Weekend Update – December 25, 2016

 …And I feel fine.

Whoever thought that we would live to see the day that the President-Elect would be running a parallel foreign policy?

Whoever thought we would live to see the day that Republicans were cozying up to the Russian government while the Democrats were sounding the siren?

Then again, did anyone really believe that Great Britain would split from the European Union?

Maybe it really is the end of the world as we know it.

The one good thing is that as best as we can project, life in a post-apocalyptic world will probably be characterized by lower tax rates.

That can only add to the feeling fine sensation and I certainly look forward to the little considered benefits of an apocalypse.

While the world may not be ending, 2016 is coming to an end and after a very palpable post-election rally, it’s not very clear where we go next.

I certainly don’t know where I go next.

In less than a month populism meets reality and the direction may become more clear. At the moment, the only thing that really is clear is that populism is a world wide phenomenon, which means that lots of world-wide enemies are being identified to account for all of the ills any particular society may be experiencing.

Based upon the rise of populism around the world, you might be justified in believing that there are plenty of ills, but maybe not enough enemies to blame, so we may have to share.

I don’t know too much about Poland, but I imagine that if the public relations campaign is run properly, you could easily get their populace to place the blame for all of their ills on Mexicans, too.

Closer to home, we will soon probably learn of plans to build a wall around the Rockettes, at least those who would prefer not to perform as part of the Inaugural festivities.

With an entirely new playbook in the White House and perhaps in Congress, as well, it remains to be seen if the FOMC can remain reasonably apolitical when faced by a barrage of Presidential Tweets aimed at its actions or inactions.

But with 2017 right around the corner it may appear that if some of that populism does morph into reality, the upcoming role of the FOMC may be to take a back seat to natural market forces.

Rather than being ahead of the curve, the FOMC may just sit back and watch interest rates climb on their own, as was the case in the post-election period and that worked out just fine, too.

With thoughts of nation wide infrastructure projects to help “Make America Great Again” together with a low unemployment rate, let the bidding begin for the workers necessary to make it happen.

The paucity of workers, though, might help to figuratively and literally delay the building of the wall that was one of the early populist positions.

Of course, I would imagine that a President Trump would have some choice words for the bankers that end up making more money in a rising interest rate environment, at least as long as the Trump family has no direct banking interests.

Having once owned a airline, it may be understandable why President-Elect Trump has taken on Boeing (BA) and even Lockheed Martin (LMT). You can be certain, however, that he won’t take on the hotel and hospitality industry.

Imagine how he might castigate the FOMC for making those projects, and perhaps personal family building projects, as well, more expensive by presiding over a rising interest rate environment.

However, maybe having some skin in the game can be a good thing when it comes to public policy. Maybe even an incentive plan, such as a portion of any money saved on the building of the next generation stealth jet fighter.

I, for one, am anxious to get 2017 underway and to see bluster given a chance to come to life.

I don’t know how much of those populist ideas will find life, but with earnings season beginning the week before inauguration, we may finally be getting some of the earnings guidance to really breathe life into markets.

If that’s going to be the case, the elusive 20.000 on the DJIA is just a stopping point.

History books will credit whoever is in office when it finally does happen, regardless of who really deserves the accolade. Economies rarely turn on a dime, but the ingredients that go into the process of change are typically forgotten once the final product is unveiled.

It’s generally easier to share the blame than to share the credit, but if the credit is shared, there can be no better sign that the end of the world has come.

I hope that the new administration is put into a position of taking whatever credit there is for a soaring stock market in 2017, regardless of whether they share that credit or not.

A soaring stock market and a soaring economy would preclude the need for continuing populist rhetoric, but if those don’t happen the next round of populism will really be something to behold.

I’ll be watching from a distance.

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

Could anything have been more pathetic than retail last week?

If your answer was, “Yes, Materials,” then you’ll understand my pain last week, even as I look back fondly on 2016.

With some major retail casualties last week and with just another week left to this holiday season, I think that the first direction that I want to take myself into for 2017 is to add to my retailer holdings.

For the final week of 20116, that means looking at Bed Bath and Beyond (BBBY), LuLuLemon Athletica (LULU), Macy’s (M) and Under Armour (UAA or UA).

If you follow Crossing Wall Street, you know that its founder, Eddy Elfenbein, is one of the most transparent stock pickers out there and one of the most credible.

He is a true buy and hold investor and his new ETF, AdvisorShares Focused Equity ETF (CWS) is based upon his annual buy list that has had a long term record of market out-performance.

While for many Bill Miller is the name that pops up when thinking long term out-performance, I think of Eddy, who is also a great Twitter follow because he is funny, self-effacing and shares relevant data and facts more readily than anyone I’ve ever seen, read or heard.

I believe that in an era where Quantitative Easing is no longer in effect and thereby no longer indiscriminately propping up most everything, true diligence will make the difference between one stock picker and the next.

You just don’t get more diligent than Eddy Elfenbein.

This year’s buy list has been released and Bed Bath and Beyond is no longer a part. Elfenbein describes it as one of the most frustrating stocks that he has owned and I continue to feel that pain.

But following this past week’s washout of an earnings report, I’m taking another look, but unlike Elfenbein, for whom diligent stock picking validates a buy and hold strategy, I have only short term interest in adding those shares and no interest in doing my due diligence.

For me, all the due diligence that I needed was seeing that its shortfall in earnings was less than the 20% off they offer on any single item with their frequent coupon mailings to my home.

I do see some continued downside risk, perhaps to the $39 level, but I would be very happy to see Bed Bath and Beyond shares tread water for a while as I would seek to serially sell call options on those shares at the $40-$42 level.

Another washout for the week was Macy’s. I was recently in one of their stores on the Eastern Shore of Maryland and was struck by how poorly maintained the exterior of the store had been, even as the interior was bright, clean and shiny and the personnel were friendly and eager to help.

While Eddy Elfenbein is transparent, I tend to be superficial, but somehow overcame that trait and overlooked the exterior.

Right now, from the outside looking in, there really doesn’t seem to be much reason to think that 2017 will be any kinder to Macy’s, as it has badly trailed the S&P 500 in 2016.

As with Bed Bath and Beyond, I think there is some reasonable support at its current price level and would also not mind seeing those shares stand in place for a while in exchange for option premiums and a generous dividend.

Under Armour now has two classes of stock. You can decide for yourself whether you want the shares with voting rights or the shares without those rights. 

The latter, the Class C shares continue to trade at quite a discount to the voting shares, while both have badly trailed the S&P 500 in the past 6 months.

My concerns about this potential position is that it’s not clear where support will come from, as voting rights shares are sitting at 2 year lows and there isn’t anywhere near as much liquidity as I would like to see in the available options.

In exchange for those uncertainties is what could be an attractive option premium, although the bid-ask spread is understandably large with such small interest on behalf of buyers and sellers, making rollovers unnecessarily difficult and expensive.

Finally, it’s not too much of a stretch to see why LuLuLemon may be attractive.

