Dec172016

Weekend Update – December 18, 2016

Weekend Update Comment

 

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

Traditional Stocks: none

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

Double-Dip Dividend:  none

Premiums Enhanced by Earnings: none

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

 
 
 
 
 
 

Dec42016

Weekend Update – December 4, 2016

Weekend Update Comment

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

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

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

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

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

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

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

This week, however, everything was different.

Maybe better, too.

Or maybe, not.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Traditional Stocks: none

Momentum Stocks: Marathon Oil

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

Premiums Enhanced by Earnings: none

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

Nov252016

Weekend Update – November 27, 2016

Weekend Update Comment

For anyone who is capable of remembering the sentiment that pervaded markets less than 3 weeks ago, the continuing shattering of stock market records day after day has to come as a surprise.

For those that had the conviction of their opinions, and there were some very prominent people expecting a sell-off in the event of a Trump victory, you have to wonder whether it was worse to miss out on the rally or worse to have been so wrong while in the public eye.

As that watchful eye looked at the DJIA, S&P 500, NASDAQ 100 and Russell 2000, all ended the week closing at their all time highs.

Do you remember what happened when the FBI announced that they were looking into some emails discovered on a laptop owned by one of Hillary Clinton’s top aides? Do you then remember what happened when the all clear was then given just days ahead of the election?

The conventional wisdom was that the uncertainty associated with the unpredictability of a Trump Administration was the antithesis to what the stock market needed to move higher.

That conventional wisdom was certainly reflected in the stock market’s exaggerated movements.

Do you remember the worldwide overnight plunges when it appeared as if Donald Trump would emerge victorious?

And then a funny thing happened.

After a quick 500 point gain in the DJIA when all of those earlier convictions were thrown out the window, the market has just had a slow and steady climb higher.

Nothing spectacular over the past 10 trading days, but it reminds me a little of the 1991-1996 period for no other reason than the move was steady, but only spectacular in its totality.

Obviously, 10 days isn’t the sort of thing that trends are made of, but there is ample reason to believe that as we do hit more and more new highs we are at the beginning of a pronounced move even higher.

Unfortunately, there’s also ample experience to suggest that new highs beget second thoughts that lead to profit taking.

Sometimes those second thoughts are pronounced and sometimes those second thoughts lead to third and fourth thoughts and continued assaults on those new highs until the original scenario of even higher new highs finally becomes reality.

As we await next week’s GDP and Employment Situation Report, it will take a really significant surprise to move the FOMC off from the path they were ordained to take a full year ago, but could then never find quite the right footing.

But once they do find the right footing in just a few weeks, and it now seems that the market has fully accepted the inevitable’s arrival, we may have a period of a market driven by old fashioned fundamentals.

With earnings season just about over and without the dourness that had accompanied reports over the past few years, there’s an optimism that may be well warranted.

Higher employment, higher wages, continuing low oil prices and now growing corporate profits and you have the right mix for 2017

Add to that a newly found optimism with what a Trump administration may hold for the financial health of American businesses and for better or worse, fundamentals may be for the better.

Of course, that’s the conventional wisdom.

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

I’ve been looking for an entry back into the Blackstone Group (BX) for quite some time. One of the impediments to doing so has been the unease regarding the highly volatile dividend, whose yield kept getting more and more distanced from sanity.

That yield is still high, but no longer insane.

WHat may be a substantive issue is what the impact of a rising rate environment may have on firms such as Blackstone, that have greatly benefited from the leverage possible with exceedingly low rates.

While an increasing interest rate environment is less conducive to profitable deals, I believe that the year long wait for an interest rate increase has already burdened Blackstone shares in the anticipation.

The certainty of an increase, even if followed by further increases with similar levels of certainty, may be far more conducive to investor confidence than the past year has been.

In the meantime, Blackstone shares offer the trifecta of the possibility of continued capital appreciation, an attractive option premium and a very generous dividend.

Cisco (CSCO) recently reported earnings and topped earnings expectations, but it didn’t join the optimistic guidance party and subsequently fell about 5%.

That decline brought Cisco shares in line with the performance of the S&P 500 for 2016 and may leave it as one of a handful of quality companies not participating in the post-election rally.

AQS a result it may present as another triple threat, as does Blackstone Group.

I think that there is opportunity for capital gains on shares, as well as a reasonable call option premium. WHile its dividend isn’t as enticing as that of Blackstone Group, it’s attractive enough to consider.

In this case, I’m most likely to think in terms of a buy/write with an expiration date shortly after the ex-dividend date, which is expected sometime in early January. 

Finally, I thought this was going to be the week that I finally stopped thinking about establishing another position in Marathon Oil (MRO). 

It had been my go to position, either as a buy/write or increasingly as a short put sale for the past 7 months. I had been hoping to open a new position this past week after closing 2 other positions the week prior, but it started to break out of the range that had worked so well for me.

That is until the close of trading last week when shares fell by about 3%.

That still left Marathon Oil shares at a level higher than I would want to enter into a new position, but may put me at a crossroads between deciding that the trade is over or that it can still continue, albeit at higher levels.

For now, I would prefer to see another decline similar to the 3% that ended the week before committing new funds, but might still consider doing so in the latter part of the week if share price hovers around $16.

In the event of a sharp decline, my inclination would be to enter into a position with the sale of put options.

Whether engaging in a buy/write or selling calls, due to the volatility enhanced premiums, there may even be reason to consider rolling over the short options even in face of assignment of calls or expiration of puts.

For me, Marathon Oil has been a position worth trying to keep open and engaging in serial rollovers for as long as possible. Doing so is sometimes as simple as doing a calculation looking at the ROI that may be received even in the face of a particular level of decline in the share price.

I often like seeing situations that I can still receive a 1% ROI for a weekly position in the face of a 3% decline in shares, in the case of short calls, for example.

Just like it feels great to be right when the conventional wisdom is wrong, it also feels great to be able to turn a profit when your stock actually goes down in value, without having to find yourself mingling with those who sell stocks short.

Not that there’s anything wrong with them or the conventional wisdom.

Traditional Stocks:  Blackstone Group, Cisco

Momentum Stocks: Marathon Oil

Double-Dip Dividend: none

Premiums Enhanced by Earnings: none

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

 

 

 

 

 

Nov192016

Weekend Update – November 20, 2016

Weekend Update Comment

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

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

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

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

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

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

Funny thing about that, though.

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

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

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

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

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

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

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

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

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

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

Check, check and check.

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

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

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

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

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

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

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

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

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

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

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

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

Maybe upside, actually.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Traditional Stocks: Dow Chemical

Momentum Stocks: Marathon Oil

Double-Dip Dividend: none

Premiums Enhanced by Earnings: GameStop (11/22 PM)

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

Nov122016

Weekend Update – November 13, 2016

Weekend Update Comment

Following the past week, it should be pretty easy to know what to do when the experts chime in and compete for your attention.

You run as far and as fast as your feet can possibly take you.

It will be fascinating to walk into a physician’s waiting room about 6 months from now and pick up some seven and eight month old copies of the news magazines sprinkled around the various end tables.

I’ve always enjoyed reading those aged articles just to get a snicker over how wrong the futurists and the experts consistently demonstrate themselves to be.

Most of the time, I don’t even have an appointment or any need. I just go to do the reading and then leave when someone finally asks “Sir, have you been helped?”

From the 99% probability of a Clinton victory in the Presidential election, as put forward by the Princeton Election Consortium, or the less sanguine 60-70% probability put forward by competitor fivethirtyeight, no one of any credibility got it right.

My guess is that if these elections predictions were written by stock analysts, the probability of a Clinton victory would have been reduced to 30% the day after the election, just as price targets and ratings are so often changed after stock moving news has already done its work.

By the same token, no one of any merit guessed that the market would rally after a Trump victory.

Following the sharp declines that were very highly correlated with news of a potential second shoe to drop with the Clinton emails and then the highly correlated surge when it was revealed that there was no second shoe, everyone became an expert waiting to chime in.

I know I was, but I don’t usually need any reason nor correlation.

Clinton was headed for an easy victory and the market would at least not follow a Trump victory path into correction.

Just when everything seemed to obvious, Clinton didn’t win and the market didn’t succumb.

Unless of course new closing highs are your definition of having succumbed.

For those playing around in the futures pit or in foreign exchanges and then prone to panic or with tight trading rules, the market did succumb long enough to prove someone’s point.

The reality is everyone got everything wrong.

Not only did Trump come out victorious, but the market was in full celebratory mode, even as interest rates rocketed higher and the only indicator that has had any value in 2016, the price of West Texas Intermediate crude oil, fizzled.

With the election out of the way, the only other story that may remain for the stock  market is whether the FOMC will finally raise interest rates in 2016.

For the most part, the free markets did the FOMC’s work for it as the 10 Year Treasury Note ended the week at 2.11%, having had an extraordinary 11% climb on a single day.

While it was all good this past week, unless of course you were a Clinton supporter, especially one leaving or short the market, I’m going to have a tough time predicting what comes next, even as retailers did their best to pit a positive spin on what awaits going into the holiday season and 2017.

That’s because of the really wide dichotomy seen this week as the S&P 500 managed its 3.8% gain, while the DJIA was 5.33% higher.

Either of those were enough to make most people happy and could just as easily be a stepping off point for even more highs or could represent a slippery slope.

Common sense may have told you that the split, if it was going to materialize, should have started as soon as sentiment began to change on Wednesday, as the DJIA made a nearly 1100 point reversal from the low point in the futures to its closing level.

It waited a full day, however, but once it did the relative performance, by sector, was fascinating, as it drew a clear distinction between the America that was perceived as existing under Clinton and the America that is now being perceived to exist under Trump.

Those perceptions are not much different from predictions of what will come to be and as we all know, predictions have a funny way of turning out.

I’m not going to run far and fast this coming week, but I am going to be wary, even as I’m thankful for so many people having been so wrong about where the markets were going to head.

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

After such increases as seen last week, it’s a little difficult to want to part with cash, unless you are of the belief that once a market high is broken, it’s only a short matter of time until the ascension continues.

I’m of the mind that some of the advances seen last week, particularly in those sectors that helped to create the dichotomy, are going to be short lived.

