Archive for the ‘NASDAQ’ Category
Stocks continue to maintain a positive bias in January, with technology and small-caps leading the charge. The NASDAQ is up over three percent in the first two weeks of January. The small-cap Russell 2000 is up 2.30%, while DOW and S&P 500 are up about 1.33% and 2.07%, respectively, in January.
The bulls appear to be in full control at this juncture.
On the charts, the NASDAQ has joined the Russell 2000 to move above their respective previous chart highs. This is bullish, but we need to see if the indices can hold.
There’s nothing wrong if you are long stocks at this time, as the market continues to want to trend higher and, as an investor or trader, you want to ride this upside wave. However, you should also be careful due to a technically overbought condition and the absence of any sort of correction. The reality is that markets cannot go up without a pause or correction. It will happen at one point.
As an investor and trader, what you can do when you feel the market may be set to take a pause and stall is to write some covered calls on your long positions. This appears to be the case at this juncture.
Covered call writing (also called Buy-Write) means you hold an underlying position in the stock represented by the call option. It is much less risky compared to naked call writing, in which you do not have an underlying position in the stock. Be aware of this distinction, as it will save you lots of stress and potential unnecessary losses in the long run.
Let’s take a look at Cisco Systems, Inc. (NASDAQ/CSCO) and assume that you own 1,000 shares at a cost base of $15.00 per share. You are already up just over $5.50 a share based on the prevailing price of $20.50.
You continue to be bullish on Cisco, but at the same time feel that the stock may continue to pause given its failure to move higher and its retrenchment back to just above its 52-week low of $20.36. There are several strategies at your disposal. You can sit on the position and wait for the stock to rise. The problem is that this is an inefficient use of capital in my view.
So, why not make your capital work for you? It’s much easier than you think and represents a win-win situation. The process involves writing covered calls on your holding of 1,000 shares of Cisco. For every board lot (100 shares) of Cisco, for example, one call option may be written.
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