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.

 
 
 
 
 
 

Jan232015

Earnings Make The Adrenaline Flow

Daily Market Update Comment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

Dec272013

When to Take Tax Losses

Articles

(A version of this article appeared in TheStreet.com).

Each year the ritual begins just days before New Years. Even in the best of years there are bound to be some losers. Fortunately, whatever faults there may be in the tax code, the ability to attenuate investment mistakes isn’t one of them.

Since I actively sell covered options and generate taxable premiums the thought of offsetting gains is appealing, but before jumping at the opportunity a grasp of history may be helpful.
In this case looking at the strategic tax losses taken in 2012 I’m struck by one thing. Four out of the five such sales saw shares appreciate more than the S&P 500’s gain for 2013. Not only did they gain more than 29% from their sales price, but they also gained more than 29 % from their purchase prices.
Proponents of the “Dogs of the Dow Theory” would readily understand the phenomenon, as perhaps should serial covered option writers who repeatedly write options on the same stocks as their prices regularly go up and down, sometimes even to extremes, yet so often recover.
Given the choice between taking a tax credit or a stock loss or paying more taxes because of greater gains, I would take the latter every time. However, there is a preponderance of thought that losses should be taken if they reach the 10% level. For those believing in rules, this is a useful rule, if consistently practiced.

Unfortunately, there is no guarantee that proceeds from the sale of losers will be recycled into the shares of winners. Sometimes losers simply give way to other losers, as even well devised ideas don’t alwaysbear fruit. While hindsight often has me wishing I had cut my losses, the real battle is deciding whether to follow your humble or arrogant side.

The arrogant side believes it can re-invest loser proceeds and recover losses. The humble side wonders how someone so ill-advised and having made the original investment, then sat frozenly while shares plunged, could now suddenly be deft enough to select a winner, instead of inviting ruination once again.
It’s difficult to not take the humble side’s argument. Logic trumps hope.
The decision process as to whether to take tax losses begins with understanding your tax liability, which is related to your marginal tax rate. If in the highest Federal tax bracket, the short term rate on capital gains is 39.6%, although the rate varies from 10 to 39.6%.

Next comes a look at the probabilities of various outcomes and their respective benefits.
There is a 100% probability that the loss will decrease your tax liability, if you didn’t violate the Wash Sales Rules. It’s hard to beat those odds, but if you do buy and sell the same stock repeatedly, as I often do, the 30 day window on either side of your proposed trade can scuttle your strategy.
The next step takes some calculation.

As an example, I’m going to look at Petrobras (PBR) shares that I bought on January 7, 2013 at $20.05 and currently trading at $13.48. An advanced degree is mathematics is unnecessary to recognize that represents more than a 10% decline and would violate investing rules sometimes attributed to famed financier Bernard Baruch.
The potential tax benefit is based upon your tax rate and whether the holding is a short term or long term. As a short term holding the Petrobras position is entitled up to a 39.6% credit against capital gains, meaning that credit can be worth up to $2.60 per share.

While that is an objective calculation, the next step is entirely subjective and focuses on your assessment of the probability that Petrobras shares will add $2.60 to its current share price. How likely is it that shares will gain 19.3%?  While there may be be company specific challenges, as well as broader economic challenges to consider, one may be justified in wondering whether Petrobras will be this year’s Hewlett Packard (HPQ), which was a strategic tax loss that I mistakenly took last year and is up 99% YTD.

If you believe that such lightning may strike twice in a lifetime you may decide to roll the dice and surrender the certainty of a short term tax credit.

if your educated gamble is right, even at the new higher price yomay still qualify for a tax loss, however, you’ll find yourself looking at a much ower credit, if the short term loss becomes a long term loss. As a movie character once asked, “are you feeling lucky?” If you can generate some option premiums along the way you can make your own luck, but whatever the outcome, it is deferred to 2015, which may entail further opportunity costs.

Then again, just look at your losers from last year. Unlikely as it may have seemed, recovery wasn’t outside the realm of possibility.

Bottom line? Ask your tax advisor, but do so soon.

May192013

Weekend Update – May 19, 2013

Weekend Update

Shades of 1999.

I’m not certain that I understand the chorus of those claiming that our current market reminds them of 1999.

Mind you, I’m as cautious, maybe much more so than the next guy and have been awaiting some kind of a correction for more than 2 months now, but I just don’t see the resemblance.

Much has also been made of the fact that the S&P 500 is now some 12% above its 200 Day Moving Average, which in the past has been an untenable position, other than back when sock puppets were ruling the markets. Back then that metric was breached for years.

Back in 1999 and the years preceding it, the catalyst was known as the “dot com boom” or “dot com bubble” or the “dot com bust,” depending on what point you entered. The catalyst was clear, perhaps best exemplified by the ubiquitous sock puppet and the short lived PSINet Stadium, back then home to the world Champion Baltimore Ravens. The Ravens survived, perhaps even thrived since then, while PSINet was a casualty of the excesses of the era. When it was all said and done you could stuff PSINet’s assets into a sock.

