Weekend Update – September 6, 2015

Stop and take a break.

I’ve been doing just that, taking a break, for about the past 5 years, but sometimes I think that I’m working harder than ever.

Lately, however, I don’t feel as if I’m on a forward path so it may be time to do exactly what the Chinese stock markets did last week and what the US stock markets are doing this coming week.

They both took some time off and perhaps it was timed to perfection. After a 42% decline in Shanghai in less than 10 weeks and a 10% drop in the S&P 500 in 6 weeks, it was definitely time to take a breather and smell the dying flowers.

China took a couple of days off for celebrations ostensibly commemorating the end of World War II. While doing so they may also have wanted to show the nation and the world just how together they have things and just how much in control they really are at a time when the image is becoming otherwise.

After all, if the Faustian Bargain in place can no longer deliver on the promise of a higher standard of living, the message of an all powerful government has to be reinforced, lest people think they can opt out of the deal and choose democracy instead.

Equally ostensibly, guided by environmental concerns and the health of its citizens, the Chinese government decided to have factories in and around Beijing closed for the days preceding the festivities in order to help clear the air a bit, but only in a non-metaphorical kind of way. The literal and figurative haze is far too thick for cosmetic actions to change anything.

Unfortunately, what we may be coming to realize is that the Chinese economic miracle we’ve come to admire may be the actual culprit for all of that pollution, through its extensive use of smoke and mirrors.

While taking some time off it’s not entirely clear whether any other “malicious short sellers” are disappearing from view and being prevented from polluting trading markets or whether arrests and detentions are also taking a much needed holiday.

Here in the United States we celebrate Labor Day by not working, rather than working extra hard and we rarely send anyone to prison for accelerating the process that leads to a financial slide.

As long as people are beginning to make comparisons between the current market correction that seems to be related to China’s market meltdown and our own financial meltdown of the past decade, it only seems appropriate to note that the key difference between our nations in that regard is that Countrywide CEO Angelo Mozilo could never have gotten a natural suntan in Beijing.

He also wouldn’t have ever seen the light of day, even it such a thing was possible through all of that haze, again after suddenly disappearing on a less than voluntary basis.

In the United States Labor Day comes every year, but a 70th anniversary celebration of the end of World War II comes but once and it may not have come as a better time, as the world is wondering just what is going on in China.

Putting the brakes on the ever-present haze and lung clogging air for a couple of days won’t make much difference and so far, neither have efforts to control market forces. Both have lots of momentum behind them and are likely to remain recalcitrant in the near term, even to the most totalitarian of governments.

When it comes to managing the economy we may be at the tip of the iceberg in terms of realizing that no one really knows what’s going on and just how accurately the modern miracle has been portrayed. But that’s the usual situation when smoke and mirrors are in place and the stakes so high.

While the Chinese markets were closed a little bit of calm overtook US markets, as there was some evidence with the release of the ADP Employment Report that bad news was again being interpreted as being good, insofar as it could delay interest rate hikes from the FOMC.

The subsequent fading of any meaningful rally to offset large losses earlier in the week was disappointing, but it was the good news and bad news nature of the Employment Situation Report that sent markets tumbling without any help from China.

The good news that was interpreted as being bad and, therefore, making a rate hike more likely at the next FOMC meeting was that the unemployment rate fell to 5.1% even in the face of mildly disappointing growth in employment and wage stagnation.

Even dusting off twice removed Federal Reserve Chairman Alan Greenspan to appropriately comment that there’s no logical reason to fear a small rate increase did nothing to re-introduce rational thought into those engaged in indiscriminate selling.

Ending the week with a large loss was bad enough. But doing so and being left behind the eight ball more than usual this week as the Shanghai market re-opens for business on Sunday makes this weekend more uncertain than usual. With Labor Day serving as an additional day to be handcuffed as passive observers we stand to have China once again put us in a position of reaction, rather than leading the world with its most vibrant and sustainable economy.

So, while I really welcome, want and need the day off on Monday for more reasons than usual, I can’t wait for Tuesday.

That makes about as much sense as everything else these days.

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

“Buying on the dip” hasn’t been as prevalent as in the past during what turned out to be a series of mini-corrections, as we’ve watched the market head into correction, then out of correction, back in and out again. For some reason, though, I’ve been a little more active in adding new positions than I would have expected at the beginning of each of the past few weeks, in the belief some price levels truly represented opportunities.

Most of that interest in buying has been dividend driven and this week is definitely one that is likely to continue that trend if I can justify the faith necessary to add any new positions.

With the exception of Best Buy (BBY) which had a very nice week as the S&P 500 fell by over 3% and Altria (MO), which matched the index for its poor performance, the remaining selections going ex-dividend this week all badly trailed the S&P 500 last week.

That’s not exactly the basis for a strong recommendation, but with the exception of BHP Billiton (BHP), it may be difficult to find a really good reason for such under-performance.

Not that it’s much consolation, however, all but BHP Billiton have actually out-performed the S&P 500 since its top, although Best Buy is the only one to have actually appreciated in share value.

Some of the potential selections, such as Altria (MO) and Merck (MRK) haven’t been very attractive “Double Dip Dividend” selections for quite a while. In a low volatility environment in the context of a relatively large premium essentially spanning the distance from one $0.50 strike level to the next, there has been very little subsidy of the dividend by the option premium and those stocks were much more likely to be assigned early if in the money.

However, the volatility induced increase in premiums is beginning to make even these high yielders that also have large dividends in absolute terms more and more worthy of consideration.

In a week that pharmaceutical companies struggled to keep up with the S&P 500 I do like the potential trades, specifically to attempt to capture dividends and option premiums in Merck and Gilead (GILD). In both cases, that’s being considered without regard to issues of pipeline.

Due to the increased market volatility their premiums make them both especially attractive considerations this week. in addition as they have also lagged the S&P 500 over the past week and month.

Merck is ex-dividend on Friday and I would consider selling a weekly in the money strike, but being prepared to roll the position over to the following week if assignment seems likely. With a dividend of $0.45, that generally means that the closing price on Thursday would have to be at least $0.45 in the money for a logical investor to exercise their options, although Merck is frequently subject to dividend arbitrage and is more likely than most to be exercised even if there is just a very small margin above that threshold price, especially if there is very little time remaining on the contract.

Gilead, on the other hand is ex-dividend on Monday of the following week. For that reason I would consider selling an in the money option contract expiring at the end of the September 2015 option cycle and wouldn’t be disappointed if the contract was exercised early. In essence the additional premium received for the week of time value atones for the early assignment.

Pfizer (PFE), on the other hand, is not ex-dividend this week, but has finally returned to a price level that I wouldn’t mind once again owning shares.

During the period of its share price climb, as is so often the case, the option premiums became less and less enticing. However, now that it has had a 13% decline in the past month, that premium is finally at a point that it offers adequate reward for the risk of further decline.

As with Merck and Gilead, the consideration of Pfizer isn’t based on pipeline nor on fundamental considerations, but purely on price and premium.

While healthcare stocks generally out-performed the S&P 500 over the past week, one notable exception was UnitedHealth Group (UNH), which is also ex-dividend this week.

In my home state of Maryland the regulatory agency approved a 26% increase in rates for Anthem (ANTM), but small premium declines for UnitedHealth policies on Friday. The relative weakness in UnitedHealth shares, however, was week long and not likely influenced by that news, as Anthem is by far the major insurance carrier in that state.

However, as is so increasingly the case, the combination of an uncertainty induced higher option premium, a dividend and the potential for some bounce back in short term share price is very appealing.

Especially when logic would dictate that China poses no threat to UnitedHealth Group’s performance, as long as logic is permitted free expression for a change.

American International Group (AIG) also goes ex-dividend this week.

I haven’t owned shares in a while and certainly haven’t done so since the passing of Robert Ben Mosche, who I considered an essentially unsung hero. His calm and steady guidance of AIG, having returned from retirement on the beaches of Croatia, was an antithesis to the reckless actions of Angelo Mozilo.

However, with its return to respectability as a company and as a stock came a decrease in option premiums and even with the re-institution of a dividend, it wasn’t a magnet for investment.

This week, the situation is different.

With a significantly increased dividend, a nearly 10% decline in the past month, an enhanced option premium and the likelihood of interest rates moving higher, AIG may be ready to hit on all cylinders.

After so much discussion about healthcare and insurance related stocks, it only seems fair to give Altria some attention. Prior to spinning off Philip Morris (PM), which was the real engine of its growth from its international activities, this was a true triple threat stock. It had great option premiums, a generous dividend and room for share appreciation, as long as you were willing to let other people participate in their own Faustian deal.

However, with the loss of Philip Morris’ growth and with declining option premiums, it has lost its luster for me, just as it has the ability to take the sheen off from health pulmonary tissue.

However, a recent 6% decline, a growing option premium and a great dividend are reasons to consider welcoming it back into the fold, even if not permitting its use in your home.

I already own two lots of Best Buy shares and rolled both over early in order to have a better chance of capturing the dividend. As with Merck, those shares go ex-dividend on Friday.

However, as opposed to Merck and so many others that are near some near term price lows, Best Buy gained in price the past week and has been doing so since reporting its earnings recently.

I would consider purchasing another lot of Best Buy shares but would be willing to cede the dividend to early assignment, based on the generous option premiums. To do so, that might be accomplished by purchasing shares and selling in the money weekly calls or even deeper in the money calls expiring the following week.

Palo Alto Networks (PANW) reports earnings this week and as with even relatively “safe” stocks of late, it may not be for the faint hearted, as it can and has made some fairly significant price moves in the past when earnings have been released.

As it is, shares of this enterprise security company are already 14% lower in the past month and meaningful price support is still about another 10% lower.

The option market is implying a 7.8% price move next week. However, a 1% weekly ROI may be potentially obtained through the sale of a weekly put contract at a strike price 10.2% below Friday’s closing price.

While the options market is beginning to do a better job of estimating price performance after a period of under-estimating downside risk, I think that there may still be some additional risk, so I would probably defer those put sales until after earnings and only in the event that there is a sharp decline in shares that could bring it closer to that support level.

For those willing to play in the land of risk, BHP Billiton is ex-dividend this week and offers a semi-annual dividend that appears to be safe, despite a nearly 8% yield. While it has decreased its dividend minimally in the past, nearly 14 years ago, it has never suspended it, despite some significant decreases in commodity prices over the years and in contrast to others, such as Freeport-McMoRan (FCX).

BHP Billiton offers only monthly option contracts and doesn’t have strike levels gradated in single or half dollar units. With its current price almost perfectly between the $32.50 and $35 strike levels and its ex-dividend date occurring early in the week, the potential short term strategies are to either sell an in the money option with a high likelihood of early assignment, or an out of the money option in the hopes of getting it all.

Finally, I missed the last strong move higher by LuLuLemon Athletica (LULU) and had shares assigned after that climb that left me in the dust. I was still happy to be out of those shares after a 13 month holding period. While it had an ROI of 10.3% that was only 0.6% better than the S&P 500 for the same period of time, so not a very worthwhile way to park money, all in all.

LuLuLemon reports earnings this week and it’s no stranger to large price moves.

Prior to this very recent increase in market volatility the options market has been under-estimating the price range that a number of stocks might move upon earnings release and I was more inclined to consider a trade, such as the sale of puts, only after earnings were released and shares plummeted beyond the lower boundary implied by the options market.

However, as volatility has made a return, the price ranges implied by the options market is beginning to increase and it is getting easier to find strike levels outside of the range that can return my threshold 1% ROI on the sale of a weekly put contract. 

The option market has implied a price move of 9.6% and a 1% ROI could potentially be achieved through the sale of a put option if shares fall less than 11.5% following earnings.

Unlike Palo Alto Networks and unlike so many other stocks in the investor’s universe, LuLuLemon is within reach of its 52 week high, which certainly makes it stand out in a crowd, even if not bent over sufficiently to bring any defectively sheer garments to their limits.

While on a different recent path from Palo Alto Networks, LuLuLemon is also a trade that I would consider only in the event of a sharp price decline and would seek to take advantage of any selling done in panic mode.

Unless of course that turns out to be the theme for the week, in which case I would rather wait for some calmer heads to prevail before loosening the grip on cash.

Traditional Stock: Pfizer

Momentum Stock: none

Double-Dip Dividend:  Altria (9/11), American International Group (9/10), Best Buy (9/11), BHP Billiton (9/9), Gilead (9/14), Merck (9/11), UnitedHealth Group (9/9)

Premiums Enhanced by Earnings: LuLuLemon Athletica (9/10 AM), Palo Alto Networks (9/9 PM)

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

Weekend Update – June 7, 2015

 

In statistics, there is a concept of “degrees of freedom.”

It is the number of independent ways by which a dynamic system can move, without violating any constraint imposed upon it.

For example, if you know that you have a dollar in change distributed between your 2 pockets and one of those pockets has $0.75 in it, there aren’t too many possibilities for what the other pocket will contain. That’s an example of a single degree of freedom. However, as soon as you throw a third pocket into the mix there are an additional 25 permutations possible, as a second degree of freedom opens up lots of possibilities.

Poor Janet Yellen. So few possibilities and so many constraints tying her up.

Since US interest rates can’t go much lower, she doesn’t have too much choice in their direction. She has no choice but to raise rates.

Eventually.

Her only freedom is in the timing of action. If you’re married to data, as is now being professed, she has to balance the opinion of a well regarded economist with the latest employment data release and the prospects of upwardly revised GDP statistics.