Once we all come to the realization that even had Hillary Clinton won the Presidential election, every President still has to put on their pant suit one leg at a time.

Casting the rhetoric aside, the harshest of the campaign and its promises are not as likely to become reality overnight, as rhetoric meats reality.

I’m not one to sell specific equities short, but if there ever felt like a right time to do so it could be in the coming week and weeks.

I’ll leave that decision to others that are far more bold than I am, however.

I think that last Friday’s trading, may otherwise be where we may find ourselves for the rest of the market, as we await some kind of a decision from the FOMC and then our own reaction to what now seems so certain.

Among the positions that I may be interested in this week is Best Buy (BBY).

It reports earnings this week and even as it closed 4% lower this past Friday, it is only 5% lower than its 52 week high. It’s downgrade a week before earnings may be a case of an analyst not waiting until the horse has left the gate and I do believe that there is some serious downside risk, if using charts as your measure.

That’s because of the significant gap higher just a few months ago that took shares about 22% higher after earnings were announced. That was far higher than the option market had been predicting.

This time, the option market is predicting an almost 10% price move, but Best Buy, over the past few years has shown that it could easily surprise those price predictions.

I’m not willing to get in front of earnings, but in the event that Best Buy disappoints on earnings and guidance and does take a marked move lower, I would be interested in either selling puts or considering a covered call position, once the upcoming ex-dividend date is announced.

In the event that I do sell puts, I would still be mindful of that ex-dividend date and would consider taking assignment, if in a position to do so, rather than attempting to keep the short put position open by rolling it over to a future date.

The dividend is worth capturing and would be even more so, in the event of a significant price decline.

You probably could have predicted with some degree of certainty that this would be another week of considering Marathon Oil (MRO).

This will, however, be another week that I won’t be following my own suggestion, because I already own my limit of 3 individual lots of shares or short puts.

Had I not done the unusual last week, I would be able to follow my own recommendation.

Last week, I decided to rollover a $14.50 short put position to keep it alive and to continue generating revenue, rather than allowing it to expire.

I did so because of the continuing risk-reward proposition, even as Marathon Oil’s price will decline by $0.05 on Monday, as it goes ex-dividend.

What prompted the decision was the realization that shares could fall an additional 3% before being faced with assignment, in exchange for an additional 1.3% ROI for the week.

For me, that has been the recurring proposition for much of 2016 and while Marathon Oil is sitting near the upper end of where I might want to establish any kind of a position, I would again embrace the chance to sell puts on the shares in the event of a decline, even if only 2-3%.

One thing that has been predictable this year has been Marathon Oil’s resilience within its trading range and the ease in which the position can be managed even in the event of a large adverse price movement.

While the shares have gone virtually nowhere in the past year, it has had enough movement in absolute terms to have made it a spectacular covered option choice and until a breakout to the upside, I suspect it will continue to be a reliable performer.

Finally, given the risky nature of the other selections this week, I actually struggled with whether to consider Microsoft (MSFT) this week.

As it sits within about 3% of its all time high, the shares are ex-dividend this week and the option premiums are fairly generous, perhaps expecting some benefit accruing from a Trump Presidency.

Some of that speculation revolves around proposed tax changes that could benefit Microsoft. Whether it’s a decrease in the corporate tax rate or a tax amnesty on profits held overseas, there may be some significant benefit to Microsoft in the event of changes to the tax code.

Where Microsoft differed from some others thought to be at future advantage, such as the pharmaceutical industry, it went lower, rather than helping to create that DJIA – S&P 500 dichotomy.

It’s somnolence last week is potentially appealing, even at its already high levels, as I will have a difficult time in the coming week trusting anything that I might believe or hear.

 

Traditional Stocks:  none

Momentum Stocks: Marathon Oil

Double-Dip Dividend: Microsoft (11/15 $0.39)

Premiums Enhanced by Earnings: Best Buy (11/17 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.

 

 

 

 

 

 

 

Nov52016

Weekend Update – November 6, 2016

Weekend Update Comment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks:  Sinclair Broadcasting 

Momentum Stocks: Marathon Oil

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

Premiums Enhanced by Earnings: KORS (11/10 PM)

 

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

 

 

 

 

Oct292016

Weekend Update – October 30, 2016

Weekend Update Comment

It’s good to have certainty in all matters of life.

I think.

There’s no doubt that stock market investors like to have certainty, or at the very least they really don’t like uncertainty.

Personally, when it comes to investing and the opportunities present when pursuing the sale of options, I like that intersection between certainty and uncertainty, especially if there is a volley back and forth, but the range is well defined.

That’s because that volley gives rise to more generous option premiums even as the risk may not reflect what is being paid.

Within that context, I’ve liked 2016, other than the brief reaction served up in response to the December 2015 interest rate increase decision by the FOMC.

With 2016 coming to an end in just 2 months and after the past week of corporate earnings, it was still hard to know where the economy was standing and whether the FOMC might have better justification to finally implement another rate increase, as we’ve all been expecting for almost a year.

So far, this most recent earnings season hasn’t provided very much of a pattern of good news on top and bottom line beats and there hasn’t very much in the way of optimistic guidance being given.

What certainty was missing over the past week with regard to the direction of the economy gave way to some certainty on Friday, however.

That morning the latest GDP data was released and there was good reason to believe that the consumer was back and spending money.

More people at work coupled with higher wages for those new jobs is the combination that we’ve been patiently waiting for to have its impact on spending and it may provide more of the certainty that the FOMC members need to move forward.

More of that certainty may come as national retailers begin releasing their earnings reports the week after next. Even as Amazon (AMZN) shares fell 5% as they delivered a rare earnings miss this past week, given the backward looking GDP statistics, there may be reason to anticipate some optimistic guidance from the likes of Macy’s (M), Target (TGT) and Kohls (KSS).

Where there was also considerable certainty was that the stock market may have been spooked a bit by the idea that the upcoming Presidential election results might be changed with news of the discovery of more Presidential “wannabe” e-mails.

I’ve been voting in Presidential elections since 1972. If you had ever asked me whether the investing class would have more confidence in the election of one party over another, I would have had great certainty in the belief that a specific party was consistently favored. That has been the case even when history suggests that economic outcomes may be better with the other party in the White House.

Friday’s response to the injection of uncertainty into the electoral process was swift, but may presage an election results rally as we get ready to close out 2016 and face the increasing certainty of a rising rate environment.

That is, of course, assuming that there isn’t another shoe left to drop over the course of the next 2 weeks. Even as a resurging consumer may now be in a better position to pick up that extra shoe or two, I’m not certain that would be enough to offset the uncertainty of an unwanted surprise.

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

I don’t know whether newly employed workers, or those enjoying a higher minimum wage are going to be the one’s flocking into all of those Coach (COH) stores, although I’m pretty certain they won’t be, I’m always intrigued by Coach as earnings are to be announced.

That intrigue doesn’t extend to trying to understand Coach’s sales strategies or its competitive position in the marketplace. The intrigue is based solely on the opportunity to generate an acceptable rate of return relative to the perceived risk of share ownership.

I almost always have owned shares, on and off, over the past 10 years and have gone through many earnings reports. What Coach hasn’t been able to do over the past few years is to have predictable bounce backs following large earnings related price declines, which it had been able to consistently do earlier in the decade.

What appeals to me about Coach at earnings hasn’t changed over the past 10 years. That is the opportunity to either secure a generous premium for the sale of options or the opportunity to buy shares at what appears to be a bargain price after the occasional disappointment.

Share ownership, even during a period of slow retracement of earnings related losses can be less onerous as long as Coach is able to maintain its dividend.

As long as dividends are on the table, the only stock going ex-dividend next week that may interest me is Intel (INTC). Unlike Microsoft (MSFT) which also just announced earnings and closed at new highs, Intel hasn’t been grabbing very much attention and is coming off its near term highs.

That recent 7% decline since earnings makes entry at this level more appealing, but I don’t expect any meaningful bounce higher in the near term. If shares do stay in the $34-$36 range, I would be more than  happy with the ability to cobble together multiple option premiums and the dividend and wouldn’t mind converting the position into a longer term holding with the expectation that there will be some substantive economic expansion in 2017 that will include the technology sector.

What I like about Intel at the moment, in addition to its upcoming dividend, is that it may be headed into a period of being range-bound. If so, that represents an opportunity to serially collect option premiums. Those premiums aren’t very rich, but that is the price to be paid for a stock that is not likely to break very far out from its range even with the infusion of significant unexpected uncertainty.

While International Paper (IP) isn’t ex-dividend until the following week, it also represents an opportunity that I have frequently sought to exploit.

That is the attempt to repurchase shares that had been assigned away from me recently, but at a higher price. I don’t necessarily mind shares going up and down while in my portfolio, as long as they are actively generating some kind of income, but I much prefer if they are in someone else’s portfolio during the down cycle.

International Paper just reported earnings and it gave an earnings surprise with disappointments on both top and bottom lines. The ensuing fallout was fairly minor, however.

My concern with adding a position is that there may still be some downside to come if you’re the kind who watches chart patterns. There may not be much price support until about $42.50.

For that reason, I might wait a day or two to see if there is any additional downward risk and if there is, or if shares remain at their Friday closing level, I would consider adding shares and then selling an extended weekly option in an effort to capture the dividend and extract some additional time premium from the sale.

In the event of further downside after having made the purchase, I would be comfortable turning the International Paper position into a longer term holding, as the 4.1% dividend makes it easier to wait.

Finally, what’s a week without another consideration of a position in Marathon Oil?

The difference, though, is that this week, while I do like the opportunity offered as it announces earnings, I will not be making any trades to open a new position.

That’s because I already have 3 open lots in Marathon Oil, including two long positions and one short put position.

My limit on any position is 3 open lots and I’m a big believer in having a personal set of rules in place.

I rolled over the short put position last week to an expiration right before the following Monday’s ex-dividend date.

In the event that lot may be assigned, I would take that assignment in order to collect the dividend and in the event that it was going to expire, I would close it out and consider the purchase of shares and immediate sale of calls.

I also had a more deep in the money short put position assigned, so I’m hoping to be able to sell calls on that position to take advantage of the earnings uncertainty enhanced premiums, while still hoping to hold onto the position long enough for the dividend, even as it is only 1.5%.

