Dec102016

Weekend Update – December 11, 2016

Weekend Update Comment

There are so many ways to look at most things.

Take a runaway train, for example.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Momentum takes them even higher.

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

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

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

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

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

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

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

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

Guess who will take the credit?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That sounds like an endorsement to me.

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

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

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

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

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

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

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

Almost like a runaway train.

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

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

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

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

 

Traditional Stocks: Gap, Inc.

Momentum Stocks: Cliffs Natural Resources

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

Premiums Enhanced by Earnings: none

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

Mar252016

Weekend Update Comment

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. 

Oct92015

Weekend Update – October 11, 2015

Weekend Update Comment

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

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

So you tell me. What can’t we do?

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

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

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

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

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

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

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

That’s not how rockets usually work, though.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: Apple, The Gap, Visa

Momentum Stocks: Coach

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

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

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

Jun272015

Weekend Update – June 28, 2015

Weekend Update Comment

To call the stock market of this past week “a dog” probably isn’t being fair to dogs.

Most everyone loves dogs, or at least can agree that others may be able to see some positive attributes in the species. It’s hard, however, to have similar equanimity, even begrudgingly so, toward the markets this week.

What started off strongly on Monday and somehow wasn’t completely disavowed the following day, devolved unnecessarily on Wednesday and without any strong reason for doing so.

In fact, it was a week of very little economic news. We were instead focused on societal news that likely made little to no impression on the markets as a whole, although one sector did stand out.

That sector was health care, as the Supreme Court’s decision on the Affordable Care Act was a re-affirmation of a key component of the legislation and delayed any need to come up with an alternative, while still allowing Presidential contenders to criticize it heading into election season.

That’s a win – win.

It also keeps the number of uninsured at their lowest levels ever and puts more money in the pockets of hospitals and insurers, alike.

That’s another win – win.

While those two are usually on the opposite sides of most health care related arguments investors definitely agreed that the Affordable Care Act was and will continue to be additive to their bottom lines.

There is no health care flag, however.

The “Rainbow Flag” got a big thumbs up last week as the Supreme Court re-affirmed the right to dignity and the universal right to have access to divorce courts. The Court’s decision and its impact on businesses and the economy was a topic of speculation that was designed to fill air time and empty columns in the business section, as it came on a quiet day to end the week.

The Confederate Flag, of course, got a big thumbs down, after 150 years of quiet and thoughtful deliberation over its merits and what it represented. The decision by major retailers to stop sales of items with the Confederate flag on them can only mean that their demand wasn’t very significant and those items will probably be sent overseas, just as is done with the tee shirts of the losing Super Bowl team, so we can expect to see lots of photos of strangely attired impoverished third world children in the future.

And that leaves Greece, the EU, the IMF and the World Bank. For those most part, those aren’t part of our societal concerns, but they do concern markets.

Just not too much this past week.

The European Union was very forward thinking in the design of its flag. Rather than being concrete and having the 12 stars represent its member nations, those stars are said to represent characteristics of those member states. In other words Greece could leave the EU and the flag remains unchanged. Although the symbolism of the stars being arranged in a circle to represent “unity” may have to come under some scrutiny.

The growing realization is that would likely not be the same for the EU itself, as an exit by Greece would ultimately be “de minimis.” Either way, we should get some more information this week, as IMF chief Christine Legarde’s June 30th line in the sand regarding Greece’s repayment is quickly approaching.

It may be too late for a proposed “Plan B” for Greece to prevent default, as the European Union is now in its 86th trimester.

Still, despite a week of little news, somehow it was another week of pronounced moves in both directions that ultimately managed to travel very little from home.

New and existing home sales data suggested a strengthening in that important sector and the revised GDP indicated that the first quarter wasn’t as much of a dog as we all had come to believe. But there really wasn’t enough additional corroborating data to make anyone jump to the conclusion that core inflation was now exceeding the same objective that Janet Yellen had just stated weren’t being met.

So any concerns about improving economic news shouldn’t have led anyone to begin expressing their fears of increased interest rates by selling their stocks.

But it did.

Wednesday’s sell-off followed the news that the revised 2015 first quarter GDP was only down by 0.2% and not the previously revised 0.7%.

That makes it seem as if nerves and expectations for a long overdue correction or even a long overdue mini-correction are ruling over common sense and rational thought.

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

The coming week is a holiday shortened one and will have the Employment Situation Report coming on Thursday, potentially adding to interest rate nervousness if numbers continue to be strong.

After Micron Technology’s (NASDAQ:MU) earnings disappointment last week it may be understandable why a broad brush was used within the technology sector to drive prices considerably lower on Friday. However, it wasn’t Micron Technology that introduced the weakness. The past two weeks haven’t been particularly kind to the sector.

At a time that I’m under-invested in technology and otherwise very reluctant to commit new funds, the sector has a disproportionate share of my attention in competition for whatever little I’m willing to let go.

With Oracle (NYSE:ORCL) having also recently reported disappointing earnings and Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) and Seagate Technology (NASDAQ:STX) reporting in the next 3 weeks, it may be an interesting period.

While Micron Technology brought up concerns about PC sales, they are more dependent upon those than some others that have found salvation in laptops, tablets and mobile devices.

What was generally missing from Micron’s report, however, was placing the blame for lower revenues on currency exchange, unlike as was just done by Oracle. Micron focused squarely on decreasing product demand and pricing pressure.

That lack of adverse impact from currency exchange is a theme that I’m expecting as the upcoming earnings season begins. Whereas the previous earnings reports provided dour guidance on expectations of USD/Euro parity, the Dollar’s relative weakness in the most recent quarter may provide some upside surprises.

With share prices in Microsoft and Intel having dropped, this may be a good time to add positions in both, as they could both be significant beneficiaries of an improvement in currency exchange, as both await any bump coming from the introduction of Windows 10. I haven’t owned shares of Microsoft for a while and have been looking for a new entry point. At the same time, I do own shares of Intel and have been looking for an opportunity to average down and ultimately leave the position, or at least underwrite some of the paper losses with premiums on contracts written on an additional lot of shares.

While Seagate Technology doesn’t report its earnings until July 15th, following its weakness over the last 7 weeks, I’m considering the sale of puts in the weeks in advance of earnings. Those premiums are elevated and will become even more so during the actual week of earnings. In the event of an adverse price move, there might be a need to rollover the puts to try and avoid or delay assignment. However, at some point in the August 2015 option cycle the shares will be ex-dividend, so a shift in strategy, pivoting to share ownership maybe called for if still short the put options.

While Oracle and Cisco (NASDAQ:CSCO) don’t report earnings for a while, both have upcoming ex-dividend dates that add to their appeal. In the case of Oracle, it’s ex-dividend date is on Monday of the following week, which opens the possibility of ceding the dividend to early assignment in exchange for getting two weeks of premium and the opportunity to recycle proceeds from an assignment into another income producing position.

Also going ex-dividend on the Monday of the following week is The Gap (NYSE:GPS). It is one of my favorite stocks, even though it rarely seems to be doing anything right these days.

Part of its allure is that it continues to provide monthly sales data and the uncertainty with those report releases consistently creates option premium opportunities usually seen only quarterly for most stocks as they prepare to release earnings.

As long as The Gap continues to trade in a range, as it has done for quite some time, there is opportunity by holding shares and serially selling calls, while collecting dividends, as the company attempts to figure out what it wants to be, as it closes stores, yet announces plans to take over the Times Square Toys ‘R Us location, for those NYC tourists that just have to jet a pair of khakis to remember their trip.

Finally, American Express (NYSE:AXP) goes ex-dividend this week. It has been extremely range bound ever since the initial shock of losing its co-branding relationship with Costco (NASDAQ:COST) in 2016.

My wife informed me this morning that after about 30 years of near exclusive use of American Express, she has replaced it with another credit card. While that’s not related to the Costco news, it is something that American Express will likely be experiencing more and more in the coming months. That may, of course, explain the spate of mailings I’ve recently received to entice continuing loyalty.

While that comes at a cost, that’s still tomorrow’s problem and the market has likely discounted the costs of the partnership dissolution, as well as the lost revenues.

I like the price range and I like the option premium and dividend opportunities for as long as they may persist, but my loyalty to shares may only go for a week at a time.

Traditional Stocks: Intel, Microsoft

Momentum Stocks: Seagate Technology

Double-Dip Dividend: American Express (6/30), Cisco (7/1), Oracle (7/6), The Gap (7/6)

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.

Apr102015

Weekend Update – April 12, 2015

Weekend Update Comment

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

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

How convenient. Talk about a fairy tale.

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

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

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

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

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

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

It isn’t.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Momentum Stocks: Abercrombie and Fitch

Double Dip Dividend: none

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

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

Mar142015

Weekend Update – March 15, 2015

Weekend Update Comment

Anyone who has seen the classic movie “Casablanca” will recall the cynicism of the scene in which Captain Renault says “I’m shocked, shocked to find that gambling is going on in here!” seconds before the croupier hands him his winnings from earlier.

This week, the Chief Global Investment Strategist of Blackrock (NYSE:BLK) in attempting to explain a sell-off earlier in the week said “You’ve got the dollar up about 23 percent from the summer lows, and people are realizing this is starting to bite into earnings.”

No doubt that a stronger US Dollar can have unwanted adverse consequences, but exactly what people was Russ Koesterich referring to that had only that morning come to that realization?

How in the world could people such as Koesterich and others responsible for managing huge funds and portfolios possibly have been caught off guard?

Was he perhaps instead suggesting that somehow small investors around the nation suddenly all had the same epiphany and logged into their workplace 401(k) accounts in order to massively dump their mutual fund shares in unison and sufficient volume prior to the previous day’s closing bell?

Somehow that doesn’t sound very likely.

I can vaguely understand how a some-what dull witted middle school aged child might not be familiar with the consequences of a strengthening dollar, especially in an economy that runs a trade deficit, but Koesterich could only have been referring to those who were capable of moving markets in such magnitude and in such short time order. There shouldn’t be too much doubt that those people incapable of seeing the downstream impacts of a strengthening US Dollar aren’t the ones likely to be influencing market direction upon their sudden realization.

Maybe it just doesn’t really matter when it’s “other people’s money” and it is really just a game and a question of pushing a sell button.

