Author: TheAcsMan

Daily Market Update – April 28, 2014 (Close) When the morning started I thought this week may be an interesting one. Well, if today is an indication, I’ve had enough interesting stiff to last me for the week. The movements today wewn’t the kind that we see very often. Where the market got back its confidence in the final hour is really a mystery. For starters, nothing happened over the weekend on the international scene, as was the fear on Friday and may have accounted for the weakness to end last week. Even those used to having seen these kind of brinksmanship games may have thought that something, perhaps unintentional, was going to result in an adverse event and subsequent fall-out in the markets. So without that overhang it’s getting off to a push higher with word of increased merger and buy out activity and a sense of relief. The relief, could still, however, be short-lived.. Then later in the week are the FOMC announcement and the Employment Situation Report. The last time around both of those saw surprising strong turnaround sell-offs following initially positive responses. In both cases neither the initial responses nor the reversals were very rational because neither really introduced any new news. Also this morning, just before the opening bell came word that some further sanctions will be levied against Russia, but like the previous ones, they are directed toward individuals, so it remains to be seen how the market looks at them. Basically, the more biting the sanctions the more bearish the market reaction. This is another week that I would be content to let prices move higher even if that was without much in the way of new purchases for the week. I would like to see the higher prices open up opportunities to just sell more calls on existing positions. As with some previous weeks, with enough positions set to expire this Friday, where possible I’d like to begin populating next week or even the monthly expiration with expiring contracts, rather than adding to the already lengthy list this week. With a handful of assignments my cash reserves are higher but they are so after coming off from a recent low point. I would very much like to see that level get even higher so I’m not likely to chase after new positions and may return to the low level of buying activity from two and three weeks ago. As long as there are opportunities to generate income from existing positions that’s acceptable, but only for so long. With the market pointing toward a higher open this morning I will sit and see if it has any legs before getting overly excited. With news of some additional sanctions against Russia will certainly come some response which may have its own impact, so I plan to tread softly this morning. After a few weeks of really nothing going on it’s actually nice to see some many different factors entering into the equation, although I may end up regretting that feeling, as sometimes boredom is better than unnecessary excitement. While anything can bring opportunity too much of the unknown isn’t something that really benefits anyone. Hopefully some clarity and some rational thought returns to the market and lets it simply concentrate on earnings and fundamentals, although hoping for that may itself be fairly irrational, given past history. Today’s market did nothing to add to the clarity but at least you have to have a little more confidence heading into tomorrow after the really nice reversal of the reversal. Then again, there’s always tomorrow to throw a wrench into well thought out plans, but it is a Tueday and we all know what that means.

 

Daily Market Update – April 28, 2014 (9:45 AM) This week may be an interesting one. For starters, nothing happened over the weekend on the international scene, as was the fear on Friday and may have accounted for the weakness to end last week. Even those used to having seen these kind of brinksmanship games may have thought that something, perhaps unintentional, was going to result in an adverse event and subsequent fall-out in the markets. So without that overhang it’s getting off to a push higher with word of increased merger and buy out activity and a sense of relief. The relief, could still, however, be short-lived.. Then later in the week are the FOMC announcement and the Employment Situation Report. The last time around both of those saw surprising strong turnaround sell-offs following initially positive responses. In both cases neither the initial responses nor the reversals were very rational because neither really introduced any new news. Also this morning, just before the opening bell came word that some further sanctions will be levied against Russia, but like the previous ones, they are directed toward individuals, so it remains to be seen how the market looks at them. Basically, the more biting the sanctions the more bearish the market reaction. This is another week that I would be content to let prices move higher even if that was without much in the way of new purchases for the week. I would like to see the higher prices open up opportunities to just sell more calls on existing positions. As with some previous weeks, with enough positions set to expire this Friday, where possible I’d like to begin populating next week or even the monthly expiration with expiring contracts, rather than adding to the already lengthy list this week. With a handful of assignments my cash reserves are higher but they are so after coming off from a recent low point. I would very much like to see that level get even higher so I’m not likely to chase after new positions and may return to the low level of buying activity from two and three weeks ago. As long as there are opportunities to generate income from existing positions that’s acceptable, but only for so long. With the market pointing toward a higher open this morning I will sit and see if it has any legs before getting overly excited. With news of some additional sanctions against Russia will certainly come some response which may have its own impact, so I plan to tread softly this morning. After a few weeks of really nothing going on it’s actually nice to see some many different factors entering into the equation, although I may end up regretting that feeling, as sometimes boredom is better than unnecessary excitement. While anything can bring opportunity too much of the unknown isn’t something that really benefits anyone. < p>Hopefully some clarity and some rational thought returns to the market and lets it simply concentrate on earnings and fundamentals, although hoping for that may itself be fairly irrational, given past history.                               

