Month: February 2014

Daily Market Update – February 20, 2014 (9:30 AM)

When Wal-Mart can’t deliver good earnings and then gives some dour guidance, what chance does anyone else have?

If you believe that retail is a reflection of the health of the consumer then it’s important to see that sector performing well, even if their share prices don’t follow.

Further, there are those that use the various retailers’ performances as reflection of various segments of society and how those segments are sharing in the economy.

When Wal-Mart isn’t doing well, the possibilities are that people are moving to a different, perhaps more upscale retailer such as Target or to a lower level retailer, such as Family Dollar Store.

Assuming that you weren’t an investor in any of those companies, which would you rather see happening? Which do you think is happening?

With some slight increase in jobless claims and a couple of months of disappointing employment numbers, given the already weakened state of retail, Wal-Mart’s earnings and outlook aren’t very encouraging for an economy that still isn’t setting the world on fire.

On the other hand, Wal-Mart has made a habit lately of being off on their own guidance and under-performing. Perhaps a part of the story is just their own inability to forecast in addition to what is going on in the marketplace. During the past few quarters the market has had very muted response to Wal-Mart’s own earnings and guidance issues, other than a very brief and quick drop when Wal-Mart released some rising inventory data that was interpreted as a very bad sign for the economy, until a Wal-Mart spokesperson clarified the limited meaning of those numbers.

Speaking of fires, the market is more likely to place emphasis on disappointments from the world’s largest retailer than it is to rejoice over Tesla’s numbers or even make illusions of a bubble in the making as Facebook pays $16 B for a company that most people have never heard about, despite nearly 500 million users.

While Tesla and Facebook may have both been profitable investments they’re not going to have much trickle down elsewhere and they certainly aren’t going to sustain or charge an economy.

The remainder of this week is not likely to have any real leadership or theme so there will likely be lots of discussion about the three big stories of the day; Wal-Mart, Tesla and Facebook.

Unless I have direct ownership or am thinking of ownership, I tend to block out those kind of stories, as their relevance is extremely limited. If the market isn’t overly concerned about Wal-Mart, why should I be?

After yesterday’s turnaround and nearly triple digit loss and this morning’s early turnaround in the pre-open market from negative to positive, there’s at least some hope that the week to end the monthly cycle may finish on an up note and help to achieve an acceptable assortment or assignments, rollovers and expirations.

As I look out the window and watch the snow quickly melting as we enjoyed a Sochi-like kind of day yesterday and again today, it reminds me that the excuse of weather will soon run its course.

While it’s true that there may be some pent up buying ready to explode once people can find their way to the stores, as many analysts have been saying, those seasonal purchases that were delayed will remain that way for a year. While that should impact on the next quarter of earnings the stock market game is very much built on expectations and guidance.

Our expectations going forward are going to be low as we’re still freshly reminded of the difficult winter. The reality, even if only matching our lowered expectations may be seen as a positive.

For the moment that encourages me as the March 2014 cycle is getting ready to begin. Cash and optimism can either be a dangerous combination or one of opportunity.

I think opportunity awaits.

Daily Market Update – February 19, 2014 (Close)

Well, that was quite a turnaround.

The final 50 minutes of the day saw a completely different day unfold and no one was really certain what was the root cause.

What it wasn’t was the Federal Reserve.

Today marked the release of the first FOMC meeting presided over by the new Chairman of the Federal Reserve, Janet Yellen.

Given that the path seems well set there doesn’t seem to be much discussion, much less any excitement about how the market might react to its release.

For the most part the previous three releases have held no surprises, yet somehow traders found a way or reason to react to the lack of news. In hindsight, someday people may realize that Bernanke’s program of Quantitative Easing created significant wealth at a time that it was greatly needed and his strategy to taper the Federal Reserve’s infusion of cash into the Treasury markets in an orderly fashion was the key to breaking the market’s addiction.

If all goes as planned the Federal Reserve will likely have completed its Treasury purchase program by summertime and we’ll just keep going merrily on our way, almost like learning to ride a two wheeler.

This morning the pre-open market was weak, but probably for no reason other than lack of any spark. The release of minutes may provide that spark even if devoid of surprises. There’s never any way to predict how the reactions will line up once all the words are parsed and the nuances are interpreted.

The real surprise, which should also probably not be a surprise is that the market is sitting just 0.6% below its high and now with the majority of earnings season behind it. Additionally, with each passing day the weather is becoming less likely to be a factor in company earnings and future guidance.

I like the current market condition and am glad to have some cash reserves to take advantage of some upward movement, but am likely to parse it out rather than going all in.

I’m optimistic, but not that optimistic.

With that optimism, however, still comes a desire to seek dividends, where possible and avoid overly volatile positions

If the market will be going higher that will also mean that volatility will stay low or even go lower, taking premiums down for the ride. That would confirm the  strategy to stay with positions that will support themselves, but with a lesser risk profile.

It was probably a good idea to not get used to the higher volatility that we had for a couple of weeks as the market headed lower, but you can’t blame someone for wishing and hoping.

