We examine the BCI Premium Stock Report on the Sunday May 23, 2021, after expiration Friday, for our Monday trade selections. One of the securities we choose is Applied Materials, Inc. (Nasdaq: AMAT). On Monday morning, May 24th, AMAT gaps up well above the price movement of the S&P 500. Is AMAT now too expensive? Should we still consider this stock or look for an alternative? This article will investigate the factors that caused the price gap-up and make some common-sense conclusions regarding the next-steps.
What caused the gap-up?
On Friday 5/21/2021 AMAT announced a stellar earnings report resulting in the gap-up as the May contracts expired. There was a 5.2% earnings surprise and a 3.2% revenue surprise as shown on the site www.earningswhispers.com:
AMAT: Positive Earnings and Revenue Surprises
There’s more
On Monday May 24th, IBD named AMAT its Stock of the Day further enhancing the gap-up in price:
AMAT Named IBD Stock of the Day
Price chart of AMAT pre- and post-earnings
AMAT Price Chart May – June 2021
After the 2 gap-ups, AMAT moved to a consolidating chart pattern, out-performing the price movement of the S&P 500. We now know that the gap-up was based on outstanding corporate fundamentals. We ask ourselves if we would buy AMAT today at the current price. For me, good news is a positive and would encourage me to consider this stock. I may wait a day or so for the price to settle but the overall picture for AMAT was only enhanced.
Discussion
Good news should not discourage us from incorporating a stock into our option-selling portfolios. Researching the cause of one or more gap-ups does make sense. If the gap-up is based on sound fundamental data, all systems are “go”. Stock prices go up and down and this is the risk we are willing to take in return for beating the market on a consistent basis. More often than not, there will be a reversion to quality, the type of securities identified in our BCI reports.
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Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Alan,
I have been subscribing to your service for many years and I notice the many improvements you have made in your publication over the years. I am grateful for the covered call knowledge you have taught me.
Some twenty years ago the covered call knowledge you taught me enabled me to make profits that made it possible to send my daughter to attend Smith College for four years.
Sincerely yours,
Stephen
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Alan,
I hope it’s ok to ask a question off topic. I am interested in the poor mans covered call and want to ask about how deep in the money we should go for our strike choices. There are usually a lot of strikes and I was hoping you could guide me how to make that choice.
Thanks a lot.
Lenny
Lenny,
The strikes we choose for the PMCC strategy must be based on our required initial structuring formula and our initial time-value return goal stated range.
When establishing our trades, the difference between the call strikes + the initial time-value premium generated must be > the cost of the LEAPS. The short call premium must meet our stated goals.
The key is to watch the time-value component of the :LEAPS. If too high, the formula requirement will not be met and we look to a deeper in-the-money strike with lower time-value.
Using the BCI PMCC Calculator (1st tab, in this case) will assist with all these calculations and guide us to the best strikes.
Alan
Alan,
This article really hits the spot.
The gap up of an underlying stock on Monday, right after expiration Friday, and right after it is bold Weekly Stock Screen is very common and makes it very hard to decide about placing a monthly CC trade.
Thank you – Roni
Roni,
I struggled with this, as well, earlier in my option-selling career and then a light bulb went off. The simple solution was to ask myself if I would buy this stock today, at this price with the information available?
It does make sense after a gap-up to wait for any volatility to subside in much the same way we do post earnings reports.
Alan
Alan,
I understand it perfectly and will always do it this way in the future.
Thanks again – Roni
Premium Members,
This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 10/22/21.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
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On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.
Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.
Best,
Barry and The Blue Collar Investor Team
Hi Alan,
I have a question regarding stock choices and avoiding earnings. I know that you recommend choosing stocks close to the 30 days to the expiration date. In the case where I really like a stock and there are no weekly options, what is your recommendation? Here is an example:
INMD is a stock which contributed to my $2800 gain in September. What are your recommendations with an earnings date of 10/26. There are no weekly options available.
1. The Nov 19 expiration. This seems like a good choice; however, after the earnings on 10/26, there will only be 24 days left to expiration
2. The Dec 17 expiration. This looks good for an out of the money strike, but the $80 in the money strike has a bid/ask spread of $.60.
3. Wait another 2 weeks when there will be 30 days to expiration
Looking forward to another successful month in November!
Thanks,
Bruce
Bruce,
I have been trading INMD, as well, since it appeared on our list of eligible stocks. with similar success. It, currently, is not in any of my portfolios because of the 10/26 ER.
As you stated, there will still be 24 days to expiration after the report passes.so there will be some significant time-value to capture with both calls and puts.
If, after the report passes, we still consider INMD an eligible security (likely), we re-check the option-chain, which will change after the report as implied volatility decreases, and see if the initial time-value return goal range meets our goals.
Also, re-check the option-chain on the premium for the $80.00 strike.
Alan
Hi Alan, hope all is well!!
is there a formula to annualize a ROI for investment in a specific period?
as an example;
FDX – made 2.2% in 35 days. What is that annualized?
(needless to say im not a math major , ugh)
thanks!!!!!!
George
George,
Glad to help.
Divide 2.2% by 35 to get a percentage return per-day. Then, multiply by 365:
[(2.2%/35) x 365] = 22.94%
Alan
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Dear Alan
Do you have a blog or video lesson that provides more detail on what triggers closing the entire PMCC position?
All I could find in the CC Alternative Strategies was on page 164: “We should be prepared to close our entire position if new information becames available that negates our initial bullish assumption on the underlying security.”
Do you have any guidelines on what would that new information be to trigger getting out of the PMCC?
o Fundamental trigger?
o Technical trigger?
o Common sense trigger?
Thanks, Chuck
Chuck,
Also, checkout pages 117 – 133 on the initial structuring of our PMCC trades. The reason that the required initial structuring formulas was included relates to the scenarios when share price accelerates substantially.
When this occurs, to keep the trade active, we are forced to buy back the (now, deep in-the-money) short call which could be quite expensive due to the intrinsic-value component of the premium.
We may not have the resources or inclination to do so. By implementing our PMCC initial trade structuring formula, we are assured of closing at a profit.
A change in our bullish assumption on the underlying and a substantial price increase are the 2 main reasons we would close both legs of the PMCC trades.
Alan
Premium Members,
There may be a delay in uploading the Weekly Stock Report this weekend. I just received notification from Schwab that their platform, “StreetSmart Edge” will be down for maintenance from 8:30 PM EST tonight (Friday), 10/29/21, through 8:30 PM EST tomorrow night (Saturday), 10/30/21. This will impact the report since I use that platform for market data.
We’ll do the best we can to minimize the delay.
Best,
Barry