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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: RayV who wrote (8113)	8/6/1998 5:35:00 PM
From: Herm	Respond to of 14162

Hi Ray, I'm sure the readers out there may have some thoughts on the RXSD plung like I do. Let's hear some! Here is my two cents worth. You are right about the fact that there was no news before the rally followed by the plung! There were clues for sure! P/E VALUE Seems pretty rich at this point and it was even higher before the recent skydive! So, with some many splits and new highs sooner or later everyone will be heading for the exits. NASDAQ: (RXSD : $24 1/16) $1,628 million Market Cap at August 6, 1998 Trades at a 54% Premium PE Multiple of 25.3 X, vs. the 16.4 X average multiple at which the Vitamins & Holisitic Health SubIndustry is priced. TECHNICAL READINGS I see RXSD first making first 52-week high around mid March and finally breaking through to a new 52-week high in July. I want to reinforce the following W.I.N. concept about dealing with 52-week highs: 1. You should ALWAYs load up with cheap PUTs for downside protection. You should obtain the money for the PUTs from your CC premies and not out of your pocket! 2. You can easily write CCs deep in the money a few months out and milk the pull back due to profit taking by leveraging with the PUTs which will become very expensive as the price drops. In essense, your CCs are protecting your stock and the PUTs are filling up your pocket book. This is the major difference between what you read all over in books or on the internet and how we do on this forum. Many readers have contributed to this final process. I did not invent anything! 3. Once the stock (RXSD in this case) bottoms on a withdraw (W) cycle and tags the lower BB and the RSI drops to a low reading for the stock, you can cover your CCs and cash out (close) your PUTs. This should become your standard procedure if you follow our W.I.N. CCing strategy. 4.SHORT INTEREST I find know the the trend month to month of the short interest helpful. Basically, the more short interest you have the more sluggest and weighted down the stock becomes because of the increased liquidity. Shorted shares are borrowed. It is a paper loan or IOU which must be returned. RXSD short interest was the greatest from April 1998 thru May 1998. RXSD made a new high in March/April and then the brakes are applied (shorting increases) and RXSD goes from 9.88 to a whopping 24.6 days average trading volume worth of shorted stock! It is only common sense that people will take their money off the tables when a new high is made. Many will also short against the box! From June 1998 thru July I see a clear short squeeze! As the trading volume kicked in and increased from May to June the shorts started to cover fast and that pumped up RXSD price. The short interest dropped from 24.60, to 18.52 to 11.36 days when RXSD peaked. Clearly, you see a relationship between open interest, volume and stock price. This is all summarized in the BB and RSI readings. The only other clue we need is news, earnings, or short interest influences. If you can't read or hear about it, then it must be short interest. Month Shares Short Avg Daily Volume Ratio* Remark 07/98 8,612,872 757,886 11.36 days 06/98 10,666,639 575,898 18.52 05/98 10,347,779 420,594 24.60 04/98 10,363,482 1,048,697 9.88 03/98 9,447,423 612,013 15.44 02/98 8,855,882 668,078 13.26 bigcharts.com Summary! When a balloon (the stock)is filled with hot air (expectations) there comes a point in time (price highs) when you need to let out some air (take some profits off the table) in order to avoid the balloon from bursting (getting ahead of earnings). Keep an eye on the amount of hot air filling up the balloon (short interest trend) because eventually they all run out of breath (RSI).