PS: For those with shares of L Brands that were purchased yesterday and then had contracts rolled over to the March 22, 2014 $55 contract, your contract has now been re-set to $54 to reflect yesterday’s $1 Special Dividend, in addition to
the regular $0.34 dividend.

The CBOE regulations require that the strike price be adjusted whenever the special dividend is greater than $0.125 per share. Because of the re-setting, there is no option strategy that can take advantage of the Special Dividend. However, the reason many investors like Special Dividends is that the stocks that do offer them very frequently recover the special dividend in their share price.

Daily Market Update – February 19, 2014 (9:30 AM)

Today marks the release of the first FOMC meeting presided over by the new Chairman of the Federal Reserve, Janet Yellen.

Given that the path seems well set there doesn’t seem to be much discussion, much less any excitement about how the market might react to its release.

For the most part the previous three releases have held no surprises, yet somehow traders found a way or reason to react to the lack of news. In hindsight, someday people may realize that Bernanke’s program of Quantitative Easing created significant wealth at a time that it was greatly needed and his strategy to taper the Federal Reserve’s infusion of cash into the Treasury markets in an orderly fashion was the key to breaking the market’s addiction.

If all goes as planned the Federal Reserve will likely have completed its Treasury purchase program by summertime and we’ll just keep going merrily on our way, almost like learning to ride a two wheeler.

This morning the pre-open market was weak, but probably for no reason other than lack of any spark. The release of minutes may provide that spark even if devoid of surprises. There’s never any way to predict how the reactions will line up once all the words are parsed and the nuances are interpreted.

The real surprise, which should also probably not be a surprise is that the market is sitting just 0.6% below its high and now with the majority of earnings season behind it. Additionally, with each passing day the weather is becoming less likely to be a factor in company earnings and future guidance.

I like the current market condition and am glad to have some cash reserves to take advantage of some upward movement, but am likely to parse it out rather than going all in.

I’m optimistic, but not that optimistic.

With that optimism, however, still comes a desire to seek dividends, where possible and avoid overly volatile positions

If the market will be going higher that will also mean that volatility will stay low or even go lower, taking premiums down for the ride. That would confirm the  strategy to stay with positions that will support themselves, but with a lesser risk profile.

It was probably a good idea to not get used to the higher volatility that we had for a couple of weeks as the market headed lower, but you can’t blame someone for wishing and hoping.

PS: For those with shares of L Brands that were purchased yesterday and then had contracts rolled over to the March 22, 2014 $55 contract, your contract has now been re-set to $54 to reflect yesterday’s $1 Special Dividend, in addition to the regular $0.34 dividend.

The CBOE regulations require that the strike price be adjusted whenever the special dividend is greater than $0.125 per share. Because of the re-setting, there is no option strategy that can take advantage of the Special Dividend. However, the reason many investors like Special Dividends is that the stocks that do offer them very frequently recover the special dividend in their share price.

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Daily Market Update – February 18, 2014 (Close)

Starting this shortened trading week less than 1% below the recent S&P 500 high there’s not much reason to believe that recent history won’t repeat itself.

That history has been about 10 occasions of a 3% or more decline followed by climbing to new highs in the past 20 months.

In the past year there have now been 4 attempts to reach a 5% decline and the result has been the same. The market just keeps wanting to climb higher and higher and has now been doing so almost interrupted for any substantive period of time for about 16 months.

With cash back up to the 40% level that I’ve been very comfortable starting each week with, I’m willing to get down to about 25% again, but also recognize that the option premiums this week will be  a little on the low side due to the decreased volatility, but especially due to the loss of a trading day’s worth of time value.

With lots of positions having contracts expiring this Friday I’m not overly anxious to add to that list but the low volatility makes it a little harder to justify longer term time frames, other than to diversify in time. At the moment I don’t anticipate going too far out in time, although some of this week’s potential dividend trades offer only monthly options, so there is a chance of going the March 2014 route on those, but most likely others will be contained to either the February 22 or 28 expirations.

This morning’s flat pre-open is the kind of market that is preferable to a sharp climb higher to start the week when you have cash in hand. I don’t think that the market is simply sending a message that it wants to wait for the release of tomorrow’s FOMC minutes, as it’s unlikely that there will be any great surprise.

That lack of surprise, however, doesn’t mean a lack of reaction, as we saw at the last FOMC minutes release when it really wasn’t clear why there was any noticeable change in direction at all.

Given that kind of unpredictability you really can’t predicate your actions on a market that has shown that kind of behavior. While any one day may see an unexpected reaction in one direction, it’s equally likely that on the occasion of the next event that reaction can be in completely the opposite direction. So why fight or why put all of your faith in any given event or the reaction to that event?

Instead, I’m apt to believe that the over-riding sentiment is that the market tried for a correction and just like all of the previous times in the past year has gotten it out of its system. That will be a more likely theme going forward until the next challenge.

Of course, with that said, I’m not crazy and will still exercise some caution.

However, for those that do have a bullish feeling that would be the time to consider using the AC/DC strategy, selling calls on only a portion of holdings in a particular stock or using different strikes on portions of the holding.