Increasingly for that more speculative portion of my portfolio I look at earnings season as being a great time to generate quick, albeit sometimes nerve wracking, income from those stocks that can be unpredictable in their typical daily trading and even more so when earnings and guidance are at hand.

For those that haven’t tried this approach before, the basic concepts and considerations are related to:

• Implied volatility;
• desired ROI;
• temperament for risk; and
• nimbleness in trading

The concepts are covered in previous articles, but in capsulized form the goal is to find a stock that can deliver a desired ROI when selling a weekly put option at a strike level that is lower than the bottom of the range defined by the option market’s implied volatility for that stock.

That is the single objective metric. The remainder of the decision process is based upon share behavior. My preference is to sell puts into share weakness in advance of earning or to sell puts after earnings and subsequent weakness. A number of the positions covered in this article suffered large losses in Friday’s (April 25, 2014) sell off.

While I highlight specific stocks I lose interest when I see shares running higher prior to earnings, as it drives up the strike level that I would have to use to achieve my desired 1% ROI for the week and may also shift premium enhancement on the call side of the equation, rather than to the put side, which also contributes to a lower ROI.

While the traditional mantra for put sellers is that you must be willing to own shares, I do not want to take ownership unless an ex-dividend date is approaching. For that reason it is important to have liquidity in the options market in order to be able to concurrently close the position and open a new one for a forward week. Ideally, that would be done at a lower strike price, although the primary goals are to delay or prevent assignment and to collect additional net premiums.

Among the stocks for consideration this week are those that can be readily recognized for their inherent risk, which may also influence price behavior irrespective of earnings or guidance. Those companies high beta, or volatility, will provide higher premiums along with greater risk. Examining the past history of a stock’s movement after previous earnings releases may be helpful in evaluating the risk-reward proposition.

This week I’m considering the sale of puts of shares of Coach (COH), Herbalife (HLF), LinkedIn (LNKD), MasterCard (MA), MetLife (MET), Phillips 66 (PSX), Seagate Technology (STX), Twitter (TWTR), Western Digital (WDC) and YELP (YELP).

While I generally do not discuss relative merits of the stocks being considered for earnings related trades, preferring to remain agnostic to those issues and simply following the considerations outlined above, Twitter bears some additional comment.

I an currently short Twitter puts, having been rolling them over weekly since their initial sale of March 24, 2014. While Twitter reports earnings this coming week, it also faces another potentially adverse event as the significant lock-up period comes to e end the following week. Although some important Twitter shareholders have indicated that they would not be selling shares at that time, there is the potential for the supply – demand equilibrium to be disrupted on underlying shares and exert downward pressure.

And of course, there’s always Herbalife and its own unique drama that can explode further on any given day. Inexplicably, while most traded lower to end this week, Herbalife didn’t follow.

Finally, while I don’t generally like the use of margin, it is often perfectly suited for this kind of trading activity. I tend to use these trades in a fully invested account that has margin privileges. Selling cash secured puts decreases the amount of margin that is available to you, however, it does not draw on margin funds and, therefore, does not incur interest expenses. Those expenses will only be incurred if the shares are assigned to you and are subsequently purchase through the use of credit.