This past week was another in which news took a back seat to fears and the fear of an imminent interest rate increase seems to be increasingly taking hold just at the same time as the currency exchange issue is getting its long overdue attention.

While there are still a handful of companies of importance to report earnings this quarter, the next earnings season begins in just 3 weeks. If Intel (NASDAQ:INTC) is any reflection, there may be any number of companies getting in line to broadcast earnings warnings to take some of the considerable pressure off the actual earnings release.

The grammatically incorrect, but burning question that I would have asked Russ Koesterich during his interview would have been “And this comes to you as a surprise, why?”

In the meantime, however, those interest rate concerns seem to have been holding the stock market hostage as the previous week’s Employment Situation report is still strengthening the belief that interest rate increases are on the near horizon, despite any lack of indication from Janet Yellen. In addition, the past week saw rates on the 10 Year Treasury Note decrease considerably and Retail Sales fell for yet another month, even while gasoline prices were increasing.

The coming week’s FOMC meeting may provide some clarity by virtue of just occurring. With so many focusing on the word “patience” in the FOMC Statement, whether it remains or is removed will offer reason to move forward as either way the answer to the “sooner or later” question will be answered.

Still, it surprises me, having grown up believing the axiom that the stock market discounts events 6 months into the future, that it has come to the point that fairly well established economic cycles, such as the impact of changing currency exchange rates on earnings, isn’t something that had long been taken into account. Even without a crystal ball, the fact that early in this current earnings season companies were already beginning to factor in currency headwinds and tempering earnings and guidance, should at least served as a clue.

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

Years ago, before spinning off its European operations, Altria (NYSE:MO) was one of my favorite companies. While I have to qualify that, lest anyone believed that their core business was the reason for my favor, it was simply a company whose shares I always wanted to trade.

In academic medicine we used to refer to the vaunted “triple threats.” That was someone who was an esteemed researcher, clinician and teacher. There really aren’t very many of those kind of people. While Altria may represent the antithesis to what a triple threat in medicine is dedicated toward, it used to be a triple threat in its own right. It had a great dividend, great option premiums and the ability to have share appreciation, as well.

That changed once Phillip Morris (NYSE:PM) went on its own and the option premiums on the remainder of Altria became less and less appealing, even as the dividend stayed the course. I found less and less reason to own shares after the split.

However, lately there has been some life appearing in those premiums at a time that shares have fallen nearly 10% in just 2 weeks. With the company re-affirming its FY 2015 guidance just a week ago, unless it too has a sudden realization that its now much smaller foreign operations and businesses will result in currency exchange losses, it may be relatively immune from what may ail many others as currency parity becomes more and more of a reality.

Lately, American Express (NYSE:AXP) can’t seem to do anything right. I say that, as both my wife and I registered our first complaints with them after more than 30 years of membership. Fascinatingly, the events were unrelated and neither of us consulted with the other, or shared information about the issues at hand, before contacting the company.

My wife, who tends to be very low maintenance, was nearly apoplectic after being passed to 11 different people, some of whom acted very “Un-American Express- like.”

The preceding is anecdotal and meaningless information, for sure, but makes me wonder about a company that received a premium for its use by virtue of its service.

With the loss of its largest co-branding partner to take effect in 2016, American Express has already sent out notices to some customers of its intent to increase interest rates on those accounts that are truly credit cards, but my guess is that revenue enhancements won’t be sufficient to offset the revenue loss from the partnership dissolution.

To that end the investing world will laud American Express for its workforce cutbacks that will certainly occur at some point, and service will as certainly decline until that point that the consumers go elsewhere for their credit needs.

That is known as a cycle. The sort of cycle that perhaps highly paid money managers are unable to recognize, until like currency headwinds, it hits them on the head.

Still, the newly introduced uncertainty into its near term and longer term prospects has again made American Express a potentially attractive covered option candidate, as it has just announced a dividend increase and a nearly $7 billion share buyback.

Based on its falling stock price, you would think that Las Vegas Sands (NYSE:LVS) hasn’t been able to do anything right of late, either.

Sometimes your fortunes are defined on the basis of either being at the right place at the right time or the wrong place at the wrong time. For the moment, Macao is the wrong place and this is the wrong time. However, despite the downturn of fortunes for those companies that placed their bets on Macao, somehow Las Vegas Sands has found the wherewithal to increase its quarterly dividend and is now at 5%, yet with a payout ratio that is sustainable.

The company also has operating and profit margins that would make others, with or without exposure to Macao envious, yet its shares continue to follow the experiences of the much smaller and poorer performing Wynn Resorts (NASDAQ:WYNN). That probably bothers Sheldon Adelson to no end, while it likely delights Steve Wynn, who would rather suffer with friends.

With shares going ex-dividend this week and trading near its yearly low, it’s hard to imagine news from Macao getting much worse, particularly as China is beginning to play the interest rate game in efforts to stimulate the economy. The risk, however, is still there and is reflected in the option premium.

Given the risk – benefit proposition, I ask myself “WWSD?”

What would Sheldon Do?

My guess is that he would be betting on his company to do more than just tread water at these levels.

The Gap (NYSE:GPS) fascinates me.

I don’t think I’ve ever been in one of their stores, but I know their brand names and occasionally make mental notes about the parking conditions in front of their stores. Those activities are absolutely meaningless, as are The Gap’s monthly sales reports.

I don’t think that I can recall any other company that so regularly alternates between being out of touch with what the consumer wants and being in complete synchrony. At least that’s how those monthly sales statistics are routinely interpreted and share prices goes predictably back and forth.

The good thing about all of the non-sense is that the opportunities to benefit from enhanced option premiums actually occurs up to 5 times in a 3 month period extending from one earnings report to the next, as the monthly same store sales reports also have enhanced premiums. With an upcoming dividend during the same week as the next same store sales report in early April 2015, this is a potential position that I’d consider selling a longer term option, in order to take advantage of the upcoming volatility, collect the dividend and perhaps have some additional time for the price to recoup if it reacts adversely.

MetLife (NYSE:MET) has been trading in a range lately that has simply been following interest rates for the most part. As it awaits a decision on its challenge to being designated as “systemically important” it probably is wishing for rate increases to come as quickly as possible so that it can put as much of its assets to productive use as quickly as possible before the inevitable constraints on its assets become a reality.

With interest rate jitters and uncertainty over the eventual judicial decision, MetLife’s option premiums are higher than is typically the case. However, in the world of my ideal youth, the stock market would have already discounted the probabilities of future interest rate increases and the upheld designation of the company as being systemically important.

With Intel’s announcement, this wasn’t a particularly good week for “old technology.” For Seagate Technolgy (NASDAQ:STX) the difficulties this week were just a continuation since its disappointing earnings in January. After its earnings plunge and an attempted bounce back, it is now nearly 9% lower than at the depth of its initial January drop.

That continued drop in share price is finally returning shares to a level that is getting my attention. With its dividend, which is very generous and appears to be safe, still two months away, Seagate Technology may be a good candidate for the sale of put contracts and if opening such a position and faced with assignment, I would consider trying to rollover as long as possible, either resulting in an eventual expiration of the position or being assigned and then in a position to collect the dividend.

Finally, for an unprecedented fourth consecutive week, I’m going to consider adding shares of United Continental (NYSE:UAL) as energy prices have recaptured its earlier lows. Those lows are good for UAL and other airlines and by and large the share prices of UAL and representative oil companies have moved in opposite directions.

I had shares of UAL assigned again this past Friday, as part of a pairs kind of trade established a few weeks ago. I still hold the energy shares, which have slumped in the past few weeks, but would be eager to once again add UAL shares at any pullback that might occur with a bounce back in energy prices.

The volatility and uncertainty inherent in shares of UAL has made it possible to buy shares and sell deep in the money calls and still make a respectable return for the week, if assigned.

That’s a risk – reward proposition that’s relatively easy to embrace, even as the risk is considerable.

 

Traditional Stocks: Altria, American Express, MetLife, The Gap

Momentum Stocks: Seagate Technology, United Continental

Double Dip Dividend: Las Vegas Sands (3/19)

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.

Feb212015

Weekend Update – February 22, 2015

Weekend Update Comment


After setting a new high on the S&P 500 last week, the bull was asleep this holiday shortened trading week, having been virtually flat for the first 3 days of trading and having been devoid of the kind of intra-day volatility that has marked most of 2015.

That’s of course only if you ignore how the week ended, as this time the S&P 500 wasn’t partying alone, as the DJIA and other indexes joined in recording new record highs.

For the briefest of moments as the market opened for trading on Friday morning it looked as if that gently sleeping bull was going to slip into some kind of an unwarranted coma and slip away, as the DJIA dropped 100 points with no consequential news to blame.

However, as has been the case for much of 2015 a reversal wiped out that move and returned the market to that gentle sleep that saw a somnolent market add a less than impressive 0.1% to its record close from the previous week.

In a perfect example of why you should give up trying to apply rational thought processes to an irrational situation, the market then later awoke from that gentle sleep in a paroxysm of buying activity, as an issue that we didn’t seem to care about before today, took hold, thereby demonstrating the corollary to “It is what it is” by showing that it only matters when it matters.

That issue revolved around Greece and the European Union. The relationship of Greece and the EU seemed to be heading toward a potential dissolution as a new Greek government was employing its finest bluster, but without much base to its bravado. As it was all unfolding, this time around, as compared to the last such crisis a few years ago, we seemed content to ignore the potential consequences to the EU and their banking system.

While that situation was being played out in the news most analysts agreed it was impressive that US markets were ignoring the drama inherent in the EU dysfunction. The threat of contagion to other “weak sister”nations in the event of a member nation’s exit and the very real question of the continuing integrity of that union seemed to be an irrelevancy to our own markets.

Yet for some reason, while we didn’t care about the potential bad news, the market seemed to really care when the bluster gave way to capitulation, even though the result was reminiscent of the very finest in “kicking the can down the road” as practiced by our own elected officials over the past few governmental stalemates.

From that moment on, as the rumors of some sort of accord were being made known the calm of the week gave way to some irrational buying.

Of course, when that can was on our own shores, the result in our stock market was exactly the same when it was kicked, so the lesson has to be pretty clear about ever wanting to do anything decisive.

