Jan172015

Weekend Update – January 18, 2015

Weekend Update Comment

This was really a wild week and somehow, with all of the negative movement, and despite futures that were again down triple digits in the previous evening’s futures trading, the stock market somehow managed to move to higher ground to bring a tumultuous week to its end.

Actually, the reason it did so is probably no mystery as the market seems to have re-coupled with oil prices, for good or for bad.

Still it was a week when stocks, interest rates, precious and non-precious metals, oil and currencies were all bouncing around wildly, as thus far, is befitting for 2015.

The tonic, one would have thought could have come from the initiation of another earnings season, traditionally led by the major banks. However “the big boys” suffered on top and bottom lines, citing disappointing results in fixed income and currency trading, as well as simply being held hostage by a low interest rate environment for their more mundane activities, like pumping money into the economy through loans.

Even worse, the unofficial spokesperson for the interest of those “too big to fail,” Jamie Dimon, seemed passively resigned to the reality that the Federal government was in charge and could do with systemically important institutions whatever it deemed appropriate, such as breaking them up.

The first sign of troubles came weeks ago as trader bonus cuts were announced. While declines in trader revenue were expected, the bonus cuts suggested that the declines were steeper than expected, particularly when the bonus cuts were greater than had only recently been announced.

Of course, that leads to the question: “If a banker can’t make money, then who can?”

That’s a reasonable question and has some basis in earnings seasons past and may provide some insight into the future.

For those who follow such things, the past few years have seen a large number of such earnings seasons start off with good news from the financial sector, only to have lackluster or disappointing results from the rest of the S&P 500, propped up by rampant buybacks.

What is rare, however, is to have the financials disappoint , yet then seeing the remainder of the market report good or better than expected earnings, particularly as the rate of increase of buybacks may be decreasing.

That is now where we stand with the second week of earnings season ready to begin when the market re-opens on Tuesday.

While there was already some clue that the major money center banks were not doing as well as perhaps expected, as bonuses were cut for many, the expectation has been that the broader economy, especially that reflecting consumer spending, would do well in an environment created by sharply falling energy prices.

Among gyrations this week were interest rates which only went lower on the week, much to the chagrin of those whose fortunes are tied to the certainty of higher rates and in face of expectations for increases, given growing employment, wage growth and the anticipated increase in consumer demand.

Funny thing about those expectations, though, as we got off to a bad start on the surprising news that retail sales for December 2014 didn’t seem to reflect any increased consumer spending, as most of us had expected, as the first dividend to come from falling energy prices.

While faith in the integrity and well being of our banking system is a cardinal tenet of our economy, it is just another representation of the certainty that investors need. That certainty was missing all of this past week as events, such as the action by the Swiss National Bank were unexpected, oil prices bounced by large leaps and falls without obvious provocation, copper prices plunged and gold seemed to be heating up.

How many of those did anyone expect to all be happening in a single week? Yet, on Friday, in a reversal of the futures, markets surged adding yet another of those large gains that are typically seen in bearish cycles.

Still, the coming week has its possible antidotes to what has been ailing us all through 2015. There are more earnings reports, including some more from the oil services sector, which could put some pessimism to rest with anything resembling better than expected news, such as was offered by Schlumberger (SLB) this past Friday, which also included a very unexpected dividend increase.

Also, this may finally be the week that Mario Draghi belatedly brings the European Central Bank into the previous decade and begins a much anticipated version of “quantitative easing.”

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. Additional earnings related trades may be seen in an accompanying article.

Among those big boys with disappointing stories to tell was JP Morgan Chase (JPM). In a very uncharacteristic manner, CEO and Chairman Jamie Dimon didn’t exude optimism and confidence, instead seemingly accepting whatever fate would be assigned by regulators. Of course, some of that resignation comes in the face of likely new assaults on Dodd-Frank, which could only be expected to benefit Dimon and others.

Whether banks and large financial institutions are under assault or not may be subject to debate, but the assault on JP Morgan’s share price is not, as it has fallen about 11% over the past two weeks, despite a nice gain on Friday.

While still above its 52 week low, unless interest rates continue their surprising descent and go lower than 1.8% for a while, this appears to be a long sought after entry point for shares. The volatility in the financial sector is so high that even with an upcoming 4 day trading week the option premium is very rich, reflecting the continuing uncertainty.

More importantly, may be the distinction that Dimon made between good and bad volatility, with JP Morgan having been subject to the bad kind of late.

The bad kind is when you have sustained moves higher or lower and the good kind is when you see a back and forth, often with little net change. The latter is a trader’s dream and it are the traders that make it rain at JP Morgan and others. That good kind of volatility is also what option writers hope will be coming their way.

So far, 2015 is sending a signal that it may be time to take the umbrellas out of storage.

MetLife (MET), with its 30 day period to challenge its designation as a “systemically important” financial institution, decided to make that challenge. As interest rates went even lower this week, momentarily breaching the 1.8% level, MetLife’s shares continued its decline.

If Dimon is correct in his resignation that nothing can really be done when regulators want to express their whims, then we should have already factored that certainty into MetLife’s share price. It too, like JP Morgan, had a nice advance on Friday, but is still about 11% lower in the past 2 weeks and has an upcoming dividend to consider, in addition to earnings a week afterward.

Intel (INTC), a stellar performer in 2014, joined the financials in reporting disappointing earnings this past week. While it did get swept along with just about everything else higher in the final hour of trading, it had already begun its share recovery after hitting its day’s low in the first 30 minutes of trading.

After 2 very well received earnings reports the past quarters, it may have been too much to expect a third successive upside surprise. However, the giant that slid into somnolence as the world was changing around it has clearly reawakened and could make a very good covered option trade once again if it repeatedly faces upside resistance at $37.50.

I’m not quite certain how to characterize The Gap (GPS). I don’t know whether it’s fashionable, just offers value or is a default shopping location for families.

What I do know is that among my frequent holdings it has a longer average holding period than most others, despite having the availability of weekly options. That’s because it consistently jumps up and down in price, partially due to its habit of still reporting same store sales each month and partially for reasons that escape my ability to grasp.

Yet, it still trades in a fairly narrow range and for that reason it is a stock that I always like to consider on a decline. Because of its same store sales reports it offers an enhanced option premium on a monthly basis in addition to its otherwise average premium returns, but it also has an acceptable dividend for your troubles of holding it for any extended period of time.

As a Pediatric Dentist, you would think that I would own Colgate-Palmolive (CL) on a regular basis. However, I tend to put option premium above any sense of professional obligation. In that regard, during a sustained period of low volatility, Colgate-Palmolive hasn’t been a very appealing alternative investment. However, with volatility creeping higher, and with shares going ex-dividend this week, the premium is getting my attention.

Together with its recent 6% price decline and its relative immunity from oil prices, the time may have arrived to align professional and premium interests. However, if shares go unassigned, consideration has to be given to selecting an option expiration for a rollover trade that offers some protection in the event of an adverse price move after earnings, which are scheduled for the following week.

Among those reporting earnings this week are Cree (CREE), eBay (EBAY) and SanDisk (SNDK).

Cree is an example of a company that regularly has an explosive move at earnings and may present some opportunity if considering the sale of puts before, or even after earnings, in the event of a large decline.

I have experience with both in the past year and the process, as well as the result can be taxing. My most recent exploit having sold puts after a large decline and eventually closing that position at a loss, and both the process and the result were less than enjoyable.

That’s not something that I’d like to do again, but seeing the ubiquity of its products and the successive earnings disappointments in the past year, I’m encouraged by the fact that Cree hasn’t altered its guidance, as it has in the past in advance of earnings.

I generally prefer selling puts into a price decline, however Cree advanced by nearly 4% on Friday and reports earnings following Tuesday’s close. In the event of a meaningful decline in price before that announcement I would consider the sale of puts. The option market believes that there can be a move of 10.1% upon earnings release, however a 1% ROI can potentially be achieved even when selling a put contract at a strike that is 14.2% below Friday’s close.

Alternatively, in the event of a large drop after earnings, consideration can be given toward selling calls in the aftermath, although if past history is a guide, when it comes to Cree, what has plunged can plunge further.

SanDisk recently altered its guidance and saw its share price plunge nearly 20%. For some reason, so often after such profit warnings are provided before earnings, the market still seems surprised after earnings are released and send shares even lower.

While I’m interested in establishing a position in SanDisk, I’m not likely to do so before earnings are announced, as the option market is implying a price move of 7% and in order to achieve a 1% ROI the strike level required is only 7.5% below Friday’s closing price. That offers inadequate cushion between risk and reward. Because I expect a further decline, I would want a greater cushion, so would prefer to wait until earnings are released.

While Cree and SanDisk are volatile and, perhaps speculative, eBay is a very different breed. However, it is still prone to decisive moves at earnings and it has recently diffused disappointing earnings reports with announcements, such as the existence of an Icahn position or comments regarding a PayPal spin-off.

As opposed to most put sale, where I usually have no interest in taking ownership of shares, eBay is one that, if I sell puts and see an adverse move, would consider taking assignments, as it has been a very reliable covered call stock for the past few years, as its shares have traded in a very narrow range.

Despite a gain on Friday that trailed the market’s advance, it is about 6% below where I last had shares assigned and would be interested in initiating another new position before it becomes a less interesting and less predictable company upon its planned PayPal spin-off.

I tend to like Best Buy (BBY) when it is down or has had a large decline in shares. It has done so on a regular basis since January 2014 and did so again this past week, almost a year to the day of its nearly 33% drop.

This time it was a pin being forced into the bubble that its shares had recently been experiencing as the reality behind its sales figures indicated that margins weren’t really in the equation. Undertaking a “sales without profits” strategy like its brickless and mortarless counterpart isn’t a formula for long term success unless you have very, very deep pockets or a surprisingly disarming and infectious laugh, such as Jeff Bezos possesses.

While possibly selling all of those GoPro (GPRO) devices and other items over the holidays at little to no profit may not have been in Best Buy’s best interests, it may have helped others, for at least as long as that strategy can be maintained.

However, Best Buy has repeatedly been an acceptable buy after gaps down in its share price, although consideration can also be given to the sale of put contracts, as its price is still a bit higher than I would like to see for a re-entry.

Finally, there are probably a large number of reasons to dislike GoPro. For me, it may begin with the fact that I’m neither young, photogenic nor athletic. For others it may have to do with secondary offerings or the bent rules around its lock-up expiration. Certainly there will be those that aren’t happy about a 50% drop from its high just 3 months ago, which includes the 31% decline occurring in the days after the lock-up expiration.