As always, if considering the sale of put options, there is always the possibility of early assignment, especially if shares fall far below
the strike price selected and, as a result, the seller should be prepared to either own shares or pre-emptively rollover the put option to a forward date. The decision to do so may be helped by closely looking at prevailing option premiums to understand whether the holder of the put option may be better served by simply trading the option and achieving leveraged returns, as opposed to having to deliver shares for purchase, which diminishes return. For that reason, it is also important to have sufficient liquidity in the option market.

 

Option to Profit Week in ReviewApril 21 – 25, 2014

NEW POSITIONS/STO	NEW STO	ROLLOVERS	CALLS ASSIGNED/PUTS EXPIRED	CALLS EXPIRED/PUTS ASSIGNED	CLOSED
4 / 5	2	5	3*  / 1	4   / 0	0

    

Weekly Up to Date Performance

April 21 – 25, 2014

New purchases for the week beat the time adjusted S&P 500  by 1.2% and also surpassed the unadjusted S&P 500 index by 0.8% during a week that ended badly on more geo-political concerns.

The market lost all of its moderate gains for the week on its final day of trading and finished with an adjusted loss for the we
ek of 0.4% and an unadjusted loss of 0.1%. On the other hand, new positions gained 0.7%.

As often happens when the overall market is week the existing positions beat the overall market after trailing last week and disrupting a string of weeks in which it had beaten the market. This week it beat the overall market by a relatively large 0.7%

For positions closed in 2014 the performance exceeded that of the S&P 500 by 1.6%. They were up 3.3% out-performing the market by 93.9%.

While it wasn’t a good way to end the week, it was finally one that made sense, given the renewed tension overseas.

What is still surprising is that past periods of heightened tension, that coincidentally perhaps came on Fridays, didn’t really erode the market, other than for one time. That time, however, saw most of the losses recouped in the final 30 minutes of trading, which was really unusual.

This time around it was just a dour day from the beginning as the selling was much worse than the pre-open market would have had you believe was in store.

As usual, the real value of a covered option strategy becomes clear when the market is struggling or flat or even mildly to moderately higher. That leaves only truly strong market performance that’s difficult to match. While that was the norm for 2013 it may be time to remember that isn’t the historical norm. Generally stocks go up and down, only occasionally doing so in a sustained manner.

In case you haven’t noticed, this isn’t 2013.

In the past 5 years we’ve seen two of those large sustained moves, one in each direction.

I know which direction I prefer, but I also know which direction wasn’t as bad as it should have been.

I have mixed feelings about this week, especially with Friday’s disappointment.

Although it didn’t snatch any positions from the jaws of assignment, I wasn’t able to get much in the way of new coverage on existing positions this week. While there was some reasonable rollover activity and generating some income for the forward week, I still would have preferred more assignments and having more cash on the sidelines. I also would have liked more in the way of ex-dividend plays, but the past few weeks have been a combination of slim pickings and poor timing in terms of price movements right before those ex-dividend dates.

At least it was fortuitous, maybe serendipitous, that most of the week’s rollovers were able to get done on Thursday, especially since Friday is the much more common time to do so. For those following along on my personal trades the same goes for rolling over some of those puts.

What a difference a day makes. Who knew?

< span style="font-family: arial, helvetica, sans-serif; font-size: medium;">All in all positions faired reasonably well, but it’s really clear that companies are taking it on the chin when earnings aren’t meeting expectations, or even worse, when offering diminished guidance. That speaks to a very wary market and it’s not as if money from one sector is rolling into another one.

My sense is that money that’s fleeing is partially going into traditional safety areas, but also going off to the side. While I don’t generally want to be with the crowd, I have no argument with setting some money aside. I just wish that this week would have allowed me to join them in a more meaningful way.

The optimist sees that sideline cash as money ready to drive the market higher. The pessimist sees everything as a negative, so I won’t even venture a guess as to what degree they read this weakness and wariness.

