Mathematicians have always been fascinated by the special properties of the number “zero.”
It’s not really certain how long the concept of zero has been around or who may have been responsible for introducing the concept, but from my perspective all of the fascination is much ado about nothing.
If the alternative is going to be something bad, I suppose that nothing is good, but it isn’t always that way.
Not all nothings are created equally.
Ancient mathematicians were themselves fascinating people whose minds were so expansive during an age when physicality was more important than cogitation.
I can only imagine what a royal court or patron would have thought after having supported those activities of a deep thinking mathematician, only to ask “Well, what have you done for the past year? What do you have to show for your efforts and my patronage?”
“I have discovered Nothing,” wasn’t likely to be well accepted without some significant opportunity for explanation. Fast talking would have to replace slow and methodical thinking if the gallows were to be avoided.
That’s especially true if the other mathematician your patron had been thinking of taking into the royal court went on to discover the magic of compound interest for the sovereign next door.
If you’re a hedge fund manager that example has some modern day application. Although we don’t generally send people to the gallows anymore for poor performance, it has been another rough year for hedge funds who are certain to realize that the very idea of “making love out of nothing at all” won’t apply to their investors.
In general, as someone who sells covered options, I like the idea of no net change, as long as there are some spasms of activity to keep people on their toes and guessing about what’s next.
Those spasms of activity create the uncertainty that is also referred to as “volatility,” and that volatility drives option premiums.
Most option buyers are looking to ride the wave of that spasm and trying to predict its onset.
In what was thought to be an oddity, 2011 ended the year with virtually no change in the S&P 500.
2011 was a great year for a covered option strategy as volatility remained high in the latter half of the year and the premiums were so engorged, it even made sense to rollover positions that were going to get called away or to sell deep in the money options.
2015? Not so much.
With now just a week remaining in 2015, that historical oddity may repeat itself as the S&P 500 is 0.1% higher, but for those who revel in volatility, 2015 was far different from 2011.
In both cases the market’s deterioration began in August and in both cases volatility spiked, but in 2015 volatility is likely to end the year lower than where it had started the year.
Beyond that, however, the nature of the “no change” seen in the S&P 500 was far different between 2011 and 2015.
The lack of change in 2011 was fairly well distributed among a broad swath of stocks. Very few stocks thrived and very few stocks plunged. The vast majority of the S&P 500 component stocks just muddled their way through the year.
In 2015, though, a fairly small handful of stocks really, really thrived and many, many stocks, really, really plunged. The skew in the fortunes of stocks was as pronounced as I can recall, with far more vastly under-performing the averages.
The net result in both 2011 and 2015 was nothing, unless you used your personal bottom line as a metric.
It bears repeating: Not all nothings are created equally.
For those who look at these sort of things, the general belief is that the year following a year of no change in the markets tends to be a good year. That was the case in 2012. Not a great year, but a good year by most measures.
If you liked 2012 and you wouldn’t mind a repeat of 2014 and aren’t necessarily holding out for another repeat of 2013, the hope has to be that this year of nothing leads to a year of some redemption, as is a befitting wish during this holiday season of redemption.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
I’ve opened fewer new positions in the past 3 weeks than I have in at least 5 years. Looking back at records, I was more actively trading the day after a heart attack, using the electrical outlet for a heart monitor in a London hospital to get the more important connections needed, than in December 2015.
Hopefully January 2016 will be different, but in another holiday shortened trading week, there’s very little reason to have any confidence of what the last week of 2015 has in store.
Looking back at the previous 51 weeks, there wasn’t much reason to believe that there was a rational basis to much of anything that ended up occurring.
This week, looking at the potential trades outlined, it’s fairly clear that I didn’t make it very far down the alphabetical list of stocks that I follow.
Cisco (CSCO), Coach (COH), Comcast (CMCSA), Cypress Semiconductor (CY), Deere (DE) and Dow Chemical (DOW) don’t represent a very broad view of what’s available, but it’s broad enough for me this week.
With the exception of Coach, all of the remainder are ex-dividend next week or on the first Monday of 2016 and with uncertainty still in the air, the idea of dividends holds more and more appeal for me.
Dow Chemical and Coach were both assigned away from me last week, although I still hold shares of each and wouldn’t mind adding to those.
With next week likely to be one that has some news of holiday sales, the predominant theme that we’re likely to hear as how the unusually warm weather across much of the country has depressed sales. We’ll probably also hear a lot about the continuing growth of on-line sales, although the inability of online retailers to get Christmas packages to homes in time will also garner attention.
While traditional retailers may suffer from the warm weather, I don’t think that Coach will be in quite the same predicament.