While it has been on a downtrend after the most recent lock-up expiration, despite having traded higher in the days before and immediately afterward, the impetus for this week’s large decline appears to be the filing of a number of patents by Apple (AAPL) which many have construed as potentially offering competition to GoPro in the hardware space, all while GoPro is already seeking to re-invent itself or at least shift from a hardware company to a media company.

I don’t know too much about Apple and I know even less about GoPro, but Apple’s long history has shown that it doesn’t necessarily pounce into markets where there already seems to be a product that is being well received by consumers.

It prefers to pick on the weak and defenseless, albeit the ones with good ideas.

Apple has done incredibly well for itself in recognizing new technologies that might be in much greater demand if the existing products didn’t suffer from horrid design and engineering. Having a fractured manufacturer base with no predominant player has also been an open invitation to Apple to meld its design and marketing prowess and capture markets.

Whatever GoPro may suffer from, I don’t think that anyone has accused the GoPro product line of either of those shortcomings. so this most recent and pronounced decline may be unwarranted. However, GoPro does report earnings in the following week, so I would consider the potential risk associated with a position unlikely to be assigned this week. For that reason I would consider either the purchase of shares and the sale of deep in the money calls or the sale of deep out of the money puts, utilizing a weekly contract and keeping fingers crossed and strapping on for the action ahead.

Traditional Stocks: Intel, JP Morgan Chase, MetLife, The Gap

Momentum Stocks: Best Buy, GoPro

Double Dip Dividend: Colgate-Palmolive (1/21)

Premiums Enhanced by Earnings: Cree (1/20 PM), eBay (1/21 PM), SanDisk (1/21 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.

Dec62014

Weekend Update – December 7, 2014

Weekend Update Comment

Trying to listen to the President put forth some statistics regarding the employment situation in the United States this past week was difficult, as my attention was captured by the festive holiday backdrop.

Holding a prominent position next to our nation’s flag was what appeared to be a symbol that perhaps reflected official endorsement of Bacchanalian celebrations, together with the more traditionally accepted holiday decorations. Enlarging the photo did nothing to re-direct my imagination.

The President’s exploring the good news contained in the Employment Situation Report and trumpeting the trend in employment statistics may have been his muted version of a Bacchanalian victory lap, of sorts.

Focusing on that background item for as long as I did in wonderment caused me to lose sight of what should probably be recognized, as Friday’s Employment Situation Report indicated the addition of more than 300,000 new jobs in the past month, as well as a substantial upward revision to the previous month.

I guess that I wasn’t alone in losing focus about what’s been going on in the economy, as later that day during one of their now ubiquitous polls, CNBC viewers were asked whether President Obama was good for the stock market.

I suppose the answer may depend on the criteria one uses to define “good.” as well as whether one believes that things would have been better without him or his economic policies, or whether their time frame is forward or backward looking. read more

Nov152014

Weekend Update – November 16, 2014

Weekend Update Comment

The past week was one of the quietest ones that could have been imagined.

The biggest stories of the week were the broken scaffolding that left two window washers dangling on the edge of the new “One World Trade Center” and the successful landing of Rosetta on a faraway comet after a 10 year mission.

With the exception of a late in the week rumor of a buyout of one oilfield services company by another, there really was nothing to propel markets as it was an extraordinarily quiet week on the economic news front, only slightly punctuated by a relatively obscure statistic that suddenly may be an important one in the coming months.

Years ago the single most important economic report came on a weekly basis. If anyone remembers all the way back to the 1980s you may recall how everyone waited for Thursdays and the release of the “M2 Money Supply” statistic.

If you do remember that you may also remember the inflation in the 1980s and can understand why M2 was watched so closely. Inflation was “Enemy #1” and the M2 Supply was linked to that evil. At one time M2 was used by the Federal Reserve to steer the economy in attempting to avoid a renewed bout of inflation.

You don’t hear much talk about M2 anymore as it was replaced by a more direct reliance on interest rates, especially the “Fed Funds Rate.” We still care about interest rates, but sometimes a little too much. Right now we seem overly concerned about when the Federal Reserve will begin to finally increase interest rates forgetting how that which helps to bring about inflation is exactly what we’ve been pining for a sign of the economy finally getting some footing.

This week we finally heard about something that wasn’t really new but got lots of comments and focus. Just a few months ago Federal Reserve Chairman Janet Yellen suggested that we should start paying more attention to the “quit rate” that was included in the “Job Openings and Labor Turnover Summary” also known as the “JOLT” Summary.

That acronym may be very unintentionally appropriate, as sometimes a jolt is exactly what’s needed to get things back into gear.

While many fight over whether the monthly Employment Situation Report should be looked at through the lens of the “U-6” measure of employment, Yellen is suggesting that the decision of people to quit their jobs in the belief that they can now land another, presumably better paying job, is telling of an economy that is heading in the right path and that will introduce some wage inflation.

That’s the kind of jolt this economy has needed. Not just more jobs, but better paying jobs that allow consumers to begin consuming again. Instead of fearing inflation, there should be some realization that a degree of inflation is exactly what this economy has needed for a long time.

One of my sons will likely be included in the next “JOLT” Summary, as he quit a job in which he was more of a low priced commodity and started on a new and much better paying job. He also bought a new car that week.

See how it works? It’s all about the discretionary spending. That’s what really fuels everything, as part of a virtuous cycle of jobs and consumerism.

Given the mixed results reported by some major retailers this week there definitely needs to be some enhancements to the top line and the only thing that can bring that about is an energized consumer jolted back to life.

For anyone that has been either on the receiving end or delivery end of paddles that are meant to jolt you back to life you know just how important that kick start is, but you also know that too much of a good thing brings its own problems.

Having been witness to the late 1970s and early 1980s there is certainly a degree of hesitance when inflation enters into the equation, but somewhere there may be a person in a position to steer the economy who understands that the extremes of the continuum aren’t the only possible outcomes.

Janet Yellen gives all indications of being the person who can jolt and withdraw jolt as signs of economic life warrant.

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

Another company bound to benefit from any improvement in employment, especially the kind that results in increased ability to engage in discretionary spending is Fastenal (FAST). This is a company that I’ve come to look at as a reflection of the real economy and while it has traded in a very narrow range it has been an excellent covered call trade.

It simply sells those things that are measures of economic development and expansion to both other business, middlemen and do it yourself kind of people. What they sell reflects a wide and varied kind of activity. They sometimes have q habit of providing revised guidance a few weeks before earnings and those occasional surprises help to create a reasonable option premium in advance of earnings, in addition to the enhancement that may come with earnings.

Dow Chemical (DOW) had a few false starts this week, jumping significantly higher and then giving back much of the gains on successive days. Those moves came before and after the announcements of additional share buybacks and an increased dividend. Shares closed up nicely on Friday continuing the hesitant optimism of earlier in the week, after having fallen from its highs of the day, only to rally back in an otherwise mediocre tape.

Add into the mix the presence of an activist investor and a long tenured CEO that is as tough as he can be charming and you have the makings of a company that will continue seeing pressures from both sides in support of shares, even though that may be a by-product of a more personal kind of battle. However, as a shareholder, you don’t necessarily care how you get to your objective, as long as you get there. Having some entertainment accompany the journey can just be an added bonus.

Joy Global (JOY) is another of these companies that trades with quite a bit volatility and is highly levered to activity in China, as well as to the veracity of reports from China. None of those are particularly endearing qualities, but Joy Global has been a company that routinely bounces back from disappointment over prospects of slowdowns in Chinese construction and infrastructure activity. It will report earnings in just a few weeks and will also be ex-dividend prior to that, so there are some events that have to be considered if entering into a new position, particularly if hoping for a quick exit.

While the majority of the systemically important companies have already reported earnings, there are quite a few of the more highly volatile companies reporting earnings this week. Among those that have caught my attention for this week are Best Buy (BBY), GameStop (GME), Green Mountain Keurig (GMCR) and salesforce.com (CRM).

Rather than considering any of them on the basis of their fundamental businesses, strengths or challenges awaiting them, I see them as potential opportunities based only on their recent price behaviors.

One thing that they all have in common is that they’ve all had recent runs higher in price. Another thing that they have in common, befitting the level of risk associated with their upcoming earnings is very high option premiums.

In order to achieve a 1% ROI on the sale of put contracts Best Buy, GameStop, Green Mountain Keurig and salesforce.com could still fall by approximately 9.2%, 21.3%, 10.5%, and 7%, respectively without assignments of puts sold. Meanwhile, their respective implied volatilities are 7.5%, 12%, 8.8% and 6.2%.

However, another thing that they share in common, at least from my perspective is that due to their recent runs higher, they may be prone to even harder falls than those implied moves might indicate. For that reason, I’m more inclined to consider the sale of puts after earnings for any of those companies that may in fact fall hard upon their releases, especially for salesforce.com, which offers the least amount of cushion between the implied move and the strike at which the ROI objective is attained.

On the other hand, GameStop offers the greatest cushion, so may be one to consider the sale of put options prior to earnings. As always, the sale of puts may require some additional attention, especially if hoping to avoid assignment if share price goes below the strike level selected.

Finally, it may be yet another week to think about Twitter (TWTR). Whether using the service or not, there’s no denying that it is a company whose stock is in search of direction, very much as many believe its company is in need of direction.

While no one has been criticizing the company on the basis of its earnings there is certainly lots of confusion about what Twitter plans to be and how it will get there, especially if it can’t decide on how to measure its activities and relate those to revenues.

This past week put the Twitter story into focus. Shares soared at its first analysts day meeting, up about 10% until Standard and Poor’s delivered an unsolicited credit report on the company, placing it at a “junk” level designation.

Granted, that S&P, by virtue of having performed an unsolicited analysis didn’t have access to the same company records as it ordinarily does when assessing a company’s credit worthiness, but the market immediately reversed course and sent shares sharply lower.

As was the case last week, I already had sold Twitter puts. I rolled those over on Thursday as Twitter was falling sharply and mat sell even more puts this week, particularly if there is some opening weakness to begin the week.

For anyone following this trade, it is one that may see lots of ups and downs and may require more maintenance, particularly in deciding whether to roil over puts to a forward week or take assignment in the event of adverse movement, but it can be a serially satisfying trade. Friday’s bounce again higher, perhaps after the realization that the S&P rating may have been based on incomplete information, may simply be one of many bounces ahead.

Traditional Stocks: Dow Chemical, Fastenal

Momentum: Joy Global, Twitter

Double Dip Dividend: none

Premiums Enhanced by Earnings: Best Buy (11/20 AM), GameStop (11/20 AM), Green Mountain Keurig (11/19 PM), salesforce.com (11/19 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.

Oct102014

Weekend Update – October 12, 2014

Weekend Update Comment

As The Federal Reserve’s policy of “Quantitative Easing” comes to an end the next phase considered should perhaps be one of instituting some form of “Quantitative Muzzling.”

