Daily Market Update – May 27, 2014 (Close)

Daily Market Update – May 27, 2014 (Close)

While I don’t like the smaller premiums that are generated on these 4 day trading weeks, I no longer dislike Monday holidays.

There was a time that I harbored some resentment for the market being closed on those Mondays. That was back in the days when such a holiday coincided with a day off for me and could have been used to hone some skills back when I couldn’t spend as much time as I wanted glued to the screen and ticker.

These days I can and suddenly, maybe not so surprisingly I like those shortened weeks and actually, on a day like Memorial Day, get a chance to understand and appreciate the reason for the holiday.

So now it’s Tuesday and inexplicably the market starts at another new high. What seems so unusual is that you really don’t see or hear a chorus of people gloating about their returns. The other day it was mentioned that some 70-80% of hedge funds were trailing the S&P 500. While that’s easy to understand if the market is going straight higher, it’s not easy to understand when the market is going lower or bouncing around.

My guess is that lots of hedge funds, after trailing the market in 2013 stopped hedging in anticipation of the need for protection and instead doubled up on the bullish end of things.

Bad timing if that’s the case and it is likely accurate to some degree. It’s not much different from the individual investor who waits until the start of the new year to get into last year’s hottest mutual fund.

While normally there would be some degree of euphoria here’s something that should be cause for concern:

That is that while the S&P 500 is going higher the number of new highs is going lower.

That’s just not the way things are supposed to work.

What that indicates is that the advance is really pretty narrow and there just isn’t a lot of participation.

Normally in a market making new highs over and over again everyone is happy because just about everything is moving higher getting swept by a rising tide.

Now, there’s a tide but it’s not doing too much sweeping and only taking a lucky few along for the ride.

I start this week with replenished cash from a decent number of assignments and having sold more new cover last week than in recent memory. On a personal note that leaves me happy, but I’m not overly anxious to plow even the full amount of the regenerated cash back into the market this week.

One of the reasons is tha
t the reward is reduced as there are only 4 days worth of premiums this week. However, beyond that is that after 2 previous weeks of not seeing much in the way of assignments and some decidedly negative trading, I’m not entirely convinced that least week’s positive trading patterns are here to stay.

My initial sense is that the optimism that may be borne of last week’s trading may be for fools.

Of course, like most everything, I’m not fully willing to base everything on that belief that may end up being wrong. So I anticipate making some trades this week in an effort to open some new positions, but I would still prefer to see uncovered positions find coverage and make my weekly income in that manner rather than having to spend very much to generate that income.

As always, we’ll see.

We’ll see if the pre-open futures have any predictive capability for the rest of the day and whether any bargains may pop up to cause me to rethink the thriftiness I have planned for the week.

But the day did keep all of the pre-open gains and set another new closing record.

Unbelievable.

PS: For those with the Feb 18, 2014 Transocean lot, sorry about the late rollover trade. I was really on the fence with this one because I wasn’t certain that the June 21, 2014 $42 calls would be assigned early to capture tomorrow’s $0.75 dividend, despite closing at $43.35.

Despite being $1.35 in the money, I’m still not certain that shares have a high probability of early assignment to capture the dividend, but I really wanted to keep this dividend and believe that Transocean has more room to climb.

Ultimately, doing the “what-if” scenarios convinced me that taking a net debit on the rollover, which actually is still a net credit thanks to the premium received for the $42 sale last week, was worthwhile.

If shares were to have been assigned early at the $42 strike the ROI would have been 8% compared to 4% for the S&P 500 over the same period.

If shares wouldn’t be assigned early and the dividend was received the ROI, if assigned at the end of the June 2014 cycle would have been 9.7%. However, given that shares closed about $0.60 over the threshold level of $42.75 there was some chance of early assignment, even though nearly 4 weeks remain on the contract.

With the rollover up to a $43 strike in exchange for going to a July 2014 expiration the likelihood of early assignment is virtually non-existent and if eventually assigned the ROI would be 11.5%

The final part of the equation was the question of what else could have been done with the money if assigned early. Given the recent low volatility the monthly ROI is at the low end of the range that I’ve been accustomed to achieving. In essence the question became could I achieve a 3.5% ROI over the 8 week period? WHile I like to believe that the answer is “yes” the belief that Transocean doesn’t have much in the way of near term downside ultimately made the decision relatively straightforward. I looked at the rollover as providing a relatively low maintenance return with greater safety that alternatiuves.