With earnings this week the options market isn’t expressing very much uncertainty over its price range. The expectation is that the move will be about 6%, which isn’t very different from what it has been for much of the past few months.

Generally, when considering the sale of puts in the face of earnings I look for a strike price outside of the range implied by the options market that will return at least a 1% ROI for the weekly contract.

That won’t be available for Marathon Oil, so I would be more inclined to consider the outright purchase of shares and the sale of calls, but only after earnings and only if the shares do not surge in price.

The intent would be to open a position in advance of the ex-dividend date and I would consider the sale of a slightly longer dated call option that rather than a typical double dipping approach, would use an out of the money strike in an attempt to secure capital gains on shares and secure the dividend, while sacrificing some premium.

If you’re looking for certainty, however, the only certainty that I can offer is that I will not be making this trade.

 

Traditional Stocks:International Paper

Momentum Stocks: none

Double-Dip Dividend: Intel (11/3 $0.26)

Premiums Enhanced by Earnings: COH (11/1 AM), Marathon Oil (11/2 PM)

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

Oct222016

Weekend Update – October 23, 2016

Weekend Update Comment

This past week was the first full week of earnings for this most recent earnings season and you could be excused for wondering just how to interpret the data coming in.

The financial sector had fared well, but if you were looking for a pattern of revenue and earnings beats, or even looking for a shared sense of optimism going forward from a more diverse group of companies, you’ve been disappointed to date.

For the most part, this past week was one of mixed messages and the market really rewarded the messages that it wanted to hear and really punished when the messages didn’t hit the right notes.

With so much attention being placed on the expectation that the FOMC would have sufficient data to warrant an interest rate increase in December, you might have thought that companies would start painting a slightly more optimistic image of what awaited their businesses, perhaps based upon a building trend from the past quarter.

That optimistic guidance has yet to prevail even as some have been reporting better than expected revenues.

But no one should be surprised with the mixed messages that the market hasn’t been able to interpret and then use as a foothold to move in a sustained direction.

The mixed messages coming from those reporting just follows the wonderful example of streaming mixed messages that have been coming at us all year long from members of the Federal Reserve.

Unfortunately, good earnings and guidance from the financial sector aren’t sufficient to serve as the tide to carry others, even as they may be necessary for a broad wave of market expansion. Also unfortunate is the fact that the good fortunes, or at least the perceived good news from the likes of Netflix (NFLX) and UnitedHealth Group (UNH) aren’t the sort of things that lead and move the economy and the stock market.

That used to be what International Business Machines (IBM) did, but no more.

The messages, thus far, from the all important technology sector, have reflected the mixed messages of the past week. For the past 30 years the health of the technology sector has been critical to overall market health, but this week the picture is muddled, even as Microsoft (MSFT) hit an all time high.

While it’s easy to dismiss the individual investor class as lacking the insight and sophistication to understand the environment, the professionals in the options market certainly got things wrong this week as their expectations for the range of price movements from those reporting earnings very often grossly underestimated those ranges.

Let’s face it.

If the investing professionals really knew what they were doing or really understood market dynamics, there would be very few large price swings.

Other than a tsunami or some other natural disaster, what surprises should there really be to so drastically alter the prospects or fortunes for any S&P 500 company?

Of course, the investing professionals, who through their acumen set stock prices often predicate their expectations on the work of those other professionals. You know, the ones who come up with earnings estimates based upon their profound understanding of the companies that they so closely follow.

The coming week has lots more earnings to come and ends the week with a GDP report, as we get closer and closer to a December FOMC meeting.

If earnings do not start to buoy the market, especially as retailers get their turn in a couple of weeks, I’m concerned that the FOMC’s seeming insistence on getting one rate increase in by year’s end, could cause a strong sell-off, especially if positive guidance is being suppressed out of self interest.

What the market needs and has always needed is clarity and not mixed messages. Corporate leaders could also play their part by dropping a strategy of under-promising if they know their business trend to be in the right direction.

We could all benefit from a moratorium on mixed messages.

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

I’m not certain that I would categorize any of the recent messages coming from Wells Fargo (WFC) as being “mixed.”

Disingenuous? Perhaps.

Totally clueless as to how they would be received? Absolutely.

But given the recent events, the fall from grace hasn’t been that horrific and there may be some stability settling in, although there could be one of those unseen tsunamis ahead that even the professionals might be excused for not predicting.

The option premiums isn’t expecting much continued volatility and although that market has under-estimated some earnings volatility, it is generally fairly good.

With an upcoming dividend during the November 2016 option cycle, I think that the financial sector tide is also there to help float Wells Fargo as it seeks to right its own ship in a public fashion.

The more clear those public messages and actions will be, the better served will shareholders be and I think this is a good opportunity to capitalize on the combination of the dividend and option premium.

One message that became clear again is that content is back in vogue.

Just take a look at how Comcast (CMCSA) has performed ever since it announced that it was going to purchase the remainder of NBC-Universal from General Electric (GE).

click to enlarge)

While Comcast may not be entirely comparable to AT&T (T), it may be useful to include the latter in the chart as well, after news came of a potential takeover of content king, TIme Warner (TWX).

The initial reaction to the news sent AT&T shares down 3%.

After that price decline, I think that the only company specific price decline that may await, is if the deal, assuming that it is progressing toward completion, falls apart.

That’s because by then it will be pretty clear that the combination is a good one and unlike the disaster that was the case with the AOL combination, the corporate cultures are not entirely dissimilar.

I want to go for this ride and may very well consider longer term dated options in an effort to also capitalize on the prospect of recapturing that 3% decline.

With Saturday afternoon’s report that a deal is ready to be announced over the weekend, I would be very interested in jumping on the opportunity if AT&T opens lower to begin the week.

Finally, we all know the old saying about a broken clock. I don’t think that there’s anything similar for a broken record, but after having some Marathon Oil (MRO) puts expire last week, recommending it again is definitely becoming a broken record.

For me, that means 10 positions in the past 7 months and an eagerness to add another position in the coming week.

As often may be the case when using a covered option strategy that prefers a short term holding period, there isn’t necessarily anything about the company itself that supports or serves as a contraindication to an investment.

It’s all about the predictability of its price swings and the reward associated with the volatility.

Every now and then a stock appears that offers that combination of sharp price swings, but with the added feature of trading in a relatively narrow range.

For as long as Marathon Oil can do that, I don’t care if it’s a broken record and keep returning back to the same place.

Even though I still have a lot priced at about $28, the predominantly short term trades in 2016 on additional lots have more than offset the paper loss on that poorly timed position and afforded the opportunity to be patient.

With expiration of $14 short puts contracts last week, I would again be interested in the sale of puts, especially if Marathon Oil opens the week with some weakness.

As I mentioned in previous week, there are those little matters of upcoming earnings the following week and as of yet unannounced ex-dividend date.

Because of the earnings, if faced with a need to keep the short put position open, I generally try to sell longer term dated puts in order to get some additional protection and time, in the event of an adverse price move.

However, in this case, that might create some risk with the upcoming dividend. For that reason, I would usually prefer to take assignment of shares and then be in a position to write calls, if possible, while also trying to retain the dividend.

I do have an existing lot of $15 short puts expiring this week and expect to do exactly tat if faced with the need to roll those short puts over again.

Once earnings are done, I’m hoping that Marathon Oil spends the next 3 months continuing to be an excellent serial rollover candidate, whether through the sale of put options or as a traditional buy and write.

With it, the message hasn’t at all been mixed in 2016.

It’s mediocrity has been the stuff that dreams and profits are made of, as every broken record should sound so good.

Traditional Stocks: AT&T, Wells Fargo

Momentum Stocks: Marathon Oil

Double-Dip Dividend: none

Premiums Enhanced by Earnings: none

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

Oct152016

Weekend Update – October 16, 2016

Weekend Update Comment

As a movie a few years ago, “It’s Complicated,” starring Alec Baldwin, was a funny one that explored some aspects of life that many could relate to in one form or another.

A few weeks ago we were all surprised to learn of some new casting for the upcoming season of Saturday Night Live. But now after his successful appearances portraying Donald Trump, Alec Baldwin’s next role could very well be that of Janet Yellen.

While the Chairman of the Federal Reserve may not be as widely known as the Presidential candidate, for those that are aware of the very important role she plays in all of our lives, we could use something amusing to put events into perspective as we end so many days just shaking our heads wondering what is really going on.

Clearly, it’s complicated.

The one thing you know in life is that when you hear someone begin an explanation of anything with the qualifier “it’s complicated,” you had better be prepared to be deflated.

In the event you are paying attention to the world’s economies, deflated is not the direction anyone wants to be going.

Unlike the way it was portrayed in the movie, complications are usually not very funny, unless perhaps brought to life by Alec Baldwin.

Sometimes, “it’s complicated,” is just a way for someone to begin a long and winded rationalization in trying to explain how an endpoint was reached, especially when the route appeared to be illogical or the endpoint itself seemed to be the wrong destination.

In essence, in such cases, the hope is that you’re not smart enough to catch on or can be swayed into believing whatever it is that the story teller wants you to believe, which is often counter to your own best interests.

At other times, it’s just a diplomatic way to be told that you’re just not smart enough to understand, so don’t even bother listening and while I’m at it, why should I even be wasting my time trying to explain it to someone like you.

Well, you can take your pick when the Chairman of the Federal Reserve tells an audience at “The Elusive Recovery” conference that “it’s complicated,” if looking for a reason to explain why the FOMC has not raised interest rates in 2016.

As an investor, the degree of certainty plays a role in the decision making process and either supports confidence or erodes it. Our expectation is that what we mortals may believe is complicated is just “matter of fact” kind of material for the smartest people in the room.

What Janet Yellen said on Friday introduced a third way of interpreting what it means when someone tells you that “it’s complicated.”

Maybe the smartest in the room themselves don’t understand the dynamics of current day events.

That’s not very comforting and that doesn’t inspire too much confidence. Despite some really good news from the financial sector as earnings season began, the sense of optimism was fleeting as a sense of cluelessness came to replace it.