During the height of that era the catalyst was thought to be in endless supply. But in the current market, what is the catalyst? Most would agree that if anything could be identified it would likely be the Federal Reserve’s policy of Quantitative Easing.

But as last week’s rumor of its upcoming end and then an article suggesting that the Federal Reserve already has an exit plan, the catalyst is clearly not thought to be unending. Unless the economy is much worse than we all believe it to be the fuel will be depleted sooner rather than later.

Now if you’re really trying to find a year comparable to this one, look no further than 1995, when the market ended the year 34% higher and never even had anything more than a 2% correction.

If llke me, and you’re selling covered options; let’s hope not.

For me, this Friday marked the end of the May 2013 option cycle. As I had been cautious since the end of February and transitioned into more monthly option contract sales, I am faced with a large number of assignments. Considering that the market has essentially been following a straight line higher having so many assignments isn’t the best of all worlds.

While I now find myself with lots of available cash the prevailing feeling that I have is that there is a need to protect those assets more than before in anticipation of some kind of correction, or at least an opportunity to discover some temporary bargains.

This week I have more than the usual number of potential new positions, however, I’m unlikely to commit wholeheartedly to their purchase, as I would like to maintain about a 40% cash position by the end of next week. I’m also more likely to continue looking at monthly option sales rather than the weekly contracts.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or the “PEE” category (see details). Additionally, although the height of earnings season has passed there may still be some more opportunity to sell well out of the money puts prior to earnings on some reasonably high profile names..

There’s no doubt that the tone for the week was changed by the down to earth utterances of David Tepper, founder of the Appaloosa Hedge Fund. He has a long term enviable record and when he speaks, which isn’t often, people do take notice. Apparently markets do, as well.

However, among the things that he mentioned was that he had lightened up on his position in Apple (AAPL). It didn’t take long for others to chime in and Apple shares fell substantially even when the market was going higher. Although I was waiting for Apple to get back into the $410-420 range, the rebound in share price following news of reduced positions by high profile investors is a good sign and I believe warrants consideration toward the purchase of new shares.

I recently purchased shares of Sunoco Logistics (SXL) in order to capture its generous and reliable dividend. My shares were assigned this past Friday, but I’m willing to repurchase, even at a higher price and even with a monthly option contract to tie me down. In the oil services business it is a lesser known entity and trades with low volume, however, it will share in sector strength, just in a much more low profile manner.

Pfizer (PFE) is another stock that was recently purchased in order to capture it’s dividend and premium and was also assigned this past week. However, it is among the “defensive” stocks that I think would fare relatively well regardless of near term market direction. Like many others that do offer weekly options, my inclination is to consider the selling monthly contracts for the time being.

While healthcare has certainly already had its time in the sun in 2013 and Bristol Myers Squibb (BMY) has had its share of that glory, after some recent tumult in its price and most recently its next day reversal of a strong move the previous day, I find the option premium appealing. However, as opposed to Pfizer, which I’m more inclined to consider a monthly option, Bristol Myers has too much downside potential for me to want to commit for longer periods.

Although I already own shares of Petrobras (PBR) and am not a big fan of adding additional shares after such a strong climb higher off of its rapidly achieved lows, Petrobras recently and quietly had quite an achievement. WHile everyone was talking about Apple’s $17 Billion bond offering that had about $50 Billion in bids, Petrobras just closed an $11 Billion offering with more than $40 Billion in bids.

Caterpillar (CAT), which I also currently own, is a perennial member of my portfolio. To a very large degree it has been recently held hostage to rumors of contraction and slowing in the Chinese economy. It has, however, shown great resiliency at the current price level and has been an excellent vehicle upon which to sell call options.

As shown in the table above, I’ve owned shares of Caterpillar on 11 separate occasions in less than a year. While the price has barely moved in that period, the net result of the in and out trades, as a result of share assignments has been a gain in excess of 35%.

The more ambiguity and equivocation there is in understanding the direction of the Chinese economy the better it has been to own Caterpillar as it just bounces around in a fairly well defined price range, making it an ideal situation for covered call strategies.

Continuing the theme of shares that I currently own, but am considering adding more shares, is British Petroleum (BP). With much of its Deepwater Horizon liabilities either behind it or well defined, shares appear to have a floor. However, in the past year, that has already been the case, as my experience with British Petroleum ownership has paralleled that of Caterpillar in both the number of separate times owning shares and in return – only better.

Of course, better than either Caterpillar or British Petroleum has been Chesapeake Energy (CHK). I’ve owned it 18 times in a year. It too has had much of its liability removed as Aubrey McClendon has left the scene and it is already well known that Chesapeake will be selling assets under a degree of duress. With its turnaround on Thursday and dip below $20, I am ready to add even more shares.

I’ve probably not owned Conoco Phillips (COP) as much as I would have imagined over the past year probably As a result of owning British Petroleum and Chesapeake Energy so often. Shares do go ex-dividend this week which always adds to the appeal, particularly when I’m in a defensive mode.

