July Option Investing – TMF Covered Calls

My basic technical analysis for June showed TMF finding support in the mid to high 70’s.  Uncertainty in Europe contributed to June’s weak market, which is usually a plus for TMF.  Unfortunately, being the “least dirty shirt in the hamper” isn’t all that special, as the U.S. has it’s own debt issues.

My June options were exercised, so I bought 200 shares of TMF the following Monday.  Calls were trading with a large premium at the time, which was probably due to the 5 weeks of time value they all contained.  Unfortunately, my order did not get placed (put my limit order too high within the B/A spread), and then I got busy.  I had secretly hoped that TMF would pop on some bad news out of Europe, resulting in capital gains for June.

End result: Bad news came (and sent the general markets back into a correction), but TMF did not respond.  I got tired of waiting and decided to take what I could get…needed SOME cashflow in June!

ETFs (Bought)

  • TMF – 200 shares @ $81.60

Calls (Sold)

  • TMF – 2 $82 call @ $3.00

June Technical Analysis – DRN, EDC, ERX, FAS, and TMF

For those of you visiting for the first time, I use basic technical analysis to make trading decisions related to a covered call strategy. Each month after options expire, I review price and market action since the previous option expiration date, as well as any commentary from the previous month’s analysis.

Every investor and trader should review their trades on a regular basis, and this effort helps me improve my ability to “read the tape”.


June Market Analysis

“Sell in May” was in full effect last month.  A majority of the daily closes were to do the downside, and on higher than average trading volume; both of which are signs of institutional selling.  Interestingly enough, the rebound we’ve seen in early June was good enough to create a change to IBD’s market outlook  on Friday (Monday’s print edition of eIBD) – we’ve now switch from a correction to a confirmed up trend.  That said, the trading volume and price increase (%) weren’t the strongest and IBD’s commented that a majority of June rally’s fail to hold.

NYSE Follow Through and Distribution Days - June 2012

And as the market goes, so goes DRN, EDC, ERX, and FAS.  The poor market price/volume action was mirrored in those 4 ETF’s, which are all searching for support, although DRN has shown the strongest price action as of late.  TMF continues to show signs of strength, along with a large dose of volatility.

June Technical Analysis for DRN

Here were my thoughts on DRN in May:

…DRN was resisting the general markets’ downward pull.  As you can see from [May’s] chart, the negative pressure finally gained the upper hand last week.  The surprise was just how quickly DRN succumbed.  On Wednesday, DRN opened at $71.oo per share.  Friday’s close of $59.72 created a loss of ~16% over 3 days of trading.  This loss highlights the volatility associated with leveraged ETFs

June’s Chart:

Candlestick Chart for DRN - June 2012

DRN found support just below $60 at a former resistance level.  There appears to be a bearish “symmetrical triangle” pattern governing the price action between the July ’11-May12 downtrend and the Oct ’11 Dec ’11 uptrend.

Contrary to the confirmed uptrend in the general markets, DRN has not generated a buy signal for me.

June Technical Analysis for EDC

May’s commentary:

The potential uptrend I mentioned failed to gain traction.  After breaching the potential uptrend, EDC plummeted in price.  The next level of potential support is right around $65-$66, set back on Sept. 30th and Nov. 25th of 2011.  If EDC can’t find footing there, the next level of support is $37.50, which was last seen during the week of Feb 27, 2009.  EDC started the month of May at $99.76, which means the ETF has lost ~33% over the past 14 trading days.  Covered calls just aren’t going to cover that kind of price drop.

June’s Chart:

Candlestick Chart for EDC - June 2012

EDC spent most of May testing the $65 support level.  Contrary to my thinking, the support level held.  EDC will have to get back to the low 80’s if it is going to test the current downtrend.  As with DRN, my program still hasn’t given a buy signal.

June Technical Analysis for ERX

May’s Commentary

ERX is still searching for support.  $25-$30 appears to be the next stop, meaning another 20% drop is likely.

June’s Chart:

Candlestick Chart for ERX - June 2012

The low 30’s showed some level of support, which is good.  ERX did not join the June rally with the same intensity as the other ETFs or the general market, which is bad.  If ERX could rally to the mid-40’s over the next month, then it would be back on my radar.  Until then, we wait.

June Technical Analysis for FAS

May’s Commentary

Just goes to show you that you CANNOT trade/invest based on hope.  I had hoped we would see a confirmation of the Nov-Mar uptrend. Instead, FAS broke it (right around $100 per share) and then fell…hard.  Since breaking the uptrend, FAS’s price has dropped ~25%.  The only good news is that the ability to trade weekly options allowed me to cover some of the losses I incurred waiting for my system’s sell signal to pop up.

June’s Chart:

Candlestick Chart for FAS - June 2012

Weekly options or not, FAS was not a good play in May.  A previous resistance level ($80) failed to provide much support, although FAS did retake that level last week.  I’d need a +20% move next month to get FAS back on the radar for June/July cashflow.

June Technical Analysis for TMF

May’s Commentary

TMF did find support in the mid-50’s, and then proceeded to break not one, but TWO potential resistance levels.  When TMF moves to the upside, it really moves!  The last time we saw this time of action was back in August and September of last year.  On the up side, we could match that price action and see some solid gains in TMF.  On the down side, that price action will also mean weakness in the general markets.

June’s Chart:

Candlestick Chart for TMF - June 2012

TMF broke resistance in fine fashion last month, rallying another 20% or so…only to immediately retreat back to high 70’s.  The former mid-70 resistance level is now a support level, so hopefully we don’t have to fall all the way back to $60 anytime soon.  Again, TMF is the only play for June at this point.  With the uncertainty surrounding the Eurozone leading us into the summer months (traditionally a lighter trading period), I expect TMF to be quite volatile…good for premiums, bad for capital gains.

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