Still, the market is now of the strong belief that we will see an interest rate increase in December 2016 and it may be clearly signaling that while it supports an increase, it only does so when it doesn’t seem to be so near at hand.

It sort of like I accept the possibility of death when I’m 20 years old, but it doesn’t frighten me. Flash forward 50 years and you may think and act a bit differently

While Alec Baldwin may be able to make that all seem funny, as Janet Yellen or even as the Grim Reaper, it isn’t.

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

I generally do read like a broken record, but even for me this is getting a little ridiculous when I continue to pay attention to Marathon Oil (MRO).

After opening my ninth Marathon Oil position last week during 2016, I am ready for a tenth, even as last week’s position is still in my account.

The past week watched the stock market and energy prices re-establish the tethered relationship that they had maintained for much of 2016, although not quite as much in the past month or so.

Marathon Oil has been my “go to” stock for 2016, not because of anything inherently wrong or right with the company, but simply for its ability to be as resilient of a yo-yo as you can find in 2016.

What it has done is simply go up and down in big chunks, but maintained a fairly tight price range and offered a very attractive option premium at the same time, owing to those big price swings.

While option premiums tend to reflect price uncertainty, Marathon Oil has coupled that price uncertainty with range certainty.

I like that combination. That tends to give you  an advantage in the risk – benefit balance.

I don’t care too much about what the company is doing nor too much about the specific macroeconomic events that may drive the price of oil. What I care about with this position, that I also find easy to trade if needing a rollover, is how to enter into it as earnings are upcoming in just 2 weeks.

My most recent position was through the sale of a put option that I subsequently rolled over. That position, if at risk of assignment at the end of the coming week will probably be rolled over again, but I would be mindful of the  date of the upcoming dividend, which is expected sometime shortly after earnings.

Whether for that lot or any new lot in the coming week or next, I would prefer to be long shares and short calls in advance of the ex-dividend date, even as my preference would be to open another new position through the sale of puts again.

Seagate Technolgy (STX) reports earnings this week.

The option market is implying a price move of about 7%. You could potentially receive a 1% ROI for the sale of a weekly option right at a strike price defined as the lower boundary of the implied move.

That’s usually not sufficient of a reward for me relative to the risk and with Seagate Technology history has plenty of examples of price swings well in excess of 7%.

While the risk of computer hardware as a commodity has been discussed for years and Seagate Technology continually written off as a dinosaur, it survives and will likely do so for more than another earnings report.

However, after a significant run higher, you can easily make a case for an out-sized move in either direction, perhaps well in excess of 7%.

Where I would be interested is after earnings are announced and the dividend is confirmed, in the event of a considerable decline in share price.

In that event, I might be very interested in the sale of puts options.

Finally, sometimes you just wait for bad news and have to decide whether that is the time to take a stance.

With its split into two different companies in the past year, Hewlett Packard (HPQ) is no longer that complicated of a business, nor is it that interesting of a business. The split off entity, Hewlett Packard Enterprises (HPE), where Meg Whitman, CEO and Chairman of the pre-split entity, decided to relocate herself, retained the distinctions of complexity and of being interesting.

Essentially, now a hardware company in what is more or less a commodity, it announced layoffs and lowered guidance for the coming year at a time when expectations for 2017 are for a more involved consumer.

After all, if the consumer isn’t going to be participating in 2017, where is the justification for raising interest rates? Add to that how Hewlett Packard has a large consumer products base and you can see the potential problem.

Or the opportunity.

With the bad news also came news of a 7% increase in the already generous dividend, made even more generous with the past week’s price decline.

Just a week earlier, I had anticipated that my existing lot of shares was likely to be assigned from me as the October 2016 option cycle came to its end this week.

This week, I’m not overly sanguine about those prospects, but with earnings still a month away and an attractive premium befitting its very recent volatility, the 7% decline in the past week looks like a good entry point.

Although my most recent holding was for only a week and was only long enough to capture the dividend, I would be prepared for this to be a longer holding period. My existing lot of shares is now more than a year old, but I won’t mind continuing to hold onto it at this level if it can continue generating option premiums and dividends.

Sometimes, buying and inadvertently holding isn’t that interesting or complicated, but there’s nothing to laugh at when the income keeps accumulating even when the stock goes nowhere.

It really isn’t that complicated, after all.

 

Traditional Stocks: Hewlett Packard

Momentum Stocks: Marathon Oil

Double-Dip Dividend:  none

Premiums Enhanced by Earnings: Seagate Technology (10/18 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. 

Oct82016

Weekend Update – October 9, 2016

Weekend Update Comment

About a year ago at this time, we were all waiting for what would turn out to be the first interest rate increase by the FOMC in nearly 9 years.

Once that increase finally arrived at the end of 2015, we were all preparing for what we were led to believe would be a series of small such increases throughout the course of 2016.

The problem, however, that stood in the way of those increases becoming reality was the FOMC’s insistence that their decisions would be data dependent. As we all know, the data to justify an increase in interest rates just hasn’t been there ever since that first increase.

The cynics, with the advantage of hindsight, might suggest that the data wasn’t even there a year ago, but that didn’t stop the FOMC from their action, which in short order took the market to its 2016 lows.

Back when those lows were hit in February, many credit Jamie Dimon, the CEO of JP Morgan Chase (JPM) for abruptly ending the correction by making a $26 million purchase of his own company’s shares. That wasn’t a terribly large amount of money, but it probably wasn’t a coincidence that the market turned on a dime.

Maybe we still haven’t returned to your grandfather’s fundamentals, but the message of confidence, without using “other people’s money,” gave a psychological boost to the market, even as JP Morgan shares didn’t garner similar benefit at the time.

As we are now in the final quarter of the year and time is running out for an interest rate increase in 2016, it may again be JP Morgan Chase in sharp focus as it gets the next earnings season underway this coming week.

This past week’s Employment Situation Report and its revisions didn’t do very much to bolster the thought that the workforce is expanding sufficiently to create inflationary pressures. However, next Friday we could be in store for a big dosing of data and opinion from those whose words have heft.

Friday morning JP Morgan Chase announces its earnings and perhaps more importantly may offer guidance that paints a picture of an awakening consumer already begun by the recent GDP release.

Not too many economic expansions begin without the leadership of the financial sector and JP Morgan is the undisputed leader.

Afterward, we get the Retail Sales Report and forecasters are expecting a nice bounce from the disappointments of the past 2 months.

Finally, with a chance to digest those earlier bits of information and much more, Janet Yellen is the keynote speaker at the “The Elusive Recovery,” the Boston Federal Reserve’s appropriately entitled conference.

If that Friday trio isn’t enough to give a sense of an impending interest rate increase, we also will have had nearly 2 days to digest the FOMC’s monthly minutes to get an idea of just how strongly some of those increasing dissenting opinions are being held.

It’s hard to imagine that we’re not now coming to a confluence of events as the clock is ticking away to close out the year.

While the actual FOMC action still remains, what really remains to be seen is whether the market will deserve to wear big boy pants up[on the news.

The one thing that has been consistent over the past few years is that the lack of any news supporting a near term interest rate increase has been met with enthusiasm. 

What might really be met with enthusiasm as we near the end of 2016 is to stand in front of that tower, as the clock is ticking away and watch the crystal ball start moving higher instead of dropping.

Anything adding delay has been the investor’s friend, but the clock has to be ticking on that relationship, too. At some point, someone has to realize that the only way higher is to have an economy that can distinguish itself from Japan’s 20 year experience.

Of course, there’s always the chance that JP Morgan disappoints and doesn’t offer an optimistic outlook for 2017 and then we may get to do 2016 all over again.

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

I made a single opening position trade last week and it was not a good one.

Selling Pro Shares Ultra Silver ETN (AGQ) puts after a nice sized decline gave me a false sense of security that there might be opportunity in that decline. It never really occurred to me that there would be so much more to come, nor that there would be a breakdown in the British Pound, as well.

With oil breaking the $50 level again and precious metals in wild fluctuation, something is afoot, as we are still within about 2% of all time highs in the S&P 500.

While I do believe that the next 2 months may have some considerable upside potential if corporate guidance finally becomes positive, I would very much like to increase my cash reserves and am not terribly excited about adding new positions.

Still, if you live and die by income generation, it is nice to come across any opportunity that may appear to have limited downside risk separate from market risk.

Of course, I didn’t find that opportunity this past week, but would still be looking at any chance to re-establish a position in Marathon Oil (MRO).

That has been my “go to” position in 2016. While in past years I’ve had multiple such positions and really enjoyed buying and re-buying the same stocks, 2016 has been a singular story.

I was eager to repurchase shares or sell puts again on any meaningful decline, but it never came. Friday’s decline was a start in the right direction, but I would like to see those shares get closer to the $15 level.

If it does, I would again be inclined to sell puts and comfortable with that decision even if shares were to subsequently fall to about $14. There is enough liquidity in the option market to keep a short put position open by rollover if faced with a short term adverse price move and the premiums are rich enough to withstand such a move, if patience is part of your investing personality.

If faced with the need to rollover those short puts, I would also be mindful of November earnings and a November ex-dividend date. The latter comes about 2 weeks after earnings, so there could be reason to take assignment of shares and then write calls to capitalize both on the volatility associated with earnings and the potential capture of the upcoming dividend.

I’m still also interested in Blackstone Group (BX) this week. The only difference is that I like it even more following a 3% decline on the week.

As was discussed last week, the earnings report and the ex-dividend date may be concomitant or at least during the same contract expiration week near the end of the month. Just as last week, my interest in a position this week would be with a very short term focus, but I would be prepared to roll the short calls over to a date at least a week beyond the earnings and ex-dividend dates.

With a very attractive dividend that is historically subject to significant change, I would look at the possibility of Blackstone becoming a longer than intended term holding in the event of an earnings surprise, but I don’t expect the kind of bad news that would necessitate another decrease in the dividend.

In the nearly 4 years since Abbott Labs (ABT) spun off AbbVie (ABBV), there’s no doubt that the market has preferred the faster growing segment of the old Abbott Labs business. In the past 5 months, however, Abbott Labs has well out-performed both AbbVie and the S&P 500.

Both are ex-dividend this week and AbbVie has a more attractive dividend. I also do prefer its recent price action to the downside, as opposed to Abbott’s move higher.