That is, as long as you overlook that bulge in its share price.

That spike creates some risk, but with those option premiums remaining elevated, the risk is a little easier to take.

That’s particularly true when realizing that there is the kind of liquidity in the options market that is missing for Under Armour. 

As a result, the prospects of being able to rollover positions in the event of an adverse price move doesn’t concern me as much as it does with Under Armour.

It has been a long time since I’ve owned any shares, but I think in this instance I would start by selling put options and then taking it on a week by week basis.

For me, however, this is the final week to be putting these thoughts on virtual paper.

I am very, very grateful to the Seeking Alpha editors and to the cast of regular readers over these past few years.

Best wishes for a happy and health New Year to all and for the best in everything that matters in the years ahead.

 

 

Traditional Stocks: Bed Bath and Beyond, Macy’s

Momentum Stocks: LuLuLemon Athletica, Under Armour

Double-Dip Dividend: none

Premiums Enhanced by Earnings: none

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

 

 

Weekend Update – July 24, 2016

“When you’re a hammer, everything looks like a nail.”

That old saying has some truth to it.

Maybe a lot of truth.

When you think about stocks all day long everything seems to be some sort of an indicator as I look for a rational explanation to what is often a prelude to an irrational outcome.

Reducing the intricate character of what is found in nature to a mathematical sequence is both uplifting and deflating.

When the very thought of uplifting and deflating conjures up an image of a stock chart it may be time to re-evaluate things.

When you start seeing the beauty in nature as a series of peaks and troughs and start thinking about Fibonacci Retracements, it is definitely time to step back.

Sometimes stepping back is the healthy thing to do, but as the market has been climbing it’s most recent mountain that has repeatedly taken the S&P 500 to new closing highs, it hasn’t taken very many breaks in its ascent.

You don’t have to be a technician, nor a mountain climber to know that every now and then you have to regroup and re-energize.

You also don’t have to be a mountain climber to know that standing on the edge of a cliff is fraught with danger, just as each step higher adds to risk, unless there’s a place to rest.

Some mountains may not even be meant to be climbed except by the very best of the best.

I’m certainly very, very far from that, but even if I was not, I would still be very, very leery.

For all of the fears that surfaced after the “Brexit” vote and all of the speculation regarding its impact on earnings guidance, those fears have been quickly dismissed and the guidance delivered, thus far, has ignored the conventional wisdom.

Whether JP Morgan (JPM) or eBay (EBAY), among those that were on the top of the Brexit hit list, there has been nary a mention of the impact of divorce on their future earnings and the broader market has taken note, as have investors in those individual stocks.

And so, as earnings have been coming in, and as they accelerate in the coming week, the mountain continues to be scaled as no one really knows where the peak happens to be.

As that peak gets higher and higher, it probably draws in two kinds of people.

The best of the best generally got that way because they are nimble in their trading and may recognize a breakout in the making when they see one.

The other kind that gets in are the ones afraid of missing out or are of the belief that what’s going on will keep on going and maybe they can finally make up for their lost opportunities over the past 7 years.

For my part, I’m going to remain circumspect and have done very, very little trading, other than rolling over positions and the occasional opening of a new position or two in any given week.

I don’t anticipate that changing too much this week as the S&P 500 has now climbed nearly 9% after its Brexit low of less than a month ago.

That’s a little too steep for me and it has been almost a straight line higher.

Being nearly fully invested, although preferring to have more cash, I’m happy to go passively along for the ride, but am not terribly interested in adding to my commitment.

Sometimes it really is better to be safe than sorry about missing out.

While a fall from a top a mountain may be a terminal event, there’s always another opportunity after a fall from a market peak and I would rather wait for that opportunity.

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

Although I my be of a mind to not commit any cash this week, I’ve been of that mind before and it is sometimes difficult to resist a trade.

For me, with a frequent focus on trades that include a short position on weekly options, the character of the market as the week begins is often the invitation to participate or the closing of the door.

I’m unlikely to ignore my reticence to participate if the market continues its climb on Monday morning. However, if there is some weakness, especially if there is some real pronounced weakness, I may change my mind.

With earnings season really getting into full gear this week, earnings or impending earnings has to be part of any equation that has a short term time frame.

Macy’s (M), which was battered following its last earnings report and is a company in transition and likely facing greater transition in the near future, doesn’t report earnings until August 11, 2016.

While earnings met the whisper numbers last quarter, revenues were down. More ominously, though, Macy’s revised its yearly guidance significantly lower at that time.

My expectation is for an “under promise and over deliver” scenario in a few weeks, but my focus is in the coming week.

I think that the downside risk is low, unless the broader market is hit with a substantive decline. For the risk, there is ample reward and Macy’s is also an imminently liquid options position, if faced with the need to rollover the short call position.

I wouldn’t mind that opportunity and with an optimistic outlook for its shares as earnings are around the corner, I’d been inclined, if faced with an option expiration, to take advantage of the earnings enhanced premiums to consider a longer time frame rollover and increasing the strike price at that time.

With the Brazil Summer Olympics ready to begin, I still think about the controversy during the last Olympics regarding Under Armour’s (UA) swimsuits, which many blamed for the poor performances by United States swimmers.

CEO Kevin Plank handled the controversy as well as any CEO could ever have done and the story disappeared from the headlines faster than anyone could have predicted.

Under Armour does lots of things very well in a very competitive industry, but what it hasn’t done well in the past 3 months, following its last earnings report, has been to keep pace with the S&P 500.

That’s a little ironic for a company that has been a pace leader and that has been unaccustomed to falling behind.

Under Armour, unlike Macy’s, increased its annual guidance last quarter, so there is always that opportunity for disappointment, but Kevin Plank likely knows his business well enough to not stick his neck out too far, nor to sully his own reputation and credibility.

In the meantime, the option market is implying an 8.1% price move next week. There isn’t too much enhancement to the option premium that you can derive by selling out of the money puts, as you can potentially receive a 1% ROI, but at a strike price that is only 9.3% lower.

That’s not too much of a cushion, but Under Armour shares are ones that I wouldn’t mind owning heading into the Olympics, particularly if there is a ban on some athletes from Russia.

Fastenal (FAST) just reported earnings and just had its ex-dividend date, so there’s nothing terribly exciting on the horizon.

Then again, there’s never anything terribly exciting about Fastenal.

It just reported a miss on earnings and shares have lagged the S&P 500 by almost 9% since then.

That decline left shares at a price below the mid-point of the high and low of 2016.

If you believe that there is some chance of a pick up in the kind of economic activity that’s usually among the first to improve after people go back to work, then Fastenal may be a good place to park some money.

Blackstone Group (BX) just reported its earnings and they came in at the mid-point between consensus and whisper, although on a decline on top line revenues.

So how do investors respond?

In the 2 days remaining on the week following the earnings announcement, Blackstone shares climbed almost 5%, while the S&P 500 fell 0.2%

Normally, I wouldn’t have too much interest in considering a stock that had just gone up 5% on non-exceptional news, but those shares are ex-dividend this week and even after a dividend reduction, the yield is very attractive, as is the option premium.

