Weekend Update – November 20, 2016

You might be able to easily understand any reluctance that the FOMC has had in the past year or maybe even in the year ahead to raise interest rates.

To understand why those decision makers could be scarred, all you have to do is glance back to nearly a year ago.

At that time, after a 9 year period of not having had a single increase in interest rates, the FOMC did increase interest rates.

The data compelled them to do so, as the FOMC has professed to be data driven.

Presumably, they did more than just look in the rear view mirror, casting forward projections and interpreting what are sometimes conflicting pieces of the puzzle.

At the time, the conventional wisdom, no doubt guided somewhat by the FOMC’s own suggestions, was that the small increase was going to be the first and that we were likely to see a series of such increases in 2016.

Funny thing about that, though.

Data is not the same as a crystal ball. Data is backward looking and trends can stop on a dime, or if I were to factor in the future value of money based upon the increase in the 10 Year Treasury note ever since Election Day, considerably more than a dime.

With the gift of hindsight, 2016 didn’t work out quite the way we all thought it might, but here we are, nearly a year later and with interest rates right where they were when they were last raised and the near certainty that they will be raised once again in just a few weeks.

Looking at the chart above and recalling the subsequent nose dive that the stock market took in the aftermath of the FOMC decision, you can begin to understand why there might be a sense of “once burned,” even as the FOMC should not include the stock market’s health in its own mandate.

But while there may still be a sense of doubt by those spending every waking moment in a darkened study pouring over economic data, when not participating in a speaking engagement, a quick look outside the window would have shown that the FOMC’s work was being done for it.

That’s because natural economic forces have now done the heavy lifting.

Just look at the nearly 28% increase in the interest rate on that 10 Year Treasury Note since its close on Election Day. That had to be music to the ears of even the doves on the FOMC, regardless of their political inclinations.

Who wants to be the bad guy or who wants to be the one responsible and have fingers pointed in their direction when things don’t work out as planned?

“The dog did it” is always a convenient excuse, but the resurgence of the consumer is now taking a dog of an economy and translating into the kind of economic growth that even a backward looking FOMC can embrace as being the handwriting on the wall.

While specialty retailers may not be feeling the glow, the larger national retailers are reporting good top and bottom lines and, more importantly, see a better near term future.

The consumer may be doing more heavy lifting at the check out line and energy prices remain low as more people are going to work and getting better wages to do so.

Check, check and check.

So while those natural forces have already driven up interest rates making it so easy for the FOMC to do so for only the first time in 2017, a small piece of me believes that the FOMC doesn’t want anyone to do its heavy lifting, but they may appreciate a little bit of a hand.

Especially, if they are of the mind to continue to present themselves as relevant in the face of an unexpected Presidential election.

That leaves me wondering whether the FOMC may still have a surprise in store for all of us and come in with a pre-emptory 0.50% interest rate hike instead of what we have been expecting.

Too much good news and too large of an increase in interest rates secondary to market forces may awaken those with memories of inflation past and the role of interest rates as a brake.

I don’t expect that to be the case, but when has predictability of the economy or the FOMC ever been assured?

Tradition would have you believe that the FOMC would not do such a thing before the start of a new administration, even as they are supposed to be blind as to the political scene, but there is not likely to be too much love lost after the moving trucks pull into the White House.

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

I don’t expect to be doing too much trading in this coming week, but that has been pretty much my story for 216, anyway.

The Thanksgiving holiday shortened week makes already low volatility induced option premiums even lower and we may be in a holding pattern until December’s FOMC meeting.

While there’s always concern about exaggerated market moves during periods of low trading volume, such as the coming week is expected to be, the possibility of a holding pattern can be a covered option writer’s best friend.

Dow Chemical (DOW) has been in a holding pattern for a while as we await some regulatory decision regarding its deal with DuPont (DD). It’s stock price has also been in a holding pattern, but the premiums may be bolstered a little bit by the uncertainty that still hangs over that deal.

Most best guesses would be that under a Trump Administration there could be a more wide embrace of such mergers and buyouts, but as I have long believed, there isn’t too much downside in the event the deal comes apart.

Maybe upside, actually.

What I do see is that there is a nice dividend coming up as 2016 comes to its end. However, I would likely try to take this on a week by week basis, also being mindful of the FOMC and its potential impact on markets.

Even with some adverse market news, I think that Dow Chemical’s downside is restrained and it may offer an attractive serial rollover opportunity allowing premiums and return to accumulate.

Although in an ear of electronic gaming, no one really rolls the dice anymore, but if you like rolling the dice, GameStop (GME) reports earnings this week. It has been everyone’s favorite short position for years and has been the least favorite of many as it has consistently refused to fade away.

The fact that the short sellers have also been on the line for a very generous dividend hasn’t helped to endear the company to them, although there is no doubt that if you had timed this stock properly, there have also been many short term shorting opportunities over the years.

The options market is implying only a 7.1% move this week, which is relatively small by past standards and GameStop has certainly shown that it can surprise stock investors and option speculators on both sides of the proposition.

I generally consider the sale of puts at a strike price that is outside of the range implied by the options market, if it can deliver a 1% ROI for the week.

It looks as if GameStop will be able to meet my criteria, but my concern in doing so is that its shares are right near an almost 4 year low and the trend in the past year hasn’t been very good.

As a specialty retailer, I don’t know if GameStop will follow the pattern of some others having recently reported earnings, but if it does, those lows are in danger of being wiped out.

For that reason, I would likely wait until after earnings are announced and would consider the purchase of shares and sale of calls if shares do anything other than moving sharply higher.

I would also want to hear some words that soothe fears regarding the dividend.

Finally, while broken records can really be annoying for those who actually remember what a record is, I’m going to look at 2016 fondly for the Marathon Oil (MRO) broken record it has given me.

With the expiration of short puts and the assignment of long calls, my self-imposed rule of never having more than 3 lots of any position is no longer a hindrance in considering a new Marathon Oil position this week.

With those two closed positions this past week, 2016 has now seen 11 Marathon Oil lots closed and it remains in a price range that I find appealing.

It is, however, at the top of that range, so I don’t expect to run head first into ownership of either shares or the sale of puts, but would absolutely consider doing so on the first downdraft in shares that again brings it near the $15 level.

Marathon Oil in 2016 has been the poster child for serial buy/writes or short put sales and then rollovers of those short option positions, sometimes even when in the money.

Of course, just like all trends, there can be a departure at any time, just as was the case for Morgan Stanley (MS), whose final lot of shares was assigned from me this past week, as it was my serial darling of 2015, until it wasn’t.

 

Traditional Stocks: Dow Chemical

Momentum Stocks: Marathon Oil

Double-Dip Dividend: none

Premiums Enhanced by Earnings: GameStop (11/22 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 25, 2016

The Talking Heads were really something.

I saw them and The Ramones in Cambridge.

Not at a concert, but at an album signing.

I picked up an album just to be able to get a close look at the members of both bands, mostly because one of the Ramones had a safety pin through his cheek and I thought that was pretty weirdly cool.

Then I promptly put the signed albums back into the rack.

Maybe it’s strange that so many years later one of the Ramones, maybe the one with the safety pin, would sing an homage to American capitalism and maybe a bit of an homage to one of its media symbols, “The Money Honey.”

But that was all almost 40 years ago and I never dreamed that those two groups would have been so influential. I never would have returned the signed albums back to the rack had I any clue that they would have been worth something some day.

In time, I came to especially like the Talking Heads, but never got as close as I did that one afternoon, instead having to settle on repeatedly melting the cassette tapes holding their songs.

“Burning Down the House,” “Once in a Lifetime” and so many more.

This coming week, right on the heels of the FOMC’s most recent statement release that kept investors in a celebratory mood, is going to be something of a Talking Feds festival.

That’s because there are no fewer than 12 scheduled speaking engagements by members of the Federal Reserve.

After putting off an interest rate increase yet again, there are probably those investors who feel that their tantrums over the immediate prospects of an interest rate increase, were taken into account by the FOMC.

It would be understandable if those investors had their selling behavior reinforced as they pursued a “Once in a Lifetime” interest rate increase policy from the FOMC.

What we are likely to get in the coming week is the kind of whipsaw movement in markets that we’ve been seeing recently as there is increasing dissent among the members.

This idea of Federal Reserve Presidents and Governors seeking public audiences is a fairly new one and doesn’t really serve much purpose, but each instance is dissected by investors as perhaps offering the most keen insight into the thinking of the FOMC.

That is, of course, until the next speaking engagement.

If luck of the draw would have the first 6 of next week’s engagements presided over by interest rate hawks or interest rate doves, we might see a decided move in a single direction and then the same move in the opposite direction as the remaining 6 had their moment in the sunshine.

There’s also the matter of which speakers are actually voting members of the FOMC.

Of the 10 voting members, five will be speaking and on a total of 6 occasions.

The preponderance of the words that are going to be heard from the voting members will be coming from among the interest rate hawks, whose words may be perceived as “Burning Down the House” that cheap money built.

The final word, as it always comes, will be from Chairman Janet Yellen, as she is the last speaker of the week and is still only a reluctant hawk.

But, she also has to be a pragmatist.

Even as economic data may not yet seem to be compelling to those of us who don’t appreciate the nuances, she is increasingly surrounded by dissent and a cacophony of opinion.

What we do know is that the Bank of Japan, on the same day as the past week’s FOMC Statement was released, admitted that negative interest rate policies weren’t working.

That essentially removed that possibility from the FOMC playbook, as if they had even ever considered it.

I don’t know whether the Talking Feds are going to produce anything resembling melody or deep insight in the course of the coming week.

My expectation, as last week’s rally took a little break to end the week, is that there may be lots of confusion in the week ahead and a stream of words to prepare us for the interest rate increase that now everyone says they are willing to accept as long as it didn’t arrive before December.

As December nears, the same fear of an interest rate increase may manifest, as we all become “Psycho Traders” when the moment of truth is thought to be right around the corner.

This week may be a good head start for those wanting to take on that personality, but there will probably be many more opportunities in the coming months as earnings season begins again in a few weeks and Federal Reserve members increasingly seek out the spotlight and break away from the center.

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 owned General Electric (GE) in a while.

Although I’m perplexed as to why that’s the case, I’m more perplexed as to General Electric’s latest ad campaign, which seems to be attempting to find some humor in the questions posed by a young man who may be developmentally disabled.

I understood their previous ad campaign that sought to portray General Electric as something other than your father’s old industrial company, but can’t begin to understand what message they’re trying to send with their latest commercial.

Nonetheless, General Electric below $30 has some appeal for me and I might be willing to overlook some of the very poor taste exhibited by their commercial.

The option premium isn’t terribly exciting, but a position in General Electric below $30 may look to capitalize on some capital appreciation on shares, in addition to that premium and the attractive dividend.