Still, the combined premium and dividend associated with Abbott Labs looks more attractive to me, especially as Abbott Labs now offers weekly option premiums. That opinion is also influenced by the size of the AbbVie dividend, which is larger than the option pricing units. That makes it more difficult to get any meaningful subsidy of the dividend related price drop in shares by an inefficiently priced call option in the event of selling an in the money call.

Time, however, until earnings is running out more quickly on Abbott Labs, as it reports earnings the following week, whereas AbbVie doesn’t do so until the end of the month. For now, I would rather take my chances with earnings from the more staid Abbott Labs, as the more bio-pharmaceutically dependent companies have hit a recent rough patch.

Finally, at a 52 week low, Starbucks (SBUX) is looking very good to me right now. There are still about 3 weeks until both earnings and its ex-dividend dates, as it is another with nearly coincident dates.

Starbucks has been basically moribund through 2016 and has badly trailed the already moribund S&P 500 during the year, while sitting at a 52 week low.

None of that is a stirring endorsement and neither is the performance of shares after the past few earnings reports.

Expectations for Starbuck’s performance are usually high and it often does suffer after earnings, but prior to this year, Howard Schultz was consistent in his ability to convince investors that their initial interpretation of earnings was incorrect, if that reaction was a negative one.

As with Blackstone, my interest at this point is purely as a short term trade, as its recent weakness has contributed to a healthier than usual option premium. However, if faced with a need to rollover that position, I would again look at doing so with a new expiration date that may be a bit beyond earnings and the ex-dividend date.

With some anticipation that Starbucks will not disappoint on earnings this time around, if in a position to require a rollover, I would probably seek to do so with a higher strike price than was used for the initial position, in anticipation of better than expected numbers and Schultz pulling a long over due rabbit out of his hat.

It would be about time.

 

Traditional Stocks: Starbucks

Momentum Stocks: Blackstone, Marathon Oil

Double-Dip Dividend: Abbott Labs (10/12 $0.26)

Premiums Enhanced by Earnings: none

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

Oct12016

Weekend Update – October 2, 2016

Weekend Update Comment

Jim Carrey made, what was by most accounts, a truly putrid move entitled “The Number 23.”

At its heart was the “23 enigma,” which is the belief that most of life’s events and incidents are somehow related to the number 23.

For example, you liked how that new sweater fit on you? The number 23.

Need more proof? The burning of Joan of Arc? The number 23.

While those may be disputable to non-believers, this was certainly the week validating the 17 enigma.

Interestingly, the great director Alfred Hitchcock made a movie entitled “The Number 17,” which is regarded among his worst and is rarely ever screened.

This past week, however, the number 17 may have been the key to five days of indecisive trading that saw triple digit moves each day, only to see the S&P 500 end the week with a 0.2% movement.

What the past week gave us were 17 separate occasions during the week when members of the Federal Reserve gave scheduled presentations.

17 is a prime number.

The prime rate is based on the federal funds rate, which is set by the FOMC and their actions or inactions have been ruling markets for months.

Do you really need any more proof than that?

If you do not, that turns out to be very fortunate, but there’s not too much doubt that it has become a free for all in terms of getting one’s interest rate opinion out in front of as many people as possible.

The week was actually to start with fewer such scheduled speaking engagements, but it must have been difficult to resist the urge to pile on.

By mid-week, as Janet Yellen was presenting some congressional testimony, there may have been some burn-out, as the needle barely moved during her time in front of the august House Services Financial Committee.

Worn out and Federal Reserve weary investors may have taken that opportunity to return to an old friend, oil, for their investing cues.

When Janet Yellen’s testimony ended, there were then only 17 hours of trading left for the week.

The ending result was that markets moved back and forth on little real news, although the end of the week’s GDP revisions did give some tangible reason to believe that a strengthening consumer could justify an interest rate increase.

However, the market plunged on that day, following the news, casting some doubt on just how accepting investors really are of a December interest rate increase, as they had seemed to be in just the previous week.

As the week did finally come to its end in rally mode we’re left wondering what comes next, as there is absolutely no clarity, unless you delve a little bit deeper into the number 17.

What does come next is that 9 Federal Reserve members will be scheduled to speak. I probably don’t have to remind anyone that 17 divided by 2 equals 8.5, which has to be rounded up to 9.

With that much clear and little else, the entirety of the coming week may become crystallized as the Employment Situation Report is released at week’s end.

Having added to my cash reserves as the previous week came to its end, I continue to not be very anxious to part with any of that cash, but sometimes do find it hard to resist even when there’s no rational reason to move forward.

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

If you’re really looking for a wild ride, perhaps after reading that article about how rollercoasters may help kidney stones to find safe passage, you should also consider ProShares Ultra Silver ETN (AGQ).

I mentioned it a few weeks ago and its recent volatility has been stunning. It’s beta, a measure of volatility has certainly picked up greatly in the past 2 months.

That alone should frighten most away from considering a covered position, as should the compromised liquidity of the options and the wide bid – ask ranges.

But 17.

Yes, 17, as the Periodic Table designation for the element silver is Ag, which are the numbers 1 and 7.

17.

And that comes to you from someone whose initials are GA.

That’s about as rational of an explanation for why to consider a position, but if you do have the stomach for the wild ride and have discretionary cash, this position could be as unpredictable and profitable as any that  you might find, although the latter attribute could be a difficult one to attain in the event of a sustained downward movement in the underlying price of silver.

With interest rates, general commodity prices and just about everything else potentially having a bearing on the daily and longer term price of this exchange traded note, its value is eroded with time, and is therefore, not intended as a longer term holding.

By the same token, as I look at its chart, I see a recent periodicity that may portend a near term move higher.

For that reason, I might consider starting with the sale of put options, but if faced with assignment, I would take the assignment rather than attempting to roll over the puts and dealing with the liquidity and pricing related issues.

At that point, if taking assignment, those shares become a vehicle for selling calls, but I would likely sit on them a bit and only sell those calls on the event of a spike higher, even if only a daily basis spike, rather than waiting for s sustained move higher.

In contrast to the speculative nature of silver, an alternative this week could be JP Morgan Chase (JPM) which is also ex-dividend this week and led by the silver haired Jamie Dimon.

With Wells Fargo (WFC) in the cross hairs of those who could hold its shares back even as the financial sector may finally be poised to respond to the long anticipated increase in interest rates, JP Morgan could simply be a beneficiary of diverted investment dollars from those having fled Wells Fargo, but still have a need to have financial sector exposure.

When it comes to dealing with regulatory and legal scrutiny, no one has done it better than JP Morgan and Jamie Dimon in the past decade and now it’s someone else’s turn to get all of the unwanted attention.

While JP Morgan is ex-dividend this week, if considering a purchase of shares and then selling short dated call options, I would also be mindful of the fact that it reports earnings the following week.

While I expect those earnings to be good and further expect positive guidance, if faced with the need to rollover the short calls, I would likely look to do so with a longer term dated option contract, such as the November 2016 and might then also consider a higher strike price.

AS long as there’s some thought to considering adding positions in the financial sector, if one wants to be a bit more speculative, there’s always Blackstone Group (BX).

While it’s dividend is usually a moving target in terms of its amount, it continues to be at a very, very attractive yield. That dividend is expected sometime near the end of October, perhaps even coincident with its earnings report.

That may create some challenges in terms of managing the position once the precise date and timing of the ex-dividend date is known. In the meantime, I would consider its purchase and concomitant sale of calls utilizing a short term contract, but continuing to be watchful of the announcement of the ex-dividend date if faced with the need to rollover the position.

Finally, the past week saw another of my Marathon Oil (MRO) positions closed. That marked the eighth such closed lot in 2016. 

With oil having once again come to influence the market’s moves, at least in the past week, as it had done for much of 2016, I’m conflicted about wanting to see Marathon Oil make a move lower.

At this point, with just 3 months left to go for the year, I’m satisfied with my portfolios absolute and relative performance and wouldn’t be happy to see it get eroded in the event oil weakens, as it might if this past week’s OPEC agreement falls apart.

However, if it does start to re-approach the $15 level, particularly on a single large downward move, I would be very eager to once again sell puts, even if premature in calling the bottom of that decline.

While there may be downside risk with the energy sector and with Marathon Oil, the option premiums have been very attractive as those shares have repeatedly made quantum leaps and drops, making it a trader’s delight.

But you don’t have to be an active trader to capitalize on the lack of direction, as those option premiums and the liquidity in the option market for Marathon Oil contracts, has made it a relatively easy position to maintain, manage and exploit.

Even in my wildest dreams I wouldn’t expect to be able to reach 17 closed lots, but if not for Marathon Oil, I’d barely have been in double digits for the number of closed positions on the year, much less triple digits, as in past years.

 

Traditional Stocks: none

Momentum Stocks: Blackstone, Marathon Oil, ProShares Ultra Silver ETN

Double-Dip Dividend: JP Morgan Chase (10/4 $0.48)

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.

 

Sep102016

Week in Review – September 11, 2016

Week in Review Comment

Sometimes you just get blindsided and even hindsight is inadequate in explaining what just happened.

There’s very little reason to ever get hit in the face, as human instinct is to protect that vulnerable piece of anatomy.

Yet, sometimes there’s a complete absence of anticipation or lack of preparation for fast, unfolding events.

Sometimes you just get lulled into a sense of security and take your eye off events surrounding you.

Granted, sometimes your inattention helps you to avoid doing the logical thing and missing out on something wonderful, but more often than not, there is a price to be paid for inattention.

When I first started writing a blog. there was a 417 point decline in the DJIA on the third day of that blog.

That was in 2007 when 417 points actually stood for something.

This past Friday’s nearly 400 point decline was minimal, by comparison.

Back in 2007, the culprit for the decline was a nearly 9% drop in the Chinese stock market. It was easy to connect the dots and honestly, you had to see some collapse coming in that market, at that time, as most everyone was beginning to openly question the veracity, validity and credibility of economic and corporate reports coming from China.

I suppose that there was some kind of identifiable culprit this past Friday, as well, but after a very quiet and protracted period following the recovery from the “Brexit” sell-off, there was little reason to suspect that it would happen on Friday.

