Dec242016

Weekend Update – December 25, 2016

Weekend Update Comment

 …And I feel fine.

Whoever thought that we would live to see the day that the President-Elect would be running a parallel foreign policy?

Whoever thought we would live to see the day that Republicans were cozying up to the Russian government while the Democrats were sounding the siren?

Then again, did anyone really believe that Great Britain would split from the European Union?

Maybe it really is the end of the world as we know it.

The one good thing is that as best as we can project, life in a post-apocalyptic world will probably be characterized by lower tax rates.

That can only add to the feeling fine sensation and I certainly look forward to the little considered benefits of an apocalypse.

While the world may not be ending, 2016 is coming to an end and after a very palpable post-election rally, it’s not very clear where we go next.

I certainly don’t know where I go next.

In less than a month populism meets reality and the direction may become more clear. At the moment, the only thing that really is clear is that populism is a world wide phenomenon, which means that lots of world-wide enemies are being identified to account for all of the ills any particular society may be experiencing.

Based upon the rise of populism around the world, you might be justified in believing that there are plenty of ills, but maybe not enough enemies to blame, so we may have to share.

I don’t know too much about Poland, but I imagine that if the public relations campaign is run properly, you could easily get their populace to place the blame for all of their ills on Mexicans, too.

Closer to home, we will soon probably learn of plans to build a wall around the Rockettes, at least those who would prefer not to perform as part of the Inaugural festivities.

With an entirely new playbook in the White House and perhaps in Congress, as well, it remains to be seen if the FOMC can remain reasonably apolitical when faced by a barrage of Presidential Tweets aimed at its actions or inactions.

But with 2017 right around the corner it may appear that if some of that populism does morph into reality, the upcoming role of the FOMC may be to take a back seat to natural market forces.

Rather than being ahead of the curve, the FOMC may just sit back and watch interest rates climb on their own, as was the case in the post-election period and that worked out just fine, too.

With thoughts of nation wide infrastructure projects to help “Make America Great Again” together with a low unemployment rate, let the bidding begin for the workers necessary to make it happen.

The paucity of workers, though, might help to figuratively and literally delay the building of the wall that was one of the early populist positions.

Of course, I would imagine that a President Trump would have some choice words for the bankers that end up making more money in a rising interest rate environment, at least as long as the Trump family has no direct banking interests.

Having once owned a airline, it may be understandable why President-Elect Trump has taken on Boeing (BA) and even Lockheed Martin (LMT). You can be certain, however, that he won’t take on the hotel and hospitality industry.

Imagine how he might castigate the FOMC for making those projects, and perhaps personal family building projects, as well, more expensive by presiding over a rising interest rate environment.

However, maybe having some skin in the game can be a good thing when it comes to public policy. Maybe even an incentive plan, such as a portion of any money saved on the building of the next generation stealth jet fighter.

I, for one, am anxious to get 2017 underway and to see bluster given a chance to come to life.

I don’t know how much of those populist ideas will find life, but with earnings season beginning the week before inauguration, we may finally be getting some of the earnings guidance to really breathe life into markets.

If that’s going to be the case, the elusive 20.000 on the DJIA is just a stopping point.

History books will credit whoever is in office when it finally does happen, regardless of who really deserves the accolade. Economies rarely turn on a dime, but the ingredients that go into the process of change are typically forgotten once the final product is unveiled.

It’s generally easier to share the blame than to share the credit, but if the credit is shared, there can be no better sign that the end of the world has come.

I hope that the new administration is put into a position of taking whatever credit there is for a soaring stock market in 2017, regardless of whether they share that credit or not.

A soaring stock market and a soaring economy would preclude the need for continuing populist rhetoric, but if those don’t happen the next round of populism will really be something to behold.

I’ll be watching from a distance.

As usual, and now for one last time, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

Could anything have been more pathetic than retail last week?

If your answer was, “Yes, Materials,” then you’ll understand my pain last week, even as I look back fondly on 2016.

With some major retail casualties last week and with just another week left to this holiday season, I think that the first direction that I want to take myself into for 2017 is to add to my retailer holdings.

For the final week of 20116, that means looking at Bed Bath and Beyond (BBBY), LuLuLemon Athletica (LULU), Macy’s (M) and Under Armour (UAA or UA).

If you follow Crossing Wall Street, you know that its founder, Eddy Elfenbein, is one of the most transparent stock pickers out there and one of the most credible.

He is a true buy and hold investor and his new ETF, AdvisorShares Focused Equity ETF (CWS) is based upon his annual buy list that has had a long term record of market out-performance.

While for many Bill Miller is the name that pops up when thinking long term out-performance, I think of Eddy, who is also a great Twitter follow because he is funny, self-effacing and shares relevant data and facts more readily than anyone I’ve ever seen, read or heard.

I believe that in an era where Quantitative Easing is no longer in effect and thereby no longer indiscriminately propping up most everything, true diligence will make the difference between one stock picker and the next.

You just don’t get more diligent than Eddy Elfenbein.

This year’s buy list has been released and Bed Bath and Beyond is no longer a part. Elfenbein describes it as one of the most frustrating stocks that he has owned and I continue to feel that pain.

But following this past week’s washout of an earnings report, I’m taking another look, but unlike Elfenbein, for whom diligent stock picking validates a buy and hold strategy, I have only short term interest in adding those shares and no interest in doing my due diligence.

For me, all the due diligence that I needed was seeing that its shortfall in earnings was less than the 20% off they offer on any single item with their frequent coupon mailings to my home.

I do see some continued downside risk, perhaps to the $39 level, but I would be very happy to see Bed Bath and Beyond shares tread water for a while as I would seek to serially sell call options on those shares at the $40-$42 level.

Another washout for the week was Macy’s. I was recently in one of their stores on the Eastern Shore of Maryland and was struck by how poorly maintained the exterior of the store had been, even as the interior was bright, clean and shiny and the personnel were friendly and eager to help.

While Eddy Elfenbein is transparent, I tend to be superficial, but somehow overcame that trait and overlooked the exterior.

Right now, from the outside looking in, there really doesn’t seem to be much reason to think that 2017 will be any kinder to Macy’s, as it has badly trailed the S&P 500 in 2016.

As with Bed Bath and Beyond, I think there is some reasonable support at its current price level and would also not mind seeing those shares stand in place for a while in exchange for option premiums and a generous dividend.

Under Armour now has two classes of stock. You can decide for yourself whether you want the shares with voting rights or the shares without those rights. 

The latter, the Class C shares continue to trade at quite a discount to the voting shares, while both have badly trailed the S&P 500 in the past 6 months.

My concerns about this potential position is that it’s not clear where support will come from, as voting rights shares are sitting at 2 year lows and there isn’t anywhere near as much liquidity as I would like to see in the available options.

In exchange for those uncertainties is what could be an attractive option premium, although the bid-ask spread is understandably large with such small interest on behalf of buyers and sellers, making rollovers unnecessarily difficult and expensive.

Finally, it’s not too much of a stretch to see why LuLuLemon may be attractive.

That is, as long as you overlook that bulge in its share price.

That spike creates some risk, but with those option premiums remaining elevated, the risk is a little easier to take.

That’s particularly true when realizing that there is the kind of liquidity in the options market that is missing for Under Armour. 

As a result, the prospects of being able to rollover positions in the event of an adverse price move doesn’t concern me as much as it does with Under Armour.

It has been a long time since I’ve owned any shares, but I think in this instance I would start by selling put options and then taking it on a week by week basis.

For me, however, this is the final week to be putting these thoughts on virtual paper.

I am very, very grateful to the Seeking Alpha editors and to the cast of regular readers over these past few years.

Best wishes for a happy and health New Year to all and for the best in everything that matters in the years ahead.

 

 

Traditional Stocks: Bed Bath and Beyond, Macy’s

Momentum Stocks: LuLuLemon Athletica, Under Armour

Double-Dip Dividend: none

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

 

 

Dec172016

Weekend Update – December 18, 2016

Weekend Update Comment

 

A long time ago there was a reasonably popular song by a group that itself was reasonably popular  at a time when Disco was dying, Punk Rock had out-grown its shock factor and Heavy Metal and long hair bands were taking root.
 
In that vacuum anything could have become reasonably popular and so it was that everyone was humming the tune of the song that cried out for the need for a new drug.
 
I always wondered why the lyrics didn’t include the requirement for a drug that won’t quit, as that’s the ultimate problem for anyone seeking to be taken to a better place through the modern miracle of chemistry.
 
At some point we develop a kind of tolerance to stimuli, to feelings and even to drugs. That’s why we always keep searching for something new. What was once good, or at least good enough, just quits on us.
 
Even when we may not fall prey to the human desire for more, bigger and better, we at least want to get the same kick at a bare minimum and we can’t possibly tolerate a drug or an emotion that quits on us.
 
This past week we came to a point when the FOMC sort of quit. It really didn’t take us any place new, even as it did finally take some action.
 
But as it took action it almost felt as if we were being left behind, as the market’s natural forces were getting ahead of the FOMC, that for years had been the dispenser of the remedies that kept our economy alive,
 
Almost like Yahoo (YHOO) waiting 3 years to let the world know of a security breach impacting a1 billion accounts, the FOMC may have been a little bit behind the curve in its decision to finally increase interest rates.
 
Maybe they were still smarting from the same decision a year earlier that had so poorly read the future path of the economy.
 
This time around, their confidence in what awaited us in 2017 was also lacking and markets didn’t like that very much, but it seems as if the bigger picture came back into focus as the week came to its end.
 
That bigger picture included realizing that another upcoming earnings season is in store in just a few weeks. There’s also that big newly created expectation of the promise of some real economic boosts from an incoming Trump Administration.
 
But as we all know, expectations can be a bad thing.
 
That upcoming earnings season will be the first in years when there are actually expectations for earnings that are not only better than expected, but not artificially boosted by stock buybacks.
 
It’s hard to say that the market’s climb since the election has in any way discounted future earnings, but you can’t entirely discount the possibility itself, even as the expectation of unbridled government spending on infrastructure may have lit the fire.
 
With some softening already being seen when compared to campaign rhetoric and no one having any clue where politic lines will fall once the least predictable President in anyone’s lifetime takes office, those expectations may give way to elation just as easily as they may usher in disappointment.
 
But at the moment, that’s all we have.
 
The FOMC has run out of new drugs and their every move is likely to be on the receiving end of a Presidential Tweetstorm, politicizing that which has become more political, but was always supposed to be above the fray.
 
We may be now entering a period when there are no new drugs to help us. Instead, it may be the time to turn toward the kind of self-help remedies that existed before the discovery of aspirin,
 
Either that which didn’t kill you made you stronger, as long as the foundation wasn’t neglected.
 
For me, that means we may finally have returned to that point that fundamentals are the drug that we need.
 
Good fundamentals, especially in an early stage of economic expansion should lead to stock market advances, even while sitting at or near more new highs.
 
After all, new highs tend to beget new highs.
 
Then again, there is also bad medicine and that bad medicine may be what the FOMC will have to resort to next.
 
For a couple of months I thought that there might be a possibility of the announcement of a 0.50% interest rate increase in December.
 
That would have really killed things and would have seen some real Twitter vitriol, but when was the last time we were looking at an economy with unemployment at a level less than the structural rate and talk of huge infrastructure projects looming?
 
Can you spell “inflation?”
 
If easy money and accommodative policy send markets higher, it doesn’t take much to realize that tighter policy sends markets lower.
 
For me, at the moment, even as more new highs are what everyone is expecting, the best drug that I can think of is cash.
 
It’s not a new drug, but it still works for me.
 
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
 
Where do you begin to think about deploying cash when the market is at these levels?
 
While many practice an investing technique that attempts to capitalize on sector rotation, you always have to be suspect about sectors or individual stocks that don’t seem to be keeping up with everyone else.
 
I haven’t been making very many trades lately, but what I have been doing much more of late is finally beginning to capitalize on some long suffering commodities positions that have been behaving like yo-yos.
 
That has meant selling calls on them, even at strike prices well below their purchase prices and either seeing those calls expire or feverishly trying to avoid their assignment by rolling them over in the hope that whatever lifted shares on one day will deflate the very next day.
 
That has also meant adding some new positions in the hopes of a quick trade to pocket some very generous premiums that have been the result of increasing volatility in the commodities sector.
 
For a few months, at least for me, it was all about Marathon Oil (MRO). While I currently do have a single lot of shares with short calls at a strike well below cost, in 2016 I had opened and closed 12 new positions either with buy/writes or more commonly, put sales.
 
In all, between opening trades and rollovers, there were 31 option positions, as a result and I would have loved to have had even more.
 
But while Marathon Oil may have moved too high for now, there are a number of potential trades for those with discretionary cash and discretionary intestinal fortitude.
 
In other words, not for the faint of heart and definitely not with the college fund.
 
Fortunately, my heart is on it last legs and I’ve long finished with college tuition payments. It’s not quite like the morbidly obese wheel chair bound man on supplemental oxygen, with a lit cigarette in his mouth and a beer in his hand, feeding $100 bills into a high rollers slot machine in Las Vegas that I saw about 10 years ago, but it’s close.
 
So, this may be another week where I will try to capitalize on that volatility, especially coming off some of the declines in commodity prices last week.
 
There’s nothing like selling puts into weakness.
 
ProShares Ultra Silver ETN (AGQ) is my favorite of this week’s possible positions, but it is my least favorite trade.
 
That’s because the options aren’t as liquid as I would like, especially when needing to rollover a position. There’s also that pesky matter of option prices in anything other than $0.01 increments.
 
However, following the sharp decline seen last week in the aftermath of the FOMC decision, I am really tempted by ProShares Ultra Silver ETN again.
 
