beginners corner

Technical Analysis and Our Option-Selling Portfolios: A Real-Life Example with Matador Resources Company (NYSE: MTDR)

BCI has a 3-pronged approach to screening for our covered call writing and put-selling watchlists. These include fundamental analysis, common-sense principles (like minimum average trading volume) and technical analysis. When we read a price chart, we are forming a mosaic of several technical parameters and then coming to a pass/fail decision. There is a degree of subjectivity when making our technical conclusions. On 4/4/2022, Bob wrote to me asking why MTDR wasn’t included in our recent premium member stock report. He correctly stated that MTDR was priced at $55.76 and the 20-day exponential moving average was at $53.17 so why wasn’t the trend our friend? This article will provide the rationale for not including MTDR in our report.

 

Technical indicators used in the

  • Moving averages (20-day and 100-day exponential)
  • Stochastic oscillator
  • Volume (Huge spike in chart due to surge in Oil & Gas Exploration industry)

Since the moving averages component was bullish, let’s review the others.

 

What is the MACD histogram?

This is a trend-following momentum indicator that shows the relationship between 2 moving averages (26-day ema and 12-day ema) which is then measured against its trigger line (9-day ema). The resulting blue bars are considered bullish if above the “0” line, especially if ascending and bearish if below, especially if descending.

 

What is the stochastic oscillator?

This is a momentum indicator that measures the price of a security relative to the high/low range over a 14-day period. The indicator oscillates between 0 and 100. Readings below 20 are considered oversold while readings above 80 are considered overbought. A bullish signal is movement from below to above 20 and ascending. A bearish signal is movement from above to below 80 and descending.

 

Volume significance

Moving average, and stochastic oscillator indicators are more significant on normal to high volume and less meaningful on weak volume. We can also look for negative volume divergence which may indicate an upcoming change in chart pattern.

 

Price chart of MTDR in April 2022

 

MTDR: Technical Chart on 4/7/2022

  • Moving averages (top of chart): Bullish as they are ascending with the 20-day EMA above the 100-day EMA and the price bars at or above the 20-day EMA (as Bob pointed out).
  • MACD histogram (red arrow): Bearish as it breaks below the “0” line and is descending.
  • Stochastic oscillator (blue arrow): Bearish as it breaks below the 80 percentile and is descending.
  • Volume bottom of chart): Robust, providing support for the significance of the other parameters.

 

Discussion

Technical analysis is 1 of the 3 screens we use to identify eligible securities. The indicators are used to form a mosaic that guides us to our trading decisions. Since there is a subjective component to these findings, opinions may vary. In the case of MTDR, the 2 trend-identifying indicators ( and stochastic oscillator) were bearish and therefore not included in our report.

 

Recovering markets

Now that the market has stabilized, this is a great time to join our premium member community

with its stock screening and educational (over 200 videos) benefits. For information, click here.

For video explanation, click here.

 

Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI teaemail 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,

Thank you so much for your thorough explanations. You are a great educator, and I can’t thank you enough for everything I’ve learned.

Art

 

Upcoming events

1.Mad Hedge Investor Summit

Thursday September 15th, 2022

12 PM ET – 1 PM ET

Title, description and registration link to follow

 

2.Money Show Orlando live event

October 30th – November 1st, 2022

OMNI ORLANDO RESORT AT CHAMPIONSGATE

Visit Alan, Barry and members of the BCI team at Booth # 415

Register here

 

Sunday, October 30, 2022, at 5:00 pm – 5:45 pm EDT
Covered Call Writing: Multiple Applications Based on Current Market Conditions

Monday, October 31, 2022, at 4:30 pm – 6:30 pm EDT
Selling Cash-Secured Puts: Detailed Start-to-Finish Six-Part Program*

 

Masters Class

Comprehensive Course on Selling Cash-Secured Puts

Detailed start-to-finish 6-part program

This presentation will provide all the information, with real-life examples, necessary to master the strategy of selling cash-secured puts. The program is divided into 6 sections:

  • Section I:
    • Option basics
  • Section II
    • Traditional put-selling
  • Section III
    • PCP (wheel) strategy
  • Section IV
    • Buy a stock at a discount instead of a limit order
  • Section V
    • Ultra-low-risk put/Delta strategy
  • Section VI
    • Ultra-low-risk put/Implied volatility strategy

This presentation was developed to benefit both beginner and experienced option traders and will provide all the information needed to initiate the strategy and elevate returns to the highest possible levels.

