Weekend Update – January 31, 2016

 

 Whether you’re an addict of some sort, an avid collector or someone who seeks thrills, most recognize that it begins to take more and more to get the same exhilarating jolt.

At some point the stimulation you used to crave starts to become less and less efficient at delivering the thrill.

And then it’s gone.

Sometimes you find yourself pining for what used to be simpler times, when excess wasn’t staring you in the face and you still knew how to enjoy a good thing.

We may have forgotten how to do that.

It’s a sad day when we can no longer derive pleasure from excess.

It seems that we’ve forgotten how to enjoy the idea of an expanding and growing economy, historically low interest rates, low unemployment and low prices.

How else can you explain the way the market has behaved for the past 6 months?

Yet something stimulated the stock market this past Thursday and Friday, just as had been the case the previous Thursday and Friday.

For most of 2016 and for a good part of 2015, the stimulus had been the price of oil. but more than often the case was that the price of oil didn’t stimulate the market, but rather sucked the life out of it.

We should have all been celebrating the wonders of cheap oil and the inability of OPEC to function as an evil cartel, but as the excess oil has just kept piling higher and higher the thrill of declining end user prices has vanished.

Good stimulus or bad stimulus, oil has taken center stage, although every now and then the debacles in China diverted our attention, as well.

Every now and then, as has especially been occurring in the past 2 weeks, there have been instances of oil coming to life and paradoxically re-animating the stock market. It was a 20% jump in the price of oil that fueled the late week rally in the final week of the January 2016 option cycle. The oil price rise has no basis in the usual supply and demand equation and given the recent dynamic among suppliers is only likely to lead to even more production.

It used to be, that unless the economy was clearly heading for a slowdown, a decreasing price of oil was seen as a boost for most everyone other than the oil companies themselves. But now, no one seems to be benefiting.

As the price of oil was going lower and lower through 2015, what should have been a good stimulus was otherwise.

However, what last Thursday and Friday may have marked was a pivot away from oil as the driver of the market, just as we had pivoted away from China’s excesses and then its economic and market woes.

At some point there has to be a realization that increasing oil prices isn’t a good thing and that may leave us with the worst of all worlds. A sliding market with oil prices sliding and then a sliding market with oil prices rising.

It seems like an eternity ago that the market was being handcuffed over worries that the FOMC was going to increase interest rates and another eternity ago that the market seemed to finally be exercising some rational judgment by embracing the rate rise, if only for a few days, just 2 months ago.

This week saw a return to those interest rate fears as the FOMC, despite a paucity of data to suggest inflation was at hand, didn’t do much to dispel the idea that “one and done” wasn’t their plan. The market didn’t like that and saw the prospects of an interest rate increase as a bad thing, even if reflecting improving economic conditions.

But more importantly, what this week also saw was the market returning to what had driven it for a few years and something that it never seemed to tire of celebrating.

That was bad news.

This week brought no good news, at all and the market liked that.

Negative interest rates in Japan? That has to be good, right?

A sluggish GDP, oil prices rising and unimpressive corporate earnings should have sent the market into a further downward spiral, but instead the idea that the economy wasn’t expanding was greeted as good news.

Almost as if the Federal Reserve still had some unspent ammunition to throw at the economy that would also serve to bolster stocks, as had been the case for nearly 6 years.

It’s not really clear how much more stimulus the Federal Reserve can provide and if investors are counting on a new and better high, they may in for a big disappointment.

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

I’m a little surprised that my brokerage firm didn’t call me last week, to see if I was still alive,  because it was the second consecutive week of not having made a single trade.

Despite what seem to be bargain prices, I haven’t been able to get very excited about very many of the ones that have seemed alluring. Although this coming Monday may be the day to mark a real and meaningful bounce higher, the lesson of the past 2 months has been that any move higher has simply been an opportunity to get disappointed and wonder how you ever could have been so fooled.

I’m not overly keen on parting with any cash this week unless there some reason to believe that the back to back gains of last week are actually the start of something, even if that something is only stability and treading water.

Building a base is probably far more healthy than trying to quickly recover all that has been quickly lost.

With weakness still abounding I’m a little more interested in looking for dividends if putting cash to work.

This week, I’m considering purchases of Intel (INTC), MetLife (MET) and Pfizer (PFE), all ex-dividend this coming week.

With the latter two, however, there’s also that pesky issue of earnings, as MetLife reports earnings after the close of trading on its ex-dividend date and Pfizer reports earnings the day before its ex-dividend date.

MetLife has joined with the rest of the financial sector in having been left stunned by the path taken by interest rates in the past 2 months, as the 10 Year Treasury Note is now at its lowest rate in about 8 months.

It wasn’t supposed to be that way.

But if you believe that it can’t keep going that way, it’s best to ignore the same argument used in the cases of the price of oil, coal and gold.

With MetLife near a 30 month low and going ex-dividend early in the week before its earnings are reported in the same day, there may be an opportunity to sell a deep in the money call and hope for early assignment, thereby losing the dividend, but also escaping the risk of earnings. In return, you may still be able to obtain a decent option premium for just a day or two of exposure.

The story of Pfizer’s proposed inversion is off the front pages and its stock price no longer reflects any ebullience. It reports earnings the morning of the day before going ex-dividend. That gives plenty of time to consider establishing a position in the event that shares either go lower or have relatively little move higher.

The option premium, however, is not very high and with the dividend considered the option market is expecting a fairly small move, perhaps in the 3-4% range. Because of that I might consider taking on the earnings risk and establishing a position in advance of earnings, perhaps utilizing an at the money strike price.

In that case, if assigned early, there is still a decent 2 day return. If not assigned early, then there is the dividend to help cushion the blow and possibly the opportunity to either be assigned as the week comes to its end or to rollover the position, if a price decline isn’t unduly large.

Intel had a nice gain on Friday and actually has a nice at the money premium. That premium is somewhat higher than usual, particularly during an ex-dividend week. As with Pfizer, even if assigned early, the return for a very short holding could be acceptable for some, particularly as earnings are not in the picture any longer.

As with a number of other positions considered this week, the liquidity of the options positions should be  sufficient to allow some management in the event rollovers are necessary.

2015 has been nothing but bad news for American Express (AXP) and its divorce from Costco (COST) in now just a bit more than a month away.

The bad news for American Express shareholders continued last week after reporting more disappointing earnings the prior week. It continued lower even as its credit card rivals overcame some weakness with their own earnings reports during the week.

At this point it’s very hard to imagine any company specific news for American Express that hasn’t already been factored into its 3 1/2 year lows.

The weekly option premium reflects continued uncertainty, but I think that this is a good place to establish a position, either through a buy/write or the sale of puts. Since the next ex-dividend date is more than 2 months away, I might favor the sale of puts, however.

Yahoo (YHOO) reports earnings this week and as important as the numbers are, there has probably been no company over the past 2 years where far more concern has focused on just what it is that Yahoo is and just what Yahoo will become.

Whatever honeymoon period its CEO had upon her arrival, it has been long gone and there is little evidence of any coherent vision.

In the 16 months since spinning off a portion of its most valuable asset, Ali Baba (BABA), it has been nothing more than a tracking stock of the latter. Ali Baba has gone 28.6% lower during that period and Yahoo 28% lower, with their charts moving in tandem every step of the way.

With Ali Baba’s earnings now out of the way and not overly likely to weigh on shares any further, the options market is implying a price move of 7.6%.

While I usually like to look for opportunities where I could possibly receive a 1% premium for the sale of puts at a strike price that’s outside of the lower boundary dictated by the option market, I very much like the premium at the at the money put strike and will be considering that sale.

The at the money weekly put sale is offering about a 4% premium. With a reasonably liquid option market, I’m not overly concerned about difficulty in being able to rollover the short puts in the event of an adverse move and might possibly consider doing so with a longer term horizon, if necessary.

Finally, there was a time that it looked as if consumers just couldn’t get enough of Michael Kors (KORS).

Nearly 2 years ago the stock hit its peak, while many were writing the epitaph of its competitor Coach (COH), at least Coach’s 23% decline in that time isn’t the 60% that Kors has plunged.

I haven’t had a position in Kors for nearly 3 years, but do still have an open position in Coach, which for years had been a favorite “go to” kind of stock with a nice dividend and a nice option premium.

Unfortunately, Coach, which had long been prone to sharp moves when earnings were announced, had lost its ability to recover reasonably quickly when the sharp moves were lower.

While Coach is one of those rare gainers in 2016, nearly 13% higher, Kors is flat on the year, although still far better than the S&P 500.

While I don’t believe that Coach has turned the tables on Kors and is now “eating their lunch” as was so frequently said when Kors was said to be responsible for Coach’s reversal of fortune, I think that there is plenty of consumer to go around for both.

Kors reports earnings this week and like COach, is prone to large earnings related moves.

With no dividend to factor into the equation, Kors may represent a good  opportunity for those willing to take some risk and consider the sale of out of the money puts.

WIth an implied move of 8.5% next week, it may be possible to get a 1.1% ROI even if shares fall by as much as 11.3% during the week.

A $4.50 move in either direction is very possible with Kors after having dropped nearly $60 over the past 2 years. However, if faced with the possibility of assignment of shares, particularly since there is no dividend, I would just look for any opportunity to continue rolling the short puts over and over.

If not wanting to take the take the risk of a potential large drop, some consideration can also be given to selling puts after earnings, in the event of a large drop in shares. If that does occur, the premiums should still be attractive enough to consider making the sale of puts after the event.

 

Traditional Stocks: American Express

Momentum Stocks:  none

Double-Dip Dividend: Intel (2/3 $0.26), MetLife (2/3 $0.38), Pfizer (2/3 $0.30)

Premiums Enhanced by Earnings: Michael Kors (2/2 AM), Yahoo (2/2 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.

Weekend Update – January 24, 2016

With the early part of the Republican primaries having focused on one candidate’s hair, it reminded me of that old complaint that people sometimes made that their hair had a mind of its own.

For better or worse the political hair jokes have pretty much finally run their course as the days tick down to a more substantive measure of a candidate’s character and positions on more weighty matters.

While it was nice seeing some gains for the week and finally having some reason to not curse 2016, there’s no mistaking the reality that the stock market hasn’t had much of a mind of its own after the first 14 trading days of the new year.

Bad hair days would have been a lot easier to take than the bad market days that have characterized much of the past  6 weeks.

The combination of China and the price of oil have led the market down and up on a daily basis and sometimes made it do flips during the course of a single trading day.

With the price of oil having climbed about 23% during the week from its multi-year lows, the market did what it hadn’t been able to do in 2016 and actually put together back to back daily gains. Maybe it was entirely coincidental that the 48 hours that saw the resurgence in the price of crude oil were the same 48 hours that saw the market string consecutive gains, but if so, that coincidence is inescapable.

While that’s encouraging there’s not too much reason to believe that the spike in the price of oil was anything more than brave investors believing that oil was in a severely over-sold position and that its recent descent had been too fast and too deep.

That pretty much describes the stock market, as well, but what you haven’t seen in 2016 is the presence of those brave souls rushing in to pick up shares in the same belief.

Of the many “factoids” that were spun this week was that neither the DJIA nor the NASDAQ 100 had even a single stock that had been higher in 2016. That may have changed by Friday’s closing bell, but then the factoid would be far less fun to share.

Instead, oil has taken the fun out of things and has dictated the direction for stocks and the behavior of investors. If anything, stocks have been a trailing indicator instead of one that discounts the future as conventional wisdom still credits it for doing, despite having put that quality on hiatus for years.

That was back when the stock market actually did have a mind of its own. Now it’s more likely to hear the familiar refrain that many of us probably heard growing up as we discovered the concept of peer pressure.

“So, if your best friend is going to jump out of the window, is that what you’re going to do, too?”

With earnings not doing much yet to give buyers a reason to come out from hiding, the coming week has two very important upcoming events, but it’s really anyone’s guess how investors could react to the forthcoming news.

There is an FOMC announcement scheduled for Wednesday, assuming that the nation’s capital is able to dig out from under the blizzard’s drifts and then the week ends with a GDP release.

With a sudden shift in the belief that the economy was heading in one and only one direction following the FOMC’s decision to increase interest rates, uncertainty is again in the air.

What next week’s events may indicate is whether we are back to the bad news is bad news or the bad news is good news mindset.

It’s hard to even make a guess as to what the FOMC might say next week.

“My bad” may be an appropriate start with the economy not seeming to be showing any real signs of going anywhere. With corporate revenues and unadulterated earnings not being terribly impressive, the oil dividend still not materializing and retail sales weak, the suggestion by Blackrock’s (BLK) Larry Fink last week that there could be layoffs ahead would seem to be the kind of bad news that would be overwhelmingly greeted for what it would assuredly represent.

When the FOMC raised interest rates the market had finally come around to believing that a rise in rates was good news, as it had to reflect an improving economic situation. If the next realization is that the improving situation would last for only a month, you might think the reception would be less than effusive.

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

Last week was the first week since 2008 or 2009 that I made no trades at all and had no ex-dividend positions. No new positions were opened, nor were any call or put rollovers executed.

Other than a few ex-dividend positions this week, I’m not certain that it will be any different from last week. I haven’t opened very many new positions of late, having to go back nearly 2 months for a week with more than a single new position having been opened.

Unlike much of the past 6 years when market pullbacks just seemed like good times to get good stocks at better prices, the past few months have been offering good prices that just kept getting better and better.

If you had been a buyer, those better and better prices were only seen that way by the next series of prospective buyers, who themselves probably came to bemoan how less they could have paid if only they waited another day or two. 

The gains of the final two days of last week make me want to continue the passivity. Anyone having chased any of those precious few days higher lately has ended up as disappointed as those believing they had picked up a bargain.

At some point it will pay to chase stocks higher and at some point it will pay to run after value.

I’m just not convinced that two days of gains are enough to  signal that value is evaporating.

The biggest interests that I have for the week are both earnings related trades. Both Apple (AAPL) and Facebook (FB) report earnings this week.

If you’re looking for a stock in bear market correction over the past 6 months, you don’t have to go much further then Apple (AAPL). Along with some of his other holdings, Apple has punished Carl Icahn in the same manner as has been occurring to mere mortals.

Of course, that 21% decline is far better than the 27% decline fro just a few days ago before Apple joined the rest of the market in rally mode.

Interestingly, the option market doesn’t appear to be pricing in very much uncertainty with earnings upcoming this week, with an implied move of only 6.2%

Since a 1% ROI can only be achieved at a strike level that’s within that range, I wouldn’t be very excited in the sale of out of the money puts prior to earnings. The risk – reward proposition just isn’t compelling enough for me. However, if Apple does drop significantly after earnings then there may be reason to consider the sale of puts.

There is some support at $90 and then a few additional support levels down to $84, but then it does get precarious all the way down to $75.

Apple hasn’t been on everyone’s lips for quite a while and we may not get to find out just how little it has also been on people’s wrists. Regardless, if the support levels between $84 and $90 are tested after earnings the put premiums should still remain fairly high. If trying this strategy and then faced with possible assignment of shares, an eye has to be kept on the announcement of the ex-dividend date, which could be as early as the following week.

While Apple is almost 20% lower over the past 6 months, Facebook has been virtually unchanged, although it was almost 30% higher over the past year.

It;s implied move is 6.8% next week, but the risk – reward is somewhat better than with Apple, if considering the sale of puts prior to earnings, as a 1% ROI for the sale of a weekly option could be obtained outside of the range defined by the option market. As with Apple, however, the slide could be more precarious as the support levels reflect some quick and sharp gains over the past 2 years.

For those that have been pushing a short strategy for GameStop (GME), and it has long been one of the most heavily of shorted stocks for quite some time, the company has consistently befuddled those who have had very logical reasons for why GameStop was going to fall off the face of the earth.

Lately, though, they’ve had reason to smile as shares are 45% lower, although on a more positive note for others, it’s only trailing the S&P 500 by 2% in 2016. They’ve had some reasons to smile in the past, as well, as the most recent plunge mirrors one from 2 years ago.

As with Apple and Facebook, perhaps the way to think about any dalliance at this moment, as the trend is lower and as volatility is higher, is through the sale of put options and perhaps considering a longer time outlook.

