In the April 5th Seasonal Forecaster newsletter I focused on Meritage Homes, a homebuilder about a fourth the size of D.R. Horton or Pulte Homes. Using one of my favorite indicators for identifying cycle lows, I pointed out that MTH was possibly at another cycle low and we could expect a bounce.
I covered the seasonal track record on MTH – an average 12.8% gain over the next 5 weeks, with gains in 19 out of the past 24 years. I said I would consider buying the stock as a standalone trade, or buying the stock and turning it into a covered call by selling April 45 calls at a minimum $.80 credit.
The markets opened down sharply that morning and MTH gapped down and kept dropping. In the April 8th newsletter I detailed that if you bought the stock right at the open, at 42.83, you had to endure a drawdown during the day, but almost broke even by the close. However, if you had used the 30-minute chart to wait for the selling to subside and buying to show up, you could have bought the stock around 42.25. The stock’s close at 43.72 meant you were already up 3.4%.
But just before the end of the day, the April 45 call could be sold for $.80. This delayed covered call trade was up about 5% at the close.
MTH wasn’t quite done setting a short-term cycle low. On April 15th, MTH dropped 7.6% to 40.01. But the covered call trade was down only 3.4%.
MTH took a stand at the 40 level and started moving upwards just prior to its earnings announcement. On April 24th, before the open, Meritage announced a 35% growth in orders, a 65% increase in revenues, and earnings 28% above estimates. The stock jumped up, closing yesterday at 49.19.
Since the April 45 calls expired worthless last Friday, this is a good time to consider selling May 50 calls. They closed yesterday going for around a $1.30 credit.
The stock/covered call position, after the expiration of the April 45 calls, had a cost basis of $41.45. If a May 50 call can be sold for $1.30 this morning, and MTH closes at or above 50 on May 17th (May option expiration), this trade will come out to a 24.5% return over 43 days, or 205% annualized.
Of course, there’s much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, type in www.markettamer.com/seasonal-forecaster
By Gregg Harris, MarketTamer Chief Technical Strategist
Copyright (C) 2013 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg’s passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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