Weekend Update – July 3, 2016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I reserve the right to change my mind, though.

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

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

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

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

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

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

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

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

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

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

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

Hopefully, he won’t change his mind.

Traditional Stocks: MetLife

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

Double-Dip Dividend: none

Premiums Enhanced by Earnings: none

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

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 – March 15, 2015

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

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

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

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

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

Somehow that doesn’t sound very likely.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What would Sheldon Do?

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

The Gap (NYSE:GPS) fascinates me.

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

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

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

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

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

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

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

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

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

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

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

 

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

Momentum Stocks: Seagate Technology, United Continental

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

Premiums Enhanced by Earnings: none

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

Weekend Update – March 8, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Neither of those is very comforting.

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

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

There’s always that.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: Dow Chemical

Momentum Stocks: Mosaic, United Continental

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

Premiums Enhanced by Earnings: none

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

Weekend Update – March 1, 2015

It was interesting listening to the questioning of FOMC Chairman Janet Yellen this week during her mandated two day congressional appearance.

The market went nicely higher on the first day when she was hosted by the more genteel of the two legislative bodies. The apparent re-embrace of her more dovish side was well received by the stock market, even as bond traders had their readings of the tea leaves called into question.

While the good will imparted by suggesting that interest rate increases weren’t around the corner was undone by the Vice-Chair on Friday those bond traders didn’t get vindicated, but the stock market reacted negatively to end a week that reacted only to interest rate concerns.

His candor, or maybe it was his opinion or even interpretation of what really goes on behind the closed doors of the FOMC may be best kept under covers, especially when I’m awaiting the likelihood of assignment of my shares and the clock is ticking toward the end of the trading week in the hope that nothing will get in the way of their appointed rounds.

Candor got in the way.

But that’s just one of the problems with too much openness, particularly when markets aren’t always prepared to rationally deal with unexpected information or even informed opinion. Sometimes the information or the added data is just noise that clutters the pathways to clear thinking.

Yet some people want even more information.

On the second day of Yellen’s testimony she was subjected to the questioning of those who are perennially in re-election mode. Yellen was chided for not being more transparent or open in detailing her private meetings. It seemed odd that such non-subtle accusations or suggestions of undue influence being exerted upon her during such meetings would be hurled at an appointed official by a publicly elected one. That’s particularly true if you believe that an elected official has great responsibility for exercising transparency to their electorate.

Good luck, however, getting one to detail meetings, much less conversations, with lobbyists, PAC representatives and donors. You can bet that every opacifier possible is used to make the obvious less obvious.

But on second thought, do we really need even more information?

I still have a certain fondness for the old days when only an elite few had timely information and you had to go to the library to seek out an updated copy of Value Line in the hopes that someone else hadn’t already torn out the pages you were seeking.

Back then the closest thing to transparency was the thinness of those library copy pages, but back then markets weren’t gyrating wildly on news that was quickly forgotten and supplanted the next day. That kind of news just didn’t exist.

You didn’t have to worry about taking the dog out for a walk and returning to a market that had morphed into something unrecognizable simply because a Federal Reserve Governor had offered an opinion in a speech to businessmen in Fort Worth.

Too much information and too easy access and the rapid flow of information may be a culprit in all of the shifting sands that seem to form at the base of markets and creating instability.

I liked the opaqueness of Greenspan during his tenure at the Federal Reserve. During that time we morphed from investors largely in the dark to investors with unbelievable access to information and rapidly diminishing attention spans. Although to be fair, that opaqueness created its own uncertainty as investors wouldn’t panic over what was said but did panic over what was meant.

If I had ever had a daughter I would probably apply parental logic and suggest that it might be best to “leave something to the imagination.” I may be getting old fashioned, but whether it’s visually transparent or otherwise, I want some things to be hidden so that I need to do some work to uncover what others may not.

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

It’s difficult to find much reason to consider a purchase of shares of Chesapeake Energy (NYSE:CHK), but exactly the same could have been said about many companies in the energy sector over the past few months. There’s no doubt that a mixture of good timing, luck and bravery has worked out for some willing to take the considerable risk.

What distinguishes Chesapeake Energy from so many others, however, is that it has long been enveloped in some kind of dysfunction and melodrama, even after severing ties with its founder. Like a ghost coming back to haunt his old house the legacy of Aubrey McClendon continues with accusations that he stole confidential data and used it for the benefit of his new company.