A 4 week contract, for example, at a strike level 4.6% below this past Friday’s close, could still offer a 3% ROI. If going that route, it would be helpful to have strategies at hand to potentially deal with an ex-dividend date in the March 2016 cycle and earnings in the April 2016 cycle.

One of the companies that I own that is going ex-dividend this week is Fastenal (FAST). I’ve long liked this company, although I’m not enamored with my last purchase, which I still own and was purchased a year ago. As often as is the case, I consider adding shares of Fastenal right before the ex-dividend date and this week is no different.

What is different is its price and with a 2 day market rally that helped it successfully test its lows, I would be interested in considering adding an additional position.

With only monthly options available, Fastenal is among the earliest of earnings reporters each quarter, so there is some time until the next challenge. Fastenal does, however, occasionally pre-announce or alter its guidance shortly before earnings, so surprises do happen, which is one of the reasons I’m still holding shares after a full year has passed.

In the past 6 months Fastenal has started very closely tracking the performance of Home Depot (HD). While generally Fastenal has lagged, in the past 2 months it has out-performed Home Depot, which was one of a handful of meaningfully winning stocks in 2015.

Finally, Morgan Stanley (MS) is also ex-dividend this week.

Along with the rest of the financials, Morgan Stanley’s share price shows the disappointment over the concern that those interest rate hikes over the rest of the year that had been expected may never see the light of day.

This week’s FOMC and GDP news can be another blow to the hopes of banks, but if I was intent upon looking for a bargain this week among many depressed stocks, I may as well get the relationship started with a dividend and a company that I can at least identify the factors that may make it move higher or lower.

Not everything should be about oil and China.

 

Traditional Stocks: none

Momentum Stocks:  GameStop

Double-Dip Dividend: Fastenal (1/27 $0.30), Morgan Stanley ($0.15)

Premiums Enhanced by Earnings:  Apple (1/26 PM), Facebook (1/27 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.

 

Weekend Update – January 24, 2016

With the early part of the Republican primaries having focused on one candidate’s hair, it reminded me of that old complaint that people sometimes made that their hair had a mind of its own.

For better or worse the political hair jokes have pretty much finally run their course as the days tick down to a more substantive measure of a candidate’s character and positions on more weighty matters.

While it was nice seeing some gains for the week and finally having some reason to not curse 2016, there’s no mistaking the reality that the stock market hasn’t had much of a mind of its own after the first 14 trading days of the new year.

Bad hair days would have been a lot easier to take than the bad market days that have characterized much of the past  6 weeks.

The combination of China and the price of oil have led the market down and up on a daily basis and sometimes made it do flips during the course of a single trading day.

With the price of oil having climbed about 23% during the week from its multi-year lows, the market did what it hadn’t been able to do in 2016 and actually put together back to back daily gains. Maybe it was entirely coincidental that the 48 hours that saw the resurgence in the price of crude oil were the same 48 hours that saw the market string consecutive gains, but if so, that coincidence is inescapable.

While that’s encouraging there’s not too much reason to believe that the spike in the price of oil was anything more than brave investors believing that oil was in a severely over-sold position and that its recent descent had been too fast and too deep.

That pretty much describes the stock market, as well, but what you haven’t seen in 2016 is the presence of those brave souls rushing in to pick up shares in the same belief.

Of the many “factoids” that were spun this week was that neither the DJIA nor the NASDAQ 100 had even a single stock that had been higher in 2016. That may have changed by Friday’s closing bell, but then the factoid would be far less fun to share.

Instead, oil has taken the fun out of things and has dictated the direction for stocks and the behavior of investors. If anything, stocks have been a trailing indicator instead of one that discounts the future as conventional wisdom still credits it for doing, despite having put that quality on hiatus for years.

That was back when the stock market actually did have a mind of its own. Now it’s more likely to hear the familiar refrain that many of us probably heard growing up as we discovered the concept of peer pressure.

“So, if your best friend is going to jump out of the window, is that what you’re going to do, too?”

With earnings not doing much yet to give buyers a reason to come out from hiding, the coming week has two very important upcoming events, but it’s really anyone’s guess how investors could react to the forthcoming news.

There is an FOMC announcement scheduled for Wednesday, assuming that the nation’s capital is able to dig out from under the blizzard’s drifts and then the week ends with a GDP release.

With a sudden shift in the belief that the economy was heading in one and only one direction following the FOMC’s decision to increase interest rates, uncertainty is again in the air.

What next week’s events may indicate is whether we are back to the bad news is bad news or the bad news is good news mindset.

It’s hard to even make a guess as to what the FOMC might say next week.

“My bad” may be an appropriate start with the economy not seeming to be showing any real signs of going anywhere. With corporate revenues and unadulterated earnings not being terribly impressive, the oil dividend still not materializing and retail sales weak, the suggestion by Blackrock’s (BLK) Larry Fink last week that there could be layoffs ahead would seem to be the kind of bad news that would be overwhelmingly greeted for what it would assuredly represent.

When the FOMC raised interest rates the market had finally come around to believing that a rise in rates was good news, as it had to reflect an improving economic situation. If the next realization is that the improving situation would last for only a month, you might think the reception would be less than effusive.

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

Last week was the first week since 2008 or 2009 that I made no trades at all and had no ex-dividend positions. No new positions were opened, nor were any call or put rollovers executed.

Other than a few ex-dividend positions this week, I’m not certain that it will be any different from last week. I haven’t opened very many new positions of late, having to go back nearly 2 months for a week with more than a single new position having been opened.

Unlike much of the past 6 years when market pullbacks just seemed like good times to get good stocks at better prices, the past few months have been offering good prices that just kept getting better and better.

If you had been a buyer, those better and better prices were only seen that way by the next series of prospective buyers, who themselves probably came to bemoan how less they could have paid if only they waited another day or two. 

The gains of the final two days of last week make me want to continue the passivity. Anyone having chased any of those precious few days higher lately has ended up as disappointed as those believing they had picked up a bargain.

At some point it will pay to chase stocks higher and at some point it will pay to run after value.

I’m just not convinced that two days of gains are enough to  signal that value is evaporating.

The biggest interests that I have for the week are both earnings related trades. Both Apple (AAPL) and Facebook (FB) report earnings this week.

If you’re looking for a stock in bear market correction over the past 6 months, you don’t have to go much further then Apple (AAPL). Along with some of his other holdings, Apple has punished Carl Icahn in the same manner as has been occurring to mere mortals.

Of course, that 21% decline is far better than the 27% decline fro just a few days ago before Apple joined the rest of the market in rally mode.

Interestingly, the option market doesn’t appear to be pricing in very much uncertainty with earnings upcoming this week, with an implied move of only 6.2%

Since a 1% ROI can only be achieved at a strike level that’s within that range, I wouldn’t be very excited in the sale of out of the money puts prior to earnings. The risk – reward proposition just isn’t compelling enough for me. However, if Apple does drop significantly after earnings then there may be reason to consider the sale of puts.

There is some support at $90 and then a few additional support levels down to $84, but then it does get precarious all the way down to $75.

Apple hasn’t been on everyone’s lips for quite a while and we may not get to find out just how little it has also been on people’s wrists. Regardless, if the support levels between $84 and $90 are tested after earnings the put premiums should still remain fairly high. If trying this strategy and then faced with possible assignment of shares, an eye has to be kept on the announcement of the ex-dividend date, which could be as early as the following week.

While Apple is almost 20% lower over the past 6 months, Facebook has been virtually unchanged, although it was almost 30% higher over the past year.

It;s implied move is 6.8% next week, but the risk – reward is somewhat better than with Apple, if considering the sale of puts prior to earnings, as a 1% ROI for the sale of a weekly option could be obtained outside of the range defined by the option market. As with Apple, however, the slide could be more precarious as the support levels reflect some quick and sharp gains over the past 2 years.

For those that have been pushing a short strategy for GameStop (GME), and it has long been one of the most heavily of shorted stocks for quite some time, the company has consistently befuddled those who have had very logical reasons for why GameStop was going to fall off the face of the earth.

Lately, though, they’ve had reason to smile as shares are 45% lower, although on a more positive note for others, it’s only trailing the S&P 500 by 2% in 2016. They’ve had some reasons to smile in the past, as well, as the most recent plunge mirrors one from 2 years ago.

As with Apple and Facebook, perhaps the way to think about any dalliance at this moment, as the trend is lower and as volatility is higher, is through the sale of put options and perhaps considering a longer time outlook.

A 4 week contract, for example, at a strike level 4.6% below this past Friday’s close, could still offer a 3% ROI. If going that route, it would be helpful to have strategies at hand to potentially deal with an ex-dividend date in the March 2016 cycle and earnings in the April 2016 cycle.

One of the companies that I own that is going ex-dividend this week is Fastenal (FAST). I’ve long liked this company, although I’m not enamored with my last purchase, which I still own and was purchased a year ago. As often as is the case, I consider adding shares of Fastenal right before the ex-dividend date and this week is no different.

What is different is its price and with a 2 day market rally that helped it successfully test its lows, I would be interested in considering adding an additional position.

With only monthly options available, Fastenal is among the earliest of earnings reporters each quarter, so there is some time until the next challenge. Fastenal does, however, occasionally pre-announce or alter its guidance shortly before earnings, so surprises do happen, which is one of the reasons I’m still holding shares after a full year has passed.

In the past 6 months Fastenal has started very closely tracking the performance of Home Depot (HD). While generally Fastenal has lagged, in the past 2 months it has out-performed Home Depot, which was one of a handful of meaningfully winning stocks in 2015.

Finally, Morgan Stanley (MS) is also ex-dividend this week.

Along with the rest of the financials, Morgan Stanley’s share price shows the disappointment over the concern that those interest rate hikes over the rest of the year that had been expected may never see the light of day.

This week’s FOMC and GDP news can be another blow to the hopes of banks, but if I was intent upon looking for a bargain this week among many depressed stocks, I may as well get the relationship started with a dividend and a company that I can at least identify the factors that may make it move higher or lower.

Not everything should be about oil and China.

 

Traditional Stocks: none

Momentum Stocks:  GameStop

Double-Dip Dividend: Fastenal (1/27 $0.30), Morgan Stanley ($0.15)

Premiums Enhanced by Earnings:  Apple (1/26 PM), Facebook (1/27 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.

 

Weekend Update – January 17, 2016


The world is awash in oil and we all know what that means.

From Texas to the Dakotas and to the North Sea and everything in-between, there is oil coming out of every pore of the ground and in ways and places we never would have imagined.

Every school aged kid knows the most basic law of economics. The more they want something that isn’t so easy to get the more they’re willing to do to get it.

It works in the other direction, too.

The more you want to get rid of something the less choosy you are in what it takes to satisfy your need.

So everyone innately understands the relationship between supply and demand. They also understand that rational people do rational things in response to the supply and demand conditions they face.

Not surprisingly, commodities live and die by the precepts of supply and demand. We all know that bumper crops of corn bring lower prices, especially as there’s only so much extra corn people are willing to eat as a result of its supply driven decrease in price.

Rational farmers don’t plant more corn in response to bumper crops and rational consumers don’t buy less when supply drives prices lower.

Stocks also live by the same precepts, except that most of the time the supply of any particular stock is fixed and it’s the demand that varies. However, we’ve all seen the frenzy around an IPO when insatiable demand in the face of limited supply makes people crazy and we’ve all seen what happens when new supply of shares, such as in a secondary offering is released.

Of course, much of what gains we’ve seen in the markets over the past few years have come as a result of manipulating supply and artificially inflating the traditional earnings per share metric.

When a deep Florida freeze hits the orange crop in Florida, no one spends too much time deeply delving into the meaning of the situation. The price for oranges will simply go higher as the demand stays reasonably the same, to a point. 

If, however, people’s tastes change and there is suddenly an imbalance between the supply and demand for orange juice, reasonable suppliers do the logical thing. They try to recognize whether the imbalance is due to too much supply or too little demand and seek to adjust supply.

Whatever steps they may take, the world’s economies aren’t too heavily invested in the world of oranges, no matter how important it may be to those Florida growers.

Suddenly, oil is different, even as it has long been a commodity whose supply has been manipulated more readily and for more varied reasons. than a farmer simply switching from corn to soybeans.

The price of oil still lives by supply and demand, but now thrown into the equation are very potent external and internal political considerations.

Saudi Arabia has to bribe its citizens into not overthrowing the monarchy while wanting to also inflict financial harm on anyone bringing new sources of supply into the marketplace. They don’t want to cede marketshare to its enemies across the gulf nor its allies across the ocean.

With those overhangs, sometimes irrational behavior is the result in the pursuit of what are considered to be rational objectives.

Oil is also different because the cause for the imbalance says a lot about the world. Why is there too much supply? Is it because of an economic slowdown and decreased demand or is it because of too much supply?

Stock markets, which are supposed to discount and reflect the future have usually been fairly rational when having a longer term vision, but that’s becoming a more rare phenomenon.

The very clear movement of stock markets in tandem with oil prices up or down has been consistent with a belief that the balance between supply and demand has been driven by demand.

Larry Fink, who most agree is a pretty smart guy, as the Chairman and CEO of Blackrock (BLK) was pretty clear the other day and has been consistent in the belief that the low price of oil was supply, and not demand driven. He has equally been long of the belief that lower oil prices were good for the world.

In any other time, supply driven low prices would have represented a breakdown in OPEC’s ability to hold the world’s economies hostage and would have been the catalyst for stock market celebrations.

Welcome to 2016, same as 2015.

But world markets continue to ignore that view and Fink may be coming to the realization that his voice of reason is drowned out by fear and irrational actions that only have a near term vision. That may explain why he now believes that there could be an additional 10% downside for US markets over the next 6 months, including the prospects of job layoffs.

That’s probably not something that the FOMC had high on its list of possible 2016 scenarios.

Ask John McCain how an increasing unemployment rate heading into a close election worked out for him, so you can imagine the distress that may be felt as 7 years of moderate growth may come to an end at just the wrong time for some with great political aspirations.

The only ones to be blamed if Fink’s fears are correct are those more readily associated with the existing power structure.

Just as falling stock prices in the face of supply driven falling oil prices seems unthinkable, “President Trump” doesn’t have a dulcet tone to my ears. More plausible, in the event of the unthinkable is that it probably wouldn’t take too much time for his now famous “The Apprentice” tag line to morph into “You’re impeached.”

So there’s always that as a distraction from a basic breakdown in what we knew to be an inviolate law of economics.

With 2016 already down 8% and sending us into our second correction in just 5 months so many stocks look so inviting, but until there’s some evidence that the demand to meet the preponderance of selling exists, to bite at those inviting places may be even more irrational than it would have been just a week earlier.

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

One stock that actually does look like a bargain to me reports earnings this week. Verizon (VZ) is the only stock in this week’s list that isn’t in or near bear correction territory in the past 2 months.

Even those few names that performed well in 2015 and helped to obscure the weakness in the broader market are suffering in the early stages of 2015.

Not so for Verizon, even though the shares have fallen nearly 5% from its near term resistance level on December 29, 2015, the S&P 500 fell almost 9% in that time.

While there is always added risk with earnings being reported, Verizon and some of its competitors stand to benefit from their own strategic shifts to stop subsidizing what it is that people crave. That may not be reflected in the upcoming earnings report, but if buying Verizon shares I may consider looking beyond the weekly options that I tend to favor in periods of low volatility. Although I usually am more likely to sell puts when earnings are in the equation, I’m more likely to go the buy/write route for this position.

The one advantage of the kind of market action that we’ve had recently is the increase in volatility that it brings.

When that occurs, I start looking more and more at longer term options. The volatility increase typically means higher premiums and that extends into the forward weeks. Longer term contracts during periods of higher volatility allow you to lock in higher premiums and give time for some share price recovery, as well.

Since Verizon also has a generous dividend, but won’t be ex-dividend for another 3 months, I might consider an April 2016 or later expiration date.

One of the companies that is getting a second look this week is Williams-Sonoma (WSM), which is also ex-dividend this week and only offers monthly options.

Shares are nearly 45% lower since the August 2015 correction and have not really had any perceptible attempt at recovering from those losses.

What it does offer, however. is a nice option premium, that even if shares declined by approximately 1% for the month could still deliver a 3.8% ROI in addition to the quarterly 0.7% dividend.