American Express (AXP) is another that I haven’t owned for a while and for much of the past 2 years, that has been a relatively good thing.

Having bounced off of its lows following a sustained decline when news hit that it was no longer going to be the exclusive credit card accepted at Costco (COST), I like the very narrow range it has traded in over the past 5 months.

That tight trading range, despite the relatively low volatility, still offers an attractive option premium and there will be an ex-dividend date probably in the next 2 weeks, or so.

One thing to keep in mind, if purchasing shares of American Express, however, is that it is one of the early earnings reporters and will be doing so before the end of the October 2016 monthly option cycle.

For that reason, I may consider a purchase of shares and the sale of calls with a longer term expiration, such as the November 2016 option, in an effort to capture the dividend, get some additional time value in the option premium received and have some additional time for price recovery in the event shares move lower upon an earning’s disappointment.

Dow Chemical (DOW) was among those stocks that I considered purchasing last week

Last week was one in which I was very reluctant to part with any of my cash reserves and only opened a single new position on the week.

In hindsight, I wished I had not been so reluctant.

But there is another opportunity with Dow Chemical this week, perhaps even more acute as it will be ex-dividend.

While there may still be some chance that the proposed complex merger with DuPont (DD) may not occur, i don’t see very much downside for Dow Chemical shares. In fact, in the event that regulatory decisions cause the proposed merger to be cancelled, I suspect that Dow Chemical will move higher, just as DuPont will move lower.

If the merger is finally approved, I think Dow Chemical will have upside in that event, as well. In the meantime, what it offers is that upside potential, the dividend and the option premium.

Perhaps even better, if looking for a potential serial rollover candidate, if Dow Chemical keeps trading in this tight range, there may be some good opportunity to continue to accumulate option premiums.

Ultimately, no one cares where your profit comes from and no one will belittle you if your return came from lots of premiums and dividends, instead of the old fashioned way.

Finally, there’s nothing really terribly exciting about Cypress Semiconductor (CY), except that it goes ex-dividend this week.

I have long liked this stock, mostly for its ability to trade in a fairly tight range, as long as you ignore the frequent earnings related moves and perhaps a failed takeover that had met with nearly everyone’s approval, except for the takeover candidate and the would be suitor that ultimately was victorious.

Since then, it’s controversial founder and CEO, who also presided over the great technology incubator that Cypress Technology had become, had left the company.

Unfortunately, shares are trading near a 15 month peak.

I still have 2 lots of shares that have January 2017 $12 call contracts written upon them and I do hope to still get 2 dividend payments from those shares. However, even at the current price I would consider adding an additional lot, but being prepared for the possibility of a longer term holding.

Since Cypress Semiconductor only offers monthly option premiums and it reports earnings during the first week of the November 2017 option cycle, in the event that an expiring October 2016 contract had to be rolled over, I would likely consider using a December 2016 or January 2017, in order to cushion some of the potential of an earning’s disappointment.

 

Traditional Stocks:  American Express, General Electric

Momentum Stocks: none

Double-Dip Dividend: Cypress Semiconductor (12/27 $0.11), Dow Chemical (9/28 $0.46)

Premiums Enhanced by Earnings: none

 

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

 

Weekend Update – September 18, 2016

 

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

Maybe several times a day.

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

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

I add the FOMC to that list.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The party may just be starting.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Far less exciting than silver is Fastenal (FAST).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Traditional Stocks:  Bristol Myers Squibb, Dow Chemical, Fastenal

Momentum Stocks: ProShares UltraSilver ETN

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

Premiums Enhanced by Earnings: none

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

Weekend Update – August 14, 2016

When the news came that Thursday’s close brought concurrent record closing highs in the three major stock indexes for the first time since 1999, it seemed pretty clear what the theme of the week’s article should be.

But as I thought about the idea of partying like it was 1999, what became clear to me was I had no idea of why anyone was in a partying kind of mood on Thursday as those records finally fell.

Ostensibly, the market was helped out by the 16% or so climbs experienced by the first of the major national retailers to report their most recent quarterly earnings.

Both Macy’s (M) and Kohls (KSS) surged higher, but there really wasn’t a shred of truly good news.

At least not the kind of news that would make anyone believe that a consumer led economy was beginning to finally wake up.

The market seemed to like the news that Macy’s was going to close 100 of its stores, while overlooking the 3.9% revenue decline in the comparable quarter of 2015.

In the case of Kohls the market completely ignored lowered full year guidance and focused on a better than expected quarter, also overlooking a 2% decline in comparable quarter revenue.

For those looking to some good retail news as validating the belief that the FOMC would have some basis to institute an interest rate increase in 2016, there should have been some disappointment.

That’s especially true when you consider that the last surge higher was in response to the stronger than expected Employment Situation Report in what could only be interpreted as an embrace of economic growth, even if leading to an increased interest rate environment.

With Friday’s Retail Sales Report showing no improvement in consumer participation, you do have to wonder about those signs pointing toward that rate hike.

Of course the official Retail Sales data are backward looking and it’s really only the future that matters, but for that matter, the early retail reports aren’t exactly painting an optimistic picture for whatever remains in 2016.

It can’t be clear to anyone what awaits. Other than repeating the usual refrains such as interest rates can’t get any lower, oil prices can’t get any lower and stocks can’t go any higher, the only thing that is clear is that whatever is anticipated is so often unrealized.

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

I’m not really sure why Dow Chemical (DOW) was punished as the past week came to its close. Of course, I understand that news of institutional buyers lightening their own load of shares can have a direct impact on the supply and demand equation and can also create a sense of needing to get out of the same position by investor lemmings.

I suppose that there may be others looking to escape over the next few days even as there is little to suggest a fundamental reason for heading for the exits.

While I already own 2 lots of its shares, I view the decline of last week as an opportunity to add shares, as the decline may have been simply nothing more than needing to digest some of its recent gains.

Dow Chemical probably has little downside with regard to its complex proposed deal with DuPont (DD) and probably has some upside potential when approval is at hand. In the meantime, however, simply continuing to trade in its recent range, along with its still generous option premiums and dividends, makes Dow Chemical an appealing potential position.

With earnings now out of the way and following a 10% decline, Gilead Sciences (GILD) is again looking attractive.

As with Dow Chemical, institutional investors have been reportedly been net sellers of shares and those shares are now at a 2 year low.

While it might be a serious mistake to believe that those shares couldn’t go any lower, there are some near term inducements to consider a position at this time and to do so without regard to what may be substantive issues for those with a longer term horizon on the company, its products and its shares.

In addition to a nice premium, particularly relative to an overall decreasing volatility environment, there is an upcoming dividend.

That dividend is still a few weeks away, so there could be some consideration to initially establishing a position through the sale of put options.

There is considerable liquidity in that market and if faced with assignment there could be ample opportunity to keep the short put position alive by rolling it over to the following week.

With that upcoming dividend, however some attention may need to be given to the possibility of taking assignment in an effort to then capture the dividend.

Finally, I’m not certain how many times in a lifetime I can consider buying shares of MetLife (MET). It is a stock that I am almost always on the fence about whether the timing is just right.

One of the things about it and some other stocks that really creates a timing problem for me is when earnings and an ex-dividend date are tightly entwined. Putting the two together, sometimes even their sequencing requires some additional thought.

Too much thought is often something that only serves to muddy things and in my case is often the reason that I end up not owning MetLife shares.

I’ve already done enough thinking in my lifetime, so there’s really not much reason to go and look for more opportunities requiring analysis of any kind.

Now, however, with both of those events in the back mirror and with nearly 3 months to go until they become issues again, it may be time to consider those shares once again.

The theory, which is getting really long in the tooth, is that interest rates have to be heading higher. As we all know, however, regardless of how true that may logically have to be, there’s nothing in our past to have prepared us for such a long and sustained period of ultra-low interest rates.

And so MetLife has not followed interest rates higher, because interest rates haven’t gone higher, much to everyone’s continuing surprise.

Not that this past week’s retail results would give anyone reason to believe that the economy really is heating up and that interest rates will follow, you still can’t escape the “sooner or later” school of logic.

I know that I can’t.

At its current level and with some decent downside support, I think that this may be a good point to get back on that rising interest rate bandwagon and use MetLife as the vehicle to prosper from systemically increased costs.

Traditional Stocks:  Dow Chemical, MetLife

Momentum Stocks:  Gilead Sciences

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 – June 26, 2016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Neither was there any half hearted attempt at a rally. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Those moves help to keep those premiums healthy and attractive.

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

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

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

I’m pretty confident of that.

 

 

Traditional Stocks: eBay

Momentum Stocks: Abercrombie and Fitch

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

Premiums Enhanced by Earnings: none

 

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

 

 

 

Weekend Update – June 19, 2016

About 25 years ago a character debuted on Saturday Night Live and the recurring joke was to try and guess the character’s gender.

The sketches typically had  red herrings and lots of mis-direction and the question of Pat’s gender was never answered.

Never a terribly popular character, someone had the fiscally irresponsible idea of making a feature film and Pat was never heard from again.

The guessing stopped.

Fast forward to 2016 and think of Pat as an FOMC member.

Over the past 2 months or so there has probably been lots of mis-direction coming from Federal Reserve Governors, perhaps as they floated trial balloons to see how interest rate action or inaction would be received by the stock market.

The health of the stock market is not really part of their mandate, but since so much of the nation’s wealth is very closely aligned with those markets, it may only be logical that the FOMC should at least have some passing interest in its health.

Who would have guessed 6 months ago when the first interest rate hike occurred that we would be at a point where that has thus far been the only one?

Who would have thought that in the transpiring 6 months nothing would have validated the December 2015 interest rate increase and that nothing but conflicting economic data would be forthcoming?

Who would have thought that the most voluble interest rate hawk among the voting members of the FOMC would this week downplay the possibility of recurring interest rate increases in what time remains in 2016?

Who would have thought that Janet Yellen would alternate between her dovish and hawkish sides and come to a point of simultaneously taking both sides?

That’s hardly the sort of thing that inspires confidence in markets.

This past week was one that if you had tried to guess what was to come next or what was to influence markets, you would have been very disappointed with your abilities.

It was a week with increasing focus on the upcoming vote by British citizens as to whether remain in the European Union. It was a week of some large moves in European stock markets and lots of disagreement not only regarding the vote’s outcome, but whether either of those outcomes would mean.

England’s bookmakers seem to have an opinion at variance with polls, but it’s anyone’s guess what the outcome will be and what the reaction will be.

It was also a week of alternating moves in our own markets as traders just grasped for direction and meaning.

On our own shores there was focus, although far less following the truly disappointing Employment Situation Report of a few weeks ago, on the FOMC Statement release and Chairman Yellen’s subsequent press conference.

