While I was looking at some candlestick charts I noticed the Yelp (YELP) chart had a pattern I look for when looking to sell Naked Calls. I noticed it was in a pattern called a “Raising Wedge.” Please take a look a my post called Where is U.S. Steel Going. This post explains a Raising Wedge pattern. In the second week of February Yelp hit a low of $14.50 and has been moving up ever since. I sold a Naked Call today with the stock at $24.74. It’s had a great run! Now at the top of it’s run it’s in a wedge pattern. This normally indicates a reversal. I feel the stock is going to start moving down. With this in mind and the stock at $24.74 I sold 10 contracts of the 5/27/16 Naked Calls. I set the Strike Price at $25.50. This gives me a little breathing room just in case it’s not ready to go down. If it continues up I’ll have to watch and make a move if needed.
Take a look at the graphic I included below. This is the wedge shape at the end of a large run up.
This Call has a great premium for a 1 week option. If this expires next week and I don’t have to cover the Call with buying the stock, it will be a great deal. I received a premium of $.45 ($450). I contribute the great premium to the high volatility while the stock was moving up. Here’s the sell order:
Sell 10 YELP 5/27/16 $25.50 C @ $.45 (+$450)
This may not seem like a great amount of return but you have to look at the Rate of Return. On a stock that’s at $24.74 with a premium of $450 the Rate of Return is 1.8%. I didn’t make the investment yet but if I have to cover this position it will be a nice return. If I never have to buy the stock, better yet. 1.8% on no investment!
I give this trade a Risk Factor of 4. It is a Naked Call and they are risky. I didn’t give it a 5 because I have a little breathing room and it’s in a “Raising Wedge” pattern. Being Naked always has a higher degree of risk. I will watch closely!
Steve
The Option Coach