Her degrees of freedom situation got a little muddled this past week as Christine Lagarde, who is the Managing Director of the International Monetary Fund, urged her to stay in line with the European Central Bank and keep interest rates low. At the same time the Employment Situation Report, released on Friday morning came in with job growth stronger than expected.

As the popular song once asked “should I stay or should I go?” is the kind of decision facing Janet Yellen right now and regardless of her decision, it’s going to be second guessed to death and much more likely to receive blame than credit for whatever near term or longer term outcomes there may be.

Doing nothing may be the safest decision, although this week the US bond market made its feelings known as rates moved in the only direction that makes sense.

That’s because suddenly the data has shifted the discussion back to the potential for the announcement of an interest rate increase as early as June 17th, the date of the next FOMC Statement release. That’s happened within days of the discussion having been about whether that increase would even occur in 2015.

With competing pressures of being out of synchrony with the direction of rates in the rest of the world and the reality of an economy that now may actually be growing at a stronger rate than had been believed, inaction would seem to be the obvious path to take.

Being tied up makes it easier to fail to act, but I’m betting that if any one can break free of the duct tape constraints that seek to bind her, it will be Janet Yellen.

The expression became long ago hackneyed, but while we all await a decision of interest rates, I suspect that Janet Yellen will break out of the box. As Bernanke before her, she will put her own twist on our narrow and limited expectations, leaving Christine Lagarde to realize that being late to the game is not a good reason to heed advice.

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

Intel (NASDAQ:INTC) had a really terrible week last week as the news that everyone had come to expect regarding its intentions with Altera (NASDAQ:ALTR) became confirmed.

The funny part, although not if you’re an Intel shareholder, is that when rumors first surfaced earlier in the year, the initial response was positive for Intel’s share price.

Not so much, though, as rumors became news and suddenly every one started questioning intel’s strategy with the acquisition.

As weak as the overall market was this past week, it was well ahead of Intel, which lost nearly 8%. That drop in price has made the shares once again appealing, as its CEO, Brian Krzanich, shouldn’t strike anyone as being frivolous, particularly as it comes to operations, having previously served as Intel’s COO. I would guess that Krzanich can sense a strategic fit better than most at a company where he has spent nearly 33 years of his life.

With Chuck Robbins set to start soon as the new CEO at Cisco (NASDAQ:CSCO), more executive level changes were announced this past week, as shares also well under-performed the S&P 500 for the week.

Although nowhere as severe as Intel’s weekly decline, the drop in Cisco’s shares bring them closer to an appealing price once again, as its ex-dividend data nears in a few weeks.

While shares are still a little higher priced than I might like to initiate a position, its recent weakness hasn’t had very much basis. Robbins’ new team, even though comprised of many Cisco insiders, is likely to hit the ground running with strategic initiatives and will probably be more focused on near term victories, than was outgoing CEO John Chambers.

I think that creates short term opportunities even as Robbins may pull out varied accounting tricks in the waning days of June in order to make the next quarter’s earnings pale in comparison to the subsequent quarter, thereby creating a positive early image of his leadership.

Altria (NYSE:MO) and Merck (NYSE:MRK) are both ex-dividend this week and both offer a very attractive dividend. While one seeks to improve people’s lives through better chemistry, the other takes a different path.

Tobacco companies faced some challenges last week as the market didn’t react well to news of a $15 billion Canadian court penalty. Nor did it react well to news that a lawsuit regarding package labeling against the FDA was being dropped. A nearly 6% drop for the week is enough evidence of market displeasure.

Those drops helped to bring shares near some support levels just in time for the dividend and surprisingly good option premiums. While I don’t take any particular delight in the products or in the consequences of their use, there has never been a very good time to bet against their continued ability to withstand challenges.

That ability to withstand challenges is one of the signs of a great company and Merck falls into that category, as well.

Most often, companies like Altria and Merck, that have better than average dividend yields and whose dividend is about the size of a strike price unit or larger, in this case $0.50, are difficult to double dip in an effort to have some of the share price reduction brought about by going ex-dividend get subsidized by the option premium. However, with pharmaceutical companies being in play of late, the option premiums are higher than they have been for quite some time, even during an ex-dividend week.

Merck is rarely a candidate for a double dip dividend trade, but may be so this coming week, having also concluded a very weak past few trading days that highlighted a number of drug study trial results.

Finally, Williams Company (NYSE:WMB) is also ex-dividend this week having fallen sharply following the very positive reception it received after announcing the planned purchase of the remainder of its pipeline business, Williams Partners (NYSE:WPZ).

With a nearly 10% decline in the past month since that announcement, as with both Altria and Merck, it offers a better than average dividend yield and a dividend that is greater than its strike price units. However, it too, is now offering an option premium that allows for double dipping that is so often now possible or feasible.

However, as with Altria, the recent decline seems to have been over-exaggerated and rather than selling an in the money call in an attempt to double dip on dividend and premium, I think that i may be inclined to forgo some of that double dipping in exchange for capital gains on the underlying shares by using out of the money options.

Either way, it’s an exercise in greed, but I like having the increased degree of freedom to do so.

Traditional Stocks: Cisco, Intel

Momentum Stocks: none

Double-Dip Dividend: Altria (6/11), Williams Company (6/10), Merck (6/11)

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.

Weekend Update – March 8, 2015

It seems as if it has been a long time since we were at that stage where good economic news was interpreted negatively and bad news was celebrated.

Lately, on the economic front there really hasn’t been any bad news, although depending on your perspective perhaps the good news just hasn’t been good enough. That might include unrequited expectations for a consumer buying frenzy that hasn’t yet materialized as a result of energy savings.

On the other hand the good news has been steady. Not terribly spectacular, but a steady climb toward an improved economic landscape for more and more people. Again, to put a little cynical spin on things, for some the climb has been far too slow and the 5.5% unemployment rate a bit illusory as so many may have simply dropped out of the employment seeking pool.

After a week in which the market moved in alternating directions on no news at all during the first 3 days of trading, it finally reverted to a paradoxical form when the Employment Situation Report was released on Friday morning.

A much better than expected number and with no revisions to previous months was great if you were among those looking for and finding a new job. What it wasn’t great for were the prospects of interest rates staying low and the Federal Reserve continuing with its “patience.”

At least that’s how the impact of the data was perceived. The good news was cast in a very negative way and the immediate reaction was not much different from the panic that might beset a grocery store when in August the Farmer’s Almanac may call for unusually brutal winter and people clear the shelves of milk in anticipation.

While there are still far too many people in need of jobs and newly created jobs aren’t necessarily of the same caliber of pay as those lost since 2008, for some the burden of the good news was too much to bear and the selling accelerated to a level not seen in quite a while, although never really to the point of toilet paper frenzy.

At the very least for those who practice a paradoxical approach to the interpretation of news, they were able to contain some of their emotions even as their irrational selling ruled the day. It was like still finding a carton of milk after the hordes had beaten you to the store, indicating that not everyone believed that Armageddon was the next stop.

I think that if I could choose, I’d much rather be trading stocks when there is an identifiable and consistent reaction to events, even if it may be less than rational. The early part of the week, moving up and down daily in individual vacuums could do little to create any kind of confidence regarding market direction. In essence, it’s easier to plan survival tactics when maniacs are in charge than it is when no one is in charge.

Those that were in charge on Friday based their actions on fear and dragged the rest of us down with them.

They were fearful that putting more people to work would accelerate the timetable for raising interest rates. That in turn would lead to greater costs of doing business and would be coming at a time that the rest of the world is lowering rates.

That would probably lead to even greater strength in the US Dollar, perhaps even USD and Euro parity, which only serves to accentuate those currency headwinds that have already been highlighted as reducing corporate earnings and would only further create competitive threats.

Cycles. You can’t live with them and you can’t live without them.

The reaction by traders on Friday would have you believe that none of this was previously known or suspected to be in our future.

The reality is that we all know that rates are going to go higher. It’s just a question of whether we follow Janet Yellen’s perceived path or Stanley Fisher’s accelerated path.

Personally, my fear is how we could be trading in a market that in the space of a single week, when both Yellen and Fischer expressed their opinions, could go from the comforting assurances from Janet Yellen to completely tossing out those assurances. That leads to the question of whether we believe she is simply wrong or just lying.

Neither of those is very comforting.

It’s actually even worse than that, as last week the market, following a positive response to Yellen’s comments turned on her barely 2 days later upon Fischer’s suggestion that interest rate increases would be coming sooner, rather than later.

On the other hand a more rational consideration of Friday’s reaction would suggest that maybe the reaction itself was irrational and unwarranted because Janet Yellen is in a better position to know about the timing or rate increases than a nervous portfolio manager and is probably much less likely to lie or mis-represent her intentions.

There’s always that.

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

Following Friday’s sell-off a number of positions appear to be more appropriately priced, however, the accelerating nature of the sell-off should leave some residual precaution as approaching the coming week, as even stock innocents were taken along for the plunge on Friday and could just as easily still be at risk.

Another large climb in 10 Year Treasury interest rates makes interest related investment strategies more appealing to some and the impending start of the European version of Quantitative Easing may also serve to siphon investment funds from US equity markets.

While I do have some room in my mind and heart for some more exciting kind of positions this week, my primary focus is likely to be on more mundane positions, especially if there’s a dividend at hand. This week’s selection is also more limited, than usual, as I expect my week to be ruled by some of that heightened caution, at least at the outset of trading.

Huntsman (NYSE:HUN), Coca Cola (NYSE:KO) and Merck (NYSE:MRK) seem to be appropriate choices for the coming week and all under-performed the S&P 500 during the past week, with the latter perhaps having more currency related considerations in their futures.

Trading right near its one year low is Huntsman Corp . It’s not a terribly exciting company, but at the moment, who really needs excitement?

Trading only monthly options I might consider the use of a longer term option sale, perhaps a May 2015, to further reduce the excitement, while bypassing earnings in late April and adding a decent sized premium to the potential return, in addition to the upcoming dividend and, hopefully, some capital gains from shares, as well.

There probably isn’t very much that can be said about Coca Cola that would offer any great new insights. With a number of potential support levels beneath its current price and a recently enhanced option premium, particularly in a week that it is ex-dividend, a position seems to offer a good balance of reward with risk.

While the company may still be floundering in its efforts to better diversify its portfolio of offerings and while it may continue to be under attack for its management, those may be of little concern for a very short term strategy seeking to capitalize on option premiums and the upcoming dividend. At its current price level, however, it is below its mid-point level range for the past 6 months and may offer some near term upside in the underlying shares in addition to the income related opportunities.

You really know that it’s no longer your “grandfather’s stock market” when big pharma is no longer the keystone in everyone’s portfolio and is no longer making front page new on a daily basis. Instead, increasingly big pharma is playing second fiddle to smaller pharmaceutical companies, at least in garnering attention, unless it is involved in a proposed buy-out or merger, as is increasingly the case.

On a steady price decline since the end of January 2015, when the market started its own party mode, Merck shares are also ex-dividend this week and offer a better premium proposition than is normally the case when doing so.

Dow Chemical (NYSE:DOW) has for the past few months been held hostage by energy prices and will likely continue so while the supply – demand situation for oil evolves for better or worse.

The only good news is that while it may be unduly castigated for its joint energy holdings the impact has been relatively muted. During the past few months as shares have become more volatile its option premiums have understandably been increasing and making it again worthy of some consideration.

Although it doesn’t go ex-dividend for another 3 weeks I would already place my sights on trying to capture that dividend and would consider a longer term option contract in order to attempt to lock in several weeks of premiums in addition to the dividend as oil is likely to go up and down many times during that time frame.

Sometimes, the best approach during periods of advanced volatility is to try and ride things out by placing some time distance between your short option positions and events.

I was considering adding more shares of Mosaic (NYSE:MOS) a few weeks ago, as it passed the $52.50 level, thinking that it might be ready for a breakout, perhaps bringing it back to levels last seen before the breakdown of the potash cartel. I can’t really recall why I ultimately decided to look elsewhere, but instead shares went into another break-down.

That breakdown last week will hopefully be much smaller, since I already own shares and will take nowhere near as long to recoup the losses.

The nearly 8% decline in shares last week for no discernible reason has now brought them back to the upper range of where I had most recently been comfortable adding shares. While the broader macro-economic picture may suggest less acreage being put to use to add to the supply of already low priced crops there isn’t such a clean association between commodity prices and fertilizer prices.

With its ex-dividend date having just passed and with the recent trend still pointing downward, Mosaic may be a good candidate to consider the sale of put options as a means of potential entry into a long position, but at an even lower price.

Finally, for the third consecutive week I would consider establishing a position in shares of United Continental (NYSE:UAL) as part of a paired trade with an energy holding, especially if you crave the kind of excitement that Huntsman may not be able to provide.

I’ve been using Marathon Oil (NYSE:MRO) as the matching energy position and had my UAL shares assigned this past Friday, despite a large price drop for the second consecutive week just before expiration.

With the energy holding still in my portfolio I would consider another purchase of UAL, particularly if there is weakness in its shares to open the week. As has been the case previously, because of the volatility in shares the option premiums have been very generous. However, rather than directly taking advantage of those premiums, my preference has been to balance risk with reward and instead have opted for lower premiums by selecting deep in the money strike prices. Doing so allows shares to drop in price while still being able to deliver an acceptable ROI for the week.