With the expectation that there would be no change in interest rates, it looked as if stocks were going to re-establish its ties to oil and for one day, at least it closely followed oil’s intra-day moves higher and lower.

But that relationship clearly disappeared in the latter half of the week as some very big moves in oil’s price saw nothing in kind in stocks and sometimes saw the glimpses of rationale behavior as oil and stocks moved in opposite directions.

Then, if you would have guessed that Janet Yellen would move markets in either direction in a big way, as she has usually been able to accomplish during her press conferences, you would have been well off the mark.

(click to enlarge)

While her obfuscation found some favor the previous week, this time around no one knew what to make of trying to have it both ways.

In fact the market was virtually unchanged during the period of the press conference, including the time taken to offer the prepared statement.

As with Pat, even if you were mildly intrigued, it may have taken a lot more than that to make some kind of a meaningful commitment or to take any kind of risk.

What the market did know was that the minute that press conference was done, it was time to sell stocks.

From another brief moment of rational thought, as good as low interest rates may be, there has to be the realization that such rates reflect mediocrity and a moribund economy. Certainly no one wants the US economy to emulate that of Japan and news that German interest rates dipped into negative territory may have sent a message that the same could then happen anywhere.

Who would have guessed?

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

For the most part, despite the uncertainty surrounding the market again this week, I’m more willing to accept risk than has been the case for much of the past year.

To a large degree that’s related to the additional increment of premium being seen in some positions as volatility has been rising.

Even if  broader market volatility is going to be short lived, some individual sectors and individual positions have a likelihood of continuing to offer higher premiums due to their baseline volatility and anything additional that may come from market uncertainty.

I am considering more positions this week than I have for much of 2016 and most of those are being considered through the sale of put options, rather than outright buy/write transactions.

With the exception of Dow Chemical (DOW), which has an upcoming ex-dividend date the following week, I’m considering the sale of puts for eBay (EBAY), PayPal (PYPL), Seagate Technology (STX), Under Armour (UA) and United Continental (UAL).

WIth the exception of Seagate Technology, the others in that put sales group do not offer a dividend, so the sale of puts doesn’t have to take into consideration that possibility of subsidizing someone else for the collection of that dividend.

The list this week is fairly varied, other than for the historical connection between eBay and PayPal.

I haven’t owned eBay since it spun off its PayPal growth engine, but it has been trading precisely the way it did when PayPal was still part of its holdings. That is, it traded in a fairly narrow and predictable range, while occasionally being punctuated with price spikes at earnings. Those spikes created a decent option premium for a stock that over the longer term of the past 4 or 5 years prior to the spin off basically traded sideways.

What is interesting about eBay this week is that there is some speculation than in the event of a withdrawal from the European Union by Great Britain, it is among those stocks that stands to lose in the process.

That process, however, is being treated as if it is going to be an instantaneous one, rather than one being drawn out over years.

If I could hold onto eBay shares and serially sell calls or able to serially roll over puts, I’d be more than happy to watch that process play out over several years.

That is if it ever even gets to that.

I’ve never owned PayPal, but it is now well past that 12 months since its offering, that is usually the amount of time that I wait before considering a position.

It too has been recently trading in a range and in the longer term has been doing so ever since the initial euphoria wore off.

I think that a near term position in PayPal does carry greater risks than with eBay, as the next support level below $36 is almost 10% lower. However, the premiums available for the sale of options can mitigate some of that risk, even as financial instruments as a whole are under pressure.

I expect that pressure to be abating fairly soon as we become less convinced of a rise in interest rates and instead end up wondering who would have guessed that they would have begun an insidious climb over the summer.

I do own and suffer with that ownership, shares of United Continental. It’s certainly a bad idea to base an investment on the proposal that shares couldn’t possibly go any lower.

The size of the recent moves lately in those shares have my interest more than the recent sustained decline which came as it looked as if those shares might reclaim their 1 year high level.

Up until the latter half of April, United Continental and oil prices were very closely and directly aligned in 2016, despite the fact that the greatest increase in the price of oil came during the period before April.

Who would have guessed that increasing oil prices would be associated with increased share prices of United Continental? That relationship, though has reverted to its more normal pattern and I believe that despite the traditional summer time impact on energy prices, increasing supply will be of benefit to United Continental.

With the Brazil Olympics being one of one controversy after another, there’s probably not too much doubt that the companies that have lots at stake during the Olympics games are easily identifiable.

I still marvel at the resiliency of Under Armour when questions were raised as to whether its swimsuit design may have cost American swimmers their expected medals. They handled the situation perfectly and the world and investors quickly moved on.

Of course, one challenge may not have to wait until Brazilian festivities begin and may instead occur before trading begins on Monday.

On Monday morning we will all know whether the Under Armour wearing Stephen Curry or the Nike (NKE) wearing LeBron James will be celebrating.

In the event of a Cleveland victory in the basketball championship finals, if Under Armour takes a drop in share price, I would be very interested in selling puts into the weakness and as with eBay or PayPal, that is a position that I wouldn’t necessarily mind keeping open if it is amenable to serial rollover.

I’ve also been suffering with shares of Seagate Technology, but as far as I know it doesn’t have too much riding on a basketball game’s outcome.

What I do like about it now is that it seems to have developed some support at its current price level and that put premium is very attractive, even as that dividend yield is very frightening.

Seagate Technology and others in the storage and memory business have been written off before as being nothing more than commodities and at some point that may become an accurate description of the business, as well as prospects for growth.

Unless Elon Musk comes up with a way to carry physical hard drives up to the cloud in one of his SpaceX vehicles, the future may not shine too brightly for physical storage. But from my actuary’s perspective, a few weeks of ownership may not be overly risky, relative to the reward.

Finally, Dow Chemical is ex-dividend next week and if participating with it next week, my preference would be to buy shares and sell calls.

I already have 2 lots of shares and have been happily collecting the dividend and rolling over call options, while watching the premiums accumulate, even as shares go nowhere.

At some point, the convoluted deal with DuPont (DD) will become reality or it will be killed off by regulators.

As with Pfizer (PFE) several months earlier, I think the current price has already given back any premium that the market placed on the proposed transaction. For that reason, I think that there is little downside to adding shares of Dow Chemical at this time.

The option premium doesn’t reflect too much volatility, but the return for the sale of an at the money option is at levels that I used to see during periods of greater market volatility.

I look at that as a bonus, when considering the times we are in and the limited company specific downside potential as the summer unfolds and we await decisions.

 

Traditional Stocks: Dow Chemical, eBay

Momentum Stocks: PayPal, Seagate Technology, Under Armour, United Continental

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.

All in all, if you think about the man made tragic events of the past week in Brussels, the very rational and calm manner in which world markets reacted was really re-assuring.

When we sometimes scratch our heads wondering whether the market will this time interpret good news as being bad or whether it will deem it good, you know that something is amiss.

It’s nice when clear and rational heads are in charge of things.

So often the way the market seems to react to events it’s not too easy to describe the action as having been rational and you really do have to wonder just who is running the place.

The same may be said for the Federal Reserve and its Governors.

It wasn’t always that way, though.

We always knew who was running the place.

While dictatorships may not be a good thing, sometimes a benevolent dictatorship isn’t the worst of all possible worlds.

There was a time that the individual members of the Federal Reserve and the FOMC kept their thoughts to themselves and knew how to behave in public and in private.

That is, up until about 11 years ago when newly appointed and now departed President of the Dallas Federal Reserve Bank, Richard Fisher, had made a comment regarding FOMC monetary tightening policy and was subsequently taken to the woodshed by Alan Greenspan.

That error in judgment, offering one’s opinion, wasn’t repeated again until the new Federal reserve Chairman, Ben Bernanke, ushered in an era of transparency, openness and the occasional dissenting vote.

At that time, Fisher didn’t even disagree with Federal reserve policy. He was simply giving his opinion on the timing left in an existing policy, or perhaps just disclosing what he knew to be the remaining time of that particular approach.

Still, that kind of behavior was unheard of and not terribly well tolerated.

Now, under Janet Yellen, it seems as if the various Governors are battling with one another over who gets the most air time and who can make the most noise.

Clearly, inmates can be intelligent people, but there may be a very good reason why they’re not running the show.

Why the market often latches onto the words of an FOMC inmate or one who’s not even in that inner circle, particularly when those words may run counter to the Chairman’s own recent words, is every bit of a mystery as why those words were uttered in the first place.

But that is where we seem to be at the moment as the crystal clear clarity that we’ve come to expect from the Federal Reserve is sounding more like the noises coming from the Tower of Babel.

And we all know how that worked out.

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

When there is so much confusion abounding, sometimes it makes some sense to get right back to basics.

There isn’t a much more basic approach to stocks than looking for safe and reliable dividend paying companies, especially when the waters are murky or choppy.

While I don’t disagree with those who point to the out-performance of the universe of dividend paying stocks to the universe of non-dividend paying stocks, I’m not a big fan of the dividend itself and it’s usually fruitless to argue the belief held by many that it is the dividend that makes the company a worthwhile investment that is prone to outperform others.

Ultimately you pay for that dividend by virtue of your share price having gone down the amount of the dividend and you may have to pay taxes as well, on that distribution.

What I do like about dividends is how some of that inherent decline in the share price may end up being subsidized by an option buyer and that can boost the return.

Most of the time, my preference would be to be able to get the premium from having sold the option, most often of weekly duration, and also to be able to collect the dividend.

What i especially like, although it doesn’t happen too often, is when a stock is ex-dividend on a Monday.

In such cases, if the option buyer is going to exercise his right to snatch those shares at a pre-determined price, he must do so no later than the previous Friday.

What I like to do with those Monday ex-dividend positions is to sell an extended weekly option and then I don’t really care too much if those shares get taken away from me early. 

That’s because the additional week’s premium offsets the loss of the dividend while being able to take the cash from the assignment to invest in some other position.

Maybe even an upcoming ex-dividend position.

While not every position that I’m considering in the coming week will be ex-dividend the following Monday, that does characterize most of the potential trades for the coming week.

To put them all of those into a single basket, Cisco (CSCO),  Comcast (CMCSA), Deere (DE) and JP Morgan Chase (JPM) are all ex-dividend next Monday.

They each have their own story to tell and since 2016 has been an incredibly quiet one for me in terms of adding new positions, there is virtually no chance that i will be adding all of them.

At the moment I do own shares of Cisco, but none of the other positions, all representing different sectors.

With everything else being equal, I’d probably be more inclined to consider adding shares to a sector in which I may be under-invested.

For me, that would be the finance sector, which has been embattled all year as the expected interest rate climbs haven’t materialized.