Literally and figuratively firing on all cylinders is General Motors (GM), but it is also figuratively being thrown out with the bath water as it has plunged alongside the S&P 500.

With earnings being reported in early February and with shares probably being ex-dividend in the final week of the March 2016 option cycle, there may be some reason to consider using a longer term option contract, perhaps even spanning 2 earnings releases and 2 ex-dividend dates, again in an attempt to take advantage of the higher volatility, by locking in on longer term contracts.

Netflix (NFLX) reports earnings this week and the one thing that’s certain is that Netflix is a highly volatile stock when reporting earnings, regardless of what the tone happens to be in the general market.

With the market so edgy at the moment, this would probably not be a good time for any company to disappoint investors.

The option market definitely demonstrates some of the uncertainty that’s associated with this coming week’s earnings, as you can get a 1% ROI even if shares drop by 22%.

As it is, shares are down nearly 20% since early December 2015, but there seem to be numerous levels of support heading toward the $81 level.

If shares do take a plunge, there would likely be a continued increase in volatility which could make it lucrative to continue rolling over puts, even if not faced with impending assignment.

Of some interest is that while call and put volumes for the upcoming weekly options were fairly closely matched, the skew was toward a significant decline in shares next week, as a large position was established at a weekly strike level $34 below Friday’s close.

Finally, last week wasn’t a very good week for the technology sector, as Intel (INTC) got things off on a sour note, which is never a good thing to do in an already battered market.

Seagate Technology (STX) wasn’t spared any pain last week, either, as it has long fallen into the same kind of commodity mindset as corn, orange juice and even oil back in the days when things made sense.

Somehow, despite having been written off as nothing more than a commodity, it has seen some good times in the past few years. That is, if you exclude 2015, as it has now fallen more than 50% since that time, but with nearly 35% of that decline having occurred in just the past 3 months.

I usually like entering a Seagate Technology position through the sale of puts, as its premium always reflects a volatile holding.

For example the sale of a weekly put at a strike price 3% below Friday’s closing price could provide a 1.9% ROI. When considering that next week is a holiday shortened week, that’s a particularly high return.

Seagate Technology is no stranger to wild intra-weekly swings. If selling puts, I prefer to try and delay assignment of shares if they fall below the strike level. Since the company reports earnings the following week, I would likely try to roll over to the week after earnings, but if then again faced with assignment, would be inclined to accept it, as shares are expected to be ex-dividend the following week.

The caveat is that those shares may be ex-dividend earlier, in which case there would be a need to keep a close eye out for the announcement in order to stand in line for the 8% dividend.

For now, Seagate does look as if it still has the ability to sustain that dividend which was increased only last quarter.

 

Traditional Stocks: General Motors

Momentum Stocks: Seagate Technolgy

Double-Dip Dividend: Williams-Sonoma (1/22 $0.35)

Premiums Enhanced by EarningsNetflix (1/19 PM), Verizon (1/21 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.

Weekend Update – January 10, 2016

new year starts off with great promise.

If seems so strange that the stock market often takes on a completely different persona from one day to the next.

Often the same holds true for one year to the next. despite there being nothing magical nor mystical about the first trading day of the year to distinguish it from the last trading day of the previous year.

For those that couldn’t wait to be finally done with 2015 out of the expectation conventional wisdom would hold and that the year following a flat performing year would be a well performing year, welcome to an unhappy New Year.

2015 was certainly a year in which there wasn’t much in the way of short term memory and the year was characterized by lots of ups and downs that took us absolutely nowhere as the market ended unchanged for the year.

While finishing unchanged should probably result in neither elation nor disgust, scratching beneath the surface and eliminating the stellar performance of a small handful of stocks could lead to a feeling of disgust.

Or you could simply look at your end of the portfolio year bottom line. Unless you put it all into the NASDAQ 100 (NDX) or the ProShares QQQ (NASDAQ:QQQ), which had no choice but to have positions in those big gainers, it wasn’t a very good year.

You don’t have to scratch very deeply beneath the surface to already have a sense of disgust about the way 2016 has gotten off to its start.

There are no shortage of people pointing out that this first week of 2016 was the worst start ever to a new year.

Ever.

That’s much more meaningful than saying that this is the worst start since 2019.

A nearly 7% decline in the first week of trading doesn’t necessarily mean that 2016 won’t be a good one for investors, but it is a big hole from which to have to emerge.

Of course a 7% decline for the week would look wonderful when compared to the situation in Shanghai, when a 7% loss was incurred to 2 different days during the week, as trading curbs were placed, markets closed and then trading curbs eliminated.

If you venture back to the June through August 2015 period, you might recall that our own correction during the latter portion of that period was preceded by two meltdowns in Shanghai that ultimately saw the Chinese government enact a number of policies to abridge the very essence of free markets. Of course, the implicit threat of the death penalty for those who may have knowingly contributed to that meltdown may have set the path for a relative period of calm until this past week when some of those policies and trading restrictions were lifted.

At the time China first attempted to control its markets, I believed that it would take a very short time for the debacle to resume, but these days, the 5 months since then are the equivalent of an eternity.

While China is again facing a crisis, the United States is back to the uncomfortable position of being the dog that is getting wagged by the tail.

US markets actually resisted the June 2015 initial plunge in China, but by the time the second of those plunges occurred in August, there was no further resistance.

For the most part the two markets have been in lock step since then.

Interestingly, when the US market had its August 2015 correction, falling from the S&P 500 2102 level, it had been flat on the year up to that point. Technicians will probably point to the fact that the market then rallied all the way back to 2102 by December 1, 2015 and that it has been nothing but a series of lower highs and lower lows since then, culminating in this week.

The decline from the recent S&P 500 peak at 2102 to 1922 downhill since then is its own 8.5%, putting us easily within a day’s worth of bad performance of another correction.

Having gone years without a traditional 10% correction, we’re now on the doorstep of the second such correction in 5 months.

While it would be easy to thank China for helping our slide, this past week was another of those perfect storms of international bad news ranging from Saudi-Iran conflict, North Korea’s nuclear ambitions and the further declining price of oil, even in the face of Saudi-Iran conflict.

Personally, I think the real kiss of death was news that 2015 saw near term record inflows into mutual funds and that the past 2 months were especially strong.

I’ve never been particularly good at timing, but there may be reason to believe that at the very least those putting their money into mutual funds aren’t very good at it either.

If I still had a shred of optimism left, I might say that the flow into mutual funds might reflect more and more people back in the workforce and contributing to workplace 401k plans.

If that’s true, I’m sure those participants would agree with me that it’s not a very happy start to the year. For those attributing end of the year weakness to the “January Effect” and anticipating some buying at bargain prices to drive stocks higher, that theory may have had yet another nail placed in its coffin.

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

2015 turned out to be my least active year for opening new positions since I’ve been keeping close track. Unfortunately, of those 107 new positions, 29 are still open and 15 of those are non-performing, as they await some opportunity to sell meaningful calls against them.

If you would have told me a year ago that I would not have rushed into to pick up bargains in the face of a precipitous 7% decline, I would have thought you to be insane.

While I did add one position last week, the past 2 months or so have been very tentative with regard to my willingness to ease the grip on cash and for the moment there’s not too much reason to suspect that 2016 will be more active than 2015.

With that said, though, volatility is now at a level that makes a little risk taking somewhat less of a risk.

While volatility has now come back to its October 2015 level, it is still far from its very brief peak in August 2015, despite the recent decline being almost at the same level as the decline seen in August.

Of course that 2% difference in those declines, could easily account for another 10 or so points of volatility. Even then, we would be quite a distance from the peak reached in 2011, when the market started a mid-year decline that saw it finish flat for the year.

The strategy frequently followed during periods of high volatility is to considering rolling over positions even if they are otherwise destined for assignment.

The reason for that is because the increasing uncertainty extends into forward weeks and drives those premiums relatively higher than the current week’s expiring premiums. During periods of low volatility, the further out in time you go to sell a contract, the lower the marginal increase in premium, as a reflection of less uncertainty.

For me, that is an ideal time and the short term outlook taken during a period of accelerating share prices is replaced by a longer term outlook and accumulation of greater premium and less active pursuit of new positions.

The old saying “when you’re a hammer, everything looks like a nail,” has some applicability following last weeks broad and sharp declines. If you have free cash, everything looks like a bargain.

While no one can predict that prices will continue to go lower as they do during the days after the Christmas shopping season, I’m in no rush to run out and pay today’s prices because of a fear that inventory at those prices will be depleted.

The one position that I did open last week was Morgan Stanley (NYSE:MS) and for a brief few hours it looked like a good decision as shares moved higher from its Monday lows when I made the purchase, even as the market went lower.

That didn’t last too long, though, as those shares ultimately were even weaker than the S&P 500 for the week.

While I already own 2 lots of Bank of America (NYSE:BAC), the declines in the financial sector seem extraordinarily overdone, even as the decline in the broader market may still have some more downside.

As is typically the case, that uncertainty brings an enhanced premium.

In Bank of America’s case, the premium for selling a near the money weekly option has been in the 1.1% vicinity of late. However, in the coming week, the ROI, including the potential for share appreciation is an unusually high 3.3%, as the $15.50 strike level offers a $0.19 premium, even as shares closed at $15.19.

With earnings coming up the following week, if those shares are not assigned, I would consider rolling those contracts over to January 29, 2016 or later.

At this point, most everyone expects that Blackstone (NYSE:BX) will have to slash its dividend. As a publicly traded company, it started its life as an over-hyped IPO and then a prolonged disappointment to those who rushed into buy shares in the after-market.

However, up until mid-year in 2015, it had been on a 3 year climb higher and has been a consistently good consideration for a buy/write strategy, if you didn’t mind chasing its price higher.

I generally don’t like to do that, so have only owned it on 3 occasions during that time period.

Since having gone public its dividend has been a consistently moving target, reflecting its operating fortunes. With it’s next ex-dividend date as yet unannounced, but expected sometime in early February, it reports earnings on January 28, 2015.

That presents considerable uncertainty and risk if considering a position. I don’t believe, however, that the announcement of a decreased dividend will be an adverse event, as it is both expected and has been part of the company’s history. WHat will likely be more germane is the health of its operating units and the degree of leverage to which Blackstone is exposed.

If willing to accept the risk, the premium reward can be significant, even if attenuating the risk by either selling deep in the money calls or selling equally out of the money put contracts.

I’m already deep under water with Bed Bath and Beyond (NASDAQ:BBBY), but after what had been characterized as disappointing earnings last week, it actually traded fairly well, despite the overall tone of the market.

It is now trading near a multi-year low and befitting that uncertainty it’s option premiums are extraordinarily generous, despite having a low beta,

As is often the case during periods of heightened volatility, consideration can be given to the sale of puts options rather than executing a buy/write.

However, given its declines, I would be inclined to consider the buy/write approach and utilize an out of the money option in the hopes of accumulating share appreciation and dividend.

If selling puts, I would sell an out of the money put and settle for a lower ROI in return for perhaps being able to sleep more soundly at night.

During downturns, I like to place some additional focus on dividends, but there aren’t very many good prospects in the coming week.

One ex-dividend position that does get my attention is AbbVie (NYSE:ABBV).

As it is, I’m under-invested in the healthcare sector and AbbVie is currently trading right at one support level and has some additional support below that, before being in jeopardy of approaching $46.50, a level to which it gapped down and then gapped higher.

It has a $0.57 dividend, which means that it is greater than the units in which its strike levels are defined. While earnings aren’t due to be reported until the end of the month, its premium is more robust than is usually the case and you can even consider selling a deep in the money call in an effort to see the shares assigned early. For what would amount to a 2 day holding, doing so could result in a 1.2% ROI, based upon Friday’s closing prices and a $55 strike level.

Finally, retail was especially dichotomous last week as there were some very strong days even during overall market weakness and then some very weak days, as well.

For those with a strong stomach, Abercrombie and Fitch (NYSE:ANF) is well off from its recent lows, but it did get hit hard on Friday, along with the retail sector and everything else.

As with AbbVie, the risk is that while shares are now resting at a support level, the next level below represents an area where there was a gap higher, so there is really no place to rest on the way down to $20.

The approach that I would consider for an Abercrombie and Fitch position to sell out of the money puts, where even a 6% decline in share price could still provide a return in excess of 1% for the week.

When selling puts, however, I generally like to avoid or delay assignment, if possible, so it is helpful to be able to watch the position in the event that a rollover is necessary if shares do fall 6% or more as the contract is running out.

Traditional Stocks: Bank of America, Bed Bath and Beyond

Momentum Stocks: Abercrombie and Fitch, Blackstone

Double-Dip Dividend: AbbVie (1/13 $0.57)

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.

Weekend Update – January 3, 3016

The "What If" game is about as fruitless as it gets, but is also as much a part of human nature as just about anything else.

How else could I explain having played that game at a high school reunion?

That may explain the consistent popularity of that simple question as a genre on so many people’s must read lists as the New Year begins.

Historical events lead themselves so beautifully to the "What If" question because the cascading of events can be so far reaching, especially in an interconnected world.

Even before that interconnection became so established it didn’t take too much imagination to envision far reaching outcomes that would have been so wildly different around the world even a century or more later.

Imagine if the Union had decided to cede Fort Sumpter and simply allowed the South to go its merry way. Would an abridged United States have been any where near the force it has been for the past 100 years? What would that have meant for Europe, the Soviet Union, Israel and every other corner of the world?

Second guessing things can never change the past, but it may provide some clues for how to approach the future, if only the future could be as predictable as the past.

Looking back at 2015 there are lots of "what if" questions that could be asked as we digest the fact that it was the market’s worst performance since 2008.

In that year the S&P 500 was down about 37%, while in 2015 it was only down 0.7%. That gives some sense of what kind of a ride we’ve been on for the past 7 years, if the worst of those years was only 0.7% lower.

But most everyone knows that the 0.7% figure is fairly illusory.

For me the "what if" game starts with what if Amazon (AMZN), Alphabet (GOOG), Microsoft (MSFT) and a handful of others had only performed as well as the averages.

Of course, even that "what if" exercise would continue to perpetuate some of the skew seen in 2015, as the averages were only as high as they were due to the significant out-performance of a handful of key constituent components of the index. Imagining what if those large winners had only gone down 0.7% for the year would still result in an index that wouldn’t really reflect just how bad the underlying market was in 2015.

While some motivated individual could do those calculations for the S&P 500, which is a bit more complex, due to its market capitalization calculation, it’s a much easier exercise for the DJIA.

Just imagine multiplying the 10 points gained by Microsoft , the 30 pre-split points gained by Nike (NKE), the 17 points by UnitedHealth Group (UNH), the 26 points by McDonalds (MCD) or the 29 points by Home Depot (HD) and suddenly the DJIA which had been down 2.2% for 2015, would have been another 761 points lower or an additional 4.5% decline.

Add another 15 points from Boeing (BA) and another 10 from Disney (DIS) and we’re starting to inch closer and closer to what could have really been a year long correction.

Beyond those names the pickings were fairly slim from among the 30 comprising that index. The S&P 500 wasn’t much better and the NASDAQ 100, up for the year, was certainly able to boast only due to the performances of Amazon, Netflix (NFLX), Alphabet and Facebook (FB).

Now, also imagine what if historically high levels of corporate stock buybacks hadn’t artificially painted a better picture of per share earnings.

That’s not to say that the past year could have only been much worse, but it could also have been much better.

Of course you could also begin to imagine what if the market had actually accepted lower energy and commodity prices as a good thing?

What if investors had actually viewed the prospects of a gradual increase in interest rates as also being a good thing, as it would be reflective of an improving, yet non-frothy, economy?

And finally, for me at least, What if the FOMC hadn’t toyed with our fragile emotions and labile intellect all through the year?

Flat line years such as 2015 and 2011 don’t come very often, but when they do, most dispense with the "what if" questions and instead focus on past history which suggests a good year to follow.

But the "what if" game can also be prospective in nature, though in the coming year we should most likely ask similar questions, just with a slight variation.

What if energy prices move higher and sooner than expected?

What if the economy expands faster than we expected?

What if money is running dry to keep the buyback frenzy alive?