Next week, however, may bring a rational reason to do something to either spur that bull to new heights or to send it into retreat.

Forget about the impending congressional testimony that Janet Yellen will be providing for 2 days next week as the impetus for the market to move. Why look for external stimulants in the form of economist-speak when you already have all of the ingredients that you need in the form of fundamentals, a language that you understand?

While “Fashion Week” was last week and exciting for some, the real excitement comes this week with the slew of earnings from major national retailers trying to sell all of those fashions. While their backward looking reports may not reflect the impact of decreased energy prices among their customers, their forward looking comments may finally bring some light to what is really going on in the economy.

With “Retail Sales” reports of the past two months, which also include gasoline purchases, having left a bad taste with investors, a better taste of things to come has already been telegraphed by some retailers in their rosy comments in advance of their earnings release.

This coming week could offer lots of rational reasons to move the market next week. Unfortunately, that could be in either direction.

With earnings reports back on center stage after a relatively quiet earnings week, stocks were mostly asleep, but, that was definitely not the case in other markets. If looking for a source of contagion there are lots of potential culprits.

Bond markets, precious metals and oil all continued their volatility. The 10 Year Treasury Bond, for example saw abrupt and large changes in direction this week and has seen rates head about 30% higher over the past couple of weeks after the FOMC sowed some doubt into their intentions and timing.

^TNX Chart

^TNX data by YCharts

While Janet Yellen may shed some light on FOMC next steps and their time frame, she is, to some degree held hostage by some of those markets, as traders move interest rates and energy prices around without regard to policy or to what they position they held deeply the day before.

For my part, I don’t mind the marked indecision in other markets as long as this current market in equities can keep moving forward a small step at a time in its sleep.

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

Yahoo (NASDAQ:YHOO) after all of these years is sadly in the position of having to establish an identity for itself, although with a market capitalization of $42 billion lots of that sadness can be assuaged.

It’s difficult to think of another situation in which a CEO has seen shares rise nearly 180% during their tenure, in this case about 30 months, yet remain so highly criticized. However, after a storied history it is a little embarrassing to be best known as the company that once owned Alibaba (NYSE:BABA), although the billions received and the billions more to come help to ease some of that awkwardness.

With Alibaba’s next lock-up expiration coming on March 18, 2015, there’s potentially some downward pressure on Yahoo which still has a sizeable stake in Alibaba, However, as has been seen over the last few years the flooding of the market with new shares doesn’t necessarily result in the logical outcome.

In the meantime, while there is some concern over the impact of that event on Yahoo shares and as Alibaba has its own uncertainties beyond the lock-up expiration, option premiums in Yahoo have gotten a little richer as shares have already come down 11% since earnings were reported. After that decline either a covered call or put sale, as an intended very short term trade may be appropriate as waiting for Yahoo to find itself before you grow too old.

For as long as Jamie Dimon remains as its CEO and Chairman, JP Morgan Chase (NYSE:JPM) isn’t likely to have any identity problems. Despite not having anywhere near the returns of Yahoo during the period of his tenure and having paid out much more in regulatory fines than Yahoo received for its Alibaba shares, the criticism is scant other than by those who battle over the idea of “too big too faii” and the actual fine-worthy actions.

However, just as the CEO of Yahoo was able to benefit from an event outside of her control, which was the purchase of Alibaba by her predecessor years earlier, Dimon stands to benefit from what will eventually be a rising interest rate rate environment. Amid some confusion over the FOMC’s comments regarding the adverse impact of low rates, but also the adverse impact of raising them too quickly, rates resumed their climb after a quick 4% decline. While the financial sector wasn’t the weakest last weak, energy had that honor, there isn’t too much reason to suspect that interest rates will return to their recent low levels.

BGC Partners (NASDAQ:BGCP) is another company that has no such identity problems as much of its identity is wrapped up in its Chairman and CEO, who has just come to agreement with the board of GFI Group (NYSE:GFIG) in his takeover bid.

For the past 10 years BGC Partners has closely tracked the interest rate on the 10 Year Treasury Note, although notably during much of 2014 it did not. Recently, however, it appears that relationship is back on track. If so, and you believe that rates will be heading higher, the opportunity for share appreciation exists. In addition to that, however, is also a very attractive dividend and shares do go ex-dividend this week. With only a monthly option contract available and large gaps between strike levels, this is a position that may warrant a longer term time frame commitment.

Also going ex-dividend this week are McDonalds (NYSE:MCD) and SanDisk (NASDAQ:SNDK).

I often think about buying shares of McDonalds, but rarely do so. Most of the time that turned out to have been a bad decision if looking at it from a covered option perspective. From a buy and hold perspective, however, it has been more than 2 years since there have been any decent entry points and returns.

With a myriad of problems facing it and a new CEO to tackle them my expectation is that more bad news is unlikely other than at the next earnings release when it wouldn’t be too surprising to see the traditional use of charges against earnings to make the new CEO’s future performance look so much better by comparison. Between now and that date in 2 months, I think there will be lots of opportunity to reap option premiums from shares, as I anticipate it trading in a narrow range or higher. Getting started with a nice dividend this week makes the process more palatable than many have been finding the menu.

SanDisk is a company that was written off years ago as being nothing more than a company that offered a one time leading product that had devolved into a commodity. You don’t, however, see too many analysts re-visiting that opinion as they frequently offer buy recommendations on shares.

SanDisk is also a company that I’ve very infrequently owned, but almost always consider adding shares when I have cash reserves and need some more technology positions in my portfolio. After a week of lots of assignments both are now the case and while its dividend isn’t as generous as that of McDonalds, it serves as a good time for entry and offers a very attractive option premium even during a week that it goes ex-dividend.

Despite a 10% share price increase since earnings, it is still about 15% below its price when it warned on earnings just a week prior to the event and received a belated downgrade from “buy to hold.” WIth continuing upside potential, this is a position that I would consider either leaving some shares uncovered or using more than one strike level for call sales

Most often when considering a trade involving a company about to report earnings and selling put options, my preference is to avoid taking ownership of shares. Generally, put sales shouldn’t be undertaken unless willing to accept the potential liability of ownership, but sometimes you would prefer to only take the reward and not the risk, if you can get away with doing so.

Additionally, I generally look for opportunities where I can receive a 1% ROI for the sale of a weekly put contract that is a strike level below the lower range of the implied move determined by the option market.

However, in the cases of Hewlett Packard (NYSE:HPQ) and The Gap (NYSE:GPS) that 1% ROI is right at the lower boundary, but I would still consider the prospect of put sales because I wouldn’t shy away from share ownership in the event of an adverse price move.

The Gap, which makes sharp moves on a regular basis as it still reports monthly sales, did so just a week earlier. It seems to also regularly find itself alternating in the eyes of investors who send shares higher or lower as if each month brings deep systemic change to the company. However, taking a longer term view or simply looking at its chart, it’s clear that shares have a way of just returning to a fleece-like comfortable level in the $39-$41 range.

In the event of an adverse price movement and facing assignment, puts can be rolled over targeting the next same store sales week as an expiration date or simply taking ownership of shares and then using that same date as a time frame for call sales. If rolling over puts I would be mindful of an April ex-dividend date and would consider taking ownership of shares prior to that time if put contracts aren’t likely to expire.

Since I have room for more than a single new technology position this week, Hewlett Packard warrants a look, as what was once derisively referred to as “old tech” is once again respectable. While I would consider starting the exposure through the sale of puts, with an ex-dividend date coming up in just a few weeks, I’d be more inclined to take assignment in the event of an adverse price move after earnings.

Finally, there’s still reason to believe that energy prices are going to continue to confound most everyone. The coupling and de-coupling of oil to and from the stock market, respectively has become too unpredictable to try to harness. However, given the back and forth seen in prices over the past month as a floor may have been put in oil prices, there may be some opportunity in considering a pairs trade, such as Marathon Oil (NYSE:MRO) and United Continental (NYSE:UAL).

United Continental and other airlines have essentially been mirror images to the moves in oil, although not always for clearly understandable reasons, as the relative role of hedging can vary among airlines, although United has reportedly closed out its hedged positions and may be a more pure trading candidate on the basis of fuel prices..

While it’s not too likely that either of these stocks will move in the same direction concurrently, the short term volatility in their prices and the extremely appealing premiums may allow the chance to prosper in one while awaiting the other’s turn to do the same.

The idea is to purchase shares and sell calls of both as a coupled trade with the expectation that they would be decoupled as oil rises or falls and one position or another is either rolled over or assigned, as a result. The remaining position is then managed on its own merits or possibly even re-coupled.

As with earnings related trades that I make that are usually agnostic to the relative merits of the company, focusing only on the risk – reward proposition, this trade is not one that cares too much about the merits of either company. Rather, it cares about their responses to the unpredictable movements in oil price that have been occurring on daily and even on an intra-day basis of late.

Traditional Stocks: JP Morgan Chase, Marathon Oil

Momentum Stocks: United Continental Holdings, Yahoo

Double Dip Dividend: BGC Partners (2/26), McDonalds (2/26), SanDisk (2/26)

Premiums Enhanced by Earnings: Hewlett Packard (2/24 PM), The Gap (2/26 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.

Jan172015

Weekend Update – January 18, 2015

Weekend Update Comment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Momentum Stocks: Best Buy, GoPro

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

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

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

Dec62014

Weekend Update – December 7, 2014

Weekend Update Comment

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

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

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

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

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

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

Nov222014

Weekend Update – November 23, 2014

Weekend Update Comment

About a month ago we got a much needed gift from Federal Reserve Governor James Bullard, who at the depths of a nearly 10% market decline gave some reason to believe that the Federal Reserve may not have been done with its tapering policy.

Since then, he’s back-peddled just a bit, appropriately, in light of the fact that tapering has now come to its planned end.

The market, however, never looked back and took full advantage of that market propelling gift.

Subsequently, a few weeks ago we got another little gift, this time from far away, as the Bank of Japan announced its own version of Quantitative Easing just in time to battle a 20 year period of economic stagnation.

Since then there haven’t been too many others coming to our shores bearing market moving gifts, as for now, it appears as if our own Federal Reserve won’t be acting as a primary catalyst for the stock market’s expansion. Once you get a taste for gifts it can be hard to go on without them continuing to stream in on a regular basis.