One consideration that I have for this stock is to sell in the money calls with an expiration date the following week.

By example, using Friday’s closing bid – ask prices, if purchasing shares at $27.42 and selling August 5, 2016 $27 calls, you would receive a $0.64 premium.

With the ex-dividend date on July 28, 2016, if shares close the previous evening above $27.36, there is a chance of early assignment. The deeper in the money at that time, the greater is the likelihood of assignment.

If assigned, the 3 day ROI would be 0.8% and the opportunity to then re-invest the assignment proceeds.

On the other hand, if those shares are assigned the following week and you get to retain the dividend, your 2 week ROI would be 2.1%

To put that into some relative context as provided by Eddy Elfenbein, the market has only risen 2% or more on 3 occasions after hitting a record closing high.

If you don’t follow Eddy Elfenbein on Twitter, you should consider it more than any of this week’s selections. He is the funniest, most gracious and offers the best factual information that can be found on Twitter.

Finally, it’s only appropriate to consider an earnings related gamble with Las Vegas Sands (LVS).

For a number of years, Las Vegas Sands was a stock that I had some really good fortune with in buying shares and then selling calls and then doing it over and over again as shares were assigned and subsequently the share price fell, putting it back into my portfolio.

That seems like an eternity ago, as I still sit on two very expensive lots of shares that are both uncovered.

The only saving grace has been the generous dividend, which would likely continue to be safe as long as Sheldon Adelson, the Chairman and CEO is in charge and has a vested interest in the dividend.

Did I mention that Adelson was also the Treasurer?

The option market is implying a 6.2% price move next week. That seems a little low to me, but what I find appealing is that even with a 9.3% decline in share price, it can be possible to generate a 1% ROI by selling out of the money puts.

With the next ex-dividend nearly 2 months away, this might be a position that I would welcome an opportunity to rollover in the event of an adverse price move this week.

Somewhere deep down, I’m of the belief that the peak of the bad news coming from its operations in Macau are about to be reached and expect to hear some hint of that as guidance is provided.

I’m also prepared, however, to fall off the cliff, but still live another day in that event.

 

Traditional Stocks:  Fastenal, Macy’s

Momentum Stocks:  none

Double-Dip Dividend: Blackstone Group (7/28 $0.36)

Premiums Enhanced by Earnings:  Las Vegas Sands (7/25 AM), Under Armour (7/26 AM)

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

Weekend Update – June 19, 2016

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

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

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

The guessing stopped.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(click to enlarge)

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

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

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

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

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

Who would have guessed?

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

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

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

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

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

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

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

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

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

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

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

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

That is if it ever even gets to that.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Traditional Stocks: Dow Chemical, eBay

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

Double-Dip Dividend: none

Premiums Enhanced by Earnings: none

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

Weekend Update – May 22, 2016

If you could really dodge a bullet, magicians from Harry Houdini to Penn and Teller would never have had to perfect the ability to catch them in their teeth.

Yet, we may have dodged a bullet this past week.

Forget about the fact that the stock market still seems to like the idea of higher oil prices. We’ve been dodging the impact of increasing oil prices through most of 2016. At some point, however, that will change. That bullet has been an incredibly slow moving one.

What we dodged was a second week of terrible retail earnings and continued over-reaction to the thought that a June 2016 interest rate hike was back on the table, as  Federal Reserve Governors are sounding increasingly hawkish.

Not that there wasn’t a reaction to the sense that such an increase was becoming more likely, but some decent earnings data coupled with increased inflation projections could have really fueled an exit for the doors.

Normally, those bits of news could have been construed positively, as reflections of an early phase of an economic recovery. However, the market has spent much of the past year wavering back and forth trying to decide whether to interpret good news and bad news for what they really were, rather than exercising intermittent bouts of reverse psychology.

Instead, the market closed the week on a high note, even ending 3 consecutive weeks of declines and with a gain large enough to keep 2016 in positive territory.

But only by the skin of its teeth.

My guess, as a licensed professional, is that the skin of your teeth gets increasingly thin the more you catch those bullets, though.

There’s not too much economic news ahead in the coming week, although the week does end with the GDP release, preceded by a withering stream of corporate earnings.

For those who bet on the odds of a  June 2016 FOMC interest rate increase announcement, the GDP may be an important bit of data, even as many retailers, arguably with a better finger on the pulse of the consumer, have only  seen their own revenues and earnings wither.

What the FOMC sees may be entirely different from what the boots on the ground, those spending their paychecks and those happy to trade goods for cash, are seeing. That may have also been the case back at the end of 2015 when the FOMC did raise interest rates as those boots were marching nowhere fast.

It takes fast moves to dodge those bullets, but the pace of economic growth still seems so slow, even as there may be some signs of it quickening.

Perhaps, from the FOMC’s perspective, the interest rate hike of 2015 prevented the initiation of overheating and the current state calls for another dose of that kind of prevention. That mat be especially true if the goal is to continue to dodge the kind of uncontrolled inflation increases seen more than a generation ago.

That bullet has been particularly slow in moving, but maybe once it gets too close it may be hard to dodge, as a toothless FOMC has little other in the way of alternatives.

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

I haven’t had many assignments in 2016, even as I’m pleased with the year to date. I’d be much more pleased, though, if I had more cash coming from more assignments of positions.

This coming week, with no positions set to expire and only a couple of ex-dividend positions, I’d like to find a reason to spend some of what little cash I have to generate some additional income for the week.

The allure of dividends is higher for me when I don’t have other immediate prospects of sufficient weekly income and that is the case this week.

That brings Corning (GLW), Dunkin Brands (DNKN) and Sinclair Broadcasting (SBGI) to mind. All have now gotten earnings out of the way, so have at least one less complication whenever considering a new position and having a relatively short time frame in mind.

The latter two only have monthly options available, but as I look at my sales for much of the past year, there has been more and more emphasis on the use of monthly or even longer expiration dates. Of course, while not necessarily embracing the idea of facing another earnings report, the use of monthly options means that the potential need to roll the short call position over brings you closer and closer to the risk of earnings.

Both Dunkin Brands and Sinclair Broadcasting have similar 2016 charts. Both are approximately at the mid-points between their recent highs and recent lows, as they both have been heading lower

That’s often a point that I like to consider as an entry.

While for those that live in the Northeast and increasingly elsewhere think of Dunkin Brands as ubiquitous, Sinclair Broadcasting is very much the same, just much less obviously.

It’s terrestrial broadcast properties are everywhere and it is increasingly venturing into original content and cable properties, as it has a long history of acquisition and strategic media market shifting.

I just like owning it because it trades in a fairly predictable range, has a nice premium and a good dividend, although earnings do sometimes present a challenge, or an opportunity, depending on your perspective. 

Dunkin Brands strategy hasn’t included acquisition of late, but it is definitely a strategy of expansion, both in the number of locations and in the number of offerings, seeking to rid its locations of excess capacity.

