Weekend Update – December 4, 2016

It’s hard to say what really came as more of a surprise.

The fact that we have a President-Elect Trump or the fact that OPEC actually came to something of an agreement this past week.

When it has come to the latter, we’d seen any number of stock market run-ups in anticipation of an OPEC agreement to limit production of crude oil in an effort to force the supply-demand curve to their nefarious favor.

Had you read the previous paragraph during any other phase of your lifetime, you would have basically found it non-sensical.

But in the past 18 months or so, we’ve been in an environment where the stock market looked favorably on a supply driven increase in the price of oil.

So when it seemed as if OPEC was going to come to an agreement to reduce production earlier in the year, stocks soared and then soured when the agreement fell apart.

Unable to learn from the past, the very next time there was rumor of an OPEC agreement stocks soared and then again soured when the predictable happened.

This week, however, everything was different.

Maybe better, too.

Or maybe, not.

What was not better was that OPEC actually came to an agreement, although you can’t be blamed if you withhold judgment in the belief that someone will cheat or that U.S. producers might be enticed to increase production as prices rise.

What may have been good, though, was that markets didn’t react with their usual state of irrational unbridled enthusiasm as the price of oil sharply increased this week.

Nor did rational behavior kick in, as a supply driven increase in the price of oil should induce concerns about corporate profits and diversion of discretionary consumer cash.

But there was some kind of rational behavior this week as was when the Employment Situation Report was released.

In that case there was basically no reaction, which is probably a good thing, as we are prepared to accept the inevitable in less than 2 weeks, as the FOMC seemingly has no choice but to announce an increase in interest rates.

Then we’ll see whether the rational behavior has longer lasting power than it did a year ago when we were in the same situation.

But, with a little bit of hindsight at hand, you do have to be impressed with what may have been a very rational response by stock markets in the aftermath of the Trump election victory, as it did a complete about face from what most everyone in the world believed that it would do.

In addition to the rational behavior displayed by the market, you may have to give some credit to the non-traditional timeframe in which the President-Elect has decided to hit the ground running when it comes to economic matters.

That timeframe is before he is empowered to really do anything other than to decide not to go to security briefings.

Can we all agree that those briefings are less relevant than the economy?

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

For those who haven’t tired of hearing about marathon Oil (MRO), I feel that I might be negligent to not bring it up again this week.

In a week when oil stocks really prospered, Marathon Oil really, really prospered.

On the one hand I felt really good about that, having sold 2 separate lots of put options, one of which was at what would turn out to be at about its lows for the week.

On the other hand, I sold calls on a far more expensive lot of shares at a strike well below my break-even and I had to scurry to roll those short calls over in the hopes that shares might find their own rational place to go, maybe just a bit south of $17.50.

But that brings me back to still be interested in Marathon Oil.

The issue, though, as it always is, is what comes next?

I’m of the belief that those higher oil prices may not be long lasting, but perhaps long enough to bring some share price stability.

Even at this new level, I might be interested in selling puts again with n $18 or $17.50 strike level, but I would certainly not do so in the same quantity as I did this week with $15 puts.

I was aggressive with those and happily so, but I would not consider doing the same this week.

Where I might consider being aggressive is with the purchase of shares of Coach (COH).

Considering the purchase of any retailer in the final month of the year is something that shouldn’t be taken too lightly, as surprises abound when you would least prefer.

What appeals to me about Coach right now is the fact that I find it fairly priced at a time when it will be ex-dividend.

For me, even as I’m still saddled with an expensive lot of Coach shares, the most appealing and profitable time to have bought shares was on the cusp of an ex-dividend date.

My history, with the exception of the current lot of shares that i own has been that dividends and earnings have been great times to do something. The problem with Coach’s earnings, however, is that they have been far lass predictable than its commitment to the dividend.

Finally, I have shares of Hewlett Packard (HPQ) and am short $15 calls that expire along with the end of the monthly option cycle.

Hewlett Packard is also ex-dividend on the Monday following this coming  week, so I will be closely watching its closing price next Friday.

But before that Friday comes by, I will seriously consider adding shares and selling calls that also expire with the monthly options.

That would be to have the possibility of collecting somewhat more than a typical week’s worth of premium, by virtue of the longer time value, following adjustment for its dividend, in the event of an early assignment.

Generally, Monday ex-dividend positions provide an opportunity to consider those scenarios where either an early assignment or the alternative of collecting both the premium and the dividend can be appealing.

It helps when the purchase price is close to the strike price and when the purchase price is close to what you would ordinarily accept as a fair price for shares.

I like Hewlett Packard at $15, although I don’t see too much prospect for capital appreciation of shares. What i like about it is as a repository for premiums and dividends and that could start as early as Monday morning.

 

Traditional Stocks: none

Momentum Stocks: Marathon Oil

Double-Dip Dividend: Hewlett Packard (12/12 $0.13), Coach (12/7 $0.33)

Premiums Enhanced by Earnings: none

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

Weekend Update – November 6, 2016

Some days we really have no clue as to what made the market move as it did, but nothing bothers us more than not knowing the reasons for everything.

We tend to like neat little answers and no untied bundles.

It starts early in life when we begin to ask the dreaded “Why?” question.

We want answers at an early stage in life even when we have no capacity to understand those answers. We also often make the mistake of querying the wrong people to answer those questions, simply on the basis of their ready availability and familiarity.

Those on the receiving end of  questions usually feel some obligation to provide an answer even if poorly equipped to do so.

While the market has now gone into a 9 consecutive day decline, it seems only natural to wonder why that’s been happening and of course, some people, have to offer their expert explanation.

It is of course understandable that the question is posed, as earnings haven’t been terrible and neither have economic data. Yet, a 9 day decline hasn’t happened since 1980 and has taken the market into a stealth 5% decline.

Sometimes “not too hot and not too cold” is just the perfect place to be, although from a stock market investor’s perspective, there is always the future that has to be addressed and then discounted.

In fact, with the release of the Employment Situation Report this past Friday, there may be enough time to cast off “fear of the known” as investors can acclimate to the stronger probability that the FOMC will finally move to increase interest rates next month. 

So why was the past week as it was and please don’t tell me “it is as it is,” which is an answer that even a three year old asking the obligatory “why” question would never find acceptable.

In the absence of any real reason and even in the absence of any ability to twist news into the opposite of what it really is, sometimes you just have to make up an answer.

As parents, many of us have done that with our children and have learned that if you answer with an air of confidence and authority, you’ve done your job, even if you have no clue as to the real answer to the question posed.

From the day that news came forth that additional emails may have been found related to the server scandal so inartfully responded to by one of the Presidential candidates, the market decline has been largely attributed to the fear that the other Presidential candidate’s electability was enhanced.

Of course, the reaction of the market when that news was initially released was likely not coincidental, so it gave a new reason to explain the unexplainable going forward and that excuse for the market’s weakness this past week was used in great abundance.

The investor class, if that association is correct, is fearful of the unknown that might accompany the election of an untested billionaire, who may not be as wealthy as he regularly portrays himself to be. 

Or perhaps, given all of the wildness accompanying this entire campaign, the electorate is worried about whether either of the Vice Presidential candidates is equipped to take the top job when indictments may come through during the Inaugural Ball.

But that still leaves us this coming week, when the market will wake up on Wednesday morning, likely having perfect knowledge of the election results, assuming no repeat of 2000.

If the assertions this past week are accurate and the billionaire has to turn his interests back to his business ventures, the expectation that the market would bounce nicely higher would be reasonable.

On the other hand, there’s always that unknown and if instead of focusing on business, the focus is on creating a Presidential Cabinet, we may pine for the days of a simple 5% decline.

The potential for an instant, even if short lived, evaporation of wealth, could throw a little wrench into the FOMC’s well laid plans. We, and they, have waited for a year for the second of what was expected to be a series of small interest rate increases through 2016.

Even the FOMC may have to find itself dealing with the unknown, but be assured, we will be the last to know, as we come to the realization that sometimes it really is as it is.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend,

This is a week that could easily go in any direction.

With the market down 5% from its September high, it wouldn’t take very much to get to correction levels, but by the same token a bounce from last week could easily be in store if election fears aren’t materialized.

While there are those who believe that the pharmaceutical industry may have greater concerns in the event of a Clinton victory, I think that has already been largely discounted.

You could be excused for not believing that if you glanced at Pfizer’s (PFE) weekly call option premium in a week that it also happens to be ex-dividend.

With the uncertainty at hand over the election, if I do dip into already low cash reserves, I’m more inclined to want to chase a dividend and am not entirely receptive to taking on undue risk.

