We’re going to look at a few charting scenarios to find a good entry that we can write puts against. Technically, we’re qualifying the stock to make sure it’s not doing something that’s going to be negative to our possibility of collecting a lot of premium on the option that we’re going to write.
This is AMBA, and if I go and look at the option chain, this would be the first thing to do. Assuming the chart looks okay, you would go here, and then see what premiums are looking like for AMBA. Right now, it is the end of January. Looking at February is probably not going to yield too much premium. I might have to go out to right now start looking at March.
An ideal month to look out to is two months out, so two expirations out. The next expiration is going to be February, and I would be looking at March because the premiums are going to be pretty good, and I only need to wait around a month and a half because it’s the end of January right now to collect full premium if I’m willing to option expiration, but a lot of times, what happens is you don’t really need to wait that long.
Often, the case is that … Say, it’s the end of January. The premium will drop so low that I’d probably be looking to buy back the end of February, so the holding time is a month to a month and a half usually. It can even be less. It just depends on what the stock does, but I am looking at February. Let’s say I want to see if I can get some good premium for the February strike because that’s even better than March because, of course, I don’t have to hold it so long.
Right here, I’ve got a $56 stock. I’ve got this 1.05, 1.70, and also, I can get it for 1.40 was the last. If I go look at this 50.5 area, which is here, that, I don’t know about right now. I’m thinking that’s an iffy area because it’s … See, it’s only $6 from the current price. There is good support though. I like that. This is in a consolidation. It’s just going sideways. There’s also support here at 45, but I know for the February, we’re just looking at them. I’m not going to get that high of a premium at this 45, but look at this barrier here.
If this starts dropping, I’ve got this 50. It’s got to crack first. That’s good support because of this dip, and then I’m going to be sitting down here, so it’s going to take a little time for it to drop through all of that. Now, if I go back over here and look at this March, and let’s see here. 45, so that’s pretty good. I am thinking this is … When it opens up tomorrow, you can probably get this for maybe $140 be a midpoint in between the bid and the ask.
I am thinking if I write some of these at $140, that would $140 premium per contract. By the end of February, this premium, assuming this stock doesn’t just drip down continuously as we move through February, this premium that I buy at $140 is likely to be around maybe 80 cents maybe lower. Let’s say it was around 70 cents. What I can think about then is I write it for $140. They’re still 70 premium. I can just buy it back. I’ll collect $70 on each contract.
If that is going to be 10 contracts, that’s $700, $70 on each contract, and that’s pretty good so I can then take the premium for that, and I’ll have my capital free, and I can go look at some more premium that I might want to write, but going back to the chart, this 45 really looks good, so I’d free comfortable writing an option there at the 45 for probably March.
Let’s look at a few more. Let’s look at Boeing because this did something crazy today, and there’s an easy way. When you see this in your chart, you can just immediately roll it out. They had obviously good earnings and shot way up. When you see this kind of parabolic move, you already know the premiums are going to be depressed quite a bit. Stock goes up, premiums depress. Stock goes down, premiums increase.
If you are thinking, “Well, I could write a 130. I could write a 125,” you got this support right here. You could write this 125 under that support, and then there’s really good support down to the 120, but if you’re thinking of the 130 and the 125, watch how bad these premiums are going to be. If I go to Boeing, I know it’s not even worth it to look at February, but let’s just look too just to see what’s going on, and I’m going to … I thought there was a way to maybe hide some of these over here. That’s fine. I’ll just leave it.
If we look at the 125s on a $147 stock, you don’t want to do anything with 25 cents, of course. Now, if we go out to March, the 125 is 49 cents and 54. As you can see, the premiums have come down quite a bit. If we wanted to get any kind of this premium, you would have to get right next to the current stock price, and you don’t want to do that, especially on a $147 stock because swings are going to be good. I mean, big. You should expect probably $10 or $15 daily swings, or at least that’s what I would allow. If it’s at $147 and it swings $15 in a 10 … Let’s say $5 to $10 swings can happen daily.