What Bullard and the Bank of Japan offered was probably what was in mind when the concept of “a little help from my friends” found its way to a sheet of music.

But what has anyone done for us lately?

This week was one of an almost comatose nature where not even an FOMC Statement release could jar the market. Having already matched a 45 year record of 5 consecutive days without a greater than 0.1% move, it seemed as if we were poised for some kind of an over the top reaction, but none was to be found.

That is, until our friends from China and the European Union decided to show their friendship and gave indications that central bank money was not a problem and would be there to support lagging economies, although the trickle down benefit of supporting equity markets seems like a welcome idea on this side of a couple of oceans.

The Bank of China’s announcement of a reduction in interest rates came as quite a surprise and at some point will get cynics wondering what is really going on in China that might require that kind of a boost from the central bank.

But that’s next week’s problem.

For today, that was a wonderful gift from the country that invented the term “capitalist roader,” perhaps as a sign of affection for what the United States represented. Amazingly, the manipulation of interest rates has seemingly replaced re-education as a means of effecting change.

While economic data from China has long been suspect, what should really be suspect is when Mario Draghi, President of the European Central Bank starts making comments about the lengths to which the ECB will go in order to achieve its mandate.

He has had a great record of hyperbole and has had an equally great ability for being able to move markets on the basis of what was consistently interpreted as a pledge to introduce a form of Quantitative Easing.

He has also been great at not following through with the unbridled support that he has consistently offered.

Was he being serious this time around? After a number of false starts and promises Draghi should have given some overt sign that this time was going to be different. I know that I can trust a man dressed for casual Friday more than I do one in a beautifully tailored Armani suit, so that could have been a good place to begin demonstrating how this time will be different.

For the U.S. stock market, it probably doesn’t really matter, as long as we can keep coming up with gifts from our other friends on a very regular basis. If not the EU, perhaps Russia will be next to grease our market climb through its central banking policies.

After that it gets a little fuzzy, but that’s a problem for 2015.

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

The most recent earnings season has had mixed news for retailers. The upper end continues to do well and there are signs of life in the middle range as well, however specialty retailers continue to struggle.

The Gap (NYSE:GPS) is one of those struggling as it awaits its new CEO after having released earnings this past week. However, in the past 2 years the Gap has been very much of a yo-yo, as it alternates regularly between disappointing sales news and optimistic forecasts. It does so monthly, so those ups and downs come more often than for many other retailers that have abandoned the practice of reporting monthly same store sales.

After this most recent decline, having just recently recovered from the loss encountered upon the announcement of the departure of its current CEO, along with some weak monthly sales reports, it looks as if is ready for yet another cycle of ups and downs. Because of its continuing to offer monthly reports, the Gap offers enhanced option premiums on a monthly basis, as well, in addition to respectable premiums the remainder of the time.

Companies that are part of the DJIA don’t usually offering a very compelling reason to try and capture an upcoming dividend along with the concurrent sale of a call option. Most often the option is appropriately priced and there is very little opportunity to try to exploit some inefficiency in that pricing, particularly when using an in the money strike.

This week, however, there may be some opportunity in both Coca-Cola (NYSE:KO) and McDonald’s (NYSE:MCD), which appropriately enough, tend to already go together.

While McDonald’s is recovering a bit from a recent share drop after some news of activist involvement in the company, it may finally make the run for the $100 level and stay there for more than just a couple of months. It’s dividend is attractive and as long as there is continuing activist interest its option premiums may continue to also be attractive, even in weeks when the dividend is offered.

Coca-Cola, on the other hand, is trading just slightly below its one year high, which isn’t generally a place that I like to enter a position. That however, can be said for many stocks as the market continually makes its own new highs.

With Warren Buffett lending his support, it’s not terribly easy for any activist activity to try and move this behemoth, which along with McDonald’s may be on the wrong side of food trends. Still those businesses are not going to unravel from one minute to the next. With a short term time frame in mind, Coca-Cola, even at these levels may offer a respectable award for the risk, particularly with the dividend in mind this week.

While Baker Hughes (NYSE:BHI) doesn’t go ex-dividend this week, it has quite a bit in common with Lorillard (NYSE:LO), which does.

Both are subjects of takeover bids and both are trading substantially lower than the current value of those bids, which are both comprised of cash and stock offers. It’s a little difficult to fully understand the relatively large gaps between their closing prices and the offer values, although regulatory and anti-trust obstacles may be playing roles.

Reportedly the Reynolds American (NYSE:RAI) bid for Lorillard is progressing and is expected to be completed sometime in the first half of 2015. Meanwhile, Halliburton (NYSE:HAL) has essentially said “tell us what assets to sell and we’ll do it” to the Department of Justice. Unfortunately, as a current Halliburton shareholder, it also has a large anti-trust termination fee as part of the proposed deal.

As a result of the activity and uncertainty revolving around the proposed buy-out the option premiums in Baker Hughes are higher than they have been in many years, reflecting also some of the risk that a deal will not be completed. However, as with the businesses at Coca-Cola and McDonald’s, that doesn’t appear to be likely in the very near time frame, as there will likely be considerable time before the Department of Justice gets involved in a meaningful and overt fashion.

Lorillard, on the other hand, has not had any enhancements of its option premiums as a result of the planned buy-out by Reynolds American. That would indicate a degree of certainty that the deal will be completed, yet there is still a considerable gap between its current price and the value implied in the offer.

My shares of Lorillard were assigned this week, despite about three days attempting to roll the shares over in order to secure the very generous dividend, which is expected to continue after the takeover. The inability to rollover the shares is further reflection of the frustrations created by the extremely low volatility and larger than normal spreads between bid and ask prices, as option volume continues to be very light.

With still about a $5 gap between those prices, Lorillard has upside potential, but also carries the risk of unexpected regulatory action. If purchasing shares of Lorillard to capture the dividend and I likely try to use near or in the money options, in an attempt to serially collect small weekly premiums, while waiting for something definitive.

Lexmark (NYSE:LXK) also goes ex-dividend this week. The last time I purchased shares was on November 25, 2013, so it seems like it may be a good way to celebrate that anniversary. Perhaps not to coincidentally, the last purchase was also dividend related.

Lexmark, once the printer division for International Business Machines (NYSE:IBM), took a page out of IBM’s strategy and completely re-invented itself. In a realization that printers were nothing more than a commodity, it has become a service and solutions oriented provider and its stock price hasn’t regretted that decision.

It does trade with some volatility, though, and it offers a good option premium in reflection of that opportunity. While earnings are still two months away, it frequently has large earnings related moves that can be managed through the use of monthly option contracts, sometimes one cycle beyond the earnings date.

If looking for volatility, you may not need to look any further than Market Vectors Gold Miners ETF (NYSEARCA:GDX). While gold has been on an essentially uni-directional downward path for much of the past 6 months and it has been difficult to find any credible proponents of its ownership, it appears as if there may be a battle brewing for where it is headed next. That battle creates significantly improved option premiums, which had been in the doldrums for much of the past 6 months.

As with the underlying metal, the miners can have significant volatility and risk and should be considered for use only as part of the speculative portion of a portfolio and in proportion to the risk it may entail.

As with some fortunate companies in the bio-technology group, sometimes speculative ventures lead to tangible products. That is certainly the case for Gilead Sciences (NASDAQ:GILD).

After a brief uproar about the yearly cost of treatment with its extremely effective Hepatitis C drug, Sovaldi, it has rebounded with ease. Congressional hearings that sought to get some spotlight for protecting the public’s interests resulted in a sharp and quick decline, but the reality has been that the costs of treatment pale in comparison to the costs of traditional treatment. Subsequently, Gilead keeps refining the protocols and adding to the profit margins, while achieving better patient outcomes for an incredibly prevalent chronic disease.

As expected, because of the continuing concerns about price and the manner in which Gilead’s price increase has been so closely associated with its Hepatitis C efforts, it is at risk for being overly reliant on a single drug or class of drugs., However, as with many suggested trades, the outlook tends to be very short term and hopefully avoids some of the risks associated with longer term cycles of ownership.

GameStop (NYSE:GME) did what it so often does after earnings. It made a large move, this time sharply lower this past Friday. With each earnings cycle and frequently in-between, questions arise regarding the business model and how GameStop can continue to survive in the current environment. That question has been asked for about a decade and GameStop has been one of the most heavily shorted stocks throughout that time.

GameStop tends to do well in the final month of the year, although it may simply be carried along for the ride, as the broad market tends to perform well at that time. Following its sharp decline, a reasonable way to consider participation would be through the sale of out of the money puts. If taking that route, this is a stock that I wouldn’t be adverse to owning if faced with possible assignment, although there is usually sufficient activity and volume to be able to roll over those puts in an attempt to avoid assignment and wait out a bounce higher in shares, while continuing to collect premiums.

Finally, this is yet another week in which to consider the sale of Twitter (NYSE:TWTR) put contracts. While it wasn’t really in the news very much this week, other than announcing some less than spectacular enhancements to its messaging options, it has been developing some support in the $39 area and offers an excellent premium in recognition of the risk involved.

The risk is the unwanted assignment and then ownership of its shares. However, what makes Twitter an appealing put option sale trade is that in the event of the prospects of assignment, it may be relatively easy to rollover to a forward week and collect additional premium without taking ownership of shares.

At a time when for many stocks the bid and ask spreads are widening and volume is shrinking, Twitter isn’t really suffering those fates, which makes the possibility of avoiding assignment higher.

For the past 3 weeks I have been rolling over Twitter puts even when not facing assignment, occasionally adjusting the strike prices in an effort to achieve an additional 1% weekly ROI on the position. Doing so may be tempting fate, but in Twitter’s brief history as a publicly traded company it has shown the ability to both come well off its highs as well as to bounce well beyond its lows. All that’s necessary is the ability to put elation or frustration into suspended animation and play the numbers, without regard to the rumors and dysfunction that may be swirling.

Traditional Stocks: The Gap

Momentum: Baker Hughes, GameStop, Gilead, Market Vectors Gold Miners ETF, Twitter

Double Dip Dividend: Coca-Cola (11/26), Lexmark (11/26), Lorillard (11/26), McDonald’s (11/26)

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.