At its current strike price, Pfizer offers some of that safety, especially with the additional cushion of its option premium and the generous dividend.

As with many stocks that I follow, sometimes it’s just a question of awaiting a drop in price to decide to once again wade in and own shares. I believe that Pfizer is at that price and it is a company that I wouldn’t mind owning for a longer term in the event of a short term adverse price movement. For those with a longer term outlook, Pfizer may be a great addition to a LEAPS covered portfolio.

While it isn’t paying a dividend this week, or even during this current monthly option cycle, Sinclair Broadcasting (SBGI) is another stock whose share price is really appealing to me.

I’ve only owned it on 7 occasions over the past 3 years and have sometimes owned it for as long as 8 months, but never at a price this low.

Sinclair Broadcasting just reported earnings and responded well, despite a slight miss on the bottom line. 

It has, over the past years traded so predictably within a range, that at this price I would be very open to adding shares, but with its ex-dividend date coming in the early part of the December 2016 option cycle, would most likely sell a December option and would also consider the use of an out of the money option, rather than a near or in the money strike price.

While any capital intensive business, such as terrestrial broadcasting may suffer from an increasing interest rate environment, Sinclair Broadcasting keeps growing its reach and its revenues reflect that growth, having increased nearly 27% in the past year.

What’s a week without another consideration of Marathon Oil (MRO)?

Again, just like last week, I won’t be following this suggestion, because I’m already at my limit of 3 open positions, wither log shares or short puts.

Last week would have been another good week to initiate an earnings related short put position as shares bounced very nicely higher when earnings were released, but then succumbed to energy price pressures to end the week virtually unchanged.

With no reason to suspect that the sector’s volatility has come to an end and no reason to suspect that the individual name will break below its support, I think that this will be another good week to consider a position.

This time, however, with the ex-dividend date being the following Monday, there may be reason to consider going long shares and selling a 2 week dated call option in the attempt to capture the dividend.

Alternatively, a weekly put option could be sold and if in jeopardy of being assigned, simply taking assignment rather than rolling the puts over.

I did that recently with another lot of Marathon Oil shares and sold calls into its earning strength, with the hope of capturing its dividend and as much option premium as I could possibly get, for as long as I can get it if shares can continue to be confined in the $13 – $16 price range.

Finally, last week it was Coach’s (COH) time to report earnings and this week it will be Michael Kors (KORS) under scrutiny.

Coach’s reception was a good one and its shares spiked as it reported earnings early in the week, but it eventually succumbed to market pressures and end the week down 1%.

In the meantime, the days when Kors was seemingly thriving at the expense of Coach have long been over and the two are more likely to see their stock prices in lockstep these days.

That’s what makes Kors so appealing this week as the option market is implying a large price move, but there may still be opportunity despite the uncertainty being expressed.

The implied move is 10.5% and while that defines a price range of about $44 – $54, you could still derive a 1% weekly ROI by selling a put option 14.2% below Friday’s closing price.

I’m not overly anxious about spending any money this week, but this trade is an appealing one. My expectation is that Kors will have a reasonably well received earnings report and that it will come with enough time between it and election results to potentially shake off any adverse macro-market movement.

Traditional Stocks:  Sinclair Broadcasting 

Momentum Stocks: Marathon Oil

Double-Dip Dividend:  PFE (11/8 $0.30)

Premiums Enhanced by Earnings: KORS (11/10 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 4, 2016

These are sensitive times.

For the longest time the FOMC and investors were the closest of allies.

The FOMC gave investors what they craved.

With cheap money increasingly made available investors could do what they want to do the most.

Invest.

In return, if you believe in trickle down economics, the great wealth created by investors would then get re-invested into the economy, helping to fund the creation of jobs, which in turn would fuel increasing demand for consumer products.

That would result in a virtuous cycle that would grow the economy, with the FOMC carefully controlling growth to keep the 40 years’ worth of inflation fears soothed.

Surely that was a win – win scenario, in theory, at least.

Then came the rumors.

Those rumors were started, fueled and spread by the very FOMC that created good times for most everyone that had a discretionary dollar to invest.

The fear that those rumors of an interest rate increase coming soon, perhaps a series of them in 2016, would become reality, periodically sowed selling waves into the blackened hearts of investors.

With even the doves among the FOMC members beginning to utter tones spoken by hawks, investors knew that their glory days were numbered and began expressing some slow acceptance of an interest rate increase.

It’s not as if they really had any choice, although it was also clear that any evidence of consumers slowing down or not living up to their expectations would send the FOMC into a bit of a retreat, which in turn would send investors into a subdued celebratory mode.

What had become clear, however, over the past few months is that the acceptance is begrudging at best, as it is more accepted in theory rather than in reality.

Investors have shown an uneasy acceptance of an interest rate hike, as long as it comes later and not sooner.

That was abundantly clear this past week as the disappointing Employment Situation Report data was initially interpreted by investors as meaning that the probability of an interest rate increase announcement coming at this month’s FOMC meeting was less likely.

Markets moved nicely higher on the notion that there was going to be another few months of cheap money to fuel the party.

But then came word from among the top leaders of the FOMC and Federal Reserve that conditions were still being met for an interest rate increase in September and investors did what they usually do when fear or loathing is part of the equation.

The FOMC and investors simply continued playing the game that they’ve been playing for much of 2016, having established an uneasy truce, while awaiting for the other side to blink.

At some point, this truce will either fall apart or the sides will embrace one another.

For all of their obfuscation and for all of the confusing economic data, there is still little sign that retailers are ready to tell us that stores are crowded and inventories are being depleted.

The FOMC seems to have erred once when raising interest rates almost a year ago. The market’s decline in the period afterward wasn’t with foresight of the lack of economic growth to come.

It was due to disappointment that the party was slowing down.

The subsequent recovery has all come as thoughts of extending the party have taken hold.

Now, though, I think we are ready to move forward, even if taking a short term step backward upon the reality of another interest rate increase, in anticipation of the FOMC not making the same mistake twice.

But, I wouldn’t mind waiting until December. It might not be a bad idea for the FOMC to be behind the curve this time, to allow the current uneasy truce to give way to renewed investor confidence based upon an expanding economy and a return to investing based upon fundamental factors.

Nothing spells peace better than two independent and healthy entities going about their own businesses side by side.

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

Volatility is painfully low and there are only 4 trading days in the current week, so weekly option premiums are going to be even less appealing.

On top of that, with earnings season essentially having come to its end, all that remains is an FOMC watch and then the reaction to its action or inaction.

For me, that just leaves more uncertainty, but without the reward.

Because of that, my predominant focus is on securing more dividends, if possible.

For the week, that leaves me in consideration of adding shares of Coach (COH), General Motors (GM) and the recently added GameStop (GME).

I currently own all three of those and see opportunity in all three, not just for the upcoming dividends, but also for their option premiums and some chance for capital appreciation, as well.

Generally, when I do consider positions going ex-dividend, I try to exploit any possibility of a pricing inefficiency that would have some of the decrease in the share price coming as a result of the dividend, being borne by the option buyer.

As a result, I usually try to sell in the money call options generally being happy with either early assignment or receiving the dividend.

This week, however, I’m more inclined to consider the sale of slightly out of the money calls or may consider longer term expirations.

I purchased GameStop following its fairly muted decline, by its historical standards, following recent earnings, specifically with the dividend in mind.

Shares have been trading fairly well on the heels of its bad news and have shown some stability. While GameStop has had “another shoe to drop” in the past, I think that the near term opportunity is to exploit both its price decline and generous dividend.

There’s no question that its business model has challenges, but those challenges have been constant and evolving over the years, while GameStop has adapted, evolved and persisted.

I don’t look at GameStop as a long term holding, but it is a stock that may also be amenable to serial rollover, which has been my primary activity in 2016, as my overall trading activity has taken a dive even from 2015, which itself was a low trading volume year.

Coach and General Motors appeal to me at the moment for different reasons.

I like Coach following having given back some recent gains, which returns it to a support level that appears to have some holding ability. With few people now questioning its long term strategy or ability to compete, Coach continues to build its base and make itself more accessible to more consumers.

Unlike GameStop, I would consider any new positions in Coach as a potential longer term holding and would also consider it a serial rollover vehicle that also happens to have an appealing dividend.

I like General Motors at the moment, not because of its recent price decline, but rather for its recent price stability.

It doesn’t have the same kind of price supports that Coach has, however, it too, may be considered as a longer term holding with a very attractive dividend and option premiums, as long as the share price remains in its current neighborhood.

