Aug272016

Weekend Update – August 28, 2016

Weekend Update Comment

I’m not entirely certain I understood what happened on Friday.

While it’s easy to understand the “one – two” punch, such as memorialized in Tennessee Ernie Ford’s song “Sixteen Tons,” it’s less easy to understand what has happened when a gift is so suddenly snatched away.

After not having attended the previous year’s Kansas City Federal Reserve Bank hosted soiree in Jackson Hole, this year Janet Yellen was there.

She was scheduled to speak on Friday morning and the market seemed to be biding its time all through the week hoping that Friday would bring some ultimate clarity.

Most expected that she would strike a more hawkish tone, but would do so in a way as to offer some comfort, rather than to instill fear, but instead of demonstrating that anticipation by buying stocks earlier in the week, traders needed the news and not the rumor.

The week was shaping up like another in a string of weeks with little to no net movement. Despite the usual series of economic reports and despite having gone through another earnings season, there was little to send markets anywhere.

Most recently, the only thing that has had any kind of an impact has been the return of the association between oil prices and the stock market and we all know that the current association can’t be one that’s sustainable.

So we waited for Friday morning.

After having sifted through that morning’s GDP release, which revealed another quarter of soft numbers, showing the economy may not have been growing very strongly, it was time to listen to what Janet Yellen was prepared to say after nearly 2 months of silence.

But first, buried within those GDP numbers was an indication that the consumer may have finally started participating in the economy by spending their money on actual consumer goods. Since 70% of the GDP is based upon consumer activity, that has to be a good sign and one that many have been waiting to see evidenced for far more than a year.

That consumer participation may have come as some news to Macy’s (M)., Kohls (KSS) and others that had little good to say about the past quarter and nothing good to say about the one upcoming.

But as with most things, messages are mixed.

In this case, though, Janet Yellen didn’t really offer a mixed message.

More precisely, however, what she said wasn’t interpreted as being a mixed message.

Investors moved the market nicely higher on hearing Yellen say that “the case for an increase in the federal funds rate has strengthened in recent months,” 

She didn’t really offer any guidance as to what else the FOMC had to see before finally raising rates, but most investors interpreted her comments as indicating that there was an even chance of that occurring at the FOMC’s December policy meeting.

They liked that.

That meant that there was still another 3 months of cheap money to play with and stock investors love cheap money as much as bond investors do not.

What stock investors apparently didn’t like was when Stanley Fischer suggested that there could still be more than one rate hike between now and the end of 2016.

In what could only be interpreted as “too much of a good thing,” the very idea of what we were all set up to expect a year ago, that is an upcoming year of small, multiple interest rate increases, began to bring sellers up front.

And so as the day and the week came to their ends, it was Stanley Fischer who ruled and demonstrated that whatever embrace investors had made of the idea of raising interest rates, it was pretty half hearted and a highly qualified endorsement.

The order of things often makes a difference.

If I knew that I was being faced with one hand that would give and the other hand that would take away, I would much prefer that the giving hand closed the show.

You can only appreciate loss if you’ve actually had something to lose and you can only really appreciate receiving a gift after having had nothing.

Unfortunately, the order of giving and taking left us with nothing but questions and uncertainty.

I’m not sure that’s what anyone intended, but if you look at the past year’s worth of statements and speeches from the various members of the FOMC, you might believe that a third mandate has been added to the Federal Reserve’s short list.

If so, they’ve been wildly successful in sowing confusion and giving and taking hope and confidence away from anyone paying attention.

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

Bristol Myers Squibb (BMY) may be a recent good example of the market’s buyers giving and the market’s sellers taking away.

It may also be a poster child for the old “you live by the sword, you die by the sword” expression, as it shares plummeted following some poorer than expected results from its late stage trials for an advanced non-small cell ling cancer drug.

That plummet took it to its yearly lows and while not too much time has passed, it may be stabilizing and ready fro participation again.

The option market, for whatever it may know, isn’t predicting too much movement in the upcoming week, but my sights are set a little longer term for this trade.

Bristol Myers Squibb is ex-dividend on October 5th, at a current 2.6% yield. It also reports earnings on October 27th.

That leaves consideration of the sale of an October 21st monthly contract in an effort to capture the dividend, capture nearly 2 months of premium and perhaps hold the stock long enough for some price recovery.

It also avoids the risk of earnings, as long as shares are assigned.

If not, I would consider rolling the expiring options over to either the November or December monthly contracts, or perhaps one of the extended weekly expiration dates.

Sinclair Broadcasting (SBGI) isn’t a terribly exciting stock, but it is one that i like to own and I’m especially drawn to it if it’s about to be ex-dividend and trading at or below the mid-point of its most recent range.

Those are all the case for Sinclair Broadcasting at the moment and I’m considering either the sale of an in the money call, with the intent of a quick exit from the position due to early assignment or a near the money strike, with the hopes of capturing the dividend and some small gains on the shares, as well.

Among the things I like about Sinclair Broadcasting is that it is relatively immune form many of those things that can weigh down stocks and that are completely unpredictable and out of anyone’s control.

Currency exchange rates, the price of oil and natural disasters come to mind. Where Sinclair broadcasting may be vulnerable, albeit along with most everyone else, is in an increasing interest rate environment, as assembling the broadcasting portfolio that it has in an expensive undertaking.

Even though my preference would be for a short term exposure, I’ve held shares before for longer time periods, partly because only monthly options are available. Additionally, if in a position to see short calls expire, I generally do not roll them over, due to their cost and reduced liquidity., unless shares are trading very close to the strike price as expiration nears.

Finally, as it always does, whenever I talk about the possibility of considering a position in Abercrombie and Fitch (ANF), it comes with advisories.

Those shares are ex-dividend this week and even as I still sit on a much more expensive lot of shares, I welcome the dividend and consider testing the waters even further to capture more of that dividend.

The problem is that the dividend is always closely associated with earnings and that’s the case this week, as well.

On a good day, Abercrombie and Fitch stock is prone to price spasms, but all bets are off when earnings are involved. Having already badly trailed the S&P 500 for the year and having fallen by about 25% from its 2016 high, there could be more downside pain, unless they know something that Macy’s doesn’t.

The option market is implying a price move of about 12% next week.

Ordinarily, I would consider the sale of puts if I thought that a 1% or more ROI for that sale could be realized at a strike price below the lower boundary predicted by options traders.

That is the case this week, but because of the dividend, my interest would be in considering a traditional buy/write, but only after earnings and only if shares fall sharply once earnings are announced on the morning before the ex-dividend date.

In that event, I might consider the sale of a deep in the money call, depending on the net premium available, in the event that deep in the money call is exercised by the buyer.

I might even consider looking at an extended weekly option, again being driven by the premium available and the resultant ROI, with or without the dividend capture being part of the calculation.

If it isn’t there may then be an opportunity to get the dividend and an option premium, with some significant downside protection.

That might be the equivalent on both hands giving.

 

Traditional Stocks: Bristol Myers Squibb

Momentum Stocks: none

Double-Dip Dividend: Abercrombie and Fitch (8/31 $0.20), Sinclair Broadcasting ((8/30 $0.18)

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.

 

 

Jun252016

Weekend Update – June 26, 2016

Weekend Update Comment

 A week ago, the world was getting ready for what all the polls had been predicting.

Only those willing to book bets seemed to have a different opinion.

Polls indicated that Great Britain was going to vote to leave the European Union, but those willing to put their money where their mouths were, didn’t agree.

Then suddenly there was a shift, perhaps due to the tragic murder of a proponent of keeping the EU intact.

That shift was seen not only in the polls, but in markets.

Suddenly, everyone was of the belief that British voters would do the obviously right thing and vote with their economic health in mind, first and foremost.

The funny thing is that it’s pretty irrational to expect rational behavior.

In a real supreme measure of confidence, just look at the 5 day performance of the S&P 500 leading up to the vote.

Although, if you really want to see what confidence looks like, just look at the gap higher to open Thursday’s trading, as voting had already started “across the pond.”

A rational person might wonder how in the world such confidence could be inspired. Not only confidence that British citizens would vote to stay in the EU, but that the preceding day’s gains were but a prelude to more gains, rather than the prelude to the “sell on the news” phenomenon.

That could all only be explained by the often irrational action provoking “fear of missing out.”

Certainly, Great Britain’s electorate would choose to stay in the EU for fear of missing out on all of the wonderful economic benefits ahead and investors feared missing out on the party that would ensue.

What they should have feared was the arrogance that allows you to get it all wrong.

Besides, if the bookies can get it wrong, what chance do mere mortals have?

With a 4 day advance of 2%, that left the S&P 500 up a whopping 3.4% for the year, that is, until traders realized that they all got “it” wrong.

By “it,” I mean the only thing that mattered at all during 2016.

In general, the only thing that does matter is whatever occurred most recently. Nothing prior to the “Brexit” is important any longer, just as that very same vote may become an ancient and irrelevant memory in just a few days as we now start worrying about the recession that JP Morgan (JPM) economists first put on the radar screen about a month ago.

For the bookies out there, the chance of a recession in the coming 12 months was put at about 35% at that time. I may not have learned a lesson about unwarranted confidence, but I feel pretty certain that those odds may have climbed a little in the past day or so.

Following Friday’s debacle in the European Union and the fears of other member nations considering the same referendum, in addition to Scotland  putting its own breakaway referendum back on the table, there may be turmoil and uncertainty for a while.

The big question is whether with stocks now sitting at the level at which they started the year, it is time to scoop up some bargains after those big one day declines?

I certainly don’t have the confidence to do so.

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

The one thing you may be able to say about Friday’s sell off, if you absolutely have to find a positive spin, is that it wasn’t really marked by panic.

Neither was there any half hearted attempt at a rally. 

Those intra-day rallies often suck people in under the pretense that everything was simply an over-reaction and it’s all alright now.

I’m not expecting any kind of a meaningful bounce higher as we get ready to trade the new week and am not particularly anxious to hunt for bargains.

It might have been easier to consider doing so if “Brexit” had some certainty about its short term impact, but also if there was some certainty that other member nations wouldn’t be lining up to consider their own version of an EU exit.

Where I may be willing to venture is where dividends are forthcoming this week, particularly if Friday took a potentially unwarranted toll on a company’s share price.

The two that come to mind very quickly are Cisco (CSCO) and Dow Chemical (DOW).

Cisco may have actually received some good news late in the week as the International Trade Commission ruled that some of its patents were infringed upon by a competitor. That initial ruling actually came in February and may have already been discounted in Cisco’s price, but the issuance of a “cease and desist” order to the competitor may help moving forward.

Nonetheless, after Friday’s decline, Cisco shares are at about the mid-way point between its recent high and recent low and for me, that is often a good point to consider entry.

With the ex-dividend date upcoming on the first trading day of the following week, which will be a Tuesday, due to the Fourth of July holiday, I would consider the sale of extended weekly call options if purchasing shares and perhaps attempting to get 2 weeks of premium even if shares are lost to early assignment.

Dow Chemical didn’t really get much in the way of good news or any bad news on Friday. it merely went along for the ride lower.

That ride lower does have several minor areas of price support beneath it and shares have traded very steadily for the past 3 months. I tend to like Dow Chemical when it is range bound. 

It generally offers an attractive option premium while doing so and if also capturing the dividend, it can pay to wait.

Among the issues ahead that many have been waiting for is a decision over the proposed complex transaction with DuPont (DD). While there isn’t much too about anything getting in the way of the proposed deal, I think that Dow Chemical is not trading at a level that has any deal premium incorporated into the share price.

I believe that whatever the outcome, Dow Chemical shares are poised to go higher, so I would consider this as a longer term holding and I already do have shares that fall into the longer term category.

Just as with Dow Chemical, I wrote about eBay (EBAY) last week.

There had been lots of speculation that eBay was among those stocks that had substantially more to lose than many others in the event of a vote to leave the European Union.

In this case, they got it right and shares tumbled nearly 7% on Friday, although they were down only 3% for the week.

Only 3%. That’s the kind of week it was.

Now that the immediacy of the shock may have passed, this may be one position that I might have a hard time passing up.

There’s no dividend to entice anyone, but it has traded very well for the past 4 months in its current range, as it now sits near the bottom of that range.

As it has historically, eBay has provided a very nice option premium, despite the fact that it tends to trade for prolonged periods in a tight range, occasionally punctuated by moves such as experienced on Friday.

Those moves help to keep those premiums healthy and attractive.

Finally, I’m not certain that Abercrombie and Fitch (ANF) has necessarily done anything really wrong, certainly not by their historical standards of poor behavior and execution, to have warranted such a large decline in the past 2 months.

I continue to hold a single lot of much more expensive shares as shares now sit at a 2 year low.

With the ex-dividend date having been earlier this month, my inclination would be to consider a position through the sale of out of the money puts. While I might not mind taking ownership of shares at a lower price, this is definitely a position that i would prefer to rollover, if faced with assignment of shares.

I’m pretty confident of that.

 

 

Traditional Stocks: eBay

Momentum Stocks: Abercrombie and Fitch

Double-Dip Dividend: Cisco (7/5 $0.26), Dow Chemical (6/28 $0.46)

Premiums Enhanced by Earnings: none

 

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

 

 

 

May292016

Weekend Update – May 29, 2016

Weekend Update Comment

We’ve all been part of one of those really disingenuous hugs.

Whether on the giving or the receiving side, you just know that there’s nothing really good coming out of it and somehow everyone ends up feeling dirty and cheapened.