Sure, there were the fears of an interest rate increase being now more likely to come in just 2 weeks, but there has already been plenty of indication that investors have already accepted an increase is likely in December. Why would those few months make such a big difference in confidence?

The answers are pre-programmed.

“The market doesn’t like uncertainty,” or “investors took the opportunity for some profit taking.”

Of course, there will always be someone who can squint enough and stare at chart formations long enough to see the “obvious” warning signs in hindsight, but there was really very little reason to have seen the sell-off coming.

The march higher by the market after “Brexit” fears disappeared was orderly and we’ve gone though a nice period of stability.

Boring, perhaps, but when is stability exciting?

Perhaps it’s when you’re defenses are down and you get lulled into a state of comfort, that you’re at greatest risk for being smacked in the face.

I certainly didn’t see Friday’s decline coming, but if you do look at the recent back and forth large movements in energy and precious metals, you have to believe that there are some tectonic plates shifting, as investors see and the flee perceived opportunities in other complexes.

Living and playing near a fault line, people are still shocked when the earth rumbles and are often unprepared for the suddenness.

They also often go back to their old way of doing things after the dust settles. After all, if you believe that you live in paradise, why would you turn your back on that just because of a rumble or two?

How do you resist the ongoing reward so f a paradise that has treated you so well in the past?

The market shook on Friday and there will undoubtedly be more of those rumbles, but it’s hard to not want to go back and take your eye off the obvious.

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

Among the things that no one could possibly have seen as coming would have been the news surrounding Wells Fargo (WFC) this past week.

We do expect banks to sometimes take on strategies that walk a fine line, as there is often great reward when you walk the edge.

We also expect that there may be an occasional employee with larceny in his heart who takes advantage of whatever exists to be exploited. Sometimes, there are even small groups of employees working toward illicit ends, such as in the cult film “Office Space.”

But what we don’t expect is that there may be 5,000 employees working toward such illicit ends, opening credit accounts on behalf of unknowing consumers and certainly without their consent and only to their detriment.

We also don’t expect that such an undertaking could possibly have flown under the radar at any company. People being people, you might expect that one of those 5,000 would have made an inopportune comment that would have been overheard by a supervisor, or at least a co-worker who was not sympathetic to such a violation of trust.

Wells Fargo, for its part fired 5,000 people.

They paid a $185 million fine on a profit of about $23 billion.

That’s the rough equivalent of a miserly tip at an “Early Bird Special” and is probably less than the personnel savings over the course of a year.

Of course, there may still be another shoe to drop.

In the meantime, shares fell on Friday. However, while they fell more than others in the financial sector, the decline was right in line with the S&P 500.

If most past egregious corporate errors are any indication, the fines paid are irrelevant and recovery is ahead. Of course, if the market decides to “sell on the news” when the FOMC finally does increase interest rates, there may be yet another shoe.

In the meantime, the sell-off on Friday may offer a near term opportunity, as options premiums are reflecting increased risk, even as the financial sector may be in line to finally realize the potential that has been pegged to a rising interest rate environment.

There is no doubt that retail is challenged right now and even a vaunted retailer like Macy’s (M) is hurting and shuttering scores of stores in response to the challenges coming from the wall-less retailer behemoth.

I already own 2 lots of Macy’s and with its continued recent weakness and an upcoming ex-dividend date, see the opportunity to add even more shares.

Just as Wells Fargo and others are bound to benefit from an increasing interest rate environment, Macy’s should start benefiting from a more engaged consumer, assuming that the FOMC’s decision to raise interest rates is partially based upon evidence of that occurring.

As with banks, the retail hypothesis has been incubating for a long, long time. The expectations that both would thrive as the economy started heating up, is making many grow weary.

Still, Macy’s is making some hard choices and there should be some reward accruing to its bottom line, even as revenues will fall.

What we have seen during the most recent earnings season is that the investor is willing to over-react to any retail news, but were especially eager to reward anything resembling news that wasn’t as bad as expected or anything resembling positive guidance.

At the first hint of such positive guidance or a better than expected bottom line, a smaller and leaner Macy’s will surge.

What will probably not surge, even if a buyer comes forward, is Twitter (TWTR).

It appears as if a ceiling exists for this company that has a product that many use, but many more do not, because of a lack of understanding of its utility.

If that utility could be understood, perhaps the C-suite at Twitter could then understand how to really monetize the platform, but I’m not entirely certain they would know how to do it if the opportunity stared them in the face.

The near term question about Twitter is just how low the stock can go, as there may be a developing sense of urgency regarding its prospects under its current leadership team.

After having had a great year with Twitter in 2014, both professionally and personally, I use it far less often and trade it far less often.

I still have a very expensive lot of Twitter shares have provided no premium income for far too long, but that I am now likely to put back on the block, even at the risk of losing shares to an assignment price far below the purchase price.

However, with Twitter in sharp focus and with the possibility of a ticking clock, I am interested in adding shares and selling calls or simply selling puts.

If doing so, my intention would be to keep the trade alive and serially selling calls or puts, even if having to roll over to a longer term strike, in the event of another adverse price move.

As with just about every investment, there has to be  consideration of the risk – reward proposition. Twitter, for as far into the future as I can see, will represent significant risk, but I like the idea that there may be a finite time period before desperation really hits the leadership or the Board of Directors.

During that time, there may be multiple opportunities to capitalize on the enhanced option premiums, as long as there is still a belief that Twitter will be an appealing property for someone to own at a price not terribly far below its all time lows.

Finally, if only I could somehow erase a $28 lot of Marathon Oil (MRO) that I still own and that hasn’t produced any income for me lately, Marathon Oil would be may favorite stock.

At least for 2016, as with the assignment of some shares this past week, I’ve now owned it on 7 occasions this year.

At mid-week, even as shares were in the money, I was hoping to be able to roll the shares over, as the premium is still reflective of its volatility, but the risk-reward proposition when it is in the money can be compelling.

How often can you find a situation that even a 3-4% decline in share price could still deliver a 1% ROI for a week, during a week when there is no particular news or company related events, such as earnings, scheduled?

As the week wore on and Marathon Oil went well above my $15 strike, the reward for the rollover could no longer keep up with the opportunity costs of passing up a chance to take the assignment proceeds and plow them into something else.

But with Friday’s plunge the opportunity costs were erased. It was just that I couldn’t get the trade made, not that I didn’t want to get it made.

That, though, leads to Monday morning and I would be eager to add Marathon Oil, in some form, back into my portfolio in the event of any additional weakness.

Even if that weakness is subdued and even if there is continued downside as energy prices may continue their volatility and propensity for short term spikes and plunges, there is nice liquidity in the options and lots of opportunity to tailor a strategy using extended weekly options, if necessary.

In the event of some weakness, I may be inclined to consider the sale of puts, rather than a traditional buy/write, but that decision could be altered by a penny or two difference in the net costs.

While I still bemoan that $28 lot and still hold out some hopes of getting it to again become a contributing member of my income producing portfolio, these cheaper lots of Marathon Oil have helped to soften the pain.

While some think of the process of adding shares when they have plunged, as “throwing good money after bad,” I still think of it as “having a child to save a life.”

Traditional Stocks: Wells Fargo

Momentum Stocks: Marathon Oil, Twitter

Double-Dip Dividend: Macy’s (9/13 $0.38)

Premiums Enhanced by Earnings: none

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

Jul162016

Weekend Update – July 17, 2016

Weekend Update Comment

 

Stock market investing is all about risk and reward and sometimes you do have to stick your neck out.

There is no reward without risk.

It’s sort of like those who say that you will never understand happiness without having experienced sadness.

My preference, however, it to simply experience varying levels of happiness and to ignore anything that might detract anything from the lowest level of happiness.

I ignore lots of things, much to the consternation of those around me.

But I ignore that consternation.

The same thing isn’t really possible with investing as not only is happiness so often of a very temporary nature and fleeting, the only way to avoid risk right now is to look at bonds or your mattress and those carry lots of opportunity risk.

Also, there’s a big difference between the qualitative feel of personal happiness and the quantitative nature of investing.

In other words, instead of being a giraffe, you would have to be an ostrich, although the ostrich is actually doing something of value when their head is below ground.

So you do have to stick your neck out if your happiness is defined in the form of stock gains.

I wasn’t very happy in 2015, but am very happy with 2016, to date.

Much of that has to do with the fact that the very stocks that disappointed me in 2015 are the ones delighting in 2016, even as they still have lots to do to erase the stink of 2015.

Sitting on some substantial year to date gains comes as the market has not only hit its all time high, for the first time in over a year, but did so again and again.

The post-Brexit turnaround has been stunning.

From the lows following the swift decline after the Brexit vote was confirmed, the S&P 500 has climbed 8%. For its part, the DJIA had climbed nearly 1400 points.

All of that has come in just 13 trading sessions and there have been scant few breathers during the ascent.

That makes some technicians nervous, as they like to see those breathers establish support levels. Other technicians see the unimpeded climb higher as conformation of a breakout whose limits can’t be quantified other than in hindsight.

People like to talk about periods of risk on and risk off and if you’re sitting on cash at the moment, you are certainly faced with a question of whether to take on risk in trying to deal with your fear of missing out on the party.

With more cash being freed up in my account this past week than has been the case since 2015, I would have been ecstatic had that been the case had markets not just climbed 8%.

The challenge is what to do with that money that won’t make you feel like an idiot because of your action or like a moron because of your inaction.

With earnings season having just started in earnest during the latter half of last week, there wasn’t the kind of very guarded Brexit related guidance that I was expecting from JP Morgan (JPM) and that I thought could set the tone to bring an end to the market’s march higher.

Nor did any of the 13 speaking appearances by members of the Federal Reserve shake anyone’s confidence.

It only made sense that as very few were expecting anything good, that the market should take the occasion to move decidedly higher.

However, now as more are beginning to believe that there’s still time to get on board, I’m feeling more reluctant to stick my neck out and don’t mind the thought of burying my head in a pile of cash.

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

I don’t think there’s very much appealing about Potash Corporation of Saskatchewan (POT), other than perhaps its name being fun to say. Potash is one of those stocks that I swore that I would never buy again, as most stocks that I’ve sold for a loss are forever dead to me.

