Should Good News Discourage Us From Entering a Covered Call Trade? – October 25, 2021
We examine the BCI Premium Stock Report on the Sunday May 23, 2021, after expiration Friday, for our Monday trade selections. One of the securities we choose is Applied Materials, Inc. (Nasdaq: AMAT). On Monday morning, May 24th, AMAT gaps up well above the price movement of the S&P 500. Is AMAT now too expensive? Should we still consider this stock or look for an alternative? This article will investigate the factors that caused the price gap-up and make some common-sense conclusions regarding the next-steps.
What caused the gap-up?
On Friday 5/21/2021 AMAT announced a stellar earnings report resulting in the gap-up as the May contracts expired. There was a 5.2% earnings surprise and a 3.2% revenue surprise as shown on the site www.earningswhispers.com:
There’s more
On Monday May 24th, IBD named AMAT its Stock of the Day further enhancing the gap-up in price:
Price chart of AMAT pre- and post-earnings
After the 2 gap-ups, AMAT moved to a consolidating chart pattern, out-performing the price movement of the S&P 500. We now know that the gap-up was based on outstanding corporate fundamentals. We ask ourselves if we would buy AMAT today at the current price. For me, good news is a positive and would encourage me to consider this stock. I may wait a day or so for the price to settle but the overall picture for AMAT was only enhanced.
Discussion
Good news should not discourage us from incorporating a stock into our option-selling portfolios. Researching the cause of one or more gap-ups does make sense. If the gap-up is based on sound fundamental data, all systems are “go”. Stock prices go up and down and this is the risk we are willing to take in return for beating the market on a consistent basis. More often than not, there will be a reversion to quality, the type of securities identified in our BCI reports.
Author: Alan Ellman