Or, what if corporate earnings actually reflect greater consumer participation?

You may as well simply ask what if rational thought were to return to markets?

But it’s probably best not to ask questions when you may not be prepared to hear the answer.

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

For those, myself included, who have been expecting some kind of a resurgence in energy prices and were disbelieving when some were calling for even further drops only to see those calls come true, it’s not really clear what the market’s reaction might be if that rebound did occur.

While the market frequently followed oil lower and then occasionally rebounded when oil did so, it’s hard to envision the market responding favorably in the face of sustained oil price stability or strength.

I’ve given up the idea that the resurgence would begin any day now and instead am more willing to put that misguided faith into the health of financial sector stocks.

Unless the FOMC is going to toy with us further or the economy isn’t going to show the kind of strength that warranted an interest rate increase or warrants future increases, financials should fare well going forward.

This week I’m considering MetLife (MET), Morgan Stanley and American Express (AXP), all well off from their 2015 highs.

MetLife, down 12% during 2015 is actually the best performer of that small group. As with Morgan Stanley, almost the entirety of the year’s loss has come in the latter half of the year when the S&P 500 was performing no worse than it had during the first 6 months of the year.

Both Morgan Stanley and MetLife have large enough option premiums to consider the sale of the nearest out of the money call contracts in an attempt to secure some share appreciation in exchange for a somewhat lo0wer option premium.

In both cases, I think the timing is good for trying to get the best of both worlds, although Morgan Stanley will be among the relatively early earnings reports in just a few weeks and still hasn’t recovered from its last quarter’s poorly received results, so it would help to be prepared to manage the position if still held going into earnings in 3 weeks.

By contrast, American Express reports on that same day, but all of 2015 was an abysmal one for the company once the world learned that its relationship with Costco (COST) was far more important than anyone had believed. The impending loss of Costco as a branded partner in the coming 3 months has weighed heavily on American Express, which is ex-dividend this week.

I would believe that most of that loss in share has already been discounted and that disappointments aren’t going to be too likely, particularly if the consumer is truly making something of a comeback.

There has actually been far less press given to retail results this past holiday season than for any that I can remember in the recent and not so recent past.

Most national retailers tend to pull rabbits out of their hats after preparing us for a disappointing holiday season, with the exception of Best Buy (BBY), which traditionally falls during the final week of the year on perpetually disappointing numbers.

Best Buy has already fallen significantly in th e past 3 months, but over the years it has generally been fairly predictable in its ability to bounce back after sharp declines, whether precipitous or death by a thousand cuts.

To my untrained eye it appears that Best Buy is building some support at the $30 level and doesn’t report full earnings for another 2 months. Perhaps it’s its reputation preceding it at this time of the year, but Best Buy’s current option premium is larger than is generally found and I might consider purchasing shares and selling out of the money calls in the anticipation of some price appreciation.

Under Armour (UA) is in a strange place, as it is currently in one of its most sustained downward trends in at least 5 years.

While Nike, its arch competitor, had a stellar year in 2015, up until a fateful downtrend that began in early October, Under Armour was significantly out-performing Nike, even while the latter was some 35% above the S&P 500’s performance.

That same untrained eye sees some leveling off in the past few weeks and despite still having a fairly low beta reflecting a longer period of observation than the past 2 months, the option premium is continuing to reflect uncertainty.

With perhaps some possibility that cold weather may finally be coming to areas where it belongs this time of the year, it may not be too late for Under Armour to play a game of catch up, which is just about the only athletic pursuit that I still consider.

Finally, Pfizer (PFE) has been somewhat mired since announcing a planned merger, buyout, inversion or whatever you like to have it considered. The initially buoyed price has fallen back, but as with Dow Chemical (DOW) which has also fallen back after a similar merger announcement move higher, it has returned to the pre-announcement level.

I view that as indicating that there’s limited downside in the event of some bad news related to the proposed merger, but as with Dow Chemical, Best Buy and Under Armour, the near term option premium continues to reflect perceived near term risk.

Whatever Pfizer;’s merger related risk may be, I don’t believe it will be a near term risk. From the perspective of a call option seller that kind of perception in the face of no tangible news can be a great gift that keeps giving.

Traditional Stocks: MetLife. Morgan Stanley, Pfizer

Momentum Stocks: Best Buy, Under Armour

Double-Dip Dividend: American Express (1/6 $0.29)

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.

Weekend Update – December 27, 2015

Mathematicians have always been fascinated by the special properties of the number “zero.”

It’s not really certain how long the concept of zero has been around or who may have been responsible for introducing the concept, but from my perspective all of the fascination is much ado about nothing.

If the alternative is going to be something bad, I suppose that nothing is good, but it isn’t always that way.

Not all nothings are created equally.

Ancient mathematicians were themselves fascinating people whose minds were so expansive during an age when physicality was more important than cogitation.

I can only imagine what a royal court or patron would have thought after having supported those activities of a deep thinking mathematician, only to ask “Well, what have you done for the past year? What do you have to show for your efforts and my patronage?”

“I have discovered Nothing,” wasn’t likely to be well accepted without some significant opportunity for explanation. Fast talking would have to replace slow and methodical thinking if the gallows were to be avoided.

That’s especially true if the other mathematician your patron had been thinking of taking into the royal court went on to discover the magic of compound interest for the sovereign next door.

If you’re a hedge fund manager that example has some modern day application. Although we don’t generally send people to the gallows anymore for poor performance, it has been another rough year for hedge funds who are certain to realize that the very idea of “making love out of nothing at all” won’t apply to their investors.

In general, as someone who sells covered options, I like the idea of no net change, as long as there are some spasms of activity to keep people on their toes and guessing about what’s next.

Those spasms of activity create the uncertainty that is also referred to as “volatility,” and that volatility drives option premiums.

Most option buyers are looking to ride the wave of that spasm and trying to predict its onset.

In what was thought to be an oddity, 2011 ended the year with virtually no change in the S&P 500.

2011 was a great year for a covered option strategy as volatility remained high in the latter half of the year and the premiums were so engorged, it even made sense to rollover positions that were going to get called away or to sell deep in the money options.

2015? Not so much.

With now just a week remaining in 2015, that historical oddity may repeat itself as the S&P 500 is 0.1% higher, but for those who revel in volatility, 2015 was far different from 2011.

In both cases the market’s deterioration began in August and in both cases volatility spiked, but in 2015 volatility is likely to end the year lower than where it had started the year.

Beyond that, however, the nature of the “no change” seen in the S&P 500 was far different between 2011 and 2015.

The lack of change in 2011 was fairly well distributed among a broad swath of stocks. Very few stocks thrived and very few stocks plunged. The vast majority of the S&P 500 component stocks just muddled their way through the year.

In 2015, though, a fairly small handful of stocks really, really thrived and many, many stocks, really, really plunged. The skew in the fortunes of stocks was as pronounced as I can recall, with far more vastly under-performing the averages.

The net result in both 2011 and 2015 was nothing, unless you used your personal bottom line as a metric.

It bears repeating: Not all nothings are created equally.

For those who look at these sort of things, the general belief is that the year following a year of no change in the markets tends to be a good year. That was the case in 2012. Not a great year, but a good year by most measures.

If you liked 2012 and you wouldn’t mind a repeat of 2014 and aren’t necessarily holding out for another repeat of 2013, the hope has to be that this year of nothing leads to a year of some redemption, as is a befitting wish during this holiday season of redemption.

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

I’ve opened fewer new positions in the past 3 weeks than I have in at least 5 years. Looking back at records, I was more actively trading the day after a heart attack, using the electrical outlet for a heart monitor in a London hospital to get the more important connections needed, than in December 2015.

Hopefully January 2016 will be different, but in another holiday shortened trading week, there’s very little reason to have any confidence of what the last week of 2015 has in store.

Looking back at the previous 51 weeks, there wasn’t much reason to believe that there was a rational basis to much of anything that ended up occurring.

This week, looking at the potential trades outlined, it’s fairly clear that I didn’t make it very far down the alphabetical list of stocks that I follow.

Cisco (CSCO), Coach (COH), Comcast (CMCSA), Cypress Semiconductor (CY), Deere (DE) and Dow Chemical (DOW) don’t represent a very broad view of what’s available, but it’s broad enough for me this week.

With the exception of Coach, all of the remainder are ex-dividend next week or on the first Monday of 2016 and with uncertainty still in the air, the idea of dividends holds more and more appeal for me.

Dow Chemical and Coach were both assigned away from me last week, although I still hold shares of each and wouldn’t mind adding to those.

With next week likely to be one that has some news of holiday sales, the predominant theme that we’re likely to hear as how the unusually warm weather across much of the country has depressed sales. We’ll probably also hear a lot about the continuing growth of on-line sales, although the inability of online retailers to get Christmas packages to homes in time will also garner attention.

While traditional retailers may suffer from the warm weather, I don’t think that Coach will be in quite the same predicament. 

Having just captured its dividend and with earnings coming up in a month, I would consider adding shares if it either stays flat to open the week or gives back a bit more of what it did to end the previous week. I’d like to consider a re-purchase of those assigned shares somewhere below $32.50, but I do see some upside potential heading into earnings and perhaps beyond.

Dow Chemical is ex-dividend this week and for the time being it may be dominated by news regarding its complex merger with DuPont (DD), whose complexity is likely designed to placate regulators. The proposed plan involves a certain amount of trust, in that a post-merger break up, a year or so down the line, is part of strategy and we all know how things may be subject to change.

Regulators may know that, too.

The nice thing about considering a position in Dow Chemical, however, is that it doesn’t appear as if there’s very much premium in the share price, reflecting the merger, any longer. Following a brief spike when the news leaked, the share price has returned to pre-leak levels.

Unlike most “Double Dip Dividend” trades where I typically prefer to sell in the money call options, in this case I may want to sell an out of the money option in anticipation of  continued price strength.

Among the potential dividend related trades are Comcast and Cisco, both of which are ex-dividend on the Monday of the following week.

In such cases, I like to look for an opportunity to consider selling an in the money extended weekly option in the hopes of seeing early assignment by the option holder in their attempt to secure the dividend.

That kind of strategy is better when volatility is higher, but can still effectively offer the option seller a portion of the dividend or in essence an enhancement to the option premium that would have been obtained if having sold a weekly option.

For example, based on the week’s closing prices, purchasing Comcast shares at $57.30 and selling a January 8, 2016 $57 option would provide a $1.04 premium.

If those shares were assigned early in a bid to grab the $0.25 dividend, the ROI for the single week of holding would be 1.3%.

If however, the shares were not assigned early, but were rather assigned the following week, the ROI would be 1.7%, so there is some justification for wanting an early assignment, particularly if you believe you can then recycle the money received back upon assignment into something else that can have a weekly ROI in excess of the additional 0.4% that could have been achieved if not assigned early.

Of course, there also has to be an underlying reason to believe that the shares are an appropriate holding in your portfolio.

Following some weakness, I think this is a good time to consider Comcast shares, as I don’t see any near term threat, although the longer term for all traditional media outlets and content providers is murky.

Cisco, on the other hand, has been successfully bouncing off from its support level at about $1 below the week’s closing price. The ROI numbers aren’t quite as compelling as for Comcast if considering selling an in the money option. However, in this case, I would consider selling an extended weekly out of the money option, again, not despairing if the shares are assigned early in an attempt by the contract holder to secure the dividend.

Deere is also ex-dividend this week and its chart from August onward, reminds me of Cisco’s chart from the end of October and I would also consider the use of an out of the money option. However, as the Deere ex-dividend date is on Tuesday, you can still consider selling a weekly in the money option if looking for a potentially quick “take the money and run” opportunity.

Since Deere’s dividend of $0.60 is larger than the strike level gradations of $0.50 and with volatility low, using a weekly  in the money option isn’t likely to result in early assignment unless shares are more than $0.60 in the money at Monday’s close.

Using a slightly more in the money option, such as the December 31, 2015 $78 option, based on last week’s closing price of $78.79 is more likely to result in an early assignment, but with only a net $0.37 to show for the effort.

Still, for a single day of holding, that’s not too bad.

On the other hand, using a January 8, 2016 $78 option could yield a net premium of $0.73 if shares are assigned early, or a total return of $1.33 if assigned at the intended expiration.

Finally, Cypress Semiconductor is also ex-dividend this week. 

It has fallen a long way ever since its strategic buyout of rival Integrated Silicon Solution was blocked by a successful rival bid.

One thing that I wouldn’t do is to discount the ability of its founder and CEO to use his own expansive mind to position Cypress Semiconductor better in a very competitive environment.

T.J. Rodgers has certainly been a visionary and strategic master. While I do currently own two lots of Cypress Semiconductor, I wouldn’t rule out adding another lot in order to secure the dividend and some share gains before the January 15, 2016 contract expiration.

However, if those contracts aren’t likely to get assigned, I would probably consider rolling over to the March 2016 contract, as earnings are reported on January 21, 2016 and shares can be volatile upon earnings news and some additional time for recovery could be appreciated while still having been able to add some premium income into the position’s net return.



Traditional Stocks: none

Momentum Stocks: Coach

Double-Dip Dividend: Cisco (1/4/16 $0.21), Comcast (1/4/16 $0.25), Cypress Semiconductor (12/29/15 $0.11), Deere (12/29/15 $0.60), Dow Chemical (12/29/15 $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.

Weekend Update – December 20, 2015

After an absolutely horrible week that came on the heels of an absolutely glorious reaction to the Employment Situation Report just 2 weeks ago, it looked as if some common sense finally had come to the market as the clock was ticking down on the year.

After that glorious reaction the DJIA found itself 0.1% higher on the year, only to see itself sink to 3.1% lower just a week later.

But this past Monday after adding another 100 points to that loss, it all turned around mid-day and kept going higher right up to and beyond the FOMC Statement release and beyond.

By the time the FOMC broke an almost 10 year hiatus on raising interest rates and Janet Yellen finished telling us all that the rate rise wasn’t likely to be the only one in the coming year, the market had embraced the news and taken the index to a point that it was almost 0.5% higher on the year.

That’s not much after nearly a year’s work, but it’s better than some of the alternatives.

Strong buying heading into the widely expected FOMC announcement looked as if it was an attempt to capitalize on what was expected to be a strong year end rally as the interest rate overhang was finally coming to its end.

There’s nothing more American than trying to foresee and then take advantage of an opportunity and to then create a “feel good” story, by using the final trading days of the year to bring some glory to a year that the net change had done little justice toward portraying the wild activity seen.

However, the kiss of death probably came as analyst after analyst started talking about a year end rally and some even began to dust off the old “we’re setting up for a rip your face off rally” cry.

With that kind of optimism it probably shouldn’t have been too much of a surprise that as the week came to its end the DJIA was 3.9% lower for the year, with the S&P 500 faring better, being only 2.6% lower.

While society may appreciate the motives behind many non-profits, it’s different when that status is intentional.

With now less than 10 trading days left before 2015 becomes inscribed there’s still plenty of time to move away from the flat line, although many will hope that we don’t move too far, as the year following q flat performing year tends to be very good.

Just like in far too many basketball games, it all comes down to the final seconds when a single missed opportunity can make all of the difference in the outcome.

The upcoming Christmas holiday trade shortened week does have a GDP report release, but not much else, although it didn’t take much to set markets upside down this week.

That GDP data may make all of the difference for the year and it may be the true test of just how firm that recent embrace of the FOMC’s decision may be.

The key to 2016 may very well end up being the same thing that kept 2015 in shackles for most of the year.

The fear of an interest rate increase was the prevailing theme as the market generally recoiled at the very thought of those rates moving higher. Instead, traders should have done what it did on far too few occasions during the year when coming to a realization that a small rate increase would not hamper growth and that an increase was the recognition of an expanding economy.

Those realizations were infrequent and short lived, just as it was this past week.

In essence, all of 2015 has been a large missed opportunity where an irrational fear of a return of 1970s era interest rates held reign.

That’s where the GDP data comes in as it intersects with Janet Yellen’s suggestion that last week’s announcement wasn’t likely to be part of a “one and done” strategy.

A strong GDP, particularly if above consensus and coupled with good news on home sales, durable goods and jobless claims may serve to fuel the fear of more interest rate hikes.

