Fundamental analysis, technical analysis, common sense principles and calculations are all critical considerations when selling stock options the Blue Collar way. Since this is my first article written on our newly enhanced web site (hope you like it!) I thought it appropriate to use a real-life example to review the basic tenets of our BCI methodology.
Although we screen our database of over 2000 stocks weekly for our premium members we ALWAYS include the IBD 50 stocks in that screen. I have selected SWI, a stock ranked #3 in the IBD 50 in the February 6th edition of that resource. The screening process begins:
1- Are options associated with this equity: Yes
2- Does the stock report same store MONTHLY retail stats? No
3- Does it rank at the highest level of all 6 SmartSelect screens? Yes
4- Does it pass the risk/reward Scouter screen with a 5 or better? Yes
5- Does it average a daily minimum trading volume of 250,000 shares? Yes
6- Is there an upcoming earnings report? No
Next we move on to technical analysis. Below is a chart showing a bullish picture, passing all of our technical requirements:
We look in the “bid” column (sell at the “bid”; buy at the “ask’) for premium returns and make sure the open interest is at least 100 contracts and/or the bid-ask spread is $0.30 or less.
Now we are ready to feed this information into the Ellman Calculator. You can use the single or multiple tabs (I prefer the multiple tab). The information is entered in the “white cells” on the left and the results are found in the “blue” cells on the right (I colorized them for discussion purposes):
ITM $35 strike generates a 5-week return of 2.3% with 5.5% protection of that premium
Near-the-money $37.50 strike generates a 3.7%, 5-week return with upside potential of an additional 1.3%
OTM $40 strike generates a 1.5%, 5-week return with the possibility of an additional 8% for upside share appreciation
The strike price that is selected is based on your personal risk tolerance and your overall market assessment. ITM strikes are the most conservative, ATM (at-the-money or near-the-money) are bullish and OTM are the most bullish. One size DOESN’T fit all!
Once your positions are established look for possible exit strategy opportunities to mitigate losses or enhance gains. These will be addressed in future articles and are discussed in great detail in my books and DVDs.
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This was an extremely light week for economic reports. The action will pick up next week:
The US trade deficit widened in December to $48.8 billion, a six-month high
Exports increased by 0.7%, the first advance for exports in 3 months
US consumer borrowing increased by $19.3 billion in December, greater than analyst expectations. This is a positive sign for consumer’s increasing faith in the economy
For the week, the S&P 500 declined by 0.2% for a year-to-date return of 7% including dividends.
IBD: Confirmed uptrend
BCI: Moderately bullish selling an equal number of ITM and OTM strikes.
My best to all,
Alan ([email protected])