Every now and then someone on the receiving end of one of those disingenuous hugs believes it’s the real thing and they are led down the wrong path or become oblivious to what is really going on.

This week the market gave a warm embrace and hug to the notion that the FOMC might actually be announcing an interest rate hike as early as its June 2016 meeting.

The chances of that even being a possibility was slight, at the very best, just 2 or 3 weeks ago. Since then, however, there has been more and more hawkish talk coming even from the doves.

The message being sent out right now is that the FOMC is like a hammer that sees everything as a nail. In that sense, every bit of economic news justifies tapping on the brakes.

Traditionally, those brakes were there to slow down an economy that was heating up and would then lead to inflation.

Inflation was once evil, but now we recognize that there are shades of grey and maybe even Charles Manson had some good qualities.

With the market’s deep hug of affection the S&P 500 ended the week 2.3% higher, seemingly sending the message that investors had grown up a lot in the past week or so and were now able to realize that another small increase in the interest rate was a reflection of an improving economy.

That should be good for everyone, right? 

Hugs all around.

So before anyone gets too giddy, it may be worthwhile to look at that last embrace that the market gave when it suspected that an interest rate hike was imminent.

That was in December 2015.

The market started to act in a mature fashion in what would turn out to be 5 days in advance of the FOMC’s December 16th announcement.

click to enlarge)

Maybe in what is best an example of “buy on the rumor and sell on the news,” the market started a swoon that was far in excess of the climb.

The first 6 weeks of 2016 were as bad as the first 6 weeks of any preceding year.

In the nearly 4 months since the market’s post-interest rate increase correction, we are left barely 1.5% away from the S&P 500’s all time high level.

Whether the FOMC’s read on the economy is correct or not, having now made that embrace, the market is likely at some kind of an inflection point heading into the June meeting.

I’m not entirely convinced that the hug this week was entirely disingenuous, after all, what were the other choices left to investors?

Continue following oil for the wrong reasons?

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

In the “Comments” section of  last week’s article a reader asked about my opinion on iPath S&P 500 VIX Short Term Futures ETN (VXX).

I’ve scanned my computer for malware to see if he had been reading my draft for this week. I think that malware may have placed the “Charles Manson” reference earlier.

For those that do look at volatility and various volatility instruments, there can be lots of risk and potentially reward in being on the correct side of a bet.

A bet. Not an investment.

In this case, there is simply the question of where the market is going and in how big of a leap and bound.

I think that the next leg is lower, although that next leg may not start for another few weeks.

However, I generally like to consider the use of iPath S&P 500 VIX Short Term Futures ETN in advance of those moves.

In a very superficial explanation, the volatility, which is a measure of uncertainty, generally moves lower when the market heads higher and reverses course as the market reverses course.

“The VIX” is now at a 2 year low after having hit a nearly 1 year high on February 11, 2016. If you believe in coincidences, that happened to be the market low point for 2016.

What “The VIX” really offers, as a result of its own volatility is an attractive option premium, whether buying shares of the ETN and then selling calls, or selling puts. It also tends to have great liquidity, which is especially important if faced with a move that goes counter to your expectation.

At this level, with an expectation that the market could be heading lower on a “sell on the news” reaction, I would expect “The VIX” to head higher.

If buying shares and selling calls, I might consider using the June 2016 expiration, while I might use the weekly expiration if selling puts. In the latter case, I would be prepared to rollover those puts if faced with assignment and then might elect to do so using that same monthly expiration date.

As long as I’m considering a bet, this may also be a good time to add some shares of Las Vegas Sands (LVS) to my existing shares that are in deep loss territory.

It’s hard to know what Las Vegas Sands really has going for it, as the story for the past few years has been entirely focused on Macau and Sheldon Adelson’s politics.

What has kept me holding shares has been the dividend and the belief that there will be either a reversal of fortune in the long term in Macau or official Chinese government economic data will give an impression of a resurging economy in the short term.

With an ex-dividend date coming up on the first day of the July 2016 monthly option cycle, my preference would be to steer clear of the long term and hope for some short term reward.

With the appearance of some base forming at its current level, I might be interested in buying shares and selling either an extended weekly call on a date after the ex-dividend date or simply going to the July 2016 monthly option contract.

In the years that I have been offering this weekly take, I’ve never included a stock position that I had absolutely no intention of buying, but this week, I do like Bank of America (BAC).

I like it for the obvious reasons.

As long as the market continues embracing the idea that an interest rate increase is a good thing, then financial sector stocks may be a reasonable place to park money.

In Bank of America’s case, it is also ex-dividend this week. However, instead of considering selling an in the money weekly option in an effort to get some of the dividend subsidized by the option buyer, I would rather try to get some stock appreciation and the dividend, in addition to the option premium.

The reason I won’t be buying shares is that I already own 3 lots and I trade with a particular set of rules. One of those rules is that I not hold more than 3 lots of any stock.

Someday I may fine tune that to give me some more flexibility, but as long as it is still a rule, I follow it and try to stay away from making decisions on the fly.

Finally, I never like Abercrombie and Fitch (ANF) as anything other than a chance to make, hopefully, a quick trade.

Often times, that’s not how it works out for me, but I insist on going back for me, over and over again.

This time, it’s hard to ignore the steep decline after earnings. That’s true, despite the fact that a steep decline after earnings shouldn’t be anything exceptional when it comes to Abercrombie and Fitch.

What attracts me to it is that it is back below the last price that I purchased shares and also happens to be ex-dividend this week.

For my temperament, that’s a good combination when faced with the “hot mess” that Abercrombie and Fitch shares have been for quite some time.

The option market clearly has low expectations for Abercrombie and Fitch this week as the in the money call premium, in what is a holiday shortened week, is really very high, particularly with the dividend factored into the equation.

Can those shares go substantially lower?

If you don’t know the very probable answer to that question, this is one stock and call sale you should avoid, just as Abercrombie and Fitch did strive to avoid a certain “uncool” demographic.

That demographic certainly included me and maybe nearly everyone i have ever known and that turned out to be a problem when your accountant doesn’t really care where the money is coming from.

But I hold no grudge as those shares, beaten down as they are, may offer a reward far in excess of the slight that Abercrombie and Fitch cast toward my people.

Maybe it’s time for that mutually rewarding embrace.

 

Traditional Stocks: none

Momentum Stocks: iPath S&P 500 VIX Short Term Futures ETN, Las Vegas Sands

Double-Dip Dividend: Abercrombie and Fitch (6/1 $0.20), Bank of America (6/1 $0.05)

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.

May142016

Weekend Update – May 15, 2016

Weekend Update Comment

It took every last bit of my courage to jump out of a plane.

That was with a parachute and I only did so after suspending all of the logical and rational thoughts that I possessed.

Sometimes you do very uncharacteristic things when you want to impress someone for some other kind of excitement.

No other level of excitement could ever be high enough to get me to further suspend logic to engage in a free fall, though.

I don’t care how exhilarating it might be, staying alive seems more exhilarating to me.

Some free falls don’t require your consent, though and unless you’ve positioned yourself short in advance of the free fall, it’s definitely not an exhilarating process.

The past week was one in which oil wasn’t the prevailing theme even as it had its own large moves.

Instead, it was the free fall of retail, led by Macy’s (M) and Nordstrom (JWN), arguably among the best of the major national retailers, that characterized the stock market.

Of course, Macy’s and then Nordstrom took most every other retailer down with them and were able to drag along many others.

That kind of free fall, though, leaves open the question of exactly where the floor happens to be. 

On a positive note, hitting the floor after a market free fall is probably a lot better than hitting the floor following a recreational free fall and you do get the chance to play the game a bit longer.

What Macy’s and Nordstrom may be telling us, and what Limited Brands (LB) suggested the prior week, is that the consumer isn’t exactly a willing participant and may instead be a lead weight on the economy.

That lead weight won’t speed up a free fall descent, as we are fortunate to be governed by some inviolate laws of physics, but they sure can make it difficult to climb back up again.

With a disappointing Employment Situation Report and disappointing GDP growth, for those, such as myself, who had hoped that perhaps retail could paint a somewhat different picture of consumer participation, there was no different picture.

It seems that investors are appropriately recognizing the weakness in retail and the weakness in job growth as not being worthy of celebration.

Sometimes bad news really is bad news.

There are many more important retailers reporting this week, but it’s not too likely that there will much in the way of upside surprises, unless expectations for Wal-Mart (WMT) are so low and results buoyed by those who, in the past quarter. stopped shopping at Macy’s.

With last week’s loss, we are about to enter the sixth month of the year with the S&P 500 barely 0.1% higher. 

The first 3 months of 2016 was a story of two equal halves moving in big ways and in opposite directions. The past two months, however, have been a story of vacillation and moving nowhere and leaving few fulfilled.

We may find out exactly where the floor may be as the coming week comes to its end.

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

For the first time in 2016 I have a decent number of options contracts expiring as the monthly cycle comes to its end.

For me, 2016 has been a year of very little trading and I’m looking forward to the opportunity to get some assignments and rollovers, as long as that free fall doesn’t continue.

While there are some positions that I wouldn’t mind adding this week, it may be yet another week with very little reason to add any new positions.

Among those that have some interest for me are ex-dividend stocks Mattel (MAT) and Microsoft (MSFT).

I had shares of Mattel assigned at $33 in January 2016, after 15 months of holding.

There was a time when I would have thought that an 18.4 % return, including dividends, for a 15 month period was pretty mediocre.

During that same time period, the S&P 500, without accounting for dividends, was 3.3% higher. 

That’s even more mediocre.

Mediocre may be a good way to describe Mattel, particularly in relationship to Hasbro (HAS), as Mattel just seems to wax and wane along with Barbie. Going on the “Mattel Shop” website doesn’t do too much to make you believe that there is anything exhilarating to be had.

What I do like about Mattel is a chance to buy shares, at a price lower than which I had them assigned away from me and a chance to capture the dividend.

When I last owned Mattel shares it only offered monthly option contracts, but now there are weekly and extended weekly contracts. If buying shares, I would sell the weekly at the money call, but if faced with the need to rollover the position, I would consider a longer term and a higher strike price.

Microsoft has just started to have a little recovery from its sharp earnings related decline. It’s not that often that you can find Microsoft trading at a nearly 10% discount to where it had recently been, but this is one of those opportunities.

It’s not likely held hostage y the price of oil, nor by the fortunes at Macy’s, nor Wal-Mart.

What it has is upside potential following that fall, a nice dividend and an attractive premium.

As it goes ex-dividend, I would likely consider the same strategy, as with Mattel, if faced with the need to rollover the short call option position.

As long as in the technology arena, Cisco (CSCO) reports earnings this week and will be ex-dividend in early July.

Normally, I like to consider the sale of weekly puts on an earnings related trade when it offers a 1% ROI or greater at a strike level that’s outside of the limit defined by the “implied move.”

In Cisco’s case, that’s not the case, as the implied move is 5.6% and the reward that I seek for that risk just isn’t there, at least not for a weekly put sale.

Where I do see some potential for reward is in the belief that Cisco may have already sustained a decline fueled by Microsoft and may have some upside potential in the months following.

For that reason I am considering the purchase of shares and sale of longer term calls prior to earnings being reported. However, if that is more exhilaration than someone is willing to endure, the alternative is to wait until after earnings and then in the event of a decline in price, to consider doing the same, but at a lower strike price.

General Motors (GM) is recovering from its February 2016 lows and doing so through a series of higher lows. I like that pattern and also have an eye on its upcoming ex-dividend date in the early part of June.

With a price increase in mind and that eye toward the dividend, I would consider the purchase of shares and again select a longer term call option sale than I would normally prefer when initiating a new position. In this instance, that would mean a June 2016 or beyond expiration date and select an out of the money strike level.

Finally, if you believe in “death by retail,” there’s always Abercrombie and Fitch (ANF).

These days, no one has great admiration for the company, but you do have to admire the steady climb it made, beginning with earnings in November 2015 and again in February 2016.

Of course, you also have to be in awe of its history of sharp declines, which now includes the past two moths.

Abercrombie and FItch doesn’t report earnings until May 26, 2016 and could easily get dragged down this coming week as other retailers take center stage.

Along with that uncertainty associated both with the sector and with Abercrombie and Fitch itself, the premium for the sale of out of the money puts is fairly attractive.

In the event that shares do take a decline and you are faced with having to take assignment of shares, a decision has to be made as to whether to attempt to rollover those short puts into the week of earnings when the premium will truly be enhanced or to take the assignment.

The key factor may be the, as yet unannounced, ex-dividend date.

Abercrombie and Fitch has an attractive dividend and I am loathe to sell puts in the face of an ex-dividend date.

If the ex-dividend date is n the same week as earnings, I would be more inclined to take assignment of shares and then sell out of the money calls on those newly assigned shares, utilizing a longer term time frame.

If the ex-dividend date is the week following earnings, then I would consider simply rolling over the puts to the week of earnings and then playing it by ear, once again coming to the same decision tree if faced with the option buyer exercising their rights.

These days, dividends and premiums and the chance to serially accumulate them are all the exhilaration that I need or can survive. 

 

Traditional Stocks:  General Motors

Momentum Stocks: Abercrombie and Fitch

Double-Dip Dividend: Mattel (5/17 $0.38), Microsoft (5/17 $0.36)

Premiums Enhanced by Earnings: Cisco (5/18 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.

