Covered Calls

GMI: 3; GMI-R: 6; Day 2 of QQQQ up-trend; CPST–a Judy’s pick

@ 12:01 am

The GMI is still 3 (of 6) but the GMI-R fell one, to 6 (of 10).  This is because there were  only 27 new highs and 28 new lows in my universe of 4,000 stocks on Wednesday.  The indicators in the GMI have kept me out of all major market declines since 1995,  including the bad markets of 2001-2002.  I then got back in the market in 2003  and my account was up over 50% that year.  I also avoided the decline that began last January, which lasted 55 days.  The new QQQQ short term up-trend is in its second day and I am beginning to wade into this market slowly by buying QLD and writing some covered calls.  If this up-trend should end quickly, I will get out and go immediately to cash again.  There is always time to catch a real up-trend that can last months……. 

The service that I use to scan stocks for writing covered calls is at www.poweropt.com. I like this service because I can narrow down my scan to include only IBD100 stocks.  The IBD100 stocks include the strongest stocks based on fundamentals and technical action as assessed by IBD.  I also eliminate stocks that will report earnings during the option period.  I was burned several times by writing covered calls on stocks that announced earnings and then plunged.  In a market up-trend writing calls on growth stocks with large premiums is the easiest and least stressful way I have ever made money in the market. Joseph Hooper’s book educated me about this new way to look at writing covered calls for income. While I do not follow his method of stocks selection and technical analysis, I do like his philosophy of writing near month covered calls for 3-5% income each month.  I do all of this trading in my IRA and do not have to worry about taxes.  Check it out…

My friend Judy, who is the best stock picker I have met, buys stocks based on concepts long before the technical action meets my requirements. Cpst
When she told me about this stock that she bought for about $1 per share, I told her I do not buy cheapies. But the stock has been rising, so I bought some around $2.09.  CPST makes microturbine engines and appears to be getting a lot of contracts.  If Judy likes a concept, it is good enough for me–as long as the chart looks good.  This weekly chart shows that CPST is now holding well above  its rising 10 week average (dotted line), which in turn is above its rising 30 week average (red line).  As long as the stock holds above this dotted line, now at 1.73, I will hold the stock.  This is not a recommendation, just an example of the chart pattern I look for and how I limit my risk.  By the way, most recent volume spikes are occurring on up weeks, suggesting strong buying. So, again, Judy buys at a price much lower than I do… 

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GMI: 3; GMI-R:7; New QQQQ up-trend; QLD and covered calls

@ 12:01 am

The GMI is now at 3 and the GMI-R is at 7.  February 27 was the last time the GMI was as high as 3.  More important, Tuesday was the first day of a new short term up-trend in the QQQQ.  The down-trend that just ended lasted 55 days.  No one can accurately predict how long this new up-trend will last, but I have to trade with the trend.  If this up-trend  ends abruptly, I will just go back to cash.  I trade in my IRA where there are no tax consequences from getting in and out of a position.  And by using a deep discount broker, commissions are not a factor.  I have therefore been buying the QLD, an ultra ETF that aims to move up (or fall) twice as much as the underlying QQQQ ETF (Nasdaq 100 index) moves.  I have also started to buy some strong growth stocks and to write April calls on them.  I am very happy to sell calls for a 3-6% premium for a one month period.  Yes, I give up any  appreciation in the stock above the strike price.  But I will be very happy to make 3-5% each month on my portfolio. When one sells covered calls to speculators, one profits similar to the way that casinos do.  I am taking money from  persons who are gambling on a rise in the options I sell them.  I use technical analysis and an option scanning service to identify stocks on which to write call options. I also only write calls that will expire within one month and take limited positions in any one stock.  As always, however, the key to success is to trade consistent with the general market’s trend.  I only write calls during a market up-trend. In future posts I will provide examples of some of these trades.

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GMI: 5; GMI-R: 9; New QQQQ short term up-trend

@ 12:01 am

The GMI is now 5 (of 6), for the first time since November 7 and the GMI-R is now 9.  (Click on table to enlarge.) Friday was the first day in the new QQQQ short term up-trend (U-1). Gmi1207  There were 144 new highs and 47 new lows in my universe of 4,000 stocks on Friday.  52% of the Nasdaq 100 stocks are back above their 30 day averages.

A trend follower never hits the top or bottom, but identifies the change in trend after it has occurred.  So, it has taken this much time since the low on November 12 for the QQQQ to turn positive.  The November bottom looks technically very similar to the bottom last  August.  That bottom was followed by a 50 day up-trend.  Time will tell if this new up-trend will last as long.  It is important to be cautious and to wade into long positions, for the trend can end abruptly at anytime.  The odds have just shifted for me, however, toward the long side.

The psychology of trend changes is interesting. When a new up-trend occurs, everyone is skeptical and the news is negative.  As the trend continues more people jump on board and there is a time when most everyone agrees that the trend is up and they stress the positives.  Confidence in the up-trend grows until the top occurs and the psychology goes into reverse.

I have written a few covered calls on growth stocks, bought some QLD, and taken small positions in a few stocks.  I am still largely in cash, however.   

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