How to define Options Strategy from a Technical Chart

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Question #1
Interviewer: Would you consider this a strong technical chart? What sort of trend do you see here?

Candidate: Yes, it is a good technical chart with a strong linear trend.

Question #2
Interviewer: Why do you think it's a strong linear trend?

Candidate: When the R-squared is approaching 0.90, it is considered strong, if not very strong.

Question #3
Interviewer: Do you think the weekly closing prices would have made the chart more meaningful?

Candidate: No. Since you are using only 6 months of data here, daily closing prices are better. Weekly would be better if you were using at least 12 months of data. 

Question #4
Interviewer: What is the best inflection point on the chart?

Candidate: Around the 90th trading day when the stock reversed its direction from under $10 and started making sharp upward move.  

Question #5
Interviewer: Would you still consider that stretch linear?

Candidate: No. That particular stretch of data shows more of an exponential trend than linear trend. Of course, the overall trend is still linear.

Question #6
Interviewer: If you were analyzing that stretch of data only, would you have seen any difference in stats?

Candidate: Yes. The R-squared would be higher, perhaps around 0.90 (it's actually 0.90, though not shown).

Question #7
Interviewer: As one of our market analysts, would you advise our clients to sell covered calls now?

Candidate: No. When a stock keeps making higher highs everyday, I would not advise selling covered calls. I will let it continue its run, for now.

Question #8
Interviewer: When do you think it's appropriate to sell covered calls?

Candidate: When the stock breaches a major support like the 120-day moving average.   

Question #9
Interviewer: How would you decide what kind of covered call to sell? 

Candidate: If the decline is really sharp, I will sell in the money or deep in the money. If it is just trending down, I will sell at the money anticipating a short consolidation and then a quick reversal.  

Disclaimer - The author is not advocating the stocks/indices listed here. Consult your Registered Rep, RIA or Financial Planner for an appropriate asset allocation model and the suitability of stocks, indices and other holdings for your portfolio. 

Link to the Book

Sid Som, MBA, MIM
President, Homequant, Inc.
homequant@gmail.com