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The stochastic oscillator is a momentum indicator that shows the location of the current closing price relative to the high-low range over a set number of periods, usually 14 trading days. Closing levels that are near the top of the range indicate accumulation or buying pressure while those near the bottom of the range indicate distribution or selling pressure. Another way to frame this is that it is the battle between the bulls and the bears and who is in charge. The indicator oscillates between 0 and 100. Readings below 20 are considered oversold while readings above 80 are considered overbought. The idea behind this indicator is that prices tend to close near the extremes of the recent range before turning points.

Let’s set up an example as to how this works. Let’s assume that during the past 14 trading days stock XYZ has seen a low of $30 and a high of $40. Today it closed at $38. Within the $10 trading range, the stock is $8 up or in the 80%. If the stock closed today at $32, it would be at the 20%. This is known as %K in stochastic lingo. [Read more →]

This past Friday, July 16th represented the expiration of the July contracts. Most of our stocks were due  to report earnings during the August cycle so these equities would NOT be eligible for an expiration Friday exit strategy like rolling out or rolling out and up. One stock that had a mixed chart pattern that may have been considered was LULU. Let’s first look at the technicals:

LULU- Chart as of 7-16-10

• The red circle highlights a recently ascending price pattern but still slightly below the 20-d ema, a negative.
• The red arrow shows the MACD histogram just turning positive, a bullish signal.
• The blue arrow highlights the stochastic oscillator moving above the 20% and ascending, also a bullish signal.

Since this is a mixed technical picture, (should I decide to keep this equity) I would lean to the rolling out strategy wherein we start the contract cycle with an I-T-M strike and downside protection. [Read more →]

 The Elite Calculator is complete! For the past several months the BCI Team has been developing an enhanced version of the Ellman Calculator (ESOC). The Basic Calculator contains the following tabs:

• Intro
• Single tab
• Multiple tab
• “What now” tab

The Elite version contains these four tabs plus two more:

• “Unwind now” tab
• Schedule D

The first of these new additions has been available to premium members for the past few months and has been explained in the following journal article:

http://www.thebluecollarinvestor.com/blog/closing-covered-call-positions-mid-contract-the-elite-calculator/

The purpose of this article is to explain the benefits of the Schedule D particularly for those trading outside of sheltered accounts. As you will see, a lot of time and effort has gone into the expanded version of the calculator. [Read more →]

 One of the common flaws found in many of the studies of the covered call strategy is that they select only slightly out-of-the-money strike prices. Needless to say, a majority of covered call writers are also guilty of the same mistake. It is certainly understandable why one would lean to this strike as we ultimately will garner the very highest of returns if the stock does appreciate up to and beyond the strike. This is a strike that should be favored when both market and individual equity fundamentals and technicals are positive.

What if the market or equity technicals are volatile or slightly bearish? Should we not consider the protection afforded by in-the-money strikes? The risk is that the stock will head north and we will miss out on the appreciation. The benefit is that the option buyer is purchasing insurance for us in the amount of intrinsic value of the option premium. This generosity should be given consideration when market or stock indicators dictate. Furthermore, in-the-money strikes have deltas approaching “1″. This means that as the stock moves up or down, the option value will move up or down in a similar amount. If the stock starts declining in value, so will the option premium and it will be less costly for us to buy back (B-T-C) the option to execute an exit strategy. [Read more →]

A key mission statement in our Blue Collar investment strategy is risk management. An integral component needed to accomplish this goal is diversification and cash allocation. We want to own at least five different stocks in five different industry segments with no single equity representing more than 20% of our portfolio. If we have five stocks selected, do we buy an equal number of shares of each? That would work if the stocks sell for the same price. Then we would be investing equal amounts of cash in each security. However, we are generally purchasing equities of different market values. How then do we calculate how many shares to purchase and how many contracts to sell? [Read more →]