It will take something really tangible to offset the fears of an image of unrestrained interest rate increases. If the FOMC is right, that should mean that corporate earnings will finally begin to reflect actual economic expansion rather than contraction of the number of shares floating around.

While the next earnings season begins in just a month, perhaps some retail sales data coming as Christmas shopping concludes may give us some hope that the consumer is really coming alive. It would be nice to see consumers helping to grow corporate earnings per share the old fashioned way, by increasing revenues.

It would then be especially nice to see traders taking that opportunity to take a stake in a growing economy.

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

In the past 2 weeks I’ve only opened a single new position.

In the week following the Employment Situation Report release I never got a feeling of comfort to move in and buy at what may have appeared to be developing bargain prices.

I had a little bit of regret last week as it didn’t take long for the market to develop a positive tone and move higher, yet even then I had a hard time justifying doing very much and really wanting to preserve cash.

Ultimately that feeling of regret gave way to some relief.

This week doesn’t have me in a very different state of mind and I expect to be reluctant to part with cash, particularly as the week’s option premiums will reflect a holiday shortened week.

In setting up a covered option portfolio I try to use a laddered approach to expiration dates in the hope that being somewhat diversified in those dates there can be some opportunity to not get caught with too many expiring positions at one time either getting stranded or assigned.

Even when not adding new positions as a means of generating weekly income, with some luck the expiring positions can become the sources of income for the week if they are able to be rolled over.

I had some decent fortune with that last week and have a number of positions up for expiration in the coming week that could potentially serve as income sources, although I would prefer that they become sources of replenishment for a low cash reserve.

This week, if spending down any of that reserve, I don’t expect to get very far flung in the positions under consideration.

Unfortunately, there aren’t any upcoming ex-divided positions this week to consider and my initial thought is to think about less risky kind of positions, but while it is a more speculative position, Seagate Technolgy (STX) has been behaving well at its current price.

Looking at 10 buy/writes or put sales of Seagate Technology over a period of 4 years has me wishing I had followed through on consideration of it more frequently. The shares are almost always volatile and they tend to defined trade in a range for a period of time following a volatile move, although the risk is always for another volatile move when otherwise unexpected.

My Seagate Technology positions have been evenly split between buy/writes and put sales, tending to favor the put sale when there is no near term ex-dividend date at hand. That has been the case with 3 put sales in the past 2 months.

Based on Friday’s closing price a put sale at a strike 1.8% below that closing price could still offer a 1.3% ROI for a week.

My most recent short put position was the longest of any of my previous positions and lasted 29 days, including the initial sale of puts and 3 rollovers in an attempt to defer assignment of shares, which I would be willing to take if the ex-dividend date was soon upcoming.

The finance sector performed better than the S&P 500 for the week, but they were even more harshly punished on the final 2 days of the week, even as some of the guessing about interest rates has been taken out of the equation.

I already own 2 lots of Bank of America (BAC) and after last week am ready to add a position in it or perhaps returning to Morgan Stanley (MS).

I had owned the latter on 17 occasions during a 19 month period in 2012 and 2013, but only 4 times since then. Those 4 times have all been in the past two months and I wouldn’t mind trying to re-create some of the experiences from 2012 and 2013.

On the other hand, I’ve owned Bank of America less frequently, but have already owned shares on 7 occasions in 2015. In my world, the more often you own shares in any given period of time the better it is performing for you, while hardly performing for anyone else just watching the shares go up and down.

In both cases the recent large moves up and down have created appealing opportunities to accumulate option premiums as well as thinking about trying to capture some gains on the shares themselves. For those a bit more cautious, some consideration could be given to foregoing the potential gain on shares by selling in the money calls or out of the money puts.

As long as their volatility remains elevated the risk is reduced as the premiums themselves become elevated as well. Additionally,as there’s little reason to believe that interest rates are heading lower any time soon, the financials may have some wind at their backs.

For investors, there is nothing special about Pfizer (PFE) at the moment, other than its quest to escape US corporate taxes. Unfortunately for Pfizer, there is nothing otherwise special about it at the moment.

Where the opportunity may be is in the amount of time that it could take for it to actually move forward with its plans. Shares are currently trading at about the level they had been when news came out of their plans so there may not be too much downside if there is an eventual roadblock placed in their path.

In the meantime, trading in a defined range may make it a hospitable place to park some cash while also collecting option premiums and perhaps a dividend, as well.

Finally, for some reason I heard the classic Byrds song “Turn, Turn, Turn” many times this week and it made me think that in addition to a time for war and a time for peace, there is also a time for comfort foods and maybe monthly options, as well.

In this case, Dunkin Brands (DNKN) offers both that form of comfort and only offers monthly option contracts.

It is well off from its highs from 3 months ago and has recently traded higher from its low point 2 months ago.

I might be very interested in adding shares if there’s any additional discomfort in its share price this week and might consider even selling March 2016 calls in an effort to ride out any earnings risk in early February as well as to collect its dividend and some potential gain on the shares themselves.

That would be sweet.

Traditional Stocks: Bank of America, Dunkin Brands, Morgan Stanley, Pfizer

Momentum Stocks: Seagate Technology

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.

Weekend Update – December 13, 2015

Sometimes if you take a step back and look at the big picture it’s much easer to see what’s going on as you distance yourself from the source.

No one, for example, falls off a cliff while watching the evening news from the safety of their media room, although being in the last car of a train doesn’t necessarily protect you when the lead car is getting ready to take a dive.

I’m not certain that anyone, whether knee deep in stocks or just casually looking at things from a dispassionate distance could have foreseen the events of the past week.

For starters, there really were no events to foresee. Certainly none to account for the nearly 4% decline in the S&P 500, with about half of that loss coming on the final trading day of the week.

What appears to have happened is that last week’s strong Employment Situation Report was the sharp bend in the track that obscured what was awaiting.

Why the rest of the track beyond that bend disappeared is anyone’s guess, as is the distance to the ground below.

With Friday’s collapse that added on to the losses earlier in the week, the market is now about 6% below its August highs and 2.3% lower on the year, with barely 3 weeks left in 2015.

Not too long ago we saw that the market was again capable of sustaining a loss of greater than 10%, although it had been a long time since we had last seen that occur. The recovery from those depths was fairly quick, also hastened by an Employment Situation report, just 2 months ago.

I don’t generally have very good prescience, but I did have a feeling of unease all week, as this was only about the 6th time in the past 5 years that I didn’t open any new positions on the week. All previous such weeks have also occurred in 2015.

The past week had little to be pleased about. Although there was a single day of gains, even those were whittled away, as all of the earlier attempts during the week to pare losses withered on the vine.

Most every sell-off this year, particularly coming at the very beginning of the week has seemed to be a good point to wade in, in pursuit of some bargains. Somehow, however, I never got that feeling last week, although I did briefly believe that the brakes were put on just in time before the tracks ran out up ahead early during Thursday’s trading.

For that brief time I thought that I had missed the opportunity to add some bargains, but instead used the strength to roll over positions a day earlier than I more normally would consider doing.

That turned out to be good luck, as there again was really no reason to expect that the brakes would give out, although that nice rally on Thursday did become less impressive as the day wore on.

Maybe that should have been the sign, but when you’re moving at high speed and have momentum behind you, it’s not easy to stop, much less know that there’s a reason to stop.

Now, as a new and potentially big week is upon us with the FOMC Statement release and Janet Yellen’s press conference to follow, the real challenge may be in knowing when to get going again.

I plan on being circumspect, but wouldn’t mind some further declines to start the coming week. At some point, you can hand over the edge and realize that firm footing isn’t that far below. Getting just a little bit closer to the ground makes the prospect of taking the leap so much easier.

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

It’s not entirely accurate to say that there were no events during the past week.

There was one big, really big event that hit early in the week and was confirmed a few days later.

That was the merger of DJIA component DuPont (DD) and its market capitalization equivalent and kissing cousin, Dow Chemical (DOW).

After both surged on the initial rumor, they gave back a substantial portion of those gains just two days later.

I currently own shares of Dow Chemical and stand to lose it to assignment at $52.50 next week, although it does go ex-dividend right before the end of the year and that may give some incentive to roll the position over to either delay assignment or to squeeze out some additional premium.

While it would be understandable to think that such a proposed merger would warrant regulatory scrutiny, the announced plans to break up the proposed newly merged company into 3 components may ease the way for the merger.

A with the earlier mega-merger between Pfizer (PFE) and Allergan (AGN) for some more questionable reasons related to tax liability, even if higher scrutiny is warranted, it’s hard to imagine action taken so quickly as to suppress share price. Because of that unlikely situation, the large premium available for selling Dow Chemical calls makes the buy/write seem especially inviting, particularly as the dividend is factored into the equation.

General Motors (GM) is ex-dividend this coming week and like many others, the quick spike in volatility has made its option premiums more and more appealing, even during a week that it is ex-dividend.

I almost always buy General Motors in advance of its dividend and as I look back over the experience wonder why I hadn’t done so more often. 

Its current price is below the mean price for the previous 6 holdings over the past 18 months and so this seems to be a good time to add shares to the ones that I already own.

The company has been incredibly resilient during that time, given some of its legal battles. That resilience has been both in share price and car sales and am improving economy should only help in both regards.

After a month of rolling over Seagate Technology (STX) short puts, they finally expired this past Friday. The underlying shares didn’t succumb to quite the same selling pressure as did the rest of the market.

As with Dow Chemical, I did give some thought to keeping the position alive even as I want to add to my cash position and the expiration of a short put contract would certainly help in that regard.

With the Seagate Technolgy cash back in hand after the expiration of those puts, I would like to do it over again, especially if Seagate shows any weakness to start the week. 

Those shares are still along way away from recovering the large loss from just 2 months ago, but they have traded well at the $34.50 range.

By my definition that means a stock that has periodic spasms of movement in both directions, but returns to some kind of a trading range in between. Unfortunately, sometimes those spasms can be larger than expected and can take longer than expected to recover.

As long as the put market has some liquidity and the options are too deeply in the money, rolling over the short puts to keep assignment at bay is a possibility and the option premiums can be very rewarding

Finally, it was a rough week for most all stocks, but the financials were hit especially hard as the interest rate on a 10 Year Treasury Note fell 6%.

That hard hit included Morgan Stanley (MS), which fell 9% on the week and MetLife (MET), which fared better, dropping by only 8%.

The decline on the former brought it back down to the lows it experienced after its most recent earnings report. At those levels I bought and was subsequently assigned out of shares on 4 occasions during a 5 week period.

In my world that’s considered to be as close to heaven as you can hope to get.

With the large moves seen in Morgan Stanley over the past 2 months it has been offering increasingly attractive option premiums and can reasonably be expected to begin to show some strength as an interest rate increase becomes reality.

MetLife, following the precipitous decline of this past week is now within easy striking distance of its 52 week low. However, shares do appear to have some reasonably good price support just $1 below Friday’s close and as with Morgan Stanley, the option premiums are indicating increased uncertainty that’s been created because of the recent strong moves lower.

In a raising rate environment those premiums can offset any near term bumpiness in the anticipated path higher, as these financial sector stocks tend to follow interest rates quite closely.

The only lesson to be learned is that sometimes it pays to not follow too closely if there’s a cliff awaiting you both.

Traditional Stocks: Dow Chemical, MetLife, Morgan Stanley

Momentum Stocks: Seagate Technology

Double-Dip Dividend: General Motors (12/16 $0.36)

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.

Weekend Update – December 6, 2015

 I don’t know if little kids still pick the petals off from daisies to the alternating refrain “She loves me, she loves me not.”

There was really no way to game that exercise, as there was with the other old refrain “Eenie meenie miney moe,” as you never knew whether there was an even or odd number of petals.

As much as one daisy looked like the next and as much as they shared the same pedigree, you really couldn’t stake much on what you saw.

Forget about trying to analyze the situation. If your romantic fortunes were tied to that daisy, that itself seemed to be a product of such intricate organization and detail, you could have arrived at your destination much more quickly by flipping a coin.

As much as you may have thought that the particular daisy you hadpicked out from among others in the field was talking directly to you, it was a mistake to believe that what you thought it was saying was really what was being said.

But most of us want to be optimistic and most of us want to believe in what we see on the surface.

Somewhat predictably, disappointment was as likely as elation as the last petal was about to hit the ground. That disappointment, though, was often preceded by a sense of hope as the petals were dwindling down to their final numbers. Everytime you heard “she loves me” and saw that you were getting closer to that very last petal, you felt a sense of confidence only to find that the odds of that confidence being rewarded were illusory.

On the other hand, it was easy to be on the winning side of “Eenie, meenie, miney, moe,” especially if the people you were with didn’t recognize the constancy of the refrain and didn’t understand the application of basic division or modular arithmetic. You also had to be adaptable and willing to subtly change your position, but the process was conquerable.

“Eenie meenie miney moe,” if played to your advantage, was a good example of a data driven action. You could stake it all on what you saw if you analyzed and then processed the changing information around you.

Most of all, you could believe the information.

For much of the past few months we’ve been lead to believe that action from the FOMC would be data driven. However, increasingly during that time, as data often seemed conflicting and not supportive of action, members of the Federal Reserve spoke in concrete terms that had to make reasonable people wonder whether data really was going to have a major role.

What we were hearing, particularly the shift toward more hawkish tones, wasn’t what we were seeing. If the data wasn’t there, why the change in tone? How do you prepare when those who are dispassionately analytical begin to sound less so?

What that has created over the past year has been an environment in which “Eenie meenies” have been replaced by daisies. What Federal Reserve Governors and FOMC members often said were at odds with what was observed and then subsequently with what they did.

Or in the case of interest rates, didn’t do.

The ability to reasonably assess and position oneself has been deteriorating as the disconnect between words and actions and words and intentions have become more commonplace.

Understandably, perhaps, this has also been a year in which the market has gone back and forth in paroxysms of buying and selling.

Those paroxysms have simply been efforts to get better positioning as the two faces of those charged with making the decision that we’ve been awaiting ever since Janet Yellen assumed the reigns of the Federal Reserve, have continually confounded everyone. 

Meanwhile, while traders may have believed that an “Eenie meenie” strategy was indicated, it really has been a case of a coin flip as may have been best demonstrated by this past week. Positioning yourself is worthless when the currency is a petal.

With lots of gyrations and lots of interesting comments this past week from Janet Yellen, numerous Federal Reserve Governors and Mario Draghi, of the ECB, the messages alternated between creating big disappointment and enormous hope.

With all of that, the market was virtually unchanged for the week, as has been the tale for all of 2015.

Friday’s strong Employment Situation Report may have finally put an end to the disconnect between words and actions. The market seemed to have embraced what it viewed as the last petal that could now lead to a period of more fundamental analysis ahead, rather than guessing what the FOMC will or won’t do. 

Hopefully, when the FOMC meets in about 10 days, words and actions will finally be aligned and two faces will become one.

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

It’s always difficult to look at a coming week with an eye on trying to identify bargains for a potential short term trade when the market closed the previous week with a large gain.

Friday’s nearly 400 DJIA point gain and that seen in the S&P 500 bringing that index within about 2% of its all time high, makes you wonder just what was wrong with those companies that lagged behind.

WIth the FOMC meeting still a week away there may still be some opportunity this coming week, as the buying on the rumor kind of activity seen this past Friday could still have some time to run, as the news is still a bit away.

Of course, I’m not certain if I would want to be around if the expected news doesn’t materialize, but it seems almost impossible to imagine that being the case. By the same token, I’m not certain that I want to be around when the expected news does materialize if that leads to the typical “sell on the news” kind of activity.

With that in mind, I don’t expect to be very active this week, as I will be reluctant to add positions after Friday’s surge that could then be at risk for a typical profit taking binge when expectations for an interest rate hike become realized.

Best Buy (BBY) was one of those companies that lagged on Friday and is well below its recent highs, which of course finds it in the company of so many others, despite the market being within easy striking distance of creating more new highs.

I thought about adding shares of Best Buy last week, but as it is ex-dividend this week, the rationale for finally relinquishing some cash in return for its option premium and dividend feels stronger as the potential return is very appealing, even if shares just tread water this week.