 

Apr92016

Weekend Update – April 10, 2016

Weekend Update Comment

There probably aren’t too many people willing to admit they remember The Osmond’s song “(Just Like A) Yo-Yo.”

The really cool people would look at you with some disdain, as the only thing that could have possibly made the yo-yo tolerable to mention in any conversation was if it was somehow in connection to the song of that title by “The Kinks.” 

With her dovish words just the prior week, Janet Yellen set off another round of market ups and downs that have taken us nowhere, other than to wonder who or what we should believe and then how to behave in response.

That’s been the case all through 2016, as another week of ups and downs have left the S&P 500 just 0.2% higher year to date. Of course, that’s within a 17 month context in which the S&P 500 has had no net movement, but has certainly had lots of ups and lots of downs.

Reminds me of something.

For those that do recall happier times with a yo-yo in hand, you may recall “the sleeper.”

“The Sleeper” was deceiving.

There was lots of energy involved in the phenomenon, but not so obviously apparent, unlike the clear ups and downs of the standard yo-yo move.

Both, though, ended up going nowhere.

“The Sleeper,” though, was quick to respond to a catalyst and return back to the regular pattern of ups and downs or whatever other tricks a yo-yo master could summon.

For now, the market catalyst continues to be oil, as it again demonstrated this week with some large moves in both directions, continuing to trade in magnitude without any obvious regard to fundamentals.

Like “The Sleeper,” markets have snapped in response to oil and even with some recent hints that oil’s hold may be lessening, stocks haven’t been able to break free.

For anyone who ever had a yo-yo string snap, breaking free isn’t necessarily a good thing, especially if stocks decide to finally break free as oil finally decides to break higher. 

While oil still is in control, increasingly, however, we may be seeing the very words of Janet Yellen and the other members of the Federal Reserve act as catalysts. There may be some increasingly divergent views regarding diagnosis and plan of action and less reticence to express those views.

That reminds me of what happened to so many great bands as the individual members sought their own creative paths.

I doubt that Janet Yellen ever purported to be cool. It’s equally unlikely that any of her recent predecessors believed themselves to be so, even as many consider them akin to Rock Gods. As Janet Yellen continues to sport the early 60s “mop-top,” reminiscent of the Fab Four, the belief may have some merit.

For those who do believe that the Federal Reserve Chairman are Rock Gods, they were rewarded this week when their own “Fab Four,” Ben Bernanke, Alan Greenspan, Janet Yellen and Paul Volcker assembled for a round table discussion of the economy.

No great pronouncements came from that historic meeting, as it was unlikely that any of her predecessors would weigh in too much in a manner that could have been considered as a challenge to Yellen’s path.

Still, the market may have used some of Yellen’s comments from that Thursday evening to propel itself strongly higher at Friday’s open, also helped out by oil once again reversing course.

But just as Yellen laid out some confidence, albeit in a non-threatening way, about the FOMC being able to initiate additional interest rate increases in 2016, came word the following morning that the Atlanta Federal Reserve was lowering its GDP forecast.

Understandably, markets may have some difficulty taking such diverging pieces of information and making sense of things.

Where that leaves us is maybe looking toward what has historically mattered.

Earnings.

This week begins another earnings season. After 4 successive quarters of disappointment we’re all primed for some good corporate earnings news.

Top line growth would be especially nice, even if comparative EPS data may not reflect quite as much artificial growth from stock buybacks during the past quarter.

Still, while we wait for Federal Reserve officials to get on a similar page, any signs from corporate earnings that the consumer is again getting involved could be the catalyst that we’ve been long awaiting.

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

I haven’t opened any new positions in the past 2 weeks as even with continuing price declines I haven’t found a sense of comfort or confidence to part with even a small bit of cash reserves.

With earnings season starting this week, I generally like to see the tone being set by the financial sector, even though their strong showing doesn’t necessarily reflect on the direction of the rest of the market. A poor showing, however, often does.

That financial sector has been battered of late as interest rates remain inconceivably low.

I’m hopeful that expectations are so low that when the big names do report over the next 2 weeks there may be some upside surprise.

However, I’m not willing to place any money on that hope.

Instead, this week I’m more intrigued by some retail names that retreated last week after a period of strength.

Among those are Best Buy (BBY), Coach (COH) and Abercrombie and Fitch (ANF).

If you believe that the consumer is coming back and you’re more inclined to be comforted by Janet Yellen than by the Atlanta Federal Reserve, then retail may be the first place to look.

With those recent losses, I may be more welcome to the notion of considering any of those positions through the sale of put contracts, rather than buy/writes.

While all have good dividends, none are in the immediate future, so that’s one less factor in the equation. With the exception of Coach, which reports earnings at the end of April, the others have an additional month before their own days of reckoning.

Coach, a one time favorite of mine, had long been a consistent performer. That’s not to say that it wasn’t unpredictable when earnings were at hand, but it could reliably be expected to revert to its mean after a large run higher or plunge lower.

That hasn’t been the case for the past few years, although more recently as Coach has been re-emerging from the shadow cast by Michael Kors (KORS) and others, it has started behaving more like the Coach of years past.

You can’t discount the impact of new leadership and strategic direction and Coach has become a far more proactive company and far less likely to take the consumer for granted.

I have a nearly 2 year old position in Coach that has been awaiting that reversion to the mean and have only owned shares on two other occasions in the past 2 years.

With a weekly put premium offering a 1% ROI even if shares fall by 1.2%, based on Friday’s closing prices, and the liquidity offered by the market for Coach puts, I find some soft leathery comfort in considering the sale of those puts and the ability to roll them over in the event of an adverse price movement in the near term.

If faced with that possibility, I would be mindful of the upcoming earnings on April 26, 2016 and if faced with again having to roll the puts over in an effort to avoid assignment of shares, I would look at bypassing the April 29, 2016 options and perhaps considering the following or even a later week and possibly with a lower strike price, as well.

In so many ways Best Buy is the same as Coach.

It too was being written off as irrelevant in the giant shadow of Amazon (AMZN), yet it’s amazing what new leadership and direction can do.

I own a nearly one year old position in Best Buy, and like Coach, have opened and closed 2 new positions since then.

The risk – reward proposition of selling puts in Best Buy isn’t as attractive as it may be for Coach, however, without the immediate challenge of an earnings announcement, there may be some opportunity for serial rollover in the event of an adverse price movement.

The one caveat is that there isn’t very much price support until 28.50, even as shares are down about 12% during the course of the past 4 weeks.

Finally, there was probably a time when if you had ever admitted to either listening to The Osmonds or ever playing with a yo-yo, you would have been banned from any Abercrombie and Fitch store for life.

Being too cool to make some people with discretionary spending power feel disenfranchised from entering your stores was probably not the best of strategic initiatives, but under new leadership a kinder and less smug Abercrombie and Fitch has arrived.

Here too, I have an 18 month old open position, but have had the good opportunity of opening and closing 6 positions since then to help ease the pain just a tiny bit.

With an almost 10% drop in the past week. the risk – reward proposition allows for a 1.2% ROI with the sale of a weekly put option, even if shares fall by 2.1% on the week.

As with the other potential choices for the week, there is some reasonable liquidity in the option market in the event that there is a need for a rollover of the short put position in an effort to escape assignment.

Whether rolling over calls or puts on a serial basis on stocks with high volatility, the net result can be very satisfying, even when the potential angst of unexpected and sudden price movements are factored into the equation.

Sometimes those ups and downs can be your best friend.

 

Traditional Stocks:  none

Momentum Stocks: Abercrombie and Fitch, Best Buy, Coach

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.

Feb272016

Weekend Update – February 28, 2016

Weekend Update Comment

It is really amazing that as big as the United States’ economy is, everything may now simply be part of a very delicate balancing act.

“Momentum” is a simple concept in classical mechanics and is generally expressed as the product of the mass of an object and its velocity.

The term “momentum” is often used when describing stocks, but many described as having momentum can be easily pushed off their track.

Another simple concept and part of classical physics, is that of “inertia.” Inertia is the resistance of any physical object to any change in its state of motion.

When a “momentum stock” has a relatively low market capitalization it isn’t too hard for resistance to match and overcome that momentum.

Greed and fear may play roles, too, in such cases, but those aren’t terms that Isaac Newton used very often.

The US economy may often move at what seems like a glacial speed, but its easy to overlook how difficult it is to alter its path due to its huge size.

That’s what makes the job of the FOMC so difficult. 

Outcomes resulting from their actions may take a long, long time to become obvious. Sometimes the FOMC acts to increase momentum and sometimes they have to act to increase resistance.

Stock market investors prefer the former, but history suggests that the early stages of the latter may be a great time for optimism.

While both momentum and inertia may be simple concepts, when considered together that’s not so much the case. Fortunately for the FOMC, the “Irresistible Force Paradox” suggests that there can be no such thing as an unstoppable object or an irresistible force.

Something has to give over the course of time.

While I’m no apologist for the George Bush presidency, the seeds for the beginning of an improvement in the economy often cited as beginning in about February 2009 could only have been sown much earlier. Similarly the economic stress in early 2001 could only have had its roots quite a bit earlier. However, our minds make temporal associations and credit or blame is often laid at the feet of the one lucky or unlucky enough to be in charge at the time something becomes obvious.

We’re now facing two delicate balances.

The first is the one continually faced by the FOMC, but that has been on most everyone’s mind ever since Janet Yellen became Chairman of the Federal Reserve.

The balance between managing inflation and not stifling economic growth has certainly been on the minds of investors. Cursed by that habit of making temporal associations, the small interest rate hike at the end of 2015, which was feared by many, could be pointed to as having set the stage for the market’s 2016 correction.

That leaves the FOMC to ponder its next step. 

While stressing that its decisions are “data driven” they can’t be completely dismissive of events around them, just as they briefly made mention of some global economic instability a few months ago, widely believed to have been related to China.

This past week’s GDP sent mixed messages regarding the critical role of the consumer, even as the previous week showed an increase in the Consumer Price Index. Whether rising health care costs or rising rents, which were at the core of the Consumer Price Index increase could hardly be interpreted as representing consumer participation, the thought that comes to mind is that if you’re a hammer everything looks like a nail.

The FOMC has to balance the data and its meaning with whatever biases each voting member may have. At the same time investors have to balance their fear of rising rates with the realization that could be reflecting an economy poised to grow and perhaps to do so in an orderly way.

But there’s another delicate balance at hand.

While we’ve all been watching how oil prices have whipsawed the stock market, there’s been the disconnect between lower oil prices borne out of excess supply and stock market health.

For those pleased to see energy prices moving higher because the market has gone in the same direction, there has to be a realization that there will be a point that what is perceived as good news will finally be recognized as being something else.

It’s hard to imagine that a continuing rise in oil will continue to be received as something positive by investors. Hopefully, though, that realization will be slow in coming. Otherwise, we face having had the worst of all worlds. Stocks declining as oil declined and then stocks declining as oil moves higher.

Now that JP Morgan Chase (JPM) has let everyone know just how on the hook it may be on its oil loan portfolio, it’s becoming more and more clear why the market is following in the same direction as oil has gone.

If the price of oil goes too low there may be drains on the banking system if there are defaults on those loans. We could again be hearing the phrase “too big to fail,” although this time instead of over-leveraged individuals losing their homes, all of the beneficiaries from the US oil boom could be at risk.

Of course, if oil goes too high and does so without being fundamentally driven, it can put a damper on a consumer driven economy that isn’t looking very robust to start.

We’re just 3 weeks away from the next FOMC Statement release and Chairman Yellen’s press conference may tip some balances. For much of the past two weeks the stock market has been celebrating higher oil and data suggesting no immediately forthcoming interest rate increase.

Of course, the FOMC may have its own irresistible force at play, perhaps explaining the earlier interest rate hike which didn’t seem to be supported by economic data. That force may be. a pre-determined intention to see rates rise

The market is of the belief that oil price momentum higher won’t meet its match in the negating force of increased interest rates, but one person may hold the balance in her hands.

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

Speaking of momentum and being easily thrown of track, Cypress Semiconductor (CY) comes to mind.

It trades at a high beta and is prone to volatile moves in either direction. It’s most recent direction has been lower, after having spiked sharply higher on news of its proposed buyout of another company.

When they were stranded at the alter by another suitor shares started a sharp descent from which it may finally be ready to emerge.

With a market capitalization of less than $3 billion it was easily knocked off track, but could just as easily get back on.

With an ex-dividend date in the April 2016 option cycle and with earnings in the May 2016 option cycle, I’m likely to add shares this coming week and will probably sell the April 2016 options while doing so.

I do have some concern about the company being able to continue its dividend, but IU don’t imagine that most who are invested in Cypress Semiconductor are doing it for the dividend, so I don’t believe that would represent significant downside pressure.

While February’s nice turnaround has left the S&P 500 significantly less in the hole for 2016. the financial sector has been continuing to have a difficult time as expectations for rising interest rates have proved premature.

American International Group (AIG) is near a 52 week low, but it hasn’t been the worst of that group even as it approaches a 20% correction for 2016.

What the downward pressure in the financial sector has brought has been enhanced option premiums. With a now respectable dividend as part of the equation and an ex-dividend the following week, I would consider selling something other than a weekly option

Abercrombie and Fitch (ANF) is on a roll of late and has earnings announced this week. It has a habit of being explosive when it does announce earnings and also has a habit of quickly giving back gains from news perceived as being positive. However, it has not given back the gains since its gap higher in November 2015.

