Any stock that has managed an almost year-long uptrend with only minor corrective moves along the way is a stock worthy of consideration when a fresh buy signal appears. Shares of Wyndham Worldwide (WYN) are in such an enviable position right now, as the Rahul Mohindar Oscillator (RMO) swing trade system has just fired another long entry signal.
Are the balance of the stock's technicals also in agreement that this is a trade setup worthy of further consideration? Figure 1, the daily graph for WYN, may have the answers that we seek, so we'll start there first.
Click to Enlarge
Selling a March $22.50 call against every 100 shares now purchased will result in a trade gain of approximately 44% if the shares are called away (if the stock remains above $22.50) at option expiration.
In early March 2009 (and who can ever forget that incredible stock market reversal that happened between Friday, March 6, and Monday, March 9, 2009?), shares of WYN were selling at the dollar store discount price of only $2.77 a share after having fallen from more than $39 starting in July 2007. Certainly, the prospects of any sustained price increases in the stock seemed remote then, but with the entire broad market's reversal helping pull the shares higher, WYN was able to stage a remarkably profitable turnaround for patient bottom fishers.
Currently, WYN boasts substantially better relative strength than the Standard & Poor's 500 (based on a 13-week rate of change calculation), so that's a checkmark in favor of a possible long entry. But what about the stock's long- and short-term money flow pattern—is it still under sufficient accumulation to warrant another buy here? Again, WYN comes through with flying colors. The stock is also exhibiting a continual progression of higher highs and higher lows, even as its 50-day exponential moving average (EMA) continues to maintain an upward slope.
Overall, WYN is a very healthy specimen, scoring sufficient points to make a long entry here a reasonable proposition. Here are a few ideas on how to play this emerging swing move.
A very simple way to play a continuation if WYN's current upswing continues would be to buy 100 shares (or multiples thereof) of WYN and then selling one March 2010 $22.50 call option against the shares. Try to get at least $1.00 for each call option sold and then set an initial stop for the entire position just below the current price of the 50-day EMA, currently near $20.92. If the trade should go immediately against you, only a modest loss will be realized, as the option (an at-the-money option) will lose many deltas on a fast trip down to that price level, thus offsetting part of the loss on the shares of the stock. Conversely, if the stock gains traction and keeps rising, consider running a three- to five-bar trailing stop of the daily lows to lock in any gains and to limit potential losses between now and March options expiration on March 19, 2010.
If the stock is called away at expiration, this covered call trade will return an annualized rate of return of nearly 45%—not a bad profit for a four-and-a-half-week commitment to the financial markets with a portion of your trading capital. As an added bonus, covered call trading is very flexible as far as entry timing goes, and offers a low-stress way for traders and investors to make steady profits over a long period of time. Invest some time with a good option analysis program, such as the one in the thinkorswim trading platform, and you'll eventually be miles ahead of the average stock and option trader.
By Donald W. Pendergast Jr. of ChartW59.com