Salesforce.com (CRM) was a recommendation last week. I did make that purchase and subsequently had shares assigned. This week it reports earnings and as many of the earnings related trades that I prefer, it offers what I believe to be a good option premium even in the event of a large downward move. In this case a 1% return for the week may be achieved if share price doesn’t exceed 8%

Sears Holdings (SHLD) always seems like a ghost town when I enter one of its stores, although perhaps a moment of introspection would indicate that I drive shoppers away. I’m aware of other story lines revolving around Sears and its real estate holdings, but tend not to think in terms of what has been playing out a s a very, very long term potential. Instead, I like Sears as a hopefully quick earnings trade.

In a week that saw beautiful price action from Macys (M), Kohls (KSS) and others, perhaps even Sears can pull out good numbers and even provide some positive guidance. However, what appeals to me is a put sale approximately 8% below Friday’s close that could offer a 4% ROI for the month or shorter.

Another retailer, The Gap (GPS), has certainly been an example of the ability to arise from the ashes and how a brand can be revitalized. Along with it, so too can its share price. The Gap reports earnings this week and has already had an impressive price run. As opposed to most other earnings related trades, I’m not looking for a significant downward move and the market isn’t expecting such a move either. Based on some of the strong retail earnings announced this past week I think The Gap may be an outright purchase, but I would be more likely to look at a weekly option sale and hope for quick assignment of shares.

TIVO (TIVO) is one of those technologies that I’ve never adopted. Maybe that’s because I never leave the house and the television is always on and I rarely see a need to change the station. But here, too, I believe TIVO offers a good short term opportunity even if shares go down as much as 20% following Monday’s earnings release. In the event that shares go appreciably higher, it is the ideal kind of earnings trade, in that coming during the first day of a monthly option contract, it could likely be quickly closed out and the money then used for another investment vehicle.

Om the other hand, Dunkin Brands (DNKN) is definitely one of those technologies that I’ve adopted, especially when having lived in New England. Fast forward 20 years and they are now everywhere in the Mid-Atlantic and spreading across the country as their new offerings also spread waists around the country. Going ex-dividend this coming week and offering a nice monthly option premium, I may bite at more than a jelly donut. However, it is trading at the upper end of its recent price range, like all too many other stocks.

Finally, Carnival (CCL) hasn’t exactly been the recipient of much good news lately. Although it’s up from its recent woes and lows. It does report earnings at the end of the June 2013 option cycle, but it also goes ex-dividend in the first week of the cycle, in addition to a offering a reasonable option premium

Traditional Stocks: Bristol Myers, Caterpillar, Pfizer, Sunoco Logistics

Momentum Stocks: Apple, Chesapeake Energy, Petrobras

Double Dip Dividend: Carnival Line (ex-div 5/22), Conoco Phillips (ex-div 5/22), Dunkin Brands (ex-div 5/23)

Premiums Enhanced by Earnings: Salesforce.com (5/23 PM), Sears Holdings (5/23 AM), The Gap (5/23 PM), TIVO (5/20 PM)

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

 

 
 

Apr282013

Weekend Update – April 28, 2013

Weekend Update

Schadenfreude suits me just fine.

Is it really “schadefreude” when you don’t really know or see the people upon whom misfortune has been heaped?

For those that aren’t familiar with the word, “schadenfreude” is the strangely good feeling that some people derive when others fail or are subject to misfortune.

In Talmudic teaching the highest form of charity is when neither the donor nor the recipient are aware of one another’s identity. Complete ignorance raises the act of charity to a higher level.

Of course, we will never be able to answer the question of whether there is really a sound produced when a tree falls in the forest and there is no one present to lay witness. A single degree of separation can completely call into question that which seems patently obvious. Ignorance of an event can be is as if it doesn’t even exist.

Being a covered option seller, I do take some perverse pleasure and satisfaction when the market goes lower, even though I know that the vast majority of investors, especially the individual investor, fares well only when the markets are moving higher.

When I sell longer term call options, such as the monthly variety, I just love seeing the share price exceed my strike level early during the term of the contract, only to watch those gains dissipate as the term nears its end, especially if the end returns right to the strike price.

Somewhere, I just know that someone is asking themselves why they didn’t take their profits when they had the chance.

That’s pretty bad, right? But I never see that person. I’m not really certain that they even exist, except for the fact that I was once that person. To a large degree I believe that I was deeply ignorant back in those days with regard to the discipline of securing profits. These days I’ve simply added ignorance to the fortunes of those on the other end of trades to the list of things unknowable. Additionally, not knowing who they are is the highest form of ignorance.

As this past week was one that I immensely enjoyed and briefly put away my short term pessimism in order to trade at levels that reflect a more bullish tone, I’m now on the fence as to whether the bullish feeling can be sustained given what the past may be revealing.

After hitting market peaks 2 weeks ago and then alternatively going from the worst week of 2013 to one of the best weeks of 2013, I continue to believe that we are replicating the first 5 months of 2012.

So while I’m very happy with the higher tract that stocks took this past week, I’m especially happy to see assignments take place and have the cash settle in my account, to hold or to invest, as the market reveals itself.

Although I would much rather be fully invested, I really do want to see give backs of many gains at this point. Having a sizeable portion in cash and evolving from the use of weekly contracts to monthly ones, or even the occasional June 2013 cycle, makes it easy to make that wish.

