Weekend Update – December 18, 2016

 

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

Traditional Stocks: none

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

Double-Dip Dividend:  none

Premiums Enhanced by Earnings: none

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

 
 
 
 
 
 

Weekend Update – December 11, 2016

There are so many ways to look at most things.

Take a runaway train, for example.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Momentum takes them even higher.

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

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

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

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

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

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

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

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

Guess who will take the credit?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That sounds like an endorsement to me.

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

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

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

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

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

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

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

Almost like a runaway train.

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

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

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

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

 

Traditional Stocks: Gap, Inc.

Momentum Stocks: Cliffs Natural Resources

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

Premiums Enhanced by Earnings: none

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

Weekend Update – March 6, 2016

Depending upon what kind of outlook you have in life, the word “limbo” can conjure up two very different pictures.

For some it can represent a theologically defined place of temporary internment for those sinners for whom redemption was still possible. 

In simple terms it may be thought of as a place between the punishing heat and torment of hell below and the divineness and comfort of heaven above.

Others may just see an image reminding them of a fun filled Caribbean night watching a limber individual dancing underneath and maybe dangerously close to a flaming bar that just keeps getting set lower and lower.

Both definitions of “limbo” require some significant balancing to get it just right.

For example, you don’t get entrance into the theologically defined “Limbo” if the preponderance of your sins are so grievous that you can’t find yourself having died in “the friendship of God.” Instead of hanging around and waiting for redemption, you get a one way ticket straight to the bottom floor.

It may take a certain balance of the quantity and quality of both the good and the bad acts that one has committed during their mortal period to determine whether they can ever have a chance to move forward and upward to approach the pearly gates of heaven.

If you’ve ever watched a limbo dancer, you know that it’s more than just the ability to flex a spinal cord. There’s also the balance that has to be maintained while somehow still moving forward and downward.

One limbo makes you strive to move you to a higher plane and the other strives to make you move to a lower plane.

Why they’re called the same thing confuses me.

After this week’s surprisingly high Employment Situation Report that was coupled with an unexpected lower average wage, the data that the FOMC finds itself analyzing seems itself to be getting more and more confusing to mere mortals.

At the same time more and more people are craving for some pronouncement of clarity.

Along with that confusion comes a need for the FOMC to balance the relative importance and meanings of the individual bits of data coming in and trying to understand what it all means going forward, if you accept that their decisions are data driven.

And, of course, there can’t be a reason to suspect that the decisions made will be anything but data driven. It’s just that there’s no data that assesses the interpretation of those economic data points and to explain why there may be widely differing opinions among the FOMC’s highly capable analysts.

Of course, there will be no shortage of critics ready to excoriate the decision makers for whatever decision they reach. However, if the FOMC members ever feel the heat they certainly do a good job of hiding that fact.

For now, markets continue to follow oil, including during its intra-day reversals and as long as oil continues to move higher, that’s a good thing.

With a nearly 10% increase this past week in oil, stocks had another great week, especially if you were holding any number of a long beleaguered series of stocks.

But as the week is set to begin, with very little of economic news scheduled and no fundamental change in anything, we’re left in limbo as we await the FOMC’s decision the following week.

Whether to continue the 3 week rally or to take profits is going to be anyone’s guess, but there’s no doubt that oil will some day be redeemed.

Not as certain is whether the stock market will come to realize that it is the reason behind prevailing oil prices and not the prices themselves that should determine whether the stock market is worthy of redemption, as well.

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

Unlike Chesapeake Energy (CHK) and Cliffs Natural Resources (CLF), many of the week’s extraordinarily performing stocks didn’t take the death of a founder or hedge fund activist to propel them forward, although it did seem as if the market placed a high multiple on death.

Having long suffered through the ownership of far too many commodity related stocks I was happy to see death and non-death related companies move higher, but still have no reason to believe that they are anywhere but remaining in limbo, with their own redemptions still being but a dream.

General Motors (GM) emerged from limbo during the throes of the financial crisis and under new leadership has weathered some difficult issues that could have been far more ruinous in an earlier time.

Like so many stocks over the past few weeks its shares have shown recovery and I believe that there is more ahead being propelled by fundamental factors. With shares being ex-dividend this week it looks like a good time to consider adding shares and selling either a weekly near the money contract or considering adding an additional week if the strike price is in the money.

In the latter case, using the slightly longer term contract would offset the loss of the dividend in the event shares are assigned early.

In a perfect example of how the herd is wrong, while we were all awaiting a rise in interest rates since the FOMC raised rates more than 3 months ago, all of those recommendations based on a rising interest rate environment were ill advised.

You know that if you owned shares of most anything in the financial sector.

I know that I know that to be the case, but I think we now may be in store for some sustained interest rate increases in the 10 Year Treasury and should see more strength being reflected in the financial sector.

One of my favorites in the event that those rates do finally resist making everyone look foolish again is MetLife (MET).

Even after having made up some lost ground over the past 3 weeks it still has more upside following a gap lower after its most recent earnings report.

While it has an admirable dividend as well, it tends to be associated with its earnings report date, which is still 2 months away. I would consider a purchase of shares and the sale of short term call contracts, further considering rolling over those contracts if assignment is likely at a price near the strike level.

It wasn’t so long ago that Seagate Technology (STX) may as well have given up. When storage was being talked about as being a commodity, most had written it off as irrelevant for anyone’s portfolio.

When a product becomes a mere commodity the conventional wisdom is that the stock becomes dead money, but it has been hard to characterize Seagate Technology as having anything but life.

Sometimes that existence has been fairly erratic as it is prone to sharp moves higher and lower, often both in narrow time frames.

That gives options an attractive premium, reflecting the enhanced volatility.

Seagate Technology is a stock that I prefer to consider through the sale of out of the money puts and am often happy rolling those puts over in an attempt to avoid being assigned shares.

With its ex-dividend date is still 2 months away, I wouldn’t mind the opportunity to do so on a serial basis and accumulating those premiums in the process. If still faced with assignment in the week leading up to that ex-dividend date I would take assignment in an effort to then grab the dividend.

The caveat is that Seagate Technology’s dividend is unsustainably high. Seagate, during its existence as a publicly traded company did briefly reduce and then suspend its dividend for nearly 2 years, beginning at the depth of the market’s 2009 meltdown. but has been consistently raising it since the resumption.

It may be time for either a respite or some killer earnings. If selling puts I would prefer the latter.

I also like the idea of selling puts into price weakness. In the event that Dow Chemical (DOW) shows some weakness as the week gets ready to begin, I may consider the sale of put options.

What may put some pressure on Dow Chemical is the news that broke after the closing bell on Friday that DuPont (DD), well along the way toward its complex merger with Dow Chemical, may have another suitor with very, very deep pockets.

That suitor is reported to be BASF SE (BASFY) the Germany based chemical company, who may have to dig extra deep due to the Euro insisting that it make its way toward parity with the US Dollar.

For its part, Dow Chemical may be forced to dig deeper to complete the deal, but the after hours trading actually saw some increase in Dow Chemical’s share price, as well, perhaps reflecting the perceived value of the Dow Chemical and DuPont merger, which may be too afar along to be disrupted by something other than regulators.

Finally, while commodities led the week higher, the advance was broad. However, in the “No Stock Left Behind” march higher during the late half of February and beginning of March are some pharmaceutical names.

Pfizer (PFE), while not the poorest of a cohort of under-performers over the past 3 weeks while the market has been working hard to erase 2016’s losses, was at the bottom of the heap this past week.

While it still has a big unresolved issue ahead of it with regard to its strategy to escape significant US tax liability by merging with Ireland based Allergan (AGN), it has long ceded the premium that investors had given it when the news of the proposal first broke.

While there is no assurance that Pfizer and Allergan will receive regulatory approval, while the proposal itself is in limbo, there continues to be opportunity to utilize Pfizer as a vehicle to generate option premiums.

With its healthy dividend, a long sojourn in limbo could be propitious for option writers, particularly if there is little downside risk associated with the merger being blocked.

 
Traditional Stocks: Dow Chemical, MetLife, Pfizer

Momentum Stocks: Seagate Technology

Double-Dip Dividend: General Motors (3/9 $0.38)

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.

 

Taking a Gamble with Earnings

The coming week stands to be a busy one as about 150 of the S&P 500 stocks will be reporting their quarterly earnings.

While earnings had gotten off to a good start last week with a strong showing from those in the financial sector, the market’s initial optimism was tempered a bit during the first day Janet Yellen’s Humphrey-Hawkins testimony and was sent into a pall with news of the tragic downing of a Malaysian civilian plan over the disputed Ukraine – Russian border area.

Regardless of the direction a stock’s price takes upon the earnings parade that also includes forward guidance there is often opportunity to profit from either the expected or unexpected news that’s delivered.

Whenever I ponder whether an earnings related trade is worth consideration I let the option market’s measure of the “implied price move” serve to determine whether there is a satisfactory risk-reward proposition. That calculation provides a price range in which projected price movements are thought to be likely.

If selling options, whether as part of a covered call strategy or through the sale of puts, there may be opportunity to achieve an acceptable premium even though if it represents a share price outside of the bounds set by the option market. Of course, that does depend to some degree on your own definition of “acceptable” and what you believe to be the appropriate level of risk to accompany that reward.

This coming week there appears to be a number of stocks that may warrant some attention as the reward may be well suited to the risk for some, as premiums tend to be heightened before known events, such as earnings.

A unifying theme for stocks that satisfy my criteria of offering a 1% or greater premium for a weekly option at a strike price outside of the boundary defined by the implied move calculation is underlying volatility. While already heightened due to impending earnings release and the uncertainty that accompanies the event, stocks that typically satisfy the criteria I’ve selected are already quite volatile.

While the implied volatilities may sometimes appear to be high, they are often consistent with past history and such moves are certainly within the realm of probability. That knowledge should serve as a warning that the unthinkable can, and does, happen.

While individuals can set their own risk-reward parameters, I’m very satisfied with a weekly 1% ROI.  The other part of the equation, the risk, is less quantitative. It is merely a question of whether the necessary strike level to achieve the reward is above or below the lower boundary defined by the stock’s implied move. 

I prefer to be below that lower boundary.