Given comments contained in this past week’s FOMC statement had recognized global economic concerns, perhaps the Federal Reserve should consider expanding its dual mandate and reaching across the ocean to affix, adjust and tighten the right remedy.

As most of us learned sometime in childhood, words have consequences. However, we tend not to mind when the consequences are positive for us or when what we all know is left unsaid and ignored.

In each of the past two weeks words from the European Central Bank’s President Mario Draghi have had adverse impacts on global markets. While no one is overtly suggesting that ECB President’s should be seen and not heard, undoubtedly at least one person is thinking that, having applied a sloppy test of correlation to the market’s moves and Draghi’s words.

Such sloppy tests may have at least as much validity as the much discussed “key reversal” seen as trading closed on Wednesday and said to presage a bullish turnaround to the downtrend.

How did that work out for most people?

This week Draghi told us what everyone knows to be the truth, but what no one wants to hear. He simply said that there can be no growth in the European economies without economic reform.

That’s not different from what he said the previous week, as he pointed out that political solutions were necessary to deal with economic woes.

We also all know if it we have to rely on politicians to do the right thing, or make the difficult decisions, we’re not going to fare terribly well, hence the sell-offs. Why the Europeans can’t simply kick things down the road and then forget about it is a question that needs to be asked.

Compare the response to Draghi’s comments to the absolutely effusive response to this past week’s FOMC statement that simply said nothing and ignored answering the question that everyone wanted to ignore.

Despite everyone knowing what Draghi has been saying to be true, having had the same scolding take place in the U.S. just two years ago, no one with an investment portfolio wants to hear of such a thing, especially when it’s followed up with downgrades of Finland’s and France’s credit ratings.

Add to the mix the International Monetary Fund’s cut to its global growth forecast and you have spoken volumes to an already wary US market that was now eagerly eying any breach of the 200 day S&P 500 moving average (dma), as that had taken the place of the “key reversal” in the hearts and minds of technicians and foisted upon investors as being the gateway to what awaits.

Unfortunately, the message being sent with that technical indicator is a bearish one. While it has been breached on numerous occasions in the past 5 years, the most pronounced and prolonged stay below the 200 dma came in the latter half of 2011, a period when triple digit daily moves were commonplace and volatility was more than double the now nearly 2 year high level.

I miss those days.

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

When I first started thinking about a theme for this week’s article I decided to focus on stocks that had already undergone their own personal 10% correction.

That list grew substantially by the time the week came to its close following a brief FOMC induced rally mid-week and that thesis was abandoned.

As trading in the coming week opens at a DJIA level lower than where it began the year, there’s not much reason to start the week with any sense of confidence.

While the S&P 500 is only 5.2% below its recent high, putting it on par with numerous “mini-corrections” over the past two years, you don’t have to do a quantitative assessment to know that this decline feels differently from the others, as volatility is at a two year high point. The sudden appearance of triple digit moves have now gone from the mundane 100 point variety and have added 200 and 300 point ones into the arsenal.

For me, this week may be a little different. Heading into the week I have less cash reserves than I would like and less confidence than I would ordinarily need to dwindle it down further.

While it appears as if there are so many values to be had I would prefer to see some sign of stability before committing resources in my usual buy/write manner. Instead, I may be more likely to add new positions through the sale of out of the money puts, unless there is a dividend involved.

Additionally, while individual stocks may have compelling reasons to consider their purchases, this week I’m less focused on those specific reasons rather than the nature of their recent price declines and the ability to capitalize on the heightened option premiums associated with their recent volatility.

One of the benefits of this rising volatility environment is that option premiums grow as does the uncertainty. The sale of puts and anticipation of the need to rollover those puts in the event of further price erosion may be better suited to an environment of continuing price declines, rather than utilizing a traditional buy/write strategy.

Furthermore, as the premiums become more and more attractive, I find myself more inclined to attempt to rollover positions that might otherwise be assigned, as the accumulation of premiums can offer significant downside protection and reduces the need to find alternative investment candidates.

If you’re looking for a sector that is screaming “correction” you really don’t have to look beyond the Energy Sector. Hearing so many analysts calling for continued decline in oil prices may be reason enough to begin considering adding positions.

Over the years I’ve lost track of how many times I’ve owned Halliburton (HAL), but other than during the 2008-2009 market crash, the time of the Deepwater Horizon disaster and during the tumultuous market of 2011, there haven’t been such precipitous declines in its price, as it has just plunged below its own 200 dma.

Although Halliburton doesn’t report earnings until the following week, next week’s premiums are reflective of the volatility anticipated. For anyone considering this position through a buy/write one factor to keep in mind is that it will be imperative to rollover the contract if expiration looks likely. That is the case because earnings are reported on the following Monday morning before trading opens so there won’t be a chance to create a hedging position unless done the previous week.

I have been waiting for an opportunity to repurchase shares of Anadarko Petroleum (APC) ever since a bankruptcy judge approved a pollution related settlement, that was part of its years earlier purchase of Kerr-McGee. Like Halliburton, it is now trading below its 200 dma, but it doesn’t report earnings until a week after Halliburton. However, it also offers exceptionally high option premiums as the perceived risk remains heightened in anticipation of further sector weakness.

Owing to its drops the final two days of the previous week, Dow Chemical (DOW) is now also trading below its 200 dma. It, too, is demonstrating an option premium that is substantially higher than has been the case recently, although the risk appears to be considered less than that seen for both Halliburton and Anadarko. With the exception of having received an “outperform” rating those past two days, Dow Chemical appears to have just been caught up in the market’s downturn.

Fastenal (FAST) has traded below its 200 dma since its last earnings report in July 2014 and was not helped by its latest report this past Friday. That was the case despite generally good revenues, but with softer margins that were expected to continue. Unlike the preceding stocks the option premiums are not expanded in reflection of heightened risk. In the event that this position is initiated with a put sale that is likely to be assigned, I would consider taking possession of shares rather than rolling over the puts, as shares go ex-dividend during the November 2014 option cycle.

For a stock whose price hasn’t done very much, eBay (EBAY) has been getting lots and lots of attention and perhaps it is that attention which has prompted it to finally decide to do what so many have suggested, by releasing plans to spin off its PayPal unit. eBay reports earnings this week and is always a prospect to exhibit a sizeable move. It is currently trading below the point that consider the mid-point of the price range that I like to see when considering a new position. As with some other potential earnings trades, it is a candidate for out of the money put sales before earnings or for those more cautious the sale of puts after earnings in the event of a large price drop upon earnings having been released.

Intel (INTC) reports earnings this week after having already been brutalized this past week along with the rest of the chip sector. Most recently I discussed some hesitancy regarding a position in Intel because it had two price gaps higher in the past few months. However, thanks to the past week it has now erased one of those price gaps that represented additional risk. As with Fastenal there is an upcoming ex-dividend date that may be a consideration in any potential trade.

Following YUM Brands’ (YUM) earnings report last week, many over-reacted during after hours trading and shares quickly recovered to end the following day higher, perhaps buoyed by the enthusiasm following the FOMC Statement. Shares did trend lower the rest of the week, but fared much better than the overall market. This coming week YUM Brands is ex-dividend and based upon its option premium is a veritable sea of calm, although it too is demonstrating growth in premiums as risk is generally heightened.

Finally, Best Buy (BBY) is one of those stocks that has seen its own personal correction, having fallen nearly 13% since the market high just 3 weeks ago. With so much attention having been placed on European concerns it’s hard to think of too many stocks that are so well shielded from some of those perceived risks. Although it doesn’t report earnings for more than a month, this is a position that I would like to maintain for an extended period of time, particularly with its currently bloated option premiums, heading into earnings, which I believe will reflect an improving discretionary spending environment, to Best Buy’s benefit.

Unless of course the muzzle falls off, in which case all bets are off for this week.

Traditional Stocks: Anadarko Petroleum, Dow Chemical, Fastenal, Halliburton

Momentum: Best Buy

Double Dip Dividend: YUM Brands (10/15)

Premiums Enhanced by Earnings: eBay (10/15 AM), Intel (10/14 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.

Aug232014

Weekend Update – August 24, 2014

Week in Review Comment

For two consecutive summers back in 1981 and 1982 I found myself in Jackson Hole.

Although both times were in August, I don’t recall having run across any Federal Reserve types at the time. However, if they were there, they certainly weren’t staying in the same campground, but I’m guessing that their table was set much the same as mine, when big decisions in an era of 15% Fed Funds rates and the burgeoning money supply were being made.

Or maybe they were simply unwinding after a long day of exchanging white papers.

And not the type that are rolled, as good old fashioned Jackson Hole cowboys were reported to do. Too much exchanging of those rolled papers could definitely lead you into some kind of complacency. I know that I really didn’t care too much about what was going to happen next and was content to just let it all keep happening without my input.

This past week was one when neither decisions nor inputs were really required from investors as the market had its best week in about four months. With the exception of a totally inconsequential FOMC statement release, there was absolutely no economic news, or really no news of any kind at all. In fact, awaiting the scheduled remarks from Mario Draghi was elevated to the status of “breaking news” as most people were tiring of seeing celebrities getting doused with a bucket of ice, under the guise of being news.

In an environment like that how could you not exercise complacency? Going along for the ride has been a good strategy, just ask most hedge fund managers. While they, and I, were elated with the sudden spike in volatility just two weeks ago, talk of a 30% surge in volatility have been replaced by silence and sulking for them and justifiable complacency for most other investors.

Even though it was another in a series of Fridays with potentially unsettling news coming from Ukraine, this time regarding violation of their border by a Russian convoy, the market completely ignored the news, as it did the encounter of a US military jet with a Chinese fighter plane at a distance reported to be 20 feet.

That seemed odd.

Instead, all eyes were focused on the Kansas City Federal Reserve’s annual soiree in Jackson Hole, awaiting the keynote speech by Janet Yellen and then some words from her European counterpart, Mario Draghi.

For her part, Janet Yellen’s prepared remarks had no impact on markets, which were largely unchanged for the day.

The speculation that the real market propelling catalyst would come from Draghi, who was said to be ready to announce a large round of European quantitative easing turned out to be unfounded and so the week ended on a whimper, with many traders exercising their complacency by having embarked on an early start to the last of summer’s weekends.

While not going out in a blaze of glory markets again thrived on the lack of any news. In that kind of environment you can easily get used to the good times. With many believing that the Federal Reserve’s policies were responsible for those good times and having a “dove” at its helm, even with telegraphed interest rate hikes and an end to quantitative easing, auto-pilot seems so right.

Until it doesn’t.

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

This week I’m drawn to summer under-performers and there appear to be quite a few among companies that can have a place even in very traditional portfolios.

