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When we select stocks for covered call writing or selling cash-secured puts we factor in fundamental, technical and common-sense screens (like minimum trading volume). This screening process is the foundation of our Premium Stock Reports. Frequently we will notice stocks removed from these lists only to return shortly thereafter. The reason for these whipsaws are usually related to the technical analysis component of the BCI screening process. Fundamentals generally will change only after quarterly earnings reports and common sense screens will change infrequently although we check them weekly for our members. Stocks “bumped” from our eligible watch list are given 3 weeks to recover before being removed completely from these reports. In the interim, they will remain in the shaded areas of our reports as shown below:

 

covered call writing and stock selction

Premium Report Showing Eligible and Recently “Bumped” Stocks

 

Why stocks get bumped and quickly return to our Premium Watch List: A real-life example with UCTT

Ultra Clean Holdings (NASDAQ: UCTT) earned its way onto our premium watch list in July and August 2017 and was then bumped from the “eligible” section in early August only to return shortly thereafter. Let’s have a look at the technical chart of UCTT highlighting the whipsaws of the technical parameters inherent in the BCI methodology.

 

coverred call writing asnd technical analysis

UCTT Technical Chart Showing Bullish and Bearish Signals

 

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  • The yellow field in the center of the chart shows bullish signals (red arrows). The price remains above the 20-day exponential moving average, the MACD Histogram is above the zero line and the stochastic oscillator is first ascending and then consolidating.
  • In the purple field all the signals turned bearish (black arrows) with the price line moving below the 20-day exponential moving average, the MACD Histogram dropping below the zero line and the stochastic oscillator dipping below the 80% to the 20%.
  • The yellow field to the far right shows an initial technical recovery with the bearish signals now turning bullish once again (red arrows on right)

 

Why these whipsaws are so important

The volatility of our underlying securities is what gives value to our options. This is also why it is so critical to have a system in place to select stocks and options based on currently available information. It also highlights why the skill of position management is essential to successful option-selling.

 

Should we automatically sell a stock if it is bumped from our watch list?

No, our positions are managed as described in my books and DVD programs once our trades are entered. However, if we sell a stock because of compromised technicals and need a replacement stock, that security should be selected from the most current list of eligible securities.

 

Should we roll an option on a stock recently bumped from our list?

Possibly. Rolling an option implies that it is in-the-money at expiration and the near-month trade has been maximized. However, if I did roll an option on a stock just removed from the eligible list but still within the 3-week window, I would roll out and not out-and-up. Rolling out, by definition, means rolling to an in-the-money strike which will give us both time value profit plus additional downside protection in the form of intrinsic value.

 

Discussion

Stock price will whipsaw up and down. This volatility is what gives value to our options. The up and down price movement will also cause some stocks to enter, get bumped and then re-enter our Premium Watch Lists. Understanding technical charts will enhance our stock, option and position management trade executions.

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Upcoming events

Portfolio Overwriting webinar for The Options Industry Council (OIC)

March 23 @ 10:30 am – 11:30 am

College and graduate school finance majors only

Quinnipiac G.A.M.E. VIII Forum

New York City

Friday March 23, 2018

“The 3-day forum, held annually in the spring, gathers some of the most successful people in finance together to share their knowledge, expertise and outlook for the future with graduate and undergraduate students”.

 

Market tone

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This week’s economic news of importance:

  • New home sales 593,000 (below expectations)
  • Durable goods orders -3.7% (below expectations)
  • Case-Shiller home price Dec 6.3%
  • GDP 2.5% (as expected)
  • Weekly jobless claims for week ending 2/24 210,000 (below expectations)
  • Personal income Jan 0.4% (below expectations)
  • Markit manufacturing PMI 55.3 (expansion)
  • Consumer sentiment Feb 99.7

For the week, the S&P 500 declined by 2.04% for a year-to-date return of  0.60%%%

Summary

IBD: Uptrend under pressure

GMI: 2/6- Buy signal since market close of February 20, 2018

BCI: I hold an equal number of in-the-money and out-of-the-money strikes and remain fully invested.  

WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US

The 6-month charts point to a neutral to bearish outlook. In the past six months, the S&P 500 was up 10% while the VIX (19.59) moved up by 60%.

Wishing you much success,

Alan and the BCI team





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