For many, the decision by JM Morgan’s Jamie Dimon to buy $26 million in his own shares was the impetus to turn the market around from its steep 2016 losses.

That turnaround started on February 11, 2016.

Those shares are still far from their 2016 high and sooner or later the inmates trading stocks and the inmates making policy will be right about the direction of interest rates.

I still hold somewhat of a grudge against Comcast when I was a consumer of its services. However, it would be the height of irrationality to ignore it for what it could contribute to my non-viewing or non-internet surfing well-being.

Once a disruptor in its own right, Comcast is working hard to remain at the cutting edge or itself be displaced as the competition and the various means of delivering content are getting more and more complex to understand.

That may be its saving grace.

When you get right down to it, nothing is as simple as having a box, your television and your computer. While there’s decidedly nothing simplistic about what Comcast is doing and where it envisions going, at some point consumers may get overwhelmed by the growth in disparate and unconnected systems and may again long for bringing it all back together under a single roof.

Even if it is and continues to be challenged, Comcast is a few dollars below some resistance and I would feel comfortable adding shares in advance of its ex-dividend date.

I haven’t owned shares of Deere for a long time, just as I haven’t owned shares of caterpillar (CAT). The two of those used to be mainstays of my portfolio, if not both at the same time, then at least alternating, often with a new purchase being initiated as an ex-dividend date was approaching.

What appeals to me about Deere at the moment is that it is a little bit off from its recent highs and only a bit higher than where it stood on February 11th.

But more importantly, this week, as with all of the other potential selections, there is a nice dividend and an equally nice option premium. That combination lends itself to any number of potential contract lengths and strike levels, depending on one’s horizon.

While I especially like the Monday ex-dividend date, this is a position that i might consider wanting to hold for a longer period of time in an effort to either reap additional option premiums or some capital gains from shares, in addition to premiums and the dividend.

While I do already own shares of Cisco and it has bounced back nicely in the past 6 weeks, I think that it, too, has some more upside potential, if only to get it back to some resistance about 5% higher from its current level.

Like most others mentioned this week, there is a generous dividend and a generous option premium that make any consideration worthwhile.

As with Deere, while the Monday ex-dividend date may lead to one specific strategy, there may also be some consideration of utilizing longer dated contracts and further out of the money strike prices in order to capitalize on some anticipated price appreciation.

By contrast, I own shares of both The Gap (GPS) and Dow Chemical (DOW).

There has been absolutely nothing good that has been said about The Gap in far too long of a time.

There was a time that The Gap could be counted upon to alternated its monthly same store sales between worse than expected and better than expected results. as a result The Gap’s shares would frequently bounce back and forth on a monthly basis and it had periodically enhanced option premiums to reflect those consistent moves.

Lately though, the news has always been disappointing and the direction of shares has been unilateral, that is, until February 11th.

There’s not too much of a likelihood that The Gap’s recent performance is related to oil prices or interest rates, but it is certainly long overdue for a sustained move higher.

At its current level, i wouldn’t mind shares staying in the same neighborhood for a while and building some support for another leg. In the meantime, at this level there is some opportunity to collect the dividend and some reasonably health premiums, as well.

Finally, just as last week, I think that there may be opportunity in Dow Chemical.

While it has unjustifiably been held hostage by falling oil prices for more than a year, it has performed admirably. The market reacted positively when the announcement was made of its fairly complex merger and subsequently planned uncoupling with DuPont (DD), although the favor was lost as the rest of the market sank.

I continue to believe that there is relatively little risk associated with shares in the event the proposed merger runs into obstacles, as shares are trading at pre-announcement levels.

That combination of dividends and option premiums keeps making Dow Chemical an appealing consideration even as lunatics may be running around elsewhere.

 

Traditional Stocks: none

Momentum Stocks: none

Double-Dip Dividend: Comcast (4/4 $0.27), CSCO (4/4 $0.26), Deere (3/29 $0.60), DOW (3/29 $0.46), GPS (4/4 $0.23), JPM (4/4 $0.44)

Premiums Enhanced by Earnings: None

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

Weekend Update – March 20, 2016

Best laid plans often have a way of working out other than expected.

On slow days I make it a point to go and sit in anyone’s waiting room, even without an appointment, just to read stale issues of business and news magazines.

Eventually I get up and leave and feel better about my track record.

Doing that tends to reinforce the belief that the “experts” called upon to predict what awaits in the future are invariably wrong, even as self tying sneakers depicted in “Back to the Future” may now become somewhat of a reality.

Sometimes it’s the timing that’s all wrong and sometimes it’s the concept.

Unless you put much stock in a prediction, such as converting all of your assets to gold in anticipation of yet another Doomsday, they tend to be forgotten unless a dusty magazine is picked up.

The plan to be awash in the one true and universal currency might have seemed like a good idea until coming to the realization that it’s hard to spread on a slice of bread, even if you actually had a slice of bread.

While you can’t be very certain about the accuracy of a “futurists” predictions, you can be very certain that no self-respecting expert on the future keeps a complete scorecard and most would probably be advocates of having physician’s offices regularly rotate their stock of reading materials.

When the FOMC does finally decide to raise interest rates again most will likely have forgotten their earlier prediction of the need for a series of rate hikes. 

Not too long ago the FOMC was predicting a more robust economy for 2016 than has been the case and this past week the members saw things somewhat differently.

To its credit, the FOMC and Chairman Yellen didn’t disown the past, which sometimes, due to revisionism can be just as difficult to discern as the future.

For what seems like the longest time, I have seen a future that has traders finally coming to the belief that a growing economy was good news and the need to continue cheap money policy was bad news.

Conceptually that has to make sense, so I’ll blame poor timing on the poor progress toward changing sentiment.

I’ve also been waiting for the longest time to see lower oil prices prod a consumer based economy toward growth and taking corporate revenues and profits to higher levels.

And I keep waiting for stock prices and oil prices to disassociate from one another during a period that oil prices are more influenced by oversupply and not reduced demand.

The track record on those is pretty abysmal, although for some very brief periods over the past few weeks it looked as if that disassociation might finally be coming.

If your memory can go back far enough, you may remember that as 2015 was coming to its end many were predicting that 2016 would follow the pattern seen in the year following a flat year in markets.

It didn’t take very long for that prediction to itself fall flat.

But what no one would have predicted was that as bad as the first 6 weeks of the year had been, the subsequent 5 weeks would erase the losses and perhaps even serve to rehabilitate the earlier prediction. 

There is little economic news next week other than release of the GDP, which has reflected less impressive than predicted growth of late.

I can confidently predict that it will have no impact on Friday’s stock market close, but I’m not willing to venture as far into the future as the following Monday.

At least I’m capable of learning from my mistakes and am equally confident in predicting that will not always be the case.
 

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

One thing that I would not have predicted was just how shortly following the market’s embrace of the Dow Chemical (DOW) and DuPont (DD) merger deal the price premium would be lost.

With shares trading just above their pre-merger disclosure and having had gone below that level in the early part of 2016, I’ve believed that there was relatively little merger related risk associated with those shares.

I had bought shares twice after the merger announcement and am ready to do so again, particularly as shares have had a somewhat irrational pattern of following the price of oil and now that trend is higher.

With its option premium still reasonably attractive as there is still a perception of either oil or merger related risk, I also have my eyes on its ex-dividend date, which is at the end of the month.

For that reason I would probably look at selling an extended weekly option and if faced with a possible early assignment, I would consider further rolling the option over, if only to get some additional premium to offset the loss of the dividend to the option buyer.

Among the things that many predicted, including myself, was that financial sector stocks would perform nicely as the path for interest rates after the FOMC’s decision at the end of 2015 was going to be higher.

In anticipation that would be the case, I had purchased shares of Morgan Stanley (MS) on 4 occasions in the 2 months leading up to that eventual decision.

That seemed like an easy thing to predict. It was a fifth purchase, that came a few weeks after the announcement that went counter to what seemed predictable.

Instead of interest rates continuing to move higher as any sane seer would have predicted, they went lower and lower, as did most financial sector stocks.

So here we are again with the feeling that now rates can only go higher, but without much confidence in when they will start to happen.

It may be the uncertainty of the latter that makes considering opening a position to be a more predictably rational thing to do.

Last week Williams Companies seemed like a good idea, particularly as there may have been some inefficiencies in its pricing and a divergence between the arbitrage and options communities regarding the prospects of its planned merger.

This week, Marathon Oil (MRO) doesn’t have the same kind of drama figuring into the equation, but along with a battered sector, it may have been price compressed more than most and with the prospects of a larger spring back.

However, even price stability in oil could create an attractive environment for accumulating very generous option premiums.

While those option premiums are attractive, I would probably sacrifice some of the assured premium by selling out of the money strikes in an effort to also capture some capital gains on shares.

As is often the case during periods of high market volatility or individual stock volatility, there may also be advantage in rolling over calls even if faced with assignment as the forward week premiums may be continuing to reflect greater uncertainty.

That was a nice formula in 2008, 2009 and the latter half of 2011 and I wouldn’t mind seeing more of those opportunities appear.

Finally, having purchased eBay (EBAY) a few weeks ago was like re-discovering an old, old friend.

I hadn’t owned shares since the confirmation that eBay was going to spin off the driver of its growth, PayPal (PYPL).  There was probably some luck with having made that first purchase in over a year on the day before the market decided to end the craziness of the first 6 weeks of 2016.

With volatility at its peak for 2016 that was a good time to consider buying just about anything, if only you could have predicted what was in store in the subsequent 5 weeks.

I couldn’t, but at the same time I couldn’t resist the lure of eBay shares. Despite having climbed 5% since then, that performance pales in comparison to the S&P 500 which was nearly 10% higher during that time span.

What eBay is continuing to offer, even as volatility has started returning to the levels it had languished for up until the past 6 months, is an attractive option premium.

The reason I had found myself having purchased shares of eBay on 25 occasions during a 4 year period, despite not having owned any shares for more than a year of that time span, is that it tended to trade in a tight range, but due to occasional surges or plunges, offered a very attractive premium.

They say that you can’t go back home, but predictably you do and sometimes it works out.

Traditional Stocks:  Dow Chemical, eBay, Morgan Stanley

Momentum Stocks:  Marathon Oil

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 – March 6, 2016

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

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

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

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

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

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

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

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

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

Why they’re called the same thing confuses me.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 
Traditional Stocks: Dow Chemical, MetLife, Pfizer

Momentum Stocks: Seagate Technology

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

Premiums Enhanced by Earnings: none

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

 

Weekend Update – February 7, 2016

If the recently deceased Harlem Globetrotters’ great player, Meadowlark Lemon had been alive today and helping the equally great band, The Byrds, re-write their classic song, it would likely get a new title.

The title would perfectly describe what this past week was a all about.