As an example of  selling calls on an existing position that is deep out of the money, I have been doing so on a far more expensive lot ever since December 31, 2014, sometimes selling calls as low as a $32.50, despite a $40 purchase. I currently have March 2017 short calls on those shares at a $36 strike. 
 
In the meantime, that position has generated enough premiums to still make it worthwhile when compared to the S&P 500 since that same time period.
 
Rather than selling puts and using a weekly timeframe, though, if adding another position, I think that I would look more at the possibility of a buy/write and would also use a $35 strike price, based on Friday’s $32.91 close, while selling a January 20. 2017 $35 call.
 
If the call is headed toward expiry, I would probably not take the unnecessary expense of the rollover and would just wait for a new opportunity to sell calls.
 
The remaining considerations for the week, Cliffs Natural Resources (CLF), Marathon Oil (MRO), Petrobras (PBR) and Transocean (RIG) are all ones that I would consider only through the sale of puts, as this time.
 
None of the positions has anything fundamental about it, as far as the decision to consider them for the week, except perhaps for Transocean.
 
What they do have in common is lots of bouncing up and down of late and lots of great premiums.
 
Of course, the problem with selling puts on any of these positions is that you do have to be willing to accept the possibility of ownership of the underlying shares.
 
Just as with selling calls on a position that is well below your cost and you have to be willing to part with the shares at a loss, you can use time as your partner in trying to avoid what you might find distasteful.
 
The nice thing about volatility is that even deep in the money volatile positions can have premiums that have sufficient value above and beyond intrinsic value, to make rollovers worthwhile.
 
The longer the time period of the rollover the greater the premium and also the more time for a price correction to perhaps help you avoid the unacceptable.
 
Right now, for example, I have rolled over my $17.50  Marathon Oil calls on 3 occasions in the hopes of avoiding the loss of shares to assignment. That has resulted in an $0.87 premium in 3 weeks and I certainly don’t mind this long term holding going below $17.50 and offering an opportunity to roll the dice again and again.
 
If it did so, I also would consider the sale of another round of put options, even though the last time I did so, it was with a $15 strike price and there isn’t very much price support between Friday’s close and that $15 level.
 
However, in an ideal covered option portfolio that’s what you would be doing with all of your positions if you were more interested in using those positions as a means of generating income, rather than trading them in for capital gains. Every now and then you would supplement your existing positions with a new one, maybe taking sector rotation into consideration, to replace something that has been assigned away from you.
 
What I never expected was that the commodity cycle, including oil, copper and iron ore, would have  stayed at depressed levels for so very long.
 
But as oil seeks to prove that it can stay above $50 this time around, there’s the backdrop of the prospect for a heating up US economy and maybe something along those lines in China, as well.
 
As long as those events don’t happen overnight, there may still be lots of ups and downs as speculators take up or shed positions helping to fuel the volatility in those positions.
 
Cliffs Natural Resources, just as Marathon Oil offers further risk as it has had some noteworthy price appreciation of late, although it is well below the promise and hopes that existed when a successful proxy fight came to its conclusion.
 
Last week the move was decidedly lower and I did sell puts on 2 occasions and was actually happy to be able to roll them over, having even considered doing so while they were out of the money, just to keep the income flow alive.
 
When volatility is high, sometimes you do consider forgoing assignment of calls or expiration of puts just to keep the golden goose going.
 
Petrobras is also showing similar signs of increased volatility and indecision in direction. As it does, those premiums get more and more appealing, particularly as the stock creates what appears to be a manageable trading range.
 
Finally, there’s Transocean.
 
Transocean is a little different as it does respond to news going on around it. EVery Friday we get news regarding the number of operating rigs drilling for oil and as the price of oil increases you would expect the number of rigs to also increase.
 
Of course, in time, that just activates the typical supply and demand equation and eventually, in the absence of increased product demand, someone has to decide to stop drilling.
 
And so on and so on.
 
If you want a new drug, just try the adrenaline that could come from any of these positions.
 
Then, think about an antacid or two.
 
 

Traditional Stocks: none

Momentum Stocks: Cliffs Natural Resources, Marathon Oil, Petrobras,  ProShares Ultra Silver, Transocean

Double-Dip Dividend:  none

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

 
 
 
 
 
 

Dec102016

Weekend Update – December 11, 2016

Weekend Update Comment

There are so many ways to look at most things.

Take a runaway train, for example.

The very idea of a “runaway train” probably evokes some thoughts of a disaster about to happen.

Following this past week’s 3.1% gain in the S&P 500, adding to the nearly 4.3% gain since the election result that most everyone thought to be improbable, the market may be taking on some characteristics of a runaway train.

But I don’t really think too much about the inevitable crash that ensues when the train does leave the tracks.

As every physics fan knows, the real challenge behind a runaway train is getting all of that momentum under control.

I don’t think about that, either, though.

What I do think about is trying to understand how to look at momentum.

Momentum, of course, is simply the product of the object’s mass and its velocity.

Mass, of course is nothing more than the force exerted by that object divided by its acceleration.

Acceleration, of course is nothing more than the derivative of an object’s velocity.

So, I like to look at momentum as an expression of the product of an object’s force and its velocity, while at the same time dividing by rate of change in that velocity.

In other words, depending upon how you look at things makes all the difference in the world.

You can look at things in their most elemental form or you can make things unnecessarily complicated and not find yourself anywhere closer to anything, other than confusion.

That runaway train could be a metaphor for the stock market we are all going to wake up to on Monday. Its momentum either makes it unstoppable or it has to come up against some awfully strong counter force to get it to stop.

This coming week marks the final FOMC meeting for 2016 and if anyone believes that it will be the force to stop the runaway train, then they haven’t been paying attention to the indifference of investors clamoring to get aboard that train.

That indifference may very well be what helps stocks do what they do so well when consistently hitting new highs.

Momentum takes them even higher.

The real difference though is that while some people do think about jumping off from a runaway train as their best chance for survival, unlike the stock market, you don’t find too many people trying to jump onto that runaway train.

No one fears missing out as the momentum grows and grows and the crash to come gets more and more frightening.

While those of us looking at events unfolding in real time, it’s hard not to refer to what we’ve been seeing over the past month as anything other than the “Trump Rally.”

In the history books, though, when looking at the stock market’s performance during the term of a Presidency, the “Trump Rally” accrues to the credit of the current sitting President.

That is precisely how it will be perceived at some point when the President-Elect is no longer able to remind the world of how he moved the market, unless a living hologram is erected in the National Mall instead of a Trump Presidential Library.

By the same token, the economy can be very much like a runaway train when it comes to the forces necessary to change its momentum. Sometimes, the force that’s necessary may be nothing more than the passage of time. Sometimes a President gets credit or may get the blame for the actions taken by his predecessor that just took time to play out, for good or for bad.

At the moment, for Presidents serving 8 years, Barack Obama is second only to Bill Clinton in terms of the market’s performance, but timing can be everything, as the “tech bubble” was the force to stop the Clinton years’ momentum, much to the dismay of George W. Bush, who inherited the ennui that set in and who many years later set into stage the inflection point in unemployment that started less than a month have his successor took office.

The last 8 years haven’t exactly been a story of momentum, but no sooner does the new President take office and we will be at the beginning of the first earnings season of 2017 when expectations are finally for broadly based improvements in earnings.

Guess who will take the credit?

Timing is everything, but who cares who gets the credit, as long as that train has lots of room and a long, long track ahead?

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

As we head toward a 10% gain since the election, the S&P 500 is now up a respectable 10.5% on the year.

History, of course, will ignore the intervening details, but it may very well turn out to be a year where the first and last 7 weeks really mattered and everything in-between was pretty much unnecessary.

That makes this year similar to most professional basketball games, except that in basketball the first 2 minutes don’t count either; only the final two do.

That Trump Rally, though, does make it more difficult to look for where do put idle funds.

I am actually at my highest cash level in some time and even as I am reasonably optimistic about what the coming quarter has to offer, I do like having cash available as more and more positions are being assigned away from me and replenishing cash reserves.

This week I’m not too excited about the prospects of parting with any of that cash and for the first time in what seems like an eternity, I won’t be thinking about any kind of new position in Marathon Oil (MRO), unless there is a strong reversal in the price of crude oil.

That doesn’t seem likely in the immediate time frame, but as more and more of those oil rigs do come on board, the runaway train will be the lure of increasing prices on supply and we all know what happens when supply outstrips demand.

It still will take more than a Netflix (NFLX), Amazon (AMZN) and Facebook (FB) led economy and stock market to increase demand for all of that extra oil that will come to market to take advantage of pricing.

No one seems to be taking advantage of pricing at Gap (GPS), based on the last couple of years.

It seems that it hasn’t had a single good monthly sales report in ages and has really had nothing good to report as its relevancy just erodes.

But as I look at its chart, Im actually encouraged by its recent 10% decline and it is beginning to appear to me as if it has found a real support level.

That level has me interested in opening a position, especially as shares go ex-dividend in just a few weeks.

The greatest difficulty that I have with this position is  deciding whether to categorize it as a “Traditional” or “Momentum” stock.

Ultimately, I think this is just a traditional kind of stock that has just had a run of either really bad luck or really bad management and really bad strategies to go along with really bad merchandise.

That sounds like an endorsement to me.

Now, if you’re really looking for a “Momentum” kind of stock, look no further than Cliffs Natural Resources (CLF).

If you haven’t noticed metal commodities are alive right now.

The trend has been higher, but there can still be some explosive lower moves and as with any momentum, you just never know when that opposition force is about to arrive.

This is a position that I would definitely first enter with the sale of out of the money put options.

In the event of an adverse price movement, and you certainly have to be prepared for one, or two, there is enough liquidity to allow rollover.,

In the event of an adverse move or two or three, there could be reason to then consider using a longer time frame for the rollover in an effort to wait out the reversal and at least get a little bit of premium in exchange for some of your stomach lining.

Finally, you rarely get a real gift from a casino that you haven’t paid for in literal or figurative spades. But this past week’s news about some heavy handed measures to limit ATM withdrawals in Macau sent shares of Las Vegas Sands into a freefall.

Almost like a runaway train.

Las Vegas Sands’ share price has made up a lot of ground lately, so the week’s sharp reaction to the Macau news may be an opportunity for those that believe human beings with a need to gamble will figure out a way to gamble.

While they’re likely well on their way to figuring out how to circumvent attempts to limit their losses, or their gains, depending on your cynicism and perspective, shares are ex-dividend on the following week’s first day of trading.

I always like considering those opportunities where even an early assignment can be appealing. In those cases, the idea is to sell an in the money call and utilize a longer dated option expiration.

With some far more expensive shares of Las Vegas Sands already in my portfolio, I have been grateful for the continued dividend and the option premiums that have put somewhat of a brake on the freefall that its shares do occasionally experience.

 

Traditional Stocks: Gap, Inc.

Momentum Stocks: Cliffs Natural Resources

Double-Dip Dividend: Las Vegas Sands (12/19 $0.72)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

Dec42016

Weekend Update – December 4, 2016

Weekend Update Comment

It’s hard to say what really came as more of a surprise.

The fact that we have a President-Elect Trump or the fact that OPEC actually came to something of an agreement this past week.

When it has come to the latter, we’d seen any number of stock market run-ups in anticipation of an OPEC agreement to limit production of crude oil in an effort to force the supply-demand curve to their nefarious favor.

Had you read the previous paragraph during any other phase of your lifetime, you would have basically found it non-sensical.

But in the past 18 months or so, we’ve been in an environment where the stock market looked favorably on a supply driven increase in the price of oil.

So when it seemed as if OPEC was going to come to an agreement to reduce production earlier in the year, stocks soared and then soured when the agreement fell apart.

Unable to learn from the past, the very next time there was rumor of an OPEC agreement stocks soared and then again soured when the predictable happened.

This week, however, everything was different.

Maybe better, too.

Or maybe, not.

What was not better was that OPEC actually came to an agreement, although you can’t be blamed if you withhold judgment in the belief that someone will cheat or that U.S. producers might be enticed to increase production as prices rise.

What may have been good, though, was that markets didn’t react with their usual state of irrational unbridled enthusiasm as the price of oil sharply increased this week.

Nor did rational behavior kick in, as a supply driven increase in the price of oil should induce concerns about corporate profits and diversion of discretionary consumer cash.

But there was some kind of rational behavior this week as was when the Employment Situation Report was released.

In that case there was basically no reaction, which is probably a good thing, as we are prepared to accept the inevitable in less than 2 weeks, as the FOMC seemingly has no choice but to announce an increase in interest rates.

Then we’ll see whether the rational behavior has longer lasting power than it did a year ago when we were in the same situation.

But, with a little bit of hindsight at hand, you do have to be impressed with what may have been a very rational response by stock markets in the aftermath of the Trump election victory, as it did a complete about face from what most everyone in the world believed that it would do.

In addition to the rational behavior displayed by the market, you may have to give some credit to the non-traditional timeframe in which the President-Elect has decided to hit the ground running when it comes to economic matters.

That timeframe is before he is empowered to really do anything other than to decide not to go to security briefings.

Can we all agree that those briefings are less relevant than the economy?

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

For those who haven’t tired of hearing about marathon Oil (MRO), I feel that I might be negligent to not bring it up again this week.

In a week when oil stocks really prospered, Marathon Oil really, really prospered.

On the one hand I felt really good about that, having sold 2 separate lots of put options, one of which was at what would turn out to be at about its lows for the week.

On the other hand, I sold calls on a far more expensive lot of shares at a strike well below my break-even and I had to scurry to roll those short calls over in the hopes that shares might find their own rational place to go, maybe just a bit south of $17.50.