Like Sinclair Broadcasting, its range is fairly predictable and it has the nice combination of premium and dividend. That’s a non-caloric sweet combination.

Corning, unlike Dunkin Brands and Sinclair Broadcasting is now moving a bit higher after having sustained a more than 10% decline after its earnings were announced last month.

It offers weekly options and I’m not terribly interested in doing much more than a week. However, while likely selling an in the money option in the hope of having some of the price decline from the dividend get offset by premium pricing, I would probably rollover the position if I believed that it was likely to get assigned early.

At the same time, at its current price, I might also consider rolling the position over, even if likely to be assigned upon expiration, in an effort to continue collecting a premium.

That brings me to retail and more retail.

Macy’s (M) started the sectors bad news off just 2 weeks ago and has been brutalized, even as Wal-Mart (WMT) finished the 2 weeks of major retailer earnings on a very positive note.

I already own 2 lots of Macy’s and am ready to add another, at what I believe is truly a bargain price among a sea of bargain priced appearing stocks.

While I normally do prefer weekly options, I may start off that way if making a purchase of shares, but would consider rolling over for a longer term, if only for the pursuit of its upcoming dividend.

With its very recent sharp decline, Macy’s call option premiums are more attractive than is usually the case. For those more interested in the sale of put options as a back door means toward ownership, that is a reasonable approach. I would, however, if faced with assignment roll those puts over until the point of ownership becomes more favorable as the week of the ex-dividend date approaches.

I may be the last guy to be seen wearing anything by Under Armour (UA) and don’t believe that I’ll be needing any of its wonderful wicking action, but I think that it is one of those true bargains amongst that sea of “posers.”

With weekly options and decent liquidity, I think that the generous premium offsets the near term risk.

Finally, where there may be more risk would be in the consideration of either Best Buy (GME) or GameStop (GME) as they both report earnings this week.

GameStop has had its epitaph written and re-written many times. It has both rewarded and punished short sellers over the years as it has had consistently large fluctuations in price, but has confounded those who have believed that its near term was extinction due to its inability to dodge the bullet of a changing landscape.

AS with most earnings related trades, my preference is to sell puts at a strike level outside of the range implied by the option market, as long as the weekly ROI is 1% or greater.

Based upon Friday’s closing price the lower boundary determined by the option market is the $26 strike level, while a 1.1% ROI could potentially be obtained at the $25.50 level.

That’s not too much of a cushion.

As an aside, the weekly open interest for GameStop is quite a bit heavier on the call side, which makes me think that the other side should at least be recognized. If you are a contrarian, that may speak to a decline at hand.

So while I do prefer selling puts into earnings when shares have already been in a declining mode, as they have been with GameStop, that small safety cushion has me more likely sitting on the sidelines, hoping to dodge a bullet, until earnings are announced at the close of trading on Thursday. At that point, I would pay attention to more than the price and where it might open and trade on Friday. I would also look for any dividend related news as it is expected to be ex-dividend as early as the following week.

Dividend news may be as significant as anything else, as GameStop has a very generous dividend and you always have to have some concern about its safety if cash flow is strangled. Heading into earnings, though, GameStop does seem to have a low enough payout ratio to at least withstand another quarter of dividend obligations.

If shares do decline after earnings and the dividend is left intact and an ex-dividend date for the following week is announced, I would strongly consider a buy and write approach. However, if the ex-dividend date will be the following week, I might instead consider the sale of puts.

Best Buy has also had its epitaph written and has somehow survived as more than just Amazon’s (AMZN) showroom.

Like GameStop there is a dividend in the near future.

However, the option market is giving a little bit bigger of a cushion if selling puts in advance of earnings.

Based upon Friday’s closing price, the option market is predicting a price range of about $29.50 – $35.50.

A 1% ROI may be potentially achieved even with a 13.4% decline in share price. I find that cushion far more appealing than for GameStop and would consider the sale of puts before earnings.

As with GameStop I would use the news of the upcoming ex-dividend date to determine what to do, but this time with regard as to what to do if faced with assignment. With good liquidity, I’d try to rollover those puts, but if faced with considering another rollover heading into the ex-dividend week, I would much rather own the shares and collect the dividend rather than partially subsidizing that dividend for the put buyer.

Traditional Stocks:  Macy’s

Momentum Stocks: Under Armour

Double-Dip Dividend: Dunkin Brands (5/25 $0.30), Corning (5/26 $0.13), SBGI (5/27 $0.18)

Premiums Enhanced by Earnings:  Best Buy (5/24 AM), GameStop (5/26 PM)

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

Weekend Update – January 3, 3016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What if energy prices move higher and sooner than expected?

What if the economy expands faster than we expected?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: MetLife. Morgan Stanley, Pfizer

Momentum Stocks: Best Buy, Under Armour

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

Premiums Enhanced by Earnings: none

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

Weekend Update – October 18, 2015

You have to be impressed with the way the market has rallied back from the morning of the most recent Employment Situation Report just 2 weeks earlier.

At the low point of that morning when the market seemed appropriately disappointed by the very disappointing numbers and the lowered revisions the S&P 500 had sunk to a point more than 11% below its recent high.

At its peak point of return since that low the S&P 500 was only 4.9% below its summer time high.

The difficulty in sustaining a large move in a short period of time is no different from the limitations we see in ourselves after expending a burst of energy and even those who are finally tuned to deliver high levels of performance.

When you think about a sprinter who’s asked to run a longer distance or bringing in a baseball relief pitcher who’s considered to be a “closer” with more than an inning to go, you see how difficult it can be to reach deep down when there’s nothing left to reach for.

Sometimes you feel as if there’s no choice and hope for the best.

You also can see just how long the recovery period can be after you’ve been asked to deliver more than you’ve been capable of delivering in the past. It seems that reaching deep down to do your best borrows heavily from the future.

While humans can often take a break and recharge a little markets are now world wide, inter-connected and plugged into a 24/7 news cycle.

While it may be boring when the market takes a rest by simply not moving anywhere, it can actually expend a lot of energy if it moves nowhere, but does so by virtue of large movements in off-setting directions.

We need a market that can now take a real rest and give up some of the histrionics, even though I like the volatility that it creates so that I can get larger premiums for the sale of options.

The seminal Jackson Browne song puts a different spin on the concept of “running on empty,” but the stock market doesn’t have the problems of a soulless wanderer, even though, as much as it’s subject to anthropomorphism, it has no soul of its own.

Nor does it have a body, but both body and soul can get tired. This market is just tired and sometimes there’s no real rest for the weary.

After having moved up so much in such a short period of time, it’s only natural to wonder just what’s left.

The market may have been digging deep down but its fuel cells were beginning to hit the empty mark.

This week was one that was very hard to read, as the financial sector began delivering its earnings and the best news that could come from those reports was that significantly decreased legal costs resulted in improved earnings, while core business activities were less than robust.