Among the companies that I am considering this coming week are Apple (AAPL), Cliffs Natural Resources (CLF), Comcast (CMCSA), Chipotle Mexican Grill (CMG), Facebook (FB), Freeport McMoRan (FCX), Intuitive Surgical (ISRG), Microsoft (MSFT), Pandora (P) and VMWare (VMW).

The basis for making any of these trades is entirely predicated upon what may be an inefficiency between the option premiums and the implied price movement. I give no consideration to fundamental nor technical issues and would prefer not to be in a position to take ownership of shares in the event of an adverse price move.

My preference when selling put contracts is to do so when shares have already been falling in price in advance of earnings. Given the flourish with which this past week ended that is a bit more difficult, as a number of the shares listed had sizable gains in the session, recovering from the previous day’s drops.

While I would prefer not to take ownership of shares, the investor must be prepared to do so or to attempt to manage the options contract, such as rolling it forward, if assignment appears inevitable.

During periods of low volatility it may sometimes be difficult to do so and achieve a meaningful additional premium without going out further in time than you may have envisioned, however.

The table above may be used as a guide for determining which of these selected companies meets risk-reward parameters. Re-assessments need to be made as prices and, therefore, strike prices and their premiums may change. Additionally, the target ROI may warrant being changed as time erodes. For example, if the trade is executed with only 4 days of time remaining on the contract the 1% ROI may find its equivalent in a 0.8% return.

While the list can be used prospectively there may also be occasion to consider put sales following earnings in those cases where shares have reacted in an extremely negative fashion to earnings or to guidance. If you believe the response was an over-reaction to the news there may then be opportunity to sell put options to take advantage of the negative sentiment that may be reflected in option premiums.

In such a case the sale of a put is a bullish sentiment and there may be opportunity to make that expression a profitable one as the over-reaction faces its own correction. My recent observation, however, is that it seems to be taking longer and longer to see some stocks mount meaningful recoveries after earnings disappointments, which I interpret as a bearish indicator for the market as a whole, as risk aversion is a priority.

Recently, I’ve spent some considerable time in managing some positions that had greater than anticipated price moves, including taking assignment and then managing the  position through the sale of call options.

Ultimately, regardless of the timing of an earnings related trade there is always opportunity when large price movements are anticipated, especially if those worst and best case scenarios aren’t realized.

Best of all, if the extreme scenarios are realized a nimble trader may have opportunity to create even more opportunities and allow the position to accumulate returns while doing so.

 

Rolling the Dice with Earnings

With earnings season ready to begin its second full week there are again some opportunities to identify stocks whose earnings may represent risk that is over-estimated by the options market, yet may still offer attractive premiums outside of the presumed risk area.

While in a perfect world good earnings would see increased share prices and bad earnings would result in price drops, the actual responses may be very unpredictable and as a result earnings reports are often periods of great consternation and frustration.

For the buy and hold investor, while earnings may send shares higher, this is also a time when paper profits may vanish and the cycle of share appreciation has to begin anew. Other than supplementing existing positions with strategic option positions, such as the purchase of out of the money puts, the investor must sit and await the fate of existing shares.

Occasionally, a covered option strategy, either through the sale of puts or buy/write transactions, may offer opportunity to achieve an acceptable return on investment while limiting the apparent risk of exposure to the large moves that may accompany good, bad or downright ugly news. Although a roll of the dice has definable probabilities, when it comes to stocks sometimes you want something that seems less predicated on chance and less on human emotion or herd mentality.

As always, whenever I consider whether an earnings related trade is worth pursuing I let the “implied volatility” serve as a guide in determining whether there is a satisfactory risk-reward proposition to consider action. That simple calculation provides an upper and lower price range in which price movement is anticipated and can then be compared to corresponding premiums collected for assuming risk. It is, to a degree based on herd mentality in the option market and has varying degrees of emotion already built into values. The greater the emotion, as expressed by the relative size of the premiums for strike levels outside of the range defined by the implied volatility the more interested I am in considering a position.

My preference in addressing earnings related trades is to do so through the sale of put contracts, always utilizing the weekly contract and a strike price that is below the lower range defined by the implied volatility calculation. Since I’m very satisfied with a weekly 1% ROI, I then look to find the strike level that corresponds to at least a 1% return.

While individuals can and should set their own risk-reward parameters, a weekly 1% ROI seems to be one that finds a good balance between risk and reward, as long as the associated strike level is also outside of the implied volatility range. If the strike level is within the range I don’t assess it as meeting my criteria. I sometimes may be less stringent, accepting a strike level slightly inside the lower boundary of the range if shares have already had some decline in the immediate days preceding earnings. Conversely, if shares have moved higher in advance of earnings I’m either less likely to execute the trade or much more stringent in strike level selection or expecting an ROI in excess of 1%.

While conventional wisdom is to not sell puts on positions that you wouldn’t mind owning at a specified price, I very often do not want to own the shares of the companies that I am considering. For the period of the trade, I remain completely agnostic to everything about the company other than its price and the ability to sell contracts and if necessary, purchase and then re-sell contracts repeatedly, until the position may be closed.

However, for those having limited or no experience with the sale of put contracts, you should assume a likelihood of being assigned shares and the potential downside of having a price drop well in excess of your projections. For that reason you may want to re-consider the agnostic part and be at peace with the potential of owning shares at your strike price and helping to reduce the burden through the sale of calls, where possible.

Since my further preference is to not be assigned shares, I favor those positions that have expanded weekly options available, so that there is opportunity to roll contracts over in the event that assignment appears likely using a time frame that offers a balance between return and brevity.

This week there are a number of stocks that will release quarterly earnings that may warrant consideration as the reward may be well suited to the risk taken for those with a little bit of adventurousness.

A number of the companies highlighted are volatile on a daily basis, but more so when event driven, such as with the report of earnings. While implied volatilities may occasionally 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. Stocks can and do move 10, 15 or 20% on news.

The coming week presents companies that I usually already follow. Among them are Amazon (AMZN), Cliffs Natural Resources (CLF), Cree (CREE), Deckers (DECK), Facebook (FB), Gilead (GILD), Microsoft (MSFT) and Netflix (NFLX).

The table above may be used as a guide for determining which of these stocks meets personal risk-reward parameters, understanding that re-calculations must be made as share prices, their associated premiums and subsequently even strike level targets may change.

While I most often use the list of stocks on a prospective basis in anticipation of an earnings related move, sometimes the sale of puts following earnings is a favorable trade, especially in instances in which shares have reacted in a decidedly negative fashion to earnings or to guidance.

Regardless of the timing of the sale of puts, before or after earnings are released, being more pessimistic regarding the potential for price drops may be an enticing trade for the generation of income.

Weekend Update – November 17, 2013

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.

Weekend Update – October 20, 2013

With the S&P 500 having reached an all time high this past week you could certainly draw the conclusion that a government shutdown is a good thing and flirting with default is a constructive strategy. At a reported cost of only $24 Billion associated with closure and nothing more than a symbolic “Fitch slap” credit watch issued, perhaps we should look forward to the next potential round in just a few months.

For me, this past week marked the slowest week of opening new positions that I can recall since the 2009 market bottom. Although history suggests that the eleventh hour is a charm, the zeal of some more newly elected officials was reminiscent of a theological premise that believes in order to save it you must first destroy the world. That kind of uncertainty is the kind in which you get your affairs in order rather than embarking on lots of new and exciting initiatives.

With manufactured uncertainty temporarily removed the market can focus on earnings and other things that most of us believe are somewhat important.

One thing that will be certain is that wherever possible the next earnings season will attempt to lay some blame for any disappointments upon the government shutdown. This past week it certainly didn’t take Stanley Black and Decker (SWK) and eBay (EBAY) very long to already take advantage of that excuse. Who knew that government purchasing agents were unable to use eBay for Blackhawk helicopter replacement parts during their unexpected furlough?

As with the previous earnings season the financial sector started off the reports in a promising way, although early in the season the results are mixed, with some significant surges and plunges. What is clear is that investors are paying particular attention to guidance.

One earnings report that caught my attention was from Pet Smart (PETM). My father always believed that no matter what the economic environment, people would always find the wherewithal to spend on the pets and their kids. Pet Smart’s disappointing earnings focused on a “challenged consumer” and lower customer traffic. That can’t be a good sign. If pets are going wanting what does that portend for the rest of us?

Yet, on the other hand, Align Technology (ALGN) discussed last week, was a different story. Certainly representing discretionary spending and not benefiting from any provisions in the Affordable Care Act, their orthodontic appliances see no barriers from the economy ahead, as they reported great earnings and guidance.

Also clouding the picture, perhaps both literally and figuratively, is the positive guidance provided by Peabody Energy (BTU). For a nation that has been said to “move on coal,” that has to be a signal of something positive going forward.

This week, with lots of cash from assignments of October 2013 option contracts, I’m anxious to get back to business as usual, but still have a bit of wariness. However, despite the appearances of a reluctant consumer, I’m encouraged by recent activity in the speculative portion of my portfoli0, enough so to consider adding to those positions, even at market highs.

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).

The news from Peabody Energy in addition to some recent price stabilization in Walter Energy (WLT), Cliffs Natural Resources (CLF) and Freeport McMoRan (FCX) have me in a hopeful mood after long having suffered with positions in all three.

A year ago at this time I believed that Freeport McMoRan would be among the best performers in 2013, but subsequent to that it has only recently started on its recovery from the price plunge it sustained when announcing plans to acquire Plains Exploration and Production, as it planned to expand its asset base to include oil and natural gas. While the long term vision may be someday vindicated, 2013 has not been a stellar year. But, like some others this week, there has been a steady strengthening in its price, despite significantly lower gold, oil and copper prices, year to date. While its dividend has made holding shares marginally tolerable through the year, I think it is now ready to start a sustained climb and it offers appealing call premiums to create income or provide downside protection. Earnings are reported this week, but the option market is not expecting a very large move.

Another company slowly climbing higher, but still with a great distance to travel is Walter Energy . In addition to suffering through a proxy fight this year and significant challenges to management, declining coal prices and a slashed dividend, I believe that it is also poised to continue climb higher. I recently tested the waters and added shares along with selling in the money calls. Those were just assigned, but I think that I’m ready to dip deeper.