“Spin, Spin, Spin.”

Whether it was post-Iowa Caucus result speeches by the candidates or President Obama’s comments in the aftermath of Friday’s disappointing Employment Situation Report and downward revision to the previous month, it’s easy to see the spin going around and around.

No wonder the stock market is getting dizzy and dizzier, despite its heights getting lower and lower.

With confusion coming from Iowa regarding the definition of “winning” from both sides of the aisle you could easily be excused for shaking your head as the week started.

Then, when a picture of decreasing employment numbers alongside increasing jobless claims numbers was painted as reflecting an increasingly robust economy you could have been further excused for shaking your head into the week’s end.

Politicians who want an opportunity to create a legacy, as well as lame duck politicians who want to cement a legacy are very adept at spin and the ability to portray everything in terms of black and white.

The other side is always wrong and the facts are as portrayed and not as fact.

For stock investors life was much easier when only having to deal with the paradoxical association between oil and stocks.

You simply awoke in the morning and saw where West Texas Intermediate was trading and knew that the stock market would go in the same direction.

Now they’re back into having to decide whether news they hear is good or bad and whether to react appropriately to that news or paradoxically.

Of course, that would be easier if news was really presented on a factual basis and not so quickly subjected to overwhelmingly sanctimonious spin.

With the notion that evidence of a slow down in the economy would make the likelihood of further Federal Reserve rate hikes less, bad news was once again being taken as good news. The predominance of oil, however, as a factor in the market’s direction may have been obscuring some of that newly rediscovered fractured thought process.

With the market having spent the week going back and forth with numerous large intra-day moves and some large daily moves, it all came down to Friday’s trading to determine the fate of the DJIA for the week, as it had only been 34 points lower heading into the final day of trading. That week included one day with a loss of 290 points and the following day with a gain of 193 points.

If you were among those for whom confidence could have been inspired by those kind of movements, then any kind of upcoming spin could have led you in any direction.

Of course, the direction also depended on whether you are now of the increasing frame of mind that good news is bad news.

While we awaited Friday morning’s Employment Situation Report release and the DJIA had been down only 0.2%, the broader indexes weren’t faring quite as well.

The S&P 500 had already been 1.3% lower on the week and the NASDAQ 100 was down 2.6%.

With Friday morning’s release, the data, while disappointing was likely not weak enough to give cause for much celebration for those looking for good reason to dismiss the possibility of future interest rate hikes in 2016.

What may have cast a pall on the market was the Presidential spin that focused on the 4.9% jobless rate and wage growth.

If you were among those interpreting bad news as being good, you had to interpret that kind of spin as being good news.

And that can only be bad as the FOMC had certainly not closed the door on further interest rate increases in its recent statement.

While the DJIA lost an additional 1.3% to end the week, the NASDAQ 100 tacked on an additional 3.4% to its already sizable loss for the week, while the S&P 500 lost an additional 1.9%.

Good luck trying to spin that as we begin to prepare for the coming week.

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

Having suffered the direct blow from decrease oil prices and the indirect blow from what those decreasing prices have wrought upon the market, it’s not easy to consider adding another energy position.

Who can begin to count the number of times over the past 15 months that it didn’t look as if we had hit a once in a generation kind of rock bottom bargain price for a barrel of oil?

With ConocoPhillips (NYSE:COP) having just slashed its dividend, you do have to wonder whether British Petroleum (NYSE:BP) could be next.

WHile its dividend this week is presumably safe, it’s harder to make that case for the remainder of 2016 if rude prices continue to test lows. In its defense, British Petroleum is better diversified than ConocoPhillips is after having spun off its refining assets a few years ago, but the risk of insufficient cash flow is still there.

What is also there is a very nice option premium in reflection of further risk.

Looking at the option premiums, I am inclined to look at more than a weekly option contract, as is normally my approach for positions going ex-dividend during the week.

The exaggerated volatility of the past 2 weeks is really enhancing the premium and the dividend is extraordinary, while likely having more safety than the option market may be surmising.

Also ex-dividend this week are DuPont (NYSE:DD) and International Paper (NYSE:IP).

While DuPont has gone considerably higher in the past two weeks, I believe that in the absence of general market weakness it can recapture much of what had been lost following the announcement of a complex deal with Dow Chemical (NYSE:DOW).

With some strength also seen in Dow Chemical recently, I took the opportunity to sell calls on uncovered shares and is a portion of the strategic theme for this week, I used an out of the money strike price and a longer term time frame than I would normally consider in an effort to lock in some higher volatility driven option premiums and to regain lost share value.

The same approach holds for if considering a purchase of International Paper.

While it’s recent earnings report exceeded expectations and met whisper numbers, its stock price trend for the past year has been decidedly lower and lower, even in the absence of structural or operating issues.

While its payout ratio is getting uncomfortably high, the generous premium should continue to be safe and I might consider locking in the premium for a longer term, perhaps to even encompass an additional ex-dividend date in May 2016, although upcoming earnings would also have to be considered if doing so.

For that reason, I might even consider going out to a July 2016 expiration in the anticipation that some of that lost luster in its price will be regained by then,

Although not ex-dividend this week, EMC Corporation (NYSE:EMC) is among some of those fallen angels in the technology sector and which are beginning to celebrate their newly found volatility with some enhanced option premiums.

Somehow lost in the story with EMC is that there is a buyout offer that appears to be on track for completion and at a price that is substantially higher than Friday’s closing price.

I’m not one to play in the same arena with those expert in the science and art of arbitrage, but this one seems to offer some opportunity, even as the deal isn’t expected to close until the end of the year.

While there may still be regulatory hurdles head, EMC appears to be a willing partner and while awaiting a decision, there are still some dividends to be had.

For that reason, I might consider buying shares and selling a longer term and significantly out of the money option contract. Since I also already have existing shares at $30, I might consider combining lots and selling calls at a strike below the cost of the original lot, not counting accumulated premiums and dividends.

Finally, I just don’t think that I can any longer resist buying shares of eBay (NASDAQ:EBAY) at this level.

eBay was one of my more frequent holdings until the announcement of its definitive plan to spin off its profitable PayPal (NASDAQ:PYPL) unit.

What could be more appropriate when talking about the week’s spin than to look at a post-spin eBay?

For years I loved holding eBay as it made little net movement, even as it had occasional spikes and plunges usually earnings related. All that meant was that it had an attractive option premium, with relatively little risk associated with it, as long as you didn’t mind those occasional plunges that were inevitably reversed.

WIth no real challenge ahead of it other than market risk in general, eBay is now at its post spin-off low and is offering a great option premium for what I perceive to be low risk.

WIth those premiums so attractive, but mindful that there may be near term market risk, I would probably think in terms of selling longer term and out of the money call contracts on any shares that I purchased.

While the market could continue to be further dragged down by declining oil prices and while games are still being played with what economic data really means and how it should be interpreted, you do have to wonder how any of that impacts eBay.

I know that I do.

Traditional Stocks: eBay, EMC Corporation

Momentum Stocks: none

Double-Dip Dividend: British Petroleum (2/10 $0.59), DuPont (2/10 $0.38), International Paper (2/11 $0.38)

Premiums Enhanced by Earnings:

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 3, 3016

The "What If" game is about as fruitless as it gets, but is also as much a part of human nature as just about anything else.

How else could I explain having played that game at a high school reunion?

That may explain the consistent popularity of that simple question as a genre on so many people’s must read lists as the New Year begins.

Historical events lead themselves so beautifully to the "What If" question because the cascading of events can be so far reaching, especially in an interconnected world.

Even before that interconnection became so established it didn’t take too much imagination to envision far reaching outcomes that would have been so wildly different around the world even a century or more later.

Imagine if the Union had decided to cede Fort Sumpter and simply allowed the South to go its merry way. Would an abridged United States have been any where near the force it has been for the past 100 years? What would that have meant for Europe, the Soviet Union, Israel and every other corner of the world?

Second guessing things can never change the past, but it may provide some clues for how to approach the future, if only the future could be as predictable as the past.

Looking back at 2015 there are lots of "what if" questions that could be asked as we digest the fact that it was the market’s worst performance since 2008.

In that year the S&P 500 was down about 37%, while in 2015 it was only down 0.7%. That gives some sense of what kind of a ride we’ve been on for the past 7 years, if the worst of those years was only 0.7% lower.

But most everyone knows that the 0.7% figure is fairly illusory.

For me the "what if" game starts with what if Amazon (AMZN), Alphabet (GOOG), Microsoft (MSFT) and a handful of others had only performed as well as the averages.

Of course, even that "what if" exercise would continue to perpetuate some of the skew seen in 2015, as the averages were only as high as they were due to the significant out-performance of a handful of key constituent components of the index. Imagining what if those large winners had only gone down 0.7% for the year would still result in an index that wouldn’t really reflect just how bad the underlying market was in 2015.

While some motivated individual could do those calculations for the S&P 500, which is a bit more complex, due to its market capitalization calculation, it’s a much easier exercise for the DJIA.

Just imagine multiplying the 10 points gained by Microsoft , the 30 pre-split points gained by Nike (NKE), the 17 points by UnitedHealth Group (UNH), the 26 points by McDonalds (MCD) or the 29 points by Home Depot (HD) and suddenly the DJIA which had been down 2.2% for 2015, would have been another 761 points lower or an additional 4.5% decline.

Add another 15 points from Boeing (BA) and another 10 from Disney (DIS) and we’re starting to inch closer and closer to what could have really been a year long correction.

Beyond those names the pickings were fairly slim from among the 30 comprising that index. The S&P 500 wasn’t much better and the NASDAQ 100, up for the year, was certainly able to boast only due to the performances of Amazon, Netflix (NFLX), Alphabet and Facebook (FB).

Now, also imagine what if historically high levels of corporate stock buybacks hadn’t artificially painted a better picture of per share earnings.

That’s not to say that the past year could have only been much worse, but it could also have been much better.

Of course you could also begin to imagine what if the market had actually accepted lower energy and commodity prices as a good thing?

What if investors had actually viewed the prospects of a gradual increase in interest rates as also being a good thing, as it would be reflective of an improving, yet non-frothy, economy?

And finally, for me at least, What if the FOMC hadn’t toyed with our fragile emotions and labile intellect all through the year?

Flat line years such as 2015 and 2011 don’t come very often, but when they do, most dispense with the "what if" questions and instead focus on past history which suggests a good year to follow.

But the "what if" game can also be prospective in nature, though in the coming year we should most likely ask similar questions, just with a slight variation.

What if energy prices move higher and sooner than expected?

What if the economy expands faster than we expected?

What if money is running dry to keep the buyback frenzy alive?

Or, what if corporate earnings actually reflect greater consumer participation?

You may as well simply ask what if rational thought were to return to markets?