What may make consideration of Abercrombie interesting this week is that it is also ex-dividend on the same day as earnings are announced.

While I normally consider the sale of puts before or after earnings, the combination of earnings, an ex-dividend date and a 13.3% implied price move has me thinking a bit differently.

I’m thinking of buying shares and then selling deep in the money calls.

Based on Friday’s closing price of $28.50, the sale of a weekly $25 strike call option at a premium of $4 would result in an ROI of 1.8% if assigned early in order to capture the dividend.

Since the ex-dividend date is March 2nd, that early assignment would have to come on Tuesday, March 1st and would preclude earnings exposure.

If, however, early assignment does not occur, the potential ROI for a full week of holding could be 2.5%, but with earnings risk. The $25 strike price is within the lower boundary implied by the option market, so one has to be prepared for a price move that may require further action.

Weyerhauser (WY) is also ex-dividend this week and its 2016 YTD loss is nearly 15%. The consensus among analysts, who are so often very late to react to good or bad news, are solidly bullish on shares at these levels.

With its merger with Plum Creek Timber now complete, many expect significant cost savings and operational synergies. 

It’s dividend isn’t quite as high and its payout ratio is almost half that of Cypress Semiconductor, but still far too high to be sustained. REIT or no REIT, paying out more than 100% of your earnings may feel good for a while if you’re on the receiving end, but is only a formula for Ponzi schemers of “The Producers.”

For now, that doesn’t concern me, but with an eye toward the upcoming ex-dividend date, which is on a Friday, I would consider selling an extended weekly option and then wouldn’t mind terribly if the options were exercised early.

Finally, I’m not one to be very interested in getting in on a stock following a climb higher, nor am I one to spend too much time reading charts.

But Coach (COH) which is ex-dividend this week gives me some reason to be interested.

A one-time favorite of mine either right before an ex-dividend date or following a large earnings related price decline, I’ve been holding onto an uncovered lot of shares for quite some time. Only the dividend has made it tolerable.

Ordinarily, I wouldn’t be terribly interested in considering adding shares of Coach following a 16% climb in the past month. However, shares are now making their second run at resistance and there is an 11% gap higher if it can successfully test that resistance.

It has been a prolonged drought for Coach as it was completely made irrelevant by Kors (KORS) for quite some time. During that time Kors had momentum and was also perceived as the force to stop Coach.

Time and tastes can change lots of things. That’s another delicate balance and for now, the balance seems to be back on the side of Coach.

Traditional Stocks: American International Group

Momentum Stocks: Cypress Semiconductor

Double-Dip Dividend: Coach (3/2 $0.34), Weyerhauser (3/4 $0.31)

Premiums Enhanced by Earnings: Abercrombie and Fitch (3/2 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.

Jan92016

Weekend Update – January 10, 2016

Weekend Update Comment

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.

Nov142015

Weekend Update – November 15, 2015

Weekend Update Comment

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.

Oct32015

Weekend Update – October 4, 2015

Weekend Update Comment

If you’re a parent, even if 50 years have passed since the last episode, you can probably still remember those wonderful situations when your child was having a complete meltdown, even as the kid really didn’t know what it is that they wanted.

Sometimes a child can get so out of control over something that they wanted so badly that even when finally getting it, they just couldn’t regain control. We’ve all seen kids carry on as if there was some horrible void being perceived in their lives that was still gaping and eating away at their very core even when their immediate issue had already been resolved.

I think that’s the only way to explain the market ups and downs that we’ve been seeing, starting from the week of the most recent FOMC Statement release and all the way through to the last trading day of the past week.

The market has gone from a condition of apoplexy over the very thought of an interest rate hike to a melt down when that very same interest rate hike didn’t materialize.

Whether the moves have been up or down the rational basis has become more elusive and knowing what to do in response has been difficult. It’s been a little bit easier to simply accept the fact that there is such a phenomenon as “the terrible twos” and just ride out the storm.

Trying to understand that kind of behavior is tantamount to trying to use rational thought processes when dealing with a child in the midst of an uncontrollable outburst.

Sometimes it’s just best to ignore what you see unfolding before your eyes and let events run their course. That may not be a call for total passivity, though, and completely giving up on things, but the belief that you can outsmart or out-think a rampaging child or a rampaging market is destined for failure.

Followings Friday’s 1.4% gain in the S&P 500 that index was down only about 8.7% from its summer time highs, after having been down as much as 11.9% after the first day of trading this past week.

In doing so, the market has continued its dance around that 10% correction line while having a regular series of irrational outbursts that have alternated between plunges and surges.

Like most parents, there is some pride that comes into play when a child finally is able to come to a stage in life when those uncontrollable and irrational outbursts have run their course. For most kids once they’ve gotten through that phase it never returns, although for some adults it may manifest itself in different ways.

I don’t know if this week is going to be that week when some pride is warranted, but at the very least the market took some time in-between its outbursts this week to collect itself. In doing so, it either continued to hover around that 10% correction line and avoided spiraling out of control or took some positive steps toward finally recovering from that correction.

It started with a 300+ point drop on Monday with almost nothing happening on Tuesday as it geared up for a 200+ point gain on Wednesday.

Then, it did virtually nothing again on Thursday, only to see the bottom drop out after some very disappointing Employment Situation Report numbers on Friday morning.

This time, “disappointing” meant employment numbers that were far lower than expected and lower revisions to the previous month.

Had the same numbers been put forward a few months ago they would have engendered elation, but now that market thinks it knows what it wants and as always, when it doesn’t get it there’s a tantrum at hand.

Then, suddenly, something just seemed to click, just a it occasionally does with a child. Sometimes it may simply be exhaustion or a realization of the futileness of demonstrable outbursts, but at other times a spark may get lit that creates a path to a greater understanding of things.

The morning turnaround on Friday occurred at that point at which the S&P 500 was approaching its lowest level since the correction began and had chartists scurrying to their charts to see where the next stop below awaited.

Instead, however, the S&P 500 climbed 3% from those depths having turned positive for the day by noontime and then continuing so soar even more.

Of course, while there may be some pride in what can be interpreted as a sudden realization of the unwarranted behavior in the morning, I always get wary of such large moves, even when they’re to my benefit. When seeing those kinds of intra-day reversals, my thoughts go from recognizing them as reasonably normal tantrums, to the less normal exhibition of a bipolar disorder.

With earnings season beginning at the end of this coming week, we may soon find out whether the market is capable of exhibiting some rational responses to real news.

I’m optimistic that those responses will be more appropriate than has been the case over the last 2 earnings seasons when the option market had repeatedly under-estimated the magnitude of those responses.

Any sign that top line and bottom line numbers are both heading in the right direction may paint those disappointing Employment Situation Report numbers as an aberration. That could be just the spark we all need to get over the hump of interest rate worries and escape the developmental binds that throw us into fits of rage.

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

I never get tired of doing the same thing over and over again. There may be a psychiatric diagnostic code for that sort of thing, but when it comes to stocks it can be a very rational way of behaving especially when those stocks start falling into a pattern of trading in a narrow price range.

However, if all those stocks did was to trade in that narrow range and didn’t have a moment of explosive behavior or two before returning to a more normal path, there would be no reason to consider owning them for any reason other than perhaps for the relative safety of their dividend income.

But those occasional moves higher and lower make the sale of calls worthwhile even when the shares are seemingly moribund. Both General Electric (NYSE:GE) and Bank of America (NYSE:BAC) are recently exhibiting the kind of behavior that can generate a very respectable return, both in relative and absolute terms, especially if the opportunity presents to buy shares on a serial basis following share assignment.

I had 2 lots of General Electric assigned this past week and would be very willing to own them for the sixth time in 6 weeks. However, following its late day turnaround on Friday, along with the rest of the market, I would probably only do so if its price came closer to $25.

With a remaining lot of shares and options set to expire this week, I would still have an eye on selling new weekly calls, but if requiring rollover at the end of the week, I would consider bypassing the cycle ending week of October 16th, and perhaps selling extended weekly calls, as General Electric will report earnings that morning.

I now own 2 lots of Bank of America and three lots at any one time is my self imposed limit, but trading at the $15.50 level has a relative feeling of safety for me. As with General Electric, however, if purchasing or adding shares, there is that little matter of upcoming earnings. While most likely beginning the process with a weekly call, if requiring a rollover as being faced with expiration rather than assignment, I would probably opt to bypass the October 16 expirations in the event of some poorly received news on earnings.

Poorly received news is an apt way to describe anything emanating from China these days. While there are lots of potential “poster child” examples of the risks associated with any stock that has exposure in China, among the more respected names has to be caterpillar (NYSE:CAT).

For many rational reasons, well known short seller Jim Chanos laid out his short thesis on caterpillar nearly 30 months ago and following a substantial move higher, the virtue of patience has begun to start its rewards.

With shares now down about 40% from a year ago, there’s still no telling if this is the bottom, but a constellation of events has me considering a position.

With its ex-dividend date the next week and then earnings the following week and a weekly option premium that reflects the near term risk, I’m ready to consider that risk.

If selling a weekly option doesn’t look as if it will result in an assignment, I would probably consider trying to roll over those options to the ex-dividend week, but with a mind toward giving up that dividend by selling a deep in the money call option in an effort to collect some additional premium, but to be out of shares prior to earnings.

Failing that, however, the next step would be to attempt to roll over those shares and again selecting an expiration date that bypasses the immediate threat of earnings and then holding on tightly as one of the least respected CEOs over the past few years may again be in people’s cross-hairs.

YUM Brands (NYSE:YUM) reports earnings this week and as ubiquitous as their locations may be in the United States, it’s almost always their Chinese holdings that get the attention of investors.

Following a strong move higher on Friday, I would be reluctant to start the week by selling puts on YUM shares, as it reports earnings Tuesday afternoon, unless there is some significant giveback of those weekending gains. At the moment, the option market is implying a price move of about 5.7%.

A 1% ROI could potentially be obtained through the sale of a weekly put at a strike level 6.7% below Friday’s close, but that may be an insufficient cushion, given YUM’s earnings history, even when the CHinese economy has not been so highly questionable. However, in the event of some price pullback prior to earnings or a large price drop after earnings, I would consider a position.

In the event of a large pullback after earnings, however, rather than selling puts, as I might usually want to do, YUM is expected to have its ex-dividend date the following week, so I might consider the purchase of shares and the sale of calls. But even then, depending on the prevailing option premiums, I could possibly consider sacrificing the dividend for the premiums that could come from selling deep in the money calls and possibly using an extended option expiration date.

Equally ubiquitous, at least in some portions of the United States is Dunkin Brands (NASDAQ:DNKN). Following a disastrous reception on Thursday to their forward guidance and the barely perceptible rebound the following day, this is a stock that I’ve wanted to repurchase for nearly a year.

With only monthly options available and without a wide assortment of strike levels, this may be a good position to consider a longer term option sale, as it reports earnings at the beginning of the November 2015 cycle and will likely have its ex-dividend date in the November or December cycle.

During this latest downturn, I’ve had a more profound respect for trying to accumulate dividends, especially as the increased volatility has created option premiums that subsidize more of the dividend related price drop in shares. In doing so, sometimes there may be just as good opportunity in trying to induce early assignment of shares by selling deeper in the money calls that you usually might do in a lower volatility environment and using an extended option timeframe.

Both Verizon (NYSE:VZ) and Oracle (NYSE:ORCL) may benefit from those approaches, although when the size of the dividend is larger than the strike price unit, such as in the case of Verizon, the advantage is a bit muted.

However, with Verizon reporting earnings on October 20th, some consideration might be given toward selling an in the money option expiring on that date, in an effort to get the larger, earnings enhanced premium, even while potentially sacrificing the dividend.

Oracle doesn’t offer the same generous dividend as does Verizon, nor does it have earnings immediately at hand.

It can be approached in a much more simplistic fashion in an attempt to capture both the dividend and the option premium by considering a sale of a call hovering near the current price. because it is ex-dividend on a Friday, there may be some opportunity to enhance the yield by selling an extended weekly option, again, possibly risking early assignment, but atoning for some of that with some additional premium

Finally, how can there be anything good to say about Abercrombie and Fitch (NYSE:ANF)? I’ve been practicing Chanos like patience on a much more expensive lot of shares, but in the meantime have found some opportunity by buying shares and selling calls in the $20-22 range.

Having now done so on 4 occasions in 2015 it nay be time to do so again as it closed in at the lower end of that range. With its earnings due relatively late in the current cycle this position can be considered either through the sale of puts or as a buy/write.

Traditional Stocks: Caterpillar, Dunkin Donuts, General Electric

Momentum Stocks: Abercrombie and Fitch, Bank of America

Double-Dip Dividend: Oracle (10/9 $0.15), Verizon (10/7 $0.565)

Premiums Enhanced by Earnings: YUM Brands (10/6 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.

Aug12015

Weekend Update – August 2, 2015

Weekend Update Comment

Like many people I know who have seen the coming attractions for “Vacation,” I’m anxious to see the film having laughed out loud on the two occasions that I saw the coming attractions.

That’s one of the benefits of diminishing short term memory and ever lower standards for what I find entertaining.

My wife and I usually rotate over who gets to select the next movie we see, although it usually works out to a 3 to 1 ratio in her favor. We tend to like different genres. But on this one, we’re both in agreement.