Sticking to the same theme, Cliffs Natural Resources goes hand in hand with Walter Energy, at least in its price behavior and disappointments. It too has slashed its dividend and its CEO has retired. Like Walter Energy, I recently started adding shares and had them assigned this week. Cliffs reports earnings this week and unlike Freeport McMoRan, the option market is expecting a larger price move.

While I rarely do more than glance at charts, in the case of Cliffs Natural Resources the 5 Year price chart may suggest a long term pattern that has shares at the beginning of a sustained climb higher.

As with many positions that are preparing to report earnings, I typically consider potential entry through the sale of put options.

Also reporting earnings this week is Cree (CREE). Thanks to legislation its LED light bulbs have become ubiquitous in home improvement stores and homes. It has the features of companies that make potentially alluring earnings trades. In this case, this always volatile moving company can sustain up to a 14% price decline and still return a 1% ROI for the week. The only real consideration is that it is capable of making that decline a reality, so if selling puts you do have to be prepared to take ownership.

While already having reported earnings and falling into the “disappointing” category, Fastenal (FAST), which I look at as being an economic barometer kind of company has already started regaining its price decline. It will be ex-dividend this week offering an additional reason to consider its purchase, even though I already own lower priced shares and rarely buy additional lots at higher prices. However, with W.W. Grainger (GWW) recently reporting positive earnings I’m encouraged that Fastenal will follow, but in the meantime the dividend and option premium make it easier to wait.

Also going ex-dividend this week is Williams-Sonoma (WSM). I considered its purchase last week, but it fell victim to a week of my inaction. While perhaps at risk to suffer from decreased spending at some higher end stores it has already fallen about 11% from its recent high point. However, since it reports earnings just prior to the expiration of the November 2013 option cycle, I might consider utilizing a December 2013 covered call sale.

The Gap (GPS) isn’t at risk of losing too many high end customers, it has just been losing customers, at least on the basis of its most recent monthly report. It is one of those retailers that still reports monthly comparison figures. That’s just one more bullet that needs to be dodged in addition to potential surprises during earnings season. Shares went precipitously lower with its most recent retail report and caught me along with it. It is near a price support level and represents an opportunity to either purchase additional shares to attempt to offset paper losses of an earlier lot or to establish an initial covered position.

While eBay may not sell used Blackhawk helicopter parts it somehow found a way to link its coming fortunes to the government shutdown. Suffering a significant price drop following earnings and guidance shares were once again in a channel of great familiarity. Having traded reliably in the $50-$52.50 range the sight of it falling was well received. However, late in the trading session on Friday someone else must have seen the same appeal as shares suddenly jumped $1.65 in about 20 minutes. That takes away some of the appeal. What takes away more of the appeal was the explanation by CEO Donahoe that spurred the surge, when he explained that he and his CFO did not mean to sound so dour about holiday prospects, it’s just that they both had colds.

On the other hand UnitedHealth Group (UNH) is a company that may be able to justifiably point its finger at the Federal government when it reports earnings again in January 2014. Already suffering a nearly 10% drop in the past week related to 2014 guidance, UnitedHealth is a major player in the options available on the Affordable Health Care Act exchanges. While perhaps not being able to blame the shutdown for any revenue related woes, disappointing enrollment statistics may be in the making. The additional price drop on Friday, following the large drop on Thursday may be related to enrollment challenges rather than projections of lower Medicare funding in the coming year. However, nearing a price support and following such a large price drop provides a combination that makes ownership appealing. Perhaps eBay employees should consider signing up en masse in the event they are all prone to colds that effect their ability to perform. In enough numbers that may be helpful to UnitedHealth Group’s 2014 revenues.

Of course, while the market seemed to rejoice at what could only be construed as the return to health of the eBay executives, Groupon (GRPN) is another example of a stock whose price has returned to more lofty levels following surgical removal of its CEO. It is one of a handful of stocks that I sold last year taking a capital loss and swore that I would never buy again. Now down about 15% from its recent high, which itself was up approximately 500% from its not too distant low, Groupon is a different company in leadership, product and prospects. While still a risky position

Finally, a name that everyone seems to disparage these days is Coach (COH). While there is certainly sufficient reason to believe that retailers, even the higher end retailers are being challenged, Coach is beginning to be perceived as taking a back seat to retailer Michael Kors (KORS). SHares have certainly been volatile, especially at earnings and Coach reports earnings this week. Having owned shares a number of times in the past year, my preference is to sell puts in advance of earnings in anticipation of a large drop. Currently, the option market is implying nearly a 9% move. A 1% ROI for the week can be obtained through such a sale if the price drop is less than 12%.

Traditional Stocks: eBay, The Gap, United Health Group

Momentum Stocks: Groupon, Walter Energy

Double Dip Dividend: Fastenal (ex-div 10/23), Williams Sonoma (ex-div 10/23)

Premiums Enhanced by Earnings: Coach (10/22 AM), Freeport McMoRan (10/22), Cree (10/22 PM), Cliffs Natural Resources (10/24 PM)

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

Weekend Update – September 15, 2013

Month after month of seeing market gains finally came to an end in August. The streak had started in November 2012 and for those who are prone to remember oddities, we even had a string of 20 consecutive gaining Tuesdays during that span.

Of course we also eclipsed the 2007 Dow Jones and S&P 500 highs and subsequently did so on repeated occasions, all while “Chicken Littles” like me kept waiting for the correction that never came.

The small head fake correction that began near the end of May was barely a blip and was quickly erased as more new highs were established, but the trading patterns of August seemed to indicate that perhaps the rally was getting tired and the market not only began sputtering, but also lost ground as Syrian related tensions were in the air.

Anxious to see a modest correction so that I would finally have something constructive to do with the cash I had been raising, I wasn’t terribly happy with what would come in September, with the first seven trading days having seen gains.

Not only did they make gains, but there were three consecutive triple digit gains. Adding insult to injury was the root cause of those triple digit gains.

While avoiding the use of military force, at least in the near term, is somewhat comforting, the very idea that a Russian proposed plan could avert military action against Syria was about as implausible as anything that occurred in the 20th or 21st centuries, with the possible exception of the Russian President speaking directly to American citizens through an op-ed piece in the New York TImes (NYT).

Russian peace plan? Can those words even possibly all be in a single paragraph?

But with fear centered around uncertainty regarding military action against Syria temporarily tabled, the market ignored August and also ignored the historical nature of Septembers past. By Friday morning, just seconds after the opening bell, all of August’s losses had been recovered.

Somehow, I am neurologically incapable of saying “Thank you, Vladimir.”

Instead, the increasingly nervous part of me wonders what there is that awaits that will continue to send markets higher? Are there unseen catalysts or are there now more opportunities for disappointment, particularly if Russian efforts, inspired by an off the cuff remark by Secretary of State Kerry, prove to be inadequate?

I’ve been asking questions in a similar vein for months now, but the answer has always been in the affirmative, even if the catalysts weren’t always apparent.

Of course, now there’s also the question of the market’s reaction to the expected announcement of the nomination of Lawrence Summers as the next Federal Reserve Chairman. The rumor that such an announcement would come today was denied, but that should come as no surprise, as President Obama had his heart set on doing so by attaching a banner to a Tomahawk missile.

If Syria fails to deliver a market correction and neither fear of the “Taper” nor the nomination of Summers can do so, at least we will have Congress back and fully engaged so that a new round of budget crises can at least allow the market to bounce up and down, which is far more healthy for someone relying on a covered option strategy. If that happens, I can hold my head up high and point to a momentary drop lower and sat “See? That correction.”

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).

I’ve only opened a limited number of new positions in the last few weeks and don’t anticipate seeing that pattern change this week, unless there is a substantive near term correction to last week’s price increases. Those increases, for example, are the reason why I have no Double Dip Dividend selections this coming week, as the risk of experiencing some price pullbacks outweighs the benefits of garnering option premiums and dividends. As it is, instead of the usual number of potential selections, this week’s list contains only 5 names.

Certainly a controversial place to begin looking in the new week is Apple (AAPL). I purchased shares last week following the large drop on Wednesday when disappointment began to settle in for varied reasons. The small recovery that I was expecting never really came, but instead of being disappointed by the inability to quickly close my position, I think that there is simply continued opportunity to pick up additional shares. However, as opposed to the rare instance of having purchased shares and not immediately having sold calls, I do plan to do so this time around if adding shares.

Apple, while not necessarily making significant changes to its product line is making significant changes to the way it conducts its business. From a trade-in program, to less expensive models, to not taking pre-orders on the upcoming iPhone 5S, to dividends and buybacks, they are shaking up their daily approach to existence on all fronts. From my vantage point the short term emphasis is that “cash is king” and that share price matters. I especially like Tim Cook’s philosophy that market share isn’t as important as having enough money to be in control of one’s destiny. The recent product announcements should see to it that the cash keeps pouring in and helps to secure that destiny.

Continuing with the controversial theme is Cliffs Natural Resources (CLF). I had written about the possibility of adding shares recently, but did not do so. Instead, I continued selling calls on a lower priced lot of shares to try and continue to offset substantial paper losses from older lots. That’s a slow process but I think at this current level the process can be speeded up by adding more shares. Highly levered to economic news from China does add to the risk of ownership, but Cliffs has been demonstrating some price stability at this level.

I may as well add to the controversy with Phillip Morris (PM). Whatever your opinions are about ownership of a company that directly results in countless premature deaths, it’s hard to overlook their move to increase the dividend and the reasonably narrow range in which shares trade. Combine those attributes with an appealing option premium and you have a combination that’s hard to resist and doesn’t even require nicotine to keep you hooked.

They say that there’s no such thing as bad publicity, although JP Morgan (JPM) may disagree. However, if you want to see the poster child for resilience you don’t have to look much further than this company. After an avalanche of bad news, having inherited the burden from Goldman Sachs (GS), JP Morgan has somehow been able to keep its share price respectably positioned. This week it announced plans to commit nearly $6 Billion toward legal defenses and compliance. In addition to an option premium that provides some comfort, shares will be ex-dividend during the October 2013 option cycle so I may consider using a longer term option sale and would actually welcome early assignment.

Finally, while earnings season is set to begin again in just a few weeks, Oracle (ORCL) is a laggard and reports this week. With the upcoming report the company will have had six months to make some changes, whether substantive or purely optical, to create a more positively received report. Following two successive negative reports that were not well received by the market, I think that its inconceivable that Larry Ellison would allow his name to be badly tarnished again by anything other than his own words and actions. No doubt that he is unhappy with share performance since that first disappointment.