But that was almost 4 years ago and it now seems like an eternity has come and gone as Potash shares are at multi-year lows.

What I do find appealing, however, is that those shares seem to have settled in at a fairly stable price range while still offering an attractive option premium.

With earnings coming up the following week, I think that if considering opening a position, now that the ex-dividend date has recently passed, I would do so through the sale of put options.

While the premium is attractive enough to use an out of the money or near the money strike price on a weekly option contract, if faced with possible assignment of shares, I would very strongly consider rolling those puts out by a few weeks or perhaps into the monthly cycle.

At the current price, I think that much of the risk has been removed, although I might have some concern about the safety of its dividend.

What I look at with Potash, is the possibility of it being a vehicle for serial purchase or rollover, while awaiting a move to the upside.

If looking for an example of a breakout, look no further than Seagate Technology (STX). It did so last week while offering some improved guidance, but probably more importantly announcing some very large reductions in its work force.

Ultimately, I will never understand how that can be good news, but for a day here or a day there, the market looks at that kind of cost cutting as good news, even as it may portend some ominous news in the future.

However, I think that the move higher in those shares is simply the long overdue correction to some unduly large declines the previous quarter following revised downward guidance and then disappointing earnings.

While I like to see support levels established to punctuate climbs higher, with Seagate Technology getting ready to report earnings in a couple of weeks, my anticipation is that there will be further upside surprise, just as in the previous quarter there was further downside surprise.

While I would likely consider starting a position with the sale of puts, if faced with assignment, I would accept the assignment rather than rolling over those puts, as there will also be an upcoming ex-dividend date.

AS with Potash, but even more so, the safety of that dividend has to be in question. I had been of the belief that a dividend decrease had been discounted to a degree, but with the recent price surge, I think that now leaves more room to fall in the event of bad news.

If assigned shares, I would look to sell longer dated out of the money calls in an effort to take advantage of the earnings enhanced premium and the possibility of retaining the dividend, while also retaining some opportunity for price appreciation.

Starbucks (SBUX) hasn’t gotten too much attention in the past couple of weeks as it has trailed the S&P 500 in the days after the recovery from Brexit worries.

It really hasn’t recovered from its last earning’s related decline, which is fairly unusual, as it has traditionally done so quite quickly after any strong downward movement, as its CEO, Howard Schultz has typically been able to convince the world that any such declines were entirely unwarranted.

I generally consider the sale of puts in advance or after earnings, but I believe that this time around I would entertain a standard buy/write trade and with an upcoming ex-dividend date, would likely use a longer term call option.

Doing so, such as using the August 2016 monthly expiration, would offer a larger option premium, some time to ride out any price decline and a greater opportunity to capture the dividend.

Even with a decline in shares after earnings are released, there is some reasonable support at a level that could easily be  staging ground for writing new call options if the monthly options expire and there is a desire to generate additional income while waiting for price recovery.

Finally, while reading about it may get old, reveling in it never does.

Once again, this week, I’m thinking about another position in Marathon Oil(MRO).

While I already have a short call position expiring this week and just had a short put position expire last week, I don’t mind the prospect of mindless repetition.

One thing that I did do with that open short call position is something that I had done frequently at one time, but not very often in the past few years.

That is to have rolled over the short call position even when it was highly likely that the position was going to be assigned.

There is something nice about having sufficient volatility in a position to generate large premiums, but to be of a mind that the downside risk is limited or might be short lived.

That has definitely characterized Marathon Oil of late and I decided to roll over the short call position, at a point when even a 2.5% decline would still allow assignment, in return for an additional 1.3% premium.

That risk-reward proposition seemed safe enough to stick my neck out and to give up some of the security of cash.

With any decline in oil on Monday and presumably with Marathon Oil, as well, I would like to consider once again selling short put options. 

The risk, however, is that in the event of an adverse price move and the subsequent need to roll over the position, you run closer to the additional risk associated with earnings, which occur the following week.

In that event I would choose an expiration date to bypass earnings, but would also be mindful of an upcoming ex-dividend at the end of the August 2016 option cycle.

From my perspective, being short put options on the ex-dividend date is an unwarranted ceding of reward while taking on additional risk.

 

Traditional Stocks:  none

Momentum Stocks:  Marathon Oil, Potash, Seagate Technology

Double-Dip Dividend:  none

Premiums Enhanced by Earnings:  Starbucks (7/21 PM)

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

Jul92016

Weekend Update – July 13, 2016

Weekend Update Comment

 I still have a fascination with license plates and the bumper stickers put on their cars.

The license plate thing these days is more geared toward trying to decipher the message contained on someone’s vanity plates.

That often takes a combination of having a very open mind as to the intended grouping of letters and numbers and to the message.

Of course, the exercise isn’t complete until then driving past the car driver and either giving them a thumbs up or a shoulder shrug.

The bumper sticker thing is more just a question of reading and then trying to imagine what the person in the car will look like once going past them.

For example, in my experience, those with the "Choose Civility" bumper sticker tend to be very rude drivers, but they don’t look rude.

What both fascinations have in common is that as I get older, the distance that I need to get within range to be able to read the plates and the bumper stickers is increasingly getting smaller and smaller.

That brings some danger, but sometimes it’s really hard to resist.

When I say "sometimes," I mean that I can never resist and it is the reason that my wife won’t let me drive when we’re together.

I need to be within range.

But basically, when it comes to those fascinations, as my eyesight may be withering with age, i seem to be willing to take on more risk to be within range in satisfying those fascinations, even as there’s little in the way of reward.

As we are getting closer and closer to the next FOMC meeting, this past Friday’s unexpectedly strong Employment Situation Report brought us closer and closer to an all time high on the S&P 500.

The coming week has an unprecedented 13 appearances by members of the Federal Reserve and we could get some insights into what various positions will be at the FOMC’s upcoming meeting.

When Monday’s opening bell rings we will be within easy range of both the closing high and the intraday high and that may be when the danger begins.

The danger is either missing out on a market that catapults beyond its previous resistance or getting sucked in a an investor afraid of missing out on the catapulting that fails to materialize.

Getting within range, however, often also gets you closer to headwinds that conspire to ensure you keep your distance. As we are preparing to bound past the upper boundary established by the S&P 500, this week also brings the start of another earnings season.

What may make the headwinds a bit more strong than usual, despite being against a backdrop of an increased possibility of the FOMC deciding to go forward and raise interest rates, is the recent vote by Great Britain to leave the European Union.

Why that may matter is that many are expecting that companies will begin to factor the unknown that awaits them in their international businesses into the guidance and no one expects anything but dour guidance.

With JP Morgan (JPM) announcing earnings this coming week and with major operations in London, the risk is clear.

While s strong showing from the financial sector during quarterly earnings reports doesn’t necessarily translate into across the board strength in other sectors or in the market itself advancing, weakness in the financial sector rarely translates into an advancing market as earnings season unfolds.

We are within reach, but it’s not so easy to see what is actually ahead.

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

I tend to be repetitive, but sometimes there’s some value in doing so.

As a teaching tool, repetition can reinforce a lesson.

As a social or business tool, repeating a person’s name, such as to a telephone support member can create an affinity and familiarity and friends do help friends, after all.

One kind of repetition that I really, really like, is the ability to serially buy shares of a stock or to serially rollover the short calls or puts on the stock.

This week, it’s Marathon Oil (MRO) again.

I have nothing of substance to add about the company itself. My focus is entirely on the enhanced premiums it continues to offer as the price of oil bounces between $45 and $50 on a very regular basis.

While doing so, I’ve now owned Marathon Oil shares on 5 occasions in the past 100 days, for a cumulative 65 days of holding.

What that means is that in between holding periods, there is an opportunity to take recycled cash that is derived from  assignments and invest in some other premium generating position.

What I’ve especially liked about Marathon Oil is that the premium is so enriched that it can even be worthwhile to roll the short call position over if faced with assignment.

With earnings in just a few weeks, I may consider entering a position this time through the sale of puts, however. In the event that the position is in jeopardy of being exercised, I would prefer to roll the puts over.

However, if still short those puts heading into the week of earnings, I would probably look at rolling them over to an extended weekly expiration date to have a little more time for price recovery, while still enjoying some enhanced premium.

If still short those puts and approaching the ex-dividend date which will likely be later in August 2016, I would then prefer to take ownership of those shares, even as the dividend yield is only about 1.3%

While no one likes to hear grinding noises emanating from their computer’s hard drive, Seagate Technology has been grinding higher after a brutal decline following lowered guidance that continued after earnings were released.

I took the occasion of the large guidance led decline to enter a position in the erroneous assumption that the shares would be relatively immune to the same bad news.

It turns out that double jeopardy is possible with stocks, even as our personal freedoms are not put to such risk.

While earnings are approaching, I think that the near term disappointment may be over and I’m ready to consider another Seagate Technology position, again through the sale of out of the money put options.

Unlike Marathon Oil, if still in a position to be short those puts as the week of earnings approaches, I would not try to roll them over using an extended option expiration date, as the ex-dividend date is expected to be the following week.

The real wild card is whether Seagate Technology can continue paying that very rich dividend if earnings come in disappointing again.

Currently, it can’t afford to do so, but the question at hand may be just how much that had already been discounted and perhaps played a role in the price plunge of the previous quarter.

Best Buy (BBY) has neither an upcoming ex-dividend date, nor upcoming earnings.

What it has is to have found some reasonable price stability as it currently sits approximately mid-way between its 2016 high and low.

In doing so, it has been fairly impressive in that there hasn’t been terribly much to drive consumers into stores for a "must have" product that hasn’t materialized this year.

Best Buy reported better than expected earnings last quarter and I expect that it will do so again, but there is nearly 6 weeks to go until earnings and I like not being within range of those earnings at the moment, as the premiums are reflecting volatility, even as that volatility may have no real basis.

Among the nice things about Best Buy, if participating with call or put options is that there is some reasonable liquidity. That makes it much easier to be nimble and manage positions if faced with the need to rollover calls or puts.

Finally, I really like Fastenal (FAST).

To me, it represents the American economy as well as anything. It is a place for individuals and other businesses to express their confidence in going forward with various infrastructure projects and the business is fairly immune to world events.