I’m under no illusions that the upcoming “vacation” being taken by the Federal Reserve and its members will have anywhere near the hijinks that the scripted “Vacation” will likely have.

For a short while the usually very visible and very eager to share their opinion members of that august institution will not garner too much attention and the stock market will be left to its own devices to try and interpret the meaning of incoming economic data in a vacuum.

The greatest likelihood is that the Federal Reserve Governors and the members of the FOMC will also be busily evaluating the economic data that will continue to accrue during the remainder of the summer, even as they have a much abridged speaking schedule in August.

I count only 3 scheduled appearances for August, which means less opportunity to go off script or less opportunity to speak one’s own mind, regardless of how that mind may lack influence where it really matters.

That then translates into less opportunity to move markets through casual comments, observations or expressions of personal opinion, even when that opinion may carry little to no weight.

While FOMC members may be taking a vacation from their public appearances for a short while, they’ll be able to give some thought to the most recent economic data which isn’t painting a picture of an economy that is expanding to the point of worry or perhaps not even to the point of justifying action.

The GDP data reported this week came in below estimates and further there was no indication of wage growth. For an FOMC that continually stresses that it will be “data driven” one has to wonder where the justification would arise to consider an interest rate increase even as early as September.

This coming week’s Employment Situation Report could alter the landscape as could the upcoming earnings reports from retailers that will begin in about 2 weeks.

With less attention being paid to when an interest rate hike may or may not occur, perhaps more attention will be paid to the details that would trigger such an increase and interpret those details on their surface, such that good news is greeted as good news and bad news as bad. That would mean a greater consideration of fundamental criteria rather than interpretation of the first or second order changes that those fundamentals might trigger.

Meanwhile, the market continues to be very deceiving.

While the S&P 500 is only about 1.5% below its all time high and the DJIA is about 3.5% below its high, it’s hard to overlook the fact that 40% of the latter’s component companies are in bear market correction.

That seems to be such an incongruous condition and the failure to break out beyond resistance levels after successfully testing support could be pointing to a developing dynamic of higher lows, but lower highs. That’s something that technicians believe may be a precursor to a breakout, but of indeterminate direction.

A lot of good that is.

The fact remains that the market has been extremely unpredictable from week to week, exhibiting something resembling a 5 steps forward and almost 5 steps backward kind of pattern throughout 2015.

With this past week being one that moved higher and bringing markets closer to its resistance level, the coming week could be an interesting one if China remains under control and fundamentals coming from earnings and economic data paint a picture of good news.

Given my low volume of trading over the past few weeks I feel that I’ve been on an extended, but unplanned vacation. Unfortunately, there are no funny tales to recount and the weeks past feel like weeks lost.

Although I’ve never really understood those who complained about having “too much quality family time” and welcomed heading back to work, I think I now have a greater appreciation for their misery.

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

Last week I purchased shares of Texas Instruments (NASDAQ:TXN) with dividend capture in mind. However, on the day before the ex-dividend date shares surged beyond my strike price and I decided to roll those options over in a hope that I could either retain the dividend and get some additional premium, or, in the event of early assignment, simply retain the additional premium.

This week, despite semi-conductors still being embattled, I’m interested in adding shares of Intel (NASDAQ:INTC), also going ex-dividend during the week.

While patiently awaiting the opportunity to sell new calls on a much more expensive existing position, I’m very aware that Intel is one of those DJIA components in correction mode. However, I don’t believe Intel will be additionally price challenged unless caught in a downward spiraling market. While I’d love to see some rebound in price for my existing shares, I’d be more than satisfied with a quick turnaround of a new lot of shares and capture of dividend and option premium.

MetLife (NYSE:MET) is also ex-dividend this week. It, too, may be in the process of developing higher lows and lower highs, which may serve as an alert.

With interest rates under pressure in the latter half of the week, MetLife followed suit lower, with both peaking mid-week. Any consideration of adding shares of MetLife for a short term holding should probably be done in the context of the expectation for interest rates climbing. If you believe that interest rates are still headed lower, the prospect of dividend capture and option premium may not offset the risk associated with the share price being pulled toward its support level.

MetLife shares are currently a little higher priced than I would like, but with a couple of days of trading prior to the ex-dividend date, I would be more enticed to consider a dividend capture trade and the use of an extended weekly option if there is price weakness early in the week.

I haven’t owned shares of Capital One Financial (NYSE:COF) in a number of years, although it’s always on my watch list. I almost included it in last week’s selection list following it’s impressive earnings related plunge of about 13%, but decided to wait to see if it could show any attempt to stem the tide.

In a sector that has generally had positive earnings this past quarter the news that Capital One was setting aside 60% more for credit losses came as a stunner, as its profitability ratio also fell.

Some price stability came creeping back last week, however, although still leaving shares well off their highs from less than 2 weeks ago. Even after some price recovery, Capital One Financial joins along with those DJIA stocks that are in correction mode and may offer some opportunity after being oversold.

Despite still owning a much too expensive lot of shares of Abercrombie and Fitch (NYSE:ANF), I’m always attracted to its shares, even when I know that they are likely not to be good for me.

There’s something perverse about that facet of human nature that finds attraction with what most know is bound to be a train wreck, but it can be so hard to resist the obvious warning signals.

While having that expensive lot of shares the recent weakness in Abercrombie and Fitch shares that have taken it below the tight range within which it had been trading makes me want to consider adding shares for the fourth time in 2015.

The option premiums are generally attractive, befitting its penchant for large moves and there is nearly 4 weeks to go until it reports earnings, so there may be some time to manage a position in the event of an adverse price movement.

I might consider the sale of puts with Abercrombie, rather than a buy/write. The one caveat about doing so and it also pertains to being short calls, is that if the ensuing share price is sharply deviating from the strike price when looking to execute a rollover, the liquidity may be problematic and the bid-ask spreads may be overly large and detrimental to someone who feels pressure to make a trade.

Finally, for those that have real intestinal fortitude, both Green Mountain Keurig (NASDAQ:GMCR) and Herbalife (NYSE:HLF) have been in the cross hairs of well known activists and both report earnings this week.

The Green Mountain Keurig saga is a long one and began some years ago when questions arose regarding its accounting practices and issues of inventory. Thrown later into the equation were questions regarding the sale of stock by its founder who had also served as CEO and Chairman until he was fired.

What Green Mountain has shown is that second acts are possible, as it has, very possibly through a lifeline offered by Coca Cola (NYSE:KO), emerged from a seeming spiral into oblivion.

Somewhat ominously, at its recent earnings report and conference, Coca Cola made no mention of its investment in Green Mountain, which has seen its share price fall by more than 50% in the past 9 months. It has been down that path before, having fallen by about 65% just 4 years ago in 2 month period.

Are there third and fourth acts?

The options market is implying a price move of about 10.7%. Meanwhile, one can potentially obtain a 1% ROI for the week if selling a put contract at a strike as much as 14% below this past Friday’s close.

In light of how this current earnings season has punished those disappointing with their earnings, even that fairly large cushion between the implied move and the strike that could deliver a 1% ROI still leads to some discomfort. However, I would very much consider the sale of puts after the earnings report if shares do plunge.

Herbalife has had its own ongoing and long saga, as well, that may be coming toward some sort of a resolution as the FTC probe is nearly 18 months old and follows allegations of illegality made nearly 3 years ago.

Following a fall to below $30 just 6 months ago, a series of court victories by Herbalife have helped to see it realize its own second act, as shares have jumped by 65% since that time.

The options market is implying a share price move of about 16%.

Considering that any day could bring great peril to Herbalife shareholders in the event of an adverse FTC decision, that implied move isn’t unduly exaggerated, as more than business results are in play at any given moment.

However, if that intestinal fortitude does exist, especially if also venturing a trade on Green Mountain, a 1% ROI may possibly be obtained by selling puts at a strike nearly 29% below Friday’s closing price.

Now that’s a cushion, but it may be a necessary one.

If the news is doubly bad, combining disappointing earnings and the coincidental release of an FTC ruling the same week that Bill Ackman would immensely enjoy, I might recommend a vacation, if you can still afford one.

Traditional Stocks: Capital One Finance

Momentum Stocks: Abercrombie and Fitch

Double-Dip Dividend: Intel (8/5), MetLife (8/5)

Premiums Enhanced by Earnings: Green Mountain Keurig (8/5 PM), Herbalife (8/5 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.

Jul112015

Weekend Update – July 12, 2015

Weekend Update Comment

While mankind has tried and will probably never give up on such attempts, there is a reason many are assigned to the fact that you just can’t fight nature.

In the case of natural disasters, those forces are so powerful and so relentless the best you can hope for is that they will run their course before nature finds its way to you.

Fleeing is probably a better strategy than fighting when faced with the release of unfathomable stores of energy in an effort to buy time until the inevitable reversal of course occurs.

Sure, you can build shelters, fortify dams or enact more stringent building codes in efforts to mollify the impacts of nature, but eventually, we all know who’s in charge.

Economic cycles, stock market cycles, currency cycles and interest rate cycles aren’t very different. They represent incredibly powerful forces that governments attempt to manipulate, but it is really only time that can tame the unwieldy power of an event, regardless of government intervention.

It’s those natural cycles, sometimes a cascade of events coming to a crescendo that are like the worst that Mother Nature has to offer.

Most of us know that trying to best nature is a fairly futile way to expend our own energy, just as is trying to manipulate or change the direction of capital markets. Over the past 50 years there is plenty of evidence to show that heavy handed government attempts to manipulate markets, such as currencies, have exceedingly short impacts.

You can’t really blame the Chinese government for trying to control their stock markets, though, especially in a time of crisis.

They’re pretty new at this capitalism game and it’s only through surviving one of the varied crises that descend upon the cogs of capitalism on occasion that you can continue to reap its many benefits.

Undoubtedly someone in a high position of authority must have seen footage from a 70 year old cartoon and had it mistaken for real news footage of someone successfully battling with a force of nature and then drew the obvious conclusion that the same would be possible as their market was threatening a meltdown.

In a system where it controls everything and has a bully pulpit in more than just figurative terms, it’s only natural to think that it could just as easily exert its will on its stock market and change its behavior.

But what we know is that the forces seen in capital markets is no different from those seen in nature, at least in terms of how unlikely it is that human efforts can suddenly change the course.

Of course, in a nation that executes many for white collar crimes, official condemnation of “malicious short sellers” who being blamed for the bursting bubble and threatened with investigation and arrest can certainly lead to behavioral changes, but not the kind that can stem the inevitable path as gravity takes control of sky high stock prices.

Learning that market forces aren’t as easily controlled as 1.4 billion people isn’t very easy when you actually do have the power to control those 1.4 billion people. That itself is so improbable that everything else must seem like a cakewalk.

When you have the power to tell people that they can only have one child, and they obey the edict, you’ve shown that you’re pretty good at battling nature and what comes naturally. So it’s only natural that when faced with a brewing crisis in their stock markets, the Chinese government would elect to try and alter its natural course.

Good luck with that.

The combination of events in China, the ongoing battle among Greece, the EU, ECB and IMF and the trading halt on the NYSE resulted in a week that saw large moves in both directions, intra-day reversals in both directions and ultimately ended the week unchanged.

There wasn’t too much doubt that events in China determined our own fortunes this past week as the net result of the interventions was to see their markets recover and spill over onto our shores. While I saw reason to establish some new positions last week as the market opened the week on a sharp decline, and was fortunate to have benefited from market strength to close the week, I’m circumspect about the ability of the Chinese government intervention to have anything more than a temporary halting impact. Being mindful of so many past attempts by governments to halt slides in their currency by massive entry into currency markets, makes me want to hold on tightly to any cash that I have as this week is about to begin.

Perhaps some good economic news will be forthcoming this week as earnings season really gets underway in earnest. Maybe some good news can move our attention away from world events, but ignoring those powerful overseas forces would be a mistake, particularly as the Chinese government’s actions may be unpredictable if their initial attempts at controlling their stock markets don’t succeed.

This coming week may offer a wild ride in both stocks and bonds and if so, we’d be very fortunate if the net result was the same as this past week, but you can be lucky only so often in the face of unleashed natural forces.

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

With fewer compelling reasons to spend money this week there aren’t too many stocks that have much in the way of appeal to me at the moment and my selections for this week continue to be limited.

As long as China is front and center, there may be some reason to think about YUM Brands (NYSE:YUM) as it both reports earnings this week and goes ex-dividend.

Over the past few years it seems that there have been an infinite number of disasters that have come YUM’s way, as so much of its fortunes rely on its businesses in China which can so easily fall prey to the weakest links in the chain, as well as to the macro-economic picture.

Following a large move higher on Friday, I wouldn’t rush into any kind of position unless there was some pullback. However, in the event that some of that gain is returned prior to earnings on Tuesday, I would consider a covered call trade, rather than the sale of puts, in order to also be able to capture the dividend the following day.

The option market is implying a 6.4% move next week. At Friday’s closing price of $90.87, the implied lower boundary is about $85. The option premium being offered for the weekly $85 strike would offer a 0.75% ROI if assigned early and a 1.2% ROI if the dividend is captured.

Since earnings are reported on Tuesday after the market’s close and the ex-dividend date is the following day, there is a very short window of opportunity for an option holder to exercise following earnings. The owner of shares would have approximately $6 of downside protection, although YUM shares can certainly be very volatile when earnings or any adverse news is reported.