Having just captured its dividend and with earnings coming up in a month, I would consider adding shares if it either stays flat to open the week or gives back a bit more of what it did to end the previous week. I’d like to consider a re-purchase of those assigned shares somewhere below $32.50, but I do see some upside potential heading into earnings and perhaps beyond.
Dow Chemical is ex-dividend this week and for the time being it may be dominated by news regarding its complex merger with DuPont (DD), whose complexity is likely designed to placate regulators. The proposed plan involves a certain amount of trust, in that a post-merger break up, a year or so down the line, is part of strategy and we all know how things may be subject to change.
Regulators may know that, too.
The nice thing about considering a position in Dow Chemical, however, is that it doesn’t appear as if there’s very much premium in the share price, reflecting the merger, any longer. Following a brief spike when the news leaked, the share price has returned to pre-leak levels.
Unlike most “Double Dip Dividend” trades where I typically prefer to sell in the money call options, in this case I may want to sell an out of the money option in anticipation of continued price strength.
Among the potential dividend related trades are Comcast and Cisco, both of which are ex-dividend on the Monday of the following week.
In such cases, I like to look for an opportunity to consider selling an in the money extended weekly option in the hopes of seeing early assignment by the option holder in their attempt to secure the dividend.
That kind of strategy is better when volatility is higher, but can still effectively offer the option seller a portion of the dividend or in essence an enhancement to the option premium that would have been obtained if having sold a weekly option.
For example, based on the week’s closing prices, purchasing Comcast shares at $57.30 and selling a January 8, 2016 $57 option would provide a $1.04 premium.
If those shares were assigned early in a bid to grab the $0.25 dividend, the ROI for the single week of holding would be 1.3%.
If however, the shares were not assigned early, but were rather assigned the following week, the ROI would be 1.7%, so there is some justification for wanting an early assignment, particularly if you believe you can then recycle the money received back upon assignment into something else that can have a weekly ROI in excess of the additional 0.4% that could have been achieved if not assigned early.
Of course, there also has to be an underlying reason to believe that the shares are an appropriate holding in your portfolio.
Following some weakness, I think this is a good time to consider Comcast shares, as I don’t see any near term threat, although the longer term for all traditional media outlets and content providers is murky.
Cisco, on the other hand, has been successfully bouncing off from its support level at about $1 below the week’s closing price. The ROI numbers aren’t quite as compelling as for Comcast if considering selling an in the money option. However, in this case, I would consider selling an extended weekly out of the money option, again, not despairing if the shares are assigned early in an attempt by the contract holder to secure the dividend.
Deere is also ex-dividend this week and its chart from August onward, reminds me of Cisco’s chart from the end of October and I would also consider the use of an out of the money option. However, as the Deere ex-dividend date is on Tuesday, you can still consider selling a weekly in the money option if looking for a potentially quick “take the money and run” opportunity.
Since Deere’s dividend of $0.60 is larger than the strike level gradations of $0.50 and with volatility low, using a weekly in the money option isn’t likely to result in early assignment unless shares are more than $0.60 in the money at Monday’s close.
Using a slightly more in the money option, such as the December 31, 2015 $78 option, based on last week’s closing price of $78.79 is more likely to result in an early assignment, but with only a net $0.37 to show for the effort.
Still, for a single day of holding, that’s not too bad.
On the other hand, using a January 8, 2016 $78 option could yield a net premium of $0.73 if shares are assigned early, or a total return of $1.33 if assigned at the intended expiration.
Finally, Cypress Semiconductor is also ex-dividend this week.
It has fallen a long way ever since its strategic buyout of rival Integrated Silicon Solution was blocked by a successful rival bid.
One thing that I wouldn’t do is to discount the ability of its founder and CEO to use his own expansive mind to position Cypress Semiconductor better in a very competitive environment.
T.J. Rodgers has certainly been a visionary and strategic master. While I do currently own two lots of Cypress Semiconductor, I wouldn’t rule out adding another lot in order to secure the dividend and some share gains before the January 15, 2016 contract expiration.
However, if those contracts aren’t likely to get assigned, I would probably consider rolling over to the March 2016 contract, as earnings are reported on January 21, 2016 and shares can be volatile upon earnings news and some additional time for recovery could be appreciated while still having been able to add some premium income into the position’s net return.
Traditional Stocks: none
Momentum Stocks: Coach
Double-Dip Dividend: Cisco (1/4/16 $0.21), Comcast (1/4/16 $0.25), Cypress Semiconductor (12/29/15 $0.11), Deere (12/29/15 $0.60), Dow Chemical (12/29/15 $0.46)
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.