2.4% protection of that profit. If those stats meet your goals, rolling out should be considered.
Next, let’s take a look at a chart from that date moving forward:
KORS price chart after 9-17-13
Yellow field: After rolling out, the price holds in the mid-$70s and the 1.7%, 1-month return is realized
Pink field: Because earnings was due on November 5th, we would allow assignment and have our shares sold @ $72.50
Purple field: After a positive earnings surprise on November 5th (note the gap up in price), the chart technicals improved and a more bullish position could be taken as the stock price moved from the high $70s to the low $80s. On Friday, December 20th, KORS was still a member of our premium watch list and trading close to $84.
Technicals are important but not our only considerations. We also view our overall market assessment and personal risk tolerance to make our final covered call writing decisions.
Summary:
Technical analysis plays a vital role in our covered call writing decisions. We are more inclined to take a bullish stance when technicals are all confirming and bullish and a conservative approach when the technicals are mixed. There are no guarantees that this approach will work every time but it will absolutely throw the odds dramatically in our favor.
Beat the rate increase for Premium Membership:
On January 17th, 2014 we will be raising subscription rates for both monthly and annual memberships. Current members will be grandfathered in to the current lower rates and need to take no action to retain this lower fee schedule. All new members who subscribe prior to January 17th will also be grandfathered in to the lower rates. Thanks for the positive feedback we have received for the new and enhanced version of our Premium Stock reports.
Next speaking engagement:
Houston, Texas
Tuesday January 14th
6:30 – 8:30 PM
http://www.aaii.com/chapters/meeting?mtg=2576&ChapterID=&via=welcome
Market tone:
The Federal Reserve’s announcement to reduce its bond-buying program gradually was embraced by the stock market in a big way. This was a concern of mine the past few weeks and the reason I turned more conservative in my covered call positions in the past contract period. That’s now behind us. The economic reports for the week were generally positive:
The bond-buying program (quantitative easing) by the Fed, which began in September, 2012, will be gradually reduced in 2014 starting in January
The purchase of mortgage-backed securities will be reduced from $40 billion to $35 billion
The purchase of Treasuries will be reduced from $45 billion to $40 billion
The Federal Open Market Committee (FOMC) is committed to keep interest rates “exceptionally low” well past the time that unemployment drops below 6.5%, especially if inflation remains below the Fed’s 2% target rate
3rd quarter GDP was upwardly revised to 4.1%, above the 3.6% expected
According to the Conference Board, the index of leading economic indicators (LEI) rose to 98.3 in November, the 5th consecutive increase
The Consumer Price Index (CPI) was unchanged in November while the overall rate of inflation for the past year was 1.2%, below the Fed’s target rate of 2%
According to the labor Department, Nonfarm productivity in the 3rd quarter rose by 3.0%, beating estimates of 1.7%
Industrial production in November increased by 1.1% better than the 0.6% anticipated. This was the largest gain since November, 2012
New home construction in November came in at a sizzling 1,091,000, higher than the 950,000 expected but existing home sales and up 29.6% from a year ago
Existing home sales, however, fell by 4.3% in November
Exports of goods and services increased by 3.9% while that of imports by only 2.4%, another economic positive
For the week, the S&P 500 rose by 2.4%, for a year-to-date return of 27%, including dividends.
Summary:
IBD: Confirmed uptrend
BCI: Moderately bullish, favoring out-of-the-money strikes 2-to-1.
Wishing our BCI community a happy new year and a prosperous and healthy 2014,
Alan and the BCI team ([email protected])
www.thebluecollarinvestor.com
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Technical Analysis and Covered Call Decisions: Looking Back At …
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