With volatility continuing so low and the longer term trend continuing higher, it’s difficult to buck the trend, so a longer term perspective with positions such as Coach and General Motors may be appropriate under current market conditions.

Finally, with so many now believing that the financial sector may finally awaken as interest rate increases seem likely, I think that I may finally be ready to secure my first position in PayPal (PYPL).

There is no dividend, but what really appeals to me since its spin off from eBay (EBAY) is the well defined trading range and liquidity of its options.

The availability of extended weekly options makes it also a candidate for serial rollovers as it continues to offer an attractive premium, despite having traded in a fairly narrow range.

Ultimately, the ideal application of a covered option strategy, in my opinion, is when that combination of price stability and attractive option premium exists alongside liquidity.

If that kind of co-existence is possible, surely investors and the FOMC can figure out a way to move forward as 2017 approaches.

Traditional Stocks: none

Momentum Stocks: PayPal

Double-Dip Dividend: Coach (9/8 $0.34), GameStop (9/7 $0.37), General Motors (9/7 $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.

Weekend Update – August 7, 2016

In the 57 years since “The Day the Music Died,” the S&P 500 has risen about 3800%

What’s not to like about that?

Among those perishing in that February plane crash was “The Big Bopper” whose signature hit song “Chantilly Lace” was telling the world what he liked. 

While it may be cute when a child gives you that kind of information, not much good is to come when an adult lets free with those unfiltered thoughts.

It may be even worse when they act upon those thoughts that no one needed to hear in the first place.

The Big Bopper’s album cover makes the words of the song even more creepy, but there must have been strains of that admittedly catchy tune playing as investors were awaiting last Friday’s Employment Situation Report.

Of course, as we all know, there is nothing creepy at all about being in love with money or letting it know what you especially like about it.

It was pretty obvious what investors wanted and liked when the data was released and seemed to put a nail into the shockingly low number of new jobs reported back in June 2016.

I don’t know what the equivalent is to the obligatory “chantilly lace” in the song, but the market definitely decided it was time to put a pretty face on the impending likelihood of an interest rate increase.

At one time reviled and probably misunderstood, now the market appears to understand that in the current economic context, a small rate increase is reflective of the early stages of an economy getting on its feet after many years of listlessness.

With a torrent of confusing data and false starts over the past couple of years and after 2 months of wildly diverging employment numbers, not only was it difficult to predict what the latest release would hold, especially after another disappointing GDP, but it was also difficult to predict or gauge the market’s reaction.

But now we know what the markets like, at least for now.

What they like heading into a week that begins quarterly earnings reports from national retailers is the sense of certainty about that interest rate increase that had been expected to occur on a serial basis during the course of 2016.

In hindsight, as good as low interest rates have been and as much as most everyone on the equity side of the equation has liked low rates, most recognized that something bad was obscured by the allure of that chantilly lace.

Sooner or later it’s time to grow up and move on and maybe Friday’s market response to another solid month of employment data was an embrace of a more mature outlook on things.

We’ll never know if The Big Bopper would have found a more mature approach in the pursuit of life’s happiness, but it’s not too likely that the market will be on an extended pursuit of logic and rational actions, despite Friday’s constructive embrace.

Of course, as we do await next Friday’s Retail Sales Report, it would be nice to get some confirmation by the retailers themselves, especially in regard to the guidance they are going to provide.

It’s one thing to make that creepy call and divulge your likes, but it’s an altogether different thing when the one on the other end of the line provides validation.

But it’s still hard to imagine how the FOMC goes forward if retail is lagging behind and there’s scant evidence of consumer participation, even as employment is growing strongly.

Next week, aside from those retail earnings and retail sales data, is going to be a quiet week on the economic front. In fact, not a single Federal Reserve Governor is scheduled to reveal what they like and we will all be spared of those inner thoughts.

That’s something that we could all like, as those are among the thoughts that should be kept to one’s self or solely in the company of consenting adults, who may still have to be prepared for what the chantilly lace has been hiding.

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

With the exception of considering adding some iPath S&P 500 VIX Short Term Futures (VXX), as a purely speculative trade, or even longer term holding, this week is one in which I think some quintessentially American brand names can strike gold without having to risk exposure to Zika or street crime.

Among the names that I might like to buy or add to existing positions are Coach (COH), General Motors (GM) and Starbucks (SBUX).

Coach reports earnings this week, as does its competitor for the hearts of investors, the non-dividend paying Michael Kors (KORS). I recently sold calls on a longstanding lot of Coach shares. While they aren’t underwater, they’re much too close to being so after having been treading water for far too long.  

Following the old axiom of “buy high and sell low,” I bought the existing lot at too high of a price and have held it for more than 2 years. At the time of the purchase, the share price was actually the lowest I had ever paid and so it seemed to be a bargain.

Funny thing about bargains.

The only thing that has made it palatable have been the dividends and the other 19 times I’ve owned shares during a 4 year period.

I often like to sell puts before earnings, as Coach does have a history of large moves, often beyond what the option market had predicted or before earnings.

This time around, though, I’m thinking of adding more shares and selling calls beyond September’s ex-dividend date in anticipation of Coach finally breaking beyond its 2 year highs, as long as the broader market plays along.

Starbucks usually recovers nicely after taking an earnings related hit. It tends to do so when Howard Schultz offers a compelling series of reasons why everyone got things wrong.

This time around, he didn’t need to do that as earnings saw neither a strong move lower or higher. It was only on the following week that some analysts expressed ambivalence over near term prospects and Starbucks shares had about a 5% decline.

I wouldn’t necessarily buy a cup of Starbucks coffee if it was offered at a 5% discount, but having wanted to own shares again following a long hiatus, that 5% may be enough of an enticement.

As with Coach, I’m thinking of using a longer dated expiration date for the sale of calls, although not so long as to encompass the next ex-dividend date.

Also along with Coach, while there are continuing currency considerations, as long as the broader market stays at current levels or higher, there isn’t much reason to expect that Starbucks will do anything less than meet the broader market’s performance.

General Motors hasn’t had a particularly good month and guidance provided by  Ford (F) certainly raises into question that need for the consumer to be in the market for new cars. However, General Motor’s performance has still been admirable, given the headwinds.

To a very large degree, that has been the story of the new General Motors under the leadership of Mary Barra.

There has been so much bad news and yet it has been methodically digested and skillfully managed.

That’s not to say that General Motors shareholders haven’t paid a price, even if only in opportunity costs, but share performance would likely have been far worse in any number of earlier time periods.

As with Coach and Starbucks, my focus is on a longer term option expiration when selling calls. In the General Motors case, there’s an attractive dividend to be factored in before the expiration of the September 2016 contract.

Just as with Coach, that dividend has made the holding of my current lot of shares palatable and may provide some justification for considering a new position as a longer term holding, while trying to accumulate dividends, option premiums and some capital gains on the underlying shares.

Finally, just when I thought volatility couldn’t possibly get any lower, I recalled some similar lines of thought regarding energy prices.

When you’re on the wrong side of the expectation that prices really can’t get any lower you also come to the realization that there really is nothing funny about “bargain prices” that turn out not to be bargains, at all.

One of the things that I like about this product, despite the fact that it is definitely not designed for longer term holding, is that it is very easily traded in the options market and offers many opportunities, even if you’re wrong about its near term direction or magnitude.

At the current level, the premiums for selling covered calls or put options is really enticing and I’m thinking of doing so, but am undecided about thinking about a short term trade or betting that in the longer term there will be some sort of a market correction.

In that case, the sale of a longer term dated, in the money put option, could be a very lucrative trade and serve as some portfolio protection, as well.

The latter has been the predominant way in which I’ve used this product over the past few years, but haven’t exactly shunned the opportunity to generate short term option income, as well.

A number if weeks ago there was a disconnect between the typical relationship between volatility and the S&P 500, in that volatility fell, even as the broader market did, as well.

To many, and in this case, they were correct, that was a harbinger of continued deterioration of the volatility index as  markets would be poised to head higher.

I can’t begin to understand the mechanism, but sometimes pure observation is a great tool if you pull the chantilly lace from in front of your eyes and take a glimpse at the ugliness of the reality straight ahead.

 

Traditional Stocks: General Motors, Starbucks

Momentum Stocks:  iPath S&P 500 VIX Short Term ETN

Double-Dip Dividend: none

Premiums Enhanced by Earnings:  Coach (8/9 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 – April 10, 2016

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

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

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

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

Reminds me of something.

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

“The Sleeper” was deceiving.

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

Both, though, ended up going nowhere.

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

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

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

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

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

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

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

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

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

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

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

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

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

Earnings.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sometimes those ups and downs can be your best friend.

