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Technical Analysis and Covered Call Decisions: Looking Back At KORS

Technical analysis is an integral part of our covered call writing decisions for both stock and option selections. It also impacts our exit strategy decisions. KORS has been a favorite of Blue Collar Investors for quite some time as a frequent member of our Premium Stock List. For the week of September 16th through the 20th, KORS was ‘bumped” from our Premium Watch List because of weakening technicals and BCI members were wondering whether to roll the option at expiration Friday. Here is a look at the bearish-leaning price chart that week:

Bearish chart for KORS

Technical analysis and covered call writing

Since the price of this equity had been rising, most of our members were faced with the decision to either roll the option or allow assignment. The earnings were not due out until November 5th. One of our BCI guidelines is to roll out rather than out-and-up if technicals are mixed. Here is a screenshot of an options chain I created when KORS was trading @ $74.30 and considering rolling out to the $72.50 strike:

rolling out with mixed technicals

KORS options chain as of 9-17-13

When feeding this information into The Ellman Calculator we generate a 1.7%, 1-month return (21% annualized) with 2.4% protection of that profit. If those stats meet your goals, rolling out should be considered.

Next, let’s take a look at a chart from that date moving forward:

Technical analysis and covered call writing

KORS price chart after 9-17-13

  • Yellow field: After rolling out, the price holds in the mid-$70s and the 1.7%, 1-month return is realized
  • Pink field: Because earnings was due on November 5th, we would allow assignment and have our shares sold @ $72.50
  • Purple field: After a positive earnings surprise on November 5th (note the gap up in price), the chart technicals improved and a more bullish position could be taken as the stock price moved from the high $70s to the low $80s. On Friday, December 20th, KORS was still a member of our premium watch list and trading close to $84.

Technicals are important but not our only considerations. We also view our overall market assessment and personal risk tolerance to make our final covered call writing decisions.

Summary:

Technical analysis plays a vital role in our covered call writing decisions. We are more inclined to take a bullish stance when technicals are all confirming and bullish and a conservative approach when the technicals are mixed. There are no guarantees that this approach will work every time but it will absolutely throw the odds dramatically in our favor.

 

Beat the rate increase for Premium Membership:

On January 17th, 2014 we will be raising subscription rates for both monthly and annual memberships. Current members will be grandfathered in to the current lower rates and need to take no action to retain this lower fee schedule. All new members who subscribe prior to January 17th will also be grandfathered in to the lower rates. Thanks for the positive feedback we have received for the new and enhanced version of our Premium Stock reports.

 

Next speaking engagement:

Houston, Texas

Tuesday January 14th

6:30 – 8:30 PM

http://www.aaii.com/chapters/meeting?mtg=2576&ChapterID=&via=welcome

 

Market tone:

The Federal Reserve’s announcement to reduce its bond-buying program gradually was embraced by the stock market in a big way. This was a concern of mine the past few weeks and the reason I turned more conservative in my covered call positions in the past contract period. That’s now behind us. The economic reports for the week were generally positive:

  • The bond-buying program (quantitative easing) by the Fed, which began in September, 2012, will be gradually reduced in 2014 starting in January
  • The purchase of mortgage-backed securities will be reduced from $40 billion to $35 billion
  • The purchase of Treasuries will be reduced from $45 billion to $40 billion
  • The Federal Open Market Committee (FOMC) is committed to keep interest rates “exceptionally low” well past the time that unemployment drops below 6.5%, especially if inflation remains below the Fed’s 2% target rate
  • 3rd quarter GDP was upwardly revised to 4.1%, above the 3.6% expected
  • According to the Conference Board, the index of leading economic indicators (LEI) rose to 98.3 in November, the 5th consecutive increase
  • The Consumer Price Index (CPI) was unchanged in November while the overall rate of inflation for the past year was 1.2%, below the Fed’s target rate of 2%
  • According to the labor Department, Nonfarm productivity in the 3rd quarter rose by 3.0%, beating estimates of 1.7%
  • Industrial production in November increased by 1.1% better than the 0.6% anticipated. This was the largest gain since November, 2012
  • New home construction in November came in at a sizzling 1,091,000, higher than the 950,000 expected but existing home sales and up 29.6% from a year ago
  • Existing home sales, however, fell by 4.3% in November
  • Exports of goods and services increased by 3.9% while that of imports by only 2.4%, another economic positive

For the week, the S&P 500 rose by 2.4%, for a year-to-date return of 27%, including dividends.

