The BCI methodology requires fundamental analysis, technical analysis and common sense screening (like minimum trading volume and avoiding earnings reports). One of the most difficult decisions retail investors face is when to sell a stock that has depreciated in value. We all deal with such decisions every contract month no matter how rigorous a screening process we have developed.
I have developed a philosophical approach to such resolutions by realizing that it is not the stock we care about but rather the cash we have invested in that security (tax issues aside). That is what our sophisticated, structured half tells us. Our weaker, emotional side tells us not to sell the stock because we haven’t as yet “realized” that loss. Which half wins out can determine the long-term success of our portfolios. This does not mean that every time there is a price decline in an underlying security we sell and replace it. In this article, we will evaluate a stock/option position shared with me by Daniel for stock Yandex N V (YNDX) in an email dated 9/23/2016.
- 8/22/2016: Buy YNDX at $22.23
- 8/22/2016: Sell the September 16, 2016 $22.00 call for $0.95
- 9/16/2016: YNDX trading at $20.95
The unrealized share loss is $1.28 ($22.23 – $20.95). The option premium was a credit for $0.95 resulting in a unrealized loss of $33.00 per contract. There is no action needed on expiration Friday since the $22.00 call option will expire worthless and shares will be retained in Daniel’s portfolio. The question is whether to sell YNDX or retain it and write another call for the October contracts. First we check the news for this stock and make sure there was no egregious news (finviz.com is an excellent site for stock news). There was not. Let’s have a look at the technical chart as screened in the BCI methodogy for the time frame in question.
YNDX Technical Chart from August to October 2016
Note the following:
- The yellow field represents the trading range for Daniel’s positions
- The orange arrow shows the price decline below the 20-day EMA but starting to move up as expiration approaches
- The red arrow highlights the MACD histogram moving slightly above the zero line as expiration approaches
- The green arrow shows a bullish stochastic oscillator signal
- Overall, we have a mixed technical picture
When do we hold rather than sell?
I would definitely sell if serious negative news came out about the corporation after entering the initial trade or if the chart technicals completely fell apart. Neither scenario exists in this case. My final decisions are based on two factors assuming all other system criteria are met (no earnings report in the next contract, for example):
- Calculations for selling next month’s options meet our goal
- The stock is not under-performing the overall market
Comparing the charts of YNDX and the S&P 500 during the trading time frame
It is clear from these charts that the overall market pulled down the price of YNDX (corresponding red arrows) and the subsequent recoveries also lined up.
Conclusion and discussion
A stock that has declined in value may still be used in the next month’s contracts if it meets the following criteria:
- No earnings report in the next contract cycle
- Chart technicals have not collapsed (mixed as opposed to completely bearish signals)
- Calculations meet our goals
- It is not under-performing the overall market
- These stocks will frequently appear in our Premium Stock Reports in the white cells but not in bold.
***Thanks to Daniel for sharing this trade with us.
Upcoming live events
1- April 6, 2017 (just added)
Alan will be interviewed on Benzinga Pre-market Radio Network regarding the best strategies to use in the current market environment.
Information and link to follow
2- April 12, 2017
Income Generation Webinar for The Options Industry Council
Information and link to follow
Global declined this week due to concerns that the Trump administration’s promised pro-growth policy agenda may be negatively impacted as GOP lawmakers failed to take a vote to repeal and replace the Affordable Care Act. West Texas Intermediate crude dropped to $47.80 from $49.25 last Friday. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), rose to 12.96 from 11.2. This week’s reports and international news of importance:
- After delaying a scheduled vote on the American Health Care Act on Thursday, President Trump “pulled” a vote on the health care bill because there were not enough votes to pass the legislation. Observers grew concerned this week that if the Trump administration failed to advance one of its signature agenda items it may also struggle to pass market-friendly items like tax reform and infrastructure investment later in the Congressional session.
- British prime minister Theresa May this week set March 29th as the day that the United Kingdom will notify the European Union of its intent to leave the EU, beginning the two-year period set out in Article 50 of the Lisbon Treaty for negotiating the terms under which the UK will exit
- Eurozone banks took up more super-cheap loans than expected from the European Central Bank’s Targeted Longer-Term Refinancing Operation (TLTRO) this week
- Flash purchasing managers’ indices jumped to their highest level in nearly six years today as the eurozone composite PMI rose to a robust 56.7. Economists extrapolate from that data that gross domestic product growth is growing at a rate in excess of an annualized 2%. The euro strengthened on the data, as well as on hopes that a centrist candidate will derail populist Marine Le Pen in the upcoming French presidential elections
- Bank of Japan governor Haruhiko Kuroda said today that there is no reason to withdraw monetary stimulus now, or to raise the bank’s bond yield target, since inflation remains well below the BOJ’s 2% goal. Recent upticks in Japanese growth and inflation have raised questions as to whether the central bank could alter its super-easy monetary policy
- Exports of Brazilian meat have plummeted in the wake of a food safety scandal
- Tightening liquidity conditions in China’s banking system are raising concerns that economic growth could be negatively impacted
THE WEEK AHEAD
MONDAY, MARCH 27
THE WEEK AHEAD
MONDAY, MARCH 27
- None scheduled
TUESDAY, MARCH 28
- Case-Shiller home price index Jan.
- Consumer confidence index March
WEDNESDAY, MARCH 29
- Pending home sales Feb.
THURSDAY, MARCH 30
- Weekly jobless claims 3/25
- Gross domestic product Q4
FRIDAY, MARCH 31
- Consumer spending Feb.
- Core Inflation Feb.
- Chicago PMI March
- Consumer sentiment index March
For the week, the S&P 500 moved down by 1.44% for a year-to-date return of 4.70%.
IBD: Uptrend under pressure
GMI: 3/6- Buy signal since market close of November 10, 2016
BCI: I am currently fully invested and have an equal number of in-the-money and out-of-the-money strikes. Waiting to see the market reaction to Friday’s non-vote on healthcare reform.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a cautiously bullish outlook. In the past six months, the S&P 500 was up 10% while the VIX (12.96) declined by 10%.
Wishing you the best in investing,
Alan ([email protected]) and the BCI team