^SPX ChartIn a world that increasingly seems dominated by technology and bio-technology, my initial thoughts this week are focused on heavy metal, although that may be a consequence of some neuron debilitating nights in Jackson Hole.

Deere (DE) announced further layoffs this past week and has been mired at $85 level. Despite record crop yields Deere has gone fallow of late. While I may still like to see it trading a little lower, it is definitely in the range that I like to own shares, not having done so since August 2013, despite it being a portfolio mainstay, at one point. While its premiums are somewhat depressed along with most everything else, at the moment stocks that have under-performed the S&P 500 for the summer have some enhanced appeal at the market’s current dizzying heights.

Although the question “how much further could it possibly fall?” is not one whose answer most people would want to hear, I like considering high quality companies that have under-performed, as the market adds to its own risk for reversal.

Also in the heavy metal business, General Motors (GM) has been subject to more scrutiny than most companies could ever withstand and I think its CEO, Mary Barra, has reacted and performed admirably, trying to get ahead of the news. In that process General Motors has also found itself mired, but trading in a fairly predictable range, having a nice option premium and an upcoming dividend offer reasons for consideration. However, in order to capture the dividend I may consider the use of a monthly contract, although expanded weekly options are available. With a Monday ex-dividend date, one can even consider the sale of a September 12, 2014 contract and trade off an extra week of option premium for the dividend, if assigned early.

International Paper (IP) may not be the stuff of heavy metal, but there is a chance that some of those white papers controlling our economic and banking policies were presented on their products. It’s also possible that some of those erstwhile cowboys passed an International Paper product along to their friends around the campfire, years ago.

At its current trading level, International Paper has my attention, although I do already own some more expensive and uncovered shares. Management has sequentially created value for investors through strategic spin-offs, which may continue and a healthy dividend. It, too, has under-performed the S&P 500 of late and should have limited geo-political risk, although it does have manufacturing facilities in Russia and “International” in its name.

It’s not too often that I think about adding shares of a Dow component or a really staid “blue chip.” However, despite some low option premiums that usually accompany such names, this week it just feels right, perhaps as somewhat of an antidote to geo-political risk.

Both McDonalds (MCD) and Kellogg (K) also happen to be ex-dividend this week and are generous in their distributions. Both have also taken their lumps recently, badly trailing the already mediocre S&P 500 through the first two months of summer.

While McDonalds isn’t entirely immune to geo-political risk, witness the sudden closure of its flagship Russian restaurant and others throughout the country, following the pattern initially seen in Crimea months ago, the risk seems to be limited, as the real issues are with declining American tastes for its products.

Kellogg quietly manufactures its products in 18 countries and markets them nearly everywhere in the world, yet it’s not too likely that anyone or any government will make Kellogg the scapegoat for its geo-political shenanigans. Although I’ve never purchased shares, it’s a company that I consistently look at in order to capture its dividend, but have always gone elsewhere to be requited.

This time may be different, though. The combination of under-performance, option premium and dividend, coupled with a little bit of a time buffer through the use of a monthly option contract provides some comfort at a time when the world may be a tinderbox.

Halliburton (HAL) also goes ex-dividend this week, but its puny dividend isn’t the sort of thing that beckons anyone to begin a chase. However, shares have recently been under attack. Although only mildly trailing the S&P 500 for the summer its decline in the past month has been 8%. That’s enough to get my attention in return for receiving an option premium and perhaps a dividend payment, as well.

Pfizer (PFE) is somewhat of a mystery to me. It is thought to have a relatively shallow pipeline of new drugs, has been rebuffed in its attempt to swallow up some competition and perhaps gain a tax inversion opportunity. The mystery, though, is why shares had fallen as they have done over the summer. Whatever disappointment existed due to the failed buyout was in excess of any premium that the market attached to that buyout and the favorable tax situation.

As with International Paper, I already own uncovered shares, but am willing to now add shares as it has shown the ability to bounce back from its recent lows. While its premium isn’t necessarily the most provocative, in the past it has been the ability to repeatedly rollover shares that has been the real reward.

You can add Blackstone (BX) to the list of uncovered positions that I hold, with the most recent contract expiring this past Friday. Undoubtedly, Blackstone’s prospects are tied to a healthy stock market and an overall healthy economy, as its varied business interests and investments are the real product and they live and die through the whims of both masters.

That’s the kind of risk that’s represented in its high beta and reflected in its option premiums. However, in this period of extraordinarily low volatility, even Blackstone is having a hard time generating premiums of old. Still, its recent decline, in the absence of any real news and during a market rise makes me believe that despite the warning signs, it may offer some safety, particularly if there is further strength in the financial sector, as in the past week.

I had been hoping to have my shares of Best Buy (BBY) assigned this past week, in order to have a free and clear mind when considering the upcoming earnings report this week. That wish was granted and its again time to consider a trade in shares.

Best Buy frequently offers a good earnings related trade due to its enhanced premiums, that in turn are due to its propensity for explosive earnings related moves. While the option market is currently assigning an implied move of 8% next week, an ROI of 1% can currently be achieved by selling puts at a strike level 8.7% below Friday’s closing price.

I generally like to see a larger gap between the implied volatility and the strike price returning the threshold premium before considering the sale of puts in advance of earnings. In this case, I may be more inclined to wait after earnings and willing to pile on if shares disappoint. However, with an ex-dividend date just two weeks later, rather than selling puts in the aftermath of a large share drop I might consider the purchase of shares and sale of call options.

Finally, what a roller coaster Abercrombie and Fitch (ANF) has found itself riding. After garnering the honor being named the “Worst CEO of 2013” shares have made an impressive turnaround.

I have no clue how suddenly its products could have become “cool” again, or why teens may now be flocking to its stores or what aggressive strategic changes CEO Jeffries may have implemented, but the sudden favor it has found among investors is undeniable, as shares have left the S&P 500 behind in the dust over the past month.

For me, that kind of share acceleration is a perfect message to consider the sale of puts as earnings are to be released.

The option market is implying a price move of 8.6%, however, a 1% ROI may be achieved at a strike level 13.8% below Friday’s close. That’s the kind of gap that I like seeing. However, as with Best Buy, there is the matter of an ex-dividend date, which happens to be on the same date as earnings are released.

If wanting to take part in this trade, that essentially leaves three different scenarios, including the commonly executed sale of puts before or after earnings. In the case of doing so before earnings the sale of puts in the face of an impending ex-dividend date frequently works to the disadvantage of the seller, much in the same way as selling calls into an ex-dividend date serves as a seller’s advantage.

That disadvantage is eliminated in selling puts after earnings, in the event of the share’s decline. However, another possibility, and one that would very likely include retention of the dividend, is the sale of deep in the money calls, particularly if using a monthly expiration. Additionally, if shares move higher after earnings, once the added volatility is removed the deeper in the money position may likely be closed at a small net price following concurrent share sales, allowing funds to be re-deployed.

Take that, complacency.

Traditional Stocks: Blackstone, Deere, General Motors, International Paper, Pfizer

Momentum:

Double Dip Dividend: Halliburton (8/29), Kellog (8/28), McDonalds (8/28)

Premiums Enhanced by Earnings: Abercrombie and Fitch (8/28 AM), Best Buy (8/26 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.

Aug162014

Weekend Update – August 17, 2014

Daily Market Update Comment

It’s hard to know whether the caption seen with this screen capture this past Friday morning was just an unfortunate mistake or an overly infatuated producer trying to send a not so subtle message to an on air personality who may not be that exciting when the teleprompter isn’t present.

There’s also the possibility that it was simply a reflection of the reality for the week. Coming to the mid-point of August and people every where grasping for the last bits of summer, it was an extraordinarily slow week for scheduled economic news and a slow week for trading. The most prevalent stories for the week were regarding the death of a beloved comic genius and that of a national figures and unknowns injecting a little icy cold fun into supporting research into the mysteries of a horrible disease.

In that vacuum the stock market was on its way to having its best week in nearly two months.

In that context, there was no doubt that boring was indeed, sexy.

For me, not so much. Boring was more like a full length burlap sack that was far too tight around the neck. Just a few short weeks ago after a deluge of market moving news I found myself wishing for quietude, only to learn that you do have to be careful what you wish for.

As a covered option trader I much prefer weeks that the market is struggling or flat. Even mild to moderate declines are better than strong moves forward, if my covered positions cause me to be left behind. I can usually do without those “best weeks ever” kind of hyperbole.

Luckily, lately Fridays have had a way of shaking things up a little bit, particularly when it comes to reversing course.

Although its probably a coincidence but seemingly market moving news from Russia seems to prefer Fridays, something noted a few months ago and not having slowed down too much.

That was certainly the case to end out the week where I was getting left behind. News, however, of a possible military action cast a pall on the markets and quickly reversed a decent gain earlier in the day.

In the perverse world of hedging your bets, sometimes those surprises are the antidote to getting left behind, so what is likely bad news for many may be more happily received by others. In some cases it’s really that bad news that’s sexy.

By the same token I wasn’t overly pleased when the market regained much of what it had lost. For me, in addition to renewing the gap between personal performance and the market, it also pointed to a market unclear as to its direction.

Even though it’s volatility that drives the premiums that can make the sale of options enticing, I really like clarity. After Friday’s events there was no clarity, other than the validation of the belief that the market is clearly on edge. At best, the market demonstrated ambivalence and that is far from being sexy.

What may be sexy is a recognition of the market’s unwillingness to give into the jitteriness and its continuing to pursue a climb higher. But then again, that wouldn’t be the first time something stupid was done in pursuit of something alluring.

I wouldn’t mind it being on the edge or deigning to walk on the wild side. That’s understandable, maybe even sexy. What is much less understandable is how forgiving the market has been, especially as it entered yet another weekend of uncertainty, yet pulled back from its retreat in a show of confidence.

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

When the market first caught word of the possible military action in Ukraine the response was fairly swift and saw nearly a 200 point market reversal.

While that move may reflect investor jitteriness and a disdain for the uncertainty that may be in store, the broad brush was fairly indiscriminate and not only took stocks with significant international exposure lower, but also took those relatively immune for a ride, even if they were already well off of their previous highs.

While I understand why MasterCard (MA) and its shareholders may have particular angst about events in Russia, I’m not certain that the same should have extended to those with interests in Best Buy (BBY) or Fastenal (FAST).

They all fell sharply and didn’t share in the subsequent recovery later in the day.

I already own Best Buy and anticipated it being assigned this past week, only to have to roll the option contracts over. While it does report earnings next week and is frequently a candidate for large moves, I think that at its Ukraine depressed price there is some spring back to supplement the always healthy option premium.