But that brings me back to still be interested in Marathon Oil.

The issue, though, as it always is, is what comes next?

I’m of the belief that those higher oil prices may not be long lasting, but perhaps long enough to bring some share price stability.

Even at this new level, I might be interested in selling puts again with n $18 or $17.50 strike level, but I would certainly not do so in the same quantity as I did this week with $15 puts.

I was aggressive with those and happily so, but I would not consider doing the same this week.

Where I might consider being aggressive is with the purchase of shares of Coach (COH).

Considering the purchase of any retailer in the final month of the year is something that shouldn’t be taken too lightly, as surprises abound when you would least prefer.

What appeals to me about Coach right now is the fact that I find it fairly priced at a time when it will be ex-dividend.

For me, even as I’m still saddled with an expensive lot of Coach shares, the most appealing and profitable time to have bought shares was on the cusp of an ex-dividend date.

My history, with the exception of the current lot of shares that i own has been that dividends and earnings have been great times to do something. The problem with Coach’s earnings, however, is that they have been far lass predictable than its commitment to the dividend.

Finally, I have shares of Hewlett Packard (HPQ) and am short $15 calls that expire along with the end of the monthly option cycle.

Hewlett Packard is also ex-dividend on the Monday following this coming  week, so I will be closely watching its closing price next Friday.

But before that Friday comes by, I will seriously consider adding shares and selling calls that also expire with the monthly options.

That would be to have the possibility of collecting somewhat more than a typical week’s worth of premium, by virtue of the longer time value, following adjustment for its dividend, in the event of an early assignment.

Generally, Monday ex-dividend positions provide an opportunity to consider those scenarios where either an early assignment or the alternative of collecting both the premium and the dividend can be appealing.

It helps when the purchase price is close to the strike price and when the purchase price is close to what you would ordinarily accept as a fair price for shares.

I like Hewlett Packard at $15, although I don’t see too much prospect for capital appreciation of shares. What i like about it is as a repository for premiums and dividends and that could start as early as Monday morning.

 

Traditional Stocks: none

Momentum Stocks: Marathon Oil

Double-Dip Dividend: Hewlett Packard (12/12 $0.13), Coach (12/7 $0.33)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

Nov252016

Weekend Update – November 27, 2016

Weekend Update Comment

For anyone who is capable of remembering the sentiment that pervaded markets less than 3 weeks ago, the continuing shattering of stock market records day after day has to come as a surprise.

For those that had the conviction of their opinions, and there were some very prominent people expecting a sell-off in the event of a Trump victory, you have to wonder whether it was worse to miss out on the rally or worse to have been so wrong while in the public eye.

As that watchful eye looked at the DJIA, S&P 500, NASDAQ 100 and Russell 2000, all ended the week closing at their all time highs.

Do you remember what happened when the FBI announced that they were looking into some emails discovered on a laptop owned by one of Hillary Clinton’s top aides? Do you then remember what happened when the all clear was then given just days ahead of the election?

The conventional wisdom was that the uncertainty associated with the unpredictability of a Trump Administration was the antithesis to what the stock market needed to move higher.

That conventional wisdom was certainly reflected in the stock market’s exaggerated movements.

Do you remember the worldwide overnight plunges when it appeared as if Donald Trump would emerge victorious?

And then a funny thing happened.

After a quick 500 point gain in the DJIA when all of those earlier convictions were thrown out the window, the market has just had a slow and steady climb higher.

Nothing spectacular over the past 10 trading days, but it reminds me a little of the 1991-1996 period for no other reason than the move was steady, but only spectacular in its totality.

Obviously, 10 days isn’t the sort of thing that trends are made of, but there is ample reason to believe that as we do hit more and more new highs we are at the beginning of a pronounced move even higher.

Unfortunately, there’s also ample experience to suggest that new highs beget second thoughts that lead to profit taking.

Sometimes those second thoughts are pronounced and sometimes those second thoughts lead to third and fourth thoughts and continued assaults on those new highs until the original scenario of even higher new highs finally becomes reality.

As we await next week’s GDP and Employment Situation Report, it will take a really significant surprise to move the FOMC off from the path they were ordained to take a full year ago, but could then never find quite the right footing.

But once they do find the right footing in just a few weeks, and it now seems that the market has fully accepted the inevitable’s arrival, we may have a period of a market driven by old fashioned fundamentals.

With earnings season just about over and without the dourness that had accompanied reports over the past few years, there’s an optimism that may be well warranted.

Higher employment, higher wages, continuing low oil prices and now growing corporate profits and you have the right mix for 2017

Add to that a newly found optimism with what a Trump administration may hold for the financial health of American businesses and for better or worse, fundamentals may be for the better.

Of course, that’s the conventional wisdom.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

I’ve been looking for an entry back into the Blackstone Group (BX) for quite some time. One of the impediments to doing so has been the unease regarding the highly volatile dividend, whose yield kept getting more and more distanced from sanity.

That yield is still high, but no longer insane.

WHat may be a substantive issue is what the impact of a rising rate environment may have on firms such as Blackstone, that have greatly benefited from the leverage possible with exceedingly low rates.

While an increasing interest rate environment is less conducive to profitable deals, I believe that the year long wait for an interest rate increase has already burdened Blackstone shares in the anticipation.

The certainty of an increase, even if followed by further increases with similar levels of certainty, may be far more conducive to investor confidence than the past year has been.

In the meantime, Blackstone shares offer the trifecta of the possibility of continued capital appreciation, an attractive option premium and a very generous dividend.

Cisco (CSCO) recently reported earnings and topped earnings expectations, but it didn’t join the optimistic guidance party and subsequently fell about 5%.

That decline brought Cisco shares in line with the performance of the S&P 500 for 2016 and may leave it as one of a handful of quality companies not participating in the post-election rally.

AQS a result it may present as another triple threat, as does Blackstone Group.

I think that there is opportunity for capital gains on shares, as well as a reasonable call option premium. WHile its dividend isn’t as enticing as that of Blackstone Group, it’s attractive enough to consider.

In this case, I’m most likely to think in terms of a buy/write with an expiration date shortly after the ex-dividend date, which is expected sometime in early January. 

Finally, I thought this was going to be the week that I finally stopped thinking about establishing another position in Marathon Oil (MRO). 

It had been my go to position, either as a buy/write or increasingly as a short put sale for the past 7 months. I had been hoping to open a new position this past week after closing 2 other positions the week prior, but it started to break out of the range that had worked so well for me.

That is until the close of trading last week when shares fell by about 3%.

That still left Marathon Oil shares at a level higher than I would want to enter into a new position, but may put me at a crossroads between deciding that the trade is over or that it can still continue, albeit at higher levels.

For now, I would prefer to see another decline similar to the 3% that ended the week before committing new funds, but might still consider doing so in the latter part of the week if share price hovers around $16.

In the event of a sharp decline, my inclination would be to enter into a position with the sale of put options.

Whether engaging in a buy/write or selling calls, due to the volatility enhanced premiums, there may even be reason to consider rolling over the short options even in face of assignment of calls or expiration of puts.

For me, Marathon Oil has been a position worth trying to keep open and engaging in serial rollovers for as long as possible. Doing so is sometimes as simple as doing a calculation looking at the ROI that may be received even in the face of a particular level of decline in the share price.

I often like seeing situations that I can still receive a 1% ROI for a weekly position in the face of a 3% decline in shares, in the case of short calls, for example.

Just like it feels great to be right when the conventional wisdom is wrong, it also feels great to be able to turn a profit when your stock actually goes down in value, without having to find yourself mingling with those who sell stocks short.

Not that there’s anything wrong with them or the conventional wisdom.

Traditional Stocks:  Blackstone Group, Cisco

Momentum Stocks: Marathon Oil

Double-Dip Dividend: none

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

 

 

 

 

 

Nov192016

Weekend Update – November 20, 2016

Weekend Update Comment

You might be able to easily understand any reluctance that the FOMC has had in the past year or maybe even in the year ahead to raise interest rates.

To understand why those decision makers could be scarred, all you have to do is glance back to nearly a year ago.

At that time, after a 9 year period of not having had a single increase in interest rates, the FOMC did increase interest rates.

The data compelled them to do so, as the FOMC has professed to be data driven.

Presumably, they did more than just look in the rear view mirror, casting forward projections and interpreting what are sometimes conflicting pieces of the puzzle.

At the time, the conventional wisdom, no doubt guided somewhat by the FOMC’s own suggestions, was that the small increase was going to be the first and that we were likely to see a series of such increases in 2016.

Funny thing about that, though.

Data is not the same as a crystal ball. Data is backward looking and trends can stop on a dime, or if I were to factor in the future value of money based upon the increase in the 10 Year Treasury note ever since Election Day, considerably more than a dime.

With the gift of hindsight, 2016 didn’t work out quite the way we all thought it might, but here we are, nearly a year later and with interest rates right where they were when they were last raised and the near certainty that they will be raised once again in just a few weeks.

Looking at the chart above and recalling the subsequent nose dive that the stock market took in the aftermath of the FOMC decision, you can begin to understand why there might be a sense of “once burned,” even as the FOMC should not include the stock market’s health in its own mandate.

But while there may still be a sense of doubt by those spending every waking moment in a darkened study pouring over economic data, when not participating in a speaking engagement, a quick look outside the window would have shown that the FOMC’s work was being done for it.

That’s because natural economic forces have now done the heavy lifting.

Just look at the nearly 28% increase in the interest rate on that 10 Year Treasury Note since its close on Election Day. That had to be music to the ears of even the doves on the FOMC, regardless of their political inclinations.

Who wants to be the bad guy or who wants to be the one responsible and have fingers pointed in their direction when things don’t work out as planned?

“The dog did it” is always a convenient excuse, but the resurgence of the consumer is now taking a dog of an economy and translating into the kind of economic growth that even a backward looking FOMC can embrace as being the handwriting on the wall.

While specialty retailers may not be feeling the glow, the larger national retailers are reporting good top and bottom lines and, more importantly, see a better near term future.

The consumer may be doing more heavy lifting at the check out line and energy prices remain low as more people are going to work and getting better wages to do so.

Check, check and check.

So while those natural forces have already driven up interest rates making it so easy for the FOMC to do so for only the first time in 2017, a small piece of me believes that the FOMC doesn’t want anyone to do its heavy lifting, but they may appreciate a little bit of a hand.

Especially, if they are of the mind to continue to present themselves as relevant in the face of an unexpected Presidential election.

That leaves me wondering whether the FOMC may still have a surprise in store for all of us and come in with a pre-emptory 0.50% interest rate hike instead of what we have been expecting.

Too much good news and too large of an increase in interest rates secondary to market forces may awaken those with memories of inflation past and the role of interest rates as a brake.

I don’t expect that to be the case, but when has predictability of the economy or the FOMC ever been assured?

Tradition would have you believe that the FOMC would not do such a thing before the start of a new administration, even as they are supposed to be blind as to the political scene, but there is not likely to be too much love lost after the moving trucks pull into the White House.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

I don’t expect to be doing too much trading in this coming week, but that has been pretty much my story for 216, anyway.

The Thanksgiving holiday shortened week makes already low volatility induced option premiums even lower and we may be in a holding pattern until December’s FOMC meeting.

While there’s always concern about exaggerated market moves during periods of low trading volume, such as the coming week is expected to be, the possibility of a holding pattern can be a covered option writer’s best friend.

Dow Chemical (DOW) has been in a holding pattern for a while as we await some regulatory decision regarding its deal with DuPont (DD). It’s stock price has also been in a holding pattern, but the premiums may be bolstered a little bit by the uncertainty that still hangs over that deal.

Most best guesses would be that under a Trump Administration there could be a more wide embrace of such mergers and buyouts, but as I have long believed, there isn’t too much downside in the event the deal comes apart.

Maybe upside, actually.

What I do see is that there is a nice dividend coming up as 2016 comes to its end. However, I would likely try to take this on a week by week basis, also being mindful of the FOMC and its potential impact on markets.

Even with some adverse market news, I think that Dow Chemical’s downside is restrained and it may offer an attractive serial rollover opportunity allowing premiums and return to accumulate.

Although in an ear of electronic gaming, no one really rolls the dice anymore, but if you like rolling the dice, GameStop (GME) reports earnings this week. It has been everyone’s favorite short position for years and has been the least favorite of many as it has consistently refused to fade away.

The fact that the short sellers have also been on the line for a very generous dividend hasn’t helped to endear the company to them, although there is no doubt that if you had timed this stock properly, there have also been many short term shorting opportunities over the years.

The options market is implying only a 7.1% move this week, which is relatively small by past standards and GameStop has certainly shown that it can surprise stock investors and option speculators on both sides of the proposition.

I generally consider the sale of puts at a strike price that is outside of the range implied by the options market, if it can deliver a 1% ROI for the week.

It looks as if GameStop will be able to meet my criteria, but my concern in doing so is that its shares are right near an almost 4 year low and the trend in the past year hasn’t been very good.

As a specialty retailer, I don’t know if GameStop will follow the pattern of some others having recently reported earnings, but if it does, those lows are in danger of being wiped out.

For that reason, I would likely wait until after earnings are announced and would consider the purchase of shares and sale of calls if shares do anything other than moving sharply higher.

I would also want to hear some words that soothe fears regarding the dividend.

Finally, while broken records can really be annoying for those who actually remember what a record is, I’m going to look at 2016 fondly for the Marathon Oil (MRO) broken record it has given me.

With the expiration of short puts and the assignment of long calls, my self-imposed rule of never having more than 3 lots of any position is no longer a hindrance in considering a new Marathon Oil position this week.

With those two closed positions this past week, 2016 has now seen 11 Marathon Oil lots closed and it remains in a price range that I find appealing.