While I usually like to consider earnings related trades on the basis of selling deep out of the money puts, Oracle may work equally well as an outright purchase and sale of calls. In the event of another price meltdown I would not go out of my way to greet Ellison if you see him in Lanai, although I don’t believe the police department was included with the sale of the island.

Traditional Stocks: JP Morgan Chase, Phillip Morris

Momentum Stocks: Apple, Cliffs Natural Resources

Double Dip Dividend: none

Premiums Enhanced by Earnings: Oracle (9/11 PM)

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

Disclosure: I am long AAPL, CLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate positions, add shares or sell puts in AAPL, CLF, JPM, ORCL and PM

Weekend Update – August 25, 2013

You’re only as good as your earnings. Having stopped making an honest living a little on the early side, I still need to make money, or otherwise my wife would insist that I do something other than watch a moving stock ticker all day.

Since there’s far too much competition on the highway exit near our home and my penmanship has deteriorated due to excessive keyboard use, I’ve come to realize that stock derived earnings, predominantly from the sale of options and accrual of dividends, are the only thing keeping me from joining those less fortunate.

I’m under no delusions. I am only as good as my earnings, just as Bob Greifeld, CEO of NASDAQ (NDAQ) should be under no delusions, as he is only as good as his response to the most recent NASDAQ failing.

On that count, I may have the advantage, although he may have better hygiene and a wardrobe that includes a clean hoodie.

There was a time that we thought of stocks in very much the same earnings centric way. If earnings were good the stock was good. There was a time that we didn’t dwell quite as much on the macro-economic data and we certainly didn’t spend time thinking about Europe or China.

However, after this most recent earnings season, which will come to an end a few days before the next season is kicked off on October 8, 2013, maybe it’s a good thing that it’s only during the otherwise slow summer months when other news is sparse, that we focus on earnings.

If you’ve been paying attention, this hasn’t been a particularly encouraging month, especially as far as retail sales go, which are about as good a reflection of discretionary spending as you can find. Beyond that, listening to guidance can make shivers run down one’s spine as less than rosy earnings pictures are being painted for the future. The very future that our markets are supposed to be discounting.

As it is the S&P 500 is now about 0.3% below the earlier all time high that was hit on May 21, 2013. That in turn gave way to a rapid 5.7% fall and equally rapid 8.6% recovery to new highs. By all historical measures that post-May 21st drop was small as compared to the gains since November 2012 and we are right back to that level.

Perhaps once summer is over and our elected officials return to Washington, DC, not only would they have an opportunity to see me at a highway exit, but they may also get back to doing the things that create the dysfunction that makes earnings less salient.

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

Most of the positions considered this week are themselves lower than they were at the low point following the May 21st peak and have underperformed the S&P 500 since that time. For the moment, as I contribute to cling to the idea that there will be some additional market weakness, my comfort level is increased by focusing on positions that don’t have as much to fall.

I’ve been anxious to buy either Cisco (CSCO) or Oracle (ORCL) ever since Cisco’s disappointing earnings report. During more vibrant markets a drop in the share price of an otherwise good company would stand out as a buying opportunity. However, recently there has been more competition among those companies suffering precipitous earnings related price drops. While striving to keep my cash reserves at sufficient levels to allow me to go on a wild spending spree, I’ve resisted opportunities in CIsco and Oracle. Both, however, are getting more and more appealing as their prices sink further.

Oracle will report its earnings right before the end of the September 2013 option cycle and I have a very hard time believing that it could be three disappointments in a row, especially after some high profile remarks by CEO Larry Ellison regarding leadership at Apple (AAPL) that could come back to haunt him, even if only in terms of comparative share performance.

A technology company that always intrigues me, if at the price point relative to its option contract strikes, is Cypress Semiconductor (CY). It’s products and technology are quietly everywhere. However, its CEO, T.J. Rodgers has become precisely the opposite, as he is increasingly appearing in the media and offering political and policy opinions that make you wonder whether he is getting detached from the business, as perhaps may be said of Ellison. In Cypress Semiconductor’s case I think the business is small and focused enough that it can withstand some diversions. It is one of the few positions that has outperformed the S&P 500 since May 21st.

Among companies reporting earnings this week is salesforce.com (CRM), which also has Larry Ellison connections. the most recent of which is a great example of how business and strategic needs may trump personal feelings. For those who would innocently suffer collateral damage otherwise, that is the way it should be, as two companies seek to have the sum of their parts create additional value. While I do own shares of salesforce.com, I would be inclined to consider the sale of puts as a means to add additional shares and achieve an earnings stream of 1% for the week while awaiting the market’s reaction to earnings. My only hesitancy is that the strike at which that return can be achieved as more close to the strike of the implied move downward than I would ordinarily like.

Having recently lost shares of Eli Lilly (LLY) to early assignment in order to capture its dividend, I’ve wanted to re-purchase shares. Along with Bristol Myers Squibb (BMY) that I have been wanting to add for a while, they both offer attractive option premiums and are both 5% below their May 21st prices, which I believe limits their short term risk, during a period that I prefer to be somewhat defensive. Additionally, Bristol Myers offers extended weekly options that can be used as part of a broader strategy to attempt and stagger option expiration dates and perhaps infusions of cash back into portfolios for new purchases.

Sinclair Broadcasting Group (SBGI) is a local television broadcasting powerhouse that just purchased the important Washington, DC ABC affiliate. But it is far more than a local presence, as it has quietly become the nation’s largest operator of television stations, barely 4 years after fears of bankruptcy. Of course its recent buying spree may put pressures on the bottom line, but for now it is coming off a nearly 8% earnings related price decline and goes ex-dividend this week. Both of those work for me.

JP Morgan (JPM) which is increasingly becoming the poster child for everything wrong with big banks, at least from the point of view of regulators and the Department of Justice, finally showed a little bit of price stability by mid-week. Although I don’t know how any initiatives directed toward JP Morgan will work out, I’m reasonably sure that talk of looking at Jamie Dimon as a potential Treasury Secretary won’t be rekindled anytime soon. At current price levels, however, I think shares warrant another look.

While I’m not a terribly big fan of controversy, I think it may be time to publicly proclaim support for Cliffs Natural Resources (CLF). Having suffered through ownership beginning prior to the dividend cut, it has been an uncomfortable experience, ameliorated a bit by occasional purchase of additional shares and sacrificing them for their option premiums. Beginning with a report approximately 6 weeks ago that China had purchased a massive amount of nickel in the London commodity market, Cliffs has been slowly showing strength that may suggest demand for iron ore is increasing. Held hostage to our perceptions of the health of the Chinese economy, which can vary wildly from day to day, Cliffs’ share price can be equally volatile, but I believe will be rewarding for the strong of stomach.

Finally, Abercrombie and Fitch (ANF) was widely criticized as no longer being “cool.” That suits me just fine, figuratively, but not literally, as I resist wearing anyone’s logo with compensation. However, after joining other teen retailers in receiving earnings related punishment, I sold puts on its shares and happily saw them expire. Long a favorite stock of mine on which to generate option premium income, I think it’s at a price level that may offer some stability even with a demographic customer base that may not offer the same stability. This has been a great company to practice serial covered call writing, as long as you have a parallel strategy during the week of earnings release. In this case, that leaves three months of evaluating opportunities and perhaps even receiving a dividend before the next quarterly challenge.

Traditional Stocks: Bristol Myers Squibb, Cisco, Cypress Semiconductor, Eli Lilly, JP Morgan, Oracle

Momentum Stocks: Cliffs Natural Resources

Double Dip Dividend: Abercrombie and Fitch (ex-div 8/29), Sinclair Broadcasting (ex-div 8/28)

Premiums Enhanced by Earnings: salesforce.com (8/29 PM)

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

 

Weekend Update – August 11, 2013

I like to end each week taking a look at the upcoming week’s economic calendar just to have an idea of what kind of curveballs may come along. It’s a fairly low value added activity as once you know what is in store for the coming week the best you can do is guess about data releases and then further guess about market reactions.

Just like the professionals.

That’s an even less productive endeavor in August and this summer we don’t even have much in the way of extrinsic factors, such as a European banking crisis to keep us occupied in our guessing. In all, there have been very few catalysts and distractions of late, hearkening back to more simple times when basic rules actually ruled.

In the vacuum that is August you might believe that markets would be inclined to respond to good old fundamentals as histrionics takes a vacation. Traditionally, that would mean that earnings take center stage and that the reverse psychology kind of thinking that attempts to interpret good news as bad and bad news as good also takes a break.

Based upon this most recent earnings season it’s hard to say that the market has fully embraced traditional drivers, however. While analysts are mixed in their overall assessment of earnings and their quality, what is clear is that earnings don’t appear to be reflective of an improving economy, despite official economic data that may be suggesting that is our direction.

That, of course, might lead you to believe that discordant earnings would put price pressure on a market that has seemingly been defying gravity.

Other than a brief and shallow three day drop this week and a very quickly corrected drop in May, the market has been incredibly resistant to broadly interpreting earnings related news negatively, although individual stocks may bear the burden of disappointing earnings, especially after steep runs higher.

But who knows, maybe Friday’s sell off, which itself is counter to the typical Friday pattern of late is a return to rational thought processes.

Despite mounting pessimism in the wake of what was being treated as an unprecedented three days lower, the market was able to find catalysts, albeit of questionable veracity, on Thursday.

First, news of better than expected economic growth in China was just the thing to reverse course on the fourth day. For me, whose 2013 thesis was predicated on better than expected Chinese growth resulting from new political leadership’s need to placate an increasingly restive and entitled society, that kind of news was long overdue, but nowhere near enough to erase some punishing declines in the likes of Cliffs Natural Resources (CLF).

That catalyst lasted for all of an hour.

The real surprising catalyst at 11:56 AM was news that JC Penney (JCP) was on the verge of bringing legendary retail maven Allen Questrom back home at the urging of a newly vocal Bill Ackman. The market, which had gone negative and was sinking lower turned around coincident with that news. Bill Ackman helped to raise share price by being Bill Ackman.