Fastenal is a very unsexy kind of stock and it does seem quite boring. I suppose that for some people its stores and catalogue of thousands of handy items may actually be very exciting. It is, however, a very exciting stock if you learn to look beyond the superficial. As a buy and hold position it has had a few instances of opportune buying over the past year. However, as a vehicle for a covered option strategy it has had many of those opportunities and I regret not having taken more advantage.

During a trading period of 14 months, while the S&P 500 has gone 18% higher, while Fastenal had gone nearly 14% lower. Not exactly the kind of stock you would find very appealing, even in very low light and deprived of oxygen. However, being opportunistic and using a covered option strategy it has delivered a 43% ROI in that period.

While Best Buy and Fastenal may have been innocent victims of Friday’s decline, MasterCard has been battling with Russian related problems for the past few months, as there had been some suggestion that the Russian banking system would create its own network of credit cards. That notion has since been dismissed, but there may be little emanating from Russia at the moment that could be taken at face value.

MasterCard shares are still a little higher than I find attractive, but it’s always in the eye of the beholder. Ever since its stock split it has traded in a nicely defined range and has moved back and forth with regularity within that range. If you like covered options, that is a really sexy characteristic.

I also understand why MetLife (MET) fell precipitously on Friday. Already owning shares and having expected its assignment, I rolled it over prematurely as it started to quickly lose altitude as the 10 year Treasury rate started plummeting. The thesis with MetLife, that has been consistently borne out is that it prospers with a rising rate environment.

Shares did recover by the close of the session and despite it being near the top of the range that I would consider a share purchase, I may be ready to add to my existing position.

I also understand why Starbucks (SBUX) may be at risk with any escalation of events in Europe. It is also a potential victim to an Italian recession and declining German GDP. However, despite those potential concerns, it actually withstood the torrents of Friday’s trading and I think is poised to trade near its current levels, which s ideal for use in a covered option trade.

I have been sitting on shares of both Freeport McMoRan (FCX) and Mosaic (MOS) for quite a while. Although the former shares are in profit they are still greatly lagging the S&P 500 for the same period. The latter is still at a loss, not having recovered from the dissolution of the potash cartel, but I’ve traded numerous intermediate positions, as is frequently done to support a paper loss.

Both, however, I believe are ready to move higher and at the very least offer appealing dividends if forced to wait. That has been a saving grace for my existing shares and could easily be so with future shares, that also provide attractive premiums. If finding entry at just the right price that combination can truly be sexy.

I’m not really certain why GameStop (GME) is still in business, but that’s been the conventional wisdom for years. The last time I was involved in shares was through the sale of puts after a plunge when Wal-Mart (WMT) announced that it would intrude of GameStop’s business and offer Wal-Mart store credits for used games. Based upon their own earnings report last week, looks like that strategy didn’t move the needle very much, however.

Still, GameStop keeps on going. It reports earnings this coming week and it was 5% lower in Friday’s trading. If considering the sale of puts before earnings, I especially find those kinds of plunges before earnings to be very sexy. With an implied move of about 7.8%, a 1% ROI may be able to be achieved by selling a put contract at a strike level 9.2% below Friday’s closing price.

In the event of an impending assignment, however, I would look for any opportunity to roll over the put contracts, but would also be mindful of an upcoming dividend payment sometime in September, which could be a good reason to take possession of shares if unable to get extricated from the short put position.

Finally, after a week of retailers reporting their sales and earnings figures, it’s not really clear whether the increased employment numbers are creating a return to discretionary spending. It’s equally not clear that Sears Holdings (SHLD), which reports earnings this week is really a retailer, but it reports earnings this week, as well. 

For years, and possibly still so, it has been extolled for its real estate strategies as it spins off or plans to spin off the only portions of its retail operations that seem to work.

However, in the world of trading for option income none of that really matters, although it may be an entertaining side bar. 

The option market is currently assigning an implied price move of approximately 9.4%, while a 1% ROI for the week may potentially be made by selling a put contract 11.8% below Friday’s closing price.

As I knew deep down in high school, even losers can be sexy in the right light. Sears Holdings could be one of those losers you can learn to love.

 

Traditional Stocks: Fastenal, MasterCard, MetLife, Starbucks

Momentum: Best Buy, Freeport McMoRan, Mosaic

Double Dip Dividend: none

Premiums Enhanced by Earnings: GameStop (8/21 PM), Sears Holdings (8/21 AM)

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

Jul192014

Weekend Update – July 20, 2014

Weekend Update Comment

While I don’t necessarily believe that space aliens will descend upon us with laser rays blazing, there’s reason to increasingly believe that possibility as we learn more and more about the existence of conditions elsewhere in the universe that may be compatible with sustaining life.

Still, even with that knowledge, I don’t let it control my life and quite frankly will probably never do anything that in any way is impacted by the thought of an encounter with an alien.

The principle reason for not elevating the alarm level is that there is no point in history to serve as an example. The pattern of life on earth has been so far devoid of such occurrences, as best we know. Right now, that’s good enough for me.

However, I just don’t completely discount the possibility, because I believe that it’s of a very low probability. Besides, the vaporization process would be so swift that there would be no time for remorse or regrets. At least that’s what I expect.

By the same token I don’t expect a complete meltdown in the market, even though I know it has and can, likely occur again. Despite its probability of occurrence and my belief of that probability, I’m not really prepared for one if it were to occur, even with the extraordinarily low cost of portfolio protection. The chances of a complete meltdown, as we know, is probably more likely to occur in the near term than the prospect of laser waving aliens in our lifetimes.

For all practical purposes one is a real probability and the other isn’t, yet they aren’t necessarily placed into different risk categories at the moment.

This week’s events, however, served as a reminder that the unexpected should always be expected. With the nice rebound on Friday from Thursday’s news of the tragic downing of the civilian Malaysian airplane, the lesson may be lost, however.

One thing that we seem to have forgotten how to do in the past 5 years is to expect the unexpected. Instead our expectations have been fueled by the relentless climb higher and a feeling of invincibility. To a large degree that feeling has been justified as every attempt to fight back against the gains has been stymied in quick and due course.

I probably wasn’t alone in having that invincible feeling way back in 2007. The vaporization process was fairly swift then, as well.

Even when faced with challenges that in the past would have sent markets tumbling, such as international conflict, we haven’t seen the application of age old adages such as “do not stay long going into a weekend of uncertainty.” This Friday’s market rebound was another example in a long string of uncertainty being expected to not lead to the unexpected.

In essence with the certainty of an ever climbing market having become the new reality there’s been very little reason to exercise caution, or at least to be prepared to act in a cautious manner in the expectation that perhaps the unexpected will occur.

Our minds are wired to like and identify patterns. That’s certainly the strategic basis for stock trading for many. Predictability brings a degree of comfort, but too much comfort brings complacency. The prevailing pattern simply argues against the unexpected, so we have discounted its probability and to a large degree its possibility.

While we may be correct in discounting complete market meltdowns, as their occurrence is still relatively uncommon, that complacency has us discounting intermediate sized moves that can easily come from the unexpected. The world is an increasingly complex and inter-connected place and as seen in the past week there needn’t be advanced warning signs for any of an infinite number of unexpected events to occur.

We did get lucky this past week, but we probably expected the luck to continue if the unexpected did strike. What would really be unexpected would be to draw a lesson from our fragility standing near market highs.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. With many companies reporting earnings this coming week a companion article, “Taking a Gamble with Earnings,” explores some additional potential trades.

As Thursday’s trading was coming to its close at the lows of the session more and more stocks were beginning to return to what seemed to be more reasonable trading levels.

The problem, of course, is dealing with the unexpected and trying to predict what comes next when there are really no data points to characterize what we’ve seen. Someday when we look back at these events and the market impact we may see a pattern, but at the moment the question will be “which pattern?” Is it one that’s simply a blip and short-lived as the event itself is self-limiting or is the pattern consistent with the beginning stages of what is to become an ongoing and escalating series of events that serve to erode confidence and place continuing strains on the market?

In other words, did we just witness a typical over-reaction and subsequent rebound or are we ready to witness a correction?

I think its the former, but it opens the possibility of additional incidents and escalation of hostilities in a part of the world that is far more meaningful to the world’s economies than unheralded internecine conflicts occurring in so many other places.

Interestingly, with that kind of backdrop, this week, while we begin to sort out what the short term holds, “Momentum” kind of stocks, particularly those with little to no international exposure in the hotbed areas, may be more conservative choices than the more Traditional selections.

While I like British Petroleum (BP), General Electric (GE) and Deere (DE) this week, predominantly due to their recent price drops, there is certainly reason to be wary of their exposure to parts of the world in conflict.

British Petroleum certainly has known interests in Russia and could be at unique risk, however, I believe that we will be seeing a lesser chest thumping Russia in the near term as there is some reason to believe that existing sanctions and perhaps expanded ones are beginning to get attention at the highest levels. Above all, pragmatism would dictate not injuring the source of hard currency.

I’ve been waiting a while to re-purchase shares of British Petroleum and certainly welcome any opportunity, even if still at a price higher than my last entry. With earnings scheduled to be reported July 29, 2014 and a healthy dividend sometime during the August 2014 option cycle there may be opportunities over the coming weeks with these shares to generate ongoing income.

General Electric reported its earnings this past Friday and also announced the impending IPO of its consumer finance business. The market was unimpressed on both counts.

I haven’t owned shares of General Electric with the frequency that it deserved. With a generous and increasing dividend, price stability, low beta and decent option premiums, it certainly has had the appeal for ownership, perhaps even using longer term option contracts to better  lock in some of those dividends. While it has significant international exposure the recent price weakness makes entry a little less risky, but even with the quality and size of General Electric unexpected bumpy rides can be possible when uncontrollable events create investor fear.

Deere is simply finally down to the price level that in the past was my upper range for purchase. With Caterpillar (CAT) reporting earnings later this week and trading near its 52 week high, there is room on the downside, as well as some trickle down to Deere shares. However, with Joy Global’s (JOY) recent performance, my anticipation is that Caterpillar’s Chinese related revenues will be enough to satisfy traders and offer some protection to Deere, as well.

On the Momentum side of the equation this week are Best Buy (BBY), Las Vegas Sands (LVS) and YUM Brands (YUM).

While Las Vegas Sands and YUM Brands certainly have international exposure, at the moment if you had to choose where to place your overseas bets, China may be relatively insulated from the unexpected elsewhere in the world.

Both companies are coming off weak earnings reports and the markets reacted accordingly. Both, however, have been very resilient to declines and finding substantive support levels in the past. With some shares of Las Vegas Sands recently assigned at current levels I would look for opportunity to re-purchase them. It’s volatility offers generous option premiums and the availability of expanded weekly options makes it easier to consider rollover opportunities in the event of unexpected price drops in order to wait out any price rebound, which has been the expected pattern.