It is, however, at the top of that range, so I don’t expect to run head first into ownership of either shares or the sale of puts, but would absolutely consider doing so on the first downdraft in shares that again brings it near the $15 level.

Marathon Oil in 2016 has been the poster child for serial buy/writes or short put sales and then rollovers of those short option positions, sometimes even when in the money.

Of course, just like all trends, there can be a departure at any time, just as was the case for Morgan Stanley (MS), whose final lot of shares was assigned from me this past week, as it was my serial darling of 2015, until it wasn’t.

 

Traditional Stocks: Dow Chemical

Momentum Stocks: Marathon Oil

Double-Dip Dividend: none

Premiums Enhanced by Earnings: GameStop (11/22 PM)

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

Nov122016

Weekend Update – November 13, 2016

Weekend Update Comment

Following the past week, it should be pretty easy to know what to do when the experts chime in and compete for your attention.

You run as far and as fast as your feet can possibly take you.

It will be fascinating to walk into a physician’s waiting room about 6 months from now and pick up some seven and eight month old copies of the news magazines sprinkled around the various end tables.

I’ve always enjoyed reading those aged articles just to get a snicker over how wrong the futurists and the experts consistently demonstrate themselves to be.

Most of the time, I don’t even have an appointment or any need. I just go to do the reading and then leave when someone finally asks “Sir, have you been helped?”

From the 99% probability of a Clinton victory in the Presidential election, as put forward by the Princeton Election Consortium, or the less sanguine 60-70% probability put forward by competitor fivethirtyeight, no one of any credibility got it right.

My guess is that if these elections predictions were written by stock analysts, the probability of a Clinton victory would have been reduced to 30% the day after the election, just as price targets and ratings are so often changed after stock moving news has already done its work.

By the same token, no one of any merit guessed that the market would rally after a Trump victory.

Following the sharp declines that were very highly correlated with news of a potential second shoe to drop with the Clinton emails and then the highly correlated surge when it was revealed that there was no second shoe, everyone became an expert waiting to chime in.

I know I was, but I don’t usually need any reason nor correlation.

Clinton was headed for an easy victory and the market would at least not follow a Trump victory path into correction.

Just when everything seemed to obvious, Clinton didn’t win and the market didn’t succumb.

Unless of course new closing highs are your definition of having succumbed.

For those playing around in the futures pit or in foreign exchanges and then prone to panic or with tight trading rules, the market did succumb long enough to prove someone’s point.

The reality is everyone got everything wrong.

Not only did Trump come out victorious, but the market was in full celebratory mode, even as interest rates rocketed higher and the only indicator that has had any value in 2016, the price of West Texas Intermediate crude oil, fizzled.

With the election out of the way, the only other story that may remain for the stock  market is whether the FOMC will finally raise interest rates in 2016.

For the most part, the free markets did the FOMC’s work for it as the 10 Year Treasury Note ended the week at 2.11%, having had an extraordinary 11% climb on a single day.

While it was all good this past week, unless of course you were a Clinton supporter, especially one leaving or short the market, I’m going to have a tough time predicting what comes next, even as retailers did their best to pit a positive spin on what awaits going into the holiday season and 2017.

That’s because of the really wide dichotomy seen this week as the S&P 500 managed its 3.8% gain, while the DJIA was 5.33% higher.

Either of those were enough to make most people happy and could just as easily be a stepping off point for even more highs or could represent a slippery slope.

Common sense may have told you that the split, if it was going to materialize, should have started as soon as sentiment began to change on Wednesday, as the DJIA made a nearly 1100 point reversal from the low point in the futures to its closing level.

It waited a full day, however, but once it did the relative performance, by sector, was fascinating, as it drew a clear distinction between the America that was perceived as existing under Clinton and the America that is now being perceived to exist under Trump.

Those perceptions are not much different from predictions of what will come to be and as we all know, predictions have a funny way of turning out.

I’m not going to run far and fast this coming week, but I am going to be wary, even as I’m thankful for so many people having been so wrong about where the markets were going to head.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

After such increases as seen last week, it’s a little difficult to want to part with cash, unless you are of the belief that once a market high is broken, it’s only a short matter of time until the ascension continues.

I’m of the mind that some of the advances seen last week, particularly in those sectors that helped to create the dichotomy, are going to be short lived.

Once we all come to the realization that even had Hillary Clinton won the Presidential election, every President still has to put on their pant suit one leg at a time.

Casting the rhetoric aside, the harshest of the campaign and its promises are not as likely to become reality overnight, as rhetoric meats reality.

I’m not one to sell specific equities short, but if there ever felt like a right time to do so it could be in the coming week and weeks.

I’ll leave that decision to others that are far more bold than I am, however.

I think that last Friday’s trading, may otherwise be where we may find ourselves for the rest of the market, as we await some kind of a decision from the FOMC and then our own reaction to what now seems so certain.

Among the positions that I may be interested in this week is Best Buy (BBY).

It reports earnings this week and even as it closed 4% lower this past Friday, it is only 5% lower than its 52 week high. It’s downgrade a week before earnings may be a case of an analyst not waiting until the horse has left the gate and I do believe that there is some serious downside risk, if using charts as your measure.

That’s because of the significant gap higher just a few months ago that took shares about 22% higher after earnings were announced. That was far higher than the option market had been predicting.

This time, the option market is predicting an almost 10% price move, but Best Buy, over the past few years has shown that it could easily surprise those price predictions.

I’m not willing to get in front of earnings, but in the event that Best Buy disappoints on earnings and guidance and does take a marked move lower, I would be interested in either selling puts or considering a covered call position, once the upcoming ex-dividend date is announced.

In the event that I do sell puts, I would still be mindful of that ex-dividend date and would consider taking assignment, if in a position to do so, rather than attempting to keep the short put position open by rolling it over to a future date.

The dividend is worth capturing and would be even more so, in the event of a significant price decline.

You probably could have predicted with some degree of certainty that this would be another week of considering Marathon Oil (MRO).

This will, however, be another week that I won’t be following my own suggestion, because I already own my limit of 3 individual lots of shares or short puts.

Had I not done the unusual last week, I would be able to follow my own recommendation.

Last week, I decided to rollover a $14.50 short put position to keep it alive and to continue generating revenue, rather than allowing it to expire.

I did so because of the continuing risk-reward proposition, even as Marathon Oil’s price will decline by $0.05 on Monday, as it goes ex-dividend.

What prompted the decision was the realization that shares could fall an additional 3% before being faced with assignment, in exchange for an additional 1.3% ROI for the week.

For me, that has been the recurring proposition for much of 2016 and while Marathon Oil is sitting near the upper end of where I might want to establish any kind of a position, I would again embrace the chance to sell puts on the shares in the event of a decline, even if only 2-3%.

One thing that has been predictable this year has been Marathon Oil’s resilience within its trading range and the ease in which the position can be managed even in the event of a large adverse price movement.

While the shares have gone virtually nowhere in the past year, it has had enough movement in absolute terms to have made it a spectacular covered option choice and until a breakout to the upside, I suspect it will continue to be a reliable performer.

Finally, given the risky nature of the other selections this week, I actually struggled with whether to consider Microsoft (MSFT) this week.

As it sits within about 3% of its all time high, the shares are ex-dividend this week and the option premiums are fairly generous, perhaps expecting some benefit accruing from a Trump Presidency.

Some of that speculation revolves around proposed tax changes that could benefit Microsoft. Whether it’s a decrease in the corporate tax rate or a tax amnesty on profits held overseas, there may be some significant benefit to Microsoft in the event of changes to the tax code.

Where Microsoft differed from some others thought to be at future advantage, such as the pharmaceutical industry, it went lower, rather than helping to create that DJIA – S&P 500 dichotomy.

It’s somnolence last week is potentially appealing, even at its already high levels, as I will have a difficult time in the coming week trusting anything that I might believe or hear.

 

Traditional Stocks:  none

Momentum Stocks: Marathon Oil

Double-Dip Dividend: Microsoft (11/15 $0.39)

Premiums Enhanced by Earnings: Best Buy (11/17 AM)

 

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

 

 

 

 

 

 

 

Nov52016

Weekend Update – November 6, 2016

Weekend Update Comment

Some days we really have no clue as to what made the market move as it did, but nothing bothers us more than not knowing the reasons for everything.

We tend to like neat little answers and no untied bundles.

It starts early in life when we begin to ask the dreaded “Why?” question.

We want answers at an early stage in life even when we have no capacity to understand those answers. We also often make the mistake of querying the wrong people to answer those questions, simply on the basis of their ready availability and familiarity.

Those on the receiving end of  questions usually feel some obligation to provide an answer even if poorly equipped to do so.

While the market has now gone into a 9 consecutive day decline, it seems only natural to wonder why that’s been happening and of course, some people, have to offer their expert explanation.

It is of course understandable that the question is posed, as earnings haven’t been terrible and neither have economic data. Yet, a 9 day decline hasn’t happened since 1980 and has taken the market into a stealth 5% decline.

Sometimes “not too hot and not too cold” is just the perfect place to be, although from a stock market investor’s perspective, there is always the future that has to be addressed and then discounted.

In fact, with the release of the Employment Situation Report this past Friday, there may be enough time to cast off “fear of the known” as investors can acclimate to the stronger probability that the FOMC will finally move to increase interest rates next month. 

So why was the past week as it was and please don’t tell me “it is as it is,” which is an answer that even a three year old asking the obligatory “why” question would never find acceptable.

In the absence of any real reason and even in the absence of any ability to twist news into the opposite of what it really is, sometimes you just have to make up an answer.

As parents, many of us have done that with our children and have learned that if you answer with an air of confidence and authority, you’ve done your job, even if you have no clue as to the real answer to the question posed.

From the day that news came forth that additional emails may have been found related to the server scandal so inartfully responded to by one of the Presidential candidates, the market decline has been largely attributed to the fear that the other Presidential candidate’s electability was enhanced.

Of course, the reaction of the market when that news was initially released was likely not coincidental, so it gave a new reason to explain the unexplainable going forward and that excuse for the market’s weakness this past week was used in great abundance.

The investor class, if that association is correct, is fearful of the unknown that might accompany the election of an untested billionaire, who may not be as wealthy as he regularly portrays himself to be. 

Or perhaps, given all of the wildness accompanying this entire campaign, the electorate is worried about whether either of the Vice Presidential candidates is equipped to take the top job when indictments may come through during the Inaugural Ball.

But that still leaves us this coming week, when the market will wake up on Wednesday morning, likely having perfect knowledge of the election results, assuming no repeat of 2000.

If the assertions this past week are accurate and the billionaire has to turn his interests back to his business ventures, the expectation that the market would bounce nicely higher would be reasonable.

On the other hand, there’s always that unknown and if instead of focusing on business, the focus is on creating a Presidential Cabinet, we may pine for the days of a simple 5% decline.

The potential for an instant, even if short lived, evaporation of wealth, could throw a little wrench into the FOMC’s well laid plans. We, and they, have waited for a year for the second of what was expected to be a series of small interest rate increases through 2016.

Even the FOMC may have to find itself dealing with the unknown, but be assured, we will be the last to know, as we come to the realization that sometimes it really is as it is.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend,

This is a week that could easily go in any direction.

With the market down 5% from its September high, it wouldn’t take very much to get to correction levels, but by the same token a bounce from last week could easily be in store if election fears aren’t materialized.

While there are those who believe that the pharmaceutical industry may have greater concerns in the event of a Clinton victory, I think that has already been largely discounted.

You could be excused for not believing that if you glanced at Pfizer’s (PFE) weekly call option premium in a week that it also happens to be ex-dividend.

With the uncertainty at hand over the election, if I do dip into already low cash reserves, I’m more inclined to want to chase a dividend and am not entirely receptive to taking on undue risk.

At its current strike price, Pfizer offers some of that safety, especially with the additional cushion of its option premium and the generous dividend.

As with many stocks that I follow, sometimes it’s just a question of awaiting a drop in price to decide to once again wade in and own shares. I believe that Pfizer is at that price and it is a company that I wouldn’t mind owning for a longer term in the event of a short term adverse price movement. For those with a longer term outlook, Pfizer may be a great addition to a LEAPS covered portfolio.

While it isn’t paying a dividend this week, or even during this current monthly option cycle, Sinclair Broadcasting (SBGI) is another stock whose share price is really appealing to me.

I’ve only owned it on 7 occasions over the past 3 years and have sometimes owned it for as long as 8 months, but never at a price this low.

Sinclair Broadcasting just reported earnings and responded well, despite a slight miss on the bottom line. 

It has, over the past years traded so predictably within a range, that at this price I would be very open to adding shares, but with its ex-dividend date coming in the early part of the December 2016 option cycle, would most likely sell a December option and would also consider the use of an out of the money option, rather than a near or in the money strike price.

While any capital intensive business, such as terrestrial broadcasting may suffer from an increasing interest rate environment, Sinclair Broadcasting keeps growing its reach and its revenues reflect that growth, having increased nearly 27% in the past year.

What’s a week without another consideration of Marathon Oil (MRO)?

Again, just like last week, I won’t be following this suggestion, because I’m already at my limit of 3 open positions, wither log shares or short puts.

Last week would have been another good week to initiate an earnings related short put position as shares bounced very nicely higher when earnings were released, but then succumbed to energy price pressures to end the week virtually unchanged.

With no reason to suspect that the sector’s volatility has come to an end and no reason to suspect that the individual name will break below its support, I think that this will be another good week to consider a position.

This time, however, with the ex-dividend date being the following Monday, there may be reason to consider going long shares and selling a 2 week dated call option in the attempt to capture the dividend.