Add that to weak earnings, pessimistic guidance, decreasing capital expenditures and a couple of downgrades and it wasn’t a good week to be Chesapeake Energy or a shareholder.

While it’s hard to say that Chesapeake Energy has now hit rock bottom, it’s certainly closer than it was at the beginning of this past week. As a shareholder of much more expensive shares I often like to add additional lower cost lots with the intent of trying to sell calls on those new shares and quickly close out the position to help underwrite paper losses in the older shares. However, I’ve waited a long time before considering doing so with Chesapeake.

Now feels like the right time.

Its elevated option premiums indicate continuing uncertainty over the direction its shares will take, but I believe the risk-reward relationship has now begun to become more favorable as so much bad news has been digested at once.

It also wasn’t a very good week to be Bank of America (NYSE:BAC) as it well under-performed other large money center banks in the wake of concerns regarding its capital models and ability to withstand upcoming stress tests. It’s also never a good sign when your CEO takes a substantial pay cut.

If course, if you were a shareholder, as I am, you didn’t have a very good week, either, but at least you had the company of all of those analysts that had recently upgraded Bank of America, including adding it to the renowned “conviction buy” list.

While I wouldn’t chase Bank of America for its dividend, it does go ex-dividend this week and is offering an atypically high option premium, befitting the perceived risk that continues until the conclusion of periodic stress testing, which will hopefully see the bank perform its calculations more carefully than it did in the previous year’s submission to the Federal Reserve.

After recently testing its 2 year lows Caterpillar (NYSE:CAT) has bounced back a bit, no doubt removing a little of the grin that may have appeared for those having spent the past 20 months with a substantial short position and only recently seeing the thesis play out, although from a price far higher than when the thesis was originally presented.

While it’s difficult to find any aspect of Caterpillar’s business that looks encouraging as mining and energy face ongoing challenges, the ability to come face to face with those lows and withstand them offers some encouragement if looking to enter into a new position. Although I rarely enter into a position with an idea of an uninterrupted long term relationship, Caterpillar’s dividend and option premiums can make it an attractive candidate for longer term holding, as well.

Baxter International (NYSE:BAX) is a fairly unexciting stock that I’ve been excited about re-purchasing for more than a year. I generally like to consider adding shares as it’s about to go ex-dividend, as it is this week, however, I had been also waiting for its share price to become a bit more reasonable.

Those criteria are in place this week while also offering an attractive option premium. Having worked in hospitals for years Baxter International products are ubiquitous and as long as human health can remain precarious the market will continue to exist for it to dominate.

Las Vegas Sands (NYSE:LVS) has certainly seen its share of ups and downs over the past few months with very much of the downside being predicated on weakness in Macao. While those stories have developed the company saw fit to increase its dividend by 30%. Given the nature of the business that Las Vegas Sands is engaged in, you would think that Sheldon Adelson saw such an action, even if in the face of revenue pressures, as being a low risk proposition.

Since the house always wins, I like that vote of confidence.

Following a very quick retreat from a recent price recovery I think that there is more upside potential in the near term although if the past few months will be any indication that path will be rocky.

This week’s potential earnings related trades were at various times poster children for “down and out” companies whose stocks reflected the company’s failing fortunes in a competitive world. The difference, however is that while Abercrombie and Fitch (NYSE:ANF) still seems to be mired in a downward spiral even after the departure of its CEO, Best Buy (NYSE:BBY) under its own new CEO seems to have broken the chains that were weighing it down and taking it toward retail oblivion.

As with most earnings related trades I consider the sale of puts at a strike price that is below the lower range dictated by the implied move determined by option premiums. Additionally, my preference would be to sell those puts at a time that shares are already heading noticeably lower. However, if that latter condition isn’t met, I may still consider the sale of puts after earnings in the event that shares do go down significantly.

While the options market is implying a 12.6% move in Abercrombie and Fitch’s share price next week a 1% ROI may be achieved even if selling a put option at a strike 21% below Friday’s close. That sounds like a large drop, but Abercrombie has, over the years, shown that it is capable of such drops.