If for whatever reason it starts swinging down and just keeps swinging down, you could write a $100 strike, and within just a few days, it’s already going to be there. It’s going to be right on top of you, so that’s one of the reasons I don’t like these stocks over $100 because of those swings and how quickly they can reach you even though you’re almost $50 away from the current price, you’re down here at $100 strike, these things can just move so much. Look how much Boeing moved from $135 all the way up to $147, and so that’s almost $13, the move there. When they move like that, that’s a tell-tale sign just to go ahead and pass that by. You don’t need to do any more research.
Now, the other direction, when they just fall quite a bit, it can be an opportunity, and it’s not like you’re trying to catch a falling knife that’s pretty much a loser’s game, but whenever … If this were inversed and this big spike were to the downside, but it didn’t break the support. We’ve got support at 116, 117, so 115 is a great area.
Let’s say it was at 135 and it just dove in one day to 125. Then, this 115 would still be looking good because it didn’t go through this 120. We won’t see it now, but if that were the case, these premiums would be looking really nice on this 115 strike because of that fast acceleration. It’s the volatility in these stocks that cause the premiums to increase, especially when the volatility is slanted or biased more to the downside.
Let’s look at a few more. How about CRAY? All right, so this is pretty much a consolidation, and these premiums are likely to be okay because of consolidation so there’s not a lot of volatility, but it’s got this little bouncing up and down going on, so the premiums are probably okay. The only issue here, and I haven’t looked at the premiums yet, is the support at $31, and that’s only $2 away from the current price. That’s just a little too close for me.
Now, if there was some way to do maybe 28 strike, but the next support is down here, and you’d be looking to 25 maybe. If you look at the 25 on CRAY, February is probably not right. Nothing there for February. March. On a $25 stock, that’s not bad, so you probably get … I’m guessing $35, so then that’s not too good. $35 per contract, and if you wrote 10 of those, that’s $350. You’ll save on commission by buying the bundle, and you would just have to hold it for a while for it to move down to maybe 10 cents, and so then you’re collecting 25 cents a premium.
If you wrote it and you got 35 cents a premium, that’s $35 a contract. If you bought it back at 15 or 20 cents, let’s say 20 cents, you’re only collecting 15 cents of premium in that case, so that’s just $15 per contract. Not that good, but this consolidation can tell not horrible premium, but not that great, so we need to check something else. How about FANG?
It’s done this dip here, a dip here. It did this thing here. Premiums might not be bad. We’d have to look. Some support here on this dip at $61, some more support here at $55, so 55 up to maybe 57 strikes. I’d do that. That’s $10 away from the stock. That’s a good margin. If we look at FANG, $55 for February. That’s low for a $68 stock. If we look at March, $55 is … That’s good, so this midpoint in between 115 and 160, maybe around 135, these 52.50s aren’t even … They’re not quite that bad, so that might be doable.
That’s how you can use charts to figure out if what some good strikes might be, and then you can go through qualifying the rest of the parameters on this stock, so you’re just looking for these depths as supportive areas, and you can write a strike under there. Assuming it’s a quality stock, so again, you’ve gone through the different checks and it does qualify as quality, then these supportive areas are usually going to work pretty well.
Now, this right here … Not this one, but what was it we were looking at earlier, LOCO, where it was just going down, and down, and down? Vector Vest would have clearly pointed this out as being a sell not having good timing, so you would have rolled it out anyway. It broke to that support. It’s not like you would have been looking … Say it was right here. It’s not like you would have been looking, “Oh, well, here’s support, so I think I’m going to go ahead and write a strike down here on this 27.”
No, that’s not what would have happened because Vector Vest would have told you this is probably a timing under one, which you don’t want. You want timings over one. It probably would have a sell rating as it was going down, so the other checks would have kept you out of trying to buy under that support right there. The supports only work when the other checks come into play. That’s why these checks imbalances are in place to make sure that you’re getting a high probability of collecting the majority of premium.
It’s not a lot that needs to be done. You can see there’s no moving averages. There’s no other indicators. There’s no oscillators or anything like that so it’s pretty simple, just a chart. You can even do these charts on Yahoo Finance and just … What you’re looking for is where is the support, and then you figure out those are some good areas around that you could write your option on. Then, you continue going through the checks and balances to make sure that the stock is quality.
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