But it’s probably best not to ask questions when you may not be prepared to hear the answer.

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

For those, myself included, who have been expecting some kind of a resurgence in energy prices and were disbelieving when some were calling for even further drops only to see those calls come true, it’s not really clear what the market’s reaction might be if that rebound did occur.

While the market frequently followed oil lower and then occasionally rebounded when oil did so, it’s hard to envision the market responding favorably in the face of sustained oil price stability or strength.

I’ve given up the idea that the resurgence would begin any day now and instead am more willing to put that misguided faith into the health of financial sector stocks.

Unless the FOMC is going to toy with us further or the economy isn’t going to show the kind of strength that warranted an interest rate increase or warrants future increases, financials should fare well going forward.

This week I’m considering MetLife (MET), Morgan Stanley and American Express (AXP), all well off from their 2015 highs.

MetLife, down 12% during 2015 is actually the best performer of that small group. As with Morgan Stanley, almost the entirety of the year’s loss has come in the latter half of the year when the S&P 500 was performing no worse than it had during the first 6 months of the year.

Both Morgan Stanley and MetLife have large enough option premiums to consider the sale of the nearest out of the money call contracts in an attempt to secure some share appreciation in exchange for a somewhat lo0wer option premium.

In both cases, I think the timing is good for trying to get the best of both worlds, although Morgan Stanley will be among the relatively early earnings reports in just a few weeks and still hasn’t recovered from its last quarter’s poorly received results, so it would help to be prepared to manage the position if still held going into earnings in 3 weeks.

By contrast, American Express reports on that same day, but all of 2015 was an abysmal one for the company once the world learned that its relationship with Costco (COST) was far more important than anyone had believed. The impending loss of Costco as a branded partner in the coming 3 months has weighed heavily on American Express, which is ex-dividend this week.

I would believe that most of that loss in share has already been discounted and that disappointments aren’t going to be too likely, particularly if the consumer is truly making something of a comeback.

There has actually been far less press given to retail results this past holiday season than for any that I can remember in the recent and not so recent past.

Most national retailers tend to pull rabbits out of their hats after preparing us for a disappointing holiday season, with the exception of Best Buy (BBY), which traditionally falls during the final week of the year on perpetually disappointing numbers.

Best Buy has already fallen significantly in th e past 3 months, but over the years it has generally been fairly predictable in its ability to bounce back after sharp declines, whether precipitous or death by a thousand cuts.

To my untrained eye it appears that Best Buy is building some support at the $30 level and doesn’t report full earnings for another 2 months. Perhaps it’s its reputation preceding it at this time of the year, but Best Buy’s current option premium is larger than is generally found and I might consider purchasing shares and selling out of the money calls in the anticipation of some price appreciation.

Under Armour (UA) is in a strange place, as it is currently in one of its most sustained downward trends in at least 5 years.

While Nike, its arch competitor, had a stellar year in 2015, up until a fateful downtrend that began in early October, Under Armour was significantly out-performing Nike, even while the latter was some 35% above the S&P 500’s performance.

That same untrained eye sees some leveling off in the past few weeks and despite still having a fairly low beta reflecting a longer period of observation than the past 2 months, the option premium is continuing to reflect uncertainty.

With perhaps some possibility that cold weather may finally be coming to areas where it belongs this time of the year, it may not be too late for Under Armour to play a game of catch up, which is just about the only athletic pursuit that I still consider.

Finally, Pfizer (PFE) has been somewhat mired since announcing a planned merger, buyout, inversion or whatever you like to have it considered. The initially buoyed price has fallen back, but as with Dow Chemical (DOW) which has also fallen back after a similar merger announcement move higher, it has returned to the pre-announcement level.

I view that as indicating that there’s limited downside in the event of some bad news related to the proposed merger, but as with Dow Chemical, Best Buy and Under Armour, the near term option premium continues to reflect perceived near term risk.

Whatever Pfizer;’s merger related risk may be, I don’t believe it will be a near term risk. From the perspective of a call option seller that kind of perception in the face of no tangible news can be a great gift that keeps giving.

Traditional Stocks: MetLife. Morgan Stanley, Pfizer

Momentum Stocks: Best Buy, Under Armour

Double-Dip Dividend: American Express (1/6 $0.29)

Premiums Enhanced by Earnings: none

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

Weekend Update – December 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 – December 13, 2015

Sometimes if you take a step back and look at the big picture it’s much easer to see what’s going on as you distance yourself from the source.

No one, for example, falls off a cliff while watching the evening news from the safety of their media room, although being in the last car of a train doesn’t necessarily protect you when the lead car is getting ready to take a dive.

I’m not certain that anyone, whether knee deep in stocks or just casually looking at things from a dispassionate distance could have foreseen the events of the past week.

For starters, there really were no events to foresee. Certainly none to account for the nearly 4% decline in the S&P 500, with about half of that loss coming on the final trading day of the week.

What appears to have happened is that last week’s strong Employment Situation Report was the sharp bend in the track that obscured what was awaiting.

Why the rest of the track beyond that bend disappeared is anyone’s guess, as is the distance to the ground below.

With Friday’s collapse that added on to the losses earlier in the week, the market is now about 6% below its August highs and 2.3% lower on the year, with barely 3 weeks left in 2015.

Not too long ago we saw that the market was again capable of sustaining a loss of greater than 10%, although it had been a long time since we had last seen that occur. The recovery from those depths was fairly quick, also hastened by an Employment Situation report, just 2 months ago.

I don’t generally have very good prescience, but I did have a feeling of unease all week, as this was only about the 6th time in the past 5 years that I didn’t open any new positions on the week. All previous such weeks have also occurred in 2015.

The past week had little to be pleased about. Although there was a single day of gains, even those were whittled away, as all of the earlier attempts during the week to pare losses withered on the vine.

Most every sell-off this year, particularly coming at the very beginning of the week has seemed to be a good point to wade in, in pursuit of some bargains. Somehow, however, I never got that feeling last week, although I did briefly believe that the brakes were put on just in time before the tracks ran out up ahead early during Thursday’s trading.

For that brief time I thought that I had missed the opportunity to add some bargains, but instead used the strength to roll over positions a day earlier than I more normally would consider doing.

That turned out to be good luck, as there again was really no reason to expect that the brakes would give out, although that nice rally on Thursday did become less impressive as the day wore on.

Maybe that should have been the sign, but when you’re moving at high speed and have momentum behind you, it’s not easy to stop, much less know that there’s a reason to stop.

Now, as a new and potentially big week is upon us with the FOMC Statement release and Janet Yellen’s press conference to follow, the real challenge may be in knowing when to get going again.

I plan on being circumspect, but wouldn’t mind some further declines to start the coming week. At some point, you can hand over the edge and realize that firm footing isn’t that far below. Getting just a little bit closer to the ground makes the prospect of taking the leap so much easier.

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

It’s not entirely accurate to say that there were no events during the past week.

There was one big, really big event that hit early in the week and was confirmed a few days later.

That was the merger of DJIA component DuPont (DD) and its market capitalization equivalent and kissing cousin, Dow Chemical (DOW).

After both surged on the initial rumor, they gave back a substantial portion of those gains just two days later.

I currently own shares of Dow Chemical and stand to lose it to assignment at $52.50 next week, although it does go ex-dividend right before the end of the year and that may give some incentive to roll the position over to either delay assignment or to squeeze out some additional premium.

While it would be understandable to think that such a proposed merger would warrant regulatory scrutiny, the announced plans to break up the proposed newly merged company into 3 components may ease the way for the merger.

A with the earlier mega-merger between Pfizer (PFE) and Allergan (AGN) for some more questionable reasons related to tax liability, even if higher scrutiny is warranted, it’s hard to imagine action taken so quickly as to suppress share price. Because of that unlikely situation, the large premium available for selling Dow Chemical calls makes the buy/write seem especially inviting, particularly as the dividend is factored into the equation.

General Motors (GM) is ex-dividend this coming week and like many others, the quick spike in volatility has made its option premiums more and more appealing, even during a week that it is ex-dividend.

I almost always buy General Motors in advance of its dividend and as I look back over the experience wonder why I hadn’t done so more often. 

Its current price is below the mean price for the previous 6 holdings over the past 18 months and so this seems to be a good time to add shares to the ones that I already own.

The company has been incredibly resilient during that time, given some of its legal battles. That resilience has been both in share price and car sales and am improving economy should only help in both regards.

After a month of rolling over Seagate Technology (STX) short puts, they finally expired this past Friday. The underlying shares didn’t succumb to quite the same selling pressure as did the rest of the market.

As with Dow Chemical, I did give some thought to keeping the position alive even as I want to add to my cash position and the expiration of a short put contract would certainly help in that regard.

With the Seagate Technolgy cash back in hand after the expiration of those puts, I would like to do it over again, especially if Seagate shows any weakness to start the week. 

Those shares are still along way away from recovering the large loss from just 2 months ago, but they have traded well at the $34.50 range.

By my definition that means a stock that has periodic spasms of movement in both directions, but returns to some kind of a trading range in between. Unfortunately, sometimes those spasms can be larger than expected and can take longer than expected to recover.

As long as the put market has some liquidity and the options are too deeply in the money, rolling over the short puts to keep assignment at bay is a possibility and the option premiums can be very rewarding

Finally, it was a rough week for most all stocks, but the financials were hit especially hard as the interest rate on a 10 Year Treasury Note fell 6%.

That hard hit included Morgan Stanley (MS), which fell 9% on the week and MetLife (MET), which fared better, dropping by only 8%.

The decline on the former brought it back down to the lows it experienced after its most recent earnings report. At those levels I bought and was subsequently assigned out of shares on 4 occasions during a 5 week period.

In my world that’s considered to be as close to heaven as you can hope to get.

With the large moves seen in Morgan Stanley over the past 2 months it has been offering increasingly attractive option premiums and can reasonably be expected to begin to show some strength as an interest rate increase becomes reality.

MetLife, following the precipitous decline of this past week is now within easy striking distance of its 52 week low. However, shares do appear to have some reasonably good price support just $1 below Friday’s close and as with Morgan Stanley, the option premiums are indicating increased uncertainty that’s been created because of the recent strong moves lower.

In a raising rate environment those premiums can offset any near term bumpiness in the anticipated path higher, as these financial sector stocks tend to follow interest rates quite closely.

The only lesson to be learned is that sometimes it pays to not follow too closely if there’s a cliff awaiting you both.

Traditional Stocks: Dow Chemical, MetLife, Morgan Stanley

Momentum Stocks: Seagate Technology

Double-Dip Dividend: General Motors (12/16 $0.36)

Premiums Enhanced by Earnings: none

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

Weekend Update – September 20, 2015

This past Monday, prior to the market’s opening, I posted the following for Option to Profit subscribers:

“In all likelihood, at this point there are only two things that would make the market take any news badly.

