Trade Strategy and Analysis – Rogers Stock (RCI.B) for July 11 2014 – Profit and Protection Through Using Options

Trade Strategy and Analysis – Rogers Stock (RCI.B) for July 11 2014 – Profit and Protection Through Using Options

A trade done today in Rogers Stock is based on the Bollinger Band Strategy trade.  I originally discussed this trade and the outlook for Rogers Stock in the 6 trade ideas article back on July 6 2014.

Protecting The Capital At Risk

The trade done today is designed to use the options available through covered calls to protect the capital which is being risked against loss. That is the purpose of options, particularly in a trade like this one in Rogers Stock.

Rogers 12 Month Daily Chart

Looking at the 12 month daily chart below you can see that the stock is presently down 12.5% from its high in late 2013 and early 2014. With the stock now at $42, there are just two other levels the stock has reached over the past 12 months, namely $41 and $40. Neither has as much support as $42 has.

Rogers Stock 12 Month Chart to July 11 2014

Rogers Stock 12 Month Chart to July 11 2014

Rogers Stock 3 Month Daily Chart

Looking at the 3 month daily chart and adding in Money Flow, Rate of Change and Relative Strength Index, we can see the damage done to the stock. In the chart you can see that the stock is moving along the lower Bollinger Band trying to cling to the $42 valuation. The lowest level to date was July 8 when intraday the stock fell to $41.45. On July 8 however the stock still closed above $42, when it closed at $42.20. Since then it has closed repeatedly above the $42.00 price including today (July 11) when it closed at $42.12.

Money Flow has finally returned back to positive readings indicating some interest in the stock developed today.

The rate of change however is still negative but it is trending sideways indicating that while little fresh capital is finding its way into Rogers Stock, it is not on the verge of collapsing further.

The relative strength index shows that the stock is weak and has been below 50 for June and now into July. In July it has fallen deeper into negative readings but remains reasonable stable. A drop further in readings would indicate that the stock is going to fall further.

Rogers Stock 3 Months To July 11 2014

Rogers Stock 3 Months To July 11 2014

Additional Technical Outlook

If we add in 4 additional technical indicators we can see more details on the stock at this important pivotal point. The accumulation distribution tool tells me that since June 20 the stock has been accumulated and with the stock now down to $42.00 the accumulation is climbing. In other words there is growing interest in buying the stock.

Momentum however remains negative on the stock and has been negative since late May. This is a long time to be negative for Rogers Stock and could be advising the stock is going to fall further. One of the important aspects to the chart that should be watched is any sign of a Bollinger Band Squeeze developing. If the stock were to enter such a squeeze while it is still trending along the lower Bollinger Band, that would almost always signal that the stock is going to move lower.

The Slow Stochastic is now signaling that the next move will be higher for the stock and the Ultimate Oscillator is has been positive and negative, back and forth over the last few days. Today it closed positive.

Rogers Stock July 11 2014

Rogers Stock 3 month daily to July 11 2014

The Strategy: Combining Covered Calls with the Bollinger Bands Strategy

By buying 1000 shares this morning for $42.00 and then selling 4 covered calls for August 16 expiry at the $42 call strike, I earned .96 cents. Because the focus of the trade is on protecting the capital at risk, selling 4 calls at the $42 strike and then keeping 600 shares uncovered provides a lot of flexibility. Most investors do not understand that it is stock ownership that is risky, not options. Options are the instrument to be used to help reduce the risk of owning stock.

For example by selling just 4 covered calls for .96 cents it reduces the cost basis of all 1000 shares to $41.62. Yet if I am right and the stock should recover from here, I can use all or part of the uncovered 600 shares to build a bigger profit into the trade. If on the other hand the stock should fall below $42 having these 600 shares uncovered assists in providing additional protection against loss of capital.

Methods I could use in this trade might include:

1) use the 600 uncovered shares to move up my 4 covered calls at $42 or sell some of the 600 shares and keep the remaining shares to help roll up my covered calls at $42, or

2) sell additional covered calls on half or all of the remaining 600 shares as the stock recovers

3) if the stock falls, roll down the 4 covered calls to $41 and sell perhaps 2 additional covered calls at $41 and leave the remaining 400 shares uncovered to assist in keeping the trade profitable

4) roll down the 4 X $42 covered calls to $41 and further out in time and then sell 3 additional covered calls in the money perhaps at $40 but leave 300 shares uncovered to assist in keeping the trade profitable.

Summary of Covered Calls Trade

In coming days I will keep the trade updated and post an update notice each time there is an update to the trade so interested investors can see the results from applying options to reduce the risk of stock ownership and how it can provide bigger returns and better protection. Right now though, with a dividend of $1.83 which provides a yield of 4.34%, and a PE of 13.4 times and price to cash flow of just 6.1 times, I think this trade looks extremely promising.


Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done. The author may or may not enter the trades mentioned. Some positions in mentioned stocks may already be held or are being adjusted.

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