Summary:

IBD: Confirmed uptrend

BCI: Moderately bullish, favoring out-of-the-money strikes 2-to-1.

Wishing our BCI community a happy new year and a prosperous and healthy 2014,

Alan and the BCI team (alan@thebluecollarinvestor.com)

www.thebluecollarinvestor.com

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

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11 Responses to “Technical Analysis and Covered Call Decisions: Looking Back At KORS”

  1. Paul December 21, 2013 7:33 am #

    Alan,

    I came across your site a few days ago and have been enjoying and devouring your beginners series. I notice you use lots of charts and was wondering what site you use to create them?

    Thanks for a great job.

    Paul

    • Alan Ellman December 21, 2013 12:32 pm #

      Paul,

      Welcome to the BCI community.

      The site I use for chart building is:

      http://www.stockscharts.com

      See pages 71 – 74 of the “Encyclopedia for Covered Call Writing”for the parameters used in the BCI methodology.

      Alan

  2. Martin Reynolds December 21, 2013 2:40 pm #

    Hi Alan,
    Please remind me, which is the better longer term indicator, Stochastic or MACD?
    Thanks, and Merry Christmas to you and your team,
    Martin

    • Alan Ellman December 22, 2013 11:07 am #

      Martin,

      Both the MACD histogram and the stochastic oscillator as set up in the BCI methodology are short-term momentum indicators geared to the 1-month options we favor. The 20-day exponential moving average is also used to reflect the time frame we are interested in.

      The MACD histogram we use involves 12-day and 26-day exponential moving averages and the 9-day exponential moving average of the MACD itself. The stochastic oscillator represents the current price of the stock as it relates to the previous 14-day trading range. All short-term as you can see.

      If i were trading in a longer term portfolio, I would favor different parameters. For example, in my latest book “Stock Investing For Students”, I favor 50-day and 200-day simple moving averages for this long-term investment plan.

      Happy holidays,
      Alan

  3. Barry B December 21, 2013 6:28 pm #

    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 12-20-13.

    For your convenience, here is the link to login to the premium site:

    https://www.thebluecollarinvestor.com/member/login.php

    Best,

    Barry and the BCI Team

  4. Alan Ellman December 22, 2013 11:14 am #

    To our premium members:

    In our new enhanced premium stock reports we show ex-dividend dates where applicable. The dates reflect those that have been announced as well as the last ex-date, if not yet announced. This will allow you to project the next ex-date to some degree of accuracy especially if the company has been generating dividends on a consistent basis. Once an ex-date is announced it will be reflected in the next stock report. Keep in mind that Boards of Directors can change the amount and timing of dividend distributions so the information we provide is the best available at the time.

    Alan

  5. Barry B December 23, 2013 9:18 am #

    Premium Members:

    This week’s Weekly Stock Screen And Watch List has been revised and uploaded to The Blue Collar Investor premium member site and is available in the “Reports” section. the Third Section was modified. The changes did not impact any stock selection decisions. Look for the report dated
    12-20-13-REVB.

    Best,

    Barry and the BCI Team

  6. Alan Ellman December 24, 2013 5:03 pm #

    Premium members:

    This week’s 6-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options.

    For your convenience, here is the link to login to the premium site:

    https://www.thebluecollarinvestor.com/member/login.php

    Happy holidays to one and all.

    Alan and the BCI team

  7. Pierre December 26, 2013 11:02 pm #

    Hi Alan, In order to avoid the downside risk of the underlying i am wondering if the following strategy could work ? Simultaneously entering a long and short position on a Stock or ETF and write Calls against it. The percentage return will be half of a normal Cover Calls but the risk will be minimal.

    • Alan Ellman December 27, 2013 6:23 am #

      Pierre,

      The long stock position will protect your short call position. If the price of the stock rises above the strike, that option will be exercised unless you close that short call position and your shares sold. Then you will be exposed in your short stock position which could result in a significant loss.

      A safer approach to protecting against a catastrophic drop in stock price is to use protective puts. Here is a link to an article I published on this topic:

      https://www.thebluecollarinvestor.com/protective-puts-using-the-collar-strategy-during-volatile-markets/

      This, too, will result in a lower return but protect against catastrophic share depreciation.

      Alan

      • Pierre December 31, 2013 2:59 am #

        Thanks for the clarification

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