I have some mixed feelings about considering Caterpillar (NYSE:CAT) this week, as so much focus is placed on its dependence on Chinese economic activity. Overall revenues from the Asia-Pacific region account for about 20% of total revenue and has already been hard hit as it share price is down nearly 25% since November 2014 and 7% in the past 2 weeks. While its CEO tried putting a positive spin on the Chinese economic slowdown a few months ago, he may have to spin extra hard now.

Caterpillar shares go ex-dividend this week and that is certainly a selling point, as its shares are approaching their 52 week low and I have been wanting to add shares for quite a while.

I would be willing to take the risk of their China exposure in the event of any additional price weakness as the week begins in the belief that any disappointing earnings or guidance the following week may have already been discounted.

I have less mixed feelings about Lowes (NYSE:LOW) which goes ex-dividend the following Monday. Lowes shares are down about 10% in the past 3 months and 4% in the past 2 weeks.

What I don’t have mixed feelings about is the quality of the shopping experience at Lowes. I’ve spent lots of time there lately, having become a convert from Home Depot (NYSE:HD) on the advice of a friend who suggested that I try them for a large DIY project I was ready to undertake.

In the past 2 months I have probably made about 20 trips, bypassing that Home Depot store and have noticed that the store always seemed busy and I tended to make more purchases as their sales associates were proactive and helpful.

While I generally like to consider Monday ex-dividend positions, that’s more true when weekly options are available, in an attempt to get 2 weeks of premium instead of the dividend, in the hopes of an early assignment. However, Lowes no longer has weekly options available and while this is the final week of the July 2015 cycle, the ex-dividend date is part of the August 2015 cycle.

With that potential purchase comes the potential liability associated with earnings, which are scheduled to be reported 2 days before the end of the monthly cycle. For that reason I might consider a purchase coupled with the sale of a September or later option, in order to capture the dividend and provide some cushion in the event of a downward price move.

I haven’t owned Baxter International (NYSE:BAX) in almost 2 years and have a very difficult time understanding why that has been the case, as it traded in a very narrow band that entire time while offering a reasonable option premium and attractive dividend.

Having now completed its spin off of Baxalta (NYSE:BXLT), it may join other companies that fell out of favor as they were perceived as less desirable after spinning off their faster growing assets. Whether that’s actually supported by reality may be questionable, but there’s no question that spin-offs, such as Baxalta and the upcoming PayPal (PYPLV) have gotten attention.

For its part, what remains of Baxter is a company that offers an excellent dividend and attractive option premiums in an industry sector that shows little sign of slowing down.

Finally, I purchased shares of Abercrombie and Fitch (NYSE:ANF) last week and happily saw them assigned. I still hold a much more expensive lot of shares and every little bit of premium derived from additional short term lot holdings helps to ease the pain of that non-performing lot.

Last week’s purchase was the third such in the past 10 weeks as Abercrombie and Fitch’s shares have been trading in a very narrow range, but its option premiums still reflect its historical ability to make large moves. Lately, those large moves have been predominantly lower and certainly any time new shares are added the risk remains of continued erosion of value.

While teen retailers haven’t been terribly good stores of stock value of late, and while there’s certainly nothing positive that can be said of Abercrombie and Fitch, it won’t report earnings again until the end of August and continues to present a short term opportunity.

However, following a price reversal during Friday’s session, that saw it’s shares close higher for the day, I would consider an entry this coming week only on weakness, if considering a covered call position. Alternatively, the sale of puts may have some more appeal, especially if there’s price weakness as the week begins and moves the share price closer to $21.

Traditional Stocks: Baxter International

Momentum Stocks: Abercrombie and Fitch

Double-Dip Dividend: Caterpillar (7/16), Lowes (7/20)

Premiums Enhanced by Earnings: YUM Brands (7/14 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.

Jul42015

Weekend Update – July 5, 2015

Weekend Update Comment

I used to work with someone who used the expression “It’s as clear as mud,” for just about every occasion, even the ones that had obvious causes, answers or paths forward.

Initially, most of us thought that was just some kind of an attempt at humor until eventually coming to the realization that the person truly understood nothing.

Right now, I feel like that person, although the fact that it took a group of relatively smart people quite a while to realize that person had no clue, may be more of a problem.

It should have been obvious. That’s why we were getting the big bucks, but the very possibility that someone who was expected to be capable, was in reality not capable, wasn’t even remotely considered, until it, too, became painfully obvious.

I see parallels in many of life’s events and the behavior of stock markets. As an individual investor the “clear as mud” character of the market seems apparent to me, but it’s not clear that the same level of diminished clarity is permeating the thought processes of those who are much smarter than me and responsible for directing the use of much more money than I could ever dream.

What often brings clarity is a storm that washes away the clouds and that perfect storm may now be brewing.

Whatever the outcome of the Greek referendum and whatever interpretation of the referendum question is used, the integrity of the EU is threatened if contagion is a by-product of the vote and any subsequent steps to resolve their debt crisis.

Most everyone agrees that the Greek economy and the size of the debt is small potatoes compared to what other dominoes in the EU may threaten to topple, or extract concessions on their debt.

Unless the stock market has been expressing fear of that contagion, accounting for some of the past week’s losses, there should be some real cause for concern. If those market declines were only focused on Greece and not any more forward looking than that, an already tentative market has no reason to do anything other than express its uncertainty, especially as critical support levels are approached.

Moving somewhat to the right on the world map, or the left, depending on how much you’re willing to travel, there is news that The People’s Republic of China is establishing a market-stabilization fund aimed at fighting off the biggest stock selloff in years and fears that it could spread to other parts of the economy. Despite the investment of $120 billion Yuan (about $19.3 billion USD) by 21 of the largest Chinese brokerages, the lesson of history is that attempts to manipulate markets tends not to work very well for more than a day or so.

That lesson seems to rarely be learned, as market forces can be tamed about as well as can forces of nature.

The speculative fervor in China and the health of its stock markets can create another kind of contagion that may begin with US Treasury Notes. Whether that means an increased escape to their safety or cashing in massive holdings is anyone’s guess. Understanding that is far beyond my ken, but somehow I don’t think that those much smarter than me have any clue, either.

Back on our own shores, this week is the start of another earnings season, although that season never really seems to end.

While I’ve been of the belief that this upcoming series of reports will benefit from a better than expected currency exchange situation, as previous forward guidance had been factoring in USD/Euro parity, the issue at hand may be the next round of forward guidance, as the Euro may be coming under renewed pressure.

Disappointing earnings at a time that the market is only 3% below its all time highs together with international pressures seems to paint a clear picture for me, but what do I know, as you can’t escape the fact that the market is only 3% below those highs.

The upcoming week may be another in a succession of recent weeks that I’ve had a difficult time finding a compelling reason to part with any money, even if that was merely a recycling of money from assigned positions.

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

Much of my interests this week are driven purely by performance relative to the S&P 500 over the previous 5 trading days and the belief that the extent of those price moves were largely unwarranted given the storm factors.

One exception, in that it marginally out-performed the S&P 500 last week, is International Paper (NYSE:IP). However, that hasn’t been the case over the past month, as the shares have badly trailed the market, possibly because its tender offer to retire high interest notes wasn’t as widely accepted as analysts had expected and interest payment savings won’t be realized to the anticipated degree.

Subsequently, shares have traded at the low end of a recent price cut target range. As it’s done so, it has finally returned to a price that I last owned shares, nearly a year ago and this appears to be an opportune time to consider a new position.

With that possibility, however, comes an awareness that earnings will be reported at the end of the month, as analysts have reduced their paper sales and expectations and profit margins have been squeezed as demand has fallen and input costs have risen.

DuPont’s (NYSE:DD) share decline wasn’t as large as it seemed as hitting a new 52 week low. That decline was exaggerated by about $3.20 after the completion of their spin-off of Chemours (NYSE:CC).

As shares have declined following the defeat of Nelson Peltz’s move to gain a seat on the Board of Directors, the option premium has remained unusually high, reflecting continued perception of volatility ahead. At a time when revenues are expected to grow in 2016 and shares may find some solace is better than expected currency exchange rates.

Cypress Semiconductor (NASDAQ:CY) has been on my wish list for the past few weeks and continues to be a possible addition during a week that I’m not expecting to be overly active in adding new positions.

What caused Cypress Semiconductor shares to soar is also what was the likely culprit in its decline. That was the proposed purchase of Integrated Silicon Solution (NASDAQ:ISSI) that subsequently accepted a bid from a consortium of private Chinese investors.

What especially caught my attention this past week was an unusually large option transaction at the $12 strike and September 18, 2015 expiration. That expiration comes a couple of days before the next anticipated ex-dividend date, so I might consider going all the way out to the December 18, 2015 expiration, to have a chance at the dividend and also to put some distance between the expiration and earnings announcements in July and October.

Potash (NYSE:POT) is ex-dividend this week and was put back on my radar by a reader who commented on a recent article about the company. While I generally lie to trade Mosaic (NYSE:MOS), the reader’s comments made me take another look after almost 3 years since the last time I owned shares.

The real difference, for me at least, between the 2 companies was the size of the dividend. While Potash has a dividend yield that is about twice the size of that of Mosaic, it’s payout ratio is about 2.7 times the rate of that of Mosaic.

While that may be of concern over the longer term, it’s not ever-present on my mind for a shorter term trade. When I last traded Potash it only offered monthly options. Now it has weekly and expanded weekly offerings, which could give opportunity to manage the position aiming for an assignment prior to its earnings report on July 30th.

During a week that caution should prevail, there are a couple of “Momentum” stocks that I would consider for purchase, also purely on their recent price activity.

It’s hard to find anything positive to say about Abercrombie and Fitch (NYSE:ANF). However, if you do sell call options, the fact that it has been trading at a reasonably well defined range of late while offering an attractive dividend, may be the best nice thing that can be said about the stock.

I recently had shares assigned and still sit with a much more expensive lot of shares that are uncovered. I’ve had 2 new lots opened in 2015 and subsequently assigned, both at prices higher than the closing price for the past week. There’s little reason to expect any real catalyst to move shares much higher, at least until earnings at the end of next month. However, perhaps more importantly, there’s little reason to expect shares to be disproportionately influenced by Greek or Chinese woes.

Trading in a narrow range and having a nice premium makes Abercrombie and Fitch a continuing attractive position, that can either be done as a covered call or through the sale of puts.

Bank of America (NYSE:BAC) is another whose shares were recently assigned and has given back some of its recent price gains while banks have been moving back and forth along with interest rates.

With the uncertainty of those interest rate movements over the next week and with earnings scheduled to be released the following week, I would consider a covered call trade that utilizes the monthly July 17, 2015 option, or even considering the August 21, 2015 expiration, to get the gift of time.

Finally, Alcoa (NYSE:AA) reports earnings this week after having sustained a 21.5% fall in shares in the past 2 months. That’s still not quite as bad as the 31% one month tumble it took 5 years ago, but shares have now fallen 36% in the past 7 months.

The option market is implying a 5% price movement next week, which on the downside would bring shares to an 18 month low.

Normally, I look for the opportunity to sell a put option in advance of earnings if I can get a 1% ROI for a weekly contract at a strike price that’s below the lower level determined by the option market’s implied movement. I usually would prefer not to take possession of shares and would attempt to delay any assignment by rolling over the short put position in an effort to wait out the price decline.

In this case the ROI is a little bit less than 1% if the price moves less than 6%, however, at this level, I wouldn’t mind taking ownership of shares, especially if Alcoa is going to move back to a prolonged period of share price stagnation as during 2012 and 2013.

That was an excellent time to be selling covered calls on the shares as premiums were elevated as so many were expecting price recovery and were willing to bet on it through options.

You can’t really go back in time, but sometimes history does repeat itself.

At least that much is clear.

Traditional Stocks: Cypress Semiconductor, DuPont, International Paper

Momentum Stocks: Abercrombie and Fitch, Bank of America

Double-Dip Dividend: Potash (7/8)

Premiums Enhanced by Earnings: Alcoa (7/8 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.

May22015

Weekend Update – May 3, 2015

Weekend Update Comment

For all the talk about how April was one of the best months of the year, that ship sailed on April 30th when the DJIA lost 192 points, to finish the month just 0.2% higher.

It will take complete Magellan-like circumnavigation to have that opportunity once again and who knows how much the world will have changed by then?

Higher Interest rates, a disintegrating EU, renewed political stalemate heading into a Presidential election, rising oil prices and expanding world conflict are just some of the destinations that may await, once having set sail.

Not quite the Western Caribbean venue I had signed up for.

With the market getting increasingly difficult to understand or predict, I’m not even certain that there will be an April in 2016, but I can’t figure out how to hedge against that possibility.

But then again, for all the talk about “Sell in May and go away,” the DJIA recovered all but 9 of those points to begin the new month. With only a single trading day in the month, if there are more gains ahead, that ship certainly hasn’t sailed yet, but getting on board may be a little more precarious when within just 0.4% of an all time closing high on the S&P 500.

The potential lesson is that for every ship that sails a new berth is created.

What really may have sailed is the coming of any consumer led expansion that was supposed to lead the economy into its next phase of growth. With the release of this month’s GDP figures, the disappointment continued as the expected dividend from lower energy prices hasn’t yet materialized, many months after optimistic projections.

How so many esteemed and knowledgeable experts could have been universally wrong, at least in the time frame, thus far, as fascinating. Government economists, private sector economists, CEOs of retail giants and talking heads near and far, all have gotten it wrong. The anticipated expansion of the economy that was going to lead to higher interest rates just hasn’t fulfilled the logical conclusions that were etched in stone.

