Using Technical Analysis for Our Stock & Option Selection in Covered Call Writing Trades – September 02, 2023
In our BCI methodology, we have a 3-pronged approach to stock selection for our covered call writing trades:
- Fundamental analysis
- Technical analysis
- Common-sense principles (minimum trading volume, avoiding earnings reports, among others)
We use a mosaic of all 3 parameters for our choices, where no one category is the sole determining factor. That said, this article will focus in on technical analysis and how it is leveraged in our non-emotional decisions. We will use 2 real-life examples with:
- Axcelis Technologies, Inc. (Nasdaq: ACLS)
- Crocs, Inc. (Nasdaq: CROX)
BCI Premium Stock Report dated 3/31/2023 (partial)
ACLS-CROX: BCI Premium Report on 3-31-2023
Comparing ACLS and CROX
Similarities
- Price ($126 – $133)
- Industry rank (A/A)
- Weeks eligible in BCI Stock Reports (12/15)
- Beta (1.75/1.84)
Differences
- Industry (Chips/Apparel)
- Technical overview (CROX in bold/ ACLS not in bold)
Bullish technical chart for CROX
CROX Price Chart on 4-3-2023
Mixed technical chart for ACLS
ACLS Price Chart on 4-3-2023
Conclusion and discussion
Stock side
If deciding between these 2 securities, all other indicators being equal, we would favor CROX over ACLS because of a stronger price chart.
Option side
We would lean more aggressive with CROX for our strike selections, favoring out-of-the-money (OTM) calls and more defensive for ACLS favoring in-the-money (ITM) calls. It is certainly appropriate to use a mix of OTM & ITM. For example, if we were selling 5 contracts of each, it would be reasonable to sell 4 OTM and 1 ITM for CROX and vice-versa for ACLS. We could also use ratios of 3/2 and 2/3. The actual ratios applied would be dependent on our overall market assessment and personal risk-tolerance.
Author: Alan Ellman