Historically, Best Buy has lagged during the final month of the year, even as other retailers have fared well. I don’t have much interest in adding to my existing Best Buy position with a longer term holding in mind, but I think a short term venture could be justified.

Macy’s (M) is another that lagged last week and had a 5 day performance similar to that of Best Buy. More importantly, it still hasn’t recovered from its earnings plunge last month and is an astonishing 46% lower in the past 5 months.

I purchased shares shortly after the earnings decline and am ready to add some more this week as those shares will also be ex-dividend. While my existing shares have calls written against them with a December 24th expiration, any additional shares purchased will most likely use a weekly expiration and may also be more likely to look at an out of the money strike, rather than the typical “Double Dip Dividend” approach that I prefer to use, in anticipation of some short term price appreciation.

Additionally, since the ex-dividend date is on a Friday, if the shares are likely to be assigned because their closing price on Thursday exceeds the strike price plus the amount of the dividend, I would consider rolling those shares over to the following week or beyond, in an effort to wring some additional premium out of the position in the event that there will then be an early assignment of the newly sold call options.

I was thinking about re-purchasing shares of Pfizer (PFE) last week in the hopes of an early week decline.

That decline came mid-week instead and I wasn’t very interested in adding any additional new positions for the week. Ultimately, Pfizer did as the market did for the week and ended unchanged.

My thinking hasn’t changed, though.

I would very strongly consider a re-purchase of recently assigned Pfizer shares on any weakness, particularly at the beginning of the week, as its premiums are still enhanced over the uncertainty surrounding the proposed tax inversion motivated merger with Ireland’s Allergan (AGN).

That process may be one that takes a while to play out and I don’t believe that there’s very much downside for Pfizer in the event that the deal can’t get done due to government rulings.

I wouldn’t mind collecting those premiums on a serial basis and would even consider rolling over positions that might otherwise be assigned if I was satisfied with my cash reserve position.

I’m not a huge fan of T-Mobile’s (TMUS) CEO, but you do have to admire someone who advocates for his company, even as he may be presiding over a company that he desperately wants to become part of a larger family, preferably one with very deep pockets or the right kind of assets.

Thanks to not paying a dividend, T-Mobile has been able to aggressively fund its activities to lure customers from others, while still leavingsufficent net earnings per share that are the envy of its competitors.

When your competitors have deeper pockets, though, that makes it hard to compete for very long, so I do wonder what additional surprises John Legere may have planned before those earnings begin to feel some pressure.

Shares have fallen about 17% in the past 10 weeks. While T-Mobile actually out-performed the market this past Friday, it did trail for the full week.

I’d be very interested in considering the sale of put options on shares if it gives up a meaningful portion of last Friday’s gain and actually wouldn’t mind the prospects of having to actively maintain that position by having to roll it over in sequential weeks in an effort to avoid assignment, while collecting premiums that are reflective of the risk.

Occasionally that can be a rewarding approach, although you sometimes have to be prepared for a longer term adverse price move.

Finally, that has exactly been the case with my favorite put sale of 2014, Twitter (TWTR), which has instead become a pariah in 2015.

With the experience of 2015 still needing to bring itself to a conclusion, I think that I am finally ready to add to the existing short put position.

At least with Twitter, the product, there isn’t enough space to speak out of both sides of your mouth, but there may be some hope that the companies executives, with a little more shell shocked experience under their belts may be better prepared to deal with investor expectations and won’t do so much to unnecessarily challenge those expectations as it gets prepared for earnings in January.

With those earnings being reported on January 26t, 2016, but the last extended weekly option expiration date on January 22, 2016, I would take an uncharacteristic position by going longer term and drawing a line in the sand at selling the $24 put. That premium is very attractive as many believe that the next stop for Twitter is $20.

With earnings the week after expiration of that contract, if selling that contract, you do have to be prepared to rollover before earnings and attempting to then take advantage of the earnings enhanced premiums in the hope that the brakes are finally applied and more carefully chosen words and messages are delivered during the ensuing conference call.

Hopefully, CEO Jack Dorsey will speak clearly and paint a vision that is more confident, but based on some kind of reality that we can all believe.



Traditional Stocks:  Pfizer

Momentum Stocks: T-Mobile, Twitter

Double-Dip Dividend:  Best Buy (12/8 $0.23), Macy’s (12/11 $0.36)

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.

Weekend Update – November 29, 2015

We used to believe that the reason people so consistently commented about how tired they were after a big Thanksgiving meal was related to the turkey itself.

Within that turkey it was said that an abundance of the basic amino acid,”tryptophan,” which is a precursor of “serotonin”  played a role in its unique ability to induce sleep.

More reasoned people believe that there is nothing special about turkey itself, in that it has no more tryptophan than any other meat and that simply eating without abandon may really explain the drowsiness so commonly experienced. Others also realize that tryptophan, when part of a melange of other amino acids, really doesn’t stand out of the crowd and exert its presence.

Then there’s the issue of serotonin itself, a naturally produced neurotransmitter, which is still not fully understood and can both energize and exhaust, in what is sometimes referred to as “the paradox of serotonin.”

From what is known about serotonin, if dietary tryptophan could exert some pharmacological influence by simply eating turkey, we would actually expect to find reports of people who got wired from their Thanksgiving meals instead of sedated.

Based upon my Thanksgiving guests this year, many of whom found the energy to go out shopping on Thursday and Friday nights, they were better proof of the notion that Black Fridays matter, rather than of the somnolent properties of turkey.

In the case of the relationship between the tryptophan in turkey and ensuing sleep, it may just be a question of taking disparate bits of information, each of which may have some validity and then stringing them together in the belief that their individual validity can be additive in nature.

Truth doesn’t always follow logic.

Another semi-myth is that when traders are off dozing or lounging in their recliners instead of trading, the likelihood of large market moves is enhanced in a volume depleted environment.

You definitely wouldn’t have known it by the market’s performance during this past week, as Friday’s trading session began the day with the S&P 500 exactly unchanged for the week and didn’t succeed in moving the needle as the week came to its end.

Other than the dueling stories of NATO ally Turkey and stuffing ally turkey, there wasn’t much this week to keep traders awake. The former could have sent the market reeling, but anticipation of the latter may have created a calming influence.

You couldn’t be blamed for buying into the tryptophan myth and wondering if everyone had started their turkey celebration days before the calendar warranted doing so.

Or maybe traders are just getting tired of the aimless back and forth that has us virtually unchanged on the DJIA for 2015 and up only 1.5% on the S&P 500 for the year.

Tryptophan or no tryptophan, treading water for a year can also tire you out.

The week started off with the news of China doubling its margin requirements and an agreement on a $160 Billion tax inversion motivated merger, yet the reaction to those news items was muted.

The same held for Friday’s 5.5% loss in Shanghai that barely raised an eyebrow once trading got underway in the United States, as drowsiness may have given way to hibernation.

Even the revised GDP, which indicated a stronger than expected growth rate, failed to really inflate or deflate. There was, however, a short lived initial reaction which was a repudiation of the recent seeming acceptance of an impending interest rate hike. For about an hour markets actually moved outside of their very tight range for the week until coming to its senses about the meaning of economic growth.

Next week there could be an awakening as the Employment Situation Report is released just days before the FOMC begins their December meeting which culminates with a Janet Yellen press conference.

Other than the blip in October’s Employment Situation Report, the predominance of data since seems to support the notion of an improving economy and perhaps one that the FOMC believes warrants the first interest rate hike in almost 10 years.

With traders again appearing to be ready to accept such an increase it’s not too likely that a strong showing will scare anyone away and may instead be cause for a renewed round of optimism.

On the other hand, a disappointing number could send most into a tizzy, as uncertainty is rarely the friend of traders and any action by the FOMC in the face of non-corroborating data wouldn’t do much to inspire confidence in anything or any institution.

For my part, I wouldn’t mind giving the tryptophan the benefit of the doubt and diving deeply into those turkey leftovers with express instructions to be woken up only once 2016 finally arrives.

Knowing that flat years, such as this one has been to date, are generally followed by reasonably robust years, overloading on the tryptophan now may be a good strategy to avoid more market indecision and avoid the wasteful use of energy that could be so much better spent in 2016.

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

A number of potential selections this week fall into the “repeat” category.

Unlike a bad case of post-Thanksgiving indigestion, the kind of repeating that occasionally takes place when selling covered calls, is actually an enjoyable condition and is more likely to result in a look of happiness instead of one of gastric distress.

This week I’m again thinking of buying Bank of America (BAC), Best Buy (BBY), Morgan Stanley (MS) and Pfizer (PFE), all of which I’ve recently owned and lost to assignment.

Sometimes that has been the case on multiple occasions over the course of just a few weeks. Where the real happiness creeps in is when you can buy those shares back and do so at a lower price than at which they were assigned.

With the S&P 500 only about 2% below its all time high, I would welcome some weakness to start the week in hopes of being able to pick up any of those 4 stocks at lower prices. My anticipation is that Friday’s Employment Situation Report will set off some buying to end the week, so I’d especially like to get the opportunity to make trades early in the week.

Bank of America and Morgan Stanley, of course, stand to benefit from increasing interest rates, although I suppose that some can make the case that when the news of an interest rate increase finally arrives, it will signal a time to sell.

If you believe in the axiom of “buying on the rumor and selling on the news,” it’s hard to argue with that notion, but I believe that the financials have so well tracked interest rates, that they will continue doing so even as the rumor becomes stale news.

As an added bonus, Bank of America is ex-dividend this week, although it’s dividend is modest by any standard and isn’t the sort that I would chase after.

Both, however, may have some short upside potential and have option premiums that are somewhat higher than they have been through much of 2015.

While both are attractive possibilities in the coming week or weeks, if forced to consider only one of the two, I would forgo Bank of America’s added bonus and focus on Morgan Stanley, as it has recovered from its recent earnings related drop, but now may be getting ready to confront its even larger August decline.

Bank of America, on the other hand, is not too far from its 2015 high point, but still can be a good short term play, perhaps even being a recurrent one over the next few weeks.

Also ex-dividend this week are two retailers, Wal-Mart (WMT) and Coach (COH) and together with Best Buy (BBY) and Bed Bath and Beyond (BBBY) are my retail focus, as I expect this year to be like most others, as the holiday season begins and ends.

While Coach may have lost some of its cachet, it’s still no Wal-Mart in that regard.

Coach has struggled to return to its April 2015 levels, although it may finally be stabilizing and recent earnings have suggested that its uncharacteristically poor execution on strategy may be coming to an end.

With a very attractive dividend and an option premium that continues to reflect some uncertainty, I wouldn’t mind finding some company for a much more expensive lot of shares that I’ve been holding for quite some time. With the ex-dividend date this week, the stars may be aligned to do so now.

I bought some Wal-Mart shares a few weeks ago after a disastrous day in which it sustained its largest daily loss ever, following the shocking revelation that increasing employee wages was going to cost the company some money.

The only real surprise on that day was that apparently no one bothered doing the very simple math when Wal-Mart first announced that it was raising wages for US employees. They provided a fixed amount for that raise and the number of employees eligible for that increase was widely known, but basic mathematical operations were out of reach to analysts, leading to their subsequent shock some months later.

Wal-Mart shares will be getting ready to begin the week slightly higher than where I purchased my most recent shares. I don’t very often add additional lots at higher prices, but the continuing gap between the current price and where it had unexpectedly plunged from offers some continued opportunity.

As with Coach, in advance of an ex-dividend date may be a fortuitous time to open a position, particularly as the option premium and dividend are both attractive, as are the shares themselves.

Neither Best Buy nor Bed Bath and Beyond are ex-dividend this week, although Best Buy will be so the following week.

That may give reason to consider selling an extended option if purchasing Best Buy shares, but it could also give some reason to sell weekly options, but to consider rolling those over if assignment is likely.

In doing so, one strategy might be to select a rollover date perhaps two weeks away and still in the money. In that manner, there may still be reason for the holder of the option contract to exercise early in order to capture the dividend, but as the seller you would receive a relatively larger premium that could offset the loss of the dividend while at the same time freeing up the cash tied up in shares of Best Buy in order to be able to put it to use in some other income producing position.

Bed Bath and Beyond is a company that I frequently consider buying and would probably have done much more frequently, if only it had offered a dividend or consistently offered weekly options for sale and purchase.

It still doesn’t offer a dividend, but sitting near a 2 year low and never being in one of their stores without lots of company at the cash register, the shares really have their appeal during the holiday season.

Finally, even with an emphasis on financials and retail, Pfizer (PFE) continues to warrant a look.

Having purchased shares last week and having seen them assigned, there’s not too much reason to believe that their planned merger with Ireland based Allergan (AGN), is going to be resolved any time soon.

While we wait for that process to play itself out, there may be fits and starts. There will clearly be opposition to the merger, as attention will focus on many issues, but none as controversial as the tax avoidance that may be a primary motivator for the transaction.

If the news for Pfizer eventually turns out to be negative and an immovable roadblock is placed, I don’t think that very much of Pfizer’s current price reflects the deal going to its anticipated completion.

With that in mind, the upside potential may be greater than the downside potential. As long as the option premiums are reflected any increased risk, this can be an especially lucrative trade the longer the process gets stretched out, particularly if Pfizer trades in a defined range and the position can be serially rolled over or purchased anew.

Traditional Stocks:  Bed Bath and Beyond, Morgan Stanley, Pfizer

Momentum Stocks:  Best Buy

Double-Dip Dividend: Bank of America (12/2 $0.05), Coach (12/2 $0.34), Wal-Mart (12/2 $0.49)

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.

Weekend Update – November 22, 2015

We’ve all seen a child who is in the midst of a tantrum or some hysterical outburst.

So often that tantrum takes on a life of its own and the perpetrator has completely forgotten what set off the outburst in the first place and just can’t get things under control even when there’s no reason for its continuation.

Most tantrums are related to an item that is wanted, but either not available to the child or has been taken away from the child.

There is a reason, but there is usually no reasoning.

When faced with the odious behavior, particularly in a public place, the instinct is often to just give in, hoping that will return calm.

The outburst is often irrational and while a parent’s response in a public place may seem to be rational, in seeking to avoid further disturbances, there may be a component of irrationality, in that acceding simply reinforces unwanted behavior.

Most will tell you that nothing is better at helping to develop appropriately self-sustaining behavior than instituting fair, clear and consistent rules that are then consistently applied.

Of course, that’s not easy when you have parents who may not agree on the rules or the consistency of their application.

But as is so often the case, once that tantrum starts, it’s easy for the child to lose sight of what the initial objective was and even if that objective is achieved, the tantrum continues. Sometimes the child can become so oppositional and caught up in the moment they may not even realize that their objective has been attained and their demands acceded to.

Eventually, all tantrums run out of steam and eventually, most children grow up and leave tantrums behind, although they may find other behavioral replacements to vex those around them, even as they enter the adult world.

As a parent, it’s easier to be a grandparent.

Unfortunately, for all of its intended or unintended paternal caring for what goes on in the stock market, there is no grandparent stage for the FOMC.

They may not see themselves in a parental role, but they have certainly been at the center of creating and rewarding some inappropriate behaviors, and perhaps acceding to them, as well.

With the release of the FOMC minutes this week and with a clear shift to a more hawkish tone regarding an interest rate increase, investors finally left their tantrum behavior behind.

That is meant as giving credit to investors.

Until the FOMC finally follows through with some clear action to complement their more clear words, there’s no reason for accolades.

Besides, clarity and consistency should be the minimally accepted behaviors from the more mature and rational FOMC, after all, how could you ever expect any kind of rational behavior down below, if those above are unable to get on the same page?

That stock market’s earlier tantrum like behavior was manifested by multiple instances of indiscriminate selling whenever the very thought of low interest rates being taken away from them presented itself.

The FOMC didn’t help things by airing individual member conflicts in opinion and sending conflicting messages. It’s easy to look at investors as an irrational bunch that is very often guided by emotion over analysis and is prone to outbursts, but as a parent, the FOMC did little to create an environment to limit that kind of behavior.

Unlike parents who do have some mandates, guiding the behavior of the stock market isn’t one of the Federal Reserve’s mandates, although as long as they’re having admitted to watching economic events in China and allowing them to become part of their decision tree, you would think that they would also watch over some fairly important events here, as investors can’t necessarily be counted upon to control their own infantile behavior.

