The Covered Call Play...

Hey Everyone, I just wanted to give an explanation on a Long-Term Covered Call play and how I use it for great Trend trades. The chart above is AKAM from last year. I have made several highlights and notations on how this play was handled.

You'll notice the first BUY signal at the bottom of the trend. Then, as the stock reached the top of the Ascending Channel, I would sell a Covered Call. You could play this one of two ways.

The first is more aggressive. You could sell an In-The-Money (ITM) Call for a nice premium with the expectation that the stock would fall below the strike, and you could buy it back on the cheap. This is how Delta works in your favor. An ITM strike has a high Delta, and as we know for every dollar movement in the stock (up or down), the option price moves accordingly. So as the stock prices moves down, the Delta burns off the Option price quickly, especially with the help of "Theta" (the Time Value decay rate).

The second Covered Call is conservative in that you are selling either an At-The-Money (ATM) or Out-of-the-Money (OTM) strike which gives you less premium, and does not burn off as fast as an ITM strike because the Delta is lower. The benefit is if you are called out, you'd make more money on the stock price.

In the example above, I would have bought the stock four (4) times, each time moving my Stop-Loss price to 3% below the recent support which helps capture the gains on the lower purchases. I also would have sold four (4) Covered Calls and then bought them back at the BUY line. In this case, I would have started buying positions at about $16.00, then closed out of the trade at about $32.00 when the trade closed two (2) consecutive days outside my Ascending Channel. You could make some very nice income on a stock like this, and it isn't even a "Buy and Hold" strategy since you are actively monitoring it.

Happy Trading!

A "Mayoral Candidate"

Our esteemed "Mayor Pro Tem" of Jamestown, Keith Volz made a comment on yesterday's post. He asked me my thoughts on WCG as a Covered Call trade. While I don't know if Keith is already in this play, let's take a look, shall we? Here's the chart:First off all, where the HECK was I when this baby broke 3 Green Arrows last July? Holy smokes, talk about a stock "en fuego" (that's "on fire" for you Gringos). WCG has doubled in price in less than a year. Certainly a strong, uptrending stock. However, it is at the top of an Ascending Channel and the MACD and STO indicate a pullback is imminent. I would wait until this drops into my highlighted area (or at least to that bottom line) and look for a bounce to get in. I would then ride it up to the top and depending on how much it rose, sell a Covered Call. Say it drops to $75, I buy. Then if it gets close to the top of the channel again, I wait till it begins to fall back, then sell my CC. For example, if the top of the channel is $88, I would sell an $85 instead of a $90. Why? Well, the premium would be much better since I am already $2-3 In The Money, so I would get that intrinsic value. But also, since it is falling, I expect it to fall below $85 before expiration. Since Delta is working in my favor on the downside, once the stock hits the channel support, I buy back the call for a little bit of money and retain ownership of the stock. I may even add more to my position down here on a bounce, then let it ride up to the channel top and sell even more Calls. I'll try to create an example of this method in a few days so everyone can see what I mean.

Anyway, great stock Keith...why didn't you tell me about this back in July/August? =P

Happy Trading!