Alternatively, a weekly put option could be sold and if in jeopardy of being assigned, simply taking assignment rather than rolling the puts over.

I did that recently with another lot of Marathon Oil shares and sold calls into its earning strength, with the hope of capturing its dividend and as much option premium as I could possibly get, for as long as I can get it if shares can continue to be confined in the $13 – $16 price range.

Finally, last week it was Coach’s (COH) time to report earnings and this week it will be Michael Kors (KORS) under scrutiny.

Coach’s reception was a good one and its shares spiked as it reported earnings early in the week, but it eventually succumbed to market pressures and end the week down 1%.

In the meantime, the days when Kors was seemingly thriving at the expense of Coach have long been over and the two are more likely to see their stock prices in lockstep these days.

That’s what makes Kors so appealing this week as the option market is implying a large price move, but there may still be opportunity despite the uncertainty being expressed.

The implied move is 10.5% and while that defines a price range of about $44 – $54, you could still derive a 1% weekly ROI by selling a put option 14.2% below Friday’s closing price.

I’m not overly anxious about spending any money this week, but this trade is an appealing one. My expectation is that Kors will have a reasonably well received earnings report and that it will come with enough time between it and election results to potentially shake off any adverse macro-market movement.

Traditional Stocks:  Sinclair Broadcasting 

Momentum Stocks: Marathon Oil

Double-Dip Dividend:  PFE (11/8 $0.30)

Premiums Enhanced by Earnings: KORS (11/10 PM)

 

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

 

 

 

 

Oct292016

Weekend Update – October 30, 2016

Weekend Update Comment

It’s good to have certainty in all matters of life.

I think.

There’s no doubt that stock market investors like to have certainty, or at the very least they really don’t like uncertainty.

Personally, when it comes to investing and the opportunities present when pursuing the sale of options, I like that intersection between certainty and uncertainty, especially if there is a volley back and forth, but the range is well defined.

That’s because that volley gives rise to more generous option premiums even as the risk may not reflect what is being paid.

Within that context, I’ve liked 2016, other than the brief reaction served up in response to the December 2015 interest rate increase decision by the FOMC.

With 2016 coming to an end in just 2 months and after the past week of corporate earnings, it was still hard to know where the economy was standing and whether the FOMC might have better justification to finally implement another rate increase, as we’ve all been expecting for almost a year.

So far, this most recent earnings season hasn’t provided very much of a pattern of good news on top and bottom line beats and there hasn’t very much in the way of optimistic guidance being given.

What certainty was missing over the past week with regard to the direction of the economy gave way to some certainty on Friday, however.

That morning the latest GDP data was released and there was good reason to believe that the consumer was back and spending money.

More people at work coupled with higher wages for those new jobs is the combination that we’ve been patiently waiting for to have its impact on spending and it may provide more of the certainty that the FOMC members need to move forward.

More of that certainty may come as national retailers begin releasing their earnings reports the week after next. Even as Amazon (AMZN) shares fell 5% as they delivered a rare earnings miss this past week, given the backward looking GDP statistics, there may be reason to anticipate some optimistic guidance from the likes of Macy’s (M), Target (TGT) and Kohls (KSS).

Where there was also considerable certainty was that the stock market may have been spooked a bit by the idea that the upcoming Presidential election results might be changed with news of the discovery of more Presidential “wannabe” e-mails.

I’ve been voting in Presidential elections since 1972. If you had ever asked me whether the investing class would have more confidence in the election of one party over another, I would have had great certainty in the belief that a specific party was consistently favored. That has been the case even when history suggests that economic outcomes may be better with the other party in the White House.

Friday’s response to the injection of uncertainty into the electoral process was swift, but may presage an election results rally as we get ready to close out 2016 and face the increasing certainty of a rising rate environment.

That is, of course, assuming that there isn’t another shoe left to drop over the course of the next 2 weeks. Even as a resurging consumer may now be in a better position to pick up that extra shoe or two, I’m not certain that would be enough to offset the uncertainty of an unwanted surprise.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

I don’t know whether newly employed workers, or those enjoying a higher minimum wage are going to be the one’s flocking into all of those Coach (COH) stores, although I’m pretty certain they won’t be, I’m always intrigued by Coach as earnings are to be announced.

That intrigue doesn’t extend to trying to understand Coach’s sales strategies or its competitive position in the marketplace. The intrigue is based solely on the opportunity to generate an acceptable rate of return relative to the perceived risk of share ownership.

I almost always have owned shares, on and off, over the past 10 years and have gone through many earnings reports. What Coach hasn’t been able to do over the past few years is to have predictable bounce backs following large earnings related price declines, which it had been able to consistently do earlier in the decade.

What appeals to me about Coach at earnings hasn’t changed over the past 10 years. That is the opportunity to either secure a generous premium for the sale of options or the opportunity to buy shares at what appears to be a bargain price after the occasional disappointment.

Share ownership, even during a period of slow retracement of earnings related losses can be less onerous as long as Coach is able to maintain its dividend.

As long as dividends are on the table, the only stock going ex-dividend next week that may interest me is Intel (INTC). Unlike Microsoft (MSFT) which also just announced earnings and closed at new highs, Intel hasn’t been grabbing very much attention and is coming off its near term highs.

That recent 7% decline since earnings makes entry at this level more appealing, but I don’t expect any meaningful bounce higher in the near term. If shares do stay in the $34-$36 range, I would be more than  happy with the ability to cobble together multiple option premiums and the dividend and wouldn’t mind converting the position into a longer term holding with the expectation that there will be some substantive economic expansion in 2017 that will include the technology sector.

What I like about Intel at the moment, in addition to its upcoming dividend, is that it may be headed into a period of being range-bound. If so, that represents an opportunity to serially collect option premiums. Those premiums aren’t very rich, but that is the price to be paid for a stock that is not likely to break very far out from its range even with the infusion of significant unexpected uncertainty.

While International Paper (IP) isn’t ex-dividend until the following week, it also represents an opportunity that I have frequently sought to exploit.

That is the attempt to repurchase shares that had been assigned away from me recently, but at a higher price. I don’t necessarily mind shares going up and down while in my portfolio, as long as they are actively generating some kind of income, but I much prefer if they are in someone else’s portfolio during the down cycle.

International Paper just reported earnings and it gave an earnings surprise with disappointments on both top and bottom lines. The ensuing fallout was fairly minor, however.

My concern with adding a position is that there may still be some downside to come if you’re the kind who watches chart patterns. There may not be much price support until about $42.50.

For that reason, I might wait a day or two to see if there is any additional downward risk and if there is, or if shares remain at their Friday closing level, I would consider adding shares and then selling an extended weekly option in an effort to capture the dividend and extract some additional time premium from the sale.

In the event of further downside after having made the purchase, I would be comfortable turning the International Paper position into a longer term holding, as the 4.1% dividend makes it easier to wait.

Finally, what’s a week without another consideration of a position in Marathon Oil?

The difference, though, is that this week, while I do like the opportunity offered as it announces earnings, I will not be making any trades to open a new position.

That’s because I already have 3 open lots in Marathon Oil, including two long positions and one short put position.

My limit on any position is 3 open lots and I’m a big believer in having a personal set of rules in place.

I rolled over the short put position last week to an expiration right before the following Monday’s ex-dividend date.

In the event that lot may be assigned, I would take that assignment in order to collect the dividend and in the event that it was going to expire, I would close it out and consider the purchase of shares and immediate sale of calls.

I also had a more deep in the money short put position assigned, so I’m hoping to be able to sell calls on that position to take advantage of the earnings uncertainty enhanced premiums, while still hoping to hold onto the position long enough for the dividend, even as it is only 1.5%.

With earnings this week the options market isn’t expressing very much uncertainty over its price range. The expectation is that the move will be about 6%, which isn’t very different from what it has been for much of the past few months.

Generally, when considering the sale of puts in the face of earnings I look for a strike price outside of the range implied by the options market that will return at least a 1% ROI for the weekly contract.

That won’t be available for Marathon Oil, so I would be more inclined to consider the outright purchase of shares and the sale of calls, but only after earnings and only if the shares do not surge in price.

The intent would be to open a position in advance of the ex-dividend date and I would consider the sale of a slightly longer dated call option that rather than a typical double dipping approach, would use an out of the money strike in an attempt to secure capital gains on shares and secure the dividend, while sacrificing some premium.

If you’re looking for certainty, however, the only certainty that I can offer is that I will not be making this trade.

 

Traditional Stocks:International Paper

Momentum Stocks: none

Double-Dip Dividend: Intel (11/3 $0.26)

Premiums Enhanced by Earnings: COH (11/1 AM), Marathon Oil (11/2 PM)

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

Oct222016

Weekend Update – October 23, 2016

Weekend Update Comment

This past week was the first full week of earnings for this most recent earnings season and you could be excused for wondering just how to interpret the data coming in.

The financial sector had fared well, but if you were looking for a pattern of revenue and earnings beats, or even looking for a shared sense of optimism going forward from a more diverse group of companies, you’ve been disappointed to date.

For the most part, this past week was one of mixed messages and the market really rewarded the messages that it wanted to hear and really punished when the messages didn’t hit the right notes.

With so much attention being placed on the expectation that the FOMC would have sufficient data to warrant an interest rate increase in December, you might have thought that companies would start painting a slightly more optimistic image of what awaited their businesses, perhaps based upon a building trend from the past quarter.

That optimistic guidance has yet to prevail even as some have been reporting better than expected revenues.

But no one should be surprised with the mixed messages that the market hasn’t been able to interpret and then use as a foothold to move in a sustained direction.

The mixed messages coming from those reporting just follows the wonderful example of streaming mixed messages that have been coming at us all year long from members of the Federal Reserve.

Unfortunately, good earnings and guidance from the financial sector aren’t sufficient to serve as the tide to carry others, even as they may be necessary for a broad wave of market expansion. Also unfortunate is the fact that the good fortunes, or at least the perceived good news from the likes of Netflix (NFLX) and UnitedHealth Group (UNH) aren’t the sort of things that lead and move the economy and the stock market.

That used to be what International Business Machines (IBM) did, but no more.

The messages, thus far, from the all important technology sector, have reflected the mixed messages of the past week. For the past 30 years the health of the technology sector has been critical to overall market health, but this week the picture is muddled, even as Microsoft (MSFT) hit an all time high.

While it’s easy to dismiss the individual investor class as lacking the insight and sophistication to understand the environment, the professionals in the options market certainly got things wrong this week as their expectations for the range of price movements from those reporting earnings very often grossly underestimated those ranges.

Let’s face it.

If the investing professionals really knew what they were doing or really understood market dynamics, there would be very few large price swings.

Other than a tsunami or some other natural disaster, what surprises should there really be to so drastically alter the prospects or fortunes for any S&P 500 company?

Of course, the investing professionals, who through their acumen set stock prices often predicate their expectations on the work of those other professionals. You know, the ones who come up with earnings estimates based upon their profound understanding of the companies that they so closely follow.

The coming week has lots more earnings to come and ends the week with a GDP report, as we get closer and closer to a December FOMC meeting.

If earnings do not start to buoy the market, especially as retailers get their turn in a couple of weeks, I’m concerned that the FOMC’s seeming insistence on getting one rate increase in by year’s end, could cause a strong sell-off, especially if positive guidance is being suppressed out of self interest.

What the market needs and has always needed is clarity and not mixed messages. Corporate leaders could also play their part by dropping a strategy of under-promising if they know their business trend to be in the right direction.

We could all benefit from a moratorium on mixed messages.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

I’m not certain that I would categorize any of the recent messages coming from Wells Fargo (WFC) as being “mixed.”

Disingenuous? Perhaps.

Totally clueless as to how they would be received? Absolutely.

But given the recent events, the fall from grace hasn’t been that horrific and there may be some stability settling in, although there could be one of those unseen tsunamis ahead that even the professionals might be excused for not predicting.

The option premiums isn’t expecting much continued volatility and although that market has under-estimated some earnings volatility, it is generally fairly good.

With an upcoming dividend during the November 2016 option cycle, I think that the financial sector tide is also there to help float Wells Fargo as it seeks to right its own ship in a public fashion.

The more clear those public messages and actions will be, the better served will shareholders be and I think this is a good opportunity to capitalize on the combination of the dividend and option premium.

One message that became clear again is that content is back in vogue.

Just take a look at how Comcast (CMCSA) has performed ever since it announced that it was going to purchase the remainder of NBC-Universal from General Electric (GE).

click to enlarge)

While Comcast may not be entirely comparable to AT&T (T), it may be useful to include the latter in the chart as well, after news came of a potential takeover of content king, TIme Warner (TWX).

The initial reaction to the news sent AT&T shares down 3%.

After that price decline, I think that the only company specific price decline that may await, is if the deal, assuming that it is progressing toward completion, falls apart.

That’s because by then it will be pretty clear that the combination is a good one and unlike the disaster that was the case with the AOL combination, the corporate cultures are not entirely dissimilar.

I want to go for this ride and may very well consider longer term dated options in an effort to also capitalize on the prospect of recapturing that 3% decline.

With Saturday afternoon’s report that a deal is ready to be announced over the weekend, I would be very interested in jumping on the opportunity if AT&T opens lower to begin the week.

Finally, we all know the old saying about a broken clock. I don’t think that there’s anything similar for a broken record, but after having some Marathon Oil (MRO) puts expire last week, recommending it again is definitely becoming a broken record.

For me, that means 10 positions in the past 7 months and an eagerness to add another position in the coming week.

As often may be the case when using a covered option strategy that prefers a short term holding period, there isn’t necessarily anything about the company itself that supports or serves as a contraindication to an investment.

It’s all about the predictability of its price swings and the reward associated with the volatility.

