By Chris Ebert

Generally, Covered Call traders can eke out a profit even when stock prices are flat or fall slightly, because they collect a premium on the option upfront when they sell it. So, for example, if a stock is trading at $100 and a trader sells a Covered Call with a $100 strike price and collects a $5 premium, the stock price can fall $5 and the Covered Call seller will still break even when the option expires. He loses $5 per share on the stock but puts $5 per share in option premium in his pocket; it’s a wash.

The downside of selling Covered Calls is that the maximum amount the seller can keep as profits on an at-the-money option is the initial option premium. So, in times of intense rallies, the Covered Call seller gets some profit but the buyer gets an immense amount of profit. While it does not occur often, such is the case now in many stocks in the S&P 500.

Folks who sold Covered Calls on $SPY and many stocks in the S&P four months ago are watching stock prices skyrocket. The buyers of those options are reaping huge profits. The sellers are keeping only the small option premium as profit. It happens occasionally. But what makes this week different than the past is that the S&P 500 is further above the point at which a Covered Call trader earns a profit. That means the buyers of those options are profiting more than they have ever profited before.

SNP Temperature 382

Since Covered Calls can survive with a profit or at least break even in small downturns or corrections, they can serve as (more…)

By Ranga

Renko charts are part of the time-independent charts such as Point and Figure, Kagi and Three Line Break. These chart types are unique because they only consider price and not time. Time, as you know is plotted on the x-axis of the stock chart and price is plotted on the y-axis. With time not being a factor for the above mentioned chart types, they allow the analyst to get some unique insights into the market or the security that they are researching.

Renko charts are one of the ways an analyst can chart the security’s price without focusing on time. It is purely based on price and the Renko chart is unique as the graph is represented as a ‘brick’. The name Renko is said to have come from the Japanese name, Renga, meaning brick, aptly reflecting it visually.

The chart below shows a typical Renko chart. In this example you are looking at the Renko chart for Apple Inc. (AAPL) with the setting of a $1.

1-Renko-Chart-AAPL

Renko chart example for AAPL with a box size of $1*

In a Renko chart, a new brick or box is formed when price moves a determined number of ticks or points. This is the fundamental difference, because in a candlestick or a bar chart, a new candlestick or bar is plotted when a new session opens. This could be the daily session or 30 mins/60 mins and so on for the intraday time frames. Because Renko charts only focus on price and not time, the bricks can often be used in identifying trends and also trading with technical chart patterns.

For a chart type that is independent of time, the common question that comes to mind is whether a Renko chart is better suited for intra-day traders or for swing traders. Those who have dabbled in both these forms of trading know how vastly different the approach and the mindset can be. (more…)

By Chris Ebert

Folks who were around in 1973 may remember U.S. school holidays like George Washington’s birthday or Abe Lincoln’s birthday, and Standard Time during the winter months. But due to the Energy Crisis, all those things went away in 1974. Daylight Saving Time became year-round and kids had to go to school in the dark, except for a week in February that was later designated as President’s week, so that the schools could conserve fuel during the snowiest, most bitter part of winter.

In 1981, kids home from school on the President’s Week break were greeted to summer-like temperatures near 70F (21C) degrees. The warmth was unprecedented and record shattering. As a result, the weather models had difficulty interpreting the data for a long, long time. In fact, the effect was so profound that more than a year later the models failed to predict the blizzard that pummeled New York city on April 7, 1982.

oms 02-14-17

Events such as these are outliers, or what some would consider a (more…)

By Chris Ebert

It can be difficult to trade when the market gets overheated. On the one hand, stock prices can become absurdly overpriced, which gives traders fear that prices will pull back; on the other the fact that stock prices are rising creates envy, which makes them attractive for buyers.

One method of determining whether stock prices are truly reaching a top is to look at the S&P 500 Temperature. Typically, the S&P rarely reaches a Temperature of 300 (meaning it’s 300 points above the level that tends to divide bullish sentiment from bearish).

Sentiment over the past decades has tended to correlate with the performance of certain option trades known as 4-month-out at-the-money Covered Calls. Essentially, when these trades are profitable at expiration, traders tend to be in a bullish buying mood; and when the trades fail, traders tend to feel bearish. The Covered-Call break-even point has been a long-standing reliable indicator of the dividing line between the Bulls and the Bears.

SNP Temperature 300

The Temperature of the S&P can be determined by calculating how many points it would have to fall in order for (more…)