Many of your readers, myself included, do not yet do options, covered calls etc. When you say that a stock "looks to test the 50 day MVA at 'x' and that you will sell calls on the pullback and buy them back when the stock hits the 50 day MVA and bounces," are you telling those of us who do only stocks to sell them and buy them back when they hit the 50 day MVA, or to just sit through these growing pains and not sell, but to keep the stock, since you feel it might keep on going higher? (April 16, 2002)
One of the great things about long term holds that are performing well is that we can ride them down to support levels, particularly after they have made a strong move up the short term moving averages and need to come back and test the 50 day MVA. Even strong stocks adhere to this pattern. When everything looks okay with the stock, i.e., it has not raced up in a blow off top or it is not tanking on heavy volume, we have no problem letting it perform these periodic corrections. It is part of how a stock rallies, consolidates, rallies and consolidates.
While we are in the stock for the long term price appreciation, we also want to get the stock working as hard as possible for us. Our goal is to get our accounts large enough to do what we want to do when we want to do it. Thus we want to work our stocks for all they are worth. We know they are going to pullback from time to time; we use that period to improve our returns. The stock is pulling back, but we are getting paid on the pullback while we wait for it to find its bottom and then rally again. Sell calls when it tops out, buy them back when it hits support. If everything looks just fine with the stock, that is how we handle it. If the stock continues to tank we sell the stock position and ride the calls lower (this requires 'going naked', i.e., short the calls on the call sale with no stock to cover it; in IRA's you cannot do this).
When we are looking at a call sale that means we are comfortable thus far with what looks to be a normal pullback to consolidate some of its gains. Thus we don't mind holding the stock because it still looks very solid. If it did not, we would be looking more to selling the stock and getting out of it with our gain rather than riding it lower and risking a total breakdown. Thus, on covered call plays we are looking at, that typically means we are not ready to pull the plug on the stock play as it looks like a normal pullback. The thing to do, however, is to learn about options and how to use covered calls so you can use these great tools to increase your returns on stock positions you are already holding.
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