Every now and then a stock appears that offers that combination of sharp price swings, but with the added feature of trading in a relatively narrow range.

For as long as Marathon Oil can do that, I don’t care if it’s a broken record and keep returning back to the same place.

Even though I still have a lot priced at about $28, the predominantly short term trades in 2016 on additional lots have more than offset the paper loss on that poorly timed position and afforded the opportunity to be patient.

With expiration of $14 short puts contracts last week, I would again be interested in the sale of puts, especially if Marathon Oil opens the week with some weakness.

As I mentioned in previous week, there are those little matters of upcoming earnings the following week and as of yet unannounced ex-dividend date.

Because of the earnings, if faced with a need to keep the short put position open, I generally try to sell longer term dated puts in order to get some additional protection and time, in the event of an adverse price move.

However, in this case, that might create some risk with the upcoming dividend. For that reason, I would usually prefer to take assignment of shares and then be in a position to write calls, if possible, while also trying to retain the dividend.

I do have an existing lot of $15 short puts expiring this week and expect to do exactly tat if faced with the need to roll those short puts over again.

Once earnings are done, I’m hoping that Marathon Oil spends the next 3 months continuing to be an excellent serial rollover candidate, whether through the sale of put options or as a traditional buy and write.

With it, the message hasn’t at all been mixed in 2016.

It’s mediocrity has been the stuff that dreams and profits are made of, as every broken record should sound so good.

Traditional Stocks: AT&T, Wells Fargo

Momentum Stocks: Marathon Oil

Double-Dip Dividend: none

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

Oct152016

Weekend Update – October 16, 2016

Weekend Update Comment

As a movie a few years ago, “It’s Complicated,” starring Alec Baldwin, was a funny one that explored some aspects of life that many could relate to in one form or another.

A few weeks ago we were all surprised to learn of some new casting for the upcoming season of Saturday Night Live. But now after his successful appearances portraying Donald Trump, Alec Baldwin’s next role could very well be that of Janet Yellen.

While the Chairman of the Federal Reserve may not be as widely known as the Presidential candidate, for those that are aware of the very important role she plays in all of our lives, we could use something amusing to put events into perspective as we end so many days just shaking our heads wondering what is really going on.

Clearly, it’s complicated.

The one thing you know in life is that when you hear someone begin an explanation of anything with the qualifier “it’s complicated,” you had better be prepared to be deflated.

In the event you are paying attention to the world’s economies, deflated is not the direction anyone wants to be going.

Unlike the way it was portrayed in the movie, complications are usually not very funny, unless perhaps brought to life by Alec Baldwin.

Sometimes, “it’s complicated,” is just a way for someone to begin a long and winded rationalization in trying to explain how an endpoint was reached, especially when the route appeared to be illogical or the endpoint itself seemed to be the wrong destination.

In essence, in such cases, the hope is that you’re not smart enough to catch on or can be swayed into believing whatever it is that the story teller wants you to believe, which is often counter to your own best interests.

At other times, it’s just a diplomatic way to be told that you’re just not smart enough to understand, so don’t even bother listening and while I’m at it, why should I even be wasting my time trying to explain it to someone like you.

Well, you can take your pick when the Chairman of the Federal Reserve tells an audience at “The Elusive Recovery” conference that “it’s complicated,” if looking for a reason to explain why the FOMC has not raised interest rates in 2016.

As an investor, the degree of certainty plays a role in the decision making process and either supports confidence or erodes it. Our expectation is that what we mortals may believe is complicated is just “matter of fact” kind of material for the smartest people in the room.

What Janet Yellen said on Friday introduced a third way of interpreting what it means when someone tells you that “it’s complicated.”

Maybe the smartest in the room themselves don’t understand the dynamics of current day events.

That’s not very comforting and that doesn’t inspire too much confidence. Despite some really good news from the financial sector as earnings season began, the sense of optimism was fleeting as a sense of cluelessness came to replace it.

Still, the market is now of the strong belief that we will see an interest rate increase in December 2016 and it may be clearly signaling that while it supports an increase, it only does so when it doesn’t seem to be so near at hand.

It sort of like I accept the possibility of death when I’m 20 years old, but it doesn’t frighten me. Flash forward 50 years and you may think and act a bit differently

While Alec Baldwin may be able to make that all seem funny, as Janet Yellen or even as the Grim Reaper, it isn’t.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

I generally do read like a broken record, but even for me this is getting a little ridiculous when I continue to pay attention to Marathon Oil (MRO).

After opening my ninth Marathon Oil position last week during 2016, I am ready for a tenth, even as last week’s position is still in my account.

The past week watched the stock market and energy prices re-establish the tethered relationship that they had maintained for much of 2016, although not quite as much in the past month or so.

Marathon Oil has been my “go to” stock for 2016, not because of anything inherently wrong or right with the company, but simply for its ability to be as resilient of a yo-yo as you can find in 2016.

What it has done is simply go up and down in big chunks, but maintained a fairly tight price range and offered a very attractive option premium at the same time, owing to those big price swings.

While option premiums tend to reflect price uncertainty, Marathon Oil has coupled that price uncertainty with range certainty.

I like that combination. That tends to give you  an advantage in the risk – benefit balance.

I don’t care too much about what the company is doing nor too much about the specific macroeconomic events that may drive the price of oil. What I care about with this position, that I also find easy to trade if needing a rollover, is how to enter into it as earnings are upcoming in just 2 weeks.

My most recent position was through the sale of a put option that I subsequently rolled over. That position, if at risk of assignment at the end of the coming week will probably be rolled over again, but I would be mindful of the  date of the upcoming dividend, which is expected sometime shortly after earnings.

Whether for that lot or any new lot in the coming week or next, I would prefer to be long shares and short calls in advance of the ex-dividend date, even as my preference would be to open another new position through the sale of puts again.

Seagate Technolgy (STX) reports earnings this week.

The option market is implying a price move of about 7%. You could potentially receive a 1% ROI for the sale of a weekly option right at a strike price defined as the lower boundary of the implied move.

That’s usually not sufficient of a reward for me relative to the risk and with Seagate Technology history has plenty of examples of price swings well in excess of 7%.

While the risk of computer hardware as a commodity has been discussed for years and Seagate Technology continually written off as a dinosaur, it survives and will likely do so for more than another earnings report.

However, after a significant run higher, you can easily make a case for an out-sized move in either direction, perhaps well in excess of 7%.

Where I would be interested is after earnings are announced and the dividend is confirmed, in the event of a considerable decline in share price.

In that event, I might be very interested in the sale of puts options.

Finally, sometimes you just wait for bad news and have to decide whether that is the time to take a stance.

With its split into two different companies in the past year, Hewlett Packard (HPQ) is no longer that complicated of a business, nor is it that interesting of a business. The split off entity, Hewlett Packard Enterprises (HPE), where Meg Whitman, CEO and Chairman of the pre-split entity, decided to relocate herself, retained the distinctions of complexity and of being interesting.

Essentially, now a hardware company in what is more or less a commodity, it announced layoffs and lowered guidance for the coming year at a time when expectations for 2017 are for a more involved consumer.

After all, if the consumer isn’t going to be participating in 2017, where is the justification for raising interest rates? Add to that how Hewlett Packard has a large consumer products base and you can see the potential problem.

Or the opportunity.

With the bad news also came news of a 7% increase in the already generous dividend, made even more generous with the past week’s price decline.

Just a week earlier, I had anticipated that my existing lot of shares was likely to be assigned from me as the October 2016 option cycle came to its end this week.

This week, I’m not overly sanguine about those prospects, but with earnings still a month away and an attractive premium befitting its very recent volatility, the 7% decline in the past week looks like a good entry point.

Although my most recent holding was for only a week and was only long enough to capture the dividend, I would be prepared for this to be a longer holding period. My existing lot of shares is now more than a year old, but I won’t mind continuing to hold onto it at this level if it can continue generating option premiums and dividends.

Sometimes, buying and inadvertently holding isn’t that interesting or complicated, but there’s nothing to laugh at when the income keeps accumulating even when the stock goes nowhere.

It really isn’t that complicated, after all.

 

Traditional Stocks: Hewlett Packard

Momentum Stocks: Marathon Oil

Double-Dip Dividend:  none

Premiums Enhanced by Earnings: Seagate Technology (10/18 AM)

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk. 

Oct82016

Weekend Update – October 9, 2016

Weekend Update Comment

About a year ago at this time, we were all waiting for what would turn out to be the first interest rate increase by the FOMC in nearly 9 years.

Once that increase finally arrived at the end of 2015, we were all preparing for what we were led to believe would be a series of small such increases throughout the course of 2016.

The problem, however, that stood in the way of those increases becoming reality was the FOMC’s insistence that their decisions would be data dependent. As we all know, the data to justify an increase in interest rates just hasn’t been there ever since that first increase.

The cynics, with the advantage of hindsight, might suggest that the data wasn’t even there a year ago, but that didn’t stop the FOMC from their action, which in short order took the market to its 2016 lows.

Back when those lows were hit in February, many credit Jamie Dimon, the CEO of JP Morgan Chase (JPM) for abruptly ending the correction by making a $26 million purchase of his own company’s shares. That wasn’t a terribly large amount of money, but it probably wasn’t a coincidence that the market turned on a dime.

Maybe we still haven’t returned to your grandfather’s fundamentals, but the message of confidence, without using “other people’s money,” gave a psychological boost to the market, even as JP Morgan shares didn’t garner similar benefit at the time.

As we are now in the final quarter of the year and time is running out for an interest rate increase in 2016, it may again be JP Morgan Chase in sharp focus as it gets the next earnings season underway this coming week.

This past week’s Employment Situation Report and its revisions didn’t do very much to bolster the thought that the workforce is expanding sufficiently to create inflationary pressures. However, next Friday we could be in store for a big dosing of data and opinion from those whose words have heft.

Friday morning JP Morgan Chase announces its earnings and perhaps more importantly may offer guidance that paints a picture of an awakening consumer already begun by the recent GDP release.

Not too many economic expansions begin without the leadership of the financial sector and JP Morgan is the undisputed leader.

Afterward, we get the Retail Sales Report and forecasters are expecting a nice bounce from the disappointments of the past 2 months.

Finally, with a chance to digest those earlier bits of information and much more, Janet Yellen is the keynote speaker at the “The Elusive Recovery,” the Boston Federal Reserve’s appropriately entitled conference.

If that Friday trio isn’t enough to give a sense of an impending interest rate increase, we also will have had nearly 2 days to digest the FOMC’s monthly minutes to get an idea of just how strongly some of those increasing dissenting opinions are being held.

It’s hard to imagine that we’re not now coming to a confluence of events as the clock is ticking away to close out the year.

While the actual FOMC action still remains, what really remains to be seen is whether the market will deserve to wear big boy pants up[on the news.

The one thing that has been consistent over the past few years is that the lack of any news supporting a near term interest rate increase has been met with enthusiasm. 

What might really be met with enthusiasm as we near the end of 2016 is to stand in front of that tower, as the clock is ticking away and watch the crystal ball start moving higher instead of dropping.

Anything adding delay has been the investor’s friend, but the clock has to be ticking on that relationship, too. At some point, someone has to realize that the only way higher is to have an economy that can distinguish itself from Japan’s 20 year experience.

Of course, there’s always the chance that JP Morgan disappoints and doesn’t offer an optimistic outlook for 2017 and then we may get to do 2016 all over again.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

I made a single opening position trade last week and it was not a good one.

Selling Pro Shares Ultra Silver ETN (AGQ) puts after a nice sized decline gave me a false sense of security that there might be opportunity in that decline. It never really occurred to me that there would be so much more to come, nor that there would be a breakdown in the British Pound, as well.

With oil breaking the $50 level again and precious metals in wild fluctuation, something is afoot, as we are still within about 2% of all time highs in the S&P 500.

While I do believe that the next 2 months may have some considerable upside potential if corporate guidance finally becomes positive, I would very much like to increase my cash reserves and am not terribly excited about adding new positions.

Still, if you live and die by income generation, it is nice to come across any opportunity that may appear to have limited downside risk separate from market risk.

Of course, I didn’t find that opportunity this past week, but would still be looking at any chance to re-establish a position in Marathon Oil (MRO).

That has been my “go to” position in 2016. While in past years I’ve had multiple such positions and really enjoyed buying and re-buying the same stocks, 2016 has been a singular story.

I was eager to repurchase shares or sell puts again on any meaningful decline, but it never came. Friday’s decline was a start in the right direction, but I would like to see those shares get closer to the $15 level.

If it does, I would again be inclined to sell puts and comfortable with that decision even if shares were to subsequently fall to about $14. There is enough liquidity in the option market to keep a short put position open by rollover if faced with a short term adverse price move and the premiums are rich enough to withstand such a move, if patience is part of your investing personality.

If faced with the need to rollover those short puts, I would also be mindful of November earnings and a November ex-dividend date. The latter comes about 2 weeks after earnings, so there could be reason to take assignment of shares and then write calls to capitalize both on the volatility associated with earnings and the potential capture of the upcoming dividend.

I’m still also interested in Blackstone Group (BX) this week. The only difference is that I like it even more following a 3% decline on the week.

As was discussed last week, the earnings report and the ex-dividend date may be concomitant or at least during the same contract expiration week near the end of the month. Just as last week, my interest in a position this week would be with a very short term focus, but I would be prepared to roll the short calls over to a date at least a week beyond the earnings and ex-dividend dates.

With a very attractive dividend that is historically subject to significant change, I would look at the possibility of Blackstone becoming a longer than intended term holding in the event of an earnings surprise, but I don’t expect the kind of bad news that would necessitate another decrease in the dividend.