 

Traditional Stocks:  none

Momentum Stocks: Abercrombie and Fitch, Best Buy, Coach

Double-Dip Dividend: None

Premiums Enhanced by Earnings: None

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

Weekend Update – February 28, 2016

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

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

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

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

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

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

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

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

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

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

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

Something has to give over the course of time.

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

We’re now facing two delicate balances.

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

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

That leaves the FOMC to ponder its next step. 

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

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

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

But there’s another delicate balance at hand.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: American International Group

Momentum Stocks: Cypress Semiconductor

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

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

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

Weekend Update – January 31, 2016

 

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

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

And then it’s gone.

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

We may have forgotten how to do that.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That was bad news.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It wasn’t supposed to be that way.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Traditional Stocks: American Express

Momentum Stocks:  none

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

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

 

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

Weekend Update – December 27, 2015

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

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

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

Not all nothings are created equally.

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

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

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

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

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

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

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

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

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

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

2015? Not so much.

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

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

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

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

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

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

It bears repeating: Not all nothings are created equally.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Regulators may know that, too.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



Traditional Stocks: none

Momentum Stocks: Coach

Double-Dip Dividend: Cisco (1/4/16 $0.21), Comcast (1/4/16 $0.25), Cypress Semiconductor (12/29/15 $0.11), Deere (12/29/15 $0.60), Dow Chemical (12/29/15 $0.46)

Premiums Enhanced by Earnings: none

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

Weekend Update – November 29, 2015

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

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

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

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

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

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

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

Truth doesn’t always follow logic.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Momentum Stocks:  Best Buy

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

Premiums Enhanced by Earnings:  none

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

Weekend Update – October 11, 2015

If you’re a fan of “American Exceptionalism” and can put aside the fact that the Shanghai stock market has made daily moves of 6% higher in the past few months on more than one occasion, you have to believe that the past week has truly been a sign of the United States’ supremacy extending to its stock markets.

We are, of optiocourse, the only nation to have successfully convinced much of the world for the past 46 years that we put a man on the moon.

So you tell me. What can’t we do?

What we can do very well is turn bad news into good news and that appears to be the path that we’ve returned to, as the market’s climb may be related to a growing belief that interest rate hikes may now be delayed and the party can continue unabated.

While it was refreshing for that short period of time when news was taken at face value, we now are faced with the prospect of markets again exhibiting their disappointment when those interest rate hikes truly do finally become reality.

Once the market came to its old realizations it moved from its intra-day lows hit after the most recent Employment Situation Report and the S&P 500 rocketed higher by 6% as a very good week came to its end on a quiet note.

While much of the gain was actually achieved when the Shanghai markets were closed for the 7 day National Day holiday celebration, it may be useful to review just what rockets are capable of doing and perhaps looking to China as an example of what soaring into orbit can lead to.

Rockets come in all sizes and shapes, but are really nothing more than a vehicle launched by a high thrust engine. Those high thrust rocket engines create the opportunities for the vehicle. Some of those vehicles are designed to orbit and others to achieve escape velocity and soar to great heights.

And some crash or explode violently, although not by design.

As someone who likes to sell options the idea of a stock just going into orbit and staying there for a while is actually really appealing, but with stocks its much better if the orbit established is one that has come down from greater heights.

That’s not how rockets usually work, though.

But for any kind of orbiting to really be worthwhile, those premiums have to be enriched by occasional bumps along the path that don’t quite make it to the level of violent explosions.

It’s just that you never really know when those violent explosions are going to come and how often. Certainly Elon Musk didn’t expect his last two rocket launches to come to sudden ends.

In China’s case those 6% increases have been followed by some epic declines, but that’s not unusual whenever seeing large moves in either direction.

As we get ready to start earnings season for real this week we may quickly learn whether our own 6% move higher was just the first leg of a multi-stage rocket launch or whether it will soon discover that there is precious little below to offer much in the way of support.

Prior to that 6% climb it was that lack of much below that created a situation where many stocks had gone into orbit, taking a rest to regain strength for a bounce higher. That temporary orbit was a great opportunity to generate some option premium income, as some of the risk of a crash was reduced as those stocks had already migrated closer to the ground.

While I don’t begrudge the recent rapid rise it would be nice to go back into orbit for a while and refuel for a slower, but more sustainable ride higher.

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

There aren’t too many data points to go on since that turnaround last week, but Apple (NASDAQ:AAPL) has been uncharacteristically missing from the party.

It seems as if it’s suddenly becoming fashionable to disparage Apple, although I don’t recall Tim Cook having given Elon Musk a hard time recently. With the opening of the movie, Steve Jobs, this week may or may not further diminish the luster.

Ever since Apple joined the DJIA on March 19, 2015 it has dragged the index 109 points lower, accounting for about 11% of the index’s decline, as it has badly lagged both the DJIA and S&P 500 during that period. The truth, however, is that upon closer look, Apple has actually under-performed both for most of the past 3 year period, even when selecting numerous sub-periods for study. The past 6 months have only made the under-performance more obvious.

With both earnings and an ex-dividend date coming in the next month, I would be inclined to consider an Apple investment from the sale of out of the money puts. If facing assignment, it should be reasonably easy to rollover those puts and continuing to do so as earnings approach. If, however, faced with the need to rollover into the week of earnings, I would do so using an extended weekly option, but one expiring in the week prior to the week of the ex-dividend date. Then, if faced with assignment, I would plan to take the assignment and capture the dividend, rather than continuing to attempt to escape share ownership.

In contrast to Apple, Visa (NYSE:V) which joined the DJIA some 2 years earlier, coincidentally having split its shares on the same day that Apple joined the index, actually added 49 points to the DJIA.

For Visa and other credit card companies there may be a perfect storm of the good kind on the horizon. With chip secured credit cards just beginning their transition into use in the United States and serving to limit losses accruing to the credit card companies, Visa is also a likely beneficiary of increasing consumer activity as there is finally some evidence that the long awaited oil dividend is finding its way into retail.

When it comes to bad news, it’s hard to find too many that have taken more lumps than YUM Brands (NYSE:YUM) and The Gap (NYSE:GPS).

Despite a small rebound in YUM shares on Friday, that came nowhere close toward erasing the 19% decline after disappointing earnings from its China operations.

YUM Brands was a potential earnings related trade last week, but it came with a condition. That condition being that there had to be significant give back of the previous week’s gains.

Instead, for the 2 trading days prior to earnings, YUM shares went higher, removing any interest in taking the risk of selling puts as the option market was still anticipating a relatively mild earnings related move and the reward was really insufficient.

Now, even after the week ending bounce, YUM’s weekly option premium is quite high, especially factoring in its ex-dividend state. As discussed last week, the premium enhancement may be sufficient to look into the possibility of selling a deep in the money weekly call option and ceding the dividend in order to accrue the premium and exit the position after just 2 days, if assigned early.

You needn’t look to China to explain The Gap’s problems. Slumping sales under its new CEO and the departure of a key executive from a rare division that was performing have sent shares lower and lower.

The troubles were compounded late this past week when The Gap did, as fewer and fewer in retail are doing, and released its same store sales figures and they continued to disappoint everyone.

Having gone ex-dividend in the past week that lure is now gone for a few months. The good news about The Gap is that it isn’t scheduled to report news of any kind of news for another month, when it releases same store sales once again, followed by quarterly results 10 days later.

The lack of any more impending bad news isn’t the best of compliments. However, unlike a rocket headed for a crash the floors for a stock can be more forgiving and The Gap is approaching a multi-year support level that may provide some justification for a position with an intended short term time frame as its option premiums are increasingly reflecting its increased volatility.

Coach (NYSE:COH) has earnings due to be reported at the end of this month. It is very often a big mover at earnings and despite some large declines had generally had a history of price recovery. That, however, hasn’t been the case in nearly 2 years.

Over the past 3 years I’ve owned Coach shares 21 times, but am currently weighed down by a single lot that is nearly 18 months old. During that time period I’ve only seen fit to add shares on a single occasion, but am again considering doing so as it seems to be building upon some support and may be one of those beneficiaries of increased consumer spending, even as its demographic may be less sensitive to energy pricing.

With the risk comes a decent weekly option premium, but I might consider sacrificing some of that premium and attempting to use a higher priced strike and perhaps an extended weekly option, but being wary of earnings, even though I expect an upward surprise.

The drug sector has seen its share of bad news lately, as well and has certainly been the target of political opportunism and over the top greed that makes almost everyone cringe.