YUM Brands is, like Deere, finally approaching the upper range of where I have purchased shares in the past. While I would like to see them even lower, I think that due to its dependence on the Chinese economy and market it may be a relative out-performer in the event of internationally induced market weakness.

Best Buy, unlike YUM Brands and Las Vegas Sands, has recently been on an upward price trajectory. I liked it much better when it was trading in the $26 range, but I believe it still has further upside potential in its slow climb back after unexpectedly bad earnings news 6 months ago. It too has an attractive option premium and a dividend and despite its recent price climb higher has come down nearly 5% in the past two weeks.

I have never purchased shares of Pandora (P) before, but love its product. At the moment I don’t particularly have any great desire to own shares, but Pandora does report earnings this week and is notable for its 10.8% implied price move. In the meantime a 1% ROI can be achieved at a strike price that is 16.4% below the current price. Those are the kind of characteristics that I like to see when considering what may otherwise be a risk laden trade.

Pandora has certainly shown itself capable of making very large earnings related moves and it is also certainly in the cross hairs of other and bigger players, such as Apple (AAPL) and Google (GOOG). However, even a scathing critic, TheStreet’s Rocco Pendola, has recently commented that its crushing defeat at the hands of those behemoths is not guaranteed.

Expected, maybe, but not guaranteed.

Facebook (FB) is also reporting earnings this coming week and in the two years that it has done so has predominantly surprised to the upside as it has quickly lived up to its vow to monetize its mobile strategy.

With an implied price move of 7.6% the strike level necessary to generate a 1% ROI through the sale of puts is 8.7% below Friday’s closing price. While shares can certainly make a move much larger than what is expected by the option market, in the event of an adverse move Facebook has some qualities that makes it an easier put option position to manage in the effort to avoid assignment.

It trades expanded weekly options and it does so with liquidity and volume, thereby having relatively narrow bid and ask spreads, even for deep in the money options.

Sooner or later, though, the expectation must be that earnings expectations won’t be met. I wouldn’t discount that possibility, although I think the options market may have done so a bit, so in this case I would be more inclined to consider the sale of puts after earnings, if share price drops on a disappointing report.

Finally, Apple reports earnings this week. It doesn’t really fulfill the criteria that I used when considering the sale of puts prior to earnings, in that it doesn’t appear that a 1% ROI can be achieved at a strike level outside of the range defined by the option market when calculating the “implied move.”

It’s probably useless trying to speculate on sales numbers or guidance. Based on its usual earnings related responses in the past, you would be justified in believing that the market had not expected  the news. However, this quarter the implied move is on the small side, at only 4.5%, suggesting that not much in the way of a surprise is expected next week.

With the current option pricing, the sale of Apple puts doesn’t meet my criteria, but I would again be interested in considering either the sale of puts after earnings, if the market’s response is negative or the outright purchase of shares and sale of calls, in anticipation of an ex-dividend date coming up in early August.

Sometimes it’s just easier dealing with the expected.

Traditional Stocks:  British Petroleum, Deere, General Electric

Momentum: Best Buy, Las Vegas Sands, YUM Brands

Double Dip Dividend: none

Premiums Enhanced by Earnings: Apple (7/22 PM), Facebook (7/23 PM), Pandora (P)

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.

May102014

Weekend Update – May 11, 2014

Weekend Update Comment

 A few hundred years ago Sir Isaac Newton is widely credited with formulating the Law of Universal Gravitation.

In hindsight, that “discovery” shouldn’t really be as momentous as the discovery more than a century earlier that the sun didn’t revolve around the earth. It doesn’t seem as if it would take an esteemed mathematician to let the would know that objects fall rather than spontaneously rise. Of course, the Law is much more complex than that, but we tend to view things in their most simplistic terms.

Up until recently, the Law of Gravity seemed to have no practical implications for the stock market because prices only went higher, just as the sun revolved around the earth until proven otherwise. Additionally, unlike the very well defined formula that describe the acceleration that accompanies a falling object, there are no such ways to describe how stocks can drop, plunge or go into free fall.

For those that remember the “Great Stockbroker Fallout of 1987,” back then young stockbrokers could have gone 5 years without realizing that what goes up will come down, fled the industry en masse upon realizing  the practical application of Newton’s genius in foretelling the ultimate direction of every stock and stock markets.

The 2014 market has been more like a bouncing ball as the past 10 weeks have seen alternating rises and falls of the S&P 500. Only a mad man or a genius could have predicted that to become the case. It’s unlikely that even a genius like Newton could have described the laws governing such behavior, although even the least insightful of physics students knows that the energy contained in that bouncing ball is continually diminished.

As in the old world when people believed that the world was flat and that its exploration might lead one to fall off the edge, I can’t help but wonder what will happen to that bouncing ball in this flat market as it deceptively has come within a whisker of even more records on the DJIA and S&P 500. Even while moving higher it seems like there is some sort of precipice ahead that some momentum stocks have already discovered while functioning as advance scouts for the rest of the market.

With earnings season nearing its end the catalyst to continue sapping the energy out of the market may need to come from elsewhere although I would gladly embrace any force that would forestall gravity’s inevitable power.

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

As a past customer, I was never enamored of Comcast (CMCSA) and jumped at the first opportunity to switch providers. But while there may be some disdain for the product and especially the service, memories of which won’t easily be erased by visions of a commercial showing a comedian riding along in a service truck, you do have to admire the company’s shares. 

Having spent the past 6 months trading above $49 it has recently been range bound and that is where the appeal for me starts. It’s history of annual dividend increases, good option premiums and price stability adds to that appeal. While there is much back story at present in the world of cable providers and Comcast’s proposed purchase of Time Warner Cable (TWC) may still have some obstacles ahead, the core business shouldn’t be adversely impacted by regulatory decisions.

Also, as a one time frequent customer of Best Buy (BBY), I don’t get into their stores very often anymore. Once they switched from a perpendicular grid store layout to a diagonal one they lost me. Other people blame it on Amazon (AMZN), but for me it was all about the floor plan. But while I don’t shop there very much anymore it’s stock has been a delight trading at the $26 level.

Having had shares assigned for the fourth time in the past two months I would like to see a little bit of a price drop after Friday’s gain before buying shares again. However, with earnings coming up during the first week of the June 2014 option cycle you do have to be prepared for nasty surprises as are often delivered. There’s still more time for someone to blame cold weather on performance and this may be the retailer to do so. WIth that in mind, Best Buy may possibly be better approached through the sale of put options this week with the intent of rolling over if in jeopardy of being assigned shares prior to the earnings release.

There’s barely a week that I don’t consider buying or adding shares of Coach. I currently own shares purchased too soon after recent earnings and that still have a significant climb ahead of them to break even. However, with an upcoming dividend during the June 2014 cycle and shares trading near the yearly low point, I may be content with settling in with a monthly option contract, collecting the premium and dividend and just waiting for shares to do what they have done so reliably over the past two years and returning to and beyond their pre-earnings report level.

Mosaic (MOS) is another one of those companies that I’ve owned on many occasions over the years. Most recently I’ve been a serial purchaser of shares as its share price plunged following announcement of a crack in the potash cartel. Still owning some more expensive shares those serial purchases have helped to offset the paper losses on the more expensive shares. Following a recent price pullback after earnings I’m ready to again add shares as I expect Mosaic to soon surpass the $50 level and stay above there.

Dow Chemical (DOW) is also a company whose shares I’ve owned with frequency over the years, but less so as it moved from $42 to $50. Having recently decided that $48 was a reasonable new re-entry point that may receive some support from the presence of activist investors, the combination of premiums, dividends and opportunity for share appreciation is compelling.

Holly Frontier (HFC) has become a recent favorite replacing Phillips 66 (PSX) which has just appreciated too much and too fast. While waiting for Phillips 66 to return to more reasonable levels, Holly Frontier has been an excellent combination of gyrating price movements up and down and a subsequent return to the mean. Because of those sharp movements its option premium is generally attractive and shares routinely distribute a special dividend in addition to a regular dividend that has been routinely increased since it began three years ago.

The financial sector has been weak of late and we’ve gotten surprises from JP Morgan (JPM) recently with regard to its future investment related earnings and Bank of America (BAC) with regard to its calculation error of capital on its books. However, Morgan Stanley (MS) has been steadfast. Fortunately, if interested in purchasing shares its steadfast performance hasn’t been matched by its share price which is now about 10% off its recent high. 

With its newly increased dividend and plenty of opportunity to see approval for a further increase, it appears to be operating at high efficiency and has been trading within a reasonably tight price range for the past 6 months, making it a good consideration for a covered option trade and perhaps on a serial basis.

Since I’ve spent much of 2014 in pursuit of dividends in anticipation of decreased opportunity for share appreciation, Eli Lilly (LLY) is once again under consideration as it goes ex-dividend this week. With shares trading less than 5% from its one year high, I would prefer a lower entry price, but the sector is seeing more interest with mergers, acquisitions and regulatory scrutiny, all of which can be an impetus for increasing option premiums.

Finally, it’s hard to believe that I would ever live in an age when people are suggesting that Apple (AAPL) may no longer be “cool.” For some, that was the reason behind their reported purchase of Beats Music, as many professed not to understand the synergies, nor the appeal, besides the cache that comes with the name. 

Last week I thought there might be opportunity to purchase Apple shares in order to attempt to capture its dividend and option premium in the hope for a quick trade. As it work turn out that trade was never made because Apple opened the week up strongly, continuing its run higher since recent earnings and other news were announced. I don’t usually chase stocks and in this case that proved to be fortuitous as shares followed the market’s own ambivalence and finished the week lower.

However, this week comes the same potential opportunity with the newly resurgent Microsoft (MSFT). While it’s still too early to begin suggesting that there’s anything “cool” about Microsoft, there’s nothing lame about trying to grab the dividend and option premium that was elusive the previous week with its competition.

Microsoft has under-performed the S&P 500 over the past month as the clamor over “old technology” hasn’t really been a path to riches, but has certainly been better than the so-called “new technology.” Yet Microsoft has been maintaining the $39 level and may be in good position to trade in that range for a while longer. It neither needs to obey or disregard gravity for its premiums and dividends to make it a worthwhile portfolio addition.

 

Traditional Stocks: Comcast, Dow Chemical, Holly Frontier

Momentum: Best Buy, Coach, Morgan Stanley, Mosaic

Double Dip Dividend: Microsoft (5/13 $0.28), Eli Lilly (5/13 $0.49)

Premiums Enhanced by Earnings: none

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

Mar162014

Weekend Update – March 16, 2014

Weekend Update

Most of us have, at one time or another believed that we were carrying the weight of the world on our shoulders. The reality will always be that unless we are the President of the United States with a decision to be made regarding pressing that red button, those feelings are somewhat exaggerated and unlikely to be borne out in fact.