Traditional Stocks: Dow Chemical

Momentum Stocks: Mosaic, United Continental

Double Dip Dividend: Huntsman (3/12), Coca Cola (3/12), Merck (3/12)

Premiums Enhanced by Earnings: none

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

Weekend Update – December 28, 2014

A week ago, it seemed as perhaps the President of Russia, Vladimir Putin was the cause for the sudden turnaround in market fortunes and was the giver of the gift that we had all been expecting this December.

His relative calm demeanor and reasonable words surrounding the sudden collapse of the Ruble and surging interest rates helped to put an equally sudden stop to market fears.

Thank you, Vladimir, but what have you done for us lately?

At least, even with his finger pointing, there hasn’t been any saber rattling and no new obligatory face saving demonstrable shows of bravado on the international front. At least, not yet, but it can get awfully cold in Russia this time of the year. Luckily for them, heating fuel is unusually inexpensive right now, although maybe not so much in Ruble terms.

Fortunately, it seems that there may be others willing to take up the mantle of prodding our markets forward when challenges appear, although it’s not very likely that they would want to do anything to lend us a helping hand or be part of the gift giving.

For the purists, there are still a steady stream of economic reports that can move markets depending on what kind of lens is used to interpret the data. Global personalities playing global games are just ephemeral distractions, even though a day old key economic report is also just as quickly forgotten when the next day’s, often contradictory report, is released.

Then it’s just a question of “what report have you delivered to me lately?”

Everyone should have expected good news coming from this week’s GDP report as the first glimpses of the impact of lower energy prices were revealed. That’s especially the case as 70% of GDP is said to be comprised of consumer spending and most everyone you know feels more wealthy. That’s not because of any great stock market rally but because of falling energy prices. Despite hitting a new record high an average of once each week in 2014 for most people that’s not where the feeling of wealth has come from this year.

The market still rallied in surprise. It was a case of good news being interpreted as good news, the way most normal people would have interpreted it.

What we can now await is the next GDP report which comes the morning after the next FOMC Statement release in January. Being data driven, it may be reasonable to expect that the FOMC may look at the initial data streams reflecting increasing consumer activity and GDP growth and throw “patience” out the window.

Then, we will simply be at the mercy of the lenses that decide whether that news is good or bad for markets as interest rate increases may seem to be warranted sooner than the last FOMC Statement led us to believe.

But this past week, it became clear that if a Santa Claus Rally does await us these final days of 2014 as the DJIA closed at another record high, the real benefactor may be the diminutive leader of a nation that mandates haircut style and prohibits the personal use of “Dear Leader’s” actual name by anyone other than “Dear Leader” himself.

I don’t want to mention him by name, however, as I don’t deal well with threats or cyber-attacks of any kind, so we’ll just say that we may be able to thank Kim Jong Doe for this week’s establishment of more new closing record highs and setting the stage for the year end rally.

The lunacy surrounding the release of an otherwise inconsequential movie displaced most of our thoughts about the price of oil. While “Dear Leader” said nothing in a calming manner, offering threats rather than constructive strategies, the change of topic was a welcome relief, as oil continued to be a drag on the overall market, but no longer holds it in hostage, at least as long as it can continue to trade in the $54-60 range.

The alleged antics of a nation and a leader so far away was far better to focus upon than anything of substantive value, or anything that could have had us put on one of those lenses that interprets good news as being bad.

As a nation witnessed markets pass the 18000 level for the very first time, en route to setting its 51st record close of the year, more interest was directed at the outrage associated with a self-imposed censorship that appeared to be an acquiescence to external threats from someone with a funny haircut.

When the very idea of seeing a movie, that may turn out to be sophomorically delightful, is construed by reasonable and educated people as the patriotic thing to do, you know that no one is really paying attention to much else going on around them.

This week that was a good thing and I hope the final few trading days of the year are equally vacuous and that the market will continue rising in a vacuum.

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

I’m generally not a big user of ETF vehicles, although they do lend themselves to a covered option strategy, this week may be a little different.

While each of the past two weeks has offered an opportunity to dip a toe back into the energy sector, this week, rather than using individual names there may be reason to think about the most beaten down among the beaten down.

If you own anything in the oil services sector, as I already do, you know which sub-section of the energy sector that happens to be. The oil services sector has been absolutely abysmal, but like the rest of the sector has shown some ability to respond to anything resembling good news. At this point, however, simply being able to tread water would be a major victory for components of that sector.

The Market Vectors Oil Services ETF (NYSEARCA:OIH) can give you either the best or the worst way to establish a position or hedge existing positions. While some components may still be at risk of eliminating or reducing a dividend, there’s not too much doubt that at the first sign of oil prices creeping higher there will be some increase in drilling activity and the reward, at these low price levels, may now finally be greater than the risk.

While not an ETF, the United States Brent Oil Fund (NYSEARCA:BNO) tracks the price of its namesake very closely and offers a way to take a position on the direction and magnitude of future pricing. While I don’t believe that oil prices will be turning higher in the near term, the opportunity doers exist, however, to use a covered call strategy and elect to sell a longer term out of the money strike, if you believe that prices will be heading higher. At the moment, with shares trading at $23.26, for example, selling a $28 April 17, 2014 call option would deliver a premium of $0.80 while awaiting shares to return to a closing price last seen on December 1, 2014.

Pharmaceutical companies, long considered a conservative kind of investment, have been anything but that in recent months. Between the flurry of merger and inversion activity and the very recent across the board drops as a cheaper alternative to the management of Hepatitis C may become the drug of choice by those paying for coverage, the entire sector has responded poorly.

Merck (NYSE:MRK) was one of those companies that appeared to be simply caught in the crosswinds between battling insurance companies and those who play in role in delivering health care and want to be paid for their services. A quick 6% drop in Merck shares isn’t something that happens with any regularity and it can be a suitable longer term covered option position, particularly with its dividend in mind.

In addition the Healthcare Select SPDR (NYSEARCA:XLV) is off of its recent highs in response to the same assault, although not to the degree of some individual names. It offers a reasonable option premium with greater diversification of risk, but without sacrificing inordinately on the reward side of the equation. Like so many surprises, in this case, the decision of a pharmacy benefit management company to squeeze profits, the initial response by investors is swift and often in over-reaction to events. The Healthcare Select SPDR may be a good vehicle to capitalize on some of the immediate reaction as some of the recovery has already begun to take form.

EMC Corp (NYSE:EMC) and VMWare (NYSE:VMW) continue to have the kind of relationship that is too close for many, particularly those who believe that EMC should capitalize by selling its large remaining holding in VMWare.

EMC shares are ex-dividend this week and despite having considered adding shares over the past few weeks, instead, I’ve just watched its price climb higher from the brief drop it took along with the rest of the market, as falling oil prices indiscriminately took most everything lower.

Whether on the basis of its own businesses, its appeal to other larger technology companies or because of its stake in VMWare, EMC remains a steadfast company that has offered moderate share appreciation, a marginally acceptable dividend and competitive option premiums. Individually, none of those is spectacular, but that reflects the kind of company that EMC is in a universe of higher profile and higher risk companies.

VMWare, on the other hand offers no dividend, but does offer some more excitement, and therefore, higher option premiums, than does EMC. I haven’t owned shares in a while, but might consider entering into a position by first selling puts and rolling over, if necessary, if assignment is trying to be avoided. With earnings being reported in a month, the evening before EMC reports its earnings, there may be additional opportunities to leverage the put premium in advance of earnings, particularly as VMWare is prone to large earnings moves.

There’s nothing terribly exciting about considering adding either Apple (NASDAQ:AAPL) or AT&T (NYSE:T) to a portfolio. With cellphone companies under some pressure, in part due to the popularity of Apple’s offerings, share price is attractive, although there may be some additional surprises as earnings season begins next month and may reflect not only on the competitive pressures, but also on the costs of having Apple as a partner.

AT&T, despite a nice recovery in the past week is still nearly 5% lower than just a month ago. With its generous dividend up for distribution the following week and earnings still nearly 3 weeks after that date, there may be opportunity to create a short term position to collect the dividend and some option premiums in the interim.

There aren’t very many insights that can be offered on Apple. It continues to be on most everyone’s wish list and continues to command premium pricing, even when there may be reasons to believe that competitors may have reasonable alternatives to offer.

Despite having gone more than 20% higher since its stock split, the climb has been reasonably orderly over the past 6 months. However, in the past month, despite the 2% climb to end last week, it has significantly under-performed the S&P 500 during December. I think that if the Santa Claus Rally is for real, Apple shares are bound to atone for some of that drop, just as there is likelihood that all of those consumers feeling more wealthy from the nice surprise of lower oil prices may have treated themselves or a loved one to a new iPhone.

Finally, this will likely be just another week where someone finds reason to either extol or criticize the leadership skills of Marissa Mayer, the CEO of Yahoo (NASDAQ:YHOO).

Like EMC, at least some of Yahoo’s fortunes are tied up in the performance of another company. However, that other company hasn’t yet been tested in any meaningful manner since its recent IPO.

For that matter neither has Marissa Mayer since her ascension, but shares have done nicely during her tenure, perhaps due to a very fortunate situation that she inherited

In the meantime as all of the speculation mounts as to what Yahoo will do with all of its cash, the shares have settled into a narrow range over the past month, having significantly trailed the S&P 500. However, in that time, it has also significantly out-performed shares of Ali Baba (NYSE:BABA), the company to which most believe its fortunes are intimately tied.

Yahoo will report earnings a week before Ali Baba and if considering a position I would probably want to consider one, perhaps the sale of puts, that might allow some reasonable ability to be out of the position before Yahoo’s earnings. If not, I’d especially want to be out before those of Ali Baba, amid reports that it spent more than $160 million in the past year countering fake listings on its websites.

While I trust that Santa Claus exists, Jack Ma’s request of “trust” may need a little more time to be earned, as apparently trustworthiness may not be a core quality extending very deeply into those who fuel the money making enterprise that took Wall Street by storm just a few months ago.

Traditional Stocks: Apple, AT&T, Healthcare Select SPDR, Merck

Momentum Stocks: United States Brent Oil Fund, Market Vectors Oil Services ETF, VMWare, Yahoo

Double Dip Dividend: EMC Corp (12/30)

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.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in AAPL, BNO, EMC, MRK, OIH, T, VMW, XLV, YHOO over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Weekend Update – October 19, 2014

 After Friday’s nearly 300 point move higher, it’s absolutely inconceivable that anyone can have a clear idea of what comes next.

Even during the climbs higher over the past two years no one really had a clue of what the next day would bring, but there was an entirely different “gestalt” about the market than we have now.

During that earlier time the sum of its parts seemed somewhat irrelevant as the market as a whole was just greater than those parts and had a momentum that was impervious to the usual challenges and patterns.

The most obvious of those challenges that hadn’t come to a fruition was the obligatory periodic 10% correction. Instead, while we really didn’t know what was coming next, at least we had a clear idea of what was not coming next.

Can you say the same today?

After a month of the kind of daily moves that we really haven’t seen since the latter half of 2011, their alternating basis can only keep people off guard.

People generally fall into two categories on days when the market spikes as it did on Friday, particularly after a torrent of plunges. They either see that as evidence that we’ve turned the corner or that it’s just another trap to lure you in so that your money can wither away while feeding the beast.

For some, those optimists among us, they will have identified a capitulation as having occurred this week. They believe that kind of blow off selling marks the beginning of a return to a climb higher.

For the pessimists among us, they see that most every out-sized market one day gain has occurred during an overall downtrend.

While I remain confused about what the next week will bring, I’m not too confused about what my course of action is likely to be.

I don’t agree with the optimists that we’ve seen a capitulation. Those tend to be marked by a frenzy of selling. It’s not just a 400 point decline, it’s the rapid acceleration of the losses that shows no evidence of letting up that is usually the hallmark. The following day is also usually marked by selling during the open and then cautious buying that becomes a flood of bargain hunters.

So capitulation? Probably not, but the market very well still could have found a near term bottom this week as that 400 point loss did evaporate. That near bottom did bring us to about a 9% overall decline in the S&P 500 over the past 4 weeks, so perhaps you might hear the optimists asking “can a brother get some slack on 1%?” in the hopes that we can all move on and return to the carefree ways of 2012 and 2013.

On the other hand, those pessimists do have data on their side. You don’t need very fancy kinds of analysis to show that those 200, 300 and higher point moves over history have only served to suck money out of people’s pockets under false pretenses.

Over the past four weeks with the possible exception of the advances higher in the latter half of this past week, every strong advance led to disappointment. Every time it looked as if there was value to be had it was another value trap, as a whole.

My course of action last week was one that still has me in shock.

I didn’t execute a single new position trade last week, after having only added 2 new positions the previous week.

I’d better get used to that shock, because I don’t expect to add many, if any, new positions this week, unless there’s some reason to believe that a period, even if very short, of stability will step in.

Perhaps continuing good earnings news will be the catalyst for the market to take a breather from its recent mindless journeys to the depths and to the heights. Good news form the financial sector, some good indications from industrials and some good news from the technology companies that really matter could be a wonderful prelude to improved retail earnings.

Or maybe none of that will matter and we’ll again focus on things like moving averages, support levels, mixed messages from Federal Reserve Governors and news of continuing economic dysfunction in the European Union, all while watching the smartest guys in the room, the bond traders have their own gyrations as interest rates on 10 Year Treasury notes resemble a yo-yo, having had an enormous 10% spread in the past week.