In fact, the strong US Dollar may give it particular cost benefit these days as its supply costs may decrease.

Fastenal stands to benefit as employment increases and as average wages increase.

As it is less likely than many to complain about the impact of "Brexit" on its upcoming sales and profits, it does report earnings this week.

Fastenal has been a notoriously volatile stock when earnings are at hand. Those shares are currently sitting at about the mid-way point between the 2016 low and high.

Fastenal only offers monthly options and this happens to be the final week of the July 2016 option cycle.

The options market is implying that the price move in the coming week may be approximately 4.4%. My expectation, however, is that the range could be as big as 9%, however, I have no idea in which direction those shares might go.

My expectation is that the direction may be higher and as opposed to typically selling an out of the money put contract, in this case I would either consider selling an at the money put or executing a buy/write with a July 2016 expiration on either of those strategies.

Part of the equation is that Fastenal will also be ex-dividend sometime early in the August 2016 cycle and if faced with assignment of shares in the event of having sold puts, I would rather accept the shares than attempt to rollover the puts.

In the event of a higher price move and having elected to execute the buy/write, I might consider the opportunity to rollover the calls, even if faced with assignment to the August 2016 option, simply in an effort to milk some additional premium from the position, in the anticipation of an early exercise by the option buyer in an effort to capture the dividend.

My current open lot of Fastenal is almost 18 months old.

Prior to 2015 I would have scoffed at its 14.7% ROI to date for such a long holding period, but compared to the 5.2% return of the S&P 500, not including dividends, I’m not scoffing.

My expectation is that an additional lot of Fastenal may again wind up being a longer term holding, but as long as those dividends and premiums accrue, even if shares are relatively stagnant, the return can be better than the alternatives.

 

Traditional Stocks:  none

Momentum Stocks:  Best Buy, Marathon Oil, Seagate Technology

Double-Dip Dividend: none

Premiums Enhanced by Earnings: Fastenal (7/12 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.

 

Jul22016

Weekend Update – July 3, 2016

Weekend Update Comment

We often have an odd way of accepting someone’s decision to change their mind.

A change of mind is frequently thought to be a sign of a poorly conceived conviction or a poorly conceived initial position.

Few politicians change their minds because they know that they will be assailed for weakness or for having caved in, as opposed to having given careful and objective thought to a complex topic.

Of course, then there’s also the issue of a politician changing their mind simply for political expediency or political advantage.

That kind of distasteful behavior, although perhaps pragmatic, just stokes our cynicism.

We sometimes get upset at a child’s frequent changes of mind and want to instill some consistency that ultimately stifles ongoing thought and assessment.

At the same time, as parents, we are often faced with alternating opinions as to whether we need to be consistent in application and formulation of the rules we set or whether there should be some ability to make the rules a living entity that is responsive to events and circumstances.

When I was a child, I attended a “Yeshiva,” which is a Jewish version of a parochial school. We were taught to abide by Biblical laws, include the law regarding Kosher foods.

One day, when I was about 10 years old, I found a package of ham in our refrigerator and confronted my mother about the blatant violation of a sacred rule.

Her response was, and I remember it some 50 years later, was “if it tastes good, it’s Kosher.”

Okay, then. There are rules and there are rules that can be changed.

Of course, we completely abhor it when someone changes their mind and moves away from a position that we hold near and dear, while at the same time rejoicing when someone changes an opinion to come over to our side.

Just a few weeks ago Janet Yellen was roundly criticized for changing her tone, as many asked what could possibly have happened in the economy in the intervening weeks to have caused a tangible shift in sentiment and more importantly, policy.

Yet, when it comes to the stock market, we accept incredibly rapid and seismic shifts on a regular basis, as if there had been tangible and readily identifiable reasons for those frequent 180 degree reversals.

Many seeking on air time express their changes of opinion without ever acknowledging their previous opinion. In those cases it’s not really a change unless the viewer remembers the preceding opinion, as the interviewer is rarely going to embarrass a guest or regular contributor.

In hindsight, it is sometimes easy to offer a rationale for sudden changes in direction. However, believing the rationale or believing the claim of identifying the variable at play, may be as delusional as offering the opinion.

The one thing that won’t change is that those hindsight and revisionist pats on the back will never change.

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

A month ago I wrote about one of the available investment tools that tracks “volatility.” When discussing the potential use of iPath S&P 500 VIX Short Term Futures ETN (VXX), it was in the context of the then upcoming FOMC announcement.

As the short term trade as which it was intended, that timing was fortuitous. However, if held onto or rolled over in an effort to milk even more of the rich premium, it would not have been very fortuitous as that trade really did end along with the FOMC announcement.

The reversal of volatility was a reflection of the suddenness with which change comes to investor sentiment.

The performance of the Volatility Index at the end of last week and the every beginning of this week had lots of people confused as the typically expected association between a declining market and an increasing measure of volatility broke down, especially during those periods that large declines were reduced heading into the close.

When that does happen and it happens infrequently, it is very often a sign of a real reversal ahead and that is certainly what we saw as the market completely changed its mind when the opening bell rang on Tuesday.

With volatility again at 2 year lows, there can be reason to believe that we are at an inflection point as the market may attempt to test its handful of resistance levels below its all time closing high.

But that inflection point can also bring a move in the opposite direction, as those points are a perfect place to teeter and either catapult or plunge.

With good liquidity and an always provocative premium, even an adverse movement can be played by rolling over to a longer term expiration. I almost always prefer initiating a position through the sale of put options.

Another potential opportunity could have come heading into the “Brexit” vote, but both the outcome of the vote and the response to the result were so unpredictable, that I didn’t consider its use at that time.

But that’s ancient history by now and more predictable opportunity may again be here.

With earnings season ready to begin just a week from now, the equation must again be mindful of the kind of havoc or opportunity that can be created when a penny here or a penny there comes as a surprise.

The real surprises ahead may be related to forward guidance, as we can begin expecting lots of companies to begin moaning about the potential impact of the “Brexit” vote and currency exchange hardships.

At a time when very few companies have been winning fans over on the basis of their earnings the next few months can be especially challenging and I’m wary of selecting positions with a short term mindset if that short term crosses the date of earnings reporting.

In the case of MetLife (MET) that means almost a month before the risk of earnings is added to the continuing risk associated with plummeting interest rates.

If you could somehow go back in time to when the FOMC announced a small interest rate increase in December 2016, you would probably have a really hard time finding anyone who would have believed that 6 months later we would not have had another or even two increases and that the 10 Year Treasury would be offering a 1.46% yield.

What you would have found, as those yields went lower and lower, was that even the relative hawks within the Federal Reserve were squawking less and less as they changed their minds about where the future was going to take the US economy.

While General Electric (GE) recently lost its “Systemically Important” label and shackles by virtue of shedding significant financial assets, MetLife did it the old fashioned way.

They litigated in order to prevent such a designation and won in its battle.

It’s hard, however, to make a case that MetLife shares were rewarded in any way relative to their peers or the S&P 500 since having won that battle.

It’s that under-performance and that enhanced premium that have me interested in adding shares.

With earnings scheduled for August 3, 2016 and an as of yet unannounced ex-dividend date. Traditionally, the ex-dividend date is the same or following day of earnings, except for the 2nd Quarter report. There has typically been a one week lag when 2nd Quarter earnings are announced.

In this case, if a purchase of MetLife shares is warranted, I would consider the sale of a longer term call option, such as the August 19, 2016 and would also give strong consideration to the use of out of the money strikes, as opposed to the shorter term and near the money or in the money strikes.

While I still suffer with a much more expensive lot of Marathon Oil (MRO), that suffering has been attenuated a little bit in 2016 as I’ve now owned new shares on 4 occasions as it has been a repository of volatility.

That’s meant that it has had a really enhanced option premium as it has gone back and forth, changing its mind along the best of the undecided.

In doing so, its path has been higher and higher in 2016, yet those large moves have kept the premiums at very, very attractive levels.

After another assignment this past week, I would very much like to go for a fifth round of ownership, although this time, I think that I’m more inclined to consider the sale of out of the money put options, rather than the buy/writes that I had been doing.

I reserve the right to change my mind, though.

With West Texas Intermediate having fallen from and then rebounded back to the $50 level, Marathon Oil has followed suit and there isn’t too much reason to believe that the near term will bring an assault on the $47 level.

However, if it does, there is sufficient liquidity in the put market to be able to rollover those puts, although this is a position that I would also consider owning outright if faced with assignment of shares.

For those dealing with smaller lots the transaction costs differential between rolling over puts versus taking assignment and then writing calls may be a factor.

In either event, earnings are upcoming on August 3, 2016 and if owning shares or still short puts, I would likely consider utilizing an expiration date a little further out in order to withstand any possible large decline, but to also give an opportunity to secure the dividend, as paltry as it may currently be.

Finally, while the correlation between falling oil prices and rising airline prices has long ago withered and while there may not be much reason to suspect any sustained oil price decline, I’m ready to add more airline shares.

As with Marathon Oil, I still suffer from holding a much more expensive lot of shares of United Continental Holdings (UAL).

At the moment, it’s really hard to see anything positive at all, about the business.

Currency pressures, increasing fuel prices, worries over international travel are enough to include in a single sentence. However, as United Continental rebounds from its 2 year lows, I think that the slew of bad news and lowered expectations are mostly discounted.

Since United Continental does not offer a dividend and has been exceptionally volatile of late, this is one position that I would consider only through the sale of puts at this time. With that, however, you do have to be aware that earnings will be reported in just 2 weeks, so if still short those puts heading into earnings, there may be good reason to limit downside risk by rolling over the position to a date far enough into the future to allow some reasonable recovery time.

That time may be longer than anticipated, however, as my current lot of shares sits uncovered and had previously sold options with expirations 3 or more months into the future.

My actuary tells me that I may not live to regret that, so I do take some comfort in that knowledge.

Hopefully, he won’t change his mind.

Traditional Stocks: MetLife

Momentum Stocks: iPath S&P 500 VIX Short Term Futures ETN, Marathon Oil, United Continental Holdings

Double-Dip Dividend: none

Premiums Enhanced by Earnings: none

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