It’s probably not an exaggeration, however, to suggest that in the past week the burden of the world weighed down heavily on the U.S. stock markets.

Slowing growth and questionable economic statistics from China and an unfolding crisis in Crimea were the culprits identified this week that sapped the momentum out of our markets. The complete list of “reasons” for last week’s performance was compiled by Josh Brown, but ultimately it all came down to our shoulders. Perhaps like a regressive tax the individual investor may feel an exaggerated impact as well when the market behaves badly and may also take longer to recover from the heavy load of losses.

In addition to the global issues then there were also issues of regulation, seeing the SEC and FTC weigh in on Herbalife (HLF), dueling words of umbrage from billionaires over eBay (EBAY) and litigation from the New York State Attorney General’s Office over General Motor’s (GM) role in potentially avoidable vehicular deaths.

What there wasn’t was anything positive or optimistic to be said during the week, other than sooner or later Spring will arrive. For the first time since the last real attempt at a correction nearly two years ago the market closed lower in each trading session of the past week.

While the weekend may change my opinion, as additional news may be forthcoming as Russian war games on Ukraine’s borders play themselves out and a Crimean referendum is held, I find myself optimistic for the coming week.

I usually try to find ten potential trades for each coming week. Last week I struggled to find just nine. This week my preliminary list was nearly twenty and I had a difficult time narrowing down to ten stocks.

That hasn’t happened in a while.

Certainly, as has been discussed in previous weeks following a downward moving market, the challenge is discerning between value and value traps. In that regard this past week is no different, but for inspiration, I look to the option seller’s best friend.

That would be volatility. It creates the kind of premiums that can make me salivate and it is the lack of volatility that makes me wonder whether anyone really cares anymore about the need for stock markets to react appropriately to fundamental factors, as opposed to simply moving higher under all circumstances.  

Since late 2011 we’ve been used to seeing historically low levels of volatility with occasional spikes representing market downturns. For those following along you know that there haven’t been many of those downturns in the past 20 months, although we did just recently quickly recover from an equally quick 7% loss. Those downturns saw spikes in volatility.

Suddenly there has been a lot of discussion about increasing volatility and for those that get excited about technical analysis, much is made of the significance of Volatility Index breaking above the 200 Day Moving Average.

What you don’t hear, however, are the video playbacks of all of the times the Volatility Index has surpassed that 200 Day Moving Average and it did not lead to a market breakdown, as suggested by many.

Instead, a quick look at the past year seems to indicate an alternating current of spikes in volatility between larger spikes and smaller ones. Simply put, I think we’re experiencing a regularly scheduled smaller spike in volatility.

I could be wrong, but that’s what hedging is all about.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum categories, with no “PEE” selections this week (see details).

As with last week, despite the uncertainty that may usher in the coming week I see some possibilities even with some higher beta positions, on a selective basis.

While I’ve been trying to emphasize dividend paying positions for the past three months, the only potential such trades that had any appeal for me this week fell into the higher beta category.

While Best Buy (BBY) is probably immune to any direct impact from an overseas crisis, it has had no difficulty in creating its own and has certainly created a crisis of faith before regaining some respectability under new leadership. But for those that have held shares that all seems so long ago after some disappointing earnings reports. Hit especially hard this most recent earnings season, Best Buy has two months left to acquit itself and another two weeks to have their cash registers ring loudly to offset any weather related disappointments. In the meantime shares do go ex-dividend this week and have been trading in a narrow range of late. In the absence of any news it may be expected to keep doing so long enough to capture a dividend and perhaps a premium or two.

Las Vegas Sands (LVS) also goes ex-dividend this week and is also a higher beta stock. While I have traded this stock with some frequency, it’s been a while since doing so as it resists going much lower. While it is at a relative low to its recent high after a 7% decline, it has still had a fairly uninterrupted trajectory. Like Best Buy, there’s not too much reason to suspect that events in Crimea will serve as a direct contagion, the higher beta may be its own heavy weight in the event of a market decline, but like cockroaches, gambling will survive even nuclear holocaust, as may Sheldon Adelson, the Chairman. It may also survive some weakness in China, as there’s no better place to bury your misery than in their Maxao casinos.

It’s usually a fallacy in the making when you use logic to convince yourself of the rationale to buy a stock. That includes the belief that if you liked a stock at one price it must certainly be even more likeable at a lower price. Yet that’s where I find myself with General Electric (GE), whose shares were just assigned from me a week ago and now find themselves priced below that earlier strike price. However, in the case of General Electric, unless there are some horrific surprises around the corner or a complete market meltdown, it’s hard to imagine that it could be classified as being a value trap at this new lower price. Down 4% in the past week and 10% YTD, if the market is heading lower, GE will have been ahead of the curve. While it’s option premium doesn’t reflect much in the way of volatility it does represent a reasonable means to surpass the performance of a flat market.

While retail has been a place that money has gone to die of late, you get a feeling that things may be reversing, at least in the minds of analysts when even Coach (COH), a literal punching leather bag for all, receives an upgrade. While my shares of Coach were assigned this week, as were my shares of Kohls (KSS), I’m ready to repurchase both in their current range, as the long fall down deserves at least a short climb higher.

Coach has shown itself to be able to faithfully defend the $46 level despite so many assaults over the past two years. That ability to consistently bounce back has made it a great covered option position, whether through outright purchase or the sale of puts.

Kohls represents exactly what I like in my stocks. That is a non-descript existence and just happily going along its way without making too much fuss, other than an occasional earnings related outburst. Dependable is far more important than being flashy and as a stock and as a company, Kohls hugs that middle lane reliably, but still provides a competitive premium thanks to those occasional outbursts.

If the thesis that retail is ready for a comeback has more of a basis than just as reflected in share price, but also reflects pent up spending from a harsh winter, MasterCard (MA) is a prime beneficiary. While already somewhat protected from the ravages of weather by virtue of being able to spend your money with just a simple mouse click, there are just some things that need to be done in the real world. Trading well below its pre-split price until recently I had not owned shares in years. Now more readily purchased in scale, I look forward to the opportunity to purchase and re-purchase these shares with some degree of regularity, WHile its dividend is paltry, there is certainly room for growth to rise to the levels of Visa (V) and Discover Financial Services (DFS). However, notwithstanding any potential bump in share price along with a dividend hike, the option premiums can make the wait worthwhile.

In a week of no industry specific news, following a flurry of changes in industry dynamics initiated by T-Mobile (TMUS), Verizon (VZ) fell 3% bringing it down to a level from which it has found significant strength. While General Electric may face some potential liability with events in Crimea or a deteriorating economy in China, I don’t see quite the same liability for Verizon. Instead, whatever burdens it has to carry will come from an increasingly competitive landscape as it and AT&T (T) are continually pushed by T-Mobile and perhaps Sprint (S). In the meantime, while trading in a range and finding support at $46, there’s always the additional lure of a 4.5% dividend.

While Verizon isn’t terribly exciting it meets its match in Intel (INTC). However, the excitement that comes from growth isn’t absolutely necessary to generate predictable profits. Intel is especially well suited when it’s share price is very close to a strike level. If volatility continues to rise the opportunity to purchase Intel expands as the price range at which it may be purchased increases, while still offering an attractive option premium which can be further enhanced by an attractive dividend.

While it was only a matter of time until retail would begin to dig its way out from under the piles of snow, no sector has brutalized me more this past year than the one that requires digging. Freeport McMoRan (FCX) is among that group that hasn’t been terribly kind to me, despite my belief that it would be the “stock of the year” for 2013.

With copper itself being brutalized this past week, despite gold’s relative strength, Freeport McMoRan has itself had the weight of the market’s response to the less than robust Chinese economy to shoulder. But the one thing that you can always count on is that data from China can easily correct reality and that explains the seemingly recurrent see-saw ride that we have been on in those sectors that are tied to their data. The true plunge in copper prices, if sustained, will not be good news for Freeport McMoRan, whose generous dividend payout could conceivably be jeopardized.

On the other hand, shares are now at a level that has repeatedly created substantial returns for those willing to test the waters.

Finally, not many companies, especially those with a newly appointed CEO had as bad a week as General Motors. You might think that having paid its first dividend in years this past Friday there would be reasons to rejoice, but finding yourself at the top of the headlines related to customer deaths isn’t an enviable place, nor one conducive to a thriving share price. When the Attorney General of any state piles on that doesn’t help.

However, with a chorus of those clamoring for General Motors to re-test the $30 level purely on a technical basis there may be reason enough to believe that won’t be the case. Having timed a purchase of shares as inopportunely as possible, I’d like nothing more than to see that position restored to some respect.

As with the recent news that the FTC will be investigating allegations that Herbalife was engaged in a Ponzi scheme, the bad news for General Motors, while coming as an acute event, will take a long while to play out, regardless of the merits of the cases or the human tragedies caught up in what is now a story of fines, punishment andperhaps even acquittal.

Traditional Stocks: Coach, General Electric, General Motors, Intel, Kohls, MasterCard, Verizon

Momentum Stocks: Freeport McMoRan

Double Dip Dividend: Best Buy (ex-div 3/18), Las Vegas Sands (ex-div 3/18)

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.

Feb222014

Profiting From Good Fortune Or Bad

Articles

While most of the more meaningful companies in the S&P 500 have already reported earnings and new earnings season is barely 7 weeks away, there’s still time to profit from remaining earnings reports coming this week.

Whether a company’s shares respond to earnings by going lower or higher there is often opportunity to profit from either the good or the bad fortunes that they may endure as a result of their past performance and outlook for future fortunes.

As always, whenever I consider whether an earnings related trade is worth consideration I let the option market’s measure of “implied volatility” serve as a threshold in determining whether there is a satisfactory risk-reward proposition. That simple calculation provides an upper and lower price range in which any anticipated price movements will be contained.

Occasionally, for those selling options, whether as part of a covered call strategy or simply through the sale of puts, there may be an opportunity to achieve an acceptable premium even though it represents a share price that is outside of those bounds set by the option market.

This week there appear to be a number of stocks preparing to release their quarterly earnings that may warrant some attention as the reward may be well suited to the risk for some.

A number of the companies that I’ve highlighted are volatile in their own rights, but even more so when event driven, such as before earnings. While the implied volatilities may sometimes appear to be high, they are frequently borne out by past history and it would be injudicious to simply believe that such implied moves are outside the realm of probability.