Best Buy on the other hand isn’t perceived as quite the same earnings risk as Abercrombie and Fitch, although it too has had some significant earnings moves in the recent past.

The options market is implying a 7% move in shares and a 1% ROI could potentially be achieved at a strike 8.1% below Friday’s close. While that’s an acceptable risk-reward proposition, given the share’s recent climb, I would prefer to wait until after earnings before considering a trade.

In this case, if Best Buy shares fall significantly after earnings, approaching the boundary defined by the implied move, I would consider selling puts, rolling over, if necessary to the following week. However, with an upcoming dividend, I would then consider taking assignment prior to the ex-dividend date, if assignment appeared likely.

Finally, I end how I ended the previous week, with the suggestion of the same paired trade that sought to take advantage of the continuing uncertainty and volatility in energy prices.

I put into play the paired trade of United Continental Holdings (NYSE:UAL) and Marathon Oil (NYSE:MRO) last week in the belief that what was good news for one company would be bad news for the other. But more importantly was the additional belief that the news would be frequently shifting due to the premise of continuing volatility and lack of direction in energy prices.

The opening trade of the pair was initiated by first adding shares of Marathon Oil as it opened sharply lower on Monday morning and selling at the money calls.

As expected, UAL itself went sharply higher as it and other airlines have essentially moved oppositely to the movements in energy prices over the past few months. However, later that same day, UAL gave up most of its gains, while Marathon Oil moved higher. A UAL share price dropped I bought shares and sold deep in the money calls.

In my ideal scenario the week would have ended with one or both being assigned, which was how it appeared to be going by Thursday’s close, despite United Continental’s price drop unrelated to the price of oil, but rather related to some safety concerns.

Instead, the week ended with both positions being rolled over at premiums in excess of what I usually expect when doing so.

Subsequently, in the final hour of trading, shares of UAL took a precipitous decline and may offer a good entry point for any new positions, again considering the sale of deep in the money calls and then waiting for a decline in Marathon Oil shares before making that purchase and selling near the money calls.

While the Federal Reserve may be data driven it’s hard to say what exactly is driving oil prices back and forth on such a frequent and regular basis. However, as long as those unpredictable ups and downs do occur there is opportunity to exploit the uncertainty and leave the data collection and interpretation to others.

I’m fine with being left in the dark.

 

Traditional Stocks: Caterpillar, Marathon Oil

Momentum Stocks: Chesapeake Energy, Las Vegas Sands, United Continental Holdings

Double Dip Dividend: Bank of America (3/4), Baxter International (3/9)

Premiums Enhanced by Earnings: Abercrombie and Fitch (3/4 AM), Best Buy (3/4 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 – February 22, 2015


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

^TNX Chart

^TNX data by YCharts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: JP Morgan Chase, Marathon Oil

Momentum Stocks: United Continental Holdings, Yahoo

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

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

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

Weekend Update – February 15, 2015

You would think that when the market sets record closing highs on the S&P 500 that there would be lots of fireworks after the fact and maybe lots of excited anticipation before the fact.

But that really hasn’t been the case since 2007.

The “whoop whoop” sounds you may have heard coming from the floor of the NYSE had nothing to do with pitched fervor, but rather with traditional noise making at 3:33 PM on the Friday before a 3 day holiday.

The whooping noise was also in sharp contrast to the relative calm of the past week and it may have been that calm, or maybe the absence of anxiety, that allowed the market to add another 2% and set those record highs.

After a while you do get tired of always living on the edge and behaving in a hyper-caffeinated way in response to even the most benign of events.

Even back in 2007 as we were closing in on what we now realize was the high point for that year, there were so many records being set, seemingly day in and out, that it began to feel more like an entitlement rather than something special.

You whoop about something special. You don’t whoop about entitlements. There was no whooping on Friday at 4 PM. instead, it was a calm, matter of fact reaction to something we had never seen before. New highs are met with yawns and new heights aren’t as dizzying as they used to be, especially if you don’t look down.

When your senses get dulled it’s sometimes hard to see what’s going on around you, but there’s a difference between maintaining a sense of calm and having your senses dulled to the dangers of collateralized debt obligations or other evils of the era.

This calmness was good.

As opposed to those who refer to pullbacks from highs as being healthy, this calm character of this climb to a new high was what health is really all about. I feel good when my portfolio outperforms the market during a down week, but the end result is still a loss. When I really feel great is when out-performing during an up week.