Unfortunately, the market hasn’t really shown what it wants, as it has gone back and forth between being disappointed about the prospects of a rise in interest rates to greeting those prospects as the good news it should be reflecting.

Sometimes parents can’t quite figure their child out, but dispensing with consistent and unified messages can only create more confusion for all.

Hopefully the market will get over its penchant for tantrums and irrational behavior, including the exuberance that Alan Greenspan once warned about, and the FOMC will be more mindful of the power it holds in creating adult like behavior in others

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

Over the past year there have been may false starts by the bond market in expectation of rising interest rates.

Theoretically, rising interest rates on bonds begins to make them more competitive of an alternative to stocks, but with those expectations for increasing rates, companies that stand to benefit from an interest rate environment are also expected to benefit from that kind of an environment.

MetLife (MET) and Morgan Stanley (MS) are two companies that I’m considering in the coming week, even as there has been somewhat of a breakdown in the association between rising interest rates and their share prices over the past month.

I’ve now owned shares of Morgan Stanley 4 times over the past 5 weeks, after having had shares assigned again this past week. It has tracked the 10 Year Treasury Note’s performance better than has MetLife over the past month, but it has dragged in its magnitude of change during that time.

Following a precipitous earnings related decline last month shares have been working their way higher, but I would consider buying shares again on any kind of weakness that may bring it closer to $33.50, although I may still be interested in shares if they remain flat as the coming week begins. Even with a trading shortened week, due to the Thanksgiving holiday, the call option premiums are reflecting some greater volatility in these shares and perhaps expectations for shares to continue tracking the 10 Year Treasury note higher.

MetLife, on the other hand, hasn’t tracked the 10 Year Treasury note very well, at all, in the past month, neither in magnitude, nor in direction. Not unexpectedly, its option premium doesn’t reflect quite the same expectation for it to track interest rates as reliably as Morgan Stanley, but may still be sufficient of an ROI for a 4 day trading week that brings us that much closer to a potential FOMC decision to raise those rates.

The days when Pfizer (PFE) was among the first and foremost on everyone’s list of pharmaceutical companies ended when Genentech came on the scene. Since then, Genentech has been rolled back into its parent and many others have come on the scene, as Pfizer has seemed to fade from the conversation.

But with what may be an impending inversion deal with Ireland’s Allergan (AGN), it is most definitely back in the headlines.

Having fallen about 9% in the past 3 weeks and with an option premium that’s reflecting some of the excitement that may be awaiting, I look at this as a good opportunity to establish a new position and would be willing to keep this one for a while, as long as the dividend is still part of the equation.

After a couple of downgrades and a lowering of price targets, Darden Restaurants (DRI) seems to have fallen out of favor with analysts, after the significant management changes following a successful proxy fight earlier in the year.

Darden reports earnings prior to the end of the December 2015 option cycle and having fallen about 10% in the past 10 days, unless there is some shocking news ahead, much of the disappointment may have already played out.

Darden Restaurants offers only monthly options and it will be ex-dividend shortly after the New Year.  As a result,  I would consider a January 2016 option sale and also using an out of the money strike price, in an effort to capture the premium, dividend and some capital gain on shares, while still having about a month for shares to recover in the event of further price declines after earnings.

Lexmark (LXK) also offers only monthly options and will be ex-dividend this week.

A few years ago Lexmark plunged when it announced it was getting out of the hardware business, just as its one time parent, International Business Machines (IBM) had also shed its hardware assets.

Both companies saw their fortunes fare well as they were re-invented, but more recently both have come under significant pressure, to the point that Lexmark recently announced that it was seeking “alternatives” to enhance shareholder value, including a sale of itself.

The initial negative reaction to that, which came on top of the more than 30% drop after disastrous earnings in July 2015 were released, has seen some reversal and cooler heads may be now prevailing.

With the next earnings release scheduled for early in the February 2016 option cycle, I would consider selling either December 2015 or January 2016 options and may actually consider doing both.

In the case of the December options, I would consider the sale of in the money options, with the intent of seeing an early assignment of the position.

For example, based upon Friday’s closing price of $35.43, the option premium for a December $34 call option was $2.30. If assigned early, that would mean a net gain of 2.5% for a single day of holding. However, if not assigned early, the monthly return would then include the dividend, resulting in a 3.5% ROI, even if shares fell as much as an additional 4%.

Hewlett Packard (HPQ) reports earnings this week and it the part of the pre-split company that’s still in the business that Lexmark abandoned and that IBM spun off.

I already own shares that have calls written against them that will be called away if the combined price of Hewlett Packard and the new Hewlett Packard Enterprises (HPE) exceeds $29.

I’d like to see that happen, but at the same time I see some appeal in considering some kind of position in Hewlett Packard, with an upcoming ex-dividend date on a Monday, two weeks away from this coming Monday.

The option market is implying a 5.6% price move this coming week as earnings are reported.

Normally, I would look for the possibility of selling puts at a strike price that was outside of the range implied by the option market, if that strike price could deliver an ROI of 1%. 

However, in this case, I am currently considering the sale of a put within the range implied by the option market and would be willing to take assignment in order to then plot a strategy to then capture the dividend and some call premiums, if possible.

With the split between Hewlett Packard and Hewlett Packard Enterprises only recently having occurred, the upcoming earnings report will very likely be a very complicated one and will include lots of adjustments and expenses related to the split, so there may be a bigger move than the option market is currently predicting. However, this earnings report will close the book and will likely be quickly forgotten, just as are most reasons behind tantrums.

Finally, Best Buy (BBY) just reported earnings and it did what so many other companies have done over the past few years as stock re-purchase programs have created havoc with the metric that has been the common language of analysts and investors alike.

What they did was to beat expectations for earnings per share, while missing on revenue estimates.

The market’s initial response to the news was to take shares down by 8.4%, but more reasonable minds pared those losses very quickly.

In the latter half of last week I wrote for subscribers that I would be looking at opportunities in retail this coming week, but the strength in some of those names this past Friday, has dampened that expectation.

While many retailer stocks do well in the period between Thanksgiving and Christmas, Best Buy is a frequent outlier in that regard.

However, having just sustained a 15.6% decline during November, I think that those shares are in a position to join the usually party and follow the typical script that has  some initial disappointment in sales figures heading into Christmas and then reports of a better than expected holiday sales season when the dust has finally settled.

I know that I’ll be giving Best Buy gift certificates this year as holiday gifts and expect some of that dust to be of my doing, so I’d be happy to get some of the trickle down benefit, especially as those call and put premiums still reflect some continued anticipation for activity.

If selling puts, however, just as with Hewlett Packard, the upcoming ex-dividend date is just 2 weeks away, so if faced with assignment, rather than rolling over, there may be reason to accept assignment and then seek to collect additional premium and the dividend.

 

Traditional Stocks:    Darden Restaurants, MetLife, Morgan Stanley, Pfizer

Momentum Stocks:   Best Buy

Double-Dip Dividend:  Lexmark (11/24)

Premiums Enhanced by Earnings: Hewlett Packard (11/24 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.

Weekend Update – November 15, 2015

Back in March 2015, when writing the article “It’s As Clear As Mud,” there was no reason to suspect that there would be a reason for a Part 2.

After all, the handwriting seemed to be fairly clear at that time and the interest rate hawks seemed to be getting their footing while laying out the ground rules for an interest rate increase that had already been expected for months prior.

In fact, back in July 2015, I wrote another article inadvertently also entitled “It’s As Clear As Mud,” but in my defense the reason for the confusion back then had nothing to do with the FOMC or the domestic US economy, so it wasn’t really a Part 2.

It was simply a case of more confusion abounding, but for an entirely different reason.

Not that the FOMC hadn’t continued their policy of obfuscation.

But here we are, 8 months after the first article and the FOMC is back at the center of confusion that’s reigning over the market as messages are mixed, economic data is perplexing and the intent of the FOMC seems to be going counter to events on the ground.

While most understand that extraordinarily low interest rates have some appeal and can also be stimulatory, there’s also the recognition that prolonged low interest rates are a reflection of a moribund economy.

While individuals may someday arrive at a point in their lives that they’re not interested in or seeking personal growth, economies always have to be in pursuit of growth unless their populations are shrinking or aging along with the individual.

Like Japan.

Most would agree that when it comes to the economy, we don’t want to be like the Japan we’ve come to know over the past generation.

So despite the stock market being unable to decide whether an increase in interest rates would be a good thing for it, an unbiased view, one that doesn’t directly benefit from cheap money, might think that the early phase of interest rate increases would simply be a reflection of good news.

Growth is good, stagnation is not.

However, the FOMC has now long maintained that it will be data driven, but what may be becoming clear is that they maintain the right to move the needle when it comes to deciding where thresholds may be on the data they evaluate.

After years of regularly being disappointed by monthly employment gains below 200,000, October 2015’s Employment Situation Report gave us a number that was below 150,000. While that was surprising, the real surprise may have come a few weeks later when the FOMC indicated that 150,000 was a number sufficiently high to justify that rate increase.

The October 2015 Employment Situation report came at a time that traders had a brief period of mental clarity. They had been looking at negative economic news as something being bad and had been sending the market lower from mid-August until the morning of the release, when it sent the market into a tailspin for an hour or so.

Then began a very impressive month long rally that was based on nothing more than an expectation that the poor employment statistics would mean further delay in interest rate hikes.

But then the came more and more hawkish talk from Federal Reserve Governors, an ensuing outstanding Employment Situation Report and terrible guidance from national retailers.

With a year of low energy prices, more and more people going back to work and minimum wage increases you would have good reason to think that retailers would be rejoicing and in a position to apply that basic law of supply and demand on the wares they sale.

But the demand part of that equation isn’t showing up in the top line, yet the hawkish FOMC tone continues.

The much discussed 0.25% increase isn’t very much and should do absolutely nothing to stifle an economy. While I’d love to see us get over being held hostage by the fear of such an increase by finally getting that increase, it’s increasingly difficult to understand the FOMC, which seems itself to be held hostage by itself.

Difficulty in understanding the FOMC was par for the course during the tenure of Alan Greenspan, but during the plain talk eras of Ben Bernanke and Janet Yellen the words are more clear, it’s just that there seems to be so much indecisiveness.

That’s odd, as Janet Yellen and Stanley Fischer are really brilliant, but may be finding themselves faced with an economy that just makes little sense and isn’t necessarily following the rules of the road.

We may find out some more of the details next week as the FOMC minutes are released, but if they’re confused, what chance do any of the rest of us have?

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

Last week was just a miserable week. I was probably more active in adding new positions than I should have been and took little solace in having them out-perform the market for the week, as they were losers, too.

This week has more potentially bad news coming from retail, at a time when I really expected some positive news, at least with regard to forward guidance.

But with Abercrombie and Fitch (NYSE:ANF) having fallen about 12% last week after having picked up a little strength in the previous week, I’m ready to look at it again as it reports earnings this week.

I am sitting on a far more expensive lot of Abercrombie and Fitch, although if looking for a little of that solace, I can find some in having also owned it on 6 other occasions in 2015 and 21 other times in the past 3 years.

Despite that one lot that I’m not currently on speaking terms with, this has been a stock that I’ve longed loved to trade.

It has been range-bound for much of the past 8 months, although the next real support level is about 20% below Friday’s closing price.

With that in mind, the option market is implying about a 13.3% price move next week. A 1% ROI could potentially be obtained by selling puts nearly 22% below that close.

A stock that I like to trade, but don’t do often enough has just come off a very bad single day’s performance. GameStop (NYSE:GME) received a downgrade this past week and fell 16.5%

The downgrade was of some significance because it came from a firm that has had a reasonably good record on GameStop, since first downgrading it in 2008 and then upgrading in 2015.

GameStop has probably been written off for dead more than any stock that I can recall and has long been a favorite for those inclined to short stocks.

Meanwhile, the options market is implying a 5.5% move next week, even though earnings aren’t to be reported until Monday morning of the following week.

A 1% ROI could possibly be achieved by selling a put contract at a strike level 5.8% below Friday’s close, but if doing that and faced with possible assignment resulting in ownership of shares, you need to be nimble enough to roll over the put contracts to the following or some other week in order to add greater downside protection.

For the following week the implied move is 12.5%, but part of that is also additional time value. However, the option market clearly still expects some additional possibility of large moves.

If you’re a glutton for more excitement, salesforce.com (NYSE:CRM) reports earnings this week and is no stranger to large price movements with or without earnings at hand.

Depending upon your perspective, salesforce.com is either an incredible example of great ingenuity or a house of cards as its accounting practices have been questioned for more than a decade.

The basic belief is that salesforce.com’s practice of stock based compensation will continue to work well for everyone as long as that share price is healthy, but being paid partially in the stock of a company whose share price is declining may seem like receiving your paycheck back in the days of Hungarian hyper-inflation.

Let’s hope it doesn’t come to that this week, as shares already did fall 4.6% last week.

The share price of salesforce.com has held up well even as rumors of a buyout from Microsoft (NASDAQ:MSFT) have gone away. The option market is implying a share price move of 8.1% next week and a 1% ROI might possibly be obtained if selling puts at a strike level 9.4% below Friday’s close.

Microsoft itself is ex-dividend this week and is one of those handful of stocks that has helped to create the illusion of a healthy broader market.

That’s because Microsoft, a member of both the DJIA and the S&P 500 is up nearly 14% for the year and is one of those few well performing companies that has helped to absorb much of the shock that’s being experienced by so many other index components that are in correction or bear territory.

In fact, coming off its market correction lows in August, Microsoft shares are some 30% higher and is only about 5% below its recent high.

While that could be interpreted by some as its shares being a prime candidate for a decline in order to catch up with a flailing market, sometimes in times of weakness it may just pay to go with the prevailing strength.

While I’d rather consider its share purchase after a price decline and before its ex-dividend date, Microsoft’s ability to withstand some of the market’s stresses adds to its appeal right now.

On the other hand, Intel’s (NASDAQ:INTC) 5.1% decline last week and its 6.5% decline from its recent ex-dividend date when some of my shares were assigned away from me early, makes it appealing.

Despite a large differential in comparative performance between Microsoft and Intel in 2015, they have actually tracked one another very well through the year if you exclude two spikes higher in Microsoft shares in the past year.

With that in mind, in a week that I like the idea of adding Microsoft for its dividend, I also like the idea of adding more Intel, just for the sake of adding Intel and capturing a reasonably generous option premium, in the hopes that it keeps up with Microsoft.

Finally, also going ex-dividend in the coming week are Dunkin Brands (NASDAQ:DNKN) and Johnson & Johnson (NYSE:JNJ).

The former probably sells something that can help you if you’ve over-indulged in the former for far too long of a time.

Dunkin Brands only has monthly dividends, but this being the final week of the monthly cycle, some consideration can be given to using it as a quick vehicle in an attempt to capture both premium and dividend, or perhaps a longer term commitment in an attempt to also secure some meaningful gain from the shares.

Those shares are actually nearly 30% lower in the past 4 months and are within easy reach of a 22 year low.

I’m currently undecided about whether to look at the short term play or a longer term, but I am also considering using a longer term contract, but rather than looking for share appreciation, perhaps using an in the money option in the hopes of being assigned shares early and then moving on to another potential target with the recycled cash.

Johnson & Johnson is not one of those companies that has helped to create the illusion of a healthy market. If you factor in dividends, Johnson & Johnson has essentially mirrored the DJIA.

Over the past 5 years, with a very notable exception of the last quarter, Johnson & Johnson has tended to trade well in the few weeks after having gone ex-dividend.

For that reason I may look at the possibility of selling calls dated for the following week, or perhaps even the week after Thanksgiving and also thinking about some capital gains on shares in addition to its generous dividend, but somewhat lower out of the money premium.’

While thinking about what to do in the coming week, I may find myself munching on some Dunkin Donuts. That tends to bring me clarity and happiness.

Maybe I could have some delivered to the FOMC for their next meeting.

It couldn’t hurt.

Traditional Stocks:Intel

Momentum Stocks: GameStop

Double-Dip Dividend: Dunkin Donuts (11/19 $0.26), Johnson & Johnson (11/20 $0.75). Microsoft (11/17 $0.36)

Premiums Enhanced by Earnings: Abercrombie and Fitch (11/20 AM), 11/18 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.

