Comments on: LEAPS As Stock Surrogates And Covered Call Writing https://www.thebluecollarinvestor.com/leaps-as-stock-surrogates-and-covered-call-writing/ Learn how to invest by selling stock options. Mon, 12 May 2014 11:08:13 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/leaps-as-stock-surrogates-and-covered-call-writing/#comment-19317 Mon, 12 May 2014 11:08:13 +0000 http://www.thebluecollarinvestor.com/?p=8858#comment-19317 In reply to Adrian.

Adrian,

I agree that a small drop in share price is no reason to sell especially when the 20/10% is not met. When a drop of 5% occurs, we will usually roll down or close the entire position depending on how the drop relates to overall market performance. If your decision was to roll down and share price continues to fall, once again you can roll down a second time or more likely, close the position and put the cash in a new position. When there is significant decline in share value the worst action to take is no action at all.

Additional information can be gleaned by looking at a price chart and noting how the stock reacted in the past when it dipped below the 20-d and 100-d EMAs.

Alan

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By: Adrian https://www.thebluecollarinvestor.com/leaps-as-stock-surrogates-and-covered-call-writing/#comment-19276 Sat, 10 May 2014 10:32:38 +0000 http://www.thebluecollarinvestor.com/?p=8858#comment-19276 Thanks for all your answers above, and have all been quite informative for me, especially for the first two. One of my stocks this contract month I know I should have used the DMCP strategy for instead of doing roll-downs, so will have to keep this in mind for other months ahead. It started the other day when I had this stock drop around 5%, the market down only 0.5% and yet no stock news was even given. Sometimes news does come out only a few days later, – so in which case I am thinking that a comparison of this stocks chart performance to the market, and then a most likely sell of this stock would have been the best strategy to do here.
Yet again if this same stock dropped only 1-2%, then I guess there should be no reason for me to want to sell it, – please tell me if you think otherwise on my thoughts above here. Thank you

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By: Alan Ellman https://www.thebluecollarinvestor.com/leaps-as-stock-surrogates-and-covered-call-writing/#comment-19256 Thu, 08 May 2014 11:42:23 +0000 http://www.thebluecollarinvestor.com/?p=8858#comment-19256 In reply to Adrian.

Adrian,

Here are your questions and my responses:

1. When comparing the S&P500 price performance to a stock, then are you comparing the trendline and price pattern breaks,etc of each, to see if the stock breaks the support or resistance lines first?(so then you will know the stock is starting to become weaker than the market)?,- should I use the “close prices” of my share just as like the S&P500 is?

As an example, if your share value dropped 5% in a week and the S&P is flat or up, there is a divergence and I would be bearish in my exit strategy execution. If, however, the market is also down 5%, I would be more forgiving, and less likely to close my entire position, but still buying back the option if the 20/10% guideline is met.

2. And when you do need to compare the S&P500 chart to the shares chart for price performance after a gapdown, then over how many months should this chart be for?, – how many weeks/months after the gapdown is this action taken, or is it immediate?

After a gap down, I always check the news for an explanation. Here is a reliable, free site for stock news information:

http://www.finviz.com

If the news is not egregious (a single analyst downgrade as opposed to corporate fraud) I wait for price stabilization after buying back the option. This will take a day or two or else I would close the position. From there, I sell OTM strikes based on current market value, not the original purchase price, as stock recovery takes place. If I see any significant divergence from the S&P 500 moving forward, I cut my losses and move on to another stock (see pages 272 – 277 of the complete Encyclopedia…).

3. Is an analyst downgrade always to be bad for a stocks price?, – if so then should the stock then be sold if I am already in it?

I put very little weight to an analyst downgrade. It may temporarily impact the price of a stock but basic share value is inherent in the price of the stock as analyzed by the institutional investors. Analysts are always disagreeing with each other, much like the experts you see on CNBC every day.

4. How long after an ER comes out should I enter a trade? (does it depend on stock volatility?)

Yes, once price volatility subsides (if there is any), it’s go time as long as the stock still meets our system criteria.

5. And do you still sell covered calls if there is an important economic report coming out (or FED news), or would you wait until it passes and then put on a trade?

Yes, absolutely. There are economic reports coming out virtually every day. If we avoided these we would never execute a trade. Looking at the weekly reports as a whole, however, is a very useful exercise and why I summarize these in my weekly blogs.

6. Some of my trades I practiced turned pretty bad, and have had negative returns for some months. So it seems like one or two bad trades has the potential to wipe all a month’s gains if we’re not careful,- just as well these were on paper!