If that’s going to be the basis for an ongoing strategy, that’s not a very good strategy. Somehow, though, the market consistently reversed early disappointment and drove those financials reporting lackluster top and bottom lines higher and higher.

You can’t help but wonder what’s left to give.

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

American Express (NYSE:AXP) and Wal-Mart (NYSE:WMT) may be on very different ends of the scale, but they’ve both known some very bad days this year.

For American Express it came with the news that it was no longer going to be accepted as the sole credit card at Costco (NASDAQ:COST) stores around the nation. While that was bad enough, the really bad news came with the realization of just how many American Express card holders were actually holders of the Costco co-branded card.

There was a great Bloomberg article this week on some of the back story behind the American Express and Costco relationship and looks at their respective cultures and the article does raise questions about American Express’ ability to continue commanding a premium transaction payment from retailers, as well as continuing to keep their current Costco cardholders without the lure of Costco.

What American Express has been of late is a steady performer and the expectation should be that the impact of its loss of business in 2016 has already been discounted.

American Express reports earnings this week, but it’s option premiums aren’t really significantly enhanced by uncertainty.

Normally, I look to the sale of puts to potentially take advantage of earnings, but with American Express I might also consider the purchase of shares and the concomitant sale of calls and then strapping on for what could be a bumpy ride.

Wal-Mart, on the other hand only recently starting accepting American Express cards and that relationship was seen as a cheapening of the elite American Express brand, but we can all agree that money is money and that may trump everything else.

Apparently, however, investors didn’t seem to realize that Wal-Mart’s well known plan to increase employee salaries was actually going to cost money and they were really taken by surprise this week when they learned just how much.

What’s really shocking is that some very simple math could have spelled it out with some very reasonable accuracy since the number of workers eligible to receive the raise and the size of the raise have been known for months.

It reminds me of the shock expressed by Captain Renault in the movie “Casablanca” as he says “I’m shocked to find gambling is going on in here,” as he swoops up his winnings.

Following the decline and with a month still to go until earnings are reported, this new bit of uncertainty has enhanced the option premiums and a reasonable premium can possibly be found even when also trying to secure some capital gains from shares by using an out of the money strike price.

The Wal-Mart news hit retail hard, although to be fair, Target’s (NYSE:TGT) decline started as a plunge the prior day, when it fell 5% in the aftermath of an unusually large purchase of short term put options.

While I would look at Target as a short term trade, selling a weekly call option on shares, in the hope that there would be some recovery in the coming week, there may also be some longer term opportunities. That’s because Target goes ex-dividend and then reports earnings 2 days later during the final week of the November 2015 option cycle.

DuPont (NYSE:DD), Seagate (NASDAQ:STX) and YUM Brands (NYSE:YUM) don’t have very much in common, other than some really large share plunges lately, something they all share with American Express and Wal-Mart.

But that’s exactly the kind of market it has been. There have been lots of large plunges and very slow recoveries. It’s often been very difficult to reconcile an overall market that was hitting all time highs at the same time that so many stocks were in correction mode.

DuPont’s plunge came after defeating an activist in pursuit of Board seats, but the announcement of the upcoming resignation of its embattled CEO has put some life back into shares, even as they face the continuing marketplace challenges.

Dupont will report earnings the following week and will be ex-dividend sometime during the November 2015 option cycle.

While normally considering entering a new position with a short term option sale, I may consider the use of a monthly option in this case in an effort to get a premium reflecting its increased volatility and possibly also capturing its dividend, while hoping for some share appreciation, as well.

Seagate Technology is simply a mess at a time that hardware companies shouldn’t be and it may become attractive to others as its price plunges.

Storage, memory and chips have been an active neighborhood, but Seagate’s recent performance shows you the risks involved when you think that a stock has become value priced.

I thought that any number of times about Seagate Technology over the course of the past 6 months, but clearly what goes low, can go much lower.

Seagate reports earnings on October 30th, so my initial approach would likely be to consider the sale of weekly, out of the money puts and hope for the best. If in jeopardy of being assigned due to a price decline, I would consider rolling the contract over. The choice of time frame for that possible rollover will depend upon Seagate’s announcement of their next ex-dividend date, which should be sometime in early November 2015.

With that dividend in mind, a very generous one and seemingly safe, thoughts could turn to taking assignment of shares and then selling calls in an effort to keep the dividend.

Caterpillar (NYSE:CAT) hasn’t really taken the same kind of single day plunge of some of those other companies, but its slow decline is finally making Jim Chanos’ much publicized 2 year short position seem to be genius.

It’s share price connection to Chinese economic activity continues and lately that hasn’t been a good thing. Caterpillar is both ex-dividend this week and reports earnings. That’s generally not a condition that I like to consider, although there are a number of companies that do the same and when they are also attractively priced it may warrant some more attention.

In this case, Caterpillar is ex-dividend on October 22nd and reports earnings that same morning. That means that if someone were to attempt to exercise their option early in order to capture the dividend, they mist do so by October 21st.

Individual stocks have been brutalized for much of 2015 and they’ve been slow in recovering.

Among the more staid selections for consideration this week are Colgate-Palmolive (NYSE:CL) and Fastenal (NASDAQ:FAST), both of which are ex-dividend this week.

I’ve always liked Fastenal and have always considered it a company that quietly reflects United States economic activity, both commercial and personal. At a time when so much attention has been focused on currency exchange and weakness in China, you would have thought, or at least I would have thought, that it was a perfect time to pick up or add shares of a company that is essentially immune to both, perhaps benefiting from a strong US Dollar.

Well, if you weren’t wrong, I have been and am already sitting on an expensive lot of uncovered shares.

With only monthly option contracts and earnings already having been reported, I would select a slightly out of the money option strike or when the December 2015 contracts are released possibly consider the slightly longer term and at a higher strike price, in the belief that Fastenal has been resting long enough at its current level and is ready for another run.

Colgate-Palmolive is a company that I very infrequently own, but always consider doing so when its ex-dividend date looms.

I should probably own it on a regular basis just to show solidarity with its oral health care products, but that’s never crossed my mind.

Not too surprisingly, given its business and sector, even from peak to trough, Colgate-Palmolive has fared far better than many and will likely continue to do so in the event of market weakness. While it may not keep up with an advancing market, that’s something that I long ago reconciled myself to, when deciding to pursue a covered option strategy.

As a result of it being perceived as having less uncertainty it’s combined option premium and dividend, if captured, isn’t as exciting as for some others, but there’s also a certain personal premium to be paid for the lack of excitement.

The excitement may creep back in the following week as Colgate reports earnings and in the event that a weekly contract has to be rolled over I would considered rolling over to a date that would allow some time for price recovery in the event of an adverse price move.

Reporting earnings this week are Alphabet (NASDAQ:GOOG) and Under Armour (NYSE:UA).

Other than the controversy surrounding its high technology swim suits at the last summer Olympics, Under Armour hasn’t faced much in the way of bad news. Even then, it proved to have skin every bit as repellent as its swim suits.

