In the April 17th issued of my Money Newsletter (”When a Stock Pulls Back“), I discussed Network Appliance (NTAP) and Allegheny Technologies (ATI), both of which appear to be pulling back to a moving average or trendline. If you have not subscribed to the newsletter, you can still get that issue if you subscribe this week.

NTAP is $37.18 as I write and since December has moved around quite a bit, from the December high of $41.56 to the recent $34.69 low. This is quite a bit of difference over relatively short time frames, about 20%. Wide-ranging days happen but are not frequent, but wide-ranging weeks are not at all uncommon. This movement makes it possible to write ITM calls and buy them back more cheaply for a profit.

Covered call returns will be low when implied volatility is low, thus many would question the point in writing calls on a stock like NTAP if volatility is low. True, low IV means that a buy-write (to buy stock for the purpose of writing calls) is a poor choice for NTAP. But for those already long NTAP, writing ITM calls at a high point in a stock’s range of daily movement - and even better, weekly movement - creates a profitable call trade when the stock pulls back.

ATI is $114.94 as I write this. It can oscillate about quite a bit, also. Just today the low and high prices are $111.45 and $115.05, a $4.50 difference so far (yesterday even larger). It can easily move over 4% in a day, much more in a week. Days with $2.00 of movement in a trading day are not at all uncommon. I stated in an earlier post that ATI would in the near future pull back to the 50-MA, which currently is about $107.20, and then resume its uptrend. It keeps nosing closer and no doubt is heading there. But - you don’t have to wait for a pullback to the trend with cymbals crashing; you can make money on it all the time.

Unlike NTAP, ATI offers good premium. ATI in fact perennially occupies a top spot on our S&P100 list and normally offers good covered call returns every month. IV is high compared to historical volatility, and time value is excellent.

Thus ATI is a good covered call candidate, and savvy call writers are milking it like a cow. If putting that trade on now, I would probably write a May or June ITM 110 call in the expectation that it will pull back to the 50-MA, giving me a chance to close the short calls with a fine profit - maybe even close it earlier on another day like today. If you are short the 110 already, I hope you closed that call today and are writing it again!

In the last month alone, ATI offered numerous chances to write calls and buy them back at a profit. Think of this combination of fat time value and price movement as a gift from Wall Street. Traders all over are scalping these moves, and we should be, too.

When ATI resumes its uptrend, I would write it OTM a couple of months - heck, the JUL 120 is bid at $6.10. Or wait for a new price advance off of support and continue the tactic of writing ITM and closing the call on pullbacks. Take advantage of stock price movement when you like and trust the stock, meaning the company is solid. When the stock moves around and there is fat time value, too (ATI), you’ve got a heavenly combination.

How often should you scalp a stock? If it is possible to do once or twice a week, why not?

This entry was posted on Thursday, April 26th, 2007 at 2:36 pm and is filed under Covered Calls, Trading Tips. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.