In recent posts I discussed, among other things, plays involving Allegheny Technologies (ATI), which just pulled back below its 50-day moving average yesterday (May 1) and recovered slightly today after opening right at the 50-MA. This pullback to support is a common thing for ATI in its uptrend, it’s just a matter of getting the timing right. Thus the coming pullback and bounce off support was a no-brainer, given the strength of 1) ATI itself, 2) its uptrend, 3) the metals industry and 4) the overall market. This was a duhhh play. We didn’t need news or to play earnings to cream a very strongly performing stock making a very obvious move.

Here’s a daily chart (click to enlarge) - I didn’t mark it but imagine the 50-MA close to the $108 level:

As ATI fell, covered writers were well advised to buy back short calls, since closing calls at a lower price than they were sold creates a profit. Or roll the calls down repeatedly. But as yesterday’s price dip illustrates, you have to be watching to catch some of these moves. Another good play I discussed was to buy the 105C when it bottomed, although I would expect the next wave in the uptrend to take it well above $120, so there is still room. Sure, implied volatility was high, making it expensive, but it was an excellent, high-quality play. If you bought the 115P or 120P as also discussed, you should have closed it out yesterday for a very nice hit.

I thought ATI would spend more time testing the 50-MA, and it still may come back to do just that, but sometimes great opportunities like this are transient.

BTW, this stock came off of our staid, boring old S&P100 list!

This entry was posted on Wednesday, May 2nd, 2007 at 9:48 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.