Strange catalyst, but it is August, after all. In a world where sharks can fall out of the sky why couldn’t JC Penney exert its influence, especially as we’re told how volatile markets can be in a light volume environment? Of course that bump only lasted about a day as shares went down because Bill Ackman acted like Bill Ackman.The ensuing dysfunction evident on Friday and price reversal in shares was, perhaps coincidentally mirrored in the overall market, as there really was no other news to account for any movement of stature.

With earnings season nearly done and most high profile companies having reported, there’s very little ahead, just more light volume days. As a covered option investor if I could script a market my preference would actually be for precisely the kind of market we have recently been seeing. The lack of commitment in either direction or the meandering around a narrow range is absolutely ideal, especially utilizing short term contracts. That kind of market present throughout 2011 and for a large part of 2012 has largely been missing this year and sorely missed. Beyond that, a drop on Fridays makes bargains potentially available on Mondays when cash from assigned positions is available.

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

For an extended period I’ve been attempting to select new positions that were soon to go ex-dividend as a means to increase income, offset lower option premiums and reduce risk, while waiting for a market decline that has never arrived.

This week, I’m more focused on the two selections that are going ex-dividend this coming week, but may have gotten away after large price rises on Thursday.

Both Cliffs Natural Resources and Microsoft (MSFT) were beneficiaries of Chinese related news. In Cliffs Natural’s case it was simply the perception that better economic news from China would translate into the need for iron ore. In Microsoft’s case is was the introduction of Microsoft Office 365 in China. Unfortunately, both stocks advanced mightily on the news, but any pullback prior to the ex-dividend dates would encourage me to add shares, even in highly volatile Cliffs, with which I have suffered since the dividend was slashed.

A bit more reliable in terms of dividend payments are Walgreens (WAG), Chevron (CVX) and Phillips 66 (PSX).

Although I do like Walgreens, I’ve only owned it infrequently. However, since beginning to offer weekly options I look more frequently to the possibility of adding shares. Despite being near its high, the prospect of a short term trade in a sector that has been middling over the past week, with a return amplified by a dividend payment, is appealing.

Despite being near the limit of the amount of exposure that I would ordinarily want in the Energy Sector, both Chevron and Phillips 66 offer good option premiums and dividends. The recent weakness in big oil makes me gravitate toward one of its members, Chevron, however, if forced to choose between just one to add to my portfolio, I prefer Phillips 66 due to its greater volatility and enhanced premiums. I currently own Phillips 66 shares but have them covered with September call contracts. In the event that I add shares I would likely elect weekly hedge contracts.

If there is some validity to the idea that the Chinese economy still has some life left in it, Joy Global (JOY), which is currently trading near the bottom of its range offers an opportunity to thrive along with the economy. Although the sector has been relatively battered compared to the overall market, option premiums and dividends have helped to close that gap and I believe that the sector is beginning to resemble a compressed spring. On a day when Deere (DE) received a downgrade and Caterpillar was unable to extend its gain from the previous day, Joy Global moved strongly higher on Friday in an otherwise weak market.

Oracle (ORCL) is one of the few remaining to have yet reported its earnings and there will be lots of anticipation and perhaps frayed nerves in advanced for next month’s report, which occurs the day prior to expiration of the September 2013 contract.

You probably don’t need the arrows in the graph above to know when those past two earnings reports occurred. Based Larry Ellison’s reaction and finger pointing the performance issues were unique to Oracle and one could reasonably expect that internal changes have been made and in place long enough to show their mark.

Fastenal (FAST) is just a great reflection of what is really going on in the economy, as it supplies all of those little things that go into big things. Without passing judgment on which direction the economy is heading, Fastenal has recently seemed to established a lower boundary on its trading range after having reported some disappointing earnings and guidance. Trading within a defined range makes it a very good candidate to consider for a covered option strategy

What’s a week without another concern about legal proceedings or an SEC investigation into the antics over at JP Morgan Chase (JPM)? While John Gotti may have been known as the “Teflon Don,” eventually after enough was thrown at him some things began to stick. I don’t know if the same fate will befall Jamie Dimon, but he has certainly had a well challenged Teflon shell. Certainly one never knows to what degree stock price will be adversely impacted, but I look at the most recent challenge as just an opportunity to purchase shares for short term ownership at a lower price than would have been available without any legal overhangs.

Morgan Stanley (MS), while trading near its multi-year high and said to have greater European exposure than other US banks, continues to move forward, periodically successfully testing its price support.

With any price weakness in JP Morgan or Morgan Stanley to open the week I would be inclined to add both, as I’ve been woefully under-invested in the Finance sector recently.

While retailers, especially teen retailers had a rough week last week, Footlocker (FL) has been a steady performer over the past year. A downgrade by Goldman Sachs (GS) on Friday was all the impetus I needed and actually purchased shares on Friday, jumping the gun a bit.

Using the lens of a covered option seller a narrow range can be far more rewarding than the typical swings seen among so many stocks that lead to evaporation of paper gains and too many instances of buying high and selling low. Some pricing pressure was placed on shares as its new CEO was rumored a potential candidate for the CEO at JC Penney. However, as that soap opera heats up, with the board re-affirming its support of their one time CEO and now interim CEO, I suspect that after still being in limbo over poaching Martha Stewart products, JC Penney will not likely further go where it’s unwelcome.

Finally, Mosaic (MOS) had a good week after having plunged the prior week, caught up in the news that the potash cartel was falling apart. Estimates that potash prices may fall by 25% caused an immediate price drop that offered opportunity as basically the fear generated was based on supposition and convenient disregard for existing contracts and the potential for more rationale explorations of self-interest that would best be found by keeping the cartel intact.

The price drop in Mosaic was reminiscent of that seen by McGraw Hill FInancial (MHFI) when it was announced that it was the target of government legal proceedings for its role in the housing crisis through its bond ratings. The drop was precipitous, but the climb back wonderfully steady.

I subsequently had Mosaic shares assigned in the past two weeks, but continue to hold far more expensively priced shares. I believe that the initial reaction was so over-blown that even with this past week’s move higher there is still more ahead, or at least some price stability, making covered options a good way to generate return and in my case help to whittle down paper losses on the older positions while awaiting some return to normalcy.

Traditional Stocks: Fastenal, Footlocker, JP Morgan, Morgan Stanley, Oracle

Momentum Stocks: Joy Global, Mosaic

Double Dip Dividend: Chevron (ex-div 8/15), Phillips 66 (ex-div 8/14), Walgreen (ex-div 8/16)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

 

 

Weekend Update – July 21, 2013

This week may have marked the last time Ben Bernanke sits in front of far less accomplished inquisitors in fulfilling his part of the obligation to provide congressional testimony in accordance with law.

The Senate, which in general is a far more genteel and learned place was absolutely fawning over the Federal Reserve Chairman who is as good at playing close to the vest as anyone, whether its regarding divulging a time table for the feared “tapering” or an indication of whether he will be leaving his position.

If anything should convince Bernanke to sign up for another round it would be to see how long the two-faced good will last and perhaps give himself the opportunity to remind his detractors just how laudatory they had been. But I can easily understand his taking leave and enjoying the ticker tape, or perhaps the “taper tick” parade that is due him.

But in a week when Treasury Secretary Jack Lew and Bernanke had opportunities to move the markets with their appearances, neither said anything of interest, nor anything that could be mis-interpreted.

Instead, at the annual CNBC sponsored “Delivering Alpha Conference” the ability of individuals such as Jim Chanos and Nelson Peltz to move individual shares was evident. What is also evident is that based upon comparative performance thus far in 2013, there aren’t likely to be many ticker tape parades honoring hedge fund managers and certainly no one is going to honor an index.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. There are many potential earnings related trades this week beyond those listed in this article for those interested in that kind of trade. (see details).

A portion of this week’s selections reflect the recently wounded, but certainly not mortally, from recent disappointing earnings. While there may not be any victory tours coming anytime soon for some of them, it’s far too short sighted to not consider the recent bad news as a stepping stone for short term opportunism.

In terms of absolute dollars lost, it’s hard to imagine the destruction of market capitalization and personal wealth at the hands of Microsoft (MSFT), Intel (INTC) and eBay (EBAY). While no one is writing an epitaph for eBay, there are no shortage of obituary writers for Microsoft and Intel. However, although most all businesses will someday go that path, I don’t think that any of that triumvirate are going to do so anytime soon, although Microsoft’s nearly 11% drop on Friday was more than the option market anticipated. It was also more than an innocent cough and may not be good for Steve Ballmer’s health.

Since my timeframe is usually short, although I do currently have shares of Intel that will soon pass their one year anniversary, I don’t think their demise or even significantly more deterioration in share price will be anytime soon. All offer better value and appealing option premiums for the risk of a purchase. Additionally, both Intel and Microsoft have upcoming dividends during the August cycle that simply adds to the short term appeal. My eBay shares were assigned on Friday, but I have been an active buyer in the $50-52.50 range and welcomed its return to that neighborhood.

I currently own some shares of Apple (AAPL) and sold some $450 August 17, 2013 calls in anticipation of its upcoming earnings. While I normally prefer the weekly options, the particular shares had an entry of $445 and haven’t earned their keep yet from cumulative option premiums. The monthly option instead offered greater time protection from adverse price action, while still getting some premium and perhaps a dividend, as well. However, with earnings this week, the more adventurous may consider the sentiment being expressed in the options market that is implying a move of approximately 5% upon earnings. Even after Friday’s 1% drop following some recent strength, I found it a little surprising at how low the put premiums are compared to call options, indicating that perhaps there is some bullish sentiment in anticipation of earnings. I simply take that as a sign of the opposite and would expect further price deterioration.

I’m always looking to buy or add shares of Caterpillar (CAT). I just had some shares assigned in order to capture the dividend. After Chanos‘ skewering of the company and its rapid descent as a direct result, I was cheering for it to go down a bit further so that perhaps shares wouldn’t be assigned early. No such luck, even after such piercing comments as “they are tied to the wrong products, at the wrong time.” I’m not certain, but he may have borrowed that phrase from last year when applied to Hewlett Packard (HPQ). For me, the various theses surrounding dependence on China or the criticisms of leadership have meant very little, as Caterpillar has steadfastly traded in a well defined range and have consistently offered option premiums upon selling calls, as well as often providing an increasingly healthy dividend. To add a bit to the excitement, however, Caterpillar does report earnings this week, so some consideration may be given to the backdoor path to potential ownership through the sale of put options.

