Technical analysis is one of the critical tools available to us in selecting the best stocks for our option-selling strategies. Price charts are much more than a sequence of dots and lines…they tell a story about a company which, with proper research, ultimately leads to a series of rules and guidelines that will assist in elevating our returns to the highest possible levels. This article will highlight a real-life example with AbbVie Inc. (NYSE: ABBV), a drug manufacturer and its price movement from January through May of 2018. My thanks to Vasanthi for sharing this trade with our BCI community.
ABBV price chart (the “story”)
ABBV: 1-Year Price Chart
- In mid-January, ABBV was purchased for $99.83 (strong technical indicators)
- In late-January, a positive earnings release resulted in a gap-up in price
- Negative news in late-March regarding one of its cancer drugs resulted in a gap-down in price
- A strong earnings report resulted in an ensuing price acceleration
Strategy guidelines resulting from “the story”
- Bullish technical indicators are one of the screening requirements for short-term option-selling
- Earnings reports can result in extreme price fluctuations and therefore must be avoided. Covered call writing and selling cash-secured puts are conservative option-selling strategies where capital preservation is important to retail investors and we don’t want to convert these strategies to risky schemes
- Drug manufacturers are among the most volatile underlyings due to the constant news regarding various studies on its pharmaceutical products. We must be sure that we have the appropriate risk-tolerance to use such securities
- Mastering the position management skill is critical when exit strategy opportunities arise. Whether share price moves up or down dramatically, there are maneuvers we can execute that will mitigate losses and enhance gains
Technical analysis is an essential tool that will enhance the quality of our stock selection process as well as tell a story regarding events impacting the price performance of a stock. This mosaic of “dots and lines” will lead us to rules and guidelines that will elevate our overall returns to the highest possible levels. Our 2 additional screens include fundamental and common-sense analysis.
The Blue Hour Webinar # 12: When to Roll our Covered Call Options
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Now available on premium and video sites
February 7th – 10th, 2019
Orlando Money Show
Omni Orlando Resort @ Champions Gate
February 7th – 10th 2019
1. Getting Started with Stock Options: Creating Monthly Cash Flow with Covered Call Writing
February 8, 2019, 3:10 pm – 3:40 pm
2. Getting Started with Stock Options: How to Select the Best Options in Bull and Bear markets
February 9, 2019, 2:00 pm – 2:45 pm
This week’s economic news of importance:
- Markit services PMI Oct. 54.8 (54.7 last)
- ISM non-manufacturing index Oct. 60.3% (59.0% expected)
- Job openings Sept. 7.0 million (7.3 million last)
- Consumer credit Sept. $11 billion ($23 billion last)
- Weekly jobless claims 11/3 214,000 (210,000 expected)
- FOMC announcement 2 – 2.25% (as expected)
- Producer price index Oct. 0.6% (0.2% expected)
- Consumer sentiment Nov. 98.3 (98.2 expected)
- Wholesale inventories Sept. 0.4% (1.0% last)
THE WEEK AHEAD
Mon Nov. 12th
- None: Veteran’s Day
Tue Nov. 13th
- NFIB small-business index Oct.
- Federal budget Oct.
Wed Nov. 14th
- Consumer price index Oct.
- Core CPI Oct.
Thu November 15th
- Weekly jobless claims 11/10
- Retail sales Oct.
- Philly Fed Nov.
- Business inventories Sept.
Fri November 16th
- Industrial production Oct.
- Capacity utilization Oct.
For the week, the S&P 500 moved up by 2.13%% for a year-to-date return of 4.02%
IBD: Market in confirmed uptrend
GMI: 4/6- Bullish signal since market close of November 8th, 2018
BCI: Selling only in-the-money strikes until market recovery is confirmed. Remain confident in long-term health of the stock market. No change from last week.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a bearish-to-neutral tone. In the past six months, the S&P 500 was up 3% while the VIX (17.41) moved up by 30%.
Wishing you much success,
Alan and the BCI team