Weekend Update – December 18, 2016

 

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

Traditional Stocks: none

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

Double-Dip Dividend:  none

Premiums Enhanced by Earnings: none

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

 
 
 
 
 
 

Weekend Update – October 2, 2016

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

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

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

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

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

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

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

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

17 is a prime number.

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

Do you really need any more proof than that?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But 17.

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

17.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Traditional Stocks: none

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

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

Premiums Enhanced by Earnings: none

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

 

Weekend Update – September 18, 2016

 

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

Maybe several times a day.

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

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

I add the FOMC to that list.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The party may just be starting.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Far less exciting than silver is Fastenal (FAST).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Traditional Stocks:  Bristol Myers Squibb, Dow Chemical, Fastenal

Momentum Stocks: ProShares UltraSilver ETN

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

Premiums Enhanced by Earnings: none

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

Weekend Update – June 30, 2013

The hard part about looking for new positions this week is that memories are still fresh of barely a week ago when we got a glimpse of where prices could be.

When it comes to short term memory the part that specializes in stock prices is still functioning and it doesn’t allow me to forget that the concept of lower does still exist.

The salivating that I recall doing a week ago was not related to the maladies that accompany my short term memory deficits. Instead it was due to the significantly lower share prices.

For the briefest of moments the market was down about 6% from its May 2013 high, but just as quickly those bargains disappeared.

I continue to beat a dead horse, that is that the behavior of our current market is eerily reminiscent of 2012. Certainly we saw the same kind of quick recovery from a quick, but relatively small drop last year.

What would be much more eerie is if following the recovery the market replicated the one meaningful correction for that year which came fresh off the hooves of the recovery.

I promise to make no more horse references.

Although, there is always that possibility that we are seeing a market reminiscent of 1982, except that a similar stimulus as seen in 1982 is either lacking or has neigh been identified yet. In that case the market just keeps going higher.

I listened to a trader today or was foaming at the mouth stating how our markets can only go higher from here. He based his opinion on “multiples” saying that our current market multiple is well below the 25 times we saw back when Soviet missiles were being pointed at us.

I’ll bet you that he misses “The Gipper,” but I’ll also bet that he didn’t consider the possibility that perhaps the 25 multiple was the irrational one and that perhaps our current market multiple is appropriate, maybe even over-valued.

But even if I continue to harbor thoughts of a lower moving market, there’s always got to be some life to be found. Maybe it’s just an involuntary twitch, but it doesn’t take much to raise hope.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or Momentum categories. With earnings season set to begin July 8, 0213, there are only a handful of laggards reporting this coming week, none of which appear risk worthy (see details).

I wrote an article last week, Wintel for the Win, focusing on Intel (INTC) and Microsoft (MSFT). This week I’m again in a position to add more shares of Intel, as my most recent lots were assigned last week. Despite its price having gone up during the past week, I think that there is still more upside potential and even in a declining market it will continue to out-perform. While I rarely like to repurchase at higher prices, this is one position that warrants a little bit of chasing.

While Intel is finally positioning itself to make a move into mobile and tablets and ready to vanquish an entire new list of competitors, Texas Instruments (TXN) is a consistent performer. My only hesitancy would be related to earnings, which are scheduled to be announced on the first day of the August 2013 cycle. Texas Instruments has a habit of making large downward moves on earnings, as the market always seems to be disappointed. With the return of the availability of weekly options I may be more inclined to consider that route, although I may also consider the August options in order to capitalize somewhat on premiums enhanced by earnings anticipation.

Already owning shares of Pfizer (PFE) and Merck (MRK), I don’t often own more than one pharmaceutical company at a time. However, this week both Eli Lilly (LLY) and Abbott Labs (ABT) may join the portfolio. Their recent charts are similar, having shown some weakness, particularly in the case of Lilly. While Abbott carries some additional risk during the July 2013 option cycle because it will report earnings, it also will go ex-dividend during the cycle. However, Lilly’s larger share drop makes it more appealing to me if only considering a single purchase, although I might also consider selling an August 2013 option even though weekly contracts are available.

I always seem to find myself somewhat apologetic when considering a purchase of shares like Phillip Morris (PM). I learned to segregate business from personal considerations a long time ago, but I still have occasional qualms. But it is the continued ability of people to disregard that which is harmful that allows companies like Phillip Morris and Lorillard (LO), which I also currently own, to be the cockroaches of the market. They will survive any kind of calamity. It’s recent under-performance makes it an attractive addition to a portfolio, particularly if the market loses some ground, thereby encouraging all of those nervous smokers to sadly rekindle their habits.

The last time I purchased Walgreens (WAG) was one of the very few times in the past year or two that I didn’t immediately sell a call to cover the shares. Then, as now, shares took, what I believed to be an unwarranted large drop following the release of earnings, which I believed offered an opportunity to capture both capital gains and option premiums during a short course of share ownership. It looks as if that kind of opportunity has replicated itself after the most recent earnings release.

Among the sectors that took a little bit of a beating last week were the financials. The opportunity that I had been looking for to re-purchase shares of JP Morgan Chase (JPM) disappeared quickly and did so before I was ready to commit additional cash reserves stored up just for the occasion. While shares have recovered they are still below their recent highs. If JP Morgan was not going ex-dividend this trade shortened week, I don’t believe that I would be considering purchasing shares. However, it may offer an excellent opportunity to take advantage of some option pricing discrepancies.

I rarely use anecdotal experience as a reason to consider purchasing shares, but an upcoming ex-dividend date on Darden Restaurants (DRI) has me taking another look. I was recently in a “Seasons 52” restaurant, which was packed on a Saturday evening. I was surprised when I learned that it was owned by Darden. It was no Red Lobster. It was subsequently packed again on a Sunday evening. WHile clearly a small portion of Darden’s chains the volume of cars in their parking lots near my home is always impressive. While my channel check isn’t terribly scientific it’s recent share drop following earnings gives me reason to believe that much of the excess has already been removed from shares and that the downside risk is minimized enough for an entry at this level.

While I did consider purchasing shares of Conoco Phillips (COP) last week, I didn’t make that purchase. Instead, this week I’ve turned my attention back to its more volatile namesake, Phillips 66 (PSX) which it had spun off just a bit more than a year ago. It has been a stellar performer in that time, despite having fallen nearly 15% since its March high and 10% since the market’s own high. It fulfills my need to find those companies that have fared more poorly than the overall market but that have a demonstrated ability to withstand some short term adverse price movements.

Finally, I haven’t recommended the highly volatile silver ETN products for quite a while, even though I continue to trade them for my personal accounts. However, with the sustained movement of silver downward, I think it is time for the cycle to reverse, much as it had done earlier this year. The divergence between the performance of the two leveraged funds, ProShares UltraShort Silver ETN (ZSL) and the ProShares Ultra Silver ETN (AGQ) are as great as I have seen in recent years. I don’t think that divergence is sustainable an would consider either the sale of puts on AGQ or outright purchase of the shares and the sale of calls, but only for the very adventurous.

Traditional Stocks: Abbott Labs, Eli Lilly, Intel, Mosaic, Phillip Morris, Texas Instruments, Walgreens

Momentum Stocks: Phillips 66, ProShares UltraSilver ETN

Double Dip Dividend: Darden Restaurants (ex-div 7/8), JP Morgan (ex-div 7/2)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.