Daily Market Update – March 4, 2014 (Close)




Daily Market Update – March 4, 2014 (Close)

Waking up this morning and seeing the pre-open futures having completely erased yesterday’s 153 point loss had me believing something substantive happened while others were awake.

Actually, that wasn’t really the case. Nothing is really different, yet, although some have hopes for everything returning back to whatever normal happened to have been a few days ago.

While President Putin did say “military force is the last option,” he did say that in Russian, so there may be some vagaries in the translation. Of course, when you say “no use of force at this time” that still leaves some important issues open, like “how about tomorrow?”

For some reason, while under the same breath the right to use force in response to what was described as a “coup” in Ukraine has been discounted

Reportedly Russian troops that are still on the Russian side of the border, having been engaged in “exercises” are retreating. Meanwhile, those in Crimea are showing no signs of doing the same

Actually, as the day wore on, it was denied that they were even Russian forces.


Reportedly, Germany’s Chancellor Angela Merkel questioned whether “Putin was in touch with reality.”

That’s comforting to think that a reportedly analytical world leader would question the ability of another world leader to engage in rational thought.

A rational market would wait for some tangible action before retreating from an initial response that at least was predicated on actions on the ground rather than rumor.

Given how easily the market turns on a dime in response to news, rumors and the interpretation of the spoken word, caution is probably a good idea when it comes to chasing the promise of “normalcy.” As opposed to the weather, which may impact markets and company performance, at least you have an idea that it will at some point stop being an issue. Events of nature have a way of being self-limiting, even if recurrent. Invariably spring comes along and things get better.

But when man made events come along you just don’t have the same certainty, because the actors don’t even know what they’re going to do next. While you would like to think that there’s a rational basis for actions, maybe only the initial actions are truly rational, as the reactions to those initial actions may utilize a lower state of rational thought, which in turn may evoke even lesser rational responses.

Who knows what a single nervous Ukrainian military recruit could trigger when a adrenaline rushed Russian recruit is polishing his rifle?

While I did see yesterday as offering a cautious opportunity, this morning I think the “cautious” part is likely to require more emphasis.

If indeed this morning’s move higher is the beginning
of the return to the move higher from the correction of just 3 weeks ago, then you simply take pleasure in watching the gains and wait for the next opportunity to spend some money.

For a brief moment yesterday volatility had started moving higher and with it came prospects of looking at premiums with some variation in their expiration terms. This morning, however, the volatility is going right back to its perma-low levels. With a large number of positions set for expiration this coming Friday the problem with adding new positions is that if premiums in forward weeks are very low the tendency is to add to positions expiring this week, instead. That adds to the risk of holding too many potentially uncovered positions in the event of a sudden turndown by the end of the week.

On the other hand, that may provide greater rational for waiting until Thursday or Friday when next week’s option contracts will appear for many positions. A few additional days to assess events and essentially getting a weekly premium and an additional day or two, as the more near the term of the option contract the greater the time adjusted premium. In essence, there is little advantage right now to selling a contract for two weeks as opposed to selling a contract for 1 week and 2 days. While Einstein’s Theory of Relativity still holds, in this case time is constant, but is just valued less as it increases in length.

Finally, while this is an Employment Situation Reports week and that usually means a net market gain for the week, extraneous events may trump the recent historical pattern of the report. In the event that international events do cool down heading into that report, then there may truly be reason to be optimistic, at least for a day.


P.S. Finally, for those that owned shares of Lorillard, the decision to close the deep in the money position was because the  option market gave an opportunity to buy back options without paying a large time premium to do so. The actual time premium paid for about 2 1/2 weeks remaining on the contract amounted to about 0.2%. That meant that the option market was not envisioning much in the way of further volatility in the position. That offered to the opportunity to get money out of the position and redeploy it elsewhere, such as Family Dollar Store.

By contrast, I would have liked to close out the $37 Abercrombie and Fitch. However, the option market was implying some additional volatility and I couldn’t get a trade that fell inside of the 0.2 to 0.3% ROI reduction range that I target. Sometimes I may be willing to pay more, but if the price goes higher on ANF, in an environment of low market volatility, the time premium on the contracts will actually go lower, making closing out the position at a fair price easier to do.

Another somewhat unusual trade today was the rollover in Coach, which goes ex-dividend tomorrow. As its price turned around from below the threshold price of $48.34, meaning that it was more likely to now be assigned early, came the opportunity to buy back those contracts at a small net debit and then roll up the contract to a higher strike. By so doing the ROI was changed from an already good 1.5% in the event of early assignment of the $48 strike to an even better 3.1% if the position is assigned next Friday.