Most of all, I want to focus on not being duped and trying to put uncovered positions to work. That means continuing to try and resist what appear to be screaming bargains, even after Friday’s march higher and higher.

But, we’re only human and can only resist for so long.

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

As I look at prices, even after some runs higher on Friday, what’s not to like? That still doesn’t mean, however, that you have to end up committing to anything.

What makes the temptation even stronger, despite a big drop in volatility on Friday, are the option premiums that can now be had when selling. The challenge, however, is finding the option buyer, as call volume is diminished, probably reflecting a paucity of belief that there will be sudden price jumps in underlying shares.

Part of the strategy accommodation that may be made if grappling with paper losses following the past four weeks is to now consider using out of the money strike prices that will still return the same ROI on the premium portion, but also potentially add some meaningful capital gains on the shares.

As with last week, I’m not terribly interested in the back story behind the week’s selections, but more in the recent price history, with particular attention to those that may have been overly and inappropriately punished.

MetLife (MET) is one of those among so many, that l have been waiting to repurchase. With the recent interest rate gyrations that actually brought the 10 Year rate below 2% there may be some rational to the price drop seen in MetLife, but with the 10% increase in rates some life was breathed back into floundering shares.

eBay (EBAY) is still a company that is always on my radar screen. Whether that will continue to be the case after the PayPal spin-off may be questionable, but for now, at its new low, low price, having taken a little bit of a beating from its just posted earnings, it really is beginning to feel irresistible.

Among sectors getting my attention this week is Healthcare. Following the drop in Merck (MRK), Baxter International (BAX) and the continued weakness of Walgreen (WAG).

With a 10% drop in shares of Merck in the past week, taking it to an 8 month low in the absence of any meaningful news one has to wonder when will the craziness end? Now in its own personal correction phase it wouldn’t be entirely an ill-conceived idea to believe that shares have either no reason to continue under-performing the market. With an attractive dividend and option premiums reflecting that downward spiral, Merck is one position that could warrant resisting the need to resist.

Baxter International is also in its own personal correction, although its time frame as been a month for that 10% decline. Despite having just released earnings and offering improved guidance shares continued to flail even as most everything else was showing some recovery. While there may be some logical explanation my interest in entertaining it may be subsumed by an interest in picking up shares.

Walgreen continues to be mired down at a price level to which it plunged after calling off any potential tax inversion plans. Being stuck in that trading range, however, has helped Walgreen to outperform the S&P 500 since it hit its highs last month. For it to continue trading in that range might be the kind of comfort that could provide some smiles even while everything else around is crumbling, particularly if the upcoming dividend is captured, as well.

Marathon Oil (MRO) is just another of those really hard hit energy stocks that has to cause some head shaking as it is in a personal correction and then some, even after 2 days of strength. The list need not end with Marathon Oil if considering adding energy sector positions, as there is no shortage of viable candidates. FOr me, Marathon Oil is one position that I’ve longed to return to my portfolio, but do understand that there may continue to be some downward pricing pressure in oil, before the inevitable bounce higher.

FInally, how can you not at least consider taking sides in the great Apple (AAPL) saga? Whether there will be a gold mine ahead as the new products hit the stores or deep disappointment, its earnings report this week is not likely to reflect anything other than great phone sales and lagging sales in most, if not all other product lines.

The option market, however, isn’t expecting too much action, with an implied price movement of only 4.4% next week. With barely a 1% premium at a strike level right at the lower edge defined by the implied move there isn’t really any enhancement in its premiums, especially as there is a general increase in volatility buoying most option premiums.

However, the sale of puts at the lower level strike may offer the opportunity to enter a position, particularly in front of the upcoming dividend at a better price than has been seen in over 2 months, or may simply offer a decent one week return.

Traditional Stocks: Baxter International, eBay, Marathon Oil, Merck, MetLife, Walgreen

Momentum: none

Double Dip Dividend: none

Premiums Enhanced by Earnings: Apple (10/20 AM)

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

Weekend Update – September 7, 2014

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.

More and More Earnings

After last week’s deluge of 150 of the S&P 500 companies reporting their earnings this week is a relatively calm one.

For all of its gyrations last week, including the sell-off on Friday, if you simply looked at the market’s net change you would have thought that it was a quiet week as well.

The initial week of earnings season did see seem promise coming from the financial sector. Last week was a mixed one, as names such as Facebook (FB) and Amazon (AMZN) went in very different directions and the initial responses to earnings didn’t necessarily match the final result, such as in the case of NetFlix (NFLX).

While some of the sell-off on Friday may be attributed to the announcement of additional European Council sanctions against Russia and perhaps even the late in the session downgrade of stocks and bonds by Goldman Sachs (GS), earnings had gotten most of the week’s attention.

The coming week offers another opportunity to consider potential trades that can profit regardless of the direction of share price movements, as long as they stay reasonably close to the option market’s predictions of their trading range in response to those reports.

In line with my own tolerance for risk and my own definition of what constitutes a suitable reward for the risk, I prefer the consideration of trades that can return at least 1% for the sale of a weekly put option at a strike level that is below the lower boundary defined by the option market’s assessment. Obviously, everyone’s risk-reward profile differs, but I believe that consistent application or standardizing criteria by individual investors is part of a discipline that can make such trades less anxiety provoking and less tied to emotional factors.

Occasionally, I will consider the outright purchase of shares and the sale of calls, rather than the sale of puts for such trades, but that is usually the case if there is also the consideration of an upcoming ex-dividend date, such as will be the case with Phillips 66 (PSX). Additionally, doing so would most likely be done if I had no hesitancy regarding the ownership of shares. In contrast, often when I sell puts I have no real interest in owning the shares and would much prefer expiration or the ability to roll over those contracts if assignment appeared likely.

This coming week there again appear to be a number of stocks deserving attention as the reward may be well suited to the level of risk, thanks to the option premiums that are enhanced before earnings are released.

As often is the case the stocks that are most likely to be able to deliver a 1% or greater premium at a strike level outside of the implied move range are already volatile stocks, whose volatility is even greater in response to earnings. While at first glance an implied move of 12%, as is the case for Yelp (YELP) may seem unusually large, past history shows that concerns for moves of that magnitude are warranted.

Among the companies that I am considering this coming week are Anadarko (APC), Herbalife (HLF), MasterCard (MA), Mosaic (MOS), Merck (MRK), Outerwall (OUTR), Phillips 66, T-Mobile (TMUS), Twitter (TWTR) and Yelp.

These potential trades are entirely based upon what may be a discrepancies between the implied price movement and option premiums that will return the desired premium. Generally, I don’t think very much about those issues that may have relevance prior to considering a purchase of shares. The focus is entirely on numbers and whether the risk-reward proposition is appealing. Issues such as whether people are tweeting enough or whether a company is based upon a pyramid strategy can wait until the following week. Hopefully, by that time I would be freed from the position and would be less interested in those issues.

Deciding to pull the trigger is often a function of the prevailing price dynamic. My preference when selling put contracts is to do so if shares are falling in price in advance of earnings. For example, last week I did not sell puts on Facebook (FB), as its shares rose sharply prior to earnings. In that case, that represented a missed opportunity, however.

Compared to the previous week’s close of trading when the market had a sizable gain, this past Friday there were widespread losses, perhaps resulting in a different dynamic as the coming week begins its trading.

While I would rather not take ownership of shares, there must be a realization that doing so may be inevitable or may require additional actions in order to prevent that unwanted outcome, such as rolling the put option forward, if possible.

If there is a large decline in share price well beyond that lower boundary, the investor should be prepared for an extended period of needing to juggle that position in order to avoid assignment while awaiting some price recovery. I have some positions, that I’ve done so for months. The end result may be satisfactory, but the process can be draining.

The table may be used as a guide for determining which of this week’s stocks meet risk-reward parameters. Re-assessments should be made as share prices  option premiums and strike levels may change. 

While the list can be used in executing trades before the release of earnings, there may also be opportunity to consider trades following earnings. I typically like to consider those trades if a stock moved higher before earnings and then plunged afterward, if in the belief that the response was an over-reaction to the news. In such cases there may be an opportunity to sell put options whose premiums will still see some enhancement as a reflection of the strong negative sentiment taking shares lower.

Ultimately, if large price movements are either anticipated or have already occurred there is usually some additional opportunity that arises with the perceived risk at hand. If the risk isn’t realized, or if the risk is managed appropriately, the reward can be very addictive.

Weekend Update – February 9, 2014

Everything is crystal clear now.

After three straight weeks of losses to end the trading week, including deep losses the past two weeks everyone was scratching their heads to recall the last time a single month had fared so poorly.

What those mounting losses accomplished was to create a clear vision of what awaited investors as the past week was to begin.

Instead, it was nice to finish on an up note to everyone’s confusion.

When you think you are seeing things most clearly is when you should begin having doubts.

Who saw a two day 350 point gain coming, unless they had bothered to realize that this week was featuring an Employment Situation Report? The one saving grace we have is that for the past 18 months you could count on a market rally to greet the employment news, regardless of whether the news met, exceeded or fell short of expectations.

That’s clarity. It’s confusing, but it’s a rare sense of clarity that comes from being so successful in its ability to predict an outcome that itself is based upon human behavior.

As the week began with a 325 point loss in the DJIA voices started bypassing talk of a 10% correction and starting uttering thoughts of a 15-20% correction. 10% was a bygone conclusion. At that point most everyone agreed that it was very clear that we were finally being faced with the “healthy” correction that had been so long overdue.

When in the middle of that correction nothing really feels very healthy about it, but when people have such certainty about things it’s hard to imagine that they might be wrong. With further downside seen by the best and brightest we were about to get healthier than our portfolios might be able to withstand.

It was absolutely amazing how clearly everyone was able to see the future. What made things even more ominous and sustaining their view was the impending Employment Situation Report due at the end of the week. Following last month’s abysmal numbers, ostensibly related to horrid weather across the country, there wasn’t too much reason to expect much in the way of an improvement this time around. Besides, the Nikkei and Russian stock markets had just dipped below the 10% threshold that many define as a market correction and as we’re continually reminded, it’s an inter-connected world these days. It wasn’t really a question of “whether,” it was a matter of “when?”

Then there was all that talk of how high the volatility was getting, even though it had a hard time even getting to October 2013 levels, much less matching historical heights. As everyone knows, volatility comes along with declining markets so the cycle was being put in place for the only outcome possible.

After Monday’s close the future was clear. Crystal clear.

Instead, the week ended with an 0.8% gain in the S&P 500 despite that plunge on Monday and a highly significant drop in volatility. The market responded to a disappointing Employment Situation Report with what logically or even using the “good news is bad news” kind of logic should not have been the case.

Now, with a week that started by confirming the road to correction we were left with a week that supported the idea that the market is resistant to a classic correction. Instead of the near term future of the markets being crystal clear we are left beginning this coming week with more confusion than is normally the case.

If it’s true that the market needs clarity in order to propel forward this shouldn’t be the week to commit yourself. However, the only thing that’s really clear about our notions is that they’re often without basis so the only reasonable advice is to do as in all weeks – look for situational opportunities that can be exploited without regard to what is going on in the rest of the world.

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

If you’re looking for certainty, or at least a company that has taken steps to diminish uncertainty, Microsoft (MSFT) is the one. With the announcement of the appointment of Satya Nadella, an insider, to be its new CEO, shares did exactly what the experts said it wouldn’t do. Not too long ago the overwhelming consensus was that the appointment of an outsider, such as Alan Mullaly would drive shares forward, while an insider would send shares tumbling into the 20s.

Microsoft simply stayed on its path with the news of an inside candidate taking the reigns. Regardless of its critics, Microsoft’s strategy is more coherent than it gets credit for and this leadership decision was a quantum leap forward, certainly far more important than discussions of screen size. With this level of certainty also comes the certainty of a dividend and attractive option premiums, making Microsoft a perennial favorite in a covered option strategy.

The antithesis of certainty may be found in the smallest of the sectors. With the tumult in pricing and contracts being promulgated by T-Mobile (TMUS) and its rebel CEO John Legere, there’s no doubt that the margins of all wireless providers is being threatened. Verizon (VZ) has already seen its share price make an initial response to those threats and has shown resilience even in the face of a declining market, as well. Although the next ex-dividend date is still relatively far away, there is a reason this is a favorite among buy and hold investors. As long as it continues to trade in a defined range, this is a position that I wouldn’t mind holding for a while and collecting option premiums and the occasional dividend.

Lowes (LOW) is always considered an also ran in the home improvement business and some recent disappointing home sales news has trickled down to Lowes’ shares. While it does report earnings during the first week of the March 2014 option cycle, I think there is some near term opportunity at it’s current lower price to see some share appreciation in addition to collecting premiums. However, I wouldn’t mind being out of my current shares prior to its scheduled earnings report.

Among those going ex-dividend this week are Conoco Phillips (COP), International Paper (IP) and Eli Lilly (LLY). In the past month I’ve owned all three concurrently and would be willing to do so again. While International Paper has outperformed the S&P 500 since the most recent market decline two weeks ago, it has also traded fairly rangebound over the past year and is now at the mid-point of that range. That makes it at a reasonable entry point.

Conoco Phillips appears to be at a good entry point simply by virtue of a nearly 12% decline from its recent high point which includes a 5% drop since the market’s own decline. With earnings out of the way, particularly as they have been somewhat disappointing for big oil and with an end in sight for the weather that has interfered with operations, shares are poised for recovery. The premiums and dividend make it easier to wait.

