When you give a buy signal for a stock and/or options, do you also write covered calls when the stock hits its target in anticipation that the stock will begin retracement/consolidation on upward bound stocks? How about when a stock hits a buy point, yet underperforms as some have done recently, will you write in the money calls; say 1-2 weeks out before you decide to take your money off the table? (March 3, 2003)

  Much depends on the type of market we are in as well as the strength of the stock. While some stocks have continued to move higher after brief respites, the majority of stocks continue to struggle in the ongoing bear market. When they get to the target we tend to take the gain and then look to see if there is a good entry point at some later time. This is particularly true with option positions as stocks can rally sharply and then sell and never come back.

That does not mean you cannot write calls in this market, particularly with the lateral move we have experienced the past month. A stock rallies up to resistance and then starts to falter. If it has been working laterally that is an excellent candidtate to sell calls on, let it fall back, and either buy them back or just let them run to expiration where the stock may or may not be over the strike price sold (and thus the shares would be called away from you).

For stocks that are underperformers, if they don't roll right basck over and we decide to hang on to see if the move builds, covereds are again good if the stock exhibits this rolling consolidation. At some point you will get caught short on this if the consolidation works and the stock breaks higher. If you buy the calls back when it looks as if the consolidation range is going to hold, however, (e.g., hitting support and again starting to move up or showing a doji) you lessen the possibility of getting caught in a sudden move up on a stock you wanted to keep.

On the downside, if the consolidation fails and you sold the calls at the peak, you don't have to worry about them as they will fall in value. What you have to worry about at that point is whether the stock can recover and you want to wait or whether you just want to sell the stock buy back the calls and look elsewhere. In those situations you often get a test of the breakdown, however, and you can get out of the stock at a better price when it rebounds up to test the breakdown. That is one of our favorite entry points on downside plays (failed test), but it is also a last chance to get out at least at a better price on upside plays gone awry.

It is never a bad idea to employ covered call methods during consolidations or other lateral moves; it puts your money to work hard for you while you wait for the next move higher.


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