The first is if no interest rate increase is announced.

Markets seem to have finally matured enough to understand that a rate hike is only a reflection of all of the good and future good things that are developing in our economy and are ready to move on instead of being paralyzed with fear that a rate hike would choke off anemic growth.

The second thing, though, is the very unlikely event of a rate hike larger than has been widely expected. That means a 0.5% hike, or even worse, a full 1% hike.

That would likely be met with crazed selling.”

Based on the way the market was trading this week as we were awaiting the FOMC Statement which was very widely expected to announce an interest rate increase, you would have been proud.

The proudness would have arisen as it seemed that the market was finally at peace with the idea that a small interest rate increase, the first in 9 years, wouldn’t be bad news, at all.

Finally, it seemed as if the market was developing some kind of a more mature outlook on things, coming to the realization that an interest rate hike was a reflection of a growing and healthy economy and was something that should be celebrated.

It always seemed somewhat ironic to me that the investing class, perhaps those most likely to endorse the concept of teaching a man how to fish rather than simply giving a handout, would be so aghast at the possibility of a cessation of a zero interest rate policy (“ZIRP”), which may have been tantamount to a handout.

The realization that ours was likely the best and most fundamentally sound economy in the world may have also been at the root of our recent disassociation from adverse market events in China.

So while the week opened with more significant weakness in China, our own markets began to trade as if they were now ready to welcome an interest rate increase and seeing it for what it really reflected.

All was well and in celebration mode as we awaited the news on Thursday.

As the news was being awaited, I saw the following Tweet. 

I don’t follow many people on Twitter, but Todd Harrison, the founder of Minyanville is one of those rare combinations of humility, great personal and professional successes, who should be followed.

I have an autographed copy of his book “The Other Side of Wall Street,” whose full title really says it all and is a very worthwhile read.

Like the beer pitchman, Todd Harrison doesn’t Tweet much, but when he does, it’s worth reading, considering and placing somewhere in your memory banks.

Many people in their Twitter profiles have a disclaimer that when they re-Tweet something it isn’t necessarily an endorsement.

When I re-Tweet something, it is always a reflection of agreement. There’s no passive – aggressiveness involved in the re-Tweet by saying “I endorse the re-Tweeting of this, but I don’t necessarily endorse its content.”

I believed, as Todd Harrison did, some 4 minutes before the FOMC statement release, that the knee jerk reaction to the FOMC decision wasn’t the one to follow.

But a funny thing happened, but not in a funny sort of way.

For a short while that knee jerk reaction would have been the right response to what should have been correctly viewed as disappointment.

What was wrong was a reversion back to a market wanting and believing that it was given another extension of the ZIRP handout. That took a market that had given up all of its substantial gains and made another reversal, this time going beyond the day’s previous gains.

With past history as a guide, going back to Janet Yellen’s predecessor, who introduced the phenomenon of the Federal Reserve Chairman’s Press Conference, the market kept going higher during the prepared statement portion of the conference and continued even higher as some clarification was sought on what was meant by “global concerns.”

Of course, everyone knew that meant China, although one has to wonder whether those global concerns also included the opinions held and expressed by Christine Legarde of the International Monetary Fund and others, who believe that it would be wrong for the FOMC to introduce an interest rate increase in 2015.

While some then began to wonder whether “global concerns” meant that the Federal Reserve was taking on a third mandate, it all turned suddenly downward.

With the exception of a very early Yellen press conference when she mischaracterized the FOMC’s time frame on rate increases and the market took a subsequent tumble, normally, Yellen’s dovish and dulcet tones are like a tonic for whatever may have been ailing the market/ This week, however, the juxtaposition of dovish and hawkish sentiments from the FOMC Statement, the subsequent press conference prepared statement and questions and answers may have been confusing enough to send traders back to their new found friend.

Logic.

Perhaps it was Yellen’s response that she couldn’t give a recipe to define what would cause the FOMC to act or perhaps it was the suggestion that the FOMC needn’t wait until their next meeting to act that sent markets sharply lower as they craved some certainty.

Or maybe it was a sudden realization that if markets had gone higher on the anticipation of a rate increase, logic would dictate that it go lower if no increase was forthcoming.

And so the initial response to the FOMC decision was the right response as the market may have shown earlier in the week that it was finally beginning to act in a mature fashion and was still capable of doing so as the winds shifted.

Perhaps the best question of that afternoon was one that pointed out an apparent inconsistency between expectations for full employment in the coming years, yet also expectations for inflation remaining below the Federal Reserve’s 2% target.

Good question.

Her answer “If our understanding of the inflation process is correct……we will see further upward pressure on inflation, may have represented a very big “if” to some and may have deflated confidence at the same time as a re-awakening was taking place that suggested that perhaps the economy wasn’t growing as strongly as had been hoped to support continued upward movement in the market.

That’s the downside to focusing on fundamentals.

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

As the market continues its uncertainty, even as it may be returning more to consideration of fundamentals, I continue to like the idea of going with some of the relative safety that may be found with dividends.

Last week I purchased more shares of General Electric (GE), hoping to capture both the dividend and the volatility enhanced premium. Those shares, however were assigned early, but having sold a 2 week option the ROI for the 3 days of holding reflected that additional time value and was a respectable 1.1%.

Even though I still hold some shares with an October 2, 2015 $25 expiration hanging over them, this week I find myself wanting to add shares of General Electric, once again, as was the case in each of the last two weeks.

Although there is no dividend in sight for another 3 months, the $25 neighborhood has been looking like a comfortable one in which to add shares as volatility has made the premiums more and more attractive and there may also be some short term upside to shares to help enhance the return.

A covered option strategy is at its best when the same stock can be used over and over again as a vehicle to generate premiums and dividends. For now, General Electric may be that stock.

Verizon (VZ) doesn’t have an upcoming dividend this week, but it will be offering one within the next 3 weeks. In addition to its recently increased dividend, the yield was especially enhanced by its sharp decline in share price at the end of the week as it gave some dour guidance for 2016.

There’s not too much doubt that the telecommunications landscape is changing rapidly, but if I had to put my confidence in any company within that smallest of sectors to survive the turmoil, it’s Verizon, as long as their debt load isn’t going to grow by a very unneeded and unwanted purchase of a pesky competitor that has been squeezing everyone’s margins.

I see Verizon’s pessimism as setting up an “under promise and over deliver” kind of scenario, as utilities typically find a way to thrive, but rarely want to shout up and down the streets about how great things are, lest people begin taking notice of how much they’re paying for someone else’s obscene profits.

Among those being considered that are going to be ex-dividend this week are Cypress Semiconductor (CY) and Green Mountain Keurig (GMCR).

I already own shares of Cypress Semiconductor and have a way to go to reach a breakeven on those shares which I purchased after its proposed buyout of another company fell through. I’ve held shares many times over the years and have become very accustomed to its significant and sizable moves, while somehow finding a way to return back to more normative pricing.

Following this past Friday’s decline its well below the $10 level that I’ve long liked for adding shares. With an ex-dividend date on Tuesday, if the trade is to be made, it will be likely done early in the week.

However, the other consideration is that Cypress Semiconductor is among the early earnings reporters and it will be reporting  on the day before its next option contract expires. For that reason, if considering a share purchase, I would probably look at a contract expiration beyond October, in the event of further price erosion.

Also going ex-dividend but not until Monday of the following week are Deere (DE) and Dow Chemical (DOW).

Like so many other stocks, they are badly beaten down and as a result are featuring an even more alluring dividend yield. However, their Monday ex-dividend date is something that can add to that allure, as any decision to exercise the option has to be made on the previous Saturday.

That presents opportunity to look at strategies that might seek to encourage early assignment through the sale of in the money call options utilizing expanded weekly options.

While Caterpillar (CAT) and others are feeling the pain of China’s economic slowdown, that’s not the case for Deere, but as is often the case, there are sympathy pains that become all too real.

Dow Chemical, on the other hand has continued to suffer from the belief that its fortunes are closely tied to oil prices. It;s CEO refuted that barely 9 months ago and subsequent earnings reports have borne out his contention, yet Dow Chemical continues to suffer as oil prices move lower.

If looking for a respite from dividends, both Bank of America (BAC) and Bed Bath and Beyond (BBBY) may be worth a look this week.

The financial sector was hard hit the past few days and Bank of America was additionally in the spotlight regarding the issue of whether its CEO should also hold the Chairman’s title.

As with Jamie Dimon before him who successfully faced the same shareholder issue and retained both designations, no one is complaining about the performance of Brian Moynihan.

Even as I sit on some more expensive shares that have options sold on them expiring in two weeks, I have no reason to complain.

Following a second consecutive day of large declines, Bank of America is trading near its support that has seemed to hold up well under previous assault attempts. As with other stocks that have suffered large declines, there is greater ability to attempt to capitalize on price gains without giving up much in the way of option premiums.

Bed Bath and Beyond reports earnings this week and has seen its price in steady decline for the past 4 months. Unlike others that have had a more precipitous decline as they’ve approached the pleasure of a 20% decline, Bed Bath and Beyond has done it in a gradual style.

While those intermediate points along the drop down may represent some resistance on the way back up, that climb higher is made easier when the preceding decline wasn’t vertical.

When considering an earnings related trade I usually look for a weekly return of 1% or greater by selling put options at a strike price that’s below the bottom range implied by the option market. The preference is that the strike price that provides that return be well below that lower boundary, The lower, the better the safety cushion.

For Bed Bath and Beyond the implied move is about 6.3%, but there is no safety cushion below a $56.50 strike level to yield that 1% return. Therefore, instead of selling puts before earnings, I would consider, as has been the predominant strategy of the past two months, of considering the sale of puts after earnings are announced, but only if there is a significant price decline.

Finally, Green Mountain Keurig is going ex-dividend this coming week, but it hardly qualifies as being among the relatively safe universe of stocks that I would prefer owning right now.

I usually like to think about opening a position in Green Mountain Keurig through the  sale of puts. However, with the ex-dividend date this week that would be like subsidizing someone who was selling those puts for the dividend related price decline.

Other than the dividend, there’s is little that I could say to justify a long term position on Green Mountain and even have a hard time justifying a short term position.

However, Green Mountain’s ex-dividend day is on Friday and expanded weekly options are available.

I would consider the purchase of shares and the concomitant sale of deep in the money expanded weekly calls in an attempt to see those shares assigned early.

As an example, with Green Mountain closing at $56.74 on Friday, the October 2, 2015 $54.50 call option would have delivered a premium of $3.08.