If history is a guide, the last correction we experienced lasted just one month and then was completely recovered 2 months after it ended.

I can live with that, at least while cash is on the sidelines. If it happens, and assuming that it’s within tolerable levels, such as 10%, I’ll be reasonably happy, but not in a schadenfreude kind of way, although that kind of admission would certainly get me much more attention. Everyone notices the misanthropic guy and wishing that stock prices retreat may be the highest form of misanthrope, especially if it disproportionately impacts widows and orphans.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or the “PEE” category (see details). Additionally, as in previous weeks there is a greater emphasis on stocks that offer monthly contracts only, eschewing the usual preference for the relatively higher ROI of weekly options for the guarantee of premiums for a longer period in order to ride out any turbulence. Additionally, as with the previous week, we are at the height of earnings season and thus far there have been some surprises, perhaps offering more opportunity to sell well out of the money puts prior to earnings.

I really can’t recall the last time I owned shares of ExxonMobil (XOM). Although it is one of the shares that I consistently follow, it rarely has piqued my short term interest. That may be changing a bit as I look at its upcoming and increased dividend. At a time that I’m expecting to be on the precipice of a market decline that is technically driven, rather than fundamentally, I would be more inclined to limit new investments to more defensive stocks that are likely to outperform a falling market during a period of economic stability or growth.

Although Apple (AAPL) was a potential earnings related trade last week, I ultimately waited for earnings and instead purchased shares the next day. Those were assigned, but if shares open the week near the $410 level, I am interested in establishing a new position and using an out of the money monthly contract in order to have an opportunity to also secure the newly increased dividend. I believe that Apple will out-perform the market in the near term and will offer trading opportunities in addition to appealing option premiums.

With last week’s selection Cisco (CSCO) among those assigned, Oracle (ORCL) also one of last week’s potential picks went unrequited. It also under-performed Cisco as some of the networking companies were depressed following Broadcom’s (BRCM) earnings. I’ll be looking to Oracle as a potential purchase this week as well, as the technology sector may be showing some signs of catching up to the overall market with Microsoft (MSFT) and Intel (INTC) showing strength.

As news related to the Chinese economy seems to wag our own stock market, the heavy machinery titans have been slammed back and forth as what is called “news” is so often re-interpreted or presented in different lights that create an alternation between good economic news and bad economic news on a near daily basis. Very often the sector moves in unison even when the exposure to China is limited. While Joy Global (JOY) has significant exposure, PACCAR (PCAR)certainly has less so. Both have recovered a bit this past week as have Caterpillar (CAT) and Deere (DE). ALl, however, continue to trail the S&P 500 in 2013.

Petrobras (PBR) suspended its regular dividend payment in 2012. I’m somewhat embarrassed to still be holding shares priced in the $19-20 range, purchased just before a slew of bad news. Having held onto shares even as they sank as much as almost 25%, it has been clawing its way back. Among the positive signs are the recent announcement of two special dividends. With the hope for some stability in its share price after bad news regarding pricing and production issues have now been digested, it may be time to restart accumulating shares.

Last week playing earnings related trades was a very timely strategy. I don’t know if the pleasant surprises will continue, but I think there may again be some very reasonable risk-reward propositions available, as long as you don’t mind the possibility of owning shares after it’s all said and done.

Among those reporting is Facebook (FB), which despite having received an IPO allocation and currently owning shares at various price points, has become one of my favorite stocks. The existence of extended weekly options opens up many more opportunities to generate option premiums and mitigate the potential impact of sudden adverse moves in share price. At Friday’s closing price, a weekly put sale at a strike price 12.5% below the close could return a 0.7% ROI. For those more adventurous, a strike price only 9% lower could yield a 1.4% return.

Pfizer (PFE) reports earnings this week and fits into the profile that appeals to me the most when considering an earnings related trade. This past week it sustained a large price drop, which is usually the signal that clears me to sell puts on shares. However, in this case, I more likely to consider an outright purchase on shares, not only for some capital appreciation and option premium income, but also in order to capture the May 8, 2013 dividend payment.

Humana (HUM) has been on a true rollercoaster ride. As often happens with health care stocks the various interpretations of how changing legislation or pricing structure may impact share price sends the shares in irrational and alternating directions. With earnings approaching and shares down almost 10% from its 2 week ago high, it represents a potentially acceptable risk-reward offer. If it falls less than another7% the ROI is approximately 1%. That, however, is for the time remaining on a monthly contract, which makes it a little less appealing to me, but still under consideration.

Finally, I’m not certain how much longer the world needs an independent Open Table (OPEN) but it has the kind of pricing volatility at the time of earnings release to make it worth considering a purchase of shares and the sale of deep in the money calls or simply a sale of deep out of the money puts.