AbbVie (NYSE:ABBV) is ex-dividend this week and is nearly 20% lower from the date that the S&P 500 began its descent toward correction territory. Since its spin-off from Abbott Labs (NYSE:ABT), which is also ex-dividend this week, AbbVie has had more than its share of controversy, including a proposed inversion and the pricing of its Hepatitis C drug regimen.

Shares seem to have respected some price support and have returned to a level well below where I last owned them. With its equally respectable option premium and generous dividend, this looks like an opportune time to consider a position, but I would like it as a short term holding in an attempt to avoid being faced with its upcoming earnings report at the end of the month.

Finally, Netflix (NASDAQ:NFLX) reports earnings this week and had been on a tear until mid-August, when a broad brush took nearly every company down 10% or more.

Of course, even with that 10% decline, Icahn Enterprises (NASDAQ:IEP), would have been far better off not having sold its shares and incurring its own 13% loss in 2015.

With earnings coming this week I found it interesting that Netflix would announce a price increase for new customers in advance of earnings. In having done so, shares spiked nearly 10%.

The option market is implying a 14% price move, however, a 1% ROI could possibly be achieved by selling a weekly put at a strike level 19% below Friday’s closing price.

That’s an unusually large cushion even as the option market has been starting to recover from a period of under-estimating earnings related moves in the past quarter.

While the safety net does appear wide, my cynical side has me believing that the subscription increase was timed to offer its own cushion for what may be some disappointing numbers. Given the emphasis on new subscriber acquisitions, I would believe that metric will come in strong, otherwise this wouldn’t be an opportune time for a price increase. However, there may be something lurking elsewhere.

With that in mind, I would consider the same approach as with YUM Brands last week and would only consider the sale of puts if preceded by some significant price pullback. Otherwise, I would hold off, but might become interested again in the event of a large downward move after earnings are released.

Traditional Stocks: Apple, The Gap, Visa

Momentum Stocks: Coach

Double-Dip Dividend: AbbVie (10/13), YUM Brands (10/14)

Premiums Enhanced by Earnings: Netflix (10/14 PM)

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

Weekend Update – August 30, 2015

Good luck to you if you have staked very much on being able to prove that you can make sense of what we’ve been seeing in the US stock market.

While it’s always impossible to predict what the coming week will bring, an even more meaningful tip of the hat would go to anyone that has a reasonable explanation of what awaits in the coming week, especially since past weeks haven’t necessarily been simple to understand, even in hindsight.

Sure, you can say that it’s all about the confusion over in China and the series of actions taken to try and control the natural laws of physics that describe the behavior of bubbles. You can simply say that confusion and lack of clear policy in the world’s second largest economy has spilled over to our shores at a time when there is little compelling reason for our own markets to make any kind of meaningful move.

That appears to be a reasonable explanation, in a case of the tail wagging the dog, but the correlation over the past week is imperfect and not much better over the past 2 weeks when some real gyrations began occurring in China.

The recovery last week was very impressive both in the US and in China, but in the span of less than 2 months, ever since China began restrictions on stock trading activity, we can point to three separate impressive recoveries in Shanghai. During that time the correlation between distant markets gets even weaker.

Good luck, then, guessing what comes next and whether the tail will still keep wagging the dog, now that the dog realizes that a better than expected GDP may be finally evidencing the long expected energy dividend to help boost consumer participation in economic growth.

Sure, anyone can say that a 10% correction has been long overdue and leave it at that, and be able to hold their head up high in any argument now that we’ve been there and done that.

There has definitely not been a shortage of people coming out of the woodwork claiming to have gone to high cash positions before this recent correction. If they did, that’s really admirable, but it’s hard to find many trumpeting that fact before the correction hit.

What would have given those willing to disengage from the market and go to cash following unsuccessful attempts to break below support levels a signal to do so? Those lower highs and higher lows over the past month may have been the indication, but even those who wholeheartedly believe in technical formations will tell you that acting on the basis of that particular phenomenon has a 50-50 chance of landing you on the right side.

And why did it finally happen now?

The time has been ripe for about 3 years. I’ve been continually wrong in that regard for that long and I certainly can’t hold my head up very high, even if I had gotten it right this time.

Which I didn’t. But being right once doesn’t necessarily atone for all of the previous wrong calls.

No sooner had the chorus of voices come together to say that the character and depth of the decline seen were increasingly arguing against a V-shaped recovery that the market now seems to be attempting that V-shaped recovery.

What tends to make the most sense is simply considering taking a point of view that’s in distinct contrast to what people clamoring for attention attempt to build their reputations upon and are equally prepared to disavow or conveniently forget.

Of course, if you want to add to the confusion, consider how even credible individuals see things very differently when also utilizing a different viewing angle of events.

Tom Lee, former chief US equity strategist for JP Morgan Chase (NYSE:JPM) and founder of Fundstrat Global, who is generally considered bullish, notes that history shows that the vast majority of 10% declines do not become bear markets.

Michael Batnick, who is the director of research at Ritholtz Wealth Management, looked at things not from the perspective of the declines, but rather from the perspective of the advances seen.

His observation is that the vast majority of those declines generally occurred in “not the healthiest markets.”

Not that such data has application to events being seen in China, but it may be worthwhile to make note of the fact that the tremendous upside moves having recently been seen in China have occurred in the context of that market still having dropped 20%.

Perhaps not having quite the same validity as laws of physics, it may make some sense to be wary of the kind of moves higher that bring big smiles to many. If China’s stock market can still wag the United States, even with less than perfect correlation, there’s reason to be circumspect not only of their continued attempts to defy natural market forces, but also of that market’s behavior.

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

While I’m among those happy to have seen the market put 2 consecutive impressive gains together, particularly after the failed attempt to bounce back from a 600+ point loss to begin the week, I don’t think that I’ll be less cautious heading into this week.

I did open 2 new positions last week near the market lows, and despite their performance am still ambivalent about those purchase decisions. For each, I sold longer term contracts than would be my typical choice, in an attempt to lock in some volatility induced premiums and to have sufficient time for price recovery in the event of a short term downturn.

With an unusually large number of personal holdings that are ex-dividend this week, I may be willing to forgo some of the reluctance to commit additional capital in an effort to capture more dividend, especially as option premiums are being enhanced by volatility.

Both Coach (NYSE:COH) and Mosaic (NYSE:MOS) are ex-dividend this week.

For me, both also represent long suffering existing positions that I’ve traded many times over the years, and have been accustomed to their proclivity toward sharp moves higher and lower.

However, what used to be relatively short time frames for those declines have been anything but that for some existing lots, even as having traded other lots at lower prices.

Since their previous ex-dividend dates both have under-performed the S&P 500, although the gap has narrowed in the past month, even as both are within reach of their yearly lows.

On a relative basis I believe that both will out-perform the S&P 500 in the event of the latter’s weakness, but may not be able to keep pace if the market continues to head higher. However, for these trades and unlike having used longer term contracts with trades last week, my eyes would be focused on a weekly option and would even be pleased if shares were assigned early in an effort to capture the dividend.

That’s one of the advantages of having higher volatility. Even early assignment can be as or more profitable than in a low volatility environment and being able to capture both the premium and dividend, when the days of the position being open are considered.

Despite having spent some quality time with Meg Whitman’s husband a few months ago, I had the good sense not to ask him anything a few days before Hewlett Packard (NYSE:HPQ) was scheduled to report earnings.

That would have been wrong and no one with an Ivy League legacy, that I’ve ever heard about, has ever crossed that line between right and wrong.

While most everyone is now focusing on the upcoming split of Hewlett Packard, my focus is dividend centric. As with Coach and Mosaic, the option premium is reflecting greater volatility and is made increasingly attractive, even during an ex-divided event.

However, since Hewlett Packard’s ex-dividend date is on Friday, there is less advantage in the event of an early assignment. That, though, points out another advantage of a higher volatility environment.

That advantage is that it is often better to rollover in the money positions, with or without a dividend in mind, than it is to accept assignment and to seek a new investment opportunity.

In this case, if faced with likely early assignment, I would probably consider rolling over to the next week and at least if still assigned early, then would be able to pocket that additional week’s option premium, which could become the equivalent of having received the dividend.

For those who are exceptionally daring, Joy Global (NYSE:JOY) is also ex-dividend this week and it is another of my long suffering positions.

These days, anything stocks associated with China have additional risk. For years Joy Global was one of a very small number of stocks that I considered owning that had large exposure to the Chinese economy. I gave considerably more credibility to Joy Global’s forecasting of its business in China than to official government reports of economic growth.

