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Weekend Update – May 29, 2016

We’ve all been part of one of those really disingenuous hugs.

Whether on the giving or the receiving side, you just know that there’s nothing really good coming out of it and somehow everyone ends up feeling dirty and cheapened.

Every now and then someone on the receiving end of one of those disingenuous hugs believes it’s the real thing and they are led down the wrong path or become oblivious to what is really going on.

This week the market gave a warm embrace and hug to the notion that the FOMC might actually be announcing an interest rate hike as early as its June 2016 meeting.

The chances of that even being a possibility was slight, at the very best, just 2 or 3 weeks ago. Since then, however, there has been more and more hawkish talk coming even from the doves.

The message being sent out right now is that the FOMC is like a hammer that sees everything as a nail. In that sense, every bit of economic news justifies tapping on the brakes.

Traditionally, those brakes were there to slow down an economy that was heating up and would then lead to inflation.

Inflation was once evil, but now we recognize that there are shades of grey and maybe even Charles Manson had some good qualities.

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Weekend Update – January 10, 2016

new year starts off with great promise.

If seems so strange that the stock market often takes on a completely different persona from one day to the next.

Often the same holds true for one year to the next. despite there being nothing magical nor mystical about the first trading day of the year to distinguish it from the last trading day of the previous year.

For those that couldn’t wait to be finally done with 2015 out of the expectation conventional wisdom would hold and that the year following a flat performing year would be a well performing year, welcome to an unhappy New Year.

2015 was certainly a year in which there wasn’t much in the way of short term memory and the year was characterized by lots of ups and downs that took us absolutely nowhere as the market ended unchanged for the year.

While finishing unchanged should probably result in neither elation nor disgust, scratching beneath the surface and eliminating the stellar performance of a small handful of stocks could lead to a feeling of disgust.

Or you could simply look at your end of the portfolio year bottom line. Unless you put it all into the NASDAQ 100 (NDX) or the ProShares QQQ (NASDAQ:QQQ), which had no choice but to have positions in those big gainers, it wasn’t a very good year.

You don’t have to scratch very deeply beneath the surface to already have a sense of disgust about the way 2016 has gotten off to its start.

There are no shortage of people pointing out that this first week of 2016 was the worst start ever to a new year.

Ever.

That’s much more meaningful than saying that this is the worst start since 2019.

A nearly 7% decline in the first week of trading doesn’t necessarily mean that 2016 won’t be a good one for investors, but it is a big hole from which to have to emerge.

Of course a 7% decline for the week would look wonderful when compared to the situation in Shanghai, when a 7% loss was incurred to 2 different days during the week, as trading curbs were placed, markets closed and then trading curbs eliminated.

If you venture back to the June through August 2015 period, you might recall that our own correction during the latter portion of that period was preceded by two meltdowns in Shanghai that ultimately saw the Chinese government enact a number of policies to abridge the very essence of free markets. Of course, the implicit threat of the death penalty for those who may have knowingly contributed to that meltdown may have set the path for a relative period of calm until this past week when some of those policies and trading restrictions were lifted.

At the time China first attempted to control its markets, I believed that it would take a very short time for the debacle to resume, but these days, the 5 months since then are the equivalent of an eternity.

While China is again facing a crisis, the United States is back to the uncomfortable position of being the dog that is getting wagged by the tail.

US markets actually resisted the June 2015 initial plunge in China, but by the time the second of those plunges occurred in August, there was no further resistance.

For the most part the two markets have been in lock step since then.

Interestingly, when the US market had its August 2015 correction, falling from the S&P 500 2102 level, it had been flat on the year up to that point. Technicians will probably point to the fact that the market then rallied all the way back to 2102 by December 1, 2015 and that it has been nothing but a series of lower highs and lower lows since then, culminating in this week.

The decline from the recent S&P 500 peak at 2102 to 1922 downhill since then is its own 8.5%, putting us easily within a day’s worth of bad performance of another correction.

Having gone years without a traditional 10% correction, we’re now on the doorstep of the second such correction in 5 months.

While it would be easy to thank China for helping our slide, this past week was another of those perfect storms of international bad news ranging from Saudi-Iran conflict, North Korea’s nuclear ambitions and the further declining price of oil, even in the face of Saudi-Iran conflict.

Personally, I think the real kiss of death was news that 2015 saw near term record inflows into mutual funds and that the past 2 months were especially strong.