Weekend Update – November 8, 2015

For a very brief period of time before October’s release of the Employment Situation Report and for about 90 minutes afterward, the stock market had started doing something we hadn’t seen for quite a while.

Surprisingly, traders had been interpreting economic news in a rational sort of way. Normally, you wouldn’t have to use the word "surprisingly" to describe that kind of behavior, but for the preceding few years the market was focused on just how great the Federal Reserve’s monetary policy was for equity investors and expressed fear at anything that would take away their easy access to cheap money or would make alternative investments more competitive.

The greatest increment of growth in our stock market over the past few years occurred when bad news was considered good and good news was considered good.

To be more precise, however, that greatest increment of growth occurred when there was the absence of good economic news in the United States and the presence of good economic news in China.

What that meant was that good economic news in the United States was most often greeted as being a threat. Meanwhile back in the good old days when China was reporting one unbelievable quarter after another, their good economic news fueled the fortunes of many US companies doing business there.

Then the news from China began to falter and we were at a very odd intersection when the market was achieving new highs even as so many companies were in correction mode as a Chinese slowdown and supremacy of American currency conspired to offset the continuing gift from the FOMC.

At the time of the release of October’s Employment Situation Report the market initially took the stunningly low number and downward revisions to previous months as reflecting a sputtering economy and added to the losses that started some 6 weeks earlier and that had finally taken the market into a long overdue correction.

90 minutes later came an end to rational behavior and the market rallied in the belief that the bad news on employment could only mean a continuation of low interest rates.

In other words, stock market investors, particularly the institutions that drive the trends were of the belief that fewer people going back to work was something that was good for those in a position to put money to work in the stock market.

Of course, they would never come right out and say that. Instead, there was surely some proprietary algorithm at work that set up a cascading avalanche of buy orders or some technical factors that conveniently removed all human emotion and empathy from the equation.

As bad as the employment numbers seemed, the real surprise came a few weeks later as the FOMC emerged from its meeting and despite not raising rates indicated that employment gains at barely above the same level everyone had taken to be disappointing would actually be sufficient to justify an interest rate increase.

The same kind of reversal that had been seen earlier in the month after the Employment Situation Report was digested was also seen after the most recent FOMC Statement release had started settling into the minds of traders. However, instead of taking the market off in an inappropriate direction, there came the realization that an increase in interest rates can only mean that the economy is improving and that can only be a good thing.

Fast forward a couple of weeks to this past week and with the uncertainty of the week ending release of the Employment Situation Report the market went nicely higher to open the first 2 days of trading.

There seemed to be a message being sent that the market was ready to once again accept an imminent interest rate increase, just as it had done a few months prior.

That seemed like a very adult-like sort of thing to do.

The real surprise came when the number of new jobs was reported to be nearly double that of the previous month and was coupled with reports of the lowest unemployment rate in almost 8 years and with a large increase in wages.

Most any other day over the past few years and that combination of news would have sent the market swooning enough to make even the fattest finger proud.

With all of those people now heading back to work and being in a position to begin spending their money in a long overdue return to conspicuous consumption, this coming week’s slew of national retailers reporting earnings may provide some real insight into the true health of the economy.

While the results of the past quarter may not yet fully reflect the improving fortunes of the workforce, I’m more inclined to listen closely to the forecasting abilities of Terry Lundgren, CEO of Macy’s (M) and his fellow retail chieftains than to most any nation’s official data set.

Hopefully, the good employment news of last week will be one of many more good pieces to come and will continue to be accepted for what they truly represent.

While the cycle of increasing workforce participation, rising wages and increased discretionary spending may stop being a virtuous one at some point, that point appears to be far off into the future and for now, I would trade off the high volatility that I usually crave for some sustained move higher that reflects some real heat in the economy.

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

What better paired trade could there be than Aetna (AET) and Altria (MO)?

I don’t mean that in terms of making the concurrent trades by taking a long position in one and a short position in the other, but rather on the basis of their respective businesses.

In the long term, Altria products will likely hasten your death while still making lots of money in the process and Aetna’s products will begrudgingly try to delay your death, being now forced to do so even when the costs of doing so will exceed the premiums being paid.

Either way, you lose, although there may be some room for a winner or two in either or both of these positions as they both had bad weeks even as the broader market finished higher for the 6th consecutive week.

Both have, in fact, badly trailed the S&P 500 since it started its rally after the October Employment Situation Report.

Aetna, although still sporting a low "beta," a measure of volatility, has been quite volatile of late and its option premium is reflecting that recent volatility even as overall volatility has returned to its historically low levels for the broader market.

With Aetna having recently reported earnings and doing what so many have done, that is beating on earnings, but missing on revenues, it had suffered a nearly 8% decline from its spike upon earnings.

That seems like a reasonable place to consider wading in, particularly with optimistic forward guidance projections and a very nice selection of option premiums.

Walgreens Boots Alliance (WBA) is ex-dividend this week. Although its dividend is well below that of dividend paying stocks in the S&P 500 its recent proposal to buy competitor Rite Aid (RAD) has increased its volatility and made it more appealing of a dividend related trade.

With some displeasure already being expressed over the buyout, Walgreens Boots Alliance will surely do the expected and sell or close some existing stores of both brands and move on with things. But until then, the premiums will likely continue somewhat elevated as Walgreens seeks to further spread its footprint across the globe.

With about a 10% drop since reporting earnings at the end of October there isn’t too much reason to suspect that it will be single out from the broader market to go much lower, unless some very significant and loud opposition to its expansion plans surfaces. With the Thanksgiving holiday rapidly approaching, I don’t think that those objections are going to be voiced in the next week or two.

International Paper (IP) is also ex-dividend this coming week and I think that I’m ready to finally add some shares to an existing lot. Like many other stocks in the past year, it’s road to recovery has been unusually slow and it is a stock that has been among those falling on hard times even as the market rallied to its highs.

While it has recovered quite a bit from its recent low, International Paper has given back some of that gain since reporting earnings last week.

Its price is now near, although still lower than the range at which I like to consider buying or adding shares. The impending dividend is often a catalyst for considering a purchase and that is definitely the case as it goes ex-dividend in a few days.

Its premium is not overly generous, as the option market isn’t perceiving too much uncertainty in the coming week, but the stock does offer a very nice dividend and I may consider using an extended option to try and make it easier to recoup the share price drop due to its dividend distribution. 

Macy’s reports earnings this week and it has had a rough ride after each of its last two earnings reports. When Macy’s is the one reporting store closures, you know that something is a miss in retail or at least some real sea change is occurring.

The fact that the sea change is now showing profits at Amazon (AMZN) for a second consecutive quarter may spell bad things for Macy’s.

The options market must see things precisely that way, because it is implying a 9.2% move in Macy’s next week, which is unusually large for it, although no doubt having taken those past two quarters into account.

Normally, I look for opportunities to sell puts on those companies reporting earnings when I can achieve a 1% ROI on that sale by selecting a strike price outside of the range implied by the option market.

In this case that’s possible, although utilizing a strike that’s 10% below Friday’s close doesn’t offer too large of a margin for error.

However, I think that CEO Lundgren is going to breathe some life into shares with his guidance. I think he understands the consumer as well as anyone, just as he had some keen insight long before anyone else, when explaining why the energy and gas price dividend being received by consumers wasn’t finding its way to retailers, nearly a year ago.

Finally, the most interesting trade of the week may be Target (TGT).

Actually, it may be a trade that takes 2 weeks to play out as the stock is ex-dividend on Monday of the following week and then reports earnings two days later.

Being ex-dividend on a Monday means that if assigned early it would have to occur by Friday of this coming week. However, due to earnings being released the following week the option premiums are significantly enhanced.

What that offers is the opportunity to consider buying shares and selling an extended weekly, deep in the money call with the aim of seeing the shares assigned early.

For example, at Friday’s close of $77.21, the sale of a November 20, 2015 $75.50 call would provide a premium of $2.60.

That would leave a net of $0.89 if shares were assigned early, or an ROI of 1.15% for the 5 day holding, with shares more likely to be assigned early the more Target closes above $76.06 by the close of Friday’s trading.

However, if not assigned early that ROI could climb to 1.9% for the 2 week holding period even if Target shares fall by as much as 2.2% upon earnings.

So maybe it’s not always a misplaced sense of logic to consider bad news as being a source for good things to come.

 

Traditional Stocks: Aetna, Altria

Momentum Stocks: none

Double-Dip Dividend: International Paper (11/12 $0.44), Target (11/16 $0.56), Walgreens Boots Alliance (11/12 $0.36)

Premiums Enhanced by Earnings: Macy’s (11/11 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.

Weekend Update – November 1, 2015

The recently deceased Hall of Fame catcher, Yogi Berra, had many quotes attributed to him, some of which he admitted were uttered by him.

One of those allegedly genuine quotes had Yogi Berra giving directions to his home, ending with the words “when you get to the fork in the road, take it.”

People have likely written PhD dissertations on the many levels of meaning that could be contained in that expression in the belief that there was something more deep to it when it was originally uttered.

We’ll probably never know whether the original expression had an underlying depth to it or was simply an incomplete thought that took on a life of its own.

Nearly each month during the Janet Yellen reign as Chairman of the Federal Reserve we’ve been wondering what path the FOMC would take when faced with a potential decision.

Each month it seems that investors felt that they were being faced with a fork in the road and there was neither much in the way of data to decide which way to go, just as the FOMC was itself looking for the data that justifies taking action.

While that decision process hasn’t really taken on a life of its own, the various and inconsistent market responses to the decisions all resulting in a lack of action have taken on a life of their own.

Over much of Yellen’s tenure the market has rallied in the day or days leading up to the FOMC Statement release and I had been expecting the same this past week, until having seen that surge in the final days of the week prior.

Once that week ending surge took place it was hard to imagine that there would still be such unbridled enthusiasm prior to the release of the FOMC’s decision. It was just too much to believe that the market would risk even more on what could only be a roll of the dice.

Last week the market stood at the fork in the road on Monday and Tuesday and finally made a decision prior to the FOMC release, only to reverse that decision and then reverse it again.

I don’t think that’s what Yogi Berra had in mind.

With the FOMC’s non-decision now out of the way and in all likelihood no further decision until at least December, the market is now really standing at that fork in the road.

With retail earnings beginning the week after next we could begin seeing the first real clues of the long awaited increase in consumer spending that could be just the data that the FOMC has been craving to justify what it increasingly wants to do.

The real issue is what road will the market take if those retail earnings do show anything striking at all. Will the market take the “good news is bad news” road or the “good news is good news” path?

Trying to figure that out is probably about as fruitless as trying to understand what Yogi Berra really meant.

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

When it comes to stocks, I’m often at my happiest when I can go in and out of the same stocks on a serial basis.

While it may be more exciting to discover a new stock or two every week to trust with your money, when it comes to making a choice, I’d much rather take the boring path at the fork.

For those inclined to believe that Yogi Berra meant to tell his prospective guests that they shouldn’t worry when they got to the fork in the road, because both paths could lead to his home, I’m inclined to believe that the boring path will have fewer bumps in its road.

After 2 successive weeks of being in and out of Morgan Stanley (NYSE:MS) and Seagate Technology (NASDAQ:STX), I’m ready to do each or both again in the coming week.

Morgan Stanley, which was ex-dividend last week, has now recovered about half of what it lost when it reported earnings earlier in the month. Its decline this past Friday and hopefully a little more as the new week gets set to begin, would again make it an attractive stock to (“re”)-consider.

While volatility has been declining, Morgan Stanley’s premium still continues elevated, even though there’s little reason to believe that there will be any near term reason for downward price pressure. In fact, a somewhat hawkish FOMC statement might give reason to suspect that the financial sector’s prospects may be brighter in the coming quarter than they were in this quarter past.

Seagate Technology, which reported earnings last week is ex-dividend this week and I would like to take advantage of either the very generous dividend, the call option premium or both.

For the past 2 weeks I had sold puts, but was prepared to take assignment rather than rolling over the short put option position in the event of an adverse price movement.

That was due to the upcoming ex-dividend date and an unwillingness as a put seller to receive a lower premium than would ordinarily be the case if no dividend was in the equation. Just as call buyers often pay a greater premium than they should when a stock is going ex-dividend, put sellers frequently receive a lower premium when selling in advance of an ex-dividend date.

I would rather be on the long end of a pricing inefficiency.

But as Seagate Technology does go ex-dividend and while its volatility remains elevated there are a number of potential combinations, all of which could give satisfactory returns if Seagate spends another week trading in a defined range.

Based upon its Friday closing price a decision to sell a near the money $38 weekly contract, $37.50 or $37 contract can be made depending on the balance between return and certainty of assignment that one desires.

For me, the sweet spot is the $37.50 contract, which if assigned early could still offer a net 1.2% ROI for a 2 day holding period.

I would trade away the dividend for that kind of return. However, if the dividend is captured, there is still sufficient time left on a weekly contract for some recovery in price to either have the position assigned or perhaps have the option rolled over to add to the return.

MetLife (NYSE:MET) is ex-dividend this week and then reports earnings after the closing bell on that same day.

Like Morgan Stanley, it stands to benefit in the event that an interest rate increase comes sooner rather than later.

Since the decision to exercise early has to be made on the day prior to earnings being announced this may also be a situation in which a number of different strike prices may be considered for the sale of calls, depending on the certainty with which one wants to enter and exit the position, relative top what one considers an acceptable ROI for what could be as little as a 2 day position.

Since MetLife has moved about 5% higher in the past 2 weeks, I’d be much more interested in opening a position in advance of the ex-dividend date and subsequent earnings announcement if shares fell a bit more to open the week.

If you have a portfolio that’s heavy in energy positions, as I do, it’s hard to think about adding another energy position.

Even as I sit on a lot of British Petroleum (NYSE:BP) that is not hedged with calls written against those shares, I am considering adding more shares this week as British Petroleum will be ex-dividend.

Unlike Seagate Technology and perhaps even MetLife, the British Petroleum position is one that I would consider because I want to retain the dividend and would also hope to be in a position to participate in some upside potential in shares.

That latter hope is one that has been dashed many times over the past year if you’ve owned many energy positions, but there have certainly been times to add new positions over that same past year. If anything has been clear, though, is that the decision to add new energy positions shouldn’t have been with a buy and hold mentality as any gains have been regularly erased.

With much of its litigation and civil suit woes behind it, British Petroleum may once again be like any other energy company these days, except for the fact that it pays a 6.7% dividend.

If not too greedy over the selection of a strike price in the hopes of participating in any upside potential, it may be possible to accumulate some premiums and dividends, before someone in a position to change their mind, decides to do so regarding offering that 6.7% dividend.

Finally, if there’s any company that has reached a fork in the road, it’s Lexmark (NYSE:LXK).

A few years ago Lexmark re-invented itself, just as its one time parent, International Business Machines (NYSE:IBM), did some years earlier.

The days about being all about hardware are long gone for both, but now there’s reason to be circumspect about being all about services, as well, as Lexmark is considering strategic alternatives to its continued existence.

I have often liked owning shares of Lexmark following a sharp drop and in advance of its ex-dividend date. It won’t be ex-dividend until early in the December 2015 cycle and there may be some question as to whether it can afford to continue that dividend.

However, in this case, there may be some advantage to dropping or even eliminating the dividend. It’s not too likely that Lexmark’s remaining investor base is there for the dividend nor would flee if the dividend was sacrificed, but that move to hold on to its cash could make Lexmark more appealing to a potential suitor.

With an eye toward Lexmark being re-invented yet again, I may consider the purchase of shares following this week’s downgrade to a “Strong Sell” and looking at a December 2015 contract with an out of the money strike price and with a hope of getting out of the position before the time for re-invention has passed.

In Lexmark’s case, waiting too long may be an issue of sticking a fork in it to see if its finally done.

Traditional Stocks: Morgan Stanley

Momentum Stocks: Lexmark

Double-Dip Dividend: British Petroleum (11/4 $0.60), MetLife (11/4 $0.38), Seagate Technology (11/4 $0.63)

Premiums Enhanced by Earnings: MetLife (11/4 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.