Traditional Stocks: ExxonMobil, Oracle, Paccar, Pfizer

Momentum Stocks: Apple, Joy Global

Double Dip Dividend: Petrobras (ex-div 4/30)

Premiums Enhanced by Earnings: Facebook (5/1 PM), Humana (5/1 AM), Open Table (5/2 PM)

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

 

Mar312013

Weekend Update – March 31, 2013

Weekend Update

It’s said that George Eastman, founder of Eastman Kodak (EKDKQ), was quite methodical as he approached the end of his life and was prepared to put his escape plan into action.

“My work here is done” may be a very logical way to approach any kind of transition, although it doesn’t have to be taken to the extreme that Eastman felt was appropriate under his circumstances. Be prepared, but don’t be crazy.

I’ve been transitioning a portfolio for almost a month in anticipation of the market taking a break and perhaps giving back some of its gains; maybe even a lot of its gains.

Doing so has made me much less fun to be around, but circumstances do change and being prepared for plausible scenarios means having exit strategies and surviving to see them do as planned until it’s time to exit the exit strategy. Once my work is done I can’t wait to get back to work.

I for one was glad to see the first quarter of 2013 come to an end. Fortunately, as a covered option seller, my remaining life span may not be sufficient to see another opening yearly quarter such as this past one, as the last such period was in 1987.

You may or may not remember how that year ended, but let’s just say that a single day 500 point drop back then was a lot more meaningful than it would be today.

I wasn’t prepared back then, in fact, that was the last time I used a margin account. I may end up being wrong this time around, but in watching markets for a number of years, both as a casual observer and as an active participant it’s reasonably clear that the good times don’t just keep rolling.

Selling covered calls is a great strategy when applied methodically, but it does meet its match in markets that just do nothing other than going higher. Hopefully April will usher in some greater variety in outcomes, as the past few weeks, despite having established records in both the Dow Jones and S&P 500 have been showing some signs of tentative behavior.

Part of being a less fun person has meant initiating fewer new positions each week. The first step to creating an environment that wouldn’t entice me to spend money on new positions was to cut off the funding just like you might with any addict. Luckily, most stock traders won’t resort to petty crime and pawning the belongings of loved ones to feed the habit, although that margin account can be very appealing and the answer to an easy fix.

I cut off my flow of funds by moving from weekly to extended weekly or monthly options. Longer contracts means less weekly contracts available to be assigned and less opportunity for new weekly cash to be available to “feed the beast.”.

Unfortunately, I also curtailed my cash flow by some unseemly timing in the purchase of new positions this past quarter, such as Petrobras (PBR) and Cliffs Natural Resources (CLF) that are sitting awaiting opportunities to have call contracts written against them.

The next part of the transition was focusing on reliable dividend paying stocks. The kind your grandfather would feel comfortable owning. Last week, all new positions went ex-dividend last week or this coming week. They’re not very exciting to own, but dividends, especially when their ensuing share price reduction is partially offset by option premiums are especially welcome.

Keeping more cash in reserve, moving away from “Momentum” positions, longer contracts and seeking near term dividends is the exit strategy and my transition is nearly complete.

Now comes the waiting and the period of self-doubt, which includes wondering when it’s time to abandon a thesis. In the meantime, increasing cash reserves doesn’t mean a total prohibition against finding potential new opportunities. After all, being prepared doesn’t have to take you to extremes. Once you’ve reached a crazy state of preparedness it’s hard to turn around to see the light.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or Momentum categories, with no selections in the “PEE” category, as earnings season begins anew on April 8, 2013 (see details). Additionally, as in previous weeks there is a greater emphasis on stocks that offer monthly contracts only, eschewing the usual preference for the relatively higher ROI of weekly options for the guarantee of premiums for a longer period in order to ride out any turbulence.

Some of this week’s selections are stocks that I already own but may consider adding to existing positions. One such stock is Deere (DE) which left me somewhat exasperated this past Thursday, the final day of a holiday shortened trading week.

At almost precisely noon shares of Deere dropped by about $1.40 in about 8 minutes, taking it from the realm of stocks poised for assignment. The plunge happened while the market was stable and most other heavy machinery and equipment makers were actually going higher. There was no news to account for the sudden and sustained drop. Neither in real time nor hours after.

Caterpillar (CAT) is one of the stocks that has an ignominious reputation during this record setting quarter. It was among the worst performers of the quarter and was routinely tagged as a laggard on those days that the broad market performed well. I recently purchased shares having waited all quarter for them to reach the price point that was very kind to me in 2012. It accompanied Deere for a small portion of the former’s inexplicable retreat but recovered sufficiently to avoid being tagged yet again.

Bristol Myers Squibb (BMY) and Medtronic (MDT) fit into two ongoing themes. Looking for near term dividend paying shares and belonging to the broadly defined healthcare sector. While healthcare has been the leading sector for the trailing year, I think there are still short term opportunities, even with a specter of a declining market. While both Bristol Myers and Medtronic have had significant advances lately, the combination of dividend and premium continue to make it appealing.

MetLife (MET), also a recent holding, fits into my broad definition of “healthcare” if you stretch that definition to an extreme. Part of my positive outlook for its shares is related to what I believe will be growth in its home insurance business. Of course, I rarely think in terms of fundamentals and certainly don’t have a long term perspective on its shares, but it is well positioned to maintain price stability even in a stock market of reduced stability.