The daring part of a position in Joy Global has more to do with just having significant interests in China, but also because it reports earnings the day after going ex-dividend. I generally do stay away from those situations and much prefer to have earnings be release first and then have the stock go ex-dividend the following day.

In this case, one can consider the purchase of shares and the sale of a deep in the money weekly call option in the hopes that someone might consider trying to capture the dividend and then perhaps selling their shares before exposure to earnings risk.

In such an event, the potential ROI can be 1.1% if selling a weekly $22 call option, based upon Friday’s $24.01 close.

However, if not assigned early, the ROI becomes 1.8% and allows for an 8% price cushion in the event of the share’s decline, which is in line with the option market’s expectations.

For those willing to cede the dividend, there is also the possibility of considering a put sale in advance of earnings.

The option market is implying only an 8.1% move next week. However, it may be possible to achieve a 1% return for the sale of a weekly put that is at a strike price 12.5% below Friday’s closing price.

Going from daring to less so, I purchased shares of $24.06 shares General Electric (NYSE:GE) last week and sold longer dated $25 calls in an effort to combine premium, capital gains on shares and an upcoming ex-dividend date.

Despite the shares having climbed during the course of the week and now beyond that strike level, I may be considering adding even more shares, again trying to take advantage of that combination, especially the higher than usual option premium that’s available.

General Electric hasn’t yet announced that ex-dividend date, but it’s reasonable to expect it sometime near September 18th. While my current short call position is for October 2, 2015, for this additional proposed lot, I may consider the sale of a September 18 slightly out of the money option contracts.

In the event that once the ex-dividend date is announced and those shares are in jeopardy of being assigned early, I might consider rolling over the position if volatility allows that to be a logical alternative to assignment.

Finally, as long as Meg Whitman is on my mind, I’m not certain how much longer I can go without owning shares of eBay (NASDAQ:EBAY). While it has traded in a very consistent range and very much paralleling the performance of the S&P 500 over the past month, it is offering an extremely attractive option premium in addition to some opportunity for capital gains on shares.

The real test, of course, begins as it releases its next earnings report which will no longer include PayPal’s (NASDAQ:PYPL) contributions to its bottom line. That is still 6 weeks away and I would consider the purchase of shares and the sale of intermediate term option contracts in order to take advantage of that higher market volatility induced premium.

At least that much makes sense to me.

Traditional Stock: eBay, General Electric

Momentum Stock: none

Double-Dip Dividend: Coach (9/3 $0.34), Hewlett Packard (9/4 $0.18), Joy Global (9/2 $0.20), Mosaic (9/1 $0.28)

Premiums Enhanced by Earnings: Joy Global (9/3 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 – May 24, 2015

There was a time, a long time ago, that people actually made telephone calls and the ones on the receiving end didn’t have Caller ID to screen those calls.

Back in those days, without any screening device, there were lots of wrong numbers. Sometimes, if it got to the point that you actually began to recognize the voice on the other end, those wrong numbers could become annoying. Of course, the time of the day also played a role in just how annoying those wrong numbers could be and they always seemed to come at the worst of times.

For example, just imagine how bad the timing might be if you discovered that the wrong GDP numbers had played a role, maybe a major role, in helping stock markets move higher in the belief that interest rate increases weren’t going to be imminent.

Somehow, that’s not as funny as the intentionally wrong number prank phone calls made by Bart Simpson.

Although anyone could make the honest mistake of dialing a wrong number, in the back of your mind you always wondered what kind of an idiot doesn’t know how to dial? After all, it was just a simple question of transposing numbers into action.

Otherwise, numbers were a thing of beauty and simply reflected the genius of mankind in their recognition and manipulations.

For many years I loved arithmetic and then I learned to really enjoy mathematics. The concept that “numbers don’t lie” had lots of meaning to me until I learned about interpretative statistics and came to realize that numbers may not lie, but people can coerce them into compromising themselves to the point that the numbers themselves are blamed.

As we’ve all been on an FOMC watch trying to predict when a data driven Federal Reserve would begin the process of increasing rates it’s a little disconcerting to learn that one of the key input numbers, the GDP, may not have been terribly accurate.

In other words, the numbers themselves may have lied.

As those GDP reports had been coming in over the past few months and had been consistently disappointing to our expectations, many wondered how they could possibly be reflecting a reality that seemed to be so opposite to what logic had suggested would be the case.

But faced with the sanctity of numbers it seemed a worthless exercise to question the illogical.

While many of us are wary of economic statistics that we see coming from overseas, particularly what may be self-serving numbers from China, there’s basically been a sense that official US government reports, while subject to revision, are at least consistent in their accuracy or inaccuracy, as the methodology is non-discriminatory and applied equally.

It really comes as a blow to confidence when the discovery is made that the methodology itself may be flawed and that it may not be a consistently applied flaw.

The word for that, one that we heard all week long, was “seasonality.”

The realization that the first quarter GDP was inaccurate puts last month’s FOMC minutes released this past week in a completely different light. While the FOMC Governors may not have been inclined to increase rates as early as this upcoming June’s meeting, that inclination may at least have been partially based upon erroneous data. That erroneous data, although perhaps isolated to a particular time of the year, therefore, may also impact the rate of change observed in subsequent periods. Those projected trends are the logical extension of discrete data points and may also contribute to policy decisions.

But not so readily once you find that you may have been living a lie.

Next week, a holiday shortened trading week, ends with the release of the GDP and may leave us with the question of just what to do with that data.

This past Friday, Federal Reserve Chairman Janet Yellen gave an address and didn’t offer any new insights into the thoughts of the FOMC, particularly as the issue of the integrity of data was concerned.

With the S&P 500 resting for the week at what may either be a resistance level or a support level, what she also didn’t do was to offer stock market bulls a reason to believe that a dovish FOMC would take a June interest rate increase off the table to offer a launching pad.

As the market sits right below its record closing highs and with earnings season begin to wind down, taking those always questionable numbers away with them until the next earnings season begins in less than 2 months, all we have left is the trust in the consistency and accuracy of economic reports. However, taking a look at both the Shanghai and Hang Seng Indexes, maybe questionable numbers isn’t such a bad thing, after all.

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

Coach (NYSE:COH) and Michael Kors (NYSE:KORS) have been very much linked in people’s minds ever since Coach’s very disappointing sales and earnings report in July 2013. At that time the storyline was that Coach was staid and uninteresting and had been supplanted in all ways by Kors.

To a large degree that mindset still continues, despite Kors steep descent from its highs of 2014. What has gone unnoticed, however, is that other than for the 6 month period after that disastrous earnings report in 2013, Coach shares have actually out-performed Kors through most of the time thereafter.

Coach didn’t fare terribly well after its most recent earnings report and its price has since returned back to where it had built a comfortable base. With an ex-dividend date upcoming the following week I think that I’m ready to add shares to a more expensive pre-existing lot that has been waiting for more than a year to be assigned and the past 8 months to be joined by another lot to help alleviate its misery.

With that upcoming dividend and with this week being a shortened trading week and offering lessened option premiums, I would likely consider a purchase of Coach shares and the sale of an extended weekly option, probably also seeking some capital gains on shares by using an out of the money strike price.

Kors on the other hand is reporting earnings this week and the option market is implying a 7.5% price movement. While not a very big differential, a 1% ROI may be achieved with the sale of a weekly put option if the shares fall less than 8.3% next week. If willing to add an additional week to the put contract expiration that would allow a fall of almost 10% before being at risk of assignment of shares.

Normally I don’t like to go more than a week at a time on a put sale unless needing to rollover a put that is deep in the money in order to prevent or delay assignment. However, the premiums this week are somewhat lower because of the holiday and that means that risk is a little bit higher if selling puts with a particular ROI as a goal in mind.

While Coach has been resistant to being buried and cast away, it’s hard to find a company that has had more requiems written for it than GameStop (NYSE:GME).

With game makers having done well of late there may be reason to delay a public performance of any requiem for yet another quarter as GameStop continues to confound investors who have long made it a very popular short position.

Unlike Kors, which pays no dividend, I do factor a dividend into the equation if selling puts in advance or after earnings are reported. GameStop reports earnings this week and will be ex-dividend sometime during the June 2015 option cycle.

With the option market having an implied price move of 6.2% as earnings are released, a 1% ROI can be achieved with the sale of a weekly put if shares don’t fall more than 6.8%. However, if faced with assignment, I would try to rollover the put options unless the ex-dividend date is announced and it is in the coming week. In that event, I would take assignment and consider the sale of calls with the added goal of also capturing the dividend.