In the nearly 4 years since Abbott Labs (ABT) spun off AbbVie (ABBV), there’s no doubt that the market has preferred the faster growing segment of the old Abbott Labs business. In the past 5 months, however, Abbott Labs has well out-performed both AbbVie and the S&P 500.

Both are ex-dividend this week and AbbVie has a more attractive dividend. I also do prefer its recent price action to the downside, as opposed to Abbott’s move higher.

Still, the combined premium and dividend associated with Abbott Labs looks more attractive to me, especially as Abbott Labs now offers weekly option premiums. That opinion is also influenced by the size of the AbbVie dividend, which is larger than the option pricing units. That makes it more difficult to get any meaningful subsidy of the dividend related price drop in shares by an inefficiently priced call option in the event of selling an in the money call.

Time, however, until earnings is running out more quickly on Abbott Labs, as it reports earnings the following week, whereas AbbVie doesn’t do so until the end of the month. For now, I would rather take my chances with earnings from the more staid Abbott Labs, as the more bio-pharmaceutically dependent companies have hit a recent rough patch.

Finally, at a 52 week low, Starbucks (SBUX) is looking very good to me right now. There are still about 3 weeks until both earnings and its ex-dividend dates, as it is another with nearly coincident dates.

Starbucks has been basically moribund through 2016 and has badly trailed the already moribund S&P 500 during the year, while sitting at a 52 week low.

None of that is a stirring endorsement and neither is the performance of shares after the past few earnings reports.

Expectations for Starbuck’s performance are usually high and it often does suffer after earnings, but prior to this year, Howard Schultz was consistent in his ability to convince investors that their initial interpretation of earnings was incorrect, if that reaction was a negative one.

As with Blackstone, my interest at this point is purely as a short term trade, as its recent weakness has contributed to a healthier than usual option premium. However, if faced with a need to rollover that position, I would again look at doing so with a new expiration date that may be a bit beyond earnings and the ex-dividend date.

With some anticipation that Starbucks will not disappoint on earnings this time around, if in a position to require a rollover, I would probably seek to do so with a higher strike price than was used for the initial position, in anticipation of better than expected numbers and Schultz pulling a long over due rabbit out of his hat.

It would be about time.

 

Traditional Stocks: Starbucks

Momentum Stocks: Blackstone, Marathon Oil

Double-Dip Dividend: Abbott Labs (10/12 $0.26)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

Oct12016

Weekend Update – October 2, 2016

Weekend Update Comment

Jim Carrey made, what was by most accounts, a truly putrid move entitled “The Number 23.”

At its heart was the “23 enigma,” which is the belief that most of life’s events and incidents are somehow related to the number 23.

For example, you liked how that new sweater fit on you? The number 23.

Need more proof? The burning of Joan of Arc? The number 23.

While those may be disputable to non-believers, this was certainly the week validating the 17 enigma.

Interestingly, the great director Alfred Hitchcock made a movie entitled “The Number 17,” which is regarded among his worst and is rarely ever screened.

This past week, however, the number 17 may have been the key to five days of indecisive trading that saw triple digit moves each day, only to see the S&P 500 end the week with a 0.2% movement.

What the past week gave us were 17 separate occasions during the week when members of the Federal Reserve gave scheduled presentations.

17 is a prime number.

The prime rate is based on the federal funds rate, which is set by the FOMC and their actions or inactions have been ruling markets for months.

Do you really need any more proof than that?

If you do not, that turns out to be very fortunate, but there’s not too much doubt that it has become a free for all in terms of getting one’s interest rate opinion out in front of as many people as possible.

The week was actually to start with fewer such scheduled speaking engagements, but it must have been difficult to resist the urge to pile on.

By mid-week, as Janet Yellen was presenting some congressional testimony, there may have been some burn-out, as the needle barely moved during her time in front of the august House Services Financial Committee.

Worn out and Federal Reserve weary investors may have taken that opportunity to return to an old friend, oil, for their investing cues.

When Janet Yellen’s testimony ended, there were then only 17 hours of trading left for the week.

The ending result was that markets moved back and forth on little real news, although the end of the week’s GDP revisions did give some tangible reason to believe that a strengthening consumer could justify an interest rate increase.

However, the market plunged on that day, following the news, casting some doubt on just how accepting investors really are of a December interest rate increase, as they had seemed to be in just the previous week.

As the week did finally come to its end in rally mode we’re left wondering what comes next, as there is absolutely no clarity, unless you delve a little bit deeper into the number 17.

What does come next is that 9 Federal Reserve members will be scheduled to speak. I probably don’t have to remind anyone that 17 divided by 2 equals 8.5, which has to be rounded up to 9.

With that much clear and little else, the entirety of the coming week may become crystallized as the Employment Situation Report is released at week’s end.

Having added to my cash reserves as the previous week came to its end, I continue to not be very anxious to part with any of that cash, but sometimes do find it hard to resist even when there’s no rational reason to move forward.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

If you’re really looking for a wild ride, perhaps after reading that article about how rollercoasters may help kidney stones to find safe passage, you should also consider ProShares Ultra Silver ETN (AGQ).

I mentioned it a few weeks ago and its recent volatility has been stunning. It’s beta, a measure of volatility has certainly picked up greatly in the past 2 months.

That alone should frighten most away from considering a covered position, as should the compromised liquidity of the options and the wide bid – ask ranges.

But 17.

Yes, 17, as the Periodic Table designation for the element silver is Ag, which are the numbers 1 and 7.

17.

And that comes to you from someone whose initials are GA.

That’s about as rational of an explanation for why to consider a position, but if you do have the stomach for the wild ride and have discretionary cash, this position could be as unpredictable and profitable as any that  you might find, although the latter attribute could be a difficult one to attain in the event of a sustained downward movement in the underlying price of silver.

With interest rates, general commodity prices and just about everything else potentially having a bearing on the daily and longer term price of this exchange traded note, its value is eroded with time, and is therefore, not intended as a longer term holding.

By the same token, as I look at its chart, I see a recent periodicity that may portend a near term move higher.

For that reason, I might consider starting with the sale of put options, but if faced with assignment, I would take the assignment rather than attempting to roll over the puts and dealing with the liquidity and pricing related issues.

At that point, if taking assignment, those shares become a vehicle for selling calls, but I would likely sit on them a bit and only sell those calls on the event of a spike higher, even if only a daily basis spike, rather than waiting for s sustained move higher.

In contrast to the speculative nature of silver, an alternative this week could be JP Morgan Chase (JPM) which is also ex-dividend this week and led by the silver haired Jamie Dimon.

With Wells Fargo (WFC) in the cross hairs of those who could hold its shares back even as the financial sector may finally be poised to respond to the long anticipated increase in interest rates, JP Morgan could simply be a beneficiary of diverted investment dollars from those having fled Wells Fargo, but still have a need to have financial sector exposure.

When it comes to dealing with regulatory and legal scrutiny, no one has done it better than JP Morgan and Jamie Dimon in the past decade and now it’s someone else’s turn to get all of the unwanted attention.

While JP Morgan is ex-dividend this week, if considering a purchase of shares and then selling short dated call options, I would also be mindful of the fact that it reports earnings the following week.

While I expect those earnings to be good and further expect positive guidance, if faced with the need to rollover the short calls, I would likely look to do so with a longer term dated option contract, such as the November 2016 and might then also consider a higher strike price.

AS long as there’s some thought to considering adding positions in the financial sector, if one wants to be a bit more speculative, there’s always Blackstone Group (BX).

While it’s dividend is usually a moving target in terms of its amount, it continues to be at a very, very attractive yield. That dividend is expected sometime near the end of October, perhaps even coincident with its earnings report.

That may create some challenges in terms of managing the position once the precise date and timing of the ex-dividend date is known. In the meantime, I would consider its purchase and concomitant sale of calls utilizing a short term contract, but continuing to be watchful of the announcement of the ex-dividend date if faced with the need to rollover the position.

Finally, the past week saw another of my Marathon Oil (MRO) positions closed. That marked the eighth such closed lot in 2016. 

With oil having once again come to influence the market’s moves, at least in the past week, as it had done for much of 2016, I’m conflicted about wanting to see Marathon Oil make a move lower.

At this point, with just 3 months left to go for the year, I’m satisfied with my portfolios absolute and relative performance and wouldn’t be happy to see it get eroded in the event oil weakens, as it might if this past week’s OPEC agreement falls apart.

However, if it does start to re-approach the $15 level, particularly on a single large downward move, I would be very eager to once again sell puts, even if premature in calling the bottom of that decline.

While there may be downside risk with the energy sector and with Marathon Oil, the option premiums have been very attractive as those shares have repeatedly made quantum leaps and drops, making it a trader’s delight.

But you don’t have to be an active trader to capitalize on the lack of direction, as those option premiums and the liquidity in the option market for Marathon Oil contracts, has made it a relatively easy position to maintain, manage and exploit.

Even in my wildest dreams I wouldn’t expect to be able to reach 17 closed lots, but if not for Marathon Oil, I’d barely have been in double digits for the number of closed positions on the year, much less triple digits, as in past years.

 

Traditional Stocks: none

Momentum Stocks: Blackstone, Marathon Oil, ProShares Ultra Silver ETN

Double-Dip Dividend: JP Morgan Chase (10/4 $0.48)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

 

Sep242016

Weekend Update – September 25, 2016

Weekend Update Comment

The Talking Heads were really something.

I saw them and The Ramones in Cambridge.

Not at a concert, but at an album signing.

I picked up an album just to be able to get a close look at the members of both bands, mostly because one of the Ramones had a safety pin through his cheek and I thought that was pretty weirdly cool.

Then I promptly put the signed albums back into the rack.

Maybe it’s strange that so many years later one of the Ramones, maybe the one with the safety pin, would sing an homage to American capitalism and maybe a bit of an homage to one of its media symbols, “The Money Honey.”

But that was all almost 40 years ago and I never dreamed that those two groups would have been so influential. I never would have returned the signed albums back to the rack had I any clue that they would have been worth something some day.

In time, I came to especially like the Talking Heads, but never got as close as I did that one afternoon, instead having to settle on repeatedly melting the cassette tapes holding their songs.

“Burning Down the House,” “Once in a Lifetime” and so many more.

This coming week, right on the heels of the FOMC’s most recent statement release that kept investors in a celebratory mood, is going to be something of a Talking Feds festival.

That’s because there are no fewer than 12 scheduled speaking engagements by members of the Federal Reserve.

After putting off an interest rate increase yet again, there are probably those investors who feel that their tantrums over the immediate prospects of an interest rate increase, were taken into account by the FOMC.

It would be understandable if those investors had their selling behavior reinforced as they pursued a “Once in a Lifetime” interest rate increase policy from the FOMC.

What we are likely to get in the coming week is the kind of whipsaw movement in markets that we’ve been seeing recently as there is increasing dissent among the members.

This idea of Federal Reserve Presidents and Governors seeking public audiences is a fairly new one and doesn’t really serve much purpose, but each instance is dissected by investors as perhaps offering the most keen insight into the thinking of the FOMC.

That is, of course, until the next speaking engagement.

If luck of the draw would have the first 6 of next week’s engagements presided over by interest rate hawks or interest rate doves, we might see a decided move in a single direction and then the same move in the opposite direction as the remaining 6 had their moment in the sunshine.

There’s also the matter of which speakers are actually voting members of the FOMC.

Of the 10 voting members, five will be speaking and on a total of 6 occasions.

The preponderance of the words that are going to be heard from the voting members will be coming from among the interest rate hawks, whose words may be perceived as “Burning Down the House” that cheap money built.

The final word, as it always comes, will be from Chairman Janet Yellen, as she is the last speaker of the week and is still only a reluctant hawk.

But, she also has to be a pragmatist.

Even as economic data may not yet seem to be compelling to those of us who don’t appreciate the nuances, she is increasingly surrounded by dissent and a cacophony of opinion.

What we do know is that the Bank of Japan, on the same day as the past week’s FOMC Statement was released, admitted that negative interest rate policies weren’t working.

That essentially removed that possibility from the FOMC playbook, as if they had even ever considered it.

I don’t know whether the Talking Feds are going to produce anything resembling melody or deep insight in the course of the coming week.

My expectation, as last week’s rally took a little break to end the week, is that there may be lots of confusion in the week ahead and a stream of words to prepare us for the interest rate increase that now everyone says they are willing to accept as long as it didn’t arrive before December.

As December nears, the same fear of an interest rate increase may manifest, as we all become “Psycho Traders” when the moment of truth is thought to be right around the corner.

This week may be a good head start for those wanting to take on that personality, but there will probably be many more opportunities in the coming months as earnings season begins again in a few weeks and Federal Reserve members increasingly seek out the spotlight and break away from the center.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

I haven’t owned General Electric (GE) in a while.

Although I’m perplexed as to why that’s the case, I’m more perplexed as to General Electric’s latest ad campaign, which seems to be attempting to find some humor in the questions posed by a young man who may be developmentally disabled.

I understood their previous ad campaign that sought to portray General Electric as something other than your father’s old industrial company, but can’t begin to understand what message they’re trying to send with their latest commercial.

Nonetheless, General Electric below $30 has some appeal for me and I might be willing to overlook some of the very poor taste exhibited by their commercial.

The option premium isn’t terribly exciting, but a position in General Electric below $30 may look to capitalize on some capital appreciation on shares, in addition to that premium and the attractive dividend.

American Express (AXP) is another that I haven’t owned for a while and for much of the past 2 years, that has been a relatively good thing.

Having bounced off of its lows following a sustained decline when news hit that it was no longer going to be the exclusive credit card accepted at Costco (COST), I like the very narrow range it has traded in over the past 5 months.