Both may feel good, but only one is good in absolute terms. From my perspective, the only healthy market is one that is moving higher, but not doing so recklessly.

This week, was a continuation of a month that has characterized by calm events and an appropriate measure of acceptance of those events while moving to greater heights in a methodical way

While it may be good to not see some kind of unbridled buying fervor break out when records are reached, it does make you wonder why the same self control can’t be put on when things momentarily appear dire, as there have certainly been plenty of near vertical declines in the past few months that just a little calmness of mind could have avoided.

Coming from the most recent decline that ended in January 2015, the move higher has presented a circuitous path toward Friday’s new high close.

Instead of the straight line higher or the “V-shaped” recoveries that so many refer to, and that have characterized upward reversals in the past few months, this most recent reversal has been a stagger stepped one.

Rather than coming as a burst of unbridled excitement, the market has been taking the time to enjoy and digest the ride higher.

The climb was odd though when you consider that oil prices had been moving strongly higher, retail sales were disappointing, interest rates were climbing and currency troubles were plaguing US company profits. All these were happening as gold, long a proxy for the investor anxiety was gyrating with large moves.

But perhaps it was a sense of serenity and calm from overseas that offset those worrying events. Greece and the European Union appeared to be closer to an agreement on debt concerns and another Ukraine peace accord seemed likely.

The stock market simply decided that nothing could possibly happen to derail either of those potential agreements.

So there’s calmness, dulled senses and burying your head in the sand.

This week the calmness may have been secondary to some denial, but given the result, I’m all for denial, as long as it can keep reality away just a little longer.

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

What surprises me most, particularly considering a portfolio that doesn’t often hold very many DJIA positions, is that this week there are 5 DJIA members that may have reason for garnering attention.

It has been a bit more than two years since I last owned American Express (NYSE:AXP). Up until 2015, if you had looked at its performance in the time since I last owned it and happened to have also been in a vacuum at the time, it looked as if it had a pretty impressive ride.

That impression would have been upset if the vacuum was disrupted and you began to compare its performance to the S&P 500 and especially if comparing it to its rivals.

That ride got considerably more bumpy this past week as it will be losing a major co-branding partner, Costco (NASDAQ:COST) in 2016. While the possibility of that partnership coming to an end had been well known, the market’s reaction suggests that either it was ignored or calmness doesn’t reside when mediocre rewards programs are threatened with extinction.

But a 10% plunge seems drastic. The co-branding effort allowed American Express to dip its toes into the credit card business and deal with normal folks who don’t always pay their credit card charges in full, but do pay interest charges. Given the Costco shopper demographic that seemed like a nice middle ground for risk and reward that will be difficult to replace. However, American Express shares are now on sale, having reached 16 month lows and the excitement injects some life into its option premiums.

Intel (NASDAQ:INTC) recovered some of its losses since my last purchase, but not enough to make it within easy striking distance of an assignment.

While it was a great performer in 2014 it has badly trailed the S&P 500 in 2015. While it may be subject to currency crosswinds, nothing fundamental has changed in its story to warrant its most recent decline, particularly as “old tech” has had its respect restored.

While its option premium is not overly exciting enough to consider using out of the money options, there is enough reason to believe that there is some additional potential for price recovery left in its shares to consider not covering all new shares.

Coca Cola (NYSE:KO) continues to be derided and maybe for good reason as it needs something to both change its image of being out of touch with contemporary tastes and some diversification of its product lines.

The former isn’t likely to happen overnight, nor is any revenue related calamity expected to strike with suddeness, at least not before its next dividend, which is expected in the next few weeks. In the meantime, as with Intel, there may be some reason to believe that some price recovery may be part of the equation when deciding to sell calls on the position.

In the cases of DJIA components Johnson and Johnson (NYSE:JNJ) and General Electric (NYSE:GE) their upcoming ex-dividend dates this week add to their interest.

Johnson and Johnson, when reporting earnings last month was one of the first to remind us of the darkness associated with a strong US dollar and its shares are still lower, having trailed the S&P 500 by nearly 8% since earnings release on January 20th. Most of that decline, however, has come since the market began its turnaround once February started.

