HOW TO WRITE COVERED CALLS - A REAL CASE STUDY!
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PAGE #8 Date: Friday, Feb. 14, 1997
Our case study ROSS STORES (ROST) closed out the week with a total price increase of $1.50 for the week at $45.50 /share or 3.41% . The stock is just reaching the 20-day moving average and should continue to move sideways for a while and then bounce off that moving average after the split in March.
In the meantime, we wait!
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HOW DO YOU KNOW WHEN A STORM IS COMING?
Have you ever owned a stock that looked real good and as soon as you placed your money down the sucker goes into a nosedive? Sure, every once and a while it happens to everyone! How do you get the courage to buy more stock when that happens? Well, let me share with you what I discovered this past year that has made me more confident and assertive in my covered call writing and buying in heavy downward price movements!
This past week we had the same thing happen. The tech stocks made beeline to Mexico! And then, bamm! The market pivots and makes a total reversal and makes a new DOW high. Well, I was fairly relax when the plung happened. Although, my friend at work came into my office and was very pale and wanted my opinion on his stock that just took a nosedive. I looked quickly looked at my charts and said to him, "buy more, it's a buying opportunity."
Now, here comes this young investor who is asking for my opinion and he starts to quickly say I'm LOCO EN LA CABESA! Translation: Touched in the Head! The next few days the stock came back to the pre-plunge price level and in walks the fellow and ask: How did you know that? Lucky Guess!
Man, I should have listened to you and picked up more stock.
Now folks, ask youself three questions:
1. 10 year T-Bill: What is the current interest rate and is the 300-day moving average above or below the average? Why, because studies show that this indicator has provided warning before major recessions. Anything else is just market jitters and market makers games. Here see for yourself at 204.242.167.16. This information is worth gold!
2. Has your stocks fundimentals changed? Yes or No! Well, then relax and use the covered call strategies we are learning on this forum.
3. How is the volatility Index? You can download this indicator from most major data houses like Dial Data and other charting data companies. It's symbol is VIX. Plot the VIX using Bollinger Bands for your high and low extreme readings.
A normal smooth market is around a reading of 20 at this time. 21 and 22 reading are rock and roll times and you can expect plunges like the one we had this week before hand! You actually see it coming and you can get all of your killer strategies set up to eat up your call buyers money.
Now, if you take the two indicators I mentioned above (VIX and 10-Year T-Bills plotted with 300 days moving average) and print them out on paper to check the dates, you will clearly see that in early July 1997 the 10-Year T-Bill interest rate reached 7% and passed the 300-day moving average and bingo, we had a MASSIVE TECHNOLOGY STOCK NOSEDIVE!
Now, I've been watching these indicators very closely and I use it as my timing info to clean up. Now, you know the rest of the story! I bet you Wade Cook never taught you that! |
