Engineers and Physicists Can Identify This Market

So which is it? Is the market going up or down? The Dow Jones Industrial Average ran up 260 points last Thursday, fell 622 over the next 4 sessions, then rebounded 225 points yesterday.

Physicists and engineers will look at the S&P 500's chart and immediately see a sine wave, a two-month-long undulating battle between buyers and sellers.

One positive in the above chart is it appears the S&P 500 is forming an ascending channel, with higher lows and higher highs, and volume on up-close days slightly tops volume on down-close days. The degree of ascension isn't great. But it is worth watching, and it may take several more weeks for one party, the buyers or the sellers, to finally give up.

If you have open stock positions this may be a good time to generate some income by selling calls against your holdings, forming covered call trades.

For example, we got into Brinker International (EAT) back on November 24th at 55.50. The stock has steadily marched upwards with only slight pullbacks:

We're now past earnings with this stock. The current pullback will hopefully stop at the trendline. We'd like to hold on to this stock, expecting further gains.

Our EAT position was up 10% a few days ago, although that has dropped to 8%. Our cost basis is 55.50, so we aren't in danger of losing money on this trade. We will likely get out with a profit even if the stock falls a few points more, leading me to decide to exit.

But with the stock closing right near an option strike price, I can consider turning this trade into a covered call. This will lower my cost basis, increase my current gain on the trade, and help me hold onto the stock. Brinker will likely declare the next dividend early in February. It's not a hefty dividend. Most likely it will be $0.28 per share. But it will help to further lower the cost basis.

Looking at the option tables, I see the February 60 call could probably be sold for $1.30. This, plus the likely $0.28 dividend, would lower my cost basis from 55.50 to 53.92. My profit on the trade, assuming I will hold it through the dividend ‘holder-of-record' date, will jump from the current 8% to 11.2%. This also assumes I would get to keep all of the option premium, keep the stock, and the stock price will remain around 60.

February option expiration is 3 weeks away. I expect the markets, and EAT specifically, to rebound by then. Earnings season will be trailing off and the market should be settled on a direction. But what if EAT is above the strike price of 60 as option expiration nears?

Right now, all the premium of the Feb 60 call is extrinsic (time) value, because the call is slightly out of the money. If the extrinsic value of the option falls below 0.20 or so, the chance of the stock being called away increases. I stated I want to keep the stock.

If that happens, I could buy the call back and just accept a lower income than the original $1.30 I was planning on. In practice, it can be easier to ‘roll' a short call up and out to a higher strike price in a later month than to buy back a short call with a low premium. Fine. That should allow me to sell a March slightly out of the money call for additional income and lowering of the cost basis.

The point is, once you are in a trade, keep an eye out for possibilities to increase your profit (such as adding to a current stock position or selling calls against the stock) and ways to decrease your risk (such as selling calls against the stock or buying protective puts).

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link: www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2015 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.

Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.

As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.

The content on any of Market Tamer websites, products, or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options, and other securities involve risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities are not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/publications/risks/riskstoc.pdf). The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.

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