Some charts to show situations where you would consider selling premium.
A couple of weeks ago I discussed the Characteristics of Selling Premium. Thursday afternoon I showed some daily charts and how they related to some shorter term “directional” positions. This evening I am going to show some longer term charts and how they relate to selling premium. The reason you must use the longer term charts, is that in most cases you are entering a position that you will be in for at least a few weeks, perhaps more than a month. And for this long of a duration, you need a longer term perspective that is not provided on a daily chart.
To be able to show the longer term perspective, I am going to use the Time Frame Analysis charts. The top left chart is the monthly chart, a very long term outlook. Top right is the weekly chart, bottom left is the daily chart, and bottom right is a short term intraday chart.
We are primarily interested in the longer term perspective that is shown on the top 2 charts, the monthly and weekly chart, but we can also use the daily chart to help “fine tune” the longer term outlook.
The top left monthly chart became extremely overbought at the end of last year and beginning of this year. The price stalled and that was one opportunity to sell the 40/45 call spread. (Sell the 40 calls and buy the 45) The price did fall below 30 and has since bounced back up to near that $40 level. But this bounce has been on a neutral trend, and the candles did not turn green to show strength, which is showing that we have a very high probability that a double top is forming on this monthly chart, giving us another opportunity to sell the 40/45 call spread.
During the month of Aug and the first ½ of Sept. the price was trying to move up but just did not show any real strength. Last week it started to turn down, turning the candle and trend red. This week it has been bouncing back towards 40, but the candle is remaining red, showing that there is a high potential that this bounce will falter and remain below 40.
Now to use the shorter term to “fine tune” the overall perspective. On the daily chart the price had been trying to hold the 38 neighborhood as support. The candles and trend were red, so the gap down was not a surprise. That move became oversold, and we did get a strong and fast bounce back up to test that 38 neighborhood as resistance. The price stalled at this level and is turning that previous support into resistance. And that short term chart is poised to turn down, which is giving us the potential that the daily chart could form a lower high.
This presented an opportunity to take advantage of the shorter term bounce that brought the price back towards 40. by giving us the expectations that a top is forming, and that selling the 40/45 call spread would be a fairly safe trade. IF the price moves to a new high above 40, then the trade is “stopped” to keep the loss to a minimum. A move above 40 would be showing a top is not forming, and that cancels the perspective that this trade would be based on.
You might have also noticed that on the weekly and daily charts the price has been staying above 35 for quite a few weeks. So couldn’t we enter an Iron Condor and also sell the 35/30 put spread?
That is a possibility, but there are 2 things to think long and hard about. First the price is pretty far from that 35 strike that would be sold, so the amount of premium (juice) that you would get is very low. The second factor is that we have both the monthly and weekly charts showing potential to turn down, so they are showing there is a risk the price could fall to and possibly below 35. You need to determine if the few drops of “juice” is worth the risk if the price does make that move.
The above chart is showing what appears to be a fairly safe opportunity. Now we can take a look at a more aggressive situation that developed on BRCM on Sept. 8th.
The monthly chart had made a strong downwards move, and had reached the bottom retracement line at 25. This retracement line is a level that could act as support.
The weekly chart had made a long downwards move and was showing a lot of oversold pressure. This along with the monthly chart retracement line gave us a warning to watch very closely.
The daily chart was also oversold, and the candle was changing colors to give us a warning that the downwards move could stall. Then we look at the short term that was trying to form a bottom and start a relief bounce.
Putting all of this information together, and we had the charts telling us that we wanted to consider selling the 22.50/25 put spread.
Not only did the price remain above 25 for the Sept. expiration, but the current weekly chart is showing a stronger potential that the price is likely to remain above 25 thru the Oct expiration. And “just in case” it doesn’t remain above 25, then a new low below 25 would cancel this perspective, and “stop” the trade to minimize the loss.
The key to selling premium is that you want to have the longer term perspective that the price will not move thru the strike that you sell. This is where you need to know the longer term support and resistance levels.