Last week I was content to simply watch prices move higher, especially insofar as it helped some depressed prices. This week, while I do have more to invest, I’m not adverse to the same possibility and would especially like to see existing positions continue to go higher and hopefully create opportunities to gain cover and some additional income. That would certainly go along with the goal of wanting to reduce the total number of holdings, which has been difficult to accomplish while simultaneously adding new positions in a market that was headed lower.

With the turnaround of the past 7 trading sessions there is opportunity to make progress in all aspects of that short term playlist. Hopefully this week will end on the same strong note as have each of the past two weeks and provide good opportuni
ty to approach the March 2014 cycle.

What I wasn’t expecting was to have seen the two dividend purchases this morning abruptly change direction and take themselves out of contention for collecting the dividend.

With Walgreen last week and for most people, Microsoft being assigned early, I’m getting greedy and want more dividends, despite the fact that this option cycle is winding up to be the best month for dividend collection that I can recall. Right now it’s running at about a 3.2% annual rate and helps a little to offset some of the lower premiums and uncovered positions.

But that desire explains why I eventually decided to try and rollover the very trades made this morning. Doing so added some earnings enhanced premiums to the dividend that is now fairly certain to remain where it belongs, for two stocks that are already down enough before their earnings next week. However, the nice thing was that even in the event of an earnings drop, there will be a month to recover and maybe do it all over again.

It was, otherwise, an entirely forgettable and boring day with almost no trading range. Despite that, this was one of the busiest days I think I’ve ever had as far as text messages and emails.

One of the reasons was related to tomorrow’s special dividend for L Brands. Lots of questions regarding how that works.

As far as being an option trader goes there is no relevance to special dividends in excess of $0.125/share.

Anything greater than that requires the strike prices to be adjusted to reflect the special dividend distribution. If, for example there is a $1 special dividend and you sold a $55 option it becomes a $54 option to reflect the fact that you just got a $1 in special dividends.

In the event of early assignment you would have gotten the full $55, but no one in their right mind will exercise early to capture a special dividend. Personally, I don’t understand why anyone likes them, other than as a matter of principle, for those that believe they should share in a stock’s good fortune. You really receive nothing other than an early tax liability, potentially.

Then, there are always those who are not in their right mind. For anyone that did the rollovers and you do get assigned, you should send them a nice “Thank You” card.

Daily Market Update – February 18, 2014 (10:30 AM)

Starting this shortened trading week less than 1% below the recent S&P 500 high there’s not much reason to believe that recent history won’t repeat itself.

That history has been about 10 occasions of a 3% or more decline followed by climbing to new highs in the past 20 months.

In the past year there have now been 4 attempts to reach a 5% decline and the result has been the same. The market just keeps wanting to climb higher and higher and has now been doing so almost interrupted for any substantive period of time for about 16 months.

With cash back up to the 40% level that I’ve been very comfortable starting each week with, I’m willing to get down to about 25% again, but also recognize that the option premiums this week will be  a little on the low side due to the decreased volatility, but especially due to the loss of a trading day’s worth of time value.

With lots of positions having contracts expiring this Friday I’m not overly anxious to add to that list but the low volatility makes it a little harder to justify longer term time frames, other than to diversify in time. At the moment I don’t anticipate going too far out in time, although some of this week’s potential dividend trades offer only monthly options, so there is a chance of going the March 2014 route on those, but most likely others will be contained to either the February 22 or 28 expirations.

This morning’s flat pre-open is the kind of market that is preferable to a sharp climb higher to start the week when you have cash in hand. I don’t think that the market is simply sending a message that it wants to wait for the release of tomorrow’s FOMC minutes, as it’s unlikely that there will be any great surprise.

That lack of surprise, however, doesn’t mean a lack of reaction, as we saw at the last FOMC minutes release when it really wasn’t clear why there was any noticeable change in direction at all.

Given that kind of unpredictability you really can’t predicate your actions on a market that has shown that kind of behavior. While any one day may see an unexpected reaction in one direction, it’s equally likely that on the occasion of the next event that reaction can be in completely the opposite direction. So why fight or why put all of your faith in any given event or the reaction to that event?

Instead, I’m apt to believe that the over-riding sentiment is that the market tried for a correction and just like all of the previous times in the past year has gotten it out of its system. That will be a more likely theme going forward until the next challenge.

Of course, with that said, I’m not crazy and will still exercise some caution.

However, for those that do have a bullish feeling that would be the time to consider using the AC/DC strategy, selling calls on only a portion of holdings in a particular stock or using different strikes on portions of the holding.

Last week I was content to simply watch prices move higher, especially insofar as it helped some depressed prices. This week, while I do have more to invest, I’m not adverse to the same possibility and would especially like to see existing positions continue to go higher and hopefully create opportunities to gain cover and some additional income. That would certainly go along with the goal of wanting to reduce the total number of holdings, which has been difficult to accomplish while simultaneously adding new positions in a market that was headed lower.

With the turnaround of the past 7 trading sessions there is opportunity to make progress in all aspects of that short term playlist. Hopefully this week will end on the same strong note as have each of the past two weeks and provide good oppo
rtunity to approach the March 2014 cycle

Daily Market Update – February 14, 2014 (Close)

The Week in Review is now posted and the Weekend Update will be posted by 12 Noon on Monday.