That tight trading range, despite the relatively low volatility, still offers an attractive option premium and there will be an ex-dividend date probably in the next 2 weeks, or so.

One thing to keep in mind, if purchasing shares of American Express, however, is that it is one of the early earnings reporters and will be doing so before the end of the October 2016 monthly option cycle.

For that reason, I may consider a purchase of shares and the sale of calls with a longer term expiration, such as the November 2016 option, in an effort to capture the dividend, get some additional time value in the option premium received and have some additional time for price recovery in the event shares move lower upon an earning’s disappointment.

Dow Chemical (DOW) was among those stocks that I considered purchasing last week. 

Last week was one in which I was very reluctant to part with any of my cash reserves and only opened a single new position on the week.

In hindsight, I wished I had not been so reluctant.

But there is another opportunity with Dow Chemical this week, perhaps even more acute as it will be ex-dividend.

While there may still be some chance that the proposed complex merger with DuPont (DD) may not occur, i don’t see very much downside for Dow Chemical shares. In fact, in the event that regulatory decisions cause the proposed merger to be cancelled, I suspect that Dow Chemical will move higher, just as DuPont will move lower.

If the merger is finally approved, I think Dow Chemical will have upside in that event, as well. In the meantime, what it offers is that upside potential, the dividend and the option premium.

Perhaps even better, if looking for a potential serial rollover candidate, if Dow Chemical keeps trading in this tight range, there may be some good opportunity to continue to accumulate option premiums.

Ultimately, no one cares where your profit comes from and no one will belittle you if your return came from lots of premiums and dividends, instead of the old fashioned way.

Finally, there’s nothing really terribly exciting about Cypress Semiconductor (CY), except that it goes ex-dividend this week.

I have long liked this stock, mostly for its ability to trade in a fairly tight range, as long as you ignore the frequent earnings related moves and perhaps a failed takeover that had met with nearly everyone’s approval, except for the takeover candidate and the would be suitor that ultimately was victorious.

Since then, it’s controversial founder and CEO, who also presided over the great technology incubator that Cypress Technology had become, had left the company.

Unfortunately, shares are trading near a 15 month peak.

I still have 2 lots of shares that have January 2017 $12 call contracts written upon them and I do hope to still get 2 dividend payments from those shares. However, even at the current price I would consider adding an additional lot, but being prepared for the possibility of a longer term holding.

Since Cypress Semiconductor only offers monthly option premiums and it reports earnings during the first week of the November 2017 option cycle, in the event that an expiring October 2016 contract had to be rolled over, I would likely consider using a December 2016 or January 2017, in order to cushion some of the potential of an earning’s disappointment.

 

Traditional Stocks:  American Express, General Electric

Momentum Stocks: none

Double-Dip Dividend: Cypress Semiconductor (12/27 $0.11), Dow Chemical (9/28 $0.46)

Premiums Enhanced by Earnings: none

 

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

 

Sep172016

Weekend Update – September 18, 2016

Weekend Update Comment

 

Everyone has been there at one time or another in their lives.

Maybe several times a day.

There is rarely a shortage of things and events that don’t serve or conspire to make us crazy.

Recurring threats of a government shutdown; the 2016 Presidential campaign; the incompetence in the executive suites of Twitter (TWTR) and pumpkin flavored everything, for example.

I add the FOMC to that list.

Although his annual Twitter campaign against pumpkin flavored everything has yet to start this year, there is scant evidence that Marek Fuchs, a wonderful MarketWatch columnist, has actually gone crazy.

However, as opposed to the hyperbole that typically characterizes the situation when someone is claiming to be made “crazy,” traders may be actually manifesting something bordering on the insane as members of the Federal Reserve toy with the fragile flowers they are in real life.

The alternating messages that have come from those members, who at one time, not too long ago, were barely seen, much less heard, have unsettled traders as the clock is ticking away toward this coming week’s FOMC Statement release.

Couple their deeply seated. but questionably held opinions regarding the timing of an interest rate increase, with the continuing assertion that the FOMC will be “data dependent,” and a stream of conflicting data and if you are prone to be driven crazy, you will be driven crazy.

Or, at the very least, prone to run on sentences.

My father, an escapee from communist Hungary, was fond of saying “this is a free country,” when looking at seemingly disturbed people spouting off their ideas. Where he may have drawn the line was when those publicly expressed ideas may have created danger.

One of the last things he saw in his life was the image of Michael Jackson dancing on the roof of a car outside of a Los Angeles court house and he said as I predicted he would.

I think that sight actually left him with some bemusement and joy, although I don’t think he would have felt the same listening to the parade of FOMC members and then watching the ensuing fallout,

Luckily, only “the 1%” are put at risk from the danger that might arise when the Federal Reserve alternates its messages, as if in some behavioral laboratory, to gauge the responses from investors, who are typically prone to give in to primitive brain centers.

That means that their responses will be either based upon fear or greed.

The past two weeks have had some of both, as there has actually been very little fundamental news to drive markets that have suddenly awakened from a mid-summer slumber.

Instead, what those weeks have had ever since the Kansas City Federal Reserve’s annual blast in Jackson Hole has been a barrage of opinions that seem eerily constructed to make investors uncertain.

That’s just crazy, but it really does seem as if the FOMC is testing the waters when we all know that they should instead be laser focused on their dual mandate, which as best as I recollect, does not include pulling the marionette strings to the New York Stock Exchange.

On a positive note, if investors are in a temporal state of being incapable of demonstrating independent action and have fallen into a pattern of passively responding to cues received from above, can they truly be crazy?

What is clear is that investors have actually been extraordinarily rational in their actions, even as alternating between the surges and plunges that would make a “bi-polar” diagnosis obvious.

What investors have demonstrated is that they accept the need for an economy that could justify an increase in interest rates.

Like a New Orleans denizen who believes in the need for public decency laws, however, there is still a prevailing belief that the good times must roll.

In the belief that an interest rate increase would be a good thing if the economy warrants one, is also the belief that we need some more time to party with cheap money.

Even New Orleans has its last calls and we will find out this coming Wednesday whether the party is over.

If rates are increased on Wednesday, the immediate response would likely be to believe that the party is over, but that would really be crazy.

The party may just be starting.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

With memories of what now seems to have been a poorly justified interest rate increase in December 2015, you might understand why some fear a repeat this coming week.

I doubt that the FOMC would make that same mistake of mis-reading the economy’s direction this time around and would be inclined to believe that if rates are increased, it should only be construed as a good sign for those who believe that stock markets should be ruled by economic fundamentals and not primitive centers of the human brain.

However, my own primitive center, at least the one that is still capable of function, tells me that the knee jerk reaction that could ensue if rates are increased, might create a risk that is well out of proportion to the reward of initiating any new positions in the early part of the week.

I had 3 assignments this past week, which would have been the norm in the previous 5 years, but has been far from my 2016 experience.

Whereas in previous years my inclination after having had weekly assignments would have been to find the very next and best place to invest that money on Monday, this week, my inclination is to park it under a mattress.

Of course, if the FOMC doesn’t raise interest rates this week, the market may be very likely to  celebrate and I’ll have missed out.

I’m not certain if “the fear of missing out” is really a primitive response, but it is a powerful one.

However, I’ll take that chance, particularly as I mis-read almost every day of the previous week as the futures were trading in the pre-open. I saw no reason for any kind of pronounced market moves, but they turned out to be a dime a dozen last week.

I’ve been a big fan of the always volatile and always interesting ProShares UltraSilver ETN (AGQ) for years.

While being a fan, that doesn’t preclude being made crazy by holding it as a long term position, even as it’s structure was never intended as anything other than a trading vehicle.

What it has offered has been an adrenaline rush, some occasional realized losses, some occasional realized gains and a great stream of option premium income.

If you’ve been following precious metals at all, even casually, you may have noticed that the past few months have seen wild moves from day to day. That is what volatility is all about and volatility is what option premiums are all about.

I can’t begin to guess where gold and silver prices are going next, but share prices will go even faster when using a leveraged product such as this one.

If you have some discretionary cash and are not prone to moments of panic, this may be a good time to consider a position in the ProShares UltraSilver ETN.

While I would likely add to my existing positions with either the sale of puts or a traditional buy/write, I would set my initial sights on a weekly contract and the hopes for a quick entry and exit.

However, in the event of an adverse price move lingering up until the expiration, I might consider extending the expiration date to something longer than just an additional week and would seriously consider a longer term that also moves the strike price to make the wait even more worthwhile.

For those who really don’t shy away from risk, rather than rolling over a position and incurring the unnecessarily high costs, as the premiums are in $0.05 units and the low liquidity may create bid – ask spreads larger than preferred, the dice can be rolled by allowing expiration and then waiting for the next opportunity to create a new short position in the case of calls.

In the event that it’s a short put that isn’t going to be rolled over, you then will own shares that will be crying out for the sale of calls whenever possible.

Far less exciting than silver is Fastenal (FAST).

With only monthly option premiums, it is definitely not a trading kind of stock, but despite its ups and down, it has really been a reliably good holding for me over the years.

Fastenal is one of those companies that flies under the radar, but is a really good indicator of where the economy is at the moment. Its commercial and consumer business may be every bit as good of a reflection of what the economy is doing than anything whose report we await as we watch the embargo clock tick down.

It is now sitting at about its 6 month low and has some support. What it also has is a nice option premiums and a nice dividend, while it is prone to large price moves when earnings are announced.

Fastenal is actually one of the very early ones to announce earnings and even as we are just coming to the end of the current earnings season, the new one starts in just a few weeks.

Since Fastenal only trades monthly options, I would likely consider selling a November 2016 or later call option to have a better chance of collecting the dividend and to also have a better time enhance option premium cushion to enhance any downside surprise.

What Fastenal has one on multiple occasions over the past few years has been to offer revised guidance prior to the release of earnings. If you’re of the belief that the FOMC will see a reason to raise interest rates sooner rather than later, Fastenal may be in a position to see the reasons for that before its customers do and their guidance may be the push for shares to reverse its recent course.

Dow Chemical (DOW) isn’t very exciting either, unless of course the unexpected happens with regard to its proposed complex merger with DuPont (DD). 

Even then, however, I think that the premium first exhibited by shares when the announcement was made, has long since been washed out and there may actually be upside potential in the event of a regulatory surprise.

I had some option contracts expire this past week and had no interest in rolling them over, because I believed that Dow Chemical would be at least as strong as the market in the coming weeks and I wanted to wait for a higher strike price at which to write new calls in an effort to optimize the combination of share gains, option premiums and capture of the upcoming dividend.

Dow Chemical has been trading in a very stable range, but it, too, is prone to some paroxysms. Those large moves in the past also make the future a little less predictable, as there are fewer support levels, but one very positive note in the past year has been the performance of Dow Chemical has finally disassociated itself from the performance of oil.

If purchase more shares this week, I’m likely to do so while writing a longer term call contract in order to have a better chance of capturing the dividend at the end of the month. I think that I would also select a strike price that would look to accumulate some profits on the underlying shares, as well, rather than just looking for short term gains from the premiums and the dividend.

Bristol Myers Squibb (BMY) probably suffered far too great of a loss following the disappointing results of a recent clinical trial of one of its anti-cancer agents.

The market reacted as if the nails were being pounded into the coffin of that drug, having neglected to recall that it is already in use for other cancers, while still being evaluated in the treatment of even others. What the market has also forgotten is that not all drugs must be effective in their own right. They may still have a bright future when used as part of a combination therapy approach, so the story on Opdivo may yet be told.

As with Dow Chemical, it has an upcoming ex-dividend date a few weeks away. Similarly, I think, especially following its recent price decline, I would sacrifice some option premium for capital gains on the underlying shares and would sell at a strike level higher than I would normally consider.

Finally, I don’t consider many trades where I might like an immediate assignment, but Las Vegas Sands (LVS), which is ex-dividend on Tuesday and has a very generous dividend for your troubles, may be the one to tempt me this week.

Most often, when the dividend is greater than the strike units, in this case a $0.72 dividend and $0.50 strike units, it’s difficult to sell an in the money option and really have an chance of securing a profitable trade in the event of an early assignment.

That may not be the case with Las Vegas Sands this week.

Using this past Friday’s closing prices by means of example, at a share price of $58.31, a September 23, 2016 $57.50 call option could be sold for about $1.27.

The likelihood is tat if Las Vegas Sands’ share price was above $58.22 at the close of trading on Monday, the day before the ex-dividend date, it would stand a chance of being assigned early, in order for the option buyer to capture the dividend. The more “in the money” the shares might be, the greater the likelihood of an early assignment.

In the event of that early assignment, the net result would be an $0.81 loss on the shares, which would be offset by the $1.27 premium. That would result in an 0.8% ROI for the day.

Of course, there’s always the chance that shares might go below $58.22 and you would get the dividend and the premium, but then be on the line for the risk associated with the shares.

Having 2 lots of Las Vegas Sands shares currently, I can tell you that risk can be substantial, especially if looking at the recent price trajectory.

If you believe that the Chinese economy is actually improving, that perceived risk may not be as great as the real risk.

Of course, in the business that Las Vegas Sands participates with, the divide between perceived risk and real risk is the reason that the house rarely loses.

In stocks, it really is a zero sum game, but that doesn’t matter to the one of the losing side of the equals sign.

While it may make you crazy to be on the losing side of that trade, it also feels really good to either be on the winning side.

Or to stop banging your head against the wall, as I may take a respite from even the compelling trades this week.

 

Traditional Stocks:  Bristol Myers Squibb, Dow Chemical, Fastenal

Momentum Stocks: ProShares UltraSilver ETN

Double-Dip Dividend:  Las Vegas Sands (9/20 $0.72)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.