Tuesday, November 22, 2011

11/22 Covered Calls

This daily posting tracks my base positions, including analysis as I try to select and enter covered call plays for December.

Covered Calls

Having selected a universe of possible plays based on a system that aggregates analyst opinion, I’m now ready to turn to the charts.

As a preliminary screening device, I’m using the relative strength index (RSI) on charts showing the standard deviation. I’m looking specifically for one or more of the following.

  • Newly risen: The RSI newly risen above the 30 line.
  • Low-ball: The RSI below the 30 line and the price below the lower one standard deviation line.
  • Deviation: An RSI bull deviation, with the RSI trending up from below the 30 line while the price trends down.

I screen hierarchically. If a stock meets the RSI criteria on a daily or weekly chart, then I’ll also look at the hourly chart. However, an hourly signal alone doesn’t make the grade.

Within the cells of the table below, I use w for the weekly chart, d for the daily chart and h for the hourly chart.

RSI Status

BIDU h d  
DDS d    
EPI d w  
EWT d h    
RIMM   w  
SLV d h    
UNG d    
VWO h d  

Channels are analyzed on the weekly chart. The dates are the end of the week during which the event occurred.

BIDU is trading within a downtrend that began July 25.

DDS is trading within an uptrend that began Aug. 19 lying within a sideways trend that began March 28.

EPI is trading within a downtrend that began Nov. 1.

EWT is trading within a downtrend that began May 9.

RIMM is trading within a downtrend that began Feb. 21.

SLV is trading within a downtrend that began March 25.

UNG is trading within a downtrend that began with a precipitous price collapse that began in July 2008.

VWO is trading within a downtrend that began May 2.

Other Channels

But what about the stocks that didn’t meet the RSI criteria?

Three are in uptrends: QCOR from March 2010, RL from July 2010, and SCSS from way back in July 2009.

Three are in sideways trends: GDX from December 2010, LVS from March 2011, and SNDK from Aug. 2010.

All but one stock is trading either at the top of the channel or has broken through the channel ceiling and is retreating.

If I’m bullish a stock, I want to buy it at the bottom of the channel, so it has room to rise. Only GDX meets that criteria, trading near the floor of the channel. DDS, from the RSI list, is at mid-channel and so is also an acceptable choice, since covered calls can make money when the price moves sideways.

LVS is a holdover stock -- its November covered call expired and I still own the shares. There are two other holdovers in my stable: BIDU, trading in a downtrending channel from July, and RIMM, downtrending since February.

BIDU is trading mid-channel, and RIMM is at the roof.

None of the stocks signalled by the RSI is in an uptrend, and of all stocks on my potentials list, only GDX is in an uptrend near the channel floor, with DDS at mid-channel.

The bottom line: This is not a bullish time in the markets. I own BIDU, LVS and RIMM shares, so I need to sell covered calls to lower the basis. Among the others, I’ll look into DDS and GDX -- the gold miners exchange-traded fund as potential covered calls. However, with gold itself (GLD) in a downtrend, GDX seems like a risky choice.

Other Base Positions

  • Long shares: CBM, PCCC, PKOH, TAST.

About my trading methods

Read a detailed explanation of my analysis method, including trading rules. These don't, at present, discuss my covered call strategy, which is under revision.


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

The trader’s greatest sin is inaction. Sleeper, awake! Seize the Nietzchean moment. Roll out of bed and trade.

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