Sunday, March 14, 2010

April Covered Calls

With 33 trading days before the April options expire, it's time to think about covered calls.

Today's search turned up fewer candidates than I've seen in the past, and some of them are sort of sketchy; at least they aren't household names.

For this analysis, I'm looking at stocks priced at $20 or less with average volume over 30 days of 1 million shares or more.

I think the rise in stock price since March of last year has moved a lot of shares above my $20 maximum. I could get more possibilities by raising the max price, but I'm reluctant to do that because covered calls are so capital intensive even at the lower prices. Or I could lower the minimum volume to 500,000 shares, which lesses the liquidity but half a mill' is still pretty adequate.

Within that universe, I select like this.


First I check out the financials and analyst ratings, selecting excellent financials and middlin' or better on the analysts. I do this because if things go wrong, I might end up owning the shares, so I'd like to improve my odds of getting out with a profit should that happen.

Second, I look at the trend on a 3-month daily chart. I prefer to see the price rising on a shallow trajectory, and I like to see a bullish technical signal in force currently (such as with the Parabolic SAR or the Macd).

Third, I look at the options that are close to the current price, either slightly in the money or slightly out. I'm looking to see what my return would be if the option is exercised (the price is above the strike at expiration) and if the option expires (the price is below the strike), leaving me holding the stock. An average return of 3.5% or greater,  whichever the outcome, is my goal.

My April search only turned up three candidates.


Everything a trader needs to know to get started in covered calls. Author Ron Groenke covers the field step by step.

Las Vegas Sands (LVS) runs casinos in Las Vegas and Macau, and is developing new locations in Singapore and Pennsylvania. The stock sells for $19.59. A $20 call gives a 91¢ premium, 4.7%  return if expired, 6.7% return if exercised. The stock has been on an uptrend since Feb. 5 and showing a psar bull signal since March 5. On the downside, it is trading at a reversal level, which makes me think it might not have much more upside to go. In the longer term the stock has been  in a sideways trend since March 2009.

Temple-Inland Inc. (TIN) makes corrugated packaging and building products. The stock sells for $19.51. A $20 call provides a premium of 70¢, a return if expired of 3.6% and if exercised of 6.1%. The stock has been on an uptrend since Feb. 5, but the uptrend slowed beginning Feb. 19. It has shown a psar bull signal since Feb. 16. The shares are trading below a peak set last December and are at a downward reversal level set in mid-January.

Tessera Technologies Inc. (TSRA) develops and makes two categories of tech products: microelectronics, and imaging/optics. The stocks is trading at $20.23. A $20 options would provide $1.05 in premium, a 5.2% return if expired and a 4.1% return if exercised. The stock has been in an uptrend since Feb. 1 and has moderated more toward sideways since early March. The chart shows a psar bull signal beginning March 2. The price is trading at a reversal level set after a downward gap in January, and that same level was significant in 2008.

That's the lot, and a somewhat sorry one it is. I don't think I'll be trading in of them on my own account. If I were, LVS would be my first choice.

Abbreviations:
psar - Parabolic Stop and Reverse
adx - Average Directional Index
pps - Person's Proprietary Signal
ma20 - 20-day moving average
macd - Moving Average Convergence-Divergence
mfi - Money Flow Index
sto - Fast Stochastic


Topic: Las Vegas Sands casino gambling Temple-Inland corrugated packaging building materials Tessera Technologies microelectronics imaging optics.

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