Wells Fargo (WFC) and JP Morgan (JPM) are two very different banks. JP Morgan goes ex-dividend this week and has been beleaguered with domestic attacks from elected officials and international attacks as Cyprus may or may not add risk to global banks, such as JP Morgan.

On the other hand, Wells Fargo is as pure of a domestic play as you can find at a size that still makes it “too big to fail.” With news of improving real estate sales all over the country the Wells Fargo money machine is poised to re-create the glory days that so abruptly ended 5 years ago.

I’ve been looking for an excuse to purchase Lowes (LOW) for the past few weeks and have watched its price show some mild erosion during that time

Dow Chemical (DOW) has been one of my favorite stocks for a long time. I purchased additional shares last week to capture its dividend and after looking at its performance over the past 10 months feel guilty thinking that it’s a “boring” stock.

In fact, it’s been absolutely the poster child for what makes a covered call strategy a successful one. While its stock price has virtually remained unchanged since May 2012, the active cycle of buying shares, selling calls, assignment, buy shares, etc.. has resulted in a nearly 40% ROI.

Finally, Western Refining (WNR) is a company whose shares I briefly owned recently at a much lower price. It was one that got away during the uni-directional market of the first quarter. Its price has come down a bit and I think may now be at its “new normal” making it perhaps an antidote to Petrobras in a sector that has some catching up to do.

Traditional Stocks: Caterpillar, Deere, Dow Chemical, JP Morgan, Lowes, MetLife, Wells Fargo

Momentum Stocks: Western Refining

Double Dip Dividend: Bristol Myers (ex-div 4/3), JP Morgan (ex-div 4/3), Medtronic (ex-div 4/3)

Premiums Enhanced by Earnings: none

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

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

 

Feb192013

Gloom Can Bring Good TImes

Articles

I often say that I neither believe nor follow fundamental nor technical analyses.

Maybe that’s because I’m incapable of understanding or learning the nuances of either. However, despite saying such, like so many things in life, the truth usually lies somewhere in-between.

I do look at charts, although I’m not entirely convinced that I know what I’m looking for or looking at when I stare at the graphic representation of what we observe in the market. On some primitive level I must be doing some kind of technical analysis because I do look for patterns, such as that mentioned about 9 months ago in how Apple (AAPL) was resembling the Google (GOOG) of 2008.

As someone who has been consistently selling options for more than 5 years, I can look at specific periods of time when those who criticize that technique would have been able to revel in their tremendous insight and understanding of price movements, while I would have been wallowing in introspection.

Luckily, that introspection never seems to last for very long.

One such period was from January 1, 2012 to mid-March 2012. One real characterization of that period, besides the seemingly higher close each and every day was the manner in which it happened. Coming immediately after the close of trading in 2011, a year in which triple digit moves in either direction were the norm, that initial period in 2012 was quite different. Those moves were rare. Instead, it was the same slow melt-up that we’ve witnessed thus far in 2013.

I’ll add the first 6 weeks of 2013 as a period that I haven’t been fully enamored of having sold options, although to be fully analytical, I’d have to admit that stock selection plays a role, as well. On paper, the adverse impact of Petrobras (PBR) and Cliffs Natural Resources (CLF), have to be given their due credit.

But looking back to 2012, it all just suddenly changed and made me feel much better about the strategy of selling options. It all started with those triple digit moves. Just as quickly, introspection gave way to a sense of high self-esteem.

As 2013 has been thus far following the same pattern, I’m beginning to see the light at the end of the tunnel.

Again, I’ll certainly admit to a very simplistic use of charts, but just as the charts of Apple and Google at different periods in their corporate lives looked remarkably similar and portended a future path for Apple, I am struck by the similarity in the slopes of the S&P 500 (SPY) for the two periods mentioned earlier.

Qualitatively, I could tell anyone how similar those periods were, without looking at any chart, owing to my trading results. However, the parallel slopes tell a more compelling and quantitative story. Beyond that, the time periods are identical. In the case of 2012, the ascendant period was followed by a brief two week flat period, which was followed by a quick 2% market drop. That drop was just as quickly erased, restoring investor confidence long enough to go through a 1 month and 8% decline.

On this President’s Day, coincidentally we are just concluding a two week period of calm and flat performance, with the S&P 500 having moved 2 points in that period.

There’s certainly no rule that I know of that insists that events repeat themselves. In this case, looking back at my 2012 results, I certainly hope that they do, as it is always preferable for the covered option seller to be doing so in a flat or down market.

Of course, a rational mind will ask what the stimulus might be for a market reversal or any large move regardless of direction. Whereas individual stocks may not require a publicly known stimulus to have a large and sudden move, the market itself needs some overt catalyst. Back in 2012, perhaps it was news of a double dip in the Spanish economy or Greek elections that turned out austerity. Who really knows?

On the horizon, the only known entity is the “sequester.” However, it’s really anyone’s guess where its current deadline for resolution may take us. The recent “Fiscal Cliff” was rationalized by many as being the impetus for the gains of 2013, but it’s not clear to me what effect the sequester may have, regardless of political agreement, or not. Any reduction in spending would be a positive and I believe that the market, which is still rumored to discount events six months into the future, is expecting some kind of resolution.