While Chanos approached his investment thesis from the short side, Nelson Peltz made his case for Pepsico’s (PEP) purchase of Mondelez (MDLZ). My shares of Mondelez were assigned today thanks to a price run higher as Peltz spoke. I never speculate on the basis of takeover rumors and am not salivating at the prospect of receiving $35-$38 per share, as Peltz suggested would be an appropriate range for a, thus far, non-receptive Pepsico to pay for Mondelez ownership. Despite the general agreement that margins at Mondelez are low, even by industry standards, it has been trading ideally for call option writers and I would consider repurchasing shares just to take advantage of the option premiums.

Fastenal (FAST) is just one of those companies that goes about its business without much fanfare and it’s shares are still depressed after offering some reduced guidance and then subsequently reporting its earnings. It goes ex-dividend this week and offers a decent monthly option premium during this period of low volatility. Without signs of industrial slowdowns it is a good place to park assets while awaiting for some sanity to be restored to the markets.

Although I’ve never been accused of having fashion sense Abercrombie and Fitch (ANF) and Michael Kors (KORS) are frequently alluring positions, although always carrying downside risk even when earnings reports are not part of the equation. I have been waiting for Kors to return to the $60 level and it did show some sporadic weakness during the past week, but doggedly stayed above that price.

Abercrombie and Fitch is always a volatile position, but offers some rewarding premiums, as long as the volatility does strike and lead to a prolonged dip. It reports earnings on August 14, 2013 and may also provide some data from European sales and currency impacts prior to that. Kors also reports earnings during the AUgust cycle and ant potential purchases of either of these shares must be prepared for ownership into earnings if weekly call contracts sold on the positions are not assigned.

Finally, it’s hard to find a stock that has performed more poorly than Cliffs Natural Resources (CLF). Although no one has placed blame on its leadership, in fact, they have been lauded for expense controls during demand downturns, it didn’t go unnoticed that shares rallied when the CEO announced his upcoming retirement. It also didn’t go unnoticed that China, despite being in a relative downturn, purchased a large portion of the nickel, a necessary ingredient for steel, available on the London commodity market. For the adventurous, Cliffs reports earnings this week and seems to have found some more friendly confines at the $16 level. The option market expects a 9% move in either direction. A downward move of that amount or less could result in a 1% ROI for the week, if selling put options. I suspect the move will be higher.

Traditional Stocks: Caterpillar, eBay, Intel. Microsoft, Mondelez

Momentum Stocks: Abercrombie and Fitch, Michael Kors

Double Dip Dividend: Fastenal (ex-div 7/24 $0.25)

Premiums Enhanced by Earnings: Apple (7/23 PM), Cliffs Natural Resources (7/25 PM)

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

Disclosure: I am long AAPL, FAST, CAT, CLF, INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

 

Weekend Update – March 31, 2013

It’s said that George Eastman, founder of Eastman Kodak (EKDKQ), was quite methodical as he approached the end of his life and was prepared to put his escape plan into action.

“My work here is done” may be a very logical way to approach any kind of transition, although it doesn’t have to be taken to the extreme that Eastman felt was appropriate under his circumstances. Be prepared, but don’t be crazy.

I’ve been transitioning a portfolio for almost a month in anticipation of the market taking a break and perhaps giving back some of its gains; maybe even a lot of its gains.

Doing so has made me much less fun to be around, but circumstances do change and being prepared for plausible scenarios means having exit strategies and surviving to see them do as planned until it’s time to exit the exit strategy. Once my work is done I can’t wait to get back to work.

I for one was glad to see the first quarter of 2013 come to an end. Fortunately, as a covered option seller, my remaining life span may not be sufficient to see another opening yearly quarter such as this past one, as the last such period was in 1987.

You may or may not remember how that year ended, but let’s just say that a single day 500 point drop back then was a lot more meaningful than it would be today.

I wasn’t prepared back then, in fact, that was the last time I used a margin account. I may end up being wrong this time around, but in watching markets for a number of years, both as a casual observer and as an active participant it’s reasonably clear that the good times don’t just keep rolling.

Selling covered calls is a great strategy when applied methodically, but it does meet its match in markets that just do nothing other than going higher. Hopefully April will usher in some greater variety in outcomes, as the past few weeks, despite having established records in both the Dow Jones and S&P 500 have been showing some signs of tentative behavior.

Part of being a less fun person has meant initiating fewer new positions each week. The first step to creating an environment that wouldn’t entice me to spend money on new positions was to cut off the funding just like you might with any addict. Luckily, most stock traders won’t resort to petty crime and pawning the belongings of loved ones to feed the habit, although that margin account can be very appealing and the answer to an easy fix.

I cut off my flow of funds by moving from weekly to extended weekly or monthly options. Longer contracts means less weekly contracts available to be assigned and less opportunity for new weekly cash to be available to “feed the beast.”.

Unfortunately, I also curtailed my cash flow by some unseemly timing in the purchase of new positions this past quarter, such as Petrobras (PBR) and Cliffs Natural Resources (CLF) that are sitting awaiting opportunities to have call contracts written against them.

The next part of the transition was focusing on reliable dividend paying stocks. The kind your grandfather would feel comfortable owning. Last week, all new positions went ex-dividend last week or this coming week. They’re not very exciting to own, but dividends, especially when their ensuing share price reduction is partially offset by option premiums are especially welcome.

Keeping more cash in reserve, moving away from “Momentum” positions, longer contracts and seeking near term dividends is the exit strategy and my transition is nearly complete.

Now comes the waiting and the period of self-doubt, which includes wondering when it’s time to abandon a thesis. In the meantime, increasing cash reserves doesn’t mean a total prohibition against finding potential new opportunities. After all, being prepared doesn’t have to take you to extremes. Once you’ve reached a crazy state of preparedness it’s hard to turn around to see the light.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or Momentum categories, with no selections in the “PEE” category, as earnings season begins anew on April 8, 2013 (see details). Additionally, as in previous weeks there is a greater emphasis on stocks that offer monthly contracts only, eschewing the usual preference for the relatively higher ROI of weekly options for the guarantee of premiums for a longer period in order to ride out any turbulence.

Some of this week’s selections are stocks that I already own but may consider adding to existing positions. One such stock is Deere (DE) which left me somewhat exasperated this past Thursday, the final day of a holiday shortened trading week.

At almost precisely noon shares of Deere dropped by about $1.40 in about 8 minutes, taking it from the realm of stocks poised for assignment. The plunge happened while the market was stable and most other heavy machinery and equipment makers were actually going higher. There was no news to account for the sudden and sustained drop. Neither in real time nor hours after.

Caterpillar (CAT) is one of the stocks that has an ignominious reputation during this record setting quarter. It was among the worst performers of the quarter and was routinely tagged as a laggard on those days that the broad market performed well. I recently purchased shares having waited all quarter for them to reach the price point that was very kind to me in 2012. It accompanied Deere for a small portion of the former’s inexplicable retreat but recovered sufficiently to avoid being tagged yet again.

Bristol Myers Squibb (BMY) and Medtronic (MDT) fit into two ongoing themes. Looking for near term dividend paying shares and belonging to the broadly defined healthcare sector. While healthcare has been the leading sector for the trailing year, I think there are still short term opportunities, even with a specter of a declining market. While both Bristol Myers and Medtronic have had significant advances lately, the combination of dividend and premium continue to make it appealing.

MetLife (MET), also a recent holding, fits into my broad definition of “healthcare” if you stretch that definition to an extreme. Part of my positive outlook for its shares is related to what I believe will be growth in its home insurance business. Of course, I rarely think in terms of fundamentals and certainly don’t have a long term perspective on its shares, but it is well positioned to maintain price stability even in a stock market of reduced stability.

Wells Fargo (WFC) and JP Morgan (JPM) are two very different banks. JP Morgan goes ex-dividend this week and has been beleaguered with domestic attacks from elected officials and international attacks as Cyprus may or may not add risk to global banks, such as JP Morgan.

On the other hand, Wells Fargo is as pure of a domestic play as you can find at a size that still makes it “too big to fail.” With news of improving real estate sales all over the country the Wells Fargo money machine is poised to re-create the glory days that so abruptly ended 5 years ago.

I’ve been looking for an excuse to purchase Lowes (LOW) for the past few weeks and have watched its price show some mild erosion during that time

Dow Chemical (DOW) has been one of my favorite stocks for a long time. I purchased additional shares last week to capture its dividend and after looking at its performance over the past 10 months feel guilty thinking that it’s a “boring” stock.

In fact, it’s been absolutely the poster child for what makes a covered call strategy a successful one. While its stock price has virtually remained unchanged since May 2012, the active cycle of buying shares, selling calls, assignment, buy shares, etc.. has resulted in a nearly 40% ROI.

Finally, Western Refining (WNR) is a company whose shares I briefly owned recently at a much lower price. It was one that got away during the uni-directional market of the first quarter. Its price has come down a bit and I think may now be at its “new normal” making it perhaps an antidote to Petrobras in a sector that has some catching up to do.

Traditional Stocks: Caterpillar, Deere, Dow Chemical, JP Morgan, Lowes, MetLife, Wells Fargo

Momentum Stocks: Western Refining

Double Dip Dividend: Bristol Myers (ex-div 4/3), JP Morgan (ex-div 4/3), Medtronic (ex-div 4/3)

Premiums Enhanced by Earnings: none

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

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.

 

Gloom Can Bring Good TImes

I often say that I neither believe nor follow fundamental nor technical analyses.

Maybe that’s because I’m incapable of understanding or learning the nuances of either. However, despite saying such, like so many things in life, the truth usually lies somewhere in-between.

I do look at charts, although I’m not entirely convinced that I know what I’m looking for or looking at when I stare at the graphic representation of what we observe in the market. On some primitive level I must be doing some kind of technical analysis because I do look for patterns, such as that mentioned about 9 months ago in how Apple (AAPL) was resembling the Google (GOOG) of 2008.

As someone who has been consistently selling options for more than 5 years, I can look at specific periods of time when those who criticize that technique would have been able to revel in their tremendous insight and understanding of price movements, while I would have been wallowing in introspection.

