Rules of consolidation

by Michael Thomsett

The popular charting “school of thought” is that reversal signals have to be either bullish or bearish. Here’s a new way to think about these signals: When stock is trading in consolidation, a reversal (or continuation) signal may forecast successful breakout. In other words, the signal applies to the trend and not just to the… [READ MORE]

Three bear spread choices

by Michael Thomsett

Based on the price pattern found on the chart, at times it is easier to decide whether the situation is bullish or bearish, than to pick which strategy to use. This presents a problem for traders who may not be able to quantify the risk level without knowing how much movement to expect. For example,… [READ MORE]

Bullish inverted head and shoulder

by Michael Thomsett

Some traders look for signals, others look for magic. Charts provide many signals, but the reliable ones are not magic by any stretch of the imagination. They are based on being able to predict what happens next. You cannot expect a sure thing. But a strong signal improves the odds in your favor. Among the… [READ MORE]

Cup and Handle Formation

by Michael Thomsett

Strong signals are not rare, but often difficult to identify. A subtle development can signal the best timing for an advantageous options trade. An example of this is the “cup and handle,” a bullish signal. It tells you that the current trend is not over yet. It can take several weeks to form. It can… [READ MORE]

Dead cat bounce

by Michael Thomsett

How can you tell when a trend is ending? For example, during a bear trend, you are likely to discover numerous short-term bullish moves or retracements even as the longer-term bear movement continues. One signal worth looking for is the dead cat bounce. This is a pattern in which the downtrend is interrupted by a… [READ MORE]

Blue ice failure

by Michael Thomsett

A valuable early warning signal, the blue ice failure, has several parts: a 50-day moving average (50MA), test of support, and candlestick reversal and continuation signals. All technical signals help improve trading. This is true if they increase your idea about the next direction price is likely to move. You can never expect to have… [READ MORE]

7 Guidelines For Covered Call Writing

by Michael Thomsett

The big appeal of covered calls has always been the double-digit annualized return that is not only possible but likely. Gains come from three sources: capital gains on stock sales, dividends, and option premium. But is it always profitable? No; you can lose money writing covered calls and even experienced options traders can easily overlook… [READ MORE]

Return calculations for covered calls

by Michael Thomsett

The covered call is widely understood as a straightforward strategy. However, calculating maximum profit, loss and breakeven are not quite as simple as some traders believe. Covered calls are not risk-free. There are two potential sources of loss. First is the “lost opportunity” occurring if and when the underlying moves far above the covered call’s… [READ MORE]

Short puts, 4 comparisons to covered calls

by Michael Thomsett

Short puts are identical to covered calls in the sense that market risk is the same. This is a bit more complex, however, because significant differences exist between the two. Four specific areas should be considered in the comparison: 1. Capital commitment. To open up a covered calls, you must own 100 shares of stock.… [READ MORE]

Short puts, collateral requirements

by Michael Thomsett

Continuing the discussion of short puts, one matter often overlooked in the discussion is the collateral discussion. The idea of “margin trading” has different meanings for short options than for trading stock. For options, margin is not only a vehicle for trading; it also refers to the collateral required in order to execute an uncovered… [READ MORE]

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