Next week is already populated with a number of expiring positions so I will likely be looking for opportunities to sell contracts for the following week, as was done this week for all other than the Facebook puts.

What I don’t know is how willing I’ll be to add too many new positions as cash is available, but definitely beginning to run low and beginning to test my comfort level.

Hopefully it will be a quiet weekend and cooler heads prevail in Russia and Ulkraine, but no one can feel very secure when having to rely on the behavior of others.

That’s what I continually told myself when I would leave my kids home alone , telling them not to touch the fireworks and hypodermic syringes I would routinely leave scattered on the kitchen table.

I wonder if they listened?



 

     

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:  BX, FB (puts), JPM, KSS, TXN, UNH

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycle:  BBY, GPS, LOW, MOS

Calls Rolled over, taking profits, into extended weekly cycle:  EBAY (5/9)

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

Calls Rolled Over, taking profits, into a future monthly cycle: none

Calls Rolled Up, taking net profits into same cycle:  none

New STO:  BMY, RIG

Put contracts sold and still open: none

Put contracts expired: FB

Put contract rolled over: none

Long term call contracts sold:  none

Calls Assigned:   BMY*, CSCO, HFC (* will query subscribers on Monday to see if BMY assigned, having closed at $50.51)

Calls Expired:   C, LULU, MA, VZ

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 Positions:  LOW (4/21 $0.18), BX (4/24 $0.35)

Ex-dividend Positions Next Week:  none

 

 

For the coming week the existing positions have lots t
hat still require the sale of contracts:   AGQ, C, CLF, DRI, FCX, FDO, GM, IP, JCP, LULU, MA, MCP, MOS,  NEM, PBR, PM, RIG, TGT, VZ, WFM, WLT, WY (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.



 

Daily Market Update – April 25, 2014 (9:00 AM) The Week in Review will be posted by 6 PM and the Weekend Update will be posted by moon on Sunday. The possible trades or outcomes today include:   Assignment:  CSCO, Holly Frontier Rollover:   BMY Expiration: C, FB (puts), LULU, MA, MOS, VZ   Trades, if any, will be attempted to be made prior to 3:30 PM EDT                         

 

Daily Market Update – April 24, 2014 (Close) There’s only one topic for today, and that’s Apple. If you haven’t seen it, my take is that Tim Cook has capitulated  and signaled that Apple’s days of growth are over. It’s no coincidence that Carl Icahn seemed to quietly fade away. You can be pretty certain that he knew what was coming and it was part of his agreement to get to the sidelines. I wouldn’t, however, count him out, as Apple continues to have large cash reserves and Icahn isn’t exactly a shrinking violet. What that means for me is that Apple may once again become a regular covered option trade, as it was for much of the previous decade. During the time that it could only go higher it wasn’t a good candidate, but it has also been one for much of the past year and now will trade with a more affordable buying price, even though that is all optics. Hopefully, some of the good news from Apple will filter through to the rest of the market as the week is in its final stretches. The pre-open futures showed strength although it quickly disappeared in the first 20 minutes. As the day wore on I think traders just stopped everything they were doing so that they could discuss the pros and cons of Apple’s decisions. They certainly didn’t do much in the way of trading. That would be nice and certainly welcome, especially if it leads to some assignments, which have been in short supply lately. While I don’t really mind not so regularly replenishing cash, at least as long as the bottom lines grows, I do mind. For starters, I like having a cushion. Not just in the event of a sudden plunge and the ability to pick up some bargains, but because having the cash reserve offers you many more paths to travel if an opportunity does arise. It’s all about having the flexibility to act when action seems appropriate. When you feel as if you are getting down to an uncomfortable level you change the way you approach things. Today will be an interesting day, as Apple hasn’t been a market leader for nearly two years and has been trading with a beta of 1.01. That’s as close as you can get to mirroring the S&P 500, or so it would seem. Essential ly, Apple has been the S&P 500, although that has been misleading, because for the past 6 months it has often gone in the opposite daily direction, but the pure math of the metric shows it to be in near perfect concordance. But it’s good to have it back on my radar, especially as an ex-dividend date nears. As with most things, you never know what the future will hold, but just as Apple has found its cash reserve to be a mixed blessing, as it has brought in the vultures, I can understand Steve Jobs’ desire to have cash available, going back to the days when he was held hostage by not having the cash when needed. As opposed to Jobs, I want to have it both ways. I want to spend mine and grow mine in an ongoing cycle. For the rest of this week I don’t think I’ll be spending very much, but I wouldn’t mind acting like a drunken sailor next week, if only Apple can lead the way and show others the light. Today, even Apple wasn’t enough to nudge the market away from the flat line, as it traded in as narrow of a range as we’ve seen lately. Still, not too bad of a day and at least we’re still in the game as the week is coming to its end, once again proving that these meandering weeks can be the best of all worlds.                       