With less than two weeks to go for the clock to stop ticking, it’s hard to imagine the market being propelled forward on any agreement. Of course, it’s certainly easy to see how another delay or “kick of the can down the road” could be unsettling, especially to credit markets. Standard and Poors may have their own headaches right now with issuance of past credit ratings, but they still do have a job to do.

While politicians may avoid the risk of being labeled “unpatriotic” for voting in favor of defense cuts, they free themselves of that charge if no agreement is reached by March 1,2013, which is just in time for a repeat of 2012.

If I were very concrete and believed that we must stick not only to the same pattern but to the same time frame, I would paint a scenario that envisions a quick 2 week sell off while some gloom sets in regarding agreement on the sequester. That, of course, would have to be followed by another 2 week period, but this time rebounding as it appears that positive movement is occurring.

That brings us to the deadline and the charting anniversary for a large market drop as either there is agreement or there is no agreement.

Win-win, especially if you’re a covered option selling politician.

 

Feb32013

Weekend Update – February 3, 2013

Weekend Update

On Wednesday evening, Bloomberg Rewind host, Matt Miller tweeted that he was interviewing Wilbur Ross in a live segment in a few moments and was soliciting questions for one of the century’s greatest investors and serial turnaround artists.

Never really needing a reason to Tweet, I was nonetheless pleased that my question was chosen, but I especially liked the ultimate answer. I simply wanted to know if the cool and calm demeanor that Wilbur Ross always displays when on television was ever belied by emotion that got in the way of a business or management decision.

The answer was, to me, at least, incredibly profound and absolutely reflective of the persona that we get to see when he makes appearances. Ross said that in takeovers things often do not go as planned, but you have to “roll with the punches.” He further went on to point out that emotions conspire to work against you in making decisions and taking actions. He was calm and collected in his response and barely showed any facial grimacing or twitching when the question was being asked.

I, on the other hand was twitching, contorting and breathing rapidly at the mere use of my question. I do the same with every tick up and down of every stock I own.

My initial thought was that was probably among the best pieces of advice that could ever be given, but it was just too bad that human nature so reflexively intervenes.

One of the things that I like about buying stocks and then selling calls is that it takes so much of the emotion out of the equation. It also frees you from being held hostage to each and every dive that shares can take for no rational reason. This week alone we watched Petrobras (PBR) drop nearly 10% as it announced fuel increases that Deutsche Bank (DB) described as a “positive” action and Chesapeake Energy (CHK) surge 10% on news that their founder and CEO, Aubrey McClendon, would be leaving in 3 months. In the case of Chesapeake Energy that surge was dissipated in just a day, although that may have been as irrational as the initial move.

Recently, large adverse moves impacted shares of Tiffany (TIF) and YUM Brands (YUM) as downgrades, stories, rumors, a smattering of data and a myriad of other factors took their turns at poking holes in whatever support existed for share price. Of course, they weren’t alone in the cross hairs of the barrage of often transiently irrelevant “facts.”

But by and large, if you sell covered options you can roll with the punches. Instead of feeling the anguish when your stock takes a hit it’s similar to seeing road-kill. It’s terrible, it’s a tragedy, but for the most part you realize that in the big picture it’s all just a blip. Those options that someone else was kind enough to buy from you protect you from having to suffer through the anguish and gives you a chance to get over the initial emotional reaction so that when it is time to make a decision, such as at the end of the option period, you can do so with a far less clouded mind.

Wouldn’t it be nice to have a little Wilbur Ross inside of all of us? Maybe even better would be to be his sole heir, though.

As everyone seemed to be giddy about the fact that the DJIA briefly crossed 140000 for the first time since 2007, I reminded myself of how short a period of time it remained there and then saw that the slopes of the periods preceding the 2007 and 2013 tops are remarkably similar. If anything, maybe a bit more steep this time around?

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Fortunately for me that was the time I learned to start going with the punches and had already started protecting my stocks with calls and then used the premiums generated to purchase more shares during the ensuing drops.

Not that history is ever in a position to repeat itself, but we’ve seen this before.

As always, this week’s potential stock positions are all intended as part of a covered option strategy, whether through the sale of covered calls or puts. The selections fall into the usual categories of Traditional, Momentum, Double Dip Dividends or “PEE” stocks (see details).

As the market found itself celebrating jobs on Friday, one sector that was left behind was retail. Among my favorites this year has been The Gap (GPS). They’re mundane, not terribly innovative, but they are ubiquitous and always a safe fashion choice. Although its next support level appears to be 10% lower it does offer an appealing enough option premium to accept that risk of wearing brown shoes with a tuxedo.

Murphy Oil (MUR) just took a large hit after announcing earnings. More and more I question the extreme earnings related reactions. What seems to separate some stocks from one another is the rapidity at which they recover from those reactions. The faster the recovery the easier it is to call it an over-reaction. Otherwise, if I own such shares and they don’t rebound quickly, it’s just a case of them being under-appreciated. In Murphy Oil’s case, I think it was a welcome over-reaction.