Eli Lilly is down about 5% from its recent high and I believe is the next due for its turn at a little run higher as the major pharmaceutical companies often alternate with one another. With Pfizer (PFE) and Merck (MRK) having recently taken those honors, it’s time for Eli Lilly to get back in the short term lead, as it is for recent also ran Bristol Myers Squibb (BMY) that was lost to assignment this past week and needs a replacement, preferably one offering a dividend.

Zillow (Z) reports earnings this week. In its short history as a publicly traded company it has had the ability to consistently beat analyst’s estimates and then usually see shares fall as earnings were released. That kind of doubled barrel consistency warrants some consideration this week as the option market is implying an 11% move this week. While that is possible, there is still an opportunity to generate a 1% ROI for the week if the share price falls by anything less than 16%.

While I’m not entirely comfortable looking for volatility among potential new positions two that do have some appeal are Coach (COH) and Morgan Stanley (MS).

Coach is a frequent candidate for consideration and I generally like it more when it’s being maligned. After last week’s blow-out earnings report by Michael Kors (KORS) the obvious next thought becomes how their earnings are coming at the expense of Coach. While there may be truth to that and has been the conventional wisdom for nearly 2 years, Coach has been able to find a very comfortable trading range and has been able to significantly increase its dividend in each of the past 4 years in time for the second quarter distribution. It’s combination of premiums, dividends and price stability, despite occasional swings, makes it worthy of consistent consideration.

I’ve been waiting for a while for another opportunity to add shares of Morgan Stanley. Down nearly 12% in the past 3 weeks may be the right opportunity, particularly as some European stability may be at hand following the European Central Bank’s decision to continue accommodation and provide some stimulus to the continent, where Morgan Stanley has interests, particularly being subject to “net counterparty exposure.” It’s ride higher has been sustained and for those looking at such things, it’s lows have been consistently higher and higher, making it a technician’s delight. I don’t really know about such things and charts certainly aren’t known for their clarity being validated, but its option premiums do compel me as do thoughts of a dividend increase that it i increasingly in position to institute.

Finally, if you’re looking for certainty you don’t have to look any further than at Chesapeake Energy (CHK) which announced a significant decrease in upcoming capital expenditures, which sent shares tumbling on the announcement. Presumably, it takes money to make money in the gas drilling business so the news wasn’t taken very well by investors. A very significant increase in option premiums early in the week suggested that some significant news was expected and it certainly came, with some residual uncertainty remaining in this week’s premiums. For those with some daring this may represent the first challenge since the days of Aubrey McClendon and may also represent an opportunity for shareholder Carl Icahn to enter the equation in a more activist manner.

Traditional Stocks: Lowes, Microsoft, Verizon

Momentum Stocks: Chesapeake Energy, Coach, Morgan Stanley,

Double Dip Dividend: Conoco Phillips (ex-div 2/13), International Paper (ex-div 2/12), Eli Lilly (ex-div 2/12)

Premiums Enhanced by Earnings: Zillow (2/12 PM)

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

Weekend Update – November 3, 2013

Some things are just unappreciated until they’re gone.

If you can remember those heady days of 2007, it seemed as if every day we were hitting new market highs and everyone was talking about it when not busy flipping houses.

Some will make the case that is the perfect example of a bubble about to burst, similar to when a bar of gold bullion appears on the cover of TIME magazine, just in time to mark the end of a bull run.

On the other hand, when everyone is suddenly talking about perhaps currently being in a bubble it may be a good time to plan for even more of a good thing.

That’s emblematic of the confusion swirling in our current markets. Earnings are up. Better than expected by most counts, yet revenues are down. The stock market can do only one thing and so it goes higher.

In case you haven’t been paying attention, 2013 has been a year of hitting record after record. Yet the buzz is absent, although house flipping is back. Not that I go to many social events but not many are talking about how wild the market has been. That’s markedly different from 2007.

Listening to those who purport to know about human behavior and markets, that means that we are not yet in a stock market bubble and as such, the market will only go higher, yet that’s at odds with the rampant bubble speculation that is being promoted in some media.

I’m a little more cynical. I see the paucity of excitement as being reflective of investors who have come to believe that consistently higher markets are an entitlement and have subsequently lost their true value. No one seems to appreciate a new record setting close, anymore. The belief in the right to a growing portfolio is no different from the right to use a calculator on an exam. Along with that right comes the loss of ability and appreciation of that ability.

Without spellchecker, the editors at Seeking Alpha would have a hard time distinguishing me from a third grader, but spelling really isn’t something I need to due. It’s just done for me.

While many were unprepared in 2007 because they were caught up in a bubble, 2013 may be different. In 2007 the feeling was that it could only get better and better, so why exercise caution? But in 2013 the feeling may be that there is nothing unusual going on, so what is there to be cautious about?

AS markets do head higher those heights are increasingly met with ennui instead of wonder and awe. It’s barely been more than five years since we last felt the wrath of an over-extended market but I’m certain that the new daily records will be missed once they’re gone.

As a normally cautious person when it comes to investing, but not terribly willing to sacrifice returns for caution my outlook changes with frequency as new funds find their way into my account after the previous week’s assignment of options I had sold.

This past week I didn’t have as many assignments as I had expected owing to some late price drops on Friday, so I’m not as likely to go on a spending spree this coming week, as I don’t want to dig deeply into my cash reserve. This week I’m inclined to think more in terms of dividend paying stocks and relatively few higher beta names, although opportunity is situational and Monday morning’s opening bell may bring surprise action. I appreciate surprise and for the record, I appreciate every single bit of share appreciation and income that comes my way as a gift from this market.

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

I currently own shares of MetLife (MET) and have done so several times this year. MetLife reported earnings this past week. They reported a nearly $2 billion turnaround in profits, but missed estimates, despite strength in every metric. They re-affirmed that a lower interest rate environment, as might be expected with a continuation of Quantitative Easing, could impact its assets’ performance in the coming year. That was the same news that created a buying opportunity in the previous quarter, so it should not have come as too much of a surprise. What did, however come as a surprise was the announcement that MetLife would no longer be offering earnings per share guidance. According to its CEO “we will instead expand our discussion of key financial metrics and business drivers, creating a more informed view of MetLife’s future prospects.” The price drop and it’s ex-dividend date this week make it a likely candidate for using my limited funds this week.

I’ve long believed that Robert ben Mosche, CEO of AIG (AIG) was something of a saint. Coming out of comfortable retirement in Croatia to attempt an AIG rescue, he continued on his quest even while battling cancer and still found the time to re-pay AIG’s very sizeable debt to US taxpayers. Who needs that sort of thing when you can live like royalty off the Mediterranean coast?

AIG was punished after reporting earnings this past week. It’s hard to say whether the in line earnings, but slightly lower revenue was to blame for the nearly 7% drop or whether joining forces with MetLife was to blame. Not that they literally joined forces, it’s just that ben Mosche announced that AIG will no longer comment on its “aspirational goals,” which was a way of saying that they too were no longer going to provide guidance. I haven’t owned shares in 2 months and that was at a lower price point than even after the large Friday drop, but I think the opportunity has re-arrived.

Wells Fargo (WFC) goes ex-dividend this week and as much as I’ve silently prayed for its share price to drop back to levels that I last owned them, it just hasn’t worked out that way. To a large degree Wells Fargo has stayed above the various banking controversies and has deflected much of the blame and scrutiny accorded others. At some point it becomes clear that prices aren’t likely to drop significantly in the near term, so it may be time to capitulate and get back on the wagon. However, what does give me some solace is that shares have trailed the S&P 500 during the three time frames that I have been recently using, each representing a near term top of the market; May 21, August 2 and September 19, 2013.

In the world of big pharma, Merck (MRK) has shared in little of the price strength seen by some others. In fact, of late, the best Merck has been able to do to prompt its shares higher have all come on the less constructive side of the ledger. Only the announcement of workforce reductions and other cost cutting steps have been viewed positively.

But at some point a value proposition is created which isn’t necessarily tied to pipelines or other factors pertinent to long term price health. In this case, a quick 7% price drop is enough to warrant consideration of a company paying an attractive dividend and offering appealing enough option premiums to sustain interest in shares even if they stagnate while awaiting the next price catalysts. Besides, if you’re selling covered calls, there’s nothing better than share price stagnation.

What is a week without drawing comparisons between Michael Kors (KORS) and Coach (COH)? Coach has become everyone’s favorite company to disparage, although on any given day it may exchange places with Caterpillar. Kors, is of course, the challenger that has displaced Coach in the hearts of investors and shoppers. Having sold Coach puts in advance of earnings and then purchasing shares even after those expired, those were assigned this past week. However, at this price level Coach is still an appealing covered option purchase and well suited for a short term strategy, even if there is validity to the thesis that it is ceding ground to Kors.

Kors, on the other hand, is doing everything right, including entering the S&P 500. It’s hard not to acknowledge its price ascent, even after a large secondary offering. While I know nothing of fashion and have no basis by which to compare Coach and Kors, I do know that as Kors reports earnings this week the option market is implying approximately 7.5% price move in either direction. However, anything less than a 10% decline in price can still deliver a 1% ROI

Williams Companies (WMB) is one of those companies that seems to fly under the radar. Although I’ve owned shares many times there has never been a reason compelling me to do so on the basis of its business fundamentals. Instead, ownership has always been prompted by an upcoming dividend or a sudden price reversal. In this case I just had shares assigned prior to earnings, which initially saw a big spike in price and then an equally large drop, bringing it right back to the level that I have found to be a comfortable entry point.

Riverbed Technology (RVBD) reported earnings last week and I did not purchase additional shares or sell puts, as I thought I might. Too bad, because the company acquitted itself well and shares moved higher. I think that shares are just starting and while RIverbed Technology has probably been my most lucrative trading partner over the years, purely on the basis of option premiums, this time around I am unlikely to write call options on all new shares, as I think $18 is the next stop before year end, particularly if the overall market doesn’t correct.

What can anyone add to the volumes that have been said about Apple (AAPL) and Intel (INTC)? Looking for insights is not a very productive endeavor, as the only new information is likely to currently exist only as insider information. Both are on recent upswings and both have healthy dividends that get my attention because of their ex-dividend dates this week. Intel offers nothing terribly exciting other than its dividend, but has been adding to its price in a stealth fashion of late, possibly resulting in the assignment of some of my current shares that represent one of the longest of my holdings, going back to September 2012. While I have always liked Intel it hasn’t always been a good covered call stock because when shares did drop, such as after earnings, the subsequent price climbs took far too long to continually be able to collect option premiums. However, without any foreseeable near term catalysts for a significant price drop it offers some opportunities for a quick premium, dividend and perhaps share appreciation, as well.

Finally, in its short history of paying dividends Apple’s shares have predominantly moved higher after going ex-dividend, although there was one notable exception. Given the factors that may be supporting Apple’s current price levels, including pressure from activist investors and Apple’s own buybacks, I’m not overly concerned about the single historical precedence and think that the triumvirate of option premium, dividend and share appreciation makes it a good addition to even a conservative portfolio.

Traditional Stocks: AIG, Merck, Williams Companies

Momentum Stocks: Coach, Riverbed Technology

Double Dip Dividend: Apple (ex-div 11/6), Intel (ex-div 11/5), MetLife (ex-div 11/6), Wells Fargo (ex-div 11/6)

Premiums Enhanced by Earnings: Michael Kors (11/5 AM)

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

Weekend Update – September 8, 2013

Employment Situation Report, Taper, new Yahoo! (YHOO) logo, Syria.

Not a line from a new, less catchy Billy Joel song, but a transition week going from the quietude of summer, which was mostly focused on fundamentals to the event driven and emotional rest of the year when the world seems to be perennially on fire, jumping from crisis to crisis.

In a few days traffic in my part of the country returns back to its normal heinous condition as our nation’s elected officials return from a much deserved 37 day vacation that they were unable to truncate by a few days to address some outstanding issues.

Just to be clear, it’s the electorate that deserved the break, but now they’re back and we can settle into our more normal state of dysfunction, while decreasing our focus on such mundane things as earnings. For the record, I don’t get out onto the roads very much anymore, having given up gainful employment for a life of ticker watching, but it’s not as easy to escape the results of having exercised our democratic rights.

Once things get back to “normal” it will seem just like old times as we are likely to give up the relative trading calm of the past two months and re-introduce a rapidly alternating volley of ups and downs as melodrama plays out in the nation’s capital. Watching the hairpin reversal as Russian Premier Putin suggested supporting the other side of the conflict and then watching a more gradual reversal during President Obama’s somewhat somnolent press conference is more like what we have become accustomed to seeing.

This morning’s Employment Situation Report which seems perfectly timed as the gateway to next week’s return to “business as usual” neither delighted nor frightened and gave no clue as to whether the “taper” is coming sooner rather than later. The revisions to previous months gave some solace that perhaps a delay was in order.

My metric is a simple one. It was the packed parking lot of a rural Delaware Fastenal (FAST) retail outlet that I saw two weeks ago that may have been part of the announcement yesterday of improved August sales for the company that has an early and ongoing part in lots of construction and industrial applications.