 

Daily Market Update – April 24, 2014 (10:00 AM) There’s only one topic for today, and that’s Apple. If you haven’t seen it, my take is that Tim Cook has capitulated  and signaled that Apple’s days of growth are over. It’s no coincidence that Carl Icahn seemed to quietly fade away. You can be pretty certain that he knew what was coming and it was part of his agreement to get to the sidelines. I wouldn’t, however, count him out, as Apple continues to have large cash reserves and Icahn isn’t exactly a shrinking violet. What that means for me is that Apple may once again become a regular covered option trade, as it was for much of the previous decade. During the time that it could only go higher it wasn’t a good candidate, but it has also been one for much of the past year and now will trade with a more affordable buying price, even though that is all optics. Hopefully, some of the good news from Apple will filter through to the rest of the market as the week is in its final stretches. The pre-open futures showed strength although it quickly disappeared in the first 20 minutes. That would be nice and certainly welcome, especially if it leads to some assignments, which have been in short supply lately. While I don’t really mind not so regularly replenishing cash, at least as long as the bottom lines grows, I do mind. For starters, I like having a cushion. Not just in the event of a sudden plunge and the ability to pick up some bargains, but because having the cash reserve offers you many more paths to travel if an opportunity does arise. It’s all about having the flexibility to act when action seems appropriate. When you feel as if you are getting down to an uncomfortable level you change the way you approach things. Today will be an interesting day, as Apple hasn’t been a market leader for nearly two years and has been trading with a beta of 1.01. Essentially, Apple has been the S&P 500, although that has been misleading, because for the past 6 months it has often gone in the opposite daily direction, but the pure math of the metric shows it to be in perfect concordance. But it’s good to have it back on my radar, especially as an ex-dividend date nears. As with most things, you never know what the future will hold, but just as Apple has found its cash reserve to be a mixed blessing, as it has brought in the vultures, I can understand Steve Jobs’ desire to have cash available, going back to the days when he was held hostage by not having the cash when needed. As opposed to Jobs, I want to have it both ways. I want to spend mine and grow mine in an ongoing cycle. For the rest of this week I don’t think I’ll be spending very much, but I wouldn’t mind acting like a drunken sailor next week, if only Apple can lead the way and show others the light.                       

Barely 6 months ago I contended that the intrusion of Carl Icahn into the company spelled the end of an era at Apple (AAPL).

Even before that point Apple had already shown that it was favoringfinancial engineering over the kind of engineering that enabled it to create a cash reserve in excess of $150 billion.

For those who cheered when it looked, from the surface, that Carl Icahn was retreating, having been prevented by Tim Cook from sacrificing corporate ethos for even more financial engineering, cheer no more.

As opposed to the 11th ever Icahn Tweet that told the world that he had amassed a “large position” in Apple, the most recent was  (self) – congratulatory.

With Apple’s post-earnings announcement of a 7 for 1 stock split and an 8% increase in the dividend, another nail has been put into a great company that is now evolving into what it had disdained in the past. In the absence of news that would excite investors and consumers alike, Apple has now continued its recent practice of pandering and diverting attention from what may be happening at the core of Apple.