I’ve never been particularly good at timing, but there may be reason to believe that at the very least those putting their money into mutual funds aren’t very good at it either.

If I still had a shred of optimism left, I might say that the flow into mutual funds might reflect more and more people back in the workforce and contributing to workplace 401k plans.

If that’s true, I’m sure those participants would agree with me that it’s not a very happy start to the year. For those attributing end of the year weakness to the “January Effect” and anticipating some buying at bargain prices to drive stocks higher, that theory may have had yet another nail placed in its coffin.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

2015 turned out to be my least active year for opening new positions since I’ve been keeping close track. Unfortunately, of those 107 new positions, 29 are still open and 15 of those are non-performing, as they await some opportunity to sell meaningful calls against them.

If you would have told me a year ago that I would not have rushed into to pick up bargains in the face of a precipitous 7% decline, I would have thought you to be insane.

While I did add one position last week, the past 2 months or so have been very tentative with regard to my willingness to ease the grip on cash and for the moment there’s not too much reason to suspect that 2016 will be more active than 2015.

With that said, though, volatility is now at a level that makes a little risk taking somewhat less of a risk.

While volatility has now come back to its October 2015 level, it is still far from its very brief peak in August 2015, despite the recent decline being almost at the same level as the decline seen in August.

Of course that 2% difference in those declines, could easily account for another 10 or so points of volatility. Even then, we would be quite a distance from the peak reached in 2011, when the market started a mid-year decline that saw it finish flat for the year.

The strategy frequently followed during periods of high volatility is to considering rolling over positions even if they are otherwise destined for assignment.

The reason for that is because the increasing uncertainty extends into forward weeks and drives those premiums relatively higher than the current week’s expiring premiums. During periods of low volatility, the further out in time you go to sell a contract, the lower the marginal increase in premium, as a reflection of less uncertainty.

For me, that is an ideal time and the short term outlook taken during a period of accelerating share prices is replaced by a longer term outlook and accumulation of greater premium and less active pursuit of new positions.

The old saying “when you’re a hammer, everything looks like a nail,” has some applicability following last weeks broad and sharp declines. If you have free cash, everything looks like a bargain.

While no one can predict that prices will continue to go lower as they do during the days after the Christmas shopping season, I’m in no rush to run out and pay today’s prices because of a fear that inventory at those prices will be depleted.

The one position that I did open last week was Morgan Stanley (NYSE:MS) and for a brief few hours it looked like a good decision as shares moved higher from its Monday lows when I made the purchase, even as the market went lower.

That didn’t last too long, though, as those shares ultimately were even weaker than the S&P 500 for the week.

While I already own 2 lots of Bank of America (NYSE:BAC), the declines in the financial sector seem extraordinarily overdone, even as the decline in the broader market may still have some more downside.

As is typically the case, that uncertainty brings an enhanced premium.

In Bank of America’s case, the premium for selling a near the money weekly option has been in the 1.1% vicinity of late. However, in the coming week, the ROI, including the potential for share appreciation is an unusually high 3.3%, as the $15.50 strike level offers a $0.19 premium, even as shares closed at $15.19.

With earnings coming up the following week, if those shares are not assigned, I would consider rolling those contracts over to January 29, 2016 or later.

At this point, most everyone expects that Blackstone (NYSE:BX) will have to slash its dividend. As a publicly traded company, it started its life as an over-hyped IPO and then a prolonged disappointment to those who rushed into buy shares in the after-market.

However, up until mid-year in 2015, it had been on a 3 year climb higher and has been a consistently good consideration for a buy/write strategy, if you didn’t mind chasing its price higher.

I generally don’t like to do that, so have only owned it on 3 occasions during that time period.

Since having gone public its dividend has been a consistently moving target, reflecting its operating fortunes. With it’s next ex-dividend date as yet unannounced, but expected sometime in early February, it reports earnings on January 28, 2015.

That presents considerable uncertainty and risk if considering a position. I don’t believe, however, that the announcement of a decreased dividend will be an adverse event, as it is both expected and has been part of the company’s history. WHat will likely be more germane is the health of its operating units and the degree of leverage to which Blackstone is exposed.

If willing to accept the risk, the premium reward can be significant, even if attenuating the risk by either selling deep in the money calls or selling equally out of the money put contracts.

I’m already deep under water with Bed Bath and Beyond (NASDAQ:BBBY), but after what had been characterized as disappointing earnings last week, it actually traded fairly well, despite the overall tone of the market.