With those packed parking lots at Fastenal, or at least one packed parking lot, the current conventional wisdom regarding heavy machinery may be unwarranted. I currently own shares of Caterpillar (CAT), Joy Global (JOY) and Deere (DE) and I believe that all three are fairly priced to either open new positions or add to existing ones. Their moves higher during Friday’s trading makes me less likely to take that plunge immediately, although Deere is coming off an explicable large decline on Thursday and may be most enticing.

The question may no longer be when the dreaded taper is coming but by how much and has the market already discounted its early appearance.

I think it has and the expectation is for a $10-15 Billion taper to start off the process. Any short term adverse response to the initiation of the taper would likely give way to rally mode once again if surprises are few.

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

With potential military action coming against Syria as early as September 9, 2013, timing of new purchases may be critical, as you might expect a near term market decline upon action and perhaps a relief rally afterward. My preference this week would be to tread slowly with creating new positions and perhaps focusing on sectors that may be a bit more resilient to the specter of armed conflict.

Healthcare in one such sector and I will be looking to replace assigned shares of Baxter International (BAX). The fact that Merck (MRK) will be ex-dividend this week makes that a likely choice, particularly as it has been trading in a very narrow range for the past 3 months.

Although Eli Lilly (LLY) is not ex-dividend this week, it is down about 10% from its recent high level and has some price support at about the $50 level. I think that it is a good defensive position in the event of a market that begins reacting to external events.

Retail has been a very mixed bag this earnings season but suddenly laggards like JC Penney (JCP) and even Sears Holdings (SHLD) have seen some buying support. While there is suggestion that their resurgence may come at the expense of retailers such as Macys (M), it is difficult to find fault with Macys at its current price and likely relative immunity from a Syria related market decline. Besides, it goes ex-dividend this week and offers an attractive option premium all helping to reduce risk of ownership.

The Gap (GPS) is another retailer that has been said to be at risk if some of the retail laggards start to catch-up. I’ve been waiting a while for The Gap’s share price to decline, but following a 13% drop from its recent peak, I think the time may now be here.

LuLuLemon Athletica (LULU) has been in the news this year for lots of reasons, some good and some not so good. While it may offend a portion of the shopping public by not offering an expanded selection of sizes and offending another portion of the public by having removed the defective too sheer products off the shelves, it has been a retailing success story and can be an exciting stock to own if you like that sort of thing. If you do, LuLuLemon reports earnings this week and it does have a history of explosive moves and occasionally throwing in some unexpected surprises, such as the departure of a respected CEO.

Shares still haven’t quite recovered from its most recent 20% earnings related decline. However, those who have a tolerance for risk may find good opportunity in either buying shares and selling deep in the money calls or selling deep in the money puts. For me, the most appealing action at the moment is selling $62.50 strike weekly puts that would return approximately 1.3% in the event that shares fall less than 11% upon earnings. The option market itself is expecting an approximately 9% move in either direction.

Lexmark (LXK) is a great example of a company that has re-invented itself and appears to be doing well by having done so, at least in the metric that matters to most – its share price.

About a year ago Lexmark announced that they were exiting the printing business, as if anyone knew that they had any other kind of business. With printers having become a low margin commodity and widespread reports that people were using printers far less as tablets have penetrated the market, the timing seemed opportune to find more cyan pastures. Following a significant drop in share price over the past 3 weeks Lexmark appears to be fairly priced, although there is still more downside potential following an impressive rise higher over the past six months.

While the Energy sector is always a risky play, especially during the uncertainties that may arise during conflict, a company such as Williams Cos. (WMB) may have some degree of immunity from events far away, as its natural gas operations are focused in North America. It does go ex-dividend this week and although I have two pe-existing lots at the current price, it too has traded in a narrow range providing a degree of safety while still offering very attractive returns from option premiums, dividends and potentially share appreciation, as well.

Finally, Abercrombie and Fitch is an always exciting purchase. Along with the rest of the teen retailers it has been punished this earning’s season and because of its high profile it is often used as an example of their precarious market position. While many are quick to say that Abercrombie is no longer considered “cool” by their target demographic and how fickle that audience is, my interests always revolve around short term trading opportunities and not long term prospects or liabilities. Shares are really well over-sold and there are no near term head winds. Abercrombie always offers an exceptional option premium relative to the risk and its regular price gyrations offer opportunity to escape or re-enter positions with frequency, making it an ideal covered call position for the investor with some tolerance for that kind of excitement.

Traditional Stocks: Caterpillar, Deere, Eli Lilly, The Gap

Momentum Stocks: Abercrombie and Fitch, Lexmark, Joy Global

Double Dip Dividend: Macys (ex-div 9/12), Merck (ex-div 9/12), Williams Co (ex-div 9/11)

Premiums Enhanced by Earnings: LuLuLemon (9/12 AM)

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

 

Weekend Update – August 4, 2013

To summarize: The New York Post rumors, “The Dark SIde” and the FOMC.

This was an interesting week.

It started with the always interesting CEO of Overstock.com (OSTK) congratulating Steve Cohen, the CEO of SAC Capital, on his SEC indictment and invoking a reference to Star Wars to describe Cohen’s darkness, at least in Patrick Byrne’s estimations.

It ended with The New York Post, a one time legitimate newspaper suggesting that JC Penney (JCP) had lost the support of CIT (CIT), the largest commercial lender in the apparel industry, which is lead by the charisma challenged past CEO of The NYSE (NYX) and Merrill Lynch, who reportedly knows credit risk as much as he knows outrageously expensive waiting room and office furniture.

The problem is that if CIT isn’t willing to float the money to vendors who supply JC Penney, their wares won’t find their way into stores. Consumers like their shopping trips to take place in stores that actually have merchandise.

At about 3:18 PM the carnage on JC Penney’s stock began, taking it from a gain for the day to a deep loss on very heavy volume, approximately triple that of most other days.

Lots of people lost lots of money as they fled for the doors in that 42 minute span, despite the recent stamp of approval that George Soros gave to JC Penney shares. His money may not have been smart enough in the face of yellow journalism fear induced selling.

The very next morning a JC Penney spokesperson called the New York Post article “untrue.” It would have helped if someone from CIT chimed in and set the record straight. While the volume following the denial was equally heavy, very little of the damage was undone. As an owner of shares, Thane’s charisma would have taken an incredible jump had he added clarity to the situation.

So someone is lying, but it’s very unlikely that there will ever be a price to be paid for having done so. Clearly, either the New York Post is correct or JC Penney is correct, but only the New York Post can hide behind journalistic license. In fact, it would be wholly irresponsible to accuse the article of promoting lies, rather it may have recklessly published unfounded rumors.

By the same token, if the JC Penney response misrepresents the reality and is the basis by which individuals chose not to liquidate holdings, the word “criminal” comes to my mind. I suppose that JC Penney could decide to create a “Prison within a Store” concept, if absolutely necessary, so that everyday activities aren’t interrupted.

For the conspiracy minded the publication of an article in a “reputable” newspaper in the final hour of trading, using the traditional “unnamed sources” is problematic and certainly invokes thoughts of the very short sellers demonized by Patrick Byrne in years past.

Oh, and in between was the release of the FOMC meeting minutes, which produced a big yawn, as was widely expected.

I certainly am not one to suggest that Patrick Byrne has been a fountain of rational thought, however, it does seem that the SEC could do a better job in allaying investor concerns about an unlevel playing field or attempts to manipulate markets. Equally important is a need to publicly address concerns that arise related to unusual trading activity in certain markets, particularly options, that seem to occur in advance of what would otherwise be unforeseen circumstances. Timing and magnitude may in and of themselves not indicate wrongdoing, but they may warrant acknowledgement for an investing public wary of the process. A jury victory against Fabrice Tourre for fraud is not the sort of thing that the public is really looking for to reinforce confidence in the process, as most have little to no direct interaction with Goldman Sachs (GS). They are far more concerned with mundane issues that seem to occur with frequency.

Perhaps the answer is not closer scrutiny and prosecution of more than just high profile individuals. Perhaps the answer is to let anyone say anything and on any medium, reserving the truth for earnings and other SEC mandated filings. Let the rumors flow wildly, let CEOs speak off the top of their heads even during “quiet periods” and let the investor beware. By still demanding truth in filings we would still be at least one step ahead of China.

My guess is that with a deluge of potential misinformation we will learn to simply block it all out of our own consciousness and ignore the need to have reflexive reaction due to fear or fear of missing out. In a world of rampantly flying rumors the appearance of an on-line New York Post article would likely not have out-sized impact.

Who knows, that might even prompt a return to the assessment of fundamentals and maybe even return us to a day when paradoxical thought processes no longer are used to interpret data, such that good news is actually finally interpreted as good news.

I conveniently left out the monthly Employment Situation Report that really ended the week, but as with ADP and the FOMC, expectations had already been set and reaction was muted when no surprises were in store. The real surprise was the lack of reaction to mildly disappointing numbers, perhaps indicating that we’re over the fear of the known.

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

One of last week’s earnings related selections played true to form and dropped decidedly after earnings were released. Coach (COH) rarely disappoints in its ability to display significant moves in either direction after earnings and in this case, the disappointment was just shy of the $52.50 strike price at which I had sold weekly puts. However, with the week now done and at its new lower price, I think Coach represents a good entry point for new shares. With its newest competitor, at least in the hearts of stock investors, Michael Kors (KORS) reporting earnings this week there is a chance that Coach may drop if Kors reports better than expected numbers, as the expectation will be that it had done so at Coach’s expense. For that reason I might consider waiting until Tuesday morning before deciding whether to add Coach to the portfolio.

Although I currently own two higher priced lots of its shares, I purchased additional shares of Mosaic (MOS) after the plunge last week when perhaps the least known cartel in the world was poised for a break-up. While most people understand that the first rule of Cartel Club is that no one leaves Cartel Club, apparently that came as news to at least one member. The shares that I purchased last week were assigned, but I believe that there is still quite a bit near term upside at these depressed prices. While theories abound, such as decreased fertilizer prices will lead to more purchases of heavy machinery, I’ll stick to the belief that lower fertilizer prices will lead to greater fertilizer sales and more revenue than current models might suggest.

Barclays (BCS) is emblematic of what US banks went through a few years ago. The European continent is coming to grips with the realization that greater capitalization of its banking system is needed. Barclays got punished twice last week. First for suggesting that it might initiate a secondary offering to raise cash and then actually releasing the news of an offering far larger than most had expected. Those bits of bad news may be good news for those that missed the very recent run from these same levels to nearly $20. Shares will also pay a modest dividend during the August 2013 option cycle, but not enough to chase shares just for the dividend.

Royal Dutch Shell (RDS.A) released its earnings this past Thursday and the market found nothing to commend. On the other hand the price drop was appealing to me, as it’s not every day that you see a 5% price drop in a company of this caliber. For your troubles it is also likely to be ex-dividend during the August 2013 option cycle. While there is still perhaps 8% downside to meet its 2 year low, I don’t think that will be terribly likely in the near term. Big oil has a way of thriving, especially if we’re at the brink of economic expansion.

Safeway (SWY) recently announced the divestiture of its Canadian holdings. As it did so shares surged wildly in the after hours. I remember that because it was one of the stocks that I was planning to recommend for the coming week and then thought that it was a missed opportunity. However, by the time the market opened the next morning most of the gains evaporated and its shares remained a Double Dip Dividend selection. While its shares are a bit higher than where I most recently had been assigned it still appears to be a good value proposition.

Baxter International (BAX) recently beat earnings estimates but wasn’t shown too much love from investors for its efforts. I look at it as an opportunity to repurchase shares at a price lower than I would have expected, although still higher than the $70 at which my most recent shares were assigned. In this case, with a dividend due early in September, I might consider a September 17, 2013 option contract, even though weekly and extended weekly options are available.

I currently own shares of Pfizer (PFE), Abbott Labs (ABT) and Eli Lilly (LLY) in addition to Merck (MRK), so I tread a little gingerly when considering adding either more shares of Merck or a new position in Bristol Myers Squibb (BMY), while I keep an eye of the need to remain diversified. Both of those, however, have traded well in their current price range and offer the kind of premium, dividend opportunity and liquidity that I like to see when considering covered call related purchases. As with Baxter, in the case of Merck I might consider selling September options because of the upcoming dividend.

Of course, to balance all of those wonderful healthcare related stocks, following its recent price weakness, I may be ready to add more shares of Lorillard (LO) which have recently shown some weakness. The last time its shares showed some weakness I decided to sell longer term call contracts that currently expire in September and also allow greater chance of also capturing a very healthy dividend. As with some other selections this month the September contract may have additional appeal due to the dividend and offers a way to collect a reasonable premium and perhaps some capital gains while counting the days.

Finally, Green Mountain Coffee Roasters (GMCR) is a repeat of last week’s earnings related selection. I did not sell puts in anticipation of the August 7, 2013 earnings report as I thought that I might, instead selecting Coach and Riverbed Technology (RVBD) as earnings related trades. Inexplicably, Green Mountain shares rose even higher during that past week, which would have been ideal in the event of a put sale.

However, it’s still not to late to look for a strike price that is beyond the 13% implied move and yet offers a meaningful premium. I think that “sweet spot” exists at the $62.50 strike level for the weekly put option. Even with a 20% drop the sale of puts at that level can return 1.1% for the week.

The announcement on Friday afternoon that the SEC was charging a former Green Mountain low level employee with insider trading violations was at least a nice cap to the week, especially if there’s a lot more to come.