Southwestern Energy (SWN) has been lagging behind some of its sector mates thus far in 2013, but that situation is reversed if looking at the one year comparisons. It reports earnings early in the March 2013 option cycle and I believe may be poised to challenge its 52 week high.

I’m somewhat reluctant to consider adding Intel shares (INTC) this week. The only lure is the dividend that comes along with it as it goes ex-dividend on February 5, 2013. My reluctance stems from the fact that if I add shares my Intel position will be too large and it has been a disappointingly under-performing asset in the months I’ve held shares, having waited a long time for something of a rebound. While I don’t expect $24 or $25 any day soon, I’m comfortable with $21, a dividend and some option premiums. At least that would ease some of the paper cuts on my wrists.

Starbucks (SBUX) another favorite is a reluctant choice this week, as well, but only because of its strong gain in Friday’s trading and the fact that its option contracts are spread a bit too far apart. With more and more options being offered at strike prices in $1 and even $0.50 gradations the $2.50 and $5 differences seen with some stocks makes them less appealing, especially if selling options to optimize income production over share gains. What’s really needed is for more people to read these articles and drive up the option trading voliume as they realize what an opportunity exists.

Chesapeake Energy has been in the news quite a bit this year, but for all of the wrong reasons. AS usual, its high profile story this week concerned its founder and CEO, Aubrey McClendon. The market quickly added 10% to share value upon learning that McClendon will be leaving the company in April 2013. It quickly gave that gain up during the course of the rest of this week. This is a position, that if I decide to enter, would likely be done on the basis of selling put options. That has been a common theme as I’ve re-entered Chesapeake Energy positions over the years.

What again distinguishes this week’s target stocks is that there is greater emphasis on risk, specifically earnings related risk, as Friday’s jobs data numbers fueled a strong week ending rally that further added to already high stock prices, making bargains harder to find.

Acme Packet (APKT) was one of the first earnings related situations that I described in an article entitled “Turning Hatred into Profits” that sought to create income from either disappointment or reaffirmation. It’s share price is higher now than it was the last time around, but I think that a 1% or more ROI for the chance that it’s share price may go down 10% or less after earnings is a reasonable risk-reward venture. If it works again, I may even try to understand what it is that Acme Packet does the next time earnings season rolls around.

Baidu (BIDU) has been on my lists for the past 2 months or so and has been purchased several times. Under the best and calmest of circumstances it is a volatile stock and is sometimes a frustrating one to match strike price premiums with anticipated objectives because the price moves so quickly. As it gets ready to report earnings, it too can easily move 10% in either direction, yet still meet my threshold of 1% ROI for the level of risk taken.

When it comes to stocks that are capable of making big moves in either direction on any given day and especially on earnings, there aren’t many that are better at doing so than Green Mountain Coffee Roasters (GMCR). This is certainly a stock that has required “going with punches” over the past few years, but it has been a mainstay of my speculative slice of my portfolio for quite a while. I typically think in terms of 25% moves when it comes to earnings. In this case I’m looking at about a 25 to 1 proposition. A 25% drop for securing a 1% profit for one week. If not, then it’s just back to the usual Green Mountain “grind” and selling calls until shares are assigned.

While Herbalife (HLF) has been having all of the fun and getting all of the attention, poor NuSkin (NUS) has been ignored. But, it too, reports earnings this week. I have no opinion on whether NuSkin or any other company are engaged in questionably ethical business practices, I just see it as a vehicle to throw off option premium with relatively little risk, despite it’s overall risky persona. It’s not a stock that I would want to hold for very long, so the availability of only monthly options is of some concern.

Riverbed Technology (RVBD) was one of the most early and most frequent members of my covered call strategy. It always feels strange when I don’t have shares. As it gets ready to report earnings this coming week I’m reminded why it so often makes numerous and sizable movements, especially in response to earnings. It has a bad habit of giving pessimistic guidance, but after a long courtship you learn to accept that failing because even if punished after conference calls it always seems to get right back up.

Finally, Panera Bread (PNRA) reports earnings next week. It too is highly capable of having large earnings related movements. Its CEO has lots of Howard Schultz-like characteristics in that he truly knows the business and every intricate detail regarding his company. Interestingly, it went up almost 4% just 2 trading days before earnings are released. That kind of investor “commitment” before a scheduled event always concerns me, but I’m not yet certain just how much it scares me.

Traditional Stocks: Murphy Oil, The Gap, Southwestern Energy

Momentum Stocks: Chesapeake Energy

Double Dip Dividend: Intel (ex-div 2/5), Starbucks (ex-div 2/5)

Premiums Enhanced by Earnings: Acme Packet (2/4 PM), Baidu (2/4 PM), Panera Bread (2/5 PM), Green Mountain Coffee Roasters (2/6 PM), NuSkin (2/6 AM), Riverbed Technology (2/7 PM)

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

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

 

much energy per calorie than most of musk labdanum amber and make sure to exercise and hormonal issues like prostate cancer
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