Technical Analysis for Options: A Real-Life Example with Deckers Outdoor Corp. (NYSE: DECK) – March 27, 2023
In our BCI methodology, we use a 3-pronged approach to screening for our covered call writing and put-selling portfolios:
- Fundamental analysis (sales & earnings
- Technical analysis (trend, volume and momentum)
- Common-sense principles (minimum trading volume, avoiding earnings reports among others)
This article will focus in on the technical analysis of DECK on 10/20/2022 and show why it was included in our premium member stock report from a technical perspective.
The 4 technical indicators used in the BCI methodology
Exponential moving averages: This is a trend following indicator which is similar to simple moving averages except that more weight is given to the most recent data. It reacts faster to recent price changes which aligns with our short time frames typically used in option selling. We use 20-day and 100-day exponential moving averages.
MACD histogram: A trend and momentum indicator that reflects the difference between 12-day and 26-day moving averages and then illustrates the MACD against its trigger line (9-day exponential moving average). The result is a bar graph that will shows a blue bar either above or below the “0” line.
Stochastic oscillator: A momentum indicator that measures the price of a security relative to a 14-day high-low range.
Volume: The # of trades in a security over a period of time and represented by vertical bars on a price chart. It confirms or questions the validity of the other indicators and can represent a negative volume divergence from the price chart.
Bold stocks in our premium member stock reports
Note that on 10/20/2022, DECK was published in bold in our most recent stock report of eligible option trading candidates. This means that DECK had all-bullish signals at that point in time:
The red arrow of this partial screenshot shows that DECK was in bold in the report indicating that all technical indicators were bullish at that point in time.
Price chart of DECK on 10/20/2022 showing the 4 technical indicators
Note the following:
- Exponential moving averages show a bullish, uptrending chart pattern with the shorter-term moving average (blue arrow) above the longer-term (red arrow). Also, there was a bullish moving average crossover at the end of July (orange arrow)
- MACD histogram shows the blue bars above the “0” line (green arrow)
- Stochastic oscillator: The chart shows an uptrending indicator, currently holding above the 80% (purple arrow)
- Volume: Volume is strong, confirming the other indicators (red circled area)
Discussion
When screening securities for short-term option trading, we should never hang our hats on 1 or 2 indicators or resources. In the BCI methodology, we use a 3-pronged approach to stock screening and technical analysis is 1 of those screens. Inherent in the technical analysis segment of our screening, we use 4 technical indicators:
- Exponential moving averages
- MACD histogram
- Stochastic oscillator
- Volume
A bullish chart pattern like this one for DECK not only assists in grading it as eligible for option selling but also helps guide us to how aggressive we decide to be regarding strike selection.
Author: Alan Ellman