Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Staying Calm and Trading One Stock at a Time
Duarte in the Money Options
The stock market continues to move steadily higher, albeit
in a volatile rising channel, as the bullish combination of a major
wall of worry and easy money until the cows come home from the Federal
Reserve continue to move money toward equities. Thus, as I noted last
week in this space “from a trading standpoint, until this breakout
is convincingly reversed, it makes sense to lean toward being long
On the down side there is still the overhang of uncertainty from
COVID-19, the election situation, and of course, the lack of fiscal
stimulus. Indeed, it is this combination of factors that continues
to create volatile intraday trading as the news cycle unfolds.
Certainly, finding stocks that seem poised for long term breakouts
and heady momentum runs is getting harder. Moreover, this type of volatile
and choppy trading action often signals that a bull market is getting
old. Yet, despite all the factors which anyone could use as an excuse
to avoid trading stocks, the general action remains positive. Therefore,
the only conclusion for now is to look for stocks that meet precise
trading criteria and buy measured amounts with adequate sell stops.
Covered Call Writing Review
In my recent visit to Dave Keller’s The
Final Bar , I described the basics of the Buy Write – Covered
Call option strategy, which can be a useful income producer especially
during the current times where interest rates are low. Here are the
basic tenets of the strategy as illustrated by a trade based on Gilead
Sciences (GILD) that I described on the show:
- Choose a stock forming base with upside potential such as Gilead
- Sell Volatility. In this example the setup was favorable as the
historical volatility (HV) was 18 and the implied volatility (IV)
- Choose a slightly out of the money strike price such as Gilead’s
December 31, 2020 $63 Call Option (GILD_12312020_C63)
- Use options that are at 45 days or less to expiration. When this
example was described there were 43 days to expiration
- Check out the Max Gain, which in this example was $302 and a Break
Even price: $59.98 (GILD)
- Use the break even point as your sell stop
- If the underlying stock’s price remains below strike price at
expiration consider rolling to the next 45-day time period
- If the option is in the money consider closing both legs of the
position or keeping the stock as you buy back the option depending
on odds of assignment and general market conditions.
Here are two other key points to consider:
- The upside potential for the Buy-Write strategy is limited. In
this case the maximum gain for the trade was around $300.
- The limited upside is balanced by the income potential of the
trade if the two legs of the trade (the underlying stock and the
option) are properly chosen and the trade proceeds optimally
- The downside potential can be substantial which is why it is worth
considering the closing out of the position when that maximum gain
is reached or when your sell stop gets hit
On the bright side, option trading software will give you all the
key parameters of the trade before you pull the trigger. So as long
as you know the basics before you trade you can just check off the
boxes and make your decision. You can learn more about options via
my Best Selling book: Trading
Options for Dummies.
New Wrinkle in MEL: Homebuilders Adapt to Changing Homeowner
As COVID-19 continues to deliver Chaos, it seems as if the behavioral
changes in the complex adaptive system comprised of the markets (M),
the economy (E) and people’s life’s decisions (L) are evolving further.
As I noted here last week before November 3 there were three major
- Population shifts from high tax to low tax states
- A boom in housing fueled by low interest rates and the above migration
- The dominance of the 401 (k) plans as the focal point of MEL
Specifically, when it comes to housing, prior to COVID-19 there was
a shift toward downsizing as empty nesters readying for retirement
and millennials coming of age were looking for smaller homes. This
led builders to shift gears away from building larger homes and increasing
production of smaller models. But of course, when Complexity and Chaos
collide things change, and in this case, it looks as if homebuyers
are now looking for bigger homes.
Interestingly, the new dynamic has emerged because of quarantines,
stay at home orders, and work from home requirements. Perhaps the whole
concept jells best when we examine the latest building
permit data which shows rising permits for single family homes
and falling permits for multiple family dwellings (rentals) while at
the same time the number of mortgages
for home purchases is on the rise.
So, at this point it’s becoming clear that while the housing market
may be changing, those builders who can adapt the best are likely to
continue to do well, as I describe directly below.