45-minute presentation

Covered Call Writing: Multiple Applications Based on Current Market Conditions

Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)

Covered call writing is a low-risk strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:

  • Normal to bull markets
  • Bear and volatile markets
  • Low interest-rate environments

A popular large-cap technology exchange-traded fund, , will be used to establish rules and guidelines to benefit in these market circumstances.

Registration link 

 

Alan speaking at a Money Show event

***********************************************************************************************************************

Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.

****************************************************************************************************************

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.

15 Responses to “Technical Analysis and Our Option-Selling Portfolios: A Real-Life Example with Matador Resources Company (NYSE: MTDR)”

  1. Samuel August 20, 2022 2:34 am
    #

    DEAR MR. ELLMAN:

    ARE MY CAPITAL GAINS FACTORED IN ON MY 1099 WHEN THE COVERED CALLS ARE ASSIGNED?

    SINCERELY,
    SAMUEL

    • Alan Ellman August 20, 2022 6:45 am
      #

      Samuel,

      I will give you my understanding in this matter but, since I am not a tax expert, I ask you check with your tax advisor before taking any action related to this matter.

      My understanding is that, if trading in a non-sheltered account, and shares are sold (as a result of exercise or otherwise) at a profit, this triggers a capital gains event. If shares are owned for more than 1 year and 1 day, there will be a long-term capital event. If less, short-term.

      It’s always to our advantage to trade in sheltered accounts but if those opportunities are not available, we move to “Plan B” … non-sheltered.

      Again, check with your tax advisor on this matter.

      Alan

  2. Todd August 20, 2022 3:11 am
    #

    Hi Alan,

    I recently have been selling In the Money Calls (due to my extensive research on Australian Tax Laws and finding it is more beneficial to do so).

    Since doing so, a few thoughts and questions have come to mind and I would love to hear your perspective:
    • If I buy a stock at $100 on August 22nd and sell an ITM call at say $90 – and that Option is not exercised on expiration day (Sept 16), do you consider that stock to now have a cost base of $90 for when you sell that call again Sept 19th?
    • I ask as I have already received the $10 intrinsic value payment plus the time value commission fee and bought more stocks with that money ($10 + Fee) and Optioned them too.
    • So that on Sept 19th if the stock was $88 and I had a cost base of $90, I could again sell an ITM strike and repeat
    • On the flip side, if the option is exercised and I receive my $90, I know I made money through the time value payment already paid to me.
    • How do you record your trades? Do you sell a spreadsheet, I use one myself but would like to see if there’s a better method?

    Regards,

    Todd

    • Alan Ellman August 20, 2022 7:02 am
      #

      Todd,

      Glad to help.

      Here’s how I record these hypothetical trades:

      SEMPTEMER EXPIRATION:

      – Cost basis: $90.00
      – Time-value profit: (Total premium – $10.00)
      – Final realized option return: (Total premium – $10.00), assuming no trade adjustments
      – Final unrealized share loss: $2.00 ($90.00 – $88.00)
      – Final net return for the September contract: [(Total premium – $10.00) -$2.00]

      OCTOBER CONTRACT

      Cost-basis of security is $88.00. The $2.00 unrealized loss was accounted for in the September contract cycle.

      SPREADSHEET

      Our recently released Trade Management Calculator is our best and only spreadsheet of its kind anywhere and will accomplish entering, managing and recording initial and final trade results. It also allows for over 20 exit strategy opportunities. Here is a link for more information:

      https://thebluecollarinvestor.com/minimembership/bci-trade-management-system/

      Scroll down for 2 informational videos: The top one is brief; the lower one is detailed (40 minutes).

      Alan

  3. Barry B August 20, 2022 11:12 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 08/19/22.

    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:

    http://www.youtube.com/user/BlueCollarInvestor

    Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as membership remains active.

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  4. JP August 23, 2022 7:14 am
    #

    Alan,

    I like your points on the EMA as opposed to SMA…….is it your experience that 20 EMA should always be above 100 EMA?

    And if the 100 crosses above the 20 is it one sell signal and the opposite one buy signal?

    best,

    JP

    • Alan Ellman August 24, 2022 6:41 am
      #

      JP,

      You have an accurate assessment of EMA.

      Let me put this in perspective. In the BCI methodology, we have 3 broad categories of screening for short-term option-selling: Fundamental analysis, technical analysis and common-sense principles (like minimum trading volume, avoiding ERs etc.).

      In the technical analysis section, EMA is 1 of 4 parameters we use. EMA is important, but there is no one parameter or screen that we “hang our hats on”

      Bottom line: If the 20-day EMA is below the 100-day EMA, we should look to another security when establishing our new positions. If the 20-day EMA drops below the 100-day EMA, it is interpreted as a bearish signal.