I’ve been waiting a long time to re-purchase shares of Baxter International (NYSE:BAX) and always seem drawn to it as it is about to go ex-dividend. This week’s ex-dividend date arrives at a time when shares are approaching their yearly low point. I tend to like that combination particularly when occurring in a company that is otherwise not terribly volatile nor prone to surprises.

As with some other trades this week I might consider bypassing the weekly option and looking at an extended weekly option to try to offset some of the relatively higher transaction costs occurring in a holiday shortened week.

Qualcomm (NASDAQ:QCOM) is also ex-dividend this week and seems to have found stability after some tumultuous trading after its January 2015 earnings report. With some upcoming technology and telecom conferences over the next 2 weeks there may be some comments or observations to shake up that stability between now and its next earnings report. However, if open to that risk, shares do offer both an attractive option premium and dividend.

With shares currently situated closer to its yearly low than its high it is another position that I would consider selling an extended weekly option and seeking to also get some capital gains on shares by using an out of the money strike price.

Finally, retail hasn’t necessarily been a shining beacon of light and whatever suspicions may surround the GDP, there’s not too much question that retailers haven’t posted the kind of revenues that would support a consumer led expansion of the economy, although strangely shoes may be exception.

One of the more volatile of the shoe companies has been Deckers Outdoor (NYSE:DECK) and if the option market is any judge, it is again expected to be volatile as it reports earnings this week.

The option market is implying a 10.5% price move in one direction or another this coming week as earnings are released and guidance provided.

Meanwhile, a 1% ROI could potentially be achieved from the sale of a put option if the shares don’t fall more than 15.4%. That’s quite a differential and may be enough to mitigate the risk in the shares of a company that are very prone to significant ups and downs.

As with Kors, there is no dividend to factor into any decision if faced with the need to either embrace or avoid assignment. In that event, I would likely try to roll the put options over to a forward week in an attempt to outlast any decline in share price and wait out price recovery, while still generating premium income.

That sounds good on paper and when it does work out that way, adding up all of those premiums on a piece of paper reminds you how beautiful simple numbers can still be.

Traditional Stocks: none

Momentum Stocks: Coach

Double Dip Dividend: Baxter International (5/28), Qualcomm (6/1)

Premiums Enhanced by Earnings: Deckers (5/28), GameStop (5/28 PM), Kors (5/27 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 – May 3, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Funny how a single product can turn it all around.

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

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

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

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

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

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

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

Traditional Stocks: Coach

Momentum Stocks: Abercrombie and Fitch, T-Mobile

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

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

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

Earnings Make The Adrenaline Flow

There’s nothing like earnings season to really get the adrenaline flowing.

Basically, whether you employ a covered option strategy or not, earnings season is always going to be one that leaves investors alternating rapidly between elation and despair and just as frequently not understanding why the market reacted as it did when news seemed so benign.

Really, can a penny miss on earnings be that significant to cause a massive sell-off, especially when we know that analysts are working from a position of less than complete and perfect information? What kind of guide to action can a half-blindfolded and shackled outside analyst really provide?

You would think that under those conditions missing by just a penny or two would be pretty close, unless you then consider that there may be billions of outstanding shares, demonstrating the adage that pennies do add up.

But then there’s also the issue of estimates not being remotely close to reality and the earnings miss or beat seems to take even the whisperers by surprise. Unfortunately, there’s no weighting system to the earnings estimates provided by the myriad of analysts following a single stock when the average estimate is calculated. The ones with questionable track records are on equal footing with the ones providing more accurate estimates.

I especially like a comment that Jamie Dimon, Chairman and CEO of JP Morgan Chase made the other day, although attributed to someone else, with regard to analysts;

“We don’t miss our estimates, you miss our actuals.”

The reactions that can send share prices plunging or surging so frequently also raise an obvious question regarding just how well versed the professional investing community actually is, versus what they pretend to be, regarding their knowledge of the value of any stock and its future prospects.

There certainly seem to be an awful lot of surprises, in both directions, if professionals are really on the case. If they can be so deficient and fooled so frequently, leading to knee jerk responses, what hope is there for the lowly individual investor?

If you’re a buy and hold trader there’s nothing more maddening than seeing your paper gains get eroded by earnings reports. Even if they eventually recover, you wonder about all of the wasted price energy that goes into the roller coaster ride, especially if it occurs on a regular quarterly basis. The long term ride higher, which the hope for any buy and hold investor, is often one that follows a very inefficient course.

That results in lots of effort and frequently without much to show for it.

While considering the sale of calls on existing positions in advance of earnings, in order to take advantage of the enhanced premiums that come along with the uncertainty that the earnings process brings, I particularly like to consider the sale of puts on positions that I may not already own, as long as there is an acceptable balance between the risk of a surprisingly large move and the reward for taking that risk.

The risk is defined by the option market and is based upon the premiums that are willing to be paid for options. The next part of the equation is defining the reward that makes the risk worthwhile for what is envisioned to be a short term position.

I’m more than happy to be able to generate a 1% ROI for the week on such a trade, but individual temperament can determine what reward suits the risk. The greater the potential reward, however, the more likely that the strike level necessary to achieve that return will be within the price boundaries dictated by the option market, which may then result in the need for further action.

Among the stocks for consideration this week are many that generally carry inherent risk and even more so in advance of earnings. Often, and perhaps counter-intuitively, those provide the best balance of risk and reward as the option market occasionally implies a large price move but still provides attractive option premiums outside of the range implied.

This week I’m considering the sale of puts of shares of Alibaba (NYSE:BABA), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Coach (NYSE:COH), Conoco Phillips (NYSE:COP), Dow Chemical (NYSE:DOW), Facebook (NASDAQ:FB), Google (NASDAQ:GOOG), Las Vegas Sands (NYSE:LVS), Microsoft (NASDAQ:MSFT), Petrobras (NYSE:PBR), Phillips 66 (NYSE:PSX) and VMWare (NYSE:VMW).

 

While there may be many fundamental or technical reasons to consider or avoid any of these stocks, when I look at the possibility of such earnings related trades I tend to dismiss those reasons, focusing entirely on the defined criteria of the implied move price range and the desired ROI.

The table can serve as a guide for other companies reporting earnings this week and can be customized to reflect an individual’s pursuit of return.

Additionally, the same considerations can be made after earnings are released. That’s especially the case when a potential candidate has met my criteria, but is moving higher in advance of earnings as was the case for the broader market to close the previous week and in the immediate aftermath of Mario Draghi’s Quantitative Easing announcement, until more sane heads prevailed the next day.

My preference is to not sell puts as a stock’s price is climbing higher. In general, I like selling calls into price strength and puts into weakness, in the attempt to capitalize on momentum and emotion in the belief that the momentum will not continue at its current pace or direction.

In the event of price strength in advance of earnings I tend to avoid the sale of puts, but would still consider doing so after earnings are released if there is a resultant price drop. Premiums can still remain high after the news has been digested and while emotions may still be running high.

The stocks that are most likely to receive a “YES” rating, indicating that they meet the established criteria, tend to already trade with some volatility even when earnings are not part of the equation.

Somewhat surprisingly a number of the stocks that I had expected would receive a “YES” designation based upon past quarters, did not do see this time, as the option market is predicting less earnings related movement and is not offering adequate premiums outside of the predicted price range.

Based upon some recent price moves observed in companies that have presented disappointing earnings I wouldn’t even consider any of those stocks rated as being “MARGINAL,” as the reward is simply insufficient, even when reward expectations are low.

For those that received a “YES” rating based on Friday’s closing prices, I would re-evaluate as next week’s trading begins in order to avoid a situation that may have greater risk of assignment than is offset by the premium’s reward.

I usually am not interested in taking assignment of such shares in the event of an adverse price move, although even with stronger indications, as with “YES” ratings, any time that you sell puts you have to be prepared to take ownership, unless you have some other exit plans, such as rolling over to a new expiration date, ideally to a lower strike level. The ability to do so is greatly enhanced by dealing with stocks that have adequate trading volume of their underlying options, especially for those deep in the money.

If you are an adrenaline junkie, earnings related trades may be just the fix for you, especially if you take measures to limit risk by limiting greed. Taking those steps can give the thrill while still keeping you in the game for the next round of earnings that will surely come along before you know it.

Weekend Update – November 30, 2014

An incredibly quiet and uneventful week, cut short by the Thanksgiving Day holiday, saw the calm interrupted as a group of oil ministers from around the world came to an agreement.

They agreed that couldn’t agree, mostly because one couldn’t trust the other to partner in concerted actions what would turn out to be in everyone’s best interests.