It is in danger of becoming Microsoft (MSFT) of old, a company that was disparaged for its lack of product innovation and lack of coherent, forward looking leadership. Add to that a lack of a readily understandable strategy and you have a perfect target for hipsters and investors alike to bash and trash.

During that period, as Microsoft share price simply stayed in place, it routinely increased its dividend, at least doing something to appease shareholders. But while doing so it was roundly criticized for expensive and non-strategic acquisitions, which were deemed to be a waste of shareholder money.

However, I don’t make the comparison to Microsoft in a disparaging way. For those who practiced a covered option strategy, they were likely big fans of Microsoft, as treading in place is a great formula for generating lots of option premiums and is especially nice if there are dividends, as well.

In fact, perhaps if I compared Apple to the new Microsoft that many see as developing under the leadership of Satya Nadella, it might be viewed as being laudatory.

Ironically then, we now have today’s Apple.

The most common complaint heard is regarding its lack of innovation. Samsung may now be somewhat passe in its own right and Google (GOOG) may have a less than concretely defined strategy, but Apple has been widely admired for its innovation within a well developed strategy. The eco-system? While many didn’t understand its meaning in high school science, it was an obviously intuitive concept when it came to the Apple family of products, making so many wonder why no one had really mastered that concept before.

But the lack of new product introduction and expansion of that eco-system is troubling and has called into question Tim Cook’s leadership and vision.

Certainly news that sales of its iPad were well below projections can’t easily be interpreted in a positive light, as Apple also reported that its cash reserve fell this quarter, as more was returned to investors than was retained.

While innovation and leadership are now called into question evoking images of the old Microsoft, one has to also wonder how much shareholder cash Apple has squandered. No, not using the traditional Microsoft strategy of over-paying for poor strategic fitting entities, but rather through appeasement.

By waiting so long to pursue any share buy back strategy Apple has continually paid top dollar for shares, as pressure mounted for some use of its cash reserves. Under out-going CFO Peter Oppenheimer the strategy has been to buy shares when prices are high and there’s little doubt that share buy backs were accelerated to, in part, appease activists past and present.

While doing all of this, Apple has significantly under-performed the S&P 500 since August 2011, which is more than a year before it reached its peak share price. The comparisons get much worse after that date.

So that’s all bad, right?

While the days of Apple reaching $1,000/share (or $142.85 on a post-split basis) may be discussions of long ago, I think the opportunities for traders are as great or better than in recent memory.

Unless one believes that Apple can re-create its explosive share growth from 2009-2012, this is the time to look at Apple much in the way that Microsoft was able to reward some shareholders. Those were the shareholders who could look beyond the demand for share appreciation in return for using shares as a vehicle to create income streams through option premiums and dividends.

Sporting an attractive dividend and always attractive option premiums there is opportunity to capitalize on Apple’s signal that it is bidding farewell to that kind of share appreciation and is looking toward more mundane ways of pacifying those who would make noise. If it can’t be done through a shorter product cycle, through new products or ever increasing sales, it may as well be done by putting the obscenely large cash hoard to work in order to maintain a status quo and keep the activists at bay.

For the purists, it’s about the products. For a while it was also about being able to continually point at higher and higher stock prices and those great, unrealized gains. However, for those who simply view a stock as a vehicle toward realized profits the end of the era that started with Carl Icahn’s “failed” activism and that has resulted in Tim Cook’s capitulation, is now the time to consider the use of Apple in a covered option strategy.

For much of the decade prior to 2009 Apple was a great covered option trade. That era disappeared with its unidirectional price climb and returned a year ago as shares hit their near term lows.

While Icahn may have driven one nail into the purist’s heart and another into the coffin of the old Apple you knew and loved by re-directing attention from product to price, he has opened up the hearts of those that like lining their pockets with real gains.

I look forward to the more frequent trading of Apple now that we all know that the pretense of returning to the glory days is over.