Luckily, that introspection never seems to last for very long.

One such period was from January 1, 2012 to mid-March 2012. One real characterization of that period, besides the seemingly higher close each and every day was the manner in which it happened. Coming immediately after the close of trading in 2011, a year in which triple digit moves in either direction were the norm, that initial period in 2012 was quite different. Those moves were rare. Instead, it was the same slow melt-up that we’ve witnessed thus far in 2013.

I’ll add the first 6 weeks of 2013 as a period that I haven’t been fully enamored of having sold options, although to be fully analytical, I’d have to admit that stock selection plays a role, as well. On paper, the adverse impact of Petrobras (PBR) and Cliffs Natural Resources (CLF), have to be given their due credit.

But looking back to 2012, it all just suddenly changed and made me feel much better about the strategy of selling options. It all started with those triple digit moves. Just as quickly, introspection gave way to a sense of high self-esteem.

As 2013 has been thus far following the same pattern, I’m beginning to see the light at the end of the tunnel.

Again, I’ll certainly admit to a very simplistic use of charts, but just as the charts of Apple and Google at different periods in their corporate lives looked remarkably similar and portended a future path for Apple, I am struck by the similarity in the slopes of the S&P 500 (SPY) for the two periods mentioned earlier.

Qualitatively, I could tell anyone how similar those periods were, without looking at any chart, owing to my trading results. However, the parallel slopes tell a more compelling and quantitative story. Beyond that, the time periods are identical. In the case of 2012, the ascendant period was followed by a brief two week flat period, which was followed by a quick 2% market drop. That drop was just as quickly erased, restoring investor confidence long enough to go through a 1 month and 8% decline.

On this President’s Day, coincidentally we are just concluding a two week period of calm and flat performance, with the S&P 500 having moved 2 points in that period.

There’s certainly no rule that I know of that insists that events repeat themselves. In this case, looking back at my 2012 results, I certainly hope that they do, as it is always preferable for the covered option seller to be doing so in a flat or down market.

Of course, a rational mind will ask what the stimulus might be for a market reversal or any large move regardless of direction. Whereas individual stocks may not require a publicly known stimulus to have a large and sudden move, the market itself needs some overt catalyst. Back in 2012, perhaps it was news of a double dip in the Spanish economy or Greek elections that turned out austerity. Who really knows?

On the horizon, the only known entity is the “sequester.” However, it’s really anyone’s guess where its current deadline for resolution may take us. The recent “Fiscal Cliff” was rationalized by many as being the impetus for the gains of 2013, but it’s not clear to me what effect the sequester may have, regardless of political agreement, or not. Any reduction in spending would be a positive and I believe that the market, which is still rumored to discount events six months into the future, is expecting some kind of resolution.

With less than two weeks to go for the clock to stop ticking, it’s hard to imagine the market being propelled forward on any agreement. Of course, it’s certainly easy to see how another delay or “kick of the can down the road” could be unsettling, especially to credit markets. Standard and Poors may have their own headaches right now with issuance of past credit ratings, but they still do have a job to do.

While politicians may avoid the risk of being labeled “unpatriotic” for voting in favor of defense cuts, they free themselves of that charge if no agreement is reached by March 1,2013, which is just in time for a repeat of 2012.

If I were very concrete and believed that we must stick not only to the same pattern but to the same time frame, I would paint a scenario that envisions a quick 2 week sell off while some gloom sets in regarding agreement on the sequester. That, of course, would have to be followed by another 2 week period, but this time rebounding as it appears that positive movement is occurring.

That brings us to the deadline and the charting anniversary for a large market drop as either there is agreement or there is no agreement.

Win-win, especially if you’re a covered option selling politician.

 

Weekend Update – February 17, 2013

It’s all relative.

Sometimes it’s really hard to put things into perspective. Our mind wants to always compare objects to one another to help understand the significance of anything that we encounter. Having perspective, formed by collecting and remembering data and the environment that created that data helps to titrate our reaction to new events.

My dog doesn’t really have any useful perspective. He thinks that everyone is out to take what’s his and he reacts by loudly barking at everyone and everything that moves. From his perspective, the fact that the mailman always leaves after he has barked out reinforces that it was the barking that made him leave.

The stock market doesn’t really work the way human perspective is designed to work. Instead, it’s more like that of a dog. Forget about all of the talk about “rational Markets.” They really don’t exist, at least not as long as investors abandon rational thought processes.

It’s all about promises, projections and clairvoyance. Despite the superficial lip service given to quarterly comparisons no one really predicates their investing actions on the basis of what’s come and gone.

During earnings season one can see how all perspective may be lost. It’s hard to account for sudden and large price moves when there’s little new news. Although I can understand the swift reaction resulting in a 20% drop when Cliffs Natural Resources (CLF) announced that it was slashing its dividend, filing for a secondary stock offering and also creating a new class of mandatory convertible shares, I can’t quite say that the same understanding exists when Generac (GNRC) drops 10% following earnings and guidance that was universally interpreted as having “waved no red flags.”

Of course, the use of perspective and especially logic based upon perspective,  can be potentially costly. For example, it’s been my perspective that Cliffs and Walter Energy (WLT) often follow a similar path.

What has been true for the past year has actually been true for the past five years. So it came as a surprise to me, at least from my perspective that the day after Cliffs Natural plunged nearly 20%, that Walter Energy, which reports earnings on February 20, 2013 would rise 6% in the absence of any news. From my perspective, that just seemed irrational.

But of course, perspective, by its nature has to be individually based. That may explain why Forbes, using its unique perspective on time, published an article on February 12, 2013, just hours before Cliffs released its earnings, that it had been named as the “Top Dividend Stock of the S&P Metals and Mining Select Industry Index”, according to Dividend Channel. In this case, Cliffs was accorded that august honor for its “strong quarterly dividend history.”

Apparently, history doesn’t extend back to 2009, when the dividend was cut by 55%, but it’s all in your perspective of things. I’m not certain where Cliffs stands in the ratings 24 hours later.

What actually caught my attention the most this past week is how performance can take a back seat to  perspectives on liability, especially in the case of Halliburton (HAL) and Transocean (RIG). On Thursday, it was announced that a Federal judge approved a mere $400 million criminal settlement against it for its seminal part in the Deepwater Horizon blowout. That’s in addition to the already $1 Billion in fines it has been assessed. In return, Transocean climbed nearly 4%, while it’s frenemy Halliburton, on no news of its own climbed 6%. Poor British Petroleum (BP) which has already doled out over $20 Billion and is still on the line for more, could only muster an erasure of its early 2% decline. For Transocean, at least, the perception was that the amount wasn’t so onerous and that the end of liability was nearing.

From one perspective reckless environmental action may be a good strategy to ensure a reasonably healthy stock performance. At least that’s worked for Halliburton, which has outperformed the S&P 500 since May 24, 2010, the date of the accident.

I usually have one or more of the “Evil Troika” in my portfolio, but at the moment, only British Petroleum is there, at its lagged its mates considerably over the past weeks. Sadly, Transocean will no longer be offering weekly options, so I’m less likely to dabble in its shares, even as Carl Icahn revels in the prospects of re-instating its dividend.

Perhaps the day will come when stocks are again measured on the basis of real fundamentals, like the net remaining after revenues and expenses, rather than distortions of performance and promises of future performance, but I doubt that will be the case in my lifetime.

In fact, the very next day on Friday, both Transocean and Walter Energy significantly reversed course. On Friday, the excuse for Transocean’s 5% drop was the same as given for Thursday’s 4% climb. Walter Energy was a bit more nebulous, as again, there was no news to account for the 3% loss.

So what’s your perspective on why the individual investor may be concerned?

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

Technology stocks haven’t been blazing the way recently, as conventional wisdom would dictate as a basic building block for a burgeoning bull market. My biggest under-performing positions are in technology at the moment, patiently sitting on shares of both Microsoft (MSFT) and Intel (INTC). Despite Tuesday’s ex-dividend date for Microsoft, I couldn’t bear to think of adding shares. However, despite a pretty strong run-up on price between earnings reports, Cisco (CSCO) looks mildly attractive after a muted response to its most recent earnings report. Even if its shares do not move, the prospect of another quiet week yet generating reasonable income on the investment for a week is always appealing.

Although I was put shares of Riverbed Technology (RVBD) this week, which is not my favorite way of coming to own shares, it’s a welcome addition and I may want to add more shares. That’s especially true now that Cisco, Oracle (ORCL) and Juniper (JNPR) have either already reported or won’t be reporting their own earnings during the coming option cycle. With those potential surprises removed from the equation there aren’t too many potential sources of bad news on the horizon. The healing from Riverbed’s own fall following earnings can now begin.

MetLife (MET) is, to me a metaphor for the stock market itself. Instead of ups and downs, it’s births and deaths. Like other primordial forms of matter, such as cockroaches, life insurance will survive nuclear holocaust. That’s an unusual perspective with which to base an investing decision, but shares seem to have found a comfortable trading range from which to milk premiums.

Aetna (AET) on the other hand, may just be a good example of the ability to evolve to meet changing environments. Regardless of what form or shape health care reform takes, most people in the health care industry would agree that the health care insurers will thrive. Although Aetna is trading near its yearly high, with flu season coming to an end, it’s time to start amassing those profits.

It’s not easy to make a recommendation to buy shares of JC Penney (JCP). It seems that each day there is a new reason to question its continued survival, or at least the survival of its CEO, Ron Johnson, who may be as good proof as you can find that the product you’re tasked with selling is what makes you a “retailing genius.” But somehow, despite all of the extraneous stories, including rumored onslaughts by those seeking to drive the company into bankruptcy and speculation that Bill Ackman will have to lighten up on his shares as the battle over Herbalife (HLF) heats up, the share price just keeps chugging along. I think there’s some opportunity to squeeze some money out of ownership by selling some in the money options and hopefully being assigned before earnings are reported the following week.

The Limited (LTD) is about as steady of a retailer as you can find. I frequently like to have shares as it is about to go ex-dividend, as it is this coming week. With only monthly options available, this is one company that I don’t mind committing to for that time period, as it generally offers a fairly low stressful holding period in return for a potential 2-3% return for the month.