For a rational option buyer to consider early exercise on Thursday, the price of shares would have to be above $54.79 and likely even higher than that, due to the inherent risk associated with owning shares, even if only for minutes on Friday morning after taking their possession.

However, if assigned early, there would be a 1.5% ROI for the 4 days of holding even if the shares fell somewhat less than 3.4%.

Their coffee and their prospects for continued marketplace success may both be insipid, but I do like the tortured logic and odds of the dividend related trade as we look ahead to a week where logic seeks to re-assert itself.

 

Traditional Stock: General Electric, Verizon

Momentum Stock: Bank of America

Double-Dip Dividend: Cypress Semiconductor (9/22), Deere (9/28), Dow Chemical (9/28), Green Mountain Keurig (9/25)

Premiums Enhanced by Earnings: Bed Bath and Beyond (9/24 PM)

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

Weekend Update – June 21, 2015

No matter how old you are, people love getting gifts.

That may even be the case when you end up paying for them yourself.

Sometimes, that’s the real surprise.

Last year, for example, I received a surprise birthday gift when hitting one of those round numbers. It was a trip to my favorite city, New Orleans, and I was further surprised by friends and family that had assembled there and then individually popped up at totally unexpected times and places.

The real surprise was when I received the hotel bill and then subsequently the other bills. While I’ll be forever remembering the moment a tap on my shoulder at a busy restaurant announced, “Sir, your drinks are here,” only to turn around and see one of my sons unexpectedly turn up holding a platter of shots. Priceless, but as long as we’re talking about price, I think that I would have chosen less costly libations had I known what was to be in store for me.

In hindsight, though, it was a great gift, but I paid the price as many expect will be the case after years of the Federal Reserve injecting liquidity into the system and keeping interest rates at historic lows, much as is now occurring throughout Europe and the world.

Following the FOMC Statement release this past week was Janet Yellen’s press conference and as one person said to me, hers was the “best tightrope walking” he’d ever seen.

Janet Yellenda, has a nice ring to it and she certainly did a great job of staying on course while questions came at her trying their best to throw her off message. Many of those questions were posed to see her lose her tight cling to the carefully nuanced words that served to tantalize, while hinting of what was ahead.

Instead of seeing the gift for what it was, they wanted to know when the bill would be coming due and maybe who was going to end up holding the bag when the celebrations were all over.

Of course, there are those really sick people for whom the gift would be seeing someone else fail or fall off that tightrope wire, but Yellen was better than any gust of wind that could come her way.

For those that had so recently come to expect that perhaps the FOMC would raise interest rates with this past week’s statement release, the market made it clear that they considered the delay as a real gift, even if the celebration and enjoyment lasted just for a day or so.

Sooner or later, there’s also a price that needs to be paid.

That gift, withholding the interest rate increase that just a couple of weeks ago seemed as if it might come this past week, not only was being delayed, but perhaps being delayed all the way to September. As if that gift wasn’t enough, there was a suggestion that any rate increase wasn’t necessarily going to be part of a planned series of regular rate increases, as had been the practice during the Greenspan era.

Could it get any better? At least that was how most heard her words as she delicately balanced them against one another, saying only those things that could be construed by willing ears as “Laissez les bons temps rouler,” as they like to say in New Orleans.

On Thursday, the day after the FOMC Statement release and press conference, it didn’t seem that it could get any better, as the market celebrated what could only be interpreted as a gift for stock investors.

Still, the reality is that while we are winding down a monetary policy era that has likely been to the benefit of our stock markets, the rest of the world is now beginning on that path and may offer stiff winds for us as the bill gets tallied.

The gales coming from Europe were evident this past week as the market was also reacting to the tightrope walk that Greece was doing as it vacillated between being reasonable and unrealistic.

Telling its IMF and ECB safety nets that there were better safety nets out there, while forgetting that neither Russia nor China has ever saved anyone without exacting a price that makes simple interest paid to the IMF and ECB look absolutely charitable, our own markets swayed along with those cross currents of uncertainty.

There may be lots of those cross currents ahead, so that balancing skill may come in very handy while waiting for earnings season to begin again in July and offering the possibility of getting grounded in fundamental reality.

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

Last week marked the second consecutive week in which I didn’t open any new positions, something that would have been unimaginable to me at any point during the past 7 or more years. This coming week I can see more of the same, as there’s very little compelling news ahead to make we want to let go of the cash in my hand. As the bill may be ready to come due soon, I’d like to be ready with that cash on hand to balance the challenge of uncertainty.

Of course, as is usually the case, once the reality of the bill finally settles in, most of the time that represents an opportunity to again start moving forward.

For now, unless there is some further compelling reason to come from upcoming GDP, Retail Sales, Employment Situation and JOLTS reports to believe that the economy is heating up sufficiently to warrant a rate increase in July, the next catalyst may very well come from earnings.

This past week Oracle (NYSE:ORCL) reported earnings. It is among a very small handful of significant companies that report late in the cycle. In fact, their report was almost 3 months following the close of the quarter upon which they reported. While many of those reported soon after earnings season started, less than 2 weeks after the close of that quarter, the expectation for currency related revenue declines was so high at that time, that those companies didn’t see stock prices harshly punished for the dollar’s strength.

Now? Not so much.

Most, in fact, took the previous earnings report opportunity to provide decreased forward guidance as the expectation was that we were headed for US Dollar and Euro parity.

Nearly 3 months later that projection hasn’t become reality, as the US dollar has weakened significantly since March 31, 2015 and that can be expected to show up in the next quarter’s earnings reports. Unfortunately for Oracle share holders, had the company reported in April, there’s a chance that they would have gotten the same free pass as did others at that time.

Sinclair Broadcasting (NASDAQ:SBGI) and Comcast (NASDAQ:CMCSA) are both firmly in the control of their founding families and are on different ends of the spectrum when it comes to their approach to bringing content into the home.

The family nature of Comcast was highlighted this past Friday with the passing of its founder, Ralph Roberts, at age 95. My mother used to say, “they should never go younger,” and while I was never a fan of their product and service, the man was an outlier in many good ways.

With Comcast having recently been extricated from a potential buyout of another cable company, it’s also finding that there are opportunities outside of people’s television sets and streaming devices, as its ownership of Universal Studios makes it the beneficiary of some blockbuster movie releases.

On the downside, it is near its 52 week high as it gets ready to go ex-dividend the week after next. That gives some reason for pause, although neither Greece nor currency headwinds should be an issue, although rising interest rates can be particularly hurtful for a capital intensive company.

However, I especially like Monday ex-dividend dates and like the idea of being assigned early on those positions, as you can get an additional week of premium in exchange for giving up the dividend and holding the stock position for a shorter period of time than planned, while having the opportunity to re-invest the assignment proceeds into another position. With the availability of expanded weekly options on Comcast there are a number of different expiration dates that can be used in an effort to capture additional time premium or try to find the right balance between premium, dividend and time.

Sinclair Broadcasting is in the terrestrial business and just keeps getting larger and larger. It’s not particularly an exciting stock, but does trade with a fairly large price range without any particularly moving news.

It is now at a price that is still above its range mid-point, but that however, has been a reliable launching pad for new positions. With only monthly options available the time commitment is longer as the July 2015 cycle begins this coming week. With earnings coming during the August 2015 cycle any short term price decline necessitating a rollover may look to bypass additional earnings risk and go to a September 2015 expiration, which would also include an upcoming dividend.

Philip Morris (NYSE:PM) and Blackberry (NASDAQ:BBRY) can both elicit some emotional responses, but for very different reasons. Both have upcoming events this week that can offer some opportunity.

Philip Morris is ex-dividend this week and that dividend is very attractive. The company recently stopped its aggressive buyback program as it was feeling the pain of currency exchange and did so, ostensibly, in favor of the dividend. With a history of annual dividend increases coming for the third quarter of each year, there is some question as to whether that will be possible this year, as cash flow is decreased from both currency and declining sales.

Earnings are scheduled to be reported on the day prior to the end of the July 2015 monthly cycle, so in the event that shares haven’t been assigned prior to that, I would consider attempting to rollover any expiring option to a date that may give sufficient time to recover from any price decline.

Blackberry reports earnings this week and is sitting precariously near its yearly lows. The options market is implying an 8% price move when earnings are released on Tuesday morning.

Blackberry usually has released earnings on Friday mornings over the past few years and I’ve generally overlooked it because my preference is to sell a weekly put on most earnings related trades. I further prefer those that report early in the week, so as to have time for some price recovery if at risk for assignment, particularly as some price recovery could ease the ability to rollover the position to delay or avoid assignment.

With a Tuesday morning report and the chance of achieving a 1% ROI at a strike just outside the range implied by the options market, the interest in a short put position is rekindled. However, the greatest likelihood is that I would be more inclined to consider a put sale after earnings, if the price declines, as the premium can really get further enhanced as the price challenges that 52 week low.

I currently own shares of Dow Chemical (NYSE:DOW) and am at risk of having those shares assigned in order to capture the dividend. With those contracts expiring on July 2, 2015 and the ex-dividend date of Friday, June 26th, the $0.42 dividend would require a price of at least $53.92 for the $53.50 options to be assigned early. If that looks like a possibility as trading nears it close on Thursday, I may consider rolling over the option position in order to secure the dividend.

However, with any price decline in shares, particularly if coming early in the week, I would consider adding additional shares and again consider selling call options for the following, holiday shortened week, or even for the week afterward.

Dow Chemical has recently been trading well off its lows that were fueled by decreasing oil prices. CEO Andrew Liveris, who has come under fire on his own for allegedly using his position to finance his lifestyle, did an excellent job in convincing investors that Dow Chemical was a beneficiary of decreasing oil prices, rather than a victim, as it was being treated early in 2015, prior to his going on the offensive.

I think that even if oil prices head moderately higher in the near term, Andrew Liveris would be able to convince people that was also to the benefit of Dow Chemical, just as I expect he’ll be able to convince internal Dow Chemical “watch dogs” that his personal actions were entirely appropriate.

Finally, I had Bank of America (NYSE:BAC) shares assigned this past week, but following weakness among financials on Friday, as well as following the week’s peak in interest rates, shares declined.

That decline, although still leaving shares near a 6 month high, does provide another entry point opportunity. While its shares may continue to be pressured if the bond market bids interest rates lower, the bond market knows exactly where interest rates are going to be headed and financials should be following along.

While the premiums aren’t spectacular, I would look at a potential purchase of shares with an eye toward a longer term holding trying to capitalize on share gains supplemented by option premiums while awaiting the reality of rate increases to come.

Traditional Stocks: Sinclair Broadcasting

Momentum Stocks: Bank of America

Double-Dip Dividend: Comcast (6/29), Dow Chemical (6/26), Philip Morris (6/23)

Premiums Enhanced by Earnings: Blackberry (6/23 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.