The news of the resignation of its COO, who also happened to serve as CFO, sent shares lower ahead of earnings.

The departure of such an important person is always consequential, although perhaps somewhat less so when the founder and CEO is still an active and positive influence in the company, as is most definitely the case with under Armour.

However, the cynic sees the timing of such a departure before earnings are released, as foretelling something awry.

The option market is implying a price move of about 7.5%, while a 1% ROI may possibly be obtained through the sale of puts 9% below Friday’s closing price.

For me, the cynic wins out, however. Under Armour then becomes another situation that I would consider the sale of puts contracts after earnings if shares drop strongly after the report, or possible before earnings if there is a sharp decline in its advance.

I’m of the belief that Google’s new corporate name, “Alphabet” will be no different from so many other projects in beta that were quietly or not so quietly dropped.

There was a time that I very actively traded Google and sold calls on the positions.

That seems like an eternity ago, as Google has settled into a fairly stodgy kind of stock for much of the past few years. Even its reaction to earnings reports have become relatively muted, whereas they once were things to behold.

That is if you ignore its most recent earnings report which resulted in the largest market capitalization gain in a single day in the history of the world.

Now, Alphabet is sitting near its all time highs and has become a target in a way that it hasn’t faced before. While it has repeatedly faced down challenges to its supremacy in the world of search, the new challenge that it is facing comes from Cupertino and other places, as ad blockers may begin to show some impact on Alphabet’s bread and butter product, Google.

Here too, the reward offered for the risk of selling puts isn’t very great, as the option market is implying a 6% move. That $40 move in either direction could bring shares down to the $620 level, at which a barely acceptable 1% ROI for a weekly put sale may be achieved.

With no cushion between what the market is implying and where a 1% ROI can be had, I would continue to consider the sale of puts if a large decline precedes the report or occurs after the report, but I don’t think that I would otherwise proactively trade prior to earnings.

Finally, VMWare (NYSE:VMW) also reports earnings this week.

If you’re looking for another stock that has plunged in the past week or so, you don’t have to go much further than VMWare, unless your definition requires a drop of more than 15%.

While it has always been a volatile name, VMWare is now at the center of the disputed valuation of the proposed buyout of EMC Corp (NYSE:EMC), which itself has continued to be the major owner of VMWare.

I generally like stocks about to report earnings when they have already suffered a large loss and this one seems right.

The option market is implying about a 5.2% move next week, yet there’s no real enhancement of the put premium, in that a 1% ROI could be obtained, but only at the lower border of the implied move.

The structure of the current buyout proposal may be a factor in limiting the price move that option buyers and sellers are expecting and may be responsible for the anticipated sedate response to any news.

While that may be the case, I think that the downside may be under-stated, as has been the case for many stocks over the past few months, so the return is not enough to get me to take the risk. But, as also has been the case for the past few months, it may be worthy considering to pile on if VMWare disappoints further and shares continue their drop after earnings are released.

That should plump up the put premium as there might be concern regarding the buyout offer on the table, which is already suspect.

Traditional Stocks: American Express, DuPont, Target, Wal-Mart

Momentum Stocks: Seagate Technology, YUM Brands

Double-Dip Dividend: Caterpillar (10/22 $0.71), Colgate-Palmolive (10/21 $0.38), Fastenal (10/23 $0.28),

Premiums Enhanced by Earnings: Alphabet (10/22 PM), Under Armour (10/22 AM), VMWare (10/20 PM)

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

Weekend Update – May 25, 2014

This was a good week, every bit as much as it was an odd one. 

You almost can’t spell “good” without “odd.”

We tend to be creatures that spend a lot of time in hindsight and attempting to dissect out what we believe to be the important components of everything that surrounds us or impacts upon us.

Sometimes what’s really important is beyond our ability to  see or understand or is just so counter-intuitive to what we believe to be true. I’m always reminded of the great Ralph Ellison book, “The Invisible Man,” in which it’s revealed that the secret to obtaining the most pure of white paints is the addition of a drop of black paint.

That makes no sense on any level unless you suspend rational thought and simply believe. Rational thought has little role when it calls for the suspension of belief.

This past week there was no reason to believe that anything good would transpire.

Coming on the heels of the previous week, which saw a perfectly good advance evaporate by week’s end there wasn’t a rational case to be made for expecting anything better the following week. That was especially true after the strong sell-off this past Tuesday.

Rational thought would never have taken the antecedent events to signal that the market would alter its typical pattern of behavior on the day of an FOMC statement release. That behavior was to generally trade in a reserved and cautious fashion prior to the 2 PM embargo release and then shift into chaotic knee-jerks and equally chaotic post-kneejerk course corrections.

Instead, the market advanced strongly from the opening bell on that day, erasing the previous day’s losses and had no immediate reaction to the FOMC release and then in an orderly fashion moved mildly higher after the words were parsed and interpreted.

The trading on that day and its timing were entirely irrational. It was odd, but it was good.

Ordinarily it would have also been irrational to expect a rational response to the minutes that offered no new news, as in the past real news was not a necessary factor for irrational buying or selling behavior.

The ensuing rational behavior was also odd, but it, too, was good.

As another new high was set to end the week there should be concern about approaching a tipping point, especially as the number of new highs is on the down trend. However, the market’s odd behavior the past week gives me reason to be optimistic in the short term, despite a belief that the upside reward is now considerably less than the downside risk in the longer term. 

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

This was a week in which those paid to observe such things finally commented on the disappointing results coming from retailers, despite the fact that the past two or three quarters have been similar and certainly not reflective of the kind of increased discretionary spending you might expect with increasing employment statistics.

With some notable exceptions, such as LuLuLemon (LULU) and Family Dollar Store (FDO) I’ve enjoyed being in and out of retailers, although I think I’d rather be maimed than actually be in and out of anyone’s actual store.

This week a number of retailers have appeal, either on their merits or because there may be some earnings related trades seeking to capitalize on their movements. Included for their merits are in the list are Bed Bath and Beyond (BBBY), eBay (EBAY), Nike (NKE) and The Gap (GPS), while Abercrombie and Fitch (ANF) and Kors (KORS) report earnings this week.

After a disappointing earnings report Bed Bath and Beyond has settled into a trading range and gas seemed to establish some support at the $60 level. Along with so many others that have seen their shares punished after earnings the recovery of share price seems delayed as compared to previous markets. For the option seller that kind of listless trading can be precisely the scenario that returns the best results.

eBay has also stagnated. With Carl Icahn still in the picture, but uncharacteristically quiet, especially after the announcement of a repatriation of some $6 billion in cash back to the United States and, therefore, subject to taxes, there doesn’t seem to be a catalyst for a return to its recent highs. That suits me just fine, as I’ve liked eBay at the $52 level for quite a while and it has been one of my more frequent in and out kind of trades. At present, I do own two other lots of shares and three lots is my self imposed limit, but for those considering an initial entry, eBay has been seen as a mediocre performer in the eyes of those expecting upward price movement, but a superstar from those seeking premium income through the serial sale of option contracts week in and out. If you’re the latter kind, eBay can be as rewarding as the very best of the rest.