Nov12014

Weekend Update – November 2, 2014

Weekend Update Comment

 It’s really hard to know what to make of the past few weeks, much less this very past one.

On an intra-day basis having the S&P 500 down 9% from its high point seemed to be the stop right before that traditional 10% level needed to qualify as a bona fide “correction.”

But something happened.

What happened isn’t really clear, but if you were among those that credited the words of Federal Reserve Governor James Bullard, who suggested that the exit from Quantitative Easing should be delayed, the recovery that ensued now appears more of a coincidence than a result.

That’s because a rational person would have believed that if the upcoming FOMC Statement failed to confirm Bullard’s opinion there would be a rush to the doors to undo the rampant buying of the preceding 10 days that was fueled under false pretenses.

But that wasn’t the case.

In fact, not only did the FOMC announce what they had telegraphed for almost a year, but the previously dissenting hawks were no longer dissenters and a well known dove was instead the one doing the dissenting.

I don’t know about you, but the gains that ensued on Thursday, had me confused, just as the markets seemed confused in the two final trading hours after the FOMC Statement release. You don’t have to be a “perma-bear” to wonder what it’s going to take to get some of your prophesies to be fulfilled.

Even though Thursday’s gains were initially illusory owing to Visa’s (V) dominance of the DJIA, they became real and broadly applied as the afternoon wore on. “How did that make any sense?” is a question that a rationally objective investor and a perma-bear might both find themselves asking as both are left behind in the dust.

I include myself in that camp, as I didn’t take advantage of what turned out to be the market lows as now new closing highs have been set.

Those new highs came courtesy of the Bank of Japan on Friday as it announced the kind of massive stimulus program that we had been expecting to first come from the European Central Bank.

While the initial reaction was elation and set the bears further into despair it also may have left them wondering what, if any role rational thought has left in the processes driving stocks and their markets.

Many, if not most, agree that the Federal Reserve’s policy of Quantitative Easing was the primary fuel boosting U.S. stock markets for years, having drawn foreign investor demand to our shores. Now, with Japan getting ready to follow the same path and perhaps the ECB next in line, we are poised to become the foreigners helping to boost markets on distant shores.

At least that what a confused, beaten and relatively poorer bear thinks as the new week gets underway.

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

I love listening to Howard Schultz defending shares of Starbucks (SBUX) after the market takes the stock lower after earnings. No one defends his company, its performance and its outlook better than Howard Schultz.

But more importantly, he has always followed up his assertions with results.

As with many stocks over the past two weeks, Starbucks is one, that in hindsight I should have purchased two weeks ago, while exercising rational thought processes that got in the way of recognizing bargain prices. Friday’s drop still makes it too late to get shares at their lows of 2 weeks ago, but I expect Schultz to be on the correct side of the analysis once again.

There’s not much disagreement that it has been a rough month for the energy sector. While it did improve last week, it still lagged most everything else, but I think that the Goldman Sachs (GS) call for $75 oil is the turning point. Unfortunately, I have more energy stocks than I would have liked, but expect their recovery and am, hesitatingly looking to add to the position, starting with British Petroleum (BP) as it is ex-dividend this week. That’s always a good place to start, especially with earnings already out of the way.

While I continue to incorrectly refer to BP as “British Petroleum” that is part of my legacy, just as its Russian exposure and legal liabilities are part of its legacy. However, I think that all of those factors are fully  priced in. Where I believe the opportunity exists is that since the September 2014 highs up to the Friday’s highs, BP hasn’t performed as well as some of its cohorts and may be due for some catch-up.

I purchased shares of Intel (INTC) the previous week and was hoping to capture its dividend, as its ex-dividend date is this week. 

Last week Intel had quite a ride as it alternated 4% moves lower and then higher on Thursday and Friday. 

Thursday’s move, which caught most everyone by surprise was accompanied by very large put option trading, including large blocks of aggressive in the money puts with less than 2 days until expiration and even larger out of the money puts expiring in 2 weeks.

Most of the weekly puts expired worthless, as there was fairly low activity on Friday, with no evidence of those contracts getting rolled forward, as shares soared.

While initially happy to see shares take a drop, since it would have meant keeping the dividend for myself, rather than being subject to early assignment, I now face that assignment as shares are again well above the strike. 

However, while entertaining thoughts of rolling those shares over to a higher strike at the same expiration date or the same strike at next week’s expiration, I may also consider adding additional shares of Intel,  for its dividend, premiums and share appreciation, as well. Given some of the confusion recently about prospects for the semi-conductor industry, I think Intel’s vision of what the future holds is as good as the industry can offer if looking for a crystal ball.

What can possibly be said about Herbalife (HLF) at this point that hasn’t already been said, ad nauseum. I’m still somewhat stunned that a single author can write 86 or so articles on Herbalife in a 365 day period and find anything new to say, although there is always the chance that singular opinion expressed may be vindicated.

The reality is that we all need to await some kind of regulatory and/or legal decisions regarding the fate of this company and its business practices.

So, like any other publicly traded company, whether under an additional microscope or not, Herbalife reports earnings this week, having announced it also reached an agreement on Friday regarding a class action suit launched by a past distributor of its products.

The options market is predicting a 16% movement in shares upon earnings release. At its Friday closing price, the lower end of that range would find shares at approximately $44. However, a weekly 1% ROI could still be obtained if selling a put option 35% below Friday’s close.

That is an extraordinary margin, but it may be borne out of extraordinary circumstances, as Monday’s earnings release may include other information regarding pending lawsuits, regulatory or legal actions that could conceivably send shares plummeting.

Or soaring.

On a more sedate, and maybe less controversial note, Whole Foods (WFM) reports earnings this week. I’m still saddled with an expensive lot of shares, that has been offset a bit by the assignment of 4 other lots this year, including this past week.

After a series of bad earnings results and share declines I think the company will soon be reporting positive results from its significant national expansion efforts.

While I generally use the sale of puts when considering an earnings related trade, usually because I would prefer not owning shares, Whole Foods is one that I would approach from either direction. While its payout ratio is higher than its peers, I think there may also be a chance that there will be a dividend increase, particularly as some of the capital expenditures will be decreasing.

While not reporting earnings this week, The Gap (GPS) is expected to provide monthly same store sales. It continues to do so, going against the retail tide, and it often sees its shares move wildly. Those moves are frequently on a monthly alternating basis, which certainly taxes rational thought.

Last month, it reported decreased same store sales, but also coupled that news with the very unexpected announcement that its CEO was leaving. Shares subsequently plummeted and have been very slow to recover.

As expected, the premium this week is significantly elevated as it reflects the risk associated with the monthly report. As with Whole Foods, this trade can also justifiably be approached wither from the direction of a traditional buy/write or put sale. In either case, some consideration should also be given to the fact that The Gap will also report its quarterly earnings right before the conclusion of the November 2014 option cycle, which can offer additional opportunity or peril.

Also like Whole Foods, I currently own a much more expensive lot of Las Vegas Sands (LVS), but have had several assigned lots subsequently help to offset those paper losses. Shares have been unusually active lately, increasingly tied to news from China, where Las Vegas Sands has significant interests in Macao.

Share ownership in Las Vegas Sands can be entertaining in its own right, as there has lately been a certain roller coaster quality from one day to the next, helping to account for its attractive option premium. In the absence of significant economic downturn news in China, which was the root cause of the recent decline, it appears that shares have found some support at its current level. Together with those nice premiums and an attractive dividend, I’m not adverse to taking a gamble on these always volatile shares, even in a market that may have some uncertainty attached to it.

Finally, Facebook (FB) and Twitter (TWTR) each reported earnings last week and were mentioned as potential earnings related trades, particularly through the sale of put options.

Both saw their shares drop sharply after the releases, however, the option markets predicted the expected ranges quite well and for those looking to wring out a 1% weekly ROI even in the face of post-earnings price disappointment were rewarded.

I didn’t take the opportunities, but still see some in each of those companies this week.

While Twitter received nothing but bad press last week and by all appearances is a company that is verging on some significant dysfunction, it is quietly actually making money. It just can’t stick with a set of metrics that are widely accepted and validated as having relevance to the satisfaction of analysts and investors.

It also can’t decide who to blame for the dysfunction, but investors are increasingly questioning the abilities of its CEO, having forgotten that Twitter was a dysfunctional place long before having gone public and long before Dick Costolo became CEO.

At its current price and with its current option premiums the sale of out of the money puts looks as appealing as they did the previous week, as long as prepared to rollover those puts or take assignment of shares in the event the market isn’t satisfied with assurances.

Facebook, on the other hand is far from dysfunctional. Presumably, its shares were punished once Mark Zuckerberg mentioned upcoming increased spending. Of course, there’s also the issue of additional shares hitting the markets, as part of the WhatsApp purchase.

Both of those are reasonable concerns, but it’s very hard to detract from the vision and execution by Zuckerberg and Cheryl Sandberg.

However, the option market continues to see the coming week’s options priced as if there was more than the usual amount of risk inherent in share pricing. I think that may be a mistake, even while its pricing of risk was well done the previous week.

Bears may be beaten and wondering what hit them, but a good tonic is profit and the sale of puts on Facebook could make bears happy while hedging their bets on a market that may put rational thought to rest for a little while longer.

Traditional Stocks:   Starbucks, The Gap

Momentum: Facebook, Twitter, Las Vegas Sands

Double Dip Dividend: British Petroleum (11/5), Intel (11/5)

Premiums Enhanced by Earnings: Herbalife (11/3 PM), Whole Foods (11/5 PM)

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

Oct42014

Weekend Update – October 5, 2014

Weekend Update Comment

This week’s markets didn’t respond so positively when Mario Draghi, the head of the European Central Bank failed to deliver on what many had been expecting for quite some time.

The financial markets wanted to hear Draghi follow through on his previous market moving rhetoric with an ECB version of Quantitative Easing, but it didn’t happen. After two years of waiting for some meaningful follow through to his assertion that “we will do whatever it takes” Draghi’s appearance as simply an empty suit becomes increasingly apparent and increasingly worrisome.

On a positive note, as befitting European styling, that suit is exquisitely tailored, but still hasn’t shown that it can stand up to pressure.

