Daily Market Update – March 24, 2014




Daily Market Update – March 24, 2014 (Close)

It’s another week that seems to be getting ready to start off with a calm opening, although the past three weeks have been anything but calm when it comes to cumulative activity. After the previous few weeks have been done, all after the initial news of trouble in Crimea, markets have ended strongly lower and strongly higher, despite what appeared to be calm beginnings.

My preference, if there’s going to be some tumult, tends to be a down Monday to start the week, especially after lots of assignments.

All in all, despite a little bit of indecision it did turn out to be a pretty calm day without the slightest shred of  real news coming from any source.

With all of that cash now sitting and waiting to be re-deployed the challenge, as always, is not giving into the temptation to do so all at once. There’s nothing worse than catching the top of a single stock, much less the top of a basket of stocks or an entire market, especially when it can be avoided with just a little bit of self-discipline.

A cash reserve of almost 50% creates lots of opportunity, but not all opportunity is good. It’s been a long time since I’ve gone on a spending spree after a week of lots of assignments and I don’t think I’ll be going on one this week either, but I am willing to get down to a 30% cash level. That would be about 10 new positions, although lately the number has been far less. Today’s four new positions was a start, at least and did create some additional cash flow without too much added risk.

As mentioned at last week’s close I will be increasingly looking at the opportunity to  squeeze premiums out of as many positions as possible that are currently uncovered, through the use of strike levels below cost basis. That means a need for greater maintenance of positions, including the possibility of rollovers at a net debit, as may be appropriate to help work a position back toward an acceptable ROI. Doing so is simply a modification of the DOH strategy. Maybe I’ll call it a “mini-DOH.”

As with the DOH strategy it helps to have volatility showing some increasing level in order to make the premium more closely offset the risk of assignment or rollover at a net debit, so not all positions may be created equally in being candidates, although that could change from week to week. As today wore on volatility decreased, so as it turned out the early in the session trades utilizing the April 4, 2014 expiration were better suited than they would have been at the end of the day.

This week I’m not terribly interested in risk other than possibly taking advantage of any position that takes a sudden hit to price that may appear to be overdone or some potential earnings related trades. Otherwise, I think this may be a week to go with reasonably boring stocks, although even those are often at or near their price peaks.

The market’s pre-open trading seemed to indicate that little of market moving potential outside of the markets themselves are knocking on the door. For know, Crimea is quiet, there’s no additional disappointing news coming from China and the coming week has little in the way of important economic reports.

With earnings season near its end and the
new one still a few weeks away it’s almost like being in limbo, but we all know that won’t last. Despite the appearances of quiet and calm the market frequently finds its own reasons for dysfunction and over-reaction.

While I do like to complain about that, it’s that very lack of predictability which creates the volatility that I don’t complain about when it’s developing.

With already eleven positions set to expire this week and having added another two, there is almost nothing thereafter, I would like to populate some of those out weeks with contracts, if only the volatility would make those premiums a little more inviting as the week goes on.

Based on the past year the periodicity between the “mini-VIX” peaks that I pointed out last week to the “maxi peaks” has been about 6 weeks and we just passed a “mini-peak.” If that stays true to form then better premiums may be on the way, but as often is the case, that comes at the expense of better stock prices.

That may re-inforce some caution when looking to spend all of that cash that’s now on the sidelines, although there still may be some time to party between peaks.

It’s those kinds of discussions and analyses that makes me glad I don’t spend more time looking at charts. I couldn’t imagine always talking and thinking like that.