The Gap reported earnings on Friday and exhibited little movement. It’s currently trading at the high end of where I like to initiate positions, but it, too, has been a very reliable covered option trade. An acceptable dividend and a fair option premium makes it an appealing recurrent trade. The only maddening aspect of The Gap is that it is one of the few remaining retailers that oddly provides monthly same store sales and as a result it is prone to wild price swings on a regular basis. Those price swings, however, tend to be alternating and do help to keep those option premiums elevated.

You simply take the good with the odd in the case of The Gap and shrug your shoulders when the market response is adverse and just await the next opportunity when suddenly all is good again.

Despite all of the past criticism and predictions of its irrelevance in the marketplace Abercrombie and Fitch continues to be a survivor.  This past Friday was the second anniversary of the initial recommendation of taking a position for Option to Profit subscribers, although I haven’t owned shares in nearly 5 months. Since that initial purchase there have been 18 such recommendations, with a cumulative 71.5% return, despite shares having barely moved during that time frame.

Always volatile, especially when earnings are due, the options market is currently implying a 10.2% move in price. For me, the availability of a 1% ROI from selling put contracts at a strike level outside of the lower boundary of that implied range gets my interest. In this case shares could fall up to 13.9% before assignment is likely and still deliver that return.

Kors, also known as “Coach (COH) Killer” also reports earnings this week. It has stood out recently because it hasn’t been subject to the same kind of selling pressure as some other “momentum” stocks. The option market is implying a price movement of 7.4%, while a 1% ROI from put sales may be obtained at a strike level currently 8.8% below Friday’s closing price. However, while Abercrombie and Fitch has plenty of experience with disappointing earnings and has experienced drastic price drops, Kors has yet to really face those kinds of challenges. In the current market environment earnings disappointments are being magnified and the risk – reward proposition with an earnings related trade in Kors may not be as favorable as for that with Abercrombie.

In the case of Kors I may be more inclined to consider a trade after earnings, particularly considering the sale of puts if earnings are disappointing and shares plummet.

After last week’s brief ownership of Under Armour (UA) this week it may be time to consider a purchase of Nike, which under-performed Under Armour for the week. Shares also go ex-dividend this week and have been reasonably range-bound of late. It isn’t a terribly exciting trade, but at this stage of life, who really needs excitement? I also don’t need a pair of running shoes and could care less about making a fashion statement, but I do like the idea of its consistency and relatively low risk necessary in order to achieve a modest reward.

Transocean (RIG) is off of its recent lows, but still has quite a way to go to return to its highs of earlier in the year. Going ex-dividend this week, the 5.7% yield has made the waiting on a more expensive lot of shares to recover a bit easier. As with eBay, I already have two lots of shares, but believe that at the current level this is a good time for initial entry, perhaps considering a longer term option contract and seeking capital gains on shares, as well. As with most everything in business and economy, the current oversupply or rigs will soon become an under supply and Transocean will reap the benefits of cyclicality.

Sinclair Broadcasting (SBGI) also goes ex-dividend this week. It is an important player in my area and has become the largest operator of local television stations in the nation, while most people have never heard the name. It is an infrequent purchase for me, but I always consider doing so as it goes ex-dividend, particularly if trading at the mid-point of its recent range. CUrrently shares a little higher than I might prefer, but with only monthly options available and an always healthy premium, I think that even at the current level there is good opportunity, even if shares do migrate to the low end of its current range.

Finally, Joy Global (JOY), one of those companies whose fortunes are closely tied to Chinese economic reports, has seen a recent 5% price drop from its April 2014 highs. While it is still above the price that I usually like to consider for an entry, I may be interested in participating this week with either a put sale of a buy/write.

Among the considerations are events coming the following week, as shares go ex-dividend early in the week and then the company reports earnings later in the week.

While my preference would be for a quick one week period of involvement, there always has to be the expectation of well laid out plans not being realized. In this case the sale of puts that may need to be rolled over would benefit from enhanced earnings related premiums, but would suffer a bit as the price decrease from the dividend may not be entirely reflected in the option premium. That’s similar to what is occasionally seen on the call side, when option premiums may be higher than they rightfully should be, as the dividend is not fully accounted.

Otherwise, if beginning a position with a buy/write and not seeing shares assigned at the end of the week, I might consider a rollover to a deep in the money call, thereby taking advantage of the enhanced premiums and offering a potential exit in the event that shares fall with the guidelines predicted by the implied volatility. Additionally, it might offer the chance of early assignment prior to earnings due to the Monday ex-dividend date, thereby providing a quick exit and the full premium without putting in the additional time and risk.

 

Traditional Stocks: Bed Bath and Beyond, eBay, The Gap

Momentum: Joy Global

Double Dip Dividend: Nike (5/29 $0.24), Sinclair Broadcasting (5/28 $0.15), Transocean (5/28 $0.75)

Premiums Enhanced by Earnings: Abercrombie and Fitch (5/29 AM), Kors (5/28 AM)

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

Weekend Update – April 6, 2014

This week started on such a positive note with the reassuring words of a dove, yet ended so harshly.

This time of the year it’s supposed to be the other way around with the lamb having the final word as months of a less threatening nature await ahead.

Instead, after Friday’s close, whatever optimism may have been generated by setting even more record highs earlier in the week, had given way to caution and perhaps preparation for some ill winds.

Back when I was in college it wasn’t meant as a compliment if you were referred to as being a “dove.” and the proverbial lamb was always being led to slaughter.  In fact, if you were called a “dove,” that was only in polite circles. Otherwise, the words used were far more descriptive and derisive.

By the same token, the doves out there may not have had the kindest of words for the hawks, but in nature, it’s usually the hawk that triumphs. In fact, recalling the recent mauling of a peace dove that had been just released by Pope Francis and some children, it didn’t really even require a hawk. A seagull and a lowly crow were enough for the task.

This week, though, it was the dove that ruled the day and set the tone for the week. Well, at least most of it, until its fragile nature beset itself.

A fragile market can be equally susceptible even to less formidable foes, as Friday’s sell-off had little basis and came on the day of the Employment Situation Report, which for the past 20 months or so has been strongly correlated to a higher moving market on the day of release and for the week as a whole. While the week as a whole did show an advance, the former correlation stood for only a short time before strong selling set in.

Whatever doubts there may have been regarding where Janet Yellen stood on that continuum from dove to hawk following her initial press conference, she made it clear that on issues of the Federal Reserve’s actions to help lower the unemployment rate, she was an unabashed dove and while there may be more dissenting voting members than before sitting on the Federal Reserve, she still controls the hawks, but probably keeps at least one eye wary at all times.

The stock market loved that re-affirmation of policy the way we love the beauty of a dove, even though like short sellers, we may privately relish its obliteration by a swooping predator hawk.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum categories, with no “PEE” selections this week (see details).