It also wasn’t the first time our expectations were dashed and no one was particularly pleased to hear Draghi place blame for the state of the various economies in the European Union at the feet of its politicians as John Chambers, the head of Standard and Poor’s Sovereign Debt Committee did some years earlier when lowering the debt rating of the United States.

Placing the blame on politicians also sends a message that the remedy must also come from politicians and that is something that tends to only occur at the precipice.

While the Biblical text referring to a young child leading a pack of wild animals is a forward looking assessment of an optimistic future, believing that an empty suit can lead a pack of self-interested politicians is an optimism perhaps less realistic than the original passage.

At least that’s what the markets believed.

Befitting the previous week’s volatility that was marked by triple digit moves in alternating fashion, Draghi’s induced 238 point decline was offset by Friday’s 208 point gain following the encouraging Employment Situation Report. Whereas the previous week’s DJIA saw a net decline of only 166 points on absolute daily moves of 810 points, this past week was more subdued. The DJIA lost only 103 points while the absolute daily changes were 519 points.

The end result of Friday’s advance was to return volatility to where it had ended last week, which was a disappointment, as you would like to see volatility rise if there has been a net decline in the broader market. Still, if you’re selling options, that level is better than it was two weeks ago.

While Friday’s gain was encouraging it is a little less so when realizing that such memorable gains are very often found during market downtrends. There is at least very little doubt that the market behavior during the past two weeks represents some qualitative difference in its behavior and an isolated move higher may not be very reflective of any developing trend, but rather reactive to a different developing trend.

As with Draghi, falling for the rhetoric of such a positive response to the Employment Situation Report, may lead to some disappointment.

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

Many of the positions being considered this week are recently highlighted positions made more appealing following recent price pullbacks rather than on any company specific factors. Of course, when looking at stocks whose price has recently fallen at some point the question regarding value versus “value trap” has to be entertained.

With some increase in volatility, despite the rollback this week, I’ve taken opportunity to rollover existing positions to forward weeks when expanded option contracts have been available. As those premiums have increased a bit being able to do so helps to reduce the risk of having so many positions expire concurrently and being all exposed to a short term and sudden price decline.

Just imagine how different the outcome for the week may have been if Thursday’s and Friday’s results were reversed if you were relying on the ability to rollover positions or have them assigned.

However, with the start of earnings season this week there’s reason to be a little more attentive when selecting positions and their contract expiration dates as earnings may play a role in the premiums. While certainly making those premiums more enticing it also increases the risk of ownership at a time when the relative market risk may outweigh the reward.

One stock not reporting earnings this week, but still having an enriched option premium is The Gap (GPS). It opens the week for trading on its ex-dividend date and later in the week is expected to announce its monthly same store sales, being one of the few remaining companies to do so. Those results are inexplicably confusing month to month and shares tend to make strong price movements, frequently in alternating directions from month to month. For that uncertainty comes a very attractive option premium for shares that despite that event driven volatility tend to trade in a fairly well defined range over the longer term.

When it comes to their fashion offerings you may be ambivalent, but when it comes to that kind of price movement and predictability, what’s not to like?

If you’re waiting for a traditional correction, one that requires a 10% pullback, look no farther than Mosaic (MOS). While it had been valiantly struggling to surpass the $50 level on its long road to recovery from the shock of the break-up of the potash cartel, it has now fallen about 13% in 5 weeks. Most recently Mosaic announced a cutback in phosphate production and lowered its guidance and when a market is already on edge it doesn’t need successive blows like those offered by Mosaic as it approaches its 52 week low.

Can shares offer further disappointment when it reports earnings at the end of this month? Perhaps, but for those with a longer term outlook, at this level shares may be repeating the opportunity they offered upon hitting their lows on the cartel’s dissolution for serial purchase and assignment, while offering a premium enhanced by uncertainty.

Seagate Technology (STX) is also officially in that correction camp, having dropped 10% in that same 5 week period. It has done so in the absence of any meaningful news other than perhaps the weight of its own share price, with its decline having come directly from its 52 week high point.

For a company that has become fairly staid, Pfizer (PFE) has been moving about quite a bit lately. Whether in the news for having sought a tax inversion opportunity or other acquisitions, it is clearly a company that is in need of some sort of catalyst. That continuing kind of movement back and forth has been pronounced very recently and should begin making its option premium increasingly enticing. With shares seemingly seeking a $30 home, regardless of which side it is currently on and an always attractive dividend, Pfizer may start getting more and more interesting, particularly in an otherwise labile market.

Dow Chemical (DOW) is one of those stocks that used to be a main stay of my investing. It’s price climb from the $40 to $50 range made it less so, but with the realization that the $50 level may be the new normal, especially with activist investor pressure, it is again on the radar screen, That’s especially true after this week’s price drop. I had been targeting the $52.50 level having been most recently assigned at $53.50, but now it appears to be gift priced. Unfortunately, it may be a perfect example of that age old dilemma regarding value, having already greatly under-performed the market since its recent high the “value trap” part may have already been played out.

While MasterCard (MA) is ex-dividend this week, it is certainly not one to chase in order to capture its dividend. With a payout ratio far below its competitors it would seem that an increase might be warranted. However, what makes MasterCard attractive is that it has seemingly found a trading range and is now situated at about the mid-point of that range. While there is some recent tumult in the world of payments and with some continuing uncertainty regarding its presence in Russia, MasterCard continues to be worth consideration, particularly as it too has significantly under-performed the S&P 500 in the past two weeks.

Equal in its under-performance to MasterCard during that period has been Texas Instruments (TXN). I’ve been eager to add some technology sector positions for a while and haven’t done so as often as necessary to develop some better diversification. Along with Intel (INTC) which I considered last week, as well, Texas Instruments is back to a price level that has my attention. Like Intel, it reports earnings soon and also goes ex-dividend during the October 2014 option cycle. Unlike Intel, however, Texas Instruments doesn’t have a couple of gap ups in price over the past three months that may represent some additional earnings related risk.

When it comes to under-performance it is possible that Coach (COH) may soon qualify as being synonymous with that designation. Not too surprisingly its past performance in the past two weeks, while below that of the S&P 500 may be more directly tied to an improved price performance seen in its competitor for investor interest, Michael Kors (KORS). However, Coach seems to have established support at its current level and may offer a similar opportunity for serial purchase and assignment as had been previously offered by Mosaic shares.

Finally, with the exception of YUM Brands (YUM) all of the other stocks highlighted this week have under-performed the S&P 500 since hitting its recent high on September 18, 2014. YUM Brands reports earnings this week and is often very volatile when it does so. This time, hover, the options market doesn’t seem to be expecting a very large move, only about 4.5%. Neither is there an opportunity to achieve a 1% ROI through the sale of a put option at a strike outside of the range implied. However, YUM Brands is one of those stocks, that if I had sold puts upon, I wouldn’t mind owning if there was a likelihood of assignment.

So often YUM Brands share price is held hostage to food safety issues in China and so often it successfully is able to  see its share price regain sudden losses. That, however, hasn’t been the case thus far since it’s summertime loss. There are probably little expectations for an upside surprise upon release of earnings and as such there may be some limited downside, perhaps explaining the option market’s subdued pricing.

If facing assignment of puts being sold with an upcoming ex-dividend date the following week, I would be inclined to accept assignment and proceed from the point of ownership rather than trying to continue avoiding ownership of shares. However, with the slightest indication of political unrest spreading from Hong Kong to the Chinese mainland that may be a decision destined for regret, just like the purchase of an ill-fitting and overly priced suit.

Traditional Stocks: Dow Chemical, Pfizer, Texas Instruments, The Gap

Momentum: Coach, Mosaic, Seagate Technology

Double Dip Dividend:  MasterCard (10/7)

Premiums Enhanced by Earnings: YUM Brands (10/7 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.

Sep272014

Weekend Update – September 28, 2014

Weekend Update Comment

For those that remember 2011 it was really an incredible year, one that I still miss and was certainly sad to see go.

Although it doesn’t have a very snappy ring to it, this past week was one to party like it was 2011 or at least revel in the thought that 2011 was about to make a return.

What I’m hoping is that this past week has lots of party left in it and will serve as a model for what lies ahead, despite the market having ended the week 1.1% lower.

For those who don’t remember 2011 simply looking at the net change for the year may leave you a little curious why I would think that it was a great year.

That’s because what you would see is that the S&P 500 was unchanged for the year, which is, at the very least, a statistical oddity. For those requiring some precision, the index actually changed 0.04 points for the year or 0.003%.

However, for those that love volatility and what it does for option premiums, despite the superficial appearance of nothing having happened for the year, the volatility increased by 31.8% for that year, ending at 23.4, which is still 57.6% higher than where it closed this past Friday.

How could that be?

That’s because that year the DJIA, which ended the year at 12217, far below the current level, had no fewer than 96 triple digit closing days. That was back in the days when 100 points actually meant something.

What was fascinating was that 46 of those moved lower and 50 moved higher. Lots and lots of exertion, but basically not too much different from running in place.

Now that’s not only volatility, but the ideal kind for an option seller. Lots of ado, but accomplishing absolutely nothing, other than the generation of lots of enriched option premiums because those alternating currents of moves generate uncertainty and anxiety.

For the option seller the nice thing about running in place is that it becomes very difficult to get lost and less necessary to give into the feelings of anxiety that accompany the uncertainty of an unknown path.

Even if you weren’t paying too much attention you may have noticed that this past week had 5 triple digit days. The absolute value of those moves was 810 points, while the net movement was only a loss of 166 points.

This was a week that moved on a wide range of factors and in a wide range.

You could point to the loose cannon words from outgoing Federal reserve Governor Richard Fisher, who, despite being chastised by then FOMC Chairman Greenspan for speaking his mind, never really stopped doing so. Ironically, his first market moving comments back in 2005 for which he was taken to the woodshed was related to suggesting that the Federal Reserve’s series of rate increases would be coming to an end sooner than most expected. This time around he created something of a panic by suggesting that this Federal Reserve, under Janet Yellen, would begin raising interest rates before most people had expected. Those words came barely a week after we found comfort in the belief that a “considerable time” would still pass before those rates would see increases.

The fact that Fisher is fairly dogmatic and has been on the wrong side of history in the past, in addition to no longer having a vote within the next few months, was lost on those who for some reason believe that he has some great insight and sway.