      If we have a stock in our portfolio where the technical chart shows a bearish crossing of the EMAs, we manage those trades as per our exit strategy arsenal, not from its appearance or removal from our stock reports.

      Alan

  5. Todd August 23, 2022 10:22 pm
    #

    Hi Alan,

    On ITM options do you set the 20% figure based on the full option fee – intrinsic and time – or just the time portion?

    I’m pretty sure I know which you are going to say, I’m more curious as to why?

    Cheers
    Todd

    • Alan Ellman August 24, 2022 6:52 am
      #

      Todd,

      The 20%/10% guidelines are based on the full premium.

      The rationale has to do with the relationship between ITM strikes (the ones with intrinsic-value) and Delta.

      One of the definitions of Delta, is the amount an option value will change for every $1.00 change in share price. ITM strikes have higher Deltas than OTM strikes. If we used time-value only, we would be closing the short calls much too soon and much too frequently.

      See the screenshot below for the relationship between Delta and the “moneyness” of our strikes.

      Alan

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

  6. Mauro August 24, 2022 1:32 am
    #

    Alan good morning,

    I’m holding one covered call of TSLA.

    When the market will close TSLA will be split (3 for1) what’s happen to my covered call?

    Have a nice day

    Mauro

    • Alan Ellman August 24, 2022 7:15 am
      #

      Mauro,

      Typically, when a stock splits 3-for-1 when holding a covered call trade, the # of shares owned will triple, share value and the strike prices will be decreased by a factor of 3 and the # of contracts will be tripled. This is the case with the current TSLA split.

      Below is a screenshot (enhanced by me) taken from http://www.theocc.com site showing the details of the split.

      Also, here is a link to an article I published on this topic:

      https://www.thebluecollarinvestor.com/covered-call-writing-and-contract-adjustments-our-premium-report-is-getting-even-better/

      Alan

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

      • Mauro August 24, 2022 11:01 am
        #

        Hi Alan,

        Thanks for you help prompt and clear……..as usual 🤣😂

        Have a nice day

        Mauro

  7. Alan Ellman August 24, 2022 4:56 pm
    #

    Premium members:

    This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.

    The mid-week market tone is located on page 1 of the report.

    New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.

    Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as membership remains active.

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

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

    NOT A PREMIUM MEMBER? Check out this link:

    https://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

  8. Huynh August 24, 2022 4:58 pm
    #

    Hi Alan, Barry,

    Since the markets are trending only some 20% of the time and in consolidation about 80% of the times, a guru has said it is almost a sure win to play covered call.

    His recipe is finding stocks in a quiet or sleeping mode for a number of weeks then buy the stock shares and sell ITM Calls..

    This guru shows an example that even when the stock has dropped 20% unexpectedly and his covered call play still win resulting in zero stress playing covered calls..Could either of you comment on this zero-stress covered call?

    Thanks,
    Huynh

    • Alan Ellman August 25, 2022 7:27 am
      #

      Huynh,

      Rather than comment on a specific guru’s strategy (I feel that every expert has something useful to learn from), l will make some statements regarding a strategy where we sell ITM calls on a security with extremely low implied volatility.

      1. ***Any strategy that seeks to exceed risk-free returns (Treasuries etc.) will always result in some risk to the investor … always. In return for undertaking additional risk, we create opportunities to beat the lower risk-free returns. Please remember this point.

      2. Using low implied volatility securities will reduce risk.

      3. Using low implied volatility securities will result in lower option premium returns as those returns are directly related to the implied volatility of the underlying securities.

      4. Using ITM calls strikes will reduce risk because the additional intrinsic-value component of the premium lowers our breakeven price points.

      5. To reduce risk even more than selling ITM covered calls, consider our Put-Call-Put (PCP or “wheel”) Strategy where deep OTM puts are sold to enter covered call trades. Here is a link to an article I published on this topic:

      https://www.thebluecollarinvestor.com/using-the-put-call-put-pcp-strategy-to-create-downside-protection-on-steroids/

      6. One of the factors that attracted me to covered call writing more than 25 years ago, was that the strategy can be crafted to all market conditions and investor personal risk-tolerances. We can create defensive to more aggressive approaches. The common feature to all these approaches is that there is some degree of risk in all of them. The amount of risk we undertake will vary from investor-to-investor, but all approaches will incur some degree of risk. There are no exceptions to this statement.

      I hope you find these points useful.

      Alan