While this was an especially brutal week for stocks on the NASDAQ and particularly for many of those stocks that had borne a disproportionate amount of everyone’s attention as they moved ever higher, many others were included in whatever wrath took hold.

With earnings season beginning this coming week there may be some return to fundamentals, however, disappointments, particularly if weather hasn’t been fully factored in or discounted may further exploit market fragility.

MasterCard (MA) was one such casualty of the stampede. There was little to account for its 2.5% drop on Friday, bringing it to its 5 month low. The previous week, faced with some potentially adverse decisions regarding swipe fees it reacted well, yet this week it did otherwise without any new challenges being sent its way. While it goes ex-dividend on Monday it’s puny dividend isn’t something that’s likely to be missed by those entering into new positions as shares find themselves at a 5 month low. Believing that last week’s selling was overdone I would consider a slightly longer option contract and the use of an out of the money strike as a means to allow some time for price repair while collecting an option premium while waiting.

While not falling quite as much as MasterCard on Friday, shares of Starbucks (SBUX) also succumbed to selling pressure. While the past week was filled with news regarding other players entering into the breakfast marketplace, including offering free cups of coffee, there was really an absence of Starbucks specific news. While breakfast taco waffles may garner some attention, Starbucks has become as much a way of life as it has a product provider. It’s current price is one where it has shown considerable strength and it too may warrant the use of slightly longer term option contracts and an out of the money strike.

Apollo Education (APOL) was a stock that I highlighted last week as a possible earnings trade. As usual, I prefer those through the sale of well out of the money put contracts prior to earnings, especially if share price is trending downward prior to earnings. In Apollo’s case shares had instead shown strength prior to the earnings release, so I stayed away from selling puts at that time. After earnings shares did sustain a drop and I then sold some out of the money puts in the hope that the drop wouldn’t continue beyond another few strike levels. While there was almost a need to roll them over on Friday as the market was crumbling, Apollo shares showed resilience, even as the market did not.

While I still don’t have much confidence in the product it offers nor the manner in which it generates its revenues, that’s largely irrelevant, as it continues to offer some reasonable returns even if shares continue to experience some decline. Once again, however, I would most likely consider the sale of puts rather than an outright purchase of shares and concomitant sale of calls.

There’s probably very little that can be added to make a discussion of Herbalife (HLF) newsworthy, but when there is, it will really be worth paying attention. While Herbalife has been a good target of put sellers following the severe price drop in the wake of regulatory and legal investigations that are being escalated, it has recovered very nicely with the realization that any real news is likely to be in the distance. It too, is a position that I would likely consider entry through the sale of out of the money puts.

This week’s dividend stocks for consideration are two that I haven’t owned for a while, as I’ve been waiting for them to return to more reasonable price levels. Sometimes the realization comes that waiting only prevents being an active participant. Aetna (AET) Abbott Labs (ABT) have long been absent from my portfolio despite continually thinking about adding them back.

With a large number of existing positions already going ex-dividend this week I’m not as anxious to add any additional ones. However, of those two, Abbott Labs is more appealing for having a higher dividend rate and for having already come off some recent price peaks. In need of additional health care sector stocks, Abbott also carries that personal appeal at this point in time. However, it reports earnings the following week so my preference, if purchasing shares, would be a quick holding and given its current option premium would even be willingly accepting of an early assignment.

Aetna has simply left me behind in the dust as I’ve been waiting for it to return to what I believed was a fair price, but apparently the market has long disagreed. While it may be some time until we all realize whether new healthcare mandates are a positive or negative for the insurers, the one thing that most everyone can agree is that the long term is always positive when your fee structure is highly responsive to actuarial data. Add to that an increasing interest rate environment and the future may be bright for insurers.

Among the shares that I had assigned this past week were Comcast (CMCSA) and Coach (COH). Following the week ending sell-off I was grateful to have as many assignments as there were, especially to replenish cash reserves in the event of buying opportunities ahead. However, among those assigned, these two are ones that I’m eager to re-incorporate into my portfolio.

Comcast, despite my personal feelings about the product and service, has just been a spectacular growth story and has had great guidance under the control of the Roberts family. My celebration of “Comcast Liberation Day” a few years ago didn’t mean that I would boycott share ownership or overlook its attributes as an investment. It’s recent 10% price drop in the past two months from its highs has offered an opportunity to find some more realistic entry points. While I’ve been following shares for quite some time, it only recently began offering weekly and expanded weekly options. For me, that was the signal, combined with the reduced share price to start initiating positions.  I envision a similar opportunity with Comcast shares on a serial basis as I have experienced with Coach.

Coach remains a stock that I feel like I could happily buy most week in and out as long as it’s trading in a $48-$54 range and have done so repeatedly when it has done so. Despite a near absence of positive news in almost two years and the company having been written off as a loser in the competitive wars, especially with Michael Kors (KORS), for those who can recognize that multiple small stock gains can be very meaningful it has been a consistent performer. With earnings approaching at the end of the month I would be less inclined to use longer term option contracts at this time, as Coach has had a recent history of sharp and unpredictable moves following earnings.

While Coach has been unable to do anything right in the eyes of many, until recently, Under Armour (UA) could do no wrong. WHile it’s still not clear whether the design of their latest skating wear for US Olympians was in any way related to their disappointing performance, Under Armour’s CEO, Kevin Plank, was a perfect study in how to present his company when under public scrutiny. 

While it received a downgrade about 3 weeks ago and subsequently fell more than 7% in that aftermath, it fell an additional 9% from that sentinel point late this week as it was carried along with the rest of the deluge. As with many others the selling was in the absence of substantive news.

With earnings season beginning this coming week, Under Armour is among those announcing early in the process on April 17, 2014. It’s volatility is commanding a health option premium at a time when many others are languishing, however, the risk may be compounded during the following week. For that reason, if considering the purchase of shares I would likely use a weekly contract and if necessary roll that over to a longer term contract in anticipation of that enhanced risk. As earnings approach, Under Armour may also turn out to be a potential earnings related trade through the sale of out of the money put options.

Finally, a number of years ago I was studying two stocks with an eye toward adding one to my regular rotation in need of another energy sector position. They were Anadarko (APC) and Apache (APA). For a while I would get their stock symbols confused and really had a difficult time discerning their differences. I still have no real idea of what those differences may be, but for some reason I gravitated toward Anadarko.

This week, that dalliance may have come to an end, at least for the time being, as my shares were assigned following an untimely and unexpected end to the Tronox litigation that was an unwelcome part of its Kerr McGee purchase.

Whatever positive comments I would normally make about Anadarko relative to its prospects for trading in a range and offering an attractive premium can now be transferred to Apache. The best part, though, is that Apache is approximately 10% below its recent high and can make me forget about Anadarko for now.

Traditional Stocks: Apache, Comcast, MasterCard, Starbucks

Momentum Stocks: Apollo Educational, Coach, Herbalife, Under Armour

Double Dip Dividend: Aetna (4/8), Abbott Labs (4/11)

Premiums Enhanced by Earnings: none

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