If you’ve played the Prisoner’s Dilemma Game you know that you can’t always trust a colleague to do the right thing or to even do the logical thing. The essence of the game is that your outcome is determined not only by your choice, but also by the choice of someone else who may or may not think rationally or who may or may not believe that you think rationally.

The real challenge is figuring out what to do yourself knowing that your fate may be, to some degree, controlled by an irrational partner, a dishonest one or one who simply doesn’t understand the concept of risk – reward. That and the fact that they may actually enjoy stabbing you in the back, even if it means they pay a price, too.

Given the disparate considerations among the member OPEC nations looking out for their national interests, in addition to the growing influence of non-OPEC nations, the only reasonable course of action was to reduce oil production. But no single nation was willing to trust that the other nations would have done the right thing to maintain oil prices at higher levels, while still obeying basic laws of supply and demand, so the resulting action was no action. The stabbing in the back was probably in the minds of some member nations, as well.

If the stock market was somehow the partner in a separate room being forced to make a buying or selling decision based on what it thought the OPEC members would do, a reasonable stock market would have expected a reduction in supply by OPEC members in support of oil prices. After all, reasonable people don’t stab others in the back.

That decision would have resulted in either buying, or at least holding energy shares in advance of the meeting and then being faced with the reality that those OPEC members, hidden away, whose interests may not have been aligned with those of investors, made a decision that made no economic sense, other than perhaps to pressure higher cost producers.

And so came the punishment the following day, as waves of selling hit at the opening of trading. Not quite a capitulation, despite the large falls, because panic was really absent and there was no crescendo-like progression, but still, the selling was intense as many headed for the exits.

While fleeing, the question of whether this decision or lack of decision marked the death of the OPEC cartel, meaning that oil would start trading more on those basic laws and not being manipulated by nations always seeking the highest reward.

The more religious and national tensions existing between member nations and the more influence of non-member nations the less likely the cartel can act as a cartel.

The poor UAE oil minister at a press conference complained that it wasn’t fair for OPEC to be blamed for low oil prices, forgetting that once you form a cartel the concept of fairness is already taken off of the table, as for more than 40 years the cartel has unfairly squeezed the world for every penny it could get.

With the belief that the death of OPEC may be at hand comes the logical, but mistaken belief that the ensuing low oil prices would be a boon for the stock market. That supposition isn’t necessarily backed up by reality, although logic would take your mind in that direction.

As it happens, rising oil prices, especially when due to demand outstripping supply makes for a good stock market, as it reflects accelerating economic growth. Falling oil prices, if due to decreased demand is certainly not a sign of future economic activity. However, we are now in some uncharted territory, as falling prices are due to supply that is greater than demand and without indication that those falling prices are going to result in a near term virtuous cycle that would send markets higher.

What we do know is that creates its own virtuous cycle as consumers will be left with more money to spend and federal and state governments will see gas taxes revenues increase as people drive more and pay less.

The dilemma now facing investors is whether there are better choices than energy stocks at the moment, despite what seems to be irrationally low pricing. The problem is that those irrational people in the other room are still in control of the destinies of others and may only begin to respond in a rational manner after having experienced maximum pain.

As much as I am tempted to add even more energy stocks, despite already suffering from a disproportionately high position, the lesson is clear.

When in doubt, don’t trust the next guy to do the right thing.

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

When Blackstone (NYSE:BX) went public a number of years ago, just prior to the financial meltdown, imagine yourself being held an a room and being given the option of investing your money in the market, without knowing whether the privately held company would decide to IPO. On the surface that might have sounded like a great idea, as the market was heading higher and higher. But the quandary was that you were being asked to make your decision without knowing that Blackstone was perhaps preparing an exit strategy for a perceived market top and was looking to cash out, rather than re-invest for growth.

Had you known that the money being raised in the IPO was going toward buying out one of the founders rather than being plowed back into the company your decision might have been different. Or had you known that the IPO was an attempt to escape the risks of a precariously priced market you may have reacted differently.

So here we are in 2014 and Blackstone, which is the business of buying struggling or undervalued businesses, nurturing them and then re-selling them, often through public markets, is again selling assets.

Are they doing so because they perceive a market peak and are securing profits or are they preparing to re-invest the assets for further growth? The dilemma faced is across the entire market and not just Blackstone, which in the short term may be a beneficiary of its actions trying to balance risk and reward by reducing its own risk.

The question of rational behavior may be raised when looking at the share price response to Dow Chemical (NYSE:DOW) on Friday. In a classic case of counting chickens before they were hatched I was expecting my shares to be assigned on Friday.

While I usually wait until Thursday or Friday to try to make rollovers, this past shortened week I actually made a number of rollovers on Tuesday, which were serendipitous, not having expected Friday’s weakness. The rollover trade that didn’t get made was for Dow Chemcal, which seemed so likely to be assigned and would have offered very little reward for the rollover.

Who knew that it would be caught up in the energy sell-off, well out of proportion to its risk in the sector, predominantly related to its Kuwaiti business alliances? The question of whether that irrational behavior will continue to punish Dow Chemical shares is at hand, but this drop just seems like a very good opportunity to add shares, both as part of corporate buybacks as well as for a personal portfolio. With my shares now not having been assigned, trading opportunities look beyond the one week horizon with an eye on holding onto shares in order to capture the dividend in late December.

The one person that I probably wouldn’t want to be in the room next to me when I was being asked to make a decision and having to rely on his mutual cooperation, would be John Legere, CEO of T-Mobile (NYSE:TMUS). He hasn’t given too much indication that he would be reluctant to throw anyone under the bus.

However, with some of the fuss about a potential buyout now on hiatus and perhaps the disappointment of no action in that regard now also on hiatus, shares may be settling back to its more sedate trading range.

That would be fine for me, still holding a single share lot and having owned shares on 5 occasions in the past year. Its option volume trading is unusually thin at times, however, and with larger bid – ask spreads than I would normally like to see. At its current price and now having withstood the pressures of its very aggressive pricing campaigns for about a year, I’m less concerned about a very bad earnings release and see upside potential as it has battled back from lower levels.

EMC Corp (NYSE:EMC) may also have had some of the takeover excitement die down, particularly as its most likely purchaser has announced its own plans to split itself into two new companies. Yet it has been able to continue trading at its upper range for the year.

EMC isn’t a terribly exciting company, but it has enough movement from buyout speculation, earnings and speculation over the future of its large VMWare (NYSE:VMW) holding to support an attractive option premium, in addition to an acceptable dividend.

I currently own shares of both Coach (NYSE:COH) and Mosaic (NYSE:MOS). They both are ex-dividend this coming week. Beyond that they also have in common the fact that I’ve been buying shares and selling calls on them for years, but most recently they have been mired at a very low price level and have been having difficulty breaking resistance at $38 and $51, respectively.

While they have been having difficulty breaking through those resistance levels they have also been finding strength at the $35 and $45 levels, respectively. Narrowing the range between support and resistance begins to make them increasingly attractive for a covered option trade, especially with the dividend at hand.

I’ve been sitting on some shares of General Motors (NYSE:GM) for a while and they are currently uncovered. I don’t particularly like adding shares after a nice rise higher, as General Motors had on Friday, but at its current price I think that it is well positioned to get back to the $35 level and while making that journey, perhaps buoyed by lower fuel prices, there is a nice dividend next week and some decent option premiums, as well. What is absolutely fascinating about the recent General Motors saga is that it has been hit with an ongoing deluge of bad news, day in and day out, yet somehow has been able to retain a reasonably respectable stock price.

Finally, it’s another week to give some thought to Abercrombie and Fitch (NYSE:ANF). That incredibly dysfunctional company that has made a habit of large price moves up and down as it tries to break away from the consumer irrelevancy that many have assigned it.

Abercrombie and Fitch recently gave some earnings warnings in anticipation of this week’s release and shares tumbled at that time. If you’ve been keeping a score card, lately the majority of those companies offering warnings or revising guidance downward, have continued to suffer once the earnings are actually released.

The options market is anticipating a 9.1% price move this week in response to earnings. However, it would still take an 11.8% decline to trigger assignment at a strike level that would offer a 1% ROI for the week of holding angst.

That kind of cushion between the implied move and the 1% ROI strike gives me reason to consider the risk of selling puts and crossing my fingers that some surprise, such as the departure of its always embattled CEO is announced, as a means of softening any further earnings disappointments.

Traditional Stocks: Blackstone, Dow Chemical, EMC Corp, General Motors

Momentum: T-Mobile

Double Dip Dividend: Coach (12/3), Mosaic (12/2)

Premiums Enhanced by Earnings: Abercrombie and Fitch (12/3 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.