Interestingly, just as it seems to be coming clear that there isn’t much reason for the FOMC to begin a rise in interest rates, the 10 Year Treasury Note’s interest rate climbed by 5%. It did so as the FOMC removed all reference from a ticking clock to determine when those hikes would begin, in favor of data alone.

I don’t know what those bond traders are thinking. Perhaps they are just getting well ahead of the curve, but as this earnings season has progressed there isn’t too much reason to see any near term impetus for anything other than risk. No one can see over the horizon, but if you’re sailing it helps to know what may be ahead.

What started out as an earnings season that was understanding of the currency related constraints facing companies and even gave a pass on pessimistic guidance, has turned into a brutally punishing market for companies that don’t have the free pass of currency.

All you have to do is look at the reactions to LinkedIn (NYSE:LNKD), Twitter (NYSE:TWTR) and Yelp (NYSE:YELP) this week, as they all reported earnings. Some of those would have gladly seen their stocks tumble by only 20% instead of the deep abyss that awaited.

Before anyone comes to the conclusion that the ship has sailed on those and similar names, I have 4 words for you: Green Mountain Coffee Roasters, now simply known as Keurig Green Mountain (NASDAQ:GMCR).

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

Coach (NYSE:COH) reported earnings last week and in 2015, up until that point, had quietly diverged from the S&P 500 in a positive way, if you had owned shares. As the luster of some of its competitors was beginning to fade and in the process of implementing a new global strategy, it appeared that Coach was ready to finally recover from a devastating earnings plunge a year ago.

It was at that time that everyone had firmly shifted their favor to competitor Michael Kors (NYSE:KORS) and had started writing Coach off, as another example of a company sailing off into oblivion as it grew out of touch with its consumers.

Who knew at that time that Kors itself would so quickly run out of steam? At least the COach ride had been a sustained one and was beginning to show some signs of renewed life.

I’ve owned shares of Coach many times over the years and have frequently purchased shares after earnings or sold puts before or after earnings, always in the expectation that any earnings plunge would be short lived. That used to be true, but not for that last decline and I am still suffering with a lot that I optimistically sold $50 August 2015 calls upon, the day before earnings were released.

Unlike many stocks that have suffered declines and that then prompts me to add more shares, I haven’t done so with Coach, but am ready to do so now as shares are back to where they started the year.

With a dividend payout that appears to be safe, an acceptable option premium and the prospects of shares re-testing its recently higher levels, this seems like an opportune time to again establish a position, although I might consider doing so through the sale of puts. If taking that route and faced with an assignment, I would attempt to rollover the puts until that time in early June 2015 when shares are expected to go ex-dividend, at which point I would prefer to be long shares.

As far as fashion and popularity go, Abercrombie and Fitch (NYSE:ANF) may have seen its ship sail and so far, any attempt to right the ship by changing leadership hasn’t played out, so clearly there’s more at play.

What has happened, though, is that shares are no longer on a downward only incline, threatening to fall off the edge. It’s already fallen off, on more than one occasion, but like Coach, this most recent recovery has been much slower than those in the past.

But it’s in that period of quiescence for a stock that has a history of volatility that a covered option strategy, especially short term oriented, may be best suited.

Just 2 weeks ago I created a covered call position on new shares and saw them assigned that same week. They were volatile within a very narrow range that week, just as they were last week. That volatility creates great option premiums, even when the net change in share price is small.

With earnings still 3 weeks away, as is the dividend, the Abercrombie and Fitch trade may also potentially be considered as a put sale, and as with Coach, might consider share ownership if faced with the prospect of assignment approaching that ex-dividend date.

T-Mobile (NYSE:TMUS), at least if you listen to its always opinionated CEO, John Legere, definitely has the wind blowing at its back. Some of that wind may be coming from Legere himself. There isn’t too much doubt that the bigger players in the cellphone industry are beginning to respond to some of T-Mobile’s innovations and will increasingly feel the squeeze on margins.

So far, though, that hasn’t been the case. as quarterly revenues for Verizon (NYSE:VZ) and AT&T (NYSE:T) are at or near all time highs, as are profits. T-Mobile, on the other hand, while seeing some growth in revenues on a much smaller denominator, isn’t consistently seeing profits.

The end game for T-Mobile can’t be predicated on an endless supply of wind, no matter how much John Legere talks or Tweets. The end game has to include being acquired by someone that has more wind in their pockets.

But in the meantime, there is still an appealing option premium and the chance of price appreciation while waiting for T-Mobile to find a place to dock.

Keurig Green Mountain was the topic of the second article I everpublished on Seeking Alpha 3 years ago this week. It seems only fitting to re-visit it as it gets to report earnings. Whenever it does, it causes me to remember the night that I appeared on Matt Miller’s one time show, Bloomberg Rewind, having earlier learned that Green Mountain shares plunged about 30% on earnings.

Given the heights at which the old Green Mountain Coffee Roasters once traded, you would have been justified in believing that on that November 2011 night, the ship had sailed on Green Mountain Coffee and it was going to be left in the heap of other momentum stocks that had run into potential accounting irregularities.

But Green Mountain had a second act and surpassed even those lofty highs, with a little help from a new CEO with great ties to a deep pocketed company that was in need of diversifying its own beverage portfolio.

Always an exciting earnings related trade, the options market is implying a 10.2% price move upon earnings. In a week that saw 20% moves in Yelp, LinkedIn and Twitter, 10% seems like child’s play.

My threshold objective of receiving a 1% ROI on the sale of a put option on a stock that is about to report earnings appears to be achievable even if shares fall by as much as 12.1%.

It will likely be a long time before anyone believes that the ship has sailed on Intel (NASDAQ:INTC), but there was no shortage of comments about how the wind had been taken out of Intel’s sales as it missed the mobile explosion.

As far as Intel’s performance goes, it looks as if that ship sailed at the end of 2014, but with recent rumors of a hook-up with Altera (NASDAQ:ALTR) and the upcoming expiration of a standstill agreement, Intel is again picking up some momentum, as the market initially seemed pleased at the prospects of the union, which now may go the hostile route.

In the meantime, with that agreement expiring in 4 weeks, Intel is ex-dividend this week. The anticipation of events to come may explain why the premium on the weekly options are relatively high during a week that shares go ex-dividend.

Finally, perhaps one of the best examples of a company whose ship had sailed and was left to sink as a withered company was Apple (NASDAQ:AAPL).

Funny how a single product can turn it all around.

it was an odd week for Apple , though. Despite a nearly $4 gain to close the week, it finished the week virtually unchanged from where it started, even though it reported earnings after Monday’s close.

While it’s always possible to put a negative spin on the various components of the Apple sales story, and that’s done quarter after quarter, they continue to amaze, as they beat analyst’s consensus for the 10th consecutive quarter. While others may moan about currency exchange, Apple is just too occupied with execution.

Still, despite beating expectations yet again, after a quick opening pop on Tuesday morning shares finished the week $4 below that peak level when the week came to its end.

None of that is odd, though, unless you’ve grown accustomed to Apple moving higher after earnings are released. What was really odd was that the news about Apple as the week progressed was mostly negative as it focused on its latest product, the Apple Watch.

Reports of a tepid reception to the product; jokes like “how do you recognize the nerd in the crowd;” reports of tattoos interfering with the full functioning of the product; criticizing the sales strategy; and complaints about how complicated the Apple Watch was to use, all seemed so un-Apple-like.

Shares are ex-dividend this week and in the very short history of Apple having paid a dividend, the shares are very likely to move higher during the immediate period following the dividend distribution.

With the announcement this past week of an additional $50 billion being allocated to stock buybacks over the next 23 months, the ship may not sail on Apple shares for quite some time.

Traditional Stocks: Coach

Momentum Stocks: Abercrombie and Fitch, T-Mobile

Double Dip Dividend: Intel (5/5), Apple (5/7)

Premiums Enhanced by Earnings: Keurig Green Mountain (5/6 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.

Apr102015

Weekend Update – April 12, 2015

Weekend Update Comment

This was one of those rare weeks where there wasn’t really any kind of theme to guide or move markets.

The week started with some nervousness about where the opening would take us after the previous Friday’s very disappointing Employment Situation Report statistics. On that day some were obliged to even suggest that it was a conspiracy that the report was released on Good Friday, as the markets were conveniently closed for what was supposedly known in advance to be a report that would have otherwise sent markets tumbling.

How convenient. Talk about a fairy tale.

That was as rational an outlook as was the response of the futures and bond markets trading, as they remained opened for holiday abbreviated sessions. Futures did go tumbling and interest rates plunged, leaving a gap for markets to deal with 3 days later.

But by then, after the mandatory initial response to those S&P 500 levels as the market opened, rational thought returned and the market had a very impressive turnaround beginning within minutes of the open.

Some brave souls may have remembered the market’s out-sized response to the previous month’s extraordinarily strong Employment Situation Report data that took the market down for the month to follow, only to see revisions to the data a month later. The 3 days off may have given them enough presence of mind to wonder whether the same outlandish response was really justified again.

One thing that the initial futures response did show us is that the market may be poised to be at risk regardless of what news is coming our way. One month the market views too many jobs as being extremely negative and the next month it views too few jobs as being just as negative.

Somewhere right in the middle may be the real sweet spot that represents the “No News is Good News” sentiment that may be the only safe place to be.

That is the true essence of a Goldilocks stock market, no matter what the accepted definition may be. It is a market where only the mediocre may be without risk. However, the question of whether mediocrity will be enough to continue to propel markets to new heights is usually easily answered.

It isn’t.

After a while warm porridge loses its appeal and something is needed to spice things up to keep Goldilocks returning. U.S. traded stocks have plenty of asset class competition in the event that they become mediocre or unpredictable.

The coming week may be just the thing to make or break the current malaise, that despite having the S&P 500 within about 0.7% of its all time high from just a month ago, is only 2.1% higher for 2015.

Granted that on an annualized basis that would bill respectable, but if the 2015 pattern of alternating monthly advances and declines continues we would end the year far from that annualized rate.

The catalyst could be this new earnings season which begins in earnest next week as the big banks report and then in the weeks to follow. Where the catalyst may arise is from our lowered expectations encountering a better reality than anticipated, as we’ve come to be prepared for some degree of lowered earnings due to currency considerations.

The real wild card will be the balance between currency losses and lower input costs from declining energy prices, as well as the impact, if any from currency hedges that may have been created. Much like the hedging of oil that some airlines were able to successfully implement before it became apparent how prescient that strategy would be, there may be some real currency winners, at least in relative terms.

I actually don’t really remember how the story of Goldilocks ended, but I think there were lots of variations to the story,depending on whether parents wanted to soothe or scare.

The real lesson is that you have to be prepared for either possibility.

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

WIth General Electric (NYSE:GE) getting most everyone’s attention this past Friday morning with plans to divest itself of most of its non-industrial assets, that may leave us with one fewer “systemically important” financial institution.

Too bad, for MetLife (NYSE:MET), which might find it would be less miserable with that proposed assignment if it had more company. It’s easy to understand why financial institutions would want to rid themselves of the yoke they perceive, however, it may be difficult to imagine how MetLife’s desire to avoid that designation can become reality. That is unless the battle goes a very long distance, which in turn could jeopardize a good deal of whatever confidence exists over the restraints that are intended to prevent another financial meltdown.

I believe that the eventuality of those restraints and capital requirements impacting MetLife’s assets is already factored into its share price. If so, MetLife is simply just a proxy for the direction of interest rates, which continue to be volatile as there is still uncertainty over when the eventual interest rate increases will be coming from the FOMC.

While waiting for that to happen MetLife has been trading in a fairly tight range and offering an attractive option premium and dividend. I’ve already owned shares on 3 occasions in 2015 and look forward to more opportunities while waiting to figure out if the economy is too hot or not hot enough or just right.

With the coming week being dominated by bank earnings, one that isn’t reporting until the following week is Morgan Stanley (NYSE:MS). Thus far 2015 hasn’t been especially kind to the money center banks, but it has held Morgan Stanley in particular low regard.

With its well respected CFO heading to warmer pastures it still has a fairly young CEO and lots of depth, with key people continually being exposed to different parts of the company, thereby lessening dependence on any one individual.

With earnings from other banks coming this week the option premiums on Morgan Stanley are a little higher than usual. However, since they report their own earnings before the market opens on Monday of the following week, it would be a good idea to attempt to rollover weekly contracts if not likely to be assigned or to simply sell extended weekly contracts to encompass the additionally enhanced premiums for both this week and the next

Bed Bath and Beyond (NASDAQ:BBBY) is no stranger to significant earnings related price drops. It did so again last week and the options market correctly created the price range in which the stock price varied.

While Bed Bath and Beyond is no stranger to those kind of drops, it does tend to have another common characteristic in that it frequently recovers from those price drops fairly quickly. That’s one reason that when suggesting that consideration be given to selling puts on it last week prior to earnings, I suggested that if threatened with assignment I would rather accept that than to try and rollover the put contracts.

Now that the damage has been done I think it’s safe to come back and consider another look at its shares. If recent history holds true then a purchase could be considered with the idea of seeking some capital gains from shares in addition to the option premiums received for the call sales.

SanDisk (NASDAQ:SNDK) reports earnings this week and has been on quite a wild ride of late. It has the rare distinction of scaring off investors on two occasions in advance of this week’s upcoming earnings. Despite an 11% price climb over the past week, it is still down nearly 20% in the past 2 weeks.