While perhaps one may make a case that Friday’s late sell-off on the leak of a Wal-Mart (WMT) memo citing their “disastrous” sales might extend to some other retailers, it’s not likely that the thesis that increased payroll taxes was responsible, also applied to The Limited, or other retailers that also suffered a last hour attack on price. Somehow that perspective was lacking when fear was at hand.

McGraw Hill (MHP) has gotten a lot of unwanted attention recently. If you’re a believer in government led vendettas then McGraw Hill has some problems on the horizon as it’s ratings agency arm, Standard and Poors, raised lots of ire last year and is being further blamed for the debt meltdown 5 years ago. It happens to have just been added to those equities that trade weekly calls and it goes ex-dividend this week. In return for the high risk, you might get am attractive premium and a dividend and perhaps even the chance to escape with your principal intact.

I haven’t owned shares of Abercrombie and Fitch (ANF) for a few months. Shares have gone in only a single direction since the last earnings report when it skyrocketed higher. With that kind of sudden movement and with continued building on that base, you have to be a real optimist to believe that it will go even higher upon release of earnings.

What can anyone possibly add to the Herbalife saga? It, too, reports earnings this week and offers opportunity whether its shares spike up, plunge or go no where. I don’t know if Bill Ackman’s allegations are true, but I do know that if the proposition that you can make money regardless of what direction shares go is true, then I want to be a part of that. Of course, the problem. among many, is that the energy stored within the share price may be far greater than the 17% or so price drop that the option premiums can support while still returning an acceptable ROI.

Also in the news and reporting earnings this week is Tesla (TSLA). This is another case of warring words, but Elon Musk probably has much more on the line than the New York Times reporter who test drove one of the electric cars. But as with Herbalife and other earnings related plays, with the anticipation of big price swings upon earnings comes opportunity through the judicious sale of puts or purchase of shares and sale of deep in the money calls.

From my perspective these are enough stocks to consider for a holiday shortened week, although as long as earnings are still front and center, both Sodastream (SODA) and Walter Energy may also be in the mix.

The nice thing about perspective is that while it doesn’t have to be rational it certainly can change often and rapidly enough to eventually converge with true rational thought.

If you can find any.

Traditional Stocks: Aetna, Cisco, MetLife

Momentum Stocks: JC Penney, RIverbed Technology

Double Dip Dividend: The Limited (ex-div 2/20), McGraw Hill (ex-div 2/22)

Premiums Enhanced by Earnings: Abercrombie and Fitch (2/22 AM), Herbalife (2/19 AM), Tesla (2/20 PM)

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

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.

 

Weekend Update – February 10, 2013

On Wednesday of this week, the Postmaster General, Patrick Donahoe, made the announcement that many of us had been expecting for years as the red ink lived up to its a visual onomatopoeia name and hemorrhaged.

No more Saturday delivery for ordinary mail. Unless I’m going away to summer camp this year, I’m not anticipating any extended grieving period for the loss, although like so many other things, the principal wags the principle.

It was a major news story in an otherwise slow news week. Surprisingly, what had gone unnoticed was the additional comment that effective immediately gloom of night would be sufficient cause to suspend delivery. Rain and snow are now also potential impediments to service, regardless of a centuries old social contract.

It’s a new world.

Forget about social contracts or expectations of behavior. Although if you follow the stock market you’re probably accustomed to broken dreams and hopes and rarely come to expect the expected.

Increasingly, data is ignored for its objective and descriptive properties. For example, when The Gap (GPS) announces great quarterly sales, as it did this week, it’s shares fell 4%, despite everyone agreeing that the results were extraordinary.

Equally common is the incredible emphasis now placed upon guidance, as if those issuing guidance have any greater ability to read the future than does the head of a close knit household. As much as I thought I knew about my family I don’t think I ever guessed anything correctly even a day into the future.

Have you ever visited a physicians office and browsed through some dated magazines? As it turns out, with near universal application, those whom we consider to be futurists have a fairly poor track record. Yet, when it comes to guidance, it is the closest thing we have to the gospel and fortunes are made or lost on the basis of the prognostications of people every bit as flawed as the guy you ignore on the subway platform every day.

For me, the past few weeks have broken some personal and inter-personal social contracts. As a die hard covered option investor, risk is the antithesis of everything I value. But as the market has been climbing higher and higher, it’s become harder and harder to find new places to park money. Additionally, the reduced premiums resulting from reduced volatility make it harder to live that life style to which I’ve become so accustomed.

That means only one thing and the devil has to be embraced.

Over the past few weeks I’ve had difficulty finding well priced and conservative investments that would feed my insatiable appetite. As a result, there have been more high beta name and more earnings related plays, not to mention lots more antacids. But sometimes you just do what has to be done.

This coming week looks to be a little different thanks to some market hesitancy. Blame it on Europe, blame it on Draghi, or just blame it on burn-out, I don’t really care, because as bad as we are at telling the future, we’re at least equally as bad at recognizing causation and correlation. It’s not like pornography. You don’t necessarily know it when you see it. But for whatever reason, this week, unlike the preceding month, it seemed easier to spot some lesser risk potential investments

As always, stocks are categorized as being either Traditional, Momentum, Double Dip Dividend or “PEE” (see details).

British Petroleum (BP) has no shortage of legal issues still awaiting it. To me it’s mind boggling that judgments and fines of $20 Billion could possibly have come as good news, but that is how news is interpreted. For some, perhaps more rational, British Petroleum’s inability to have its share price keep up with the likes of its partners in evil, Halliburton (HAL) and Transocean (RIG) is a sign of the legal liability overhang.

For me, it is finally down enough that I am interested in re-purchasing shares last owned a month ago, which to me seems like an eternity, since at the moment I own neither its shares, nor Halliburton or Transocean, usually mainstays of my portfolio. The dividend this week is a bonus.

As long as on the energy theme, Southwestern Energy (SWN) was a potential selection from last week that went unrequited. At this level it still looks like a reasonable trade and resultant ROI after selling an in the money option, in a market that may be taking a little break

The Limited (LTD) is one of those retailers that I never seem to own often enough, which is odd since I’m a serial re-purchaser of stocks that I’ve owned and that subsequently are assigned due to the use of covered calls. It has a good dividend, including regular use of special dividends and trades in a reasonably tight range. During the final week of a monthly option it becomes a bit more appealing to me. However, if not assigned next Friday and faced with owning shares for at least an additional month, it dies go ex-dividend early in the March 2013 option cycle. Although I own more retailers than I would like, at the moment, this is one for which it may be worth bending some diversification rules.

DuPont (DD) was one of those stocks that I regularly owned when I first started selling options. A combination of good premiums, reliable dividends and price appreciation, especially after early 2009 made it a great income generator. These days, lower volatility has taken its toll on the premiums and the availability of only monthly options has made me look elsewhere. However, this week DuPont goes ex-dividend, and as the final week of the monthly option cycle it effectively trades as a weekly option, although you have to be prepared to own it through the next cycle or longer.

Walter Energy (WLT) and Cliffs Natural Resources (CLF) seem to go hand in hand in the speculative corner of my portfolio. It goes ex-dividend this week and always offers a nice option premium in exchange for the risk that is being taken on. A caveat that should be considered for adding new shares is that if shares are not assigned by the end of the week, Walter Energy reports earnings the following week and that may be more excitement than many would want to accept. Writing a deeper in the money call or a longer duration call may be strategies to reduce that kind of stress.

Baidu (BIDU) is one of the very few Chinese companies that I ever consider purchasing. I do, however, miss the days when Muddy Waters would live up to its name and cast aspersions on the accounting practices of some Chinese companies. That always represented a good opportunity to sell puts a few days later and then merrily go on your way when the waters calmed. Someday, I’m fairly confident that most, if not all of the fears that we have regarding accounting practices will become reality. I’m hopeful that it’s not this week, as I already own shares of Baidu by virtue of being assigned $97.50 puts on Friday (February 7, 2013). If you don’t mind wild swings within a 10% range on a seemingly regular basis, Baidu is a good way to generate income. My experience with shares has been that a moment or two after its price performance looks bleak, it bounces right back. It is a good example of why gloom shouldn’t be a deterrent, but I doubt the Postmaster General is paying any attention to me.

Riverbed Technology (RVBD) was a potential earnings choice last week. As usual it’s price movements tend to be exaggerated after it announces earnings, particularly since they tend to give pessimistic guidance. Back in the old days you would give pessimistic guidance and then shares would soar when earnings surpassed the forecast. That was so yesterday’s social contract. RIverbed reported record revenues, in-line EPS data, but offered a weak outlook. SO what else is new? Its shares have been one of my greatest option premium producers for years and I look for every opportunity to either own shares or sell puts.

Buffalo Wild Wings (BWLD) is one of those places that I would love to visit, but know that it may not be worth trading off a few years of my life. It is also one of those companies that tends to have exaggerated moves following earnings release. In this case about 1.4% for a 10% drop in share price. The biggest caveat is that Buffalo Wild Wings has shown that it can easily drop 15% on earnings release.

Cliffs Natural Resources is not for the faint of heart. It bounces around on rumors of the Chinese economy’s well being and global growth. It is a good example of forecaster’s inability to forecast, as it recently fully recovered from a recent major downgrade from Goldman Sachs (GS), which at least was consistent in demonstrating that predicting commodity prices was not one of its strengths. On top of its usual volatility, Cliffs Natural reports earnings this week and has yet to announce its next dividend, which is currently at nearly 7%. I already own shares and have so, on and off for a few months. If I did anything, it would most likely be through the sale of well out of the money puts, seeking to return 1-1.5% for the week.

Finally, it’s yet another retailer, Michael Kors (KORS), and it is a difficult one to ignore as it reports its earnings this week. As with most all “PEE” selections, it is very capable of making large moves upon releasing earnings and providing guidance. In this case, the ratio that may lure me into committing to another retailer is a 1% ROI in exchange for a 10% or less drop in share price.

Traditional Stocks: British Petroleum, Southwestern Energy, The Limited

Momentum Stocks: Baidu, Riverbed Technology

Double Dip Dividend: British Petroleum (ex-div 2/13), DuPont (ex-div2/13), Walter Energy (ex-div 2/13)

Premiums Enhanced by Earnings: Buffalo Wild Wings (2/12 PM), Cliffs Natural (2/12 PM), Kors (2/12 AM)

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

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.

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