This is a great time to have your own set of go to indicators at
your fingertips. To learn how to build your own NYSE Advance Decline
line like I do and how to use it, check out my latest Your Daily Five
video: “How to build my Favorite Indicator.” Click here .
Bigger is Better Again? Hovnanian Adapts to Changing Homeowner
I recently recommended purchasing shares of homebuilder Hovnanian Enterprises
(HOV) based on a bullish chart pattern, but as I dug into the company,
I found that HOV may be better suited for the next leg of the housing
market than some of its competitors like Lennar (LEN) and KB Homes (KBH)
whose shares have fallen lately.
Specifically, after digging through HOV’s most recent earnings call
I found several bullish nuggets:
- The company is building bigger houses to accommodate changing
tastes such as requests from purchasers for more indoor and outdoor
space in order to adjust to the new COVID world
- They have raised prices and no one seems to be complaining and
- The current building data – i.e. the number of homes being built
at the moment is still a fraction of the number of homes built during
previous “bubbles,” a fact that suggests that the current trend in
homebuilding is sustainable due to low interest rates
But perhaps the diamond in the call was the statement from CEO Ara
Hovnanian is the fact that because of regulatory burdens it takes a
long time now to buy and permit land and to go through the process
of building a home. So while that’s not convenient for buyers, as long
as demand keeps outpacing supply, this building cycle can and likely
will be extended.
Technically, the stock is in a rising channel with reliable support
at the 50-day moving average which can be used as an entry point on
dips if the stock holds there. Accumulation Distribution (ADI) and
On Balance Volume (OBV) suggest some short term distribution but volume
analysis and Volume by Price (VBP) suggest there is low risk as long
as the stock remains above the 50 day moving average.
Moreover, aside from good support at the 20- and 50-day moving averages
there is little overhead resistance. If the company continues to outperform
expectations and there are no major roadblocks, especially on the political
front, HOV is likely to continue its steady climb as it has adapted
better than its competitors to the evolving marketplace.
NYAD Hovers Near New Highs
The New York Stock Exchange Advance Decline line (NYAD) made a couple
of new highs lately and has been hovering near the new high ever since.
We are, however, still looking for confirmation for the new highs on
NYAD from the S & P 500 (SPX) and the Nasdaq 100 (NDX).
Still, even as NYAD remains well in the Complexity zone trading above
its 20,50, and 200-day moving averages and the general tone of the market
remains positive, there are some subtle hints in the indexes which are
Specifically, the Accumulation Distribution (ADI) and on Balance Volume
(OBV) indicators for the S & P 500 (SPX) and the Nasdaq 100 (NDX)
indices are somewhat cautionary as is the ROC. Together these three
indicators suggest that there was some selling going on as the week
By the same token, the issues with ADI, OBV, and ROC seem to be short
term in nature, at least for now since these indicators remain above
key support levels. However, if this trend accelerates and NYAD starts
to break down we may see some aggressive selling in the next few days.
The bottom line is that the market, for now, remains in an uptrend
for the intermediate term but the short term shows that there is some
doubt creeping into the bullish trend.
Staying Calm and Trading One Stock at a Time Will Get You
Through in this Market
The stock market remains in a long-term uptrend, but given the uncertainty
of the moment, the short term is likely to remain choppy. In other
words, as we’ve been for the past few months the news cycle will be
all about the election and COVID-19.
This means that intraday volatility will continue. And while we can’t
ignore the volatility there is one effective way to filter it: monitor
each portfolio position individually. If the market is falling but
your stocks are holding up the chances are fairly good that when the
next news item hits and the market bounces back, your stocks will participate
in the new rally.
For more on how to deal with the current market checkout my latest
Your Daily Five video here .
Joe Duarte is a former money manager, an active trader and a widely
recognized independent stock market analyst since 1987. He is author
of eight investment books, including the best sellingTrading
Options for Dummies, rated a TOP
Options Book for 2018 by Benzinga.com - now in its third edition, The
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