It is now trading near a multi-year low and befitting that uncertainty it’s option premiums are extraordinarily generous, despite having a low beta,

As is often the case during periods of heightened volatility, consideration can be given to the sale of puts options rather than executing a buy/write.

However, given its declines, I would be inclined to consider the buy/write approach and utilize an out of the money option in the hopes of accumulating share appreciation and dividend.

If selling puts, I would sell an out of the money put and settle for a lower ROI in return for perhaps being able to sleep more soundly at night.

During downturns, I like to place some additional focus on dividends, but there aren’t very many good prospects in the coming week.

One ex-dividend position that does get my attention is AbbVie (NYSE:ABBV).

As it is, I’m under-invested in the healthcare sector and AbbVie is currently trading right at one support level and has some additional support below that, before being in jeopardy of approaching $46.50, a level to which it gapped down and then gapped higher.

It has a $0.57 dividend, which means that it is greater than the units in which its strike levels are defined. While earnings aren’t due to be reported until the end of the month, its premium is more robust than is usually the case and you can even consider selling a deep in the money call in an effort to see the shares assigned early. For what would amount to a 2 day holding, doing so could result in a 1.2% ROI, based upon Friday’s closing prices and a $55 strike level.

Finally, retail was especially dichotomous last week as there were some very strong days even during overall market weakness and then some very weak days, as well.

For those with a strong stomach, Abercrombie and Fitch (NYSE:ANF) is well off from its recent lows, but it did get hit hard on Friday, along with the retail sector and everything else.

As with AbbVie, the risk is that while shares are now resting at a support level, the next level below represents an area where there was a gap higher, so there is really no place to rest on the way down to $20.

The approach that I would consider for an Abercrombie and Fitch position to sell out of the money puts, where even a 6% decline in share price could still provide a return in excess of 1% for the week.

When selling puts, however, I generally like to avoid or delay assignment, if possible, so it is helpful to be able to watch the position in the event that a rollover is necessary if shares do fall 6% or more as the contract is running out.

Traditional Stocks: Bank of America, Bed Bath and Beyond

Momentum Stocks: Abercrombie and Fitch, Blackstone

Double-Dip Dividend: AbbVie (1/13 $0.57)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

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Weekend Update – November 29, 2015

We used to believe that the reason people so consistently commented about how tired they were after a big Thanksgiving meal was related to the turkey itself.

Within that turkey it was said that an abundance of the basic amino acid,”tryptophan,” which is a precursor of “serotonin”  played a role in its unique ability to induce sleep.

More reasoned people believe that there is nothing special about turkey itself, in that it has no more tryptophan than any other meat and that simply eating without abandon may really explain the drowsiness so commonly experienced. Others also realize that tryptophan, when part of a melange of other amino acids, really doesn’t stand out of the crowd and exert its presence.

Then there’s the issue of serotonin itself, a naturally produced neurotransmitter, which is still not fully understood and can both energize and exhaust, in what is sometimes referred to as “the paradox of serotonin.”

From what is known about serotonin, if dietary tryptophan could exert some pharmacological influence by simply eating turkey, we would actually expect to find reports of people who got wired from their Thanksgiving meals instead of sedated.

Based upon my Thanksgiving guests this year, many of whom found the energy to go out shopping on Thursday and Friday nights, they were better proof of the notion that Black Fridays matter, rather than of the somnolent properties of turkey.

In the case of the relationship between the tryptophan in turkey and ensuing sleep, it may just be a question of taking disparate bits of information, each of which may have some validity and then stringing them together in the belief that their individual validity can be additive in nature.

Truth doesn’t always follow logic.

Another semi-myth is that when traders are off dozing or lounging in their recliners instead of trading, the likelihood of large market moves is enhanced in a volume depleted environment.

You definitely wouldn’t have known it by the market’s performance during this past week, as Friday’s trading session began the day with the S&P 500 exactly unchanged for the week and didn’t succeed in moving the needle as the week came to its end.

Other than the dueling stories of NATO ally Turkey and stuffing ally turkey, there wasn’t much this week to keep traders awake. The former could have sent the market reeling, but anticipation of the latter may have created a calming influence.

You couldn’t be blamed for buying into the tryptophan myth and wondering if everyone had started their turkey celebration days before the calendar warranted doing so.