Or you could point to the widespread belief that the Alibaba (BABA) IPO was another in a line of “biggest” IPOs that marked market tops that simply accepted the contention without realizing how precisely cherry picked the data had been and how it had conveniently excluded some significant data points that would have lead to refuting the “obvious” conclusions.

Or you could point to the widespread fascination with the non-validated “death cross” that has adherents and believers, despite its inconsistency as a predictive tool of the market heading into a correction.

Or you could point to the market dipping below its 50 day moving average as a bullish indicator that would coerce some into initiating buying programs.

Clearly, the market had little basis to do much of anything this week, but when it was all said and done, despite the three large downward moves, there wasn’t too much damage done, leaving the S&P 500 only 1.5% off of its all time high point but having raised volatility 21.8% at the same time.

Just like 2011 when all was still good with the world as long as you retain a faulty sense of memory.

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

With Friday’s week ending rally that for a brief while looked as if it was getting poised to erase the previous day’s loss of 264 points some of the apparent price bargains that had developed during that loss were lessened. However, those bargains are always relative to whatever time frame you elect to utilize and whatever direction you believe awaits.

After the past week its exceptionally difficult to have a sense of what kind of market awaits, but the past two years gives reason to believe that we are in store for another of the periodic mini-corrections that have prefaced every climb higher. That periodicity suggests that the current 1.5% decline is but a beginning.

I would gladly trade off additional climbs higher for the type of volatility we’ve seen in the past week. While I’m not anxious to necessarily start a shopping spree, the real challenge is knowing when to get on the party train. Although I don’t place too much emphasis on charts I would be inclined to watch a decided move below the 50 day moving average for a week or so before feeling a sense of confidence.

British Petroleum (BP) fulfills that criteria as does Conoco Phillips (COP), both in the beleaguered energy sector. British Petroleum’s descent below the 5o day moving average has been more prolonged and marked than has Conoco’s, so may have some greater appeal for me, particularly if I plan to be very discerning about spending money on new positions. Part of British Petroleum’s additional burden, beyond what the energy sector is experiencing, continues to be related to its liability in the Deepwater Horizon oil spill of 2010 and it suffered a quantum drop just a few weeks ago when the company was found to be grossly negligent in US District Court for its role in the spill.

Conoco Phillips, on the other hand is just caught up with the rest as energy prices are under pressure. It has, however, traded in a relatively stable range for nearly two months, perhaps making it a reasonable covered option trade, particularly as its ex-dividend date approaches.

Caterpillar (CAT) after having embarrassed the legions of those lambasting it and its CEO, is a stock that has demonstrated the ability to bounce back from having dipped below its 50 day moving average over the past 2 months and following some recent weakness ostensibly related to weakness in China, may also now be ready for a climb higher. Like Conoco, its upcoming dividend late in the October 2014 cycle or early in the November cycle can make the decision to purchase shares somewhat easier.

If Richard Fischer is correct on interest rate hikes and eventually he will be, Citigroup (C) and MetLife (MET) will both stand to benefit from a rising interest rate environment.

Eventually even the phrase “considerable time,” as found in the FOMC statements must give way to something a little less imprecise and some of the uncertainty regarding the timing of interest rate increases will be lost. While I’ve recently had shares of both MetLife and Citigroup assigned, I would like to add them back to the portfolio, despite their current price levels. While both are similarly lower from their very recent highs those levels may represent resting points for what may be deserved climbs even higher.

The Gap (GPS) is one of those stocks that I tend to buy too early during a period of descending price and frequently end up owning longer than I would have liked. However, it has now fallen nearly 10% in the last 3 weeks following a negative response to its most recently monthly same store sales report.

Those reports are a major part of the surprises during previous bouts of ownership, as they, just like this week’s triple digit moves, frequently alternated between well and poorly received results.,

With same store sales again expected the week after next, as well as going ex-dividend in that week, I may consider bypassing the use of a weekly or expanded weekly option and instead considering the monthly expiration in order to create some time cushion in the event of a second consecutive adverse response.

Intel (INTC) and Cisco (CSCO) both regained some lost ground on Friday as technology stocks rebounded from some of their strong losses earlier in the week. In a week that I would like to add some technology exposure both are appealing, although both also have different considerations.

While Intel will be among those companies reporting earnings early in the upcoming cycle, Cisco will not do so for another month, but will be ex-dividend in the coming week. Both are also approaching their 50 day moving averages but from opposite directions.

Making a decision regarding either of these two would likely be predicated on their next decisive price moves around their respective 50 day moving averages. I might be more inclined to purchase either if they stay above the line. However, if moving below, I would defer the purchase, although the Cisco dividend may offer a more compelling reason to decide between these two stocks, particularly as Intel has a tough act to follow after its most recent earnings report.

Finally, Walgreen (WAG) reports earnings this week just as the rest of the world is getting ready to begin the next cycle of quarterly reports the following week.

Walgreen, after having announced that it was not going to pursue a tax inversion, nearly two months ago, is still seeing its shares trading at a significantly depressed level.

While I usually like to consider earnings related trades on the basis of a calculation of the implied price move relative to the potential for achieving a threshold return on investment and would prefer not to own shares, in this case I wouldn’t mind taking ownership at the right price.

With option premiums enhanced somewhat due to the upcoming earnings release I would consider the sale of out of the money weekly puts and if facing the possibility of assignment would consider taking that assignment if the price of shares was near the strike price so that I could initiate a short call position upon taking ownership of shares. However, in the event that shares plunge beyond that price level I would likely prefer to attempt to rollover the puts in an effort to prevent that assignment.

Hopefully, regardless of the outcome there will still be a party going on.

Traditional Stocks: British Petroleum, Caterpillar, Conoco, Intel, MetLife, The Gap

Momentum: Citibank

Double Dip Dividend: Cisco

Premiums Enhanced by Earnings: Walgreen

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.

Sep62014

Weekend Update – September 7, 2014

Weekend Update Comment

There was no shortage of news stories that could have prevented the market from setting yet another new closing high this week.

While much of the week was spent on discussing the tragic sequence of events leading to the death of Joan Rivers, markets still had a job to do, but may have been in no position to stop the momentum, regardless of the nature of more germane events.

Despite what everyone agrees to have been a disappointing Employment Situation Report, the market shrugged off that news and closed the week at another new record. They did so as many experts questioned the validity of the statistics rather than getting in the way of a market that was moving higher.

As the saying goes “you don’t step in front of a moving train.”

The previous day, with the announcement by ECB President Mario Draghi of further decreases in interest rates and more importantly the institution of what is being referred to as “Quantitative Easing Lite,” the market chose to ignore the same reasoning that many believed was behind our own market’s steady ascent and could, therefore, pose a threat to that continued ascent.

Many agreed that the Federal Reserve’s policy of Quantitative Easing was a major reason for our equity market’s climb, as it fueled a flight of assets from low return bonds and from overseas. Now, with the same ingredients being assembled for a similar environment in European markets “QE Lite” could represent competition to US equity markets through our own flight of assets.

Barry Ritholtz, a noted equities analyst, recently commented that the drop in CNBC viewership to all time low levels was a “hugely bullish” sign for the markets, using their viewership as a contrarian indicator.

Never mind that along with them may be the loss of continued fuel to propel the markets onward, or consistent with disappointing employment numbers perhaps viewers are electing to drop their basic cable service before giving up their smartphone data plans.

There aren’t too many ways to stop a runaway train. The sheer momentum of a heavy projectile moving at high speed is hard to counter. You really don’t want to step in front of it as a primary strategy.

What makes that train run, however, is its fuel and at some point that fuel runs out.

However, by the same token there was no shortage of news that could have sent the markets soaring much higher.

Fuel, meet brakes.

Instead, the week closed up only slightly higher, yet continuing the weekly record of more new highs that lasted all throughout August.

What the market didn’t do was to embrace the news of a Ukraine-Russia truce, whereas weeks earlier it had shown that it cared deeply about such news, rallying on its rumor and falling on renewed conflict.

Even runaway trains may be able to be controlled by applying the brakes. The lack of a strong response to the thought of a lasting truce in the Ukraine conflict may be a reflection of some working brakes that may still be part of the equation.

While this week did finish at another new closing high, it did so without real conviction. While a runaway train would have great difficulty staying on track when coming to a curve, that may be precisely where the market now finds itself.

Whether it derails or not may be as much related to whether that curve is an inflection or simply a barrier to seeing what may lay ahead.

This past week, I think the market actually got it right, by not over-reacting to anything, as it demonstrated caution, perhaps aware that the curve ahead was steep.

How unusual would that have been? Rational markets?

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

A number of potential selections this week share the common bond of having been recipients of bad news recently.

British Petroleum (BP), a perennial bad guy when it comes to environmental record and safety received word of an $18 billion fine related to the devastating Gulf Oil spill. Despite a bounce back on Friday and assignment of shares that I had bought just the previous day, the response to that fine is very reminiscent of the initial reaction to similar news that greeted Anadarko (APC).

The bad news is tantamount to nothing more than metaphoric brakes having now been applied and defining the end of their liability. On the other hand, there is certainly the possibility of payment being delayed for years as appeals work their way through the judicial system or an agreement to a lesser penalty, which could only buoy shares. The introduction of this new level of uncertainty certainly buoyed British Petroleum’s option premiums last week and that appears to be carrying through to the coming week.

The Gap (GPS) remains an anachronism as it reports monthly same store sales. For those following those results it appears that every month or two the story is at a polar opposite to previous reports and the stock responds accordingly. This time the report showed a 2% decline, whereas analysts were expecting a 2% increase in sales.

The subsequent sharp decline in shares was eased somewhat my the market’s close and is still somewhat higher than I would like to re-initiate a position, but it is back on the radar screen after having been recently assigned. At the $42 level it has been a very good covered call trade.

eBay (EBAY), despite the steady stream of disparagement, has been one of my favorite positions. It, like The Gap is a little higher than where I would ideally like to start or add to a position, but then again, what isn’t?

The bad news confronting eBay may become reality this week, as Apple (AAPL) unveils its new products on Tuesday, which are rumored to incorporate a payment system that could then compete directly with eBay’s PayPal division.