Traditional Stocks: Barclays, Baxter International, Bristol Myers Squibb, Lorillard, Merck, Royal Dutch Shell, Safeway

Momentum Stocks: Coach, Mosaic

Double Dip Dividend: Barclays (ex-div 8/7)

Premiums Enhanced by Earnings: Green Mountain Coffee Roasters (8/7 PM)

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

 

Weekend Update – June 30, 2013

The hard part about looking for new positions this week is that memories are still fresh of barely a week ago when we got a glimpse of where prices could be.

When it comes to short term memory the part that specializes in stock prices is still functioning and it doesn’t allow me to forget that the concept of lower does still exist.

The salivating that I recall doing a week ago was not related to the maladies that accompany my short term memory deficits. Instead it was due to the significantly lower share prices.

For the briefest of moments the market was down about 6% from its May 2013 high, but just as quickly those bargains disappeared.

I continue to beat a dead horse, that is that the behavior of our current market is eerily reminiscent of 2012. Certainly we saw the same kind of quick recovery from a quick, but relatively small drop last year.

What would be much more eerie is if following the recovery the market replicated the one meaningful correction for that year which came fresh off the hooves of the recovery.

I promise to make no more horse references.

Although, there is always that possibility that we are seeing a market reminiscent of 1982, except that a similar stimulus as seen in 1982 is either lacking or has neigh been identified yet. In that case the market just keeps going higher.

I listened to a trader today or was foaming at the mouth stating how our markets can only go higher from here. He based his opinion on “multiples” saying that our current market multiple is well below the 25 times we saw back when Soviet missiles were being pointed at us.

I’ll bet you that he misses “The Gipper,” but I’ll also bet that he didn’t consider the possibility that perhaps the 25 multiple was the irrational one and that perhaps our current market multiple is appropriate, maybe even over-valued.

But even if I continue to harbor thoughts of a lower moving market, there’s always got to be some life to be found. Maybe it’s just an involuntary twitch, but it doesn’t take much to raise hope.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or Momentum categories. With earnings season set to begin July 8, 0213, there are only a handful of laggards reporting this coming week, none of which appear risk worthy (see details).

I wrote an article last week, Wintel for the Win, focusing on Intel (INTC) and Microsoft (MSFT). This week I’m again in a position to add more shares of Intel, as my most recent lots were assigned last week. Despite its price having gone up during the past week, I think that there is still more upside potential and even in a declining market it will continue to out-perform. While I rarely like to repurchase at higher prices, this is one position that warrants a little bit of chasing.

While Intel is finally positioning itself to make a move into mobile and tablets and ready to vanquish an entire new list of competitors, Texas Instruments (TXN) is a consistent performer. My only hesitancy would be related to earnings, which are scheduled to be announced on the first day of the August 2013 cycle. Texas Instruments has a habit of making large downward moves on earnings, as the market always seems to be disappointed. With the return of the availability of weekly options I may be more inclined to consider that route, although I may also consider the August options in order to capitalize somewhat on premiums enhanced by earnings anticipation.

Already owning shares of Pfizer (PFE) and Merck (MRK), I don’t often own more than one pharmaceutical company at a time. However, this week both Eli Lilly (LLY) and Abbott Labs (ABT) may join the portfolio. Their recent charts are similar, having shown some weakness, particularly in the case of Lilly. While Abbott carries some additional risk during the July 2013 option cycle because it will report earnings, it also will go ex-dividend during the cycle. However, Lilly’s larger share drop makes it more appealing to me if only considering a single purchase, although I might also consider selling an August 2013 option even though weekly contracts are available.

I always seem to find myself somewhat apologetic when considering a purchase of shares like Phillip Morris (PM). I learned to segregate business from personal considerations a long time ago, but I still have occasional qualms. But it is the continued ability of people to disregard that which is harmful that allows companies like Phillip Morris and Lorillard (LO), which I also currently own, to be the cockroaches of the market. They will survive any kind of calamity. It’s recent under-performance makes it an attractive addition to a portfolio, particularly if the market loses some ground, thereby encouraging all of those nervous smokers to sadly rekindle their habits.

The last time I purchased Walgreens (WAG) was one of the very few times in the past year or two that I didn’t immediately sell a call to cover the shares. Then, as now, shares took, what I believed to be an unwarranted large drop following the release of earnings, which I believed offered an opportunity to capture both capital gains and option premiums during a short course of share ownership. It looks as if that kind of opportunity has replicated itself after the most recent earnings release.

Among the sectors that took a little bit of a beating last week were the financials. The opportunity that I had been looking for to re-purchase shares of JP Morgan Chase (JPM) disappeared quickly and did so before I was ready to commit additional cash reserves stored up just for the occasion. While shares have recovered they are still below their recent highs. If JP Morgan was not going ex-dividend this trade shortened week, I don’t believe that I would be considering purchasing shares. However, it may offer an excellent opportunity to take advantage of some option pricing discrepancies.

I rarely use anecdotal experience as a reason to consider purchasing shares, but an upcoming ex-dividend date on Darden Restaurants (DRI) has me taking another look. I was recently in a “Seasons 52” restaurant, which was packed on a Saturday evening. I was surprised when I learned that it was owned by Darden. It was no Red Lobster. It was subsequently packed again on a Sunday evening. WHile clearly a small portion of Darden’s chains the volume of cars in their parking lots near my home is always impressive. While my channel check isn’t terribly scientific it’s recent share drop following earnings gives me reason to believe that much of the excess has already been removed from shares and that the downside risk is minimized enough for an entry at this level.

While I did consider purchasing shares of Conoco Phillips (COP) last week, I didn’t make that purchase. Instead, this week I’ve turned my attention back to its more volatile namesake, Phillips 66 (PSX) which it had spun off just a bit more than a year ago. It has been a stellar performer in that time, despite having fallen nearly 15% since its March high and 10% since the market’s own high. It fulfills my need to find those companies that have fared more poorly than the overall market but that have a demonstrated ability to withstand some short term adverse price movements.

Finally, I haven’t recommended the highly volatile silver ETN products for quite a while, even though I continue to trade them for my personal accounts. However, with the sustained movement of silver downward, I think it is time for the cycle to reverse, much as it had done earlier this year. The divergence between the performance of the two leveraged funds, ProShares UltraShort Silver ETN (ZSL) and the ProShares Ultra Silver ETN (AGQ) are as great as I have seen in recent years. I don’t think that divergence is sustainable an would consider either the sale of puts on AGQ or outright purchase of the shares and the sale of calls, but only for the very adventurous.

Traditional Stocks: Abbott Labs, Eli Lilly, Intel, Mosaic, Phillip Morris, Texas Instruments, Walgreens

Momentum Stocks: Phillips 66, ProShares UltraSilver ETN

Double Dip Dividend: Darden Restaurants (ex-div 7/8), JP Morgan (ex-div 7/2)

Premiums Enhanced by Earnings: none

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

 

Weekend Update – May 12, 2013

There’s certainly no way to deny the fact that this has been an impressive first 4 months of the year. The recently touted statistic was that after 4 months and one week the market had gone up 13%.

To put that into the perspective the statistic wanted you to have, the statistical factoid added that for all of 2012 the market was up only 7.2%. That certainly tells you not only how impressive this gain has been but how 2013 will undoubtedly leave 2012 in the dust.

What is left unmentioned is that in 2012, in a period of only 3 months and 1 week the market was up 12.9%.

What happened? Could that happen again? Those are questions asked by someone who turned cautious when the market was up less than 8% in 2013 and wasn’t adequately cautious in 2012.

SInce 1970, the S&P 500 has finished the year with gains of greater than 14% on a total of 16 occasions, so there could easily be more to come. That can easily be a justifiable perspective to hold unless you also look at the margins by which 14% was exceeded. In that event, the perspective becomes less compelling. It’s still possible to end the year substantially higher than 14%, just not as likely as such a great start might suggest.

But remember, statistics don’t mislead people. People mislead people.

There was little to no substantive news this past week as the market just continued on auto-pilot. If you owned shares of any of the stocks that had super-sized moves after earnings, such as Tesla (TSLA) or Green Mountain Coffee Roasters (GMCR), that was news enough. But for the rest of us it was quiet.

What was interesting, however, was the behavior of the market during the final hour of Thursday’s trading.

That period marked a turnaround sending the market quite a bit lower, at least based on recent standards when only higher seems to be the order of the day. Initially, the drop was ascribed to a strengthening of the dollar and further drop in gold. Those, however, had been going on for a while, having started earlier in the trading session.

What came to light and whose timing was curiously coincident with the market change in direction was a rumor of a rumor that someone from within JP Morgan (JPM) was suggesting that the Federal Reserve was ready to begin tapering its Treasury purchases, those signaling the beginning of an end to Quantitative Easing.

For the growing throng that believe that QE has been responsible for the market’s climb higher, life after QE couldn’t possibly be rosy.

First comes an errant AP Tweet, then an unconfirmed rumor of a rumor. Those incidents would seem to indicate vulnerability or at least an Achilles heel that could stand in the way of this year becoming the 17th in the list.

Easily said, but otherwise, there’s really not much else on the radar screen that appears poised to interfere with the market’s manifest destiny. Unless of course, Saturday’s Wall Street Journal report that the Federal Reserve has indeed mapped out a strategy for winding down QE, transforms rumor into potential reality.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories (see details). Additionally, as the week unwinds, I may place relatively greater emphasis on dividend paying stocks and give greater consideration to monthly contracts, in order to lock into option premiums for a longer period in the event that 2012 is the order of the day.

This week’s selections seem to have more healthcare stocks than usual. I know that healthcare may have already run its course as it was a market leader through the first 4 months of 2012, but some individual names haven’t been to the party or have recently fallen on hard times.

Amgen (AMGN) didn’t react terribly well following its recent earnings report, having fallen 6%. That’s not to say that it hadn’t enjoyed a nice gain in 2013. However, it does offer an attractive short term option premium, despite also being ex-dividend this week. That’s a combination that I like, especially when I still remain somewhat defensive in considering opening new positions.

Eli Lilly (LLY) is also trading ex-dividend this coming week. It has under-performed the S&P 500 this year, but still, a 10% gain YTD isn’t a bad four months of work. It has fallen about 7% since reporting its most recent quarter’s earnings.

Merck (MRK) isn’t joining the ex-dividend parade this week, but will do so during the June 2013 option cycle for those a little more long term oriented than I typically tend to be. However, during a period of having repositioned myself defensively, the longer term options have utility and can provide a better price cushion in the event of adverse market moves.

I’ve owned shares of Conoco Phillips (COP) only once since the spin-off of its refinery arm, Phillips 66 (PSX). It used to be a very regular part of my portfolio prior to that occasion. The parent certainly hasn’t fared as well as the child in the 15 months since Phillips 66 has traded as a public company. The 80% difference in return is glaring. But like so many stocks, I think Phillips 66 isn’t priced for a new purchase, while Conoco Phillips represents some opportunity. Additionally, though not yet announced, there should be a dividend forthcoming in the next week or two.

I don’t recall why I didn’t purchase shares of Marathon Oil (MRO) last week after a discussion of its merits, but it probably had to do with the limited buying I was doing across the board. It reported earnings last week, perhaps that was a risk factor that didn’t have commensurate reward in the option premiums offered. But this week, with that risk removed, it goes ex-dividend and the consideration begins anew.

Although I already own shares of JP Morgan, I would consider adding to that position. Regardless of what your opinion is on the issue of separating the roles of Chairman and CEO, there’s not too much disagreement that Jamie Dimon will forever be remembered as one of the supporting pillars during and in the immediate aftermath of our financial meltdown. The recent spate of diversions has kept JP Morgan from keeping pace with the S&P 500 during 2013, but I believe it is capable of cutting that gap.

Autodesk (ADSK) reports earnings this week and is down about 4% from its recent high. I often like to consider earnings trades on shares that are already down somewhat, however, shares are up quite a bit in the past 3 weeks. While the options market was implying about a 6% move upon earnings, anything less than a 7% move downward could offer a 1.1% option premium for the week’s exposure to risk.

Salesforce.com (CRM) is another of those rare companies that haven’t kept up with market lately. That’s been especially true since its recent stock split. Although it does offer a an attractive weekly premium, the challenge may lie the possibility that shares are not assigned as the May 2013 option cycle ends, because earnings are reported during the first week of the June 2013 cycle. Barring a large downward move prior to earnings, there would certainly be ample time to re-position with another weekly or even monthly option contract prior to earning’s release.

To round off my over-exposure to the technology sector, I may consider either adding more shares of Cisco (CSCO) or selling puts in advance of this week’s earning’s report. I’ve added shares in each of three successive weeks and don’t believe that Cisco’s earnings will reflect some of the woes expressed by Oracle (ORCL). My only personal concern is related to the issue of diversification, but for the moment, technology may be the sector in which to throw caution to the wind.

US Steel (X) has been one of those stocks that I’m not terribly happy about, although that really only pertains to the current lot that I hold. Along with pretty much everything in the metals complex, US Steel hasn’t fared very well the past few months. However, I think that I am ready for a resurgence in the sector and am hoping that the sector agrees with me, or at least continues to show some strength as it has this past week.

Finally, despite having owned Facebook (FB) since the IPO and currently owning two individual lots, priced at $29 and $27.17, it remains one of my favorite new stocks. Not because I can count on it going to $30, but because I can count on it staying in a reasonable pricing neighborhood and becoming a recurrent stream of option income.