Mastering exit strategy execution will mitigate losses and enhance gains. This must be a major aspect of your paper-trading program.

Alan

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By: Adrian https://www.thebluecollarinvestor.com/leaps-as-stock-surrogates-and-covered-call-writing/#comment-19229 Wed, 07 May 2014 08:41:10 +0000 http://www.thebluecollarinvestor.com/?p=8858#comment-19229 Alan, I have recently been studying some stocks charts against the market, to try determine whether I should have sold any stock I papertrade at the appropriate time.
The problem I have is I’m not quite sure whether the way you are analysing these charts together confirms what I suspect would be right. So my 1st two extended questions of five are about my price performance issue:-
1. When comparing the S&P500 price performance to a stock, then are you comparing the trendline and price pattern breaks,etc of each, to see if the stock breaks the support or resistance lines first?(so then you will know the stock is starting to become weaker than the market)?,- should I use the “close prices” of my share just as like the S&P500 is?

2. And when you do need to compare the S&P500 chart to the shares chart for price performance after a gapdown, then over how many months should this chart be for?, – how many weeks/months after the gapdown is this action taken, or is it immediate?

3. Is an analyst downgrade always to be bad for a stocks price?, – if so then should the stock then be sold if I am already in it?

4. How long after an ER comes out should I enter a trade?(does it depend on stock volatility?)

5. And do you still sell covered calls if there is an important economic report coming out(or FED news), or would you wait until it passes and then put on a trade?

Some of my trades I practiced turned pretty bad, and have had negative returns for some months. So it seems like one or two bad trades has the potential to wipe all a months gains if we’re not careful,- just as well these were on paper!
If you can give me some answers to all this, then with hope I may be able to reduce a paper-loss a little bit. Thanks

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By: Alan Ellman https://www.thebluecollarinvestor.com/leaps-as-stock-surrogates-and-covered-call-writing/#comment-19216 Mon, 05 May 2014 21:45:17 +0000 http://www.thebluecollarinvestor.com/?p=8858#comment-19216 Running list stocks in the news: TRN:

Trinity Industries, ranked #5 on this week’s IBD 50, and a stock in “bold” on our Premium Watch List, just announced a 2-for-1 stock split and an increase of 33% in its quarterly dividend. The split is effective as of June 19th. This will double the number of shares owned, the number of contracts sold and halve the srtike prices originally sold for the June contracts and halve the market share price.

See pages 323 – 330 in the “Complete Encyclopedia for Covered Call Writing” to review how stock splits impact our covered call positions.

Below is the current chart of TRN using the technical parameters of the BCI methodology. CLICK ON IMAGE TO ENLARGE AND USE THE BACK ARROW TO RETURN TO THIS BLOG.

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/leaps-as-stock-surrogates-and-covered-call-writing/#comment-19211 Mon, 05 May 2014 17:32:52 +0000 http://www.thebluecollarinvestor.com/?p=8858#comment-19211 In reply to Ron.

Ron,

1- Depending on your definition, I believe there is downside protection when selling OTM puts:

Stock @ $42
Sell OTM $40 put for $1.50 = $150/contract
Cash to secure put = $4000.00
1-month initial return = 3.75%
That profit is guaranteed as long as the price remains above $40
Downside protection = $2/$42 = 4.8%
We are guaranteed a 3.75%, 1-month return as long as share depreciation is not greater than 4.8% by expiration.

I am currently writing abook about put-selling because of member demand. Should be available in a few months.

2- Setting a stop on the long stock and short call option may not prevent a loss. If you sold an ITM strike and the price drops to the strike, that option is now an ATM strike which has a much higher time value component than ITM or OTM strikes. Now theta may have eroded, the time value depending on where we are in the contract but avoiding a loss is not guaranteed….no free lunches unfortunately for us but happily for those taking the other side of our trades.

Alan

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By: Ron https://www.thebluecollarinvestor.com/leaps-as-stock-surrogates-and-covered-call-writing/#comment-19210 Mon, 05 May 2014 17:29:57 +0000 http://www.thebluecollarinvestor.com/?p=8858#comment-19210 Hi Alan,

I have just realized something significantly wrong with my thinking that Short Puts are like Buy/Write calls.

With a short put there really is no downside protection since the cost to exit, should the underlying price decline, is higher. At the same time with a covered call the premium has declined by the time the underlying falls to the strike price. So I can prevent a loss just by setting a stop on both the stock and the option at the strike price of the call.

I’d like your thoughts on this.

Ron

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