Based upon the market’s reaction to news of Carl Icahn’s position in eBay and the reaction upon rumor that eBay was telling prospective PayPal officers that it would be spun off, suggests that competition could be beneficial to eBay’s share price, as it could speed up the spin off of a very valuable asset, particularly before that asset has a chance to erode.

eBay’s option premiums for the coming week certainly are reflective of near term uncertainty that is very likely related to what most have probably already discounted.

One of the things that has made eBay a favorite of mine is the serial nature in which I’ve been able to buy shares and sell calls over the past few years. That’s a characteristic that isn’t found frequently enough and depends on a stock’s being able to trade in a reasonably defined range, while still having some occasional spikes and plunges.

T-Mobile (TMUS) is beginning to show some of those same characteristics, although it may not be in the picture for as long as eBay has been, owing to the clear message that it is in play. It needs a capital infusion just as it needs more spectrum. Its parent has already indicated that it would be a willing seller at $35.

Demonstrating some support at $28.50 and having an apparent upper cap, I like when ranges are defined, particularly as its price can easily modulate itself within that range on any news or rumor. Those sort of events help to keep its option premium appealing and enable it to be traded on a serial basis, as well, or simply rolling over option contracts to help the premiums accumulate.

I haven’t owned shares of Kors (KORS) for a while, and have not been particularly fond of it as it has largely been held responsible for the sales and share price woes at Coach (COH), which like eBay, has been one of my covered option favorites, thanks to its price mediocrity, but consistent option premium stream.

With news of a secondary stock offering whose shares represent complete divestiture by the private equity firm that once held a majority interest in the company and the departure of two board members, it can’t get too much worse for shares, unless it too is a runaway train.

News of product discounting and slowing revenue growth compounds the insult of not receiving any of the proceeds of the secondary offering, which is expected to close this coming week. As with a number of other stocks in the “bad news” category, the option premiums are elevated, but much of the bad news may have already been digested.

Among this week’s potential dividend selections, there is some recent bad news at AIG (AIG), which hasn’t been reflected in its share price.

That is additional credit to Robert Benmosche, the past CEO, who recently announced that his longstanding cancer is now thought to be of a terminal nature. His legacy, will undoubtedly include him as one of the heroes coming out of the financial crisis, with a reputation enhanced by his commitment even during periods of personal duress.

While no one is going to chase shares of AIG in order to capture its tiny dividend, it along with a number of other stocks highlighted this week continue the strategy of looking for positions that have trailed the S&P 500 during the past summer. Unlike some of the others burdened by recent bad news, AIG isn’t offering an enriched option premium, again somewhat of a tribute to the stability created by Benmosche.

Both Coca Cola (KO) and Merck (MRK) are ex-dividend this week. Neither is a frequent point of focus for me, but both may represent some reasonable safety, although Merck has out-performed the S&P 500 this summer.

As is commonly the case with companies that are DJIA components that offer better than average dividends, there isn’t as readily obtainable advantage to attempting to “double dip.” For that reason, when considering the purchase of shares in advance of the dividend and if using an in the money strike price, it may make some sense to use something other than a weekly option, so that the additional time value may end up being a factor in limiting the incidence of early exercise.

Despite both companies having significant international exposure I don’t believe that any near term flare ups will unduly drag either of them downward and during a period of continuing low volatility those dividends look ever more attractive, particularly if risk is mitigated.

Finally, Whole Foods (WFM), while not one of my recent favorite stocks, has lately been presenting excellent opportunity to whittle down paper losses on an all too expensive lot of shares that has been sitting fallow, with no hedges sold against it for a while.

It appears, from its recent price behavior that shares have found some reasonable support at $38.50 and may be ready to begin a climb higher as it may start deriving some benefits from its significant expansion over the past year. Together with the fact that its controversial co-CEO hasn’t said much in the way of inflammatory comments lately, has helped the shares maintain some semblance of stability.

In this case, Whole Foods may be ready to be the beneficiary of some good news. It, along with some others this week, are offering option premiums that are in clear contrast to the steadily decreasing premiums more commonly being seen.

Personally, I’m all for this runaway train to keep running, just as long as it does so at a reasonable speed, so that there’s plenty of opportunity to get off. Perhaps this past week’s performance shows some good common sense, which is what really makes it so unusual, but would represent a welcome change.

Traditional Stocks: British Petroleum, eBay, The Gap, Whole Foods

Momentum: Kors, T-Mobile

Double Dip Dividend: AIG (9/9). Coca Cola (9/11), Merck (9/11)

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.

Jul112014

Weekend Update – July 13, 2014

Weekend Update Comment

In the past month Janet Yellen has reaffirmed the commitment to keeping stocks the preferred investment vehicle yet after the initial euphoria, skepticism and askance looks greeted any attempts to set even more new record highs.

For stock investors the greatest gift of all was there, delivered on a platter, just waiting to be taken advantage of this past week. But we didn’t do so, maybe having learned a lesson from Greek mythology and avoiding obvious and superficial temptation.

Unfortunately, the application of that lesson may have been misguided as the temptations offered by the Federal Reserve had already run fairly deep, having already been acknowledged to have fueled much of the years long rally in stocks.

Instead of focusing on accepting and making good use of the gifts this past week it didn’t take long to re-ignite talk of the beginning of the long overdue correction after a failed start to the week’s trading.

The week itself was a bizarre one with some fairly odd stories diverting attention from what really mattered.

There was the frivolous news of a wildly successful potato salad Kickstarter campaign, the inconsequential news of the demise of Crumbs (CRMB), the laughably sad news of the sudden appearance of a seemingly phony social media company in Belize with a $5 billion market capitalization while the SEC slept and feel good news of LeBron James taking his talents back to the fine people of Cleveland.

Somewhere in-between was also the news that a Portuguese bank was having some difficulty paying back short term debt obligations.

Talk of an impending correction came before this week’s FOMC statement release, which did much to erase the previous two days of weakness, but it was short lived, as fears related to the European banking system swept through the European markets and made their ways to our shores on Thursday.

This was yet another week when the market wasn’t willing to accept the assurance of continuing gifts from the Federal Reserve after the initial giddiness upon the delivery of its news. While we all know that sooner or later the gifts from the Federal Reserve will slow down and then stop altogether in advance of that time when it actually begins to impede our over-fed avarice, there isn’t too much reason to refuse the gifts that are still there to be given. While perhaps those gifts could be viewed as an entitlement perhaps the additional lesson learned is that we are resilient enough to not allow a natural sense of cautionary behavior to be disarmed.

Somehow, I doubt that’s the case, just as I doubt that Greek mythology has taught very many or lasting lessons to many of us lately.

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

Puts I sold on Bed Bath and Beyond (BBBY) that I sold a few weeks ago expired this past week, as they were within easy range of assignment or in need of rollover on Friday until murmurings of a leveraged buyout started to lift shares.

Had those murmurings waited until sometime on Monday I might have considered them as a gift, as I wanted to now add shares to my portfolio. However, coming as they did, although securing the ability to see the puts sold expire worthless, may have snatched a gift away, as I rarely want to chase a stock once it has started moving higher. However, on any weakness that see shares trading lower to begin the week, I would be anxious to add shares as I believe Bed Bath and Beyond was already in recovery mode from the strong selling pressure after it reported earnings a few weeks ago.

The Gap (GPS) continues to be one of the dwindling few that report monthly sales statistics. As it does, it regularly has paroxysms of movement when those statistics are released. Rarely does it string together more than two successive months of consistent data, such that its share price bounces quite a bit, despite shares themselves not being terribly volatile in the longer run. Those movements often provide nice option premiums and makes The Gap an attractive buy, although it can also be a frustrating position, as a result. However, it is one that I frequently like as part of my portfolio and currently do own shares. This most recent report on Friday don’t send shares moving as much as in the recent past, however, it did create an opportunity to consider the addition of more shares.

With earnings season beginning to high gear this week there is no shortage of potential candidates. However, unless most weeks when considering earnings related trades I only think in terms of put sales and would prefer not to own shares.

That is certainly the case with SanDisk (SNDK).

The option market believes that there may be a 6.6% movement in either direction next week upon earnings being released. However, a 1.1% ROI can potentially be achieved at a strike level that is outside of the range implied by the option market, making it an appealing trade, if willing to also manage the position in the event that assignment may be likely by attempting to roll over the put sale to a new time period.

On the other hand both Blackstone (BX) and Cypress Semiconductor (CY) are shares that I would want to own at a lower price and would consider accepting assignment rather than rolling over and trying to stay one step ahead of assignment.

In the case of Cypress Semiconductor, whose products are quietly ubiquitous, since it has only monthly options available, there aren’t good opportunies to try such evasive techniques, so being prepared for ownership is a requisite if selling puts. Shares have traded in an identifiable range, so if assigned and patient there’s liukely to be an escape path while collecting option premiums and perhaps dividends, as well.

Blackstone is off from its recent highs and has been a beneficiary of the rash of IPO offerings of late. While I wouldn’t mind owning shares again at this level, the fact that it offers many expanded weekly options does allow for the possibility of managing the position through rollovers in the event that assignment may be imminent. However, with a generous dividend upcoming there may also be reason to consider ownership if assignment may be likely.

Finally, A stock that I love to own is Fastenal (FAST). To me it represents a snapshot of the US economy. Depending on your perspective when the economy does well, Fastenal does well or when Fastenal is doing well the economy is doing well. While that’s fairly simple and easy to understand, even if not entirely validated, what is always less easy to understand is how a stock responds to its earnings reports. In this case shares of Fastenal tumbled as top line numbers were very good, but margins were decreasing.

While that may not be great news for Fastenal and it certainly wasn’t for its shareholders today, the growth in sales revenues may be a positive sign for the economy. For me, the negative response provides opportunity to once again own shares and to do so as either a potential short term purchase or with a longer term horizon.

While Fastenal trades only monthly options with this being the final week of the July 2014 cycle it could potentially be purchased with the mindset of a weekly option trader. However, in the event that shares aren’t assigned, they do go ex-dividend the following week, so there may be reason to consider immediately considering an August 2014 option in hedging the share purchase.

Traditional Stocks: Bad Bath and Beyond, Fastenal, The Gap

Momentum: none

Double Dip Dividend: none

Premiums Enhanced by Earnings: Blackstone, Cypress Semiconductor, SanDisk

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.