Traditional Stocks: Cisco, Conoco Phillips, Merck, Salesforce.com

Momentum Stocks: Facebook, US Steel

Double Dip Dividend: Amgen (ex-div 5/14), Eli Lilly (ex-div 5/14), Marathon Oil (ex-div 5/14)

Premiums Enhanced by Earnings: Autodesk (5/16 PM)

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

 

Weekend Update – March 24, 2013

Common sense tells us that at some point there has to be some retracement following an impressive climb higher. My common sense has never been very good, so I’m beginning to question the pessimism that overtook me about 4 weeks ago.

Maybe the new version of a market plunge is simply staying at or near the same level for a few days. After all, who doesn’t believe that if you’re not moving ahead that you’re falling behind? It is all about momentum and growth. Besides, if history can be re-written by the victors, why not the rules that are based on historical observations?

During the previous 4 weeks I’ve made very few of the trades that I would have ordinarily made, constantly expecting either the sky to fall down or the floor to disappear from underneath. Of the trades, most have fallen in line with the belief that what others consider a timeless bit of advice. Investing in quality companies with reliably safe dividends may be timeless, but it can also be boring. Of course, adding in the income from selling options and it’s less so, but perhaps more importantly better positioned to cushion any potential drops in an overall market.

That makes sense to me, so there must be something flawed in the reasoning, although it did work in 2007-2009 and certainly worked in 1999-2000. I can safely say that without resorting to a re-writing of history.

Among the areas that I would like to consider adding this week are healthcare, industrials and financial sectors, having started doing so last week with Caterpillar (CAT) and Morgan Stanley (MS).

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

Deere (DE) has been unnecessarily caught in the headlights recently, as it frequently trades in parallel to other heavy machinery giants, despite Deere not having the same kind of global economic exposure. The fact that it goes ex-dividend this week and always offers a reasonable premium, even when volatility is low, makes it a good selection, especially at its current price, which is down about 8% in a time that the S&P 500 has been up 3%. That seems a bit incongruous.

State Street Bank (STT) also goes ex-dividend this week. At a time when banks with global interests are at risk due to European Union and Euro related issues, State Street is probably the lowest profile of all of our “too big to fail” banks that play with the “big boys” overseas. Despite a marked climb, particularly from mid-January, it has shown resistance to potentially damaging international events.

While State Street Bank looks appealing, I have wanted to pick up shares of JP Morgan (JPM) for the past couple of weeks as it and its one time invincible CEO and Chairman, have come under increasing scrutiny and attack. Although it doesn’t pay a dividend this week, if purchased and call options are not assigned, it does offer a better dividend to holders than State Street and will do so on April 3, 2013. Better yet, Jamie Dimon will be there to oversee the dividend as both CEO and Chairman, as the Board of Directors re-affirmed his dual role late Friday afternoon, to which shares showed no response.

If you’re looking for a poster child to represent the stock market top of 2007, then look no further than Blackstone (BX). It was even hotter than Boston Chicken of a generation earlier, and it, too, quickly left a bad after taste. Suddenly, Blackstone no longer seems irrelevant and its name is being heard more frequently as buyouts, mergers and acquisitions are returning to the marketplace, perhaps just in time for another top.

Back in the days when I had to deal with managed care health companies, I wasn’t particularly fond of them, perhaps because I was wrong in the early 1980s when I thought they would disappear as quickly as they arrived. As it turns out, it was only the managed care company on whose advisory board I served that left the American landscape for greener pastures in The Philippines. Humana, one of the early managed care companies at that time was predominantly in the business of providing health care. These days it’s divested itself of that side of the social contract and now markets and offers insurance products.

Humana (HUM) is a low volatility stock as reflected in its “beta” of 0.85 and is trading close to its two year low. The fear with Humana, as with other health care with a large Medicare population is that new reimbursement rates, which are expected to be released on April 1, 2013 will be substantially lower. Shares have already fallen more almost 20% in the past 6 weeks at a time when insurers, on the other side of the equation, have fared well.

UnitedHealth Care (UNH) is the big gorilla in the healthcare room. It has really lagged the S&P 500 ever since being add to the DJIA. However, if your objective is to find stocks upon which you can generate revenue from dividends and the sale of option premiums, you really don’t need much in the way of share performance. In fact, it may be antithetical to what you really want. UnitedHealth Group, though, doesn’t have the same degree of exposure to Medicare fees, as does Humana.

While the insurers and the health care providers battle it out between themselves and the government, there’s another component to healthcare that comes into focus for me this week. The suppliers were in the news this week as Cardinal Health (CAH) reportedly has lost its contract with Walgreens (WAG). Cardinal Health and Baxter (BAX) do not do anything terribly exciting, they just do somethings that are absolutely necessary for the provision of healthcare, both in formal settings and at home. Although also subject to Medicare reimbursement rates and certainly susceptible to pricing pressure from its partners, they are consistently reliable companies and satisfy my need to look for low beta positions. Besides their option premiums, Cardinal Health also goes ex-dividend this week.

Then again, what’s healthcare without pharmaceuticals? Merck (MRK) is another of those companies whose shares I’ve wanted to buy over the past few weeks. It’s now come down from its recent Vytorin related high and may round out purchases in the sector.

With the safe and boring out of the way, there are still a few laggard companies that have yet to report their quarterly earnings before the cycle starts all over again on April 8th. Of those, one caught my attention.

Why anyone goes into a GameStop (GME) store is beyond me. Yet, if you travel around the country you will still see the occasional Blockbuster store, as well. Yet, somehow GameStop shares tend not to suffer terribly when earnings are released, although it is very capable of making large moves at any other time. The current proposition is whether the sale of puts to derive a 2.8% ROI in the event of less than a 12% decline in share price is worthwhile.

Now that’s a challenging game and you don’t even have to leave home to play it.

Traditional Stocks: Baxter, Blackstone, JP Morgan, UnitedHealth Group

Momentum Stocks: none

Double Dip Dividend: Cardinal Health (3/27), Deere (3/26), Humana (3/26), State Street Bank (3/27)

Premiums Enhanced by Earnings: GameStop (3/28 AM)

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

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

 

Weekend Update – March 17, 2013

Many stock charts look similar lately. For those old enough to remember Alan Greenspan’s first year as Chairman of the Federal Reserve Bank, the upward slope was all that many new investors and stock brokers had known for 5 years.

You may or may not recall how that second year went for him. It was the year that the stock market re-discovered the concept of gravity and the more complex notion of negative numbers.

To hear the one time Federal Reserve Chairman intone yesterday that the market is greatly undervalued sends whatever message you would like to hear when you digest his words.

“Irrational exuberance is the last term I would use to characterize the performance at the moment.”

The key to escaping responsibility and a stain on your prognosticating ability is the phrase “at the moment.” I use that a lot myself, as any moment can end up being the inflection point. It’s just too bad that the television cameras aren’t rolling at that point.

There’s much speculation lately about the source of any new money coming into the markets. Whether it’s refugees from the bond market or those that have sat on the sidelines since being shaken out sometime in the past 5 years. I’m not certain why the answer seems so hard to ascertain, but with all of the smug talk about those investors who represent the “smart money,” you might believe that any new money at the margins would be somewhat less smart. After all, besides perhaps being late to the party, they were either in bonds or cash all of this time.

How smart is that? Well, it depends on what side of the inflection you’re on when the question is asked.

Regardless of where any new money may be coming, all such funds are faced with the same dilemma. Do you chase something that’s already left the station or do you wait for the next opportunity to come along?

In a way, if you sell calls on your positions, you’re regularly faced with those question upon assignment. If you sell lots of weekly call options the question is a frequent one.

If you believe in history repeating itself, images such as this may be of concern:

Unless of course you’re very concrete, in which case there’s still three months left to frolic in higher prices and invest with impunity.

Approaching my fourth week of negativity and seeing a decrease in option income as a result of re-investing less of the proceeds of assigned shares, something has to reach a breaking point. Since the theoretical number of consecutive days that the market could go higher is unlimited, it may make sense to temper the conviction that only negative things wait ahead, especially for those unprepared.

Granted, the “doomsday preppers” that are featured on basic cable these days may not be the best of role models, there has to be something in-between that offers a compromise.

I think that compromise is avoiding most anything that your grandfather never had to opportunity to purchase.

The week’s selections are categorized as either Traditional, Momentum, or “PEE” (see details). Although my preference is to now look for high quality, dividend paying stocks as a defensive position, sadly, there are none such going ex-dividend this week.

I don’t recall the last time I considered so many stocks at any single time from the Dow Jones Index. In a month where the first 10 trading days took us higher, of the following Dow Index stocks only one outperformed the S&P 500.

Caterpillar (CAT) is approaching one of my favorite price points for its shares. Despite no negative news, other than what may be inferred though always questionable Chinese economic data, shares have been languishing and get more appealing daily. Those other heavy machinery companies without the potential Chinese exposure have been enjoying the market climb.

Home Depot (HD) has been a favorite stock ever since I dared to compare it to Apple (AAPL) in terms of performance, at a time that Apple was hitting on all cylinders. There’s nothing terribly exciting and there’s probably very little new information that can be added about Home Depot. It simply offers safety,a decent premium and continues to hit on all cylinders even as other more flashy companies have done otherwise. Let others debate whether increased housing sales are good or bad or whether it is a better buy than Lowes (LOW). It is simply a reliable portfolio partner.

JP Morgan Chase (JPM) is no longer made of Teflon, although its share price continues to be fairly resistant. With Congressional hearings starting today and findings that JP Morgan was indifferent, at best, to the risks that it was assuming in what became known as the “London Whale Trades,” it will re-join its banking brethren who are, by and large, seeing their stocks enjoy the results of the stress tests. The increased dividend announced is a nice little touch, as well an inducement to add shares.

I rarely look at the Communication Services or Utilities sectors unless I want safety and dividends. That was a good formula early on in the process of recovering from 2007 plunge. But it may also be a good formula to protect against downwinds. Not necessarily a very exciting approach, but sleeping at night has its own merits. AT&T (T), although not going ex-dividend this week is expected to announce its ex-dividend date sometime in the April 2013 option cycle. It will be my Ambien.

Merck (MRK) was the lone Dow component company to have out-performed the S&P 500 through March 14, 2013, purely on the big bump when it received favorable news regarding its controversial Vytorin product. Recently its option premiums have started to become more compelling. I had hoped to purchase shares last week in order to capture the dividend, however, the Vytorin news disrupted that, as I chose not to chase.

Starbucks (SBUX) is a bit more expensive than I would like in order to pick up new shares, but I always prefer to get shares when it hovers near a strike price. Although your grandfather may not have been able to ever purchase shares of this company, it definitely has a business model of which he would approve. Basic and simple, while offering an addictive product worked well for tobacco companies and is equally and consistently successful at Starbucks.

The lone Momentum stock this week is Coach (COH). Having just had shares assigned at $49 and still owning some higher priced shares at $51, I rarely like to chase stocks as their prices have gone higher than their assigned price. However, I think that the worst is over for Coach and it still carries cache, despite some equivocation regarding its status in the luxury sector of retail.

I’ve had shares of Coach come in and out of my portfolio on a consistent basis ever since the first assault on its future and subsequent 10% drop in share price. It’s sometimes a little maddening how out-sized its moves are, but it does tend to gravitate back toward its pre-assault home.

Although I do want to eschew risk, there may be some earnings related trades this week that may still offer a reasonable risk-reward scenario.

With the exception of LuLu Lemon (LULU), all of the potential earnings related stocks are ones that I’ve happily owned in the past year and would be comfortable owning again. LuLu Lemon, however, is the only one of those potential plays that would fall into the Momentum category, although all are retailers or consumer discretionary companies.

Retailing based on what may turn out to be a fad is always a risky proposition and LuLu Lemon has certainly shown that it’s capable of exhibiting large price moves, both earnings related and otherwise. Someday, it may be on the wrong side of being a fad, but there’s currently no indication of that happening and impacting this current upcoming earnings release. Although it is capable of a 15% move in either direction, those a bit more daring may find the premiums associated with a 10% move appealing.

My shares of Tiffany were assigned this Friday, having been held for 181 days, as compared to just 26 days for positions opened in 2012. It’s was an interesting run, with lots of ups and downs, but its performance beat the S&P 500 for its holding period by 4.9%. Now offering weekly options, it is even more appealing to me as a casual purchase. With earnings this week and a significant recent run-up in price, put options are aggressively priced and attractive, if you don’t mind the possibility of owning shares.

Williams Sonoma (WSM) is one of those stocks for which I wished weekly options existed, especially as it offers earning related opportunities at the very beginning of a monthly cycle. It too, is very capable of 10% moves in either direction upon earnings, but as Coach, does have a tendency to return if the market reacts negatively.

The final earnings related trade is Nike (NKE). Although it is also capable of 10% moves, it doesn’t offer premiums quite as enhanced as some of the other names. However, it certainly doesn’t carry the risk of being a fad and so, even with a precipitous drop there can be reasonable expectations for a return to health. Even in the event of assignments of puts sold to capitalize on earnings, there are worse things in the world than owning shares of Nike.

Traditional Stocks: AT&T, Caterpillar, DuPont, Home Depot, JP Morgan, Merck, Starbucks

Momentum Stocks: COH

Double Dip Dividend: none

Premiums Enhanced by Earnings: LuLu Lemon (3/21 AM), Nike (3/21 PM), Tiffany (3/22 AM), Williams Sonoma (3/19 PM)

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

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