The option market is implying a relatively small 6.8% move in the coming week which is on the low side, perhaps in the belief that there can’t possibly be another shoe to be dropped.

Normally, when considering the sale of puts in advance of earnings I like to look for a strike price that’s outside of the range defined by the options market that will return at least a 1% ROI for the week. However, that strike level is only 7.1% lower, which doesn’t provide too much of a safety cushion.

However, I would be very interested in the possibility of selling puts on SanDisk shares after earnings in the event of a sharp drop or prior to earnings in the event of significant price erosion before the event.

Fastenal (NASDAQ:FAST) also reports earnings this coming week and didn’t change its guidance or offer earnings warnings as it occasionally does in the weeks in advance of the release.

It actually had a nice report last quarter and initially went higher, although a few weeks later, without any tangible news, it nose-dived, along with some of its competitors.

What makes Fastenal interesting is that it is almost entirely US based and so will have very little currency risk. The risk, however, is that it is currently trading near its 2 year lows, so if considering an earnings related trade, I’m thinking of a buy/write and using a May 2015 expiration, to both provide some time to recover from any further decline and to also have a chance at collecting the dividend at the end of April.

With a much more expensive lot of shares of Abercrombie and Fitch (NYSE:ANF) long awaiting an opportunity to sell some calls upon, I’m finally ready to consider adding more shares. The primary goal is to start whittling down some of the losses on those shares and Abercrombie is finally showing some signs of making a floor, at least until the next earnings report at the end of May.

With its dysfunction hopefully all behind it now with the departure of its past CEO it still has a long way to go to reclaim lost ground ceded to others in the fickle adolescent retail market. The reasonable price stability of the past month offers some reason to believe that the time to add shares or open a new position may have finally arrived. Alternatively, however, put sales may be considered, especially if shares open on a lower note to begin the week.

Finally, I don’t know why I keep buying The Gap (NYSE:GPS), except that it never really seems to go anywhere. It does have a decent dividend, but it’s premiums are nothing really spectacular.

What appeals to me about The Gap, however, is that it’s one of those few stocks that is continually under the microscope as it reports monthly sales statistics and as a result it regularly has some enhanced premiums and it tends to alternate rapidly between disappointing and upbeat same store sales.

All in all, that makes it a really good stock to consider for a covered option strategy. It’s especially nice to see a stock that does trade in a fairly tight range, even while it may have occasional hiccoughs that are fairly predictable as to when they will occur, just as their direction isn’t at all predictable.

The Gap reported those same store sales last week and this time they disappointed. That actually marked the second consecutive month of disappointment, which is somewhat unusual, but in having done so, it still hasn’t violated that comfortable range.

I already own some shares and in expectation of a better than expected report for the following month, my inclination is to add shares, but rather than write contracts expiring this week will look at those expiring on either May 8 or May 15, 2015, taking advantage of the added uncertainty coming along with the next scheduled same store sales report. In doing so I would likely think about using an out of the money strike, rather than a near the money strike in anticipation of finally getting some good news and getting back on track at The Gap.

Traditional Stocks: Bed Bath and Beyond, MetLife, Morgan Stanley, The Gap

Momentum Stocks: Abercrombie and Fitch

Double Dip Dividend: none

Premiums Enhanced by Earnings: Fastenal (4/14 AM), SanDisk (4/15 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.

Feb282015

Weekend Update – March 1, 2015

Weekend Update Comment

It was interesting listening to the questioning of FOMC Chairman Janet Yellen this week during her mandated two day congressional appearance.

The market went nicely higher on the first day when she was hosted by the more genteel of the two legislative bodies. The apparent re-embrace of her more dovish side was well received by the stock market, even as bond traders had their readings of the tea leaves called into question.

While the good will imparted by suggesting that interest rate increases weren’t around the corner was undone by the Vice-Chair on Friday those bond traders didn’t get vindicated, but the stock market reacted negatively to end a week that reacted only to interest rate concerns.

His candor, or maybe it was his opinion or even interpretation of what really goes on behind the closed doors of the FOMC may be best kept under covers, especially when I’m awaiting the likelihood of assignment of my shares and the clock is ticking toward the end of the trading week in the hope that nothing will get in the way of their appointed rounds.

Candor got in the way.

But that’s just one of the problems with too much openness, particularly when markets aren’t always prepared to rationally deal with unexpected information or even informed opinion. Sometimes the information or the added data is just noise that clutters the pathways to clear thinking.

Yet some people want even more information.

On the second day of Yellen’s testimony she was subjected to the questioning of those who are perennially in re-election mode. Yellen was chided for not being more transparent or open in detailing her private meetings. It seemed odd that such non-subtle accusations or suggestions of undue influence being exerted upon her during such meetings would be hurled at an appointed official by a publicly elected one. That’s particularly true if you believe that an elected official has great responsibility for exercising transparency to their electorate.

Good luck, however, getting one to detail meetings, much less conversations, with lobbyists, PAC representatives and donors. You can bet that every opacifier possible is used to make the obvious less obvious.

But on second thought, do we really need even more information?

I still have a certain fondness for the old days when only an elite few had timely information and you had to go to the library to seek out an updated copy of Value Line in the hopes that someone else hadn’t already torn out the pages you were seeking.

Back then the closest thing to transparency was the thinness of those library copy pages, but back then markets weren’t gyrating wildly on news that was quickly forgotten and supplanted the next day. That kind of news just didn’t exist.

You didn’t have to worry about taking the dog out for a walk and returning to a market that had morphed into something unrecognizable simply because a Federal Reserve Governor had offered an opinion in a speech to businessmen in Fort Worth.

Too much information and too easy access and the rapid flow of information may be a culprit in all of the shifting sands that seem to form at the base of markets and creating instability.

I liked the opaqueness of Greenspan during his tenure at the Federal Reserve. During that time we morphed from investors largely in the dark to investors with unbelievable access to information and rapidly diminishing attention spans. Although to be fair, that opaqueness created its own uncertainty as investors wouldn’t panic over what was said but did panic over what was meant.

If I had ever had a daughter I would probably apply parental logic and suggest that it might be best to “leave something to the imagination.” I may be getting old fashioned, but whether it’s visually transparent or otherwise, I want some things to be hidden so that I need to do some work to uncover what others may not.

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

It’s difficult to find much reason to consider a purchase of shares of Chesapeake Energy (NYSE:CHK), but exactly the same could have been said about many companies in the energy sector over the past few months. There’s no doubt that a mixture of good timing, luck and bravery has worked out for some willing to take the considerable risk.

What distinguishes Chesapeake Energy from so many others, however, is that it has long been enveloped in some kind of dysfunction and melodrama, even after severing ties with its founder. Like a ghost coming back to haunt his old house the legacy of Aubrey McClendon continues with accusations that he stole confidential data and used it for the benefit of his new company.

Add that to weak earnings, pessimistic guidance, decreasing capital expenditures and a couple of downgrades and it wasn’t a good week to be Chesapeake Energy or a shareholder.

While it’s hard to say that Chesapeake Energy has now hit rock bottom, it’s certainly closer than it was at the beginning of this past week. As a shareholder of much more expensive shares I often like to add additional lower cost lots with the intent of trying to sell calls on those new shares and quickly close out the position to help underwrite paper losses in the older shares. However, I’ve waited a long time before considering doing so with Chesapeake.

Now feels like the right time.

Its elevated option premiums indicate continuing uncertainty over the direction its shares will take, but I believe the risk-reward relationship has now begun to become more favorable as so much bad news has been digested at once.

It also wasn’t a very good week to be Bank of America (NYSE:BAC) as it well under-performed other large money center banks in the wake of concerns regarding its capital models and ability to withstand upcoming stress tests. It’s also never a good sign when your CEO takes a substantial pay cut.

If course, if you were a shareholder, as I am, you didn’t have a very good week, either, but at least you had the company of all of those analysts that had recently upgraded Bank of America, including adding it to the renowned “conviction buy” list.

While I wouldn’t chase Bank of America for its dividend, it does go ex-dividend this week and is offering an atypically high option premium, befitting the perceived risk that continues until the conclusion of periodic stress testing, which will hopefully see the bank perform its calculations more carefully than it did in the previous year’s submission to the Federal Reserve.

After recently testing its 2 year lows Caterpillar (NYSE:CAT) has bounced back a bit, no doubt removing a little of the grin that may have appeared for those having spent the past 20 months with a substantial short position and only recently seeing the thesis play out, although from a price far higher than when the thesis was originally presented.

While it’s difficult to find any aspect of Caterpillar’s business that looks encouraging as mining and energy face ongoing challenges, the ability to come face to face with those lows and withstand them offers some encouragement if looking to enter into a new position. Although I rarely enter into a position with an idea of an uninterrupted long term relationship, Caterpillar’s dividend and option premiums can make it an attractive candidate for longer term holding, as well.

Baxter International (NYSE:BAX) is a fairly unexciting stock that I’ve been excited about re-purchasing for more than a year. I generally like to consider adding shares as it’s about to go ex-dividend, as it is this week, however, I had been also waiting for its share price to become a bit more reasonable.

Those criteria are in place this week while also offering an attractive option premium. Having worked in hospitals for years Baxter International products are ubiquitous and as long as human health can remain precarious the market will continue to exist for it to dominate.

Las Vegas Sands (NYSE:LVS) has certainly seen its share of ups and downs over the past few months with very much of the downside being predicated on weakness in Macao. While those stories have developed the company saw fit to increase its dividend by 30%. Given the nature of the business that Las Vegas Sands is engaged in, you would think that Sheldon Adelson saw such an action, even if in the face of revenue pressures, as being a low risk proposition.

Since the house always wins, I like that vote of confidence.

Following a very quick retreat from a recent price recovery I think that there is more upside potential in the near term although if the past few months will be any indication that path will be rocky.

This week’s potential earnings related trades were at various times poster children for “down and out” companies whose stocks reflected the company’s failing fortunes in a competitive world. The difference, however is that while Abercrombie and Fitch (NYSE:ANF) still seems to be mired in a downward spiral even after the departure of its CEO, Best Buy (NYSE:BBY) under its own new CEO seems to have broken the chains that were weighing it down and taking it toward retail oblivion.

As with most earnings related trades I consider the sale of puts at a strike price that is below the lower range dictated by the implied move determined by option premiums. Additionally, my preference would be to sell those puts at a time that shares are already heading noticeably lower. However, if that latter condition isn’t met, I may still consider the sale of puts after earnings in the event that shares do go down significantly.

While the options market is implying a 12.6% move in Abercrombie and Fitch’s share price next week a 1% ROI may be achieved even if selling a put option at a strike 21% below Friday’s close. That sounds like a large drop, but Abercrombie has, over the years, shown that it is capable of such drops.

Best Buy on the other hand isn’t perceived as quite the same earnings risk as Abercrombie and Fitch, although it too has had some significant earnings moves in the recent past.

The options market is implying a 7% move in shares and a 1% ROI could potentially be achieved at a strike 8.1% below Friday’s close. While that’s an acceptable risk-reward proposition, given the share’s recent climb, I would prefer to wait until after earnings before considering a trade.

In this case, if Best Buy shares fall significantly after earnings, approaching the boundary defined by the implied move, I would consider selling puts, rolling over, if necessary to the following week. However, with an upcoming dividend, I would then consider taking assignment prior to the ex-dividend date, if assignment appeared likely.

Finally, I end how I ended the previous week, with the suggestion of the same paired trade that sought to take advantage of the continuing uncertainty and volatility in energy prices.

I put into play the paired trade of United Continental Holdings (NYSE:UAL) and Marathon Oil (NYSE:MRO) last week in the belief that what was good news for one company would be bad news for the other. But more importantly was the additional belief that the news would be frequently shifting due to the premise of continuing volatility and lack of direction in energy prices.

The opening trade of the pair was initiated by first adding shares of Marathon Oil as it opened sharply lower on Monday morning and selling at the money calls.

As expected, UAL itself went sharply higher as it and other airlines have essentially moved oppositely to the movements in energy prices over the past few months. However, later that same day, UAL gave up most of its gains, while Marathon Oil moved higher. A UAL share price dropped I bought shares and sold deep in the money calls.

In my ideal scenario the week would have ended with one or both being assigned, which was how it appeared to be going by Thursday’s close, despite United Continental’s price drop unrelated to the price of oil, but rather related to some safety concerns.

Instead, the week ended with both positions being rolled over at premiums in excess of what I usually expect when doing so.

Subsequently, in the final hour of trading, shares of UAL took a precipitous decline and may offer a good entry point for any new positions, again considering the sale of deep in the money calls and then waiting for a decline in Marathon Oil shares before making that purchase and selling near the money calls.

While the Federal Reserve may be data driven it’s hard to say what exactly is driving oil prices back and forth on such a frequent and regular basis. However, as long as those unpredictable ups and downs do occur there is opportunity to exploit the uncertainty and leave the data collection and interpretation to others.

I’m fine with being left in the dark.

 

Traditional Stocks: Caterpillar, Marathon Oil

Momentum Stocks: Chesapeake Energy, Las Vegas Sands, United Continental Holdings

Double Dip Dividend: Bank of America (3/4), Baxter International (3/9)

Premiums Enhanced by Earnings: Abercrombie and Fitch (3/4 AM), Best Buy (3/4 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.