Week in Review – October 6 – 10, 2014


Option to Profit Week in Review
October 6 – 10,  2014
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Weekly Up to Date Performance

October 6 – 10, 2014

New purchases for the week beat both the unadjusted and adjusted S&P 500 by 1.5% during a week that finally had everyone noticing the back and forth movements of regularity of triple digit moves, now expanding to levels of 200 and 300 points.

However, that is simply in relative terms, as those new positions still fell by 1.6% as compared to the S&P 500, which was 3.1% lower for the week, as the DJIA actually finished below 2013’s close.

It was a week of little news other than the FOMC and some more errant words from Mario Draghi.

That changed Friday afternoon with some credit warnings in Europe, including downgrades of Finnish and French debt.

With no assignments this week performance of closed positions were unchanged from last week and continued to out-perform the S&P 500 performance by 1.7%. They were up 3.5% out-performing the market by 91.8%. 

This was another awful week from most perspectives, if not all.

The only potential positive spin is that Friday ended up on a negative note, which was probably better than an advance, having come off the previous day’s 300+ point decline.

While most analysts and technicians don’t agree on much, they generally do agree that large gains coming on the heels of large losses don’t have any positive meaning. They prefer to see blow-out kind of declines, sort of like getting it out of your system.

The exception is when the gain represents a “key reversal,” and we all know how well that predictive tool worked out.

That kind of further large decline may be the sort of thing that may be in store on Monday, as markets re-open. That’s especially so since the news of the credit downgrades came after  the European markets closed and they haven’t had a chance to respond.

Further, in the US banks are closed for the Columbus Day holiday and that could present some very short term liquidity issues as equity trading goes on as usual.

In some small way I can look to the dividends received this week, which were more than the usual number, and the ability to rollover some positions despite the weakness, as well as the ability to sell some new covered options, as something akin to a positive note.

Somehow, even with a horrible environment there was an opportunity to get 10 OTP trades in for the week.

However, the relative out-performance of positions is of little solace during a week that saw nothing redeeming, other than a brief move higher after release of the FOMC Statement. I suppose it’s nice to have that kind of relative out-performance, but it’s no replacement for the real thing.

After the past 3 weeks are all said and done, the market is down only about 5%, which puts it at the level of most all of the other periodic declines of the past two years. However, it really, really feels like much more because of all of those large moves heading in both directions, but being increasingly a net negative.

For those watching volatility, you may have noticed that before the late sell-off the volatility was rising more than usual given where the day’s change had stood, reflecting the continuing back and forth during the day. Despite having had some of these periodic mini-corrections greater than our current correction, the volatility is now at a two year high, as the back and forth movement continues to be reminiscent of 2011.

If that continues as we head into net week I would envision spending much more time looking for “DOH” trading opportunities. Once the volatility begins to rise those become more and more appealing and can become a primary source of income.

The downside, however, is that they take much more attention and maintenance, as the ideal DOH Trade is one that lasts only for a day or two and sees the contract sold expire worthless. Otherwise you end up chasing the opportunity to rollover the contract in an attempt to avoid being assigned at a strike price that is below your original cost. If you follow my personal trades that’s what happened with some of those trades today.

The positive aspect of the DOH Trades is that during a prolonged downturn it really makes a big difference to be able to squeeze out some premium, particularly as you are able to use strike prices that are generally 2% or more above the current price at the time of the option contract sale, depending on the number of days of contract duration.

While doing so may be a nuisance, it is the kind of nuisance that has me preferring markets that are down trending.

With less cash than I would like at the current market level and despite what look like so many great values, there has to be hesitance about spending any more of the cash reserve down. Ideally, if doing so, it would be in support of other existing positions, such as you might do in cost averaging down, rather than looking for too many new positions.

Still, I don’t expect to actively look for “deals” next week. It’s generally easier to do that when a particular sector or a particular stock is beaten down. It’s much harder to select what may be ready to bounce back when almost everything has been pummeled, so if the market continues in its current pattern the emphasis will be on beginning to generate revenue from existing positions, even if through the use of strike prices below cost.

There are two caveats to all of the above.

One is that with a market moving lower, new positions are often more appropriately entered through the sale of puts and rolling those over, where appropriate or simply taking assignment. So if considering any new positions the sale of puts may be the way to go.

The second caveat regards the DOH trades. 

With a small number of positions set to expire next week as the monthly cycle concludes, I may consider using some expanded weekly option expirations for some potential DOH trades, rather than very short term trades, particularly if there are also upcoming earnings. That would reduce some of their high maintenance and provide more time for any price blips to even out. An example of that might be Las Vegas Sands, which was a DOH trade today and then reports earnings next week. Ideally, the way to enter into that kind of a trade is during a strong price rise and then using a well out of the money strike whose premium will be enhanced by the earnings event.

Otherwise, for now, you’ll be hearing a lot about moving averages the next week and the risk that it presents at a time when people are fleeing from risk. It means nothing except in hindsight. If the 200 DMA proves to be important, you’ll be hearing about it ad nauseum. If not? That will be the end of its mention, just like the “key reversal” has been relegated to the closet.

While the crowd running from risk and an over-reliance on unvalidated technical indicators may normally represent contrarian opportunities, I’m content to wait to see some stability return first.

That’s far more important than a surge higher that only ends up being another in a string of disappointments.


This week’s details may be seen in the Weekly Performance spreadsheet * or in the PDF file, as well as as in the summary.below

(Note: Duplicate mention of positions reflects different priced lots):

New Positions Opened:   DOW, EMC

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycle:  none

Calls Rolled over, taking profits, into extended weekly cycle:  DOW (10/31), LVS (10/31), WFM (10/31)

Calls Rolled over, taking profits, into the monthly cycle: none

Calls Rolled Over, taking profits, into a future monthly cycle: BMY (11/22), PBR (11/22)

Calls Rolled Up, taking net profits into same cyclenone

New STO:  GDX (10/24), LVS (10/10)

Put contracts expired: none

Put contracts rolled over: none

Long term call contracts sold:  none

Calls Assigned: none

Calls Expired:  GPS, HAL

Puts Assigned:  none

Stock positions Closed to take profits:  none

Stock positions Closed to take losses: none

Calls Closed to Take Profits: none

Ex-dividend PositionsCHK (10/10 $0.09), CPB (10/8 $0.31), DRI (10/8 $0.55), FCX (10/10 $0.31), GPS (10/6 $0.22)

Ex-dividend Positions Next Week:  none



For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, CHK, CLF, COH, FCX, GDX, GM, GPS, HAL, HFC, .JCP, JOY, K,  LULU, LVS, MCP, MOS,  NEM, RIG, SBGI, TGT, WFM, WLT (See “Weekly Performance” spreadsheet or PDF file)

* If you don’t have a program to read or modify spreadsheets, you can download the OpenOffice Suite at no cost.