Uncharacteristically, Johnson and Johnson’s option premium has become attractive, even in a week that has a significant dividend event. As with its fellow DJIA members, Intel and Coca Cola, I would consider some possibility of trying to also capitalize on share appreciation to complement the option premium and the dividend.

General Electric is the least appealing of the DJIA components considered this week as its option premium is fairly small as it goes ex-dividend. However, General Electric is a stock that I repeatedly can’t understand why I haven’t owned with much greater regularity.

It has traded in a fairly predictable range, has offered an excellent and growing dividend and reasonable option premiums for an extended period of time. That’s a great combination when considering a covered option strategy.

Add Kellogg (NYSE:K) to the list of companies bemoaning the impact of a strong dollar on their earnings and future prospects for profits. Down nearly 5% on its earnings and a more impressive 9.6% in the past 3 weeks it also has to deal with falling cereal sales, which likely played a role in analyst downgrades this week. While currencies continually fluctuate and at some point will shift to Kellogg’s benefit, those sagging sales adjusted for currency effect, is a cause for concern, but not right away.

As with American Express that price decline brings shares to a more reasonable price point, well below where I last owned shares less 2 months ago. With an upcoming dividend in the March 2015 option cycle and only offering monthly options, I would consider selling March options bypassing what remains of the February contract in anticipation of some price recovery.

Facebook (NASDAQ:FB) has been uncharacteristically quiet since it reported earnings last month, as investor attention has shifted to Twitter (NYSE:TWTR).

Its share price has been virtually unchanged over the past 3 months but its option premiums have remained very attractive and continue to be so, even as it may have recently fallen off investor’s radar screens despite having avoided mis-steps that characterize so many young companies with great growth.

While I generally consider the sale of puts in advance of earnings and frequently would prefer not to take assignment of shares, Facebook is an exception to that preference. While I would consider entering a position through the sale of puts if shares move adversely the market for its options is liquid enough to likely allow put rollovers, or if taking assignment create an easy path for selling calls on the position.

Finally, I don’t really begin to make believe that I understand the dynamics of oil prices, nor understand the impact of prices on the various industries that either get their revenue by being some part of the process from ground to tank or that see a large part of their costs related to energy pricing. I certainly don’t understand “crack spreads” and find myself more likely to giggle than to ask an informed question or add an insight when the topic arises.

United Continental Holdings (NYSE:UAL) is one of those that certainly has a large portion of its costs tied up in fuel prices. While hedging of fuel can certainly be a factor in generating profits, it can also be a tool to generate losses, as they have learned.

With about $1 billion in hedging related losses expected in 2015 United shares are down nearly 10% since having reported earnings. That’s only fair as its price trajectory higher over the previous months was closely aligned with the perception that falling jet fuel prices would be a boon for airlines, without real regard to the individual liabilities held in futures contracts.

As with energy companies over the past few months the great uncertainty created by rapidly moving prices created greatly enhanced option premiums. With oil prices having significant gains this week but still a chorus of those calling for $30 oil, it’s anyone’s guess where the next stop may be. However, any period of stability or only mildly higher fuel prices may still accrue benefit to those airlines that had been hedged at far higher levels, such as United.

While we think about an “energy sector,” there’s no doubt that its comprised of a broad range of companies that fit in somewhere along that continuum from discovery to delivery. It’s probably reasonable to believe that not all portions of the sector experience the same level of response to price changes of crude oil.

Western Refining (NYSE:WNR) is ex-dividend this week and reports earnings the following week. It’s in a portion of the energy sector that doesn’t suffer the same as those in the business of drilling when crude oil prices are plunging, as evidenced by the refiner’s performance relative to the S&P 500 in 2015.

If previous earnings reports from many others in the sector are to act as a guide, although there have been some exceptions, any disappointing earnings are already anticipated and Western Refining’s report will be well received.

For that reason, I might consider, as with Kellogg, bypassing the February 2015 option contract and considering a sale of the March 2015 contract, which also provides nearly a month for share price to recover in the event of a move lower upon earnings.

Traditional Stocks: American Express, Coca Cola, Intel, Kellogg

Momentum Stocks: Facebook, United Continental Holdings

Double Dip Dividend: General Electric (2/19), Johnson and Johnson (2/20), Western Refining (2/18)

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.