A stock can go up, go down or hold it’s trading price in a tight channel. For the covered call trader, you can look at this by different levels such goes up a little, goes up a lot, goes down a little and goes up a lot. The writer makes money if the stock goes up a little and a lot. The call writer will also make money if the stock hold it’s price and maybe if the stock goes down a little. The greatest concern to call writers is if the stock goes downs a lot. This is where a call writer can lose a significant amount of capital.
To determine what trend the stock is in before buying, look for these three trends on the stock chart:
Uptrending: the stock is in an uptrend when it is making higher high and high lows. The stock price will be rising higher from left to right on the chart.
Downtrending: the stock is in a downtrend when is is making lower highs and lower lows. The stock price will be moving lower from left to right on the chart.
Channeling- the stock is trading in a sideways range between price support and resistance levels. If you draw a line above the recent highs and below the recent lows it will be two horizontal parallel lines.
There are some charts that are so volatile that they cannot be characterized at all. The simple rule is if you can’t determine the stock price trend then pass on this stock as a covered call candidate. You do not need to be an expert at reading stock charts to be successful. If you can get the trend direction correct then you will have more consistent trading profits.
Learn more about call writing.
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