While individuals can certainly set their own risk-reward parameters, I tend to look at a weekly 1% ROI as meeting my threshold on the reward side of the equation. I measure the degree of risk as whether I need to look above or below the implied volatility to achieve that desired return for what is anticipated to be a week’s investment.

Satisfactory risk exists when the strike price necessary to achieve the ROI is outside of the range predicted by the option market.

The coming week is replete with earnings reports and presents more companies than I usually find that satisfy the above criteria and are in companies that I usually already follow. Among the companies that I am considering this coming week are Abercrombie and Fitch (ANF), Best Buy (BBY), Deckers (DECK), JC Penney (JCP), Macys (M), salesforce.com (CRM), SolarCity (SCTY), Soda Stream (SODA) and T-Mobile (TMUS).

Since the basis of these trades is purely upon what may be considered an inefficiency between the option premiums and the implied volatility, I give no consideration to fundamental nor technical issues. However, my preference, when selling put contracts is to do so when shares have already been falling in price in advance of earnings. As the current week came to its end that included JC Penney, SolarCity, Deckers and Best Buy, although the coming week may define other possibilities.

For those not having sold put contracts in the past, one caveat when considering such trades, is that the investor must be prepared to own the shares if assigned or to manage the options contract, such as rolling it forward, if assignment appears inevitable.

 The table may be used as a guide for determining which of these selected companies meet the risk-reward parameters that an individual sets, understanding that re-assessments need to be made as prices and, therefore, strike prices and their premiums may change.

While the list can be used on a prospective basis in anticipation of an earnings related move there may also be occasion to consider the sale of puts following earnings in those cases where shares have reacted in a decidedly negative fashion to earnings or to guidance.

While some believe in hitting someone when they’re already down, there can be much more satisfaction gained in giving them support in their effort to rise again. Inherently the sale of a put is a statement of bullish sentiment and there may be opportunity to make that expression a profitable one as the response of many when knocked down is to get back up again.

Whether prospective or reactive, there is always opportunity when big movements are anticipated, but not fully realized.

And if they are realized? Think of it as simply more opportunity for opportunity.

Nov172013

Weekend Update – November 17, 2013

Weekend Update

Things aren’t always as they seem.

As I listened to Janet Yellen face her Senate inquisitors as the hearing process began for her nomination as our next Federal Reserve Chairman, the inquisitors themselves were reserved. In fact they were completely unrecognizable as they demonstrated behavior that could be described as courteous, demur and respectful. They didn’t act like the partisan megalomaniacs they usually are when the cameras are rolling and sound bites are beckoning.

That can’t last. Genteel or not, we all know that the reality is very different. At some point the true colors bleed through and reality has to take precedence.

Closing my eyes I thought it was Woody Allen’s sister answering softball economic questions. Opening my eyes I thought I was having a flashback to a curiously popular situational comedy from the 1990s, “Suddenly Susan,” co-starring a Janet Yellen look-alike, known as “Nana.” No one could possibly sling arrows at Nana.

These days we seem to go back and forth between trying to decide whether good news is bad news and bad news is good news. Little seems to be interpreted in a consistent fashion or as it really is and as a result reactions aren’t very predictable.

Without much in the way of meaningful news during the course of the week it was easy to draw a conclusion that the genteel hearings and their content was associated with the market’s move to the upside. In this case the news was that the economy wasn’t yet ready to stand on its own without Treasury infusions and that was good for the markets. Bad news, or what would normally be considered bad news was still being considered as good news until some arbitrary point that it is decided that things should return to being as they really seem, or perhaps the other way around..

While there’s no reason to believe that Janet Yellen will do anything other than to follow the accommodative actions of the Federal Reserve led by Ben Bernanke, political appointments and nominations have a long history of holding surprises and didn’t always result in the kind of comfortable predictability envisioned. As it would turn out even Woody Allen wasn’t always what he had seemed to be.

Certainly investing is like that and very little can be taken for granted. With two days left to go until the end of the just ended monthly option cycle and having a very large number of positions poised for assignment or rollover, I had learned the hard way in recent months that you can’t count on anything. In those recent cases it was the release of FOMC minutes two days before monthly expiration that precipitated market slides that snatched assignments away. Everything seemed to be just fine and then it wasn’t suddenly so.

As the markets continue to make new closing highs there is division over whether what we are seeing is real or can be sustained. I’m tired of having been wrong for so long and wonder where I would be had I not grown cash reserves over the past 6 months in the belief that the rising market wasn’t what it really seemed to be.

What gives me comfort is knowing that I would rather be wondering that than wondering why I didn’t have cash in hand to grab the goodies when reality finally came along.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

Sometimes the most appealing purchases are the very stocks that you already own or recently owned. Since I almost exclusively employ a covered option strategy I see lots of rotation of stocks in and out of my portfolio. That’s especially true at the end of a monthly option cycle, particularly if ending in a flourish of rising prices, as was the case this week.

Among shares assigned this past week were Dow Chemical (DOW), International Paper (IP), eBay (EBAY) and Seagate Technology (STX).

eBay just continues to be a model of price mediocrity. It seems stuck in a range but seems to hold out enough of a promise of breaking out of that range that its option premiums continue to be healthy. At a time when good premiums are increasingly difficult to attain because of historically low volatility, eBay has consistently been able to deliver a 1% ROI for its near the money weekly options. I don’t mind wallowing in its mediocrity, I just wonder why Carl Icahn hasn’t placed this one on his radar screen.

International Paper is well down from its recent highs and I’ve now owned and lost it to assignment three times in the past month. While that may seem an inefficient way to own a stock, it has also been a good example of how the sum of the parts can be greater than the whole when tallying the profits that can arise from punctuated ownership versus buy and hold. Having comfortably under-performed the broad market in 2013 it doesn’t appear to have froth built into its current price

Although Dow Chemical is getting near the high end of the range that I would like to own shares it continues to solidify its base at these levels. What gives me some comfort in considering adding shares at this level is that Dow Chemical has still under-performed the S&P 500 YTD and may be more likely to withstand any market downturn, especially when buoyed by dividends, option premiums and some patience, if required.

Unitedhealth Group (UNH) is in a good position as it’s on both sides of the health care equation. Besides being the single largest health care carrier in the United States, its purchase of Quality Software Services last year now sees the company charged with the responsibility of overhauling and repairing the beleaguered Affordable Care Act’s web site. That’s convenient, because it was also chosen to help set up the web site. It too, is below its recent highs and has been slowly working its way back to that level. Any good news regarding ACA, either programmatically or related to the enrollment process, should translate into good news for Unitedhealth

Seagate Technology simply goes up and down. That’s a perfect recipe for a successful covered option holding. It’s moves, in both directions, can however, be disconcerting and is best suited for the speculative portion of a portfolio. While not too far below its high thanks to a 2% drop on Friday, it does have reasonable support levels and the more conservative approach may be through the sale of out of the money put options.

While I always feel a little glow whenever I’m able to repurchase shares after assignment at a lower price, sometimes it can feel right even at a higher price. That’s the case with Microsoft (MSFT). Unlike many late to the party who had for years disparaged Microsoft, I enjoyed it trading with the same mediocrity as eBay. But even better than eBay, Microsoft offered an increasingly attractive dividend. Shares go ex-dividend this week and I’d like to consider adding shares after a moth’s absence and having missed some of the run higher. With all of the talk of Alan Mullally taking over the reins, there is bound to be some let down in price when the news is finally announced, but I think the near term price future for shares is relatively secure and I look forward to having Microsoft serve as a portfolio annuity drawing on its dividends and option premiums.

I’m always a little reluctant to recommend a possible trade in Cliffs Natural Resources (CLF). Actually, not always, only since the trades that still have me sitting on much more expensive shares purchased just prior to the dividend cut. Although in the interim I’ve made trades to offset those paper losses, thanks to attractive option premiums reflecting the risk, I believe that the recent sustained increase in this sector is for real and will continue. Despite that, I still wavered about considering the trade again this week, but the dividend pushed me over. Although a fraction of what it had been earlier in the year it still has some allure and increasing iron ore prices may be just the boost needed for a dividend boost which would likely result in a significant rise in shares. I’m not counting on it quite yet, but think that may be a possibility in time for the February 2014 dividend.

While earnings season is winding down there are some potentially interesting trades to consider for those with a little bit of a daring aspect to their investing.

Not too long ago Best Buy (BBY) was derided as simply being Amazon’s (AMZN) showroom and was cited as heralding the death of “brick and mortar.” But, things really aren’t always as they seem, as Best Buy has certainly implemented strategic shifts and has seen its share price surge from its lows under previous management. As with most earnings related trades that I consider undertaking, I’m most likely if earnings are preceded by shares declining in price. Selling puts into price weakness adds to the premium while some of the steam of an earnings related decline may be dissipated by the selling before the actual release.

salesforce.com (CRM) has been a consistent money maker for investors and is at new highs. It is also a company that many like to refer to as a house of cards, yet another way of saying that “things aren’t always as they seem.” As earnings are announced this week there is certainly plenty of room for a fall, even in the face of good news. With a nearly 9% implied volatility, a 1.1% ROI can be attained if less than a 10% price drop occurs, based on Friday’s closing prices through the sale of out of the money put contracts.

Then of course, there’s JC Penney (JCP). What can possibly be added to its story, other than the intrigue that accompanies it relating to the smart money names having taken large positions of late. While the presence of “smart money” isn’t a guarantee of success, it does get people’s attention and JC Penney shares have fared well in the past week in advance of earnings. The real caveat is that the presence of smart money may not be what it seems. With an implied move of 11% the sale of put options has the potential to deliver an ROI of 1.3% even if shares fall nearly 17%.

Finally, even as a one time New York City resident, I don’t fully understand the relationship between its residents and the family that controls Cablevision (CVC), never having used their services. As an occasional share holder, however, I do understand the nature of the feelings that many shareholders have against the Dolan family and the feelings that the publicly traded company has served as a personal fiefdom and that share holders have often been thrown onto the moat in an opportunity to suck assets out for personal gain.

I may be understating some of those feelings, but I harbor none of those, personally. In fact, I learned long ago, thanks to the predominantly short term ownership afforded through the use of covered options, that it should never be personal. It should be about making profits. Cablevision goes ex-dividend this week and is well off of its recent highs. Dividends, option premiums and some upside potential are enough to make even the most hardened of investors get over any personal grudges.

Traditional Stocks: Dow Chemical, eBay, International Paper, Unitedhealth Group

Momentum Stocks: Seagate Technology

Double Dip Dividend: Cablevision (ex-div 11/20), Cliffs Natural (ex-div 11/20), Microsoft (ex-div 11/19)

Premiums Enhanced by Earnings: Best Buy (11/19 AM), salesforce.com (11/18 PM), JC Penney (11/20 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.