Or maybe traders are just getting tired of the aimless back and forth that has us virtually unchanged on the DJIA for 2015 and up only 1.5% on the S&P 500 for the year.

Tryptophan or no tryptophan, treading water for a year can also tire you out.

The week started off with the news of China doubling its margin requirements and an agreement on a $160 Billion tax inversion motivated merger, yet the reaction to those news items was muted.

The same held for Friday’s 5.5% loss in Shanghai that barely raised an eyebrow once trading got underway in the United States, as drowsiness may have given way to hibernation.

Even the revised GDP, which indicated a stronger than expected growth rate, failed to really inflate or deflate. There was, however, a short lived initial reaction which was a repudiation of the recent seeming acceptance of an impending interest rate hike. For about an hour markets actually moved outside of their very tight range for the week until coming to its senses about the meaning of economic growth.

Next week there could be an awakening as the Employment Situation Report is released just days before the FOMC begins their December meeting which culminates with a Janet Yellen press conference.

Other than the blip in October’s Employment Situation Report, the predominance of data since seems to support the notion of an improving economy and perhaps one that the FOMC believes warrants the first interest rate hike in almost 10 years.

With traders again appearing to be ready to accept such an increase it’s not too likely that a strong showing will scare anyone away and may instead be cause for a renewed round of optimism.

On the other hand, a disappointing number could send most into a tizzy, as uncertainty is rarely the friend of traders and any action by the FOMC in the face of non-corroborating data wouldn’t do much to inspire confidence in anything or any institution.

For my part, I wouldn’t mind giving the tryptophan the benefit of the doubt and diving deeply into those turkey leftovers with express instructions to be woken up only once 2016 finally arrives.

Knowing that flat years, such as this one has been to date, are generally followed by reasonably robust years, overloading on the tryptophan now may be a good strategy to avoid more market indecision and avoid the wasteful use of energy that could be so much better spent in 2016.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

A number of potential selections this week fall into the “repeat” category.

Unlike a bad case of post-Thanksgiving indigestion, the kind of repeating that occasionally takes place when selling covered calls, is actually an enjoyable condition and is more likely to result in a look of happiness instead of one of gastric distress.

This week I’m again thinking of buying Bank of
America (BAC), Best Buy (BBY), Morgan Stanley (MS) and Pfizer (PFE), all of which I’ve recently owned and lost to assignment.

Sometimes that has been the case on multiple occasions over the course of just a few weeks. Where the real happiness creeps in is when you can buy those shares back and do so at a lower price than at which they were assigned.

With the S&P 500 only about 2% below its all time high, I would welcome some weakness to start the week in hopes of being able to pick up any of those 4 stocks at lower prices. My anticipation is that Friday’s Employment Situation Report will set off some buying to end the week, so I’d especially like to get the opportunity to make trades early in the week.

Bank of America and Morgan Stanley, of course, stand to benefit from increasing interest rates, although I suppose that some can make the case that when the news of an interest rate increase finally arrives, it will signal a time to sell.

If you believe in the axiom of “buying on the rumor and selling on the news,” it’s hard to argue with that notion, but I believe that the financials have so well tracked interest rates, that they will continue doing so even as the rumor becomes stale news.

As an added bonus, Bank of America is ex-dividend this week, although it’s dividend is modest by any standard and isn’t the sort that I would chase after.

Both, however, may have some short upside potential and have option premiums that are somewhat higher than they have been through much of 2015.

While both are attractive possibilities in the coming week or weeks, if forced to consider only one of the two, I would forgo Bank of America’s added bonus and focus on Morgan Stanley, as it has recovered from its recent earnings related drop, but now may be getting ready to confront its even larger August decline.

Bank of America, on the other hand, is not too far from its 2015 high point, but still can be a good short term play, perhaps even being a recurrent one over the next few weeks.

Also ex-dividend this week are two retailers, Wal-Mart (WMT) and Coach (COH) and together with Best Buy (BBY) and Bed Bath and Beyond (BBBY) are my retail focus, as I expect this year to be like most others, as the holiday season begins and ends.

While Coach may have lost some of its cachet, it’s still no Wal-Mart in that regard.

Coach has struggled to return to its April 2015 levels, although it may finally be stabilizing and recent earnings have suggested that its uncharacteristically poor execution on strategy may be coming to an end.

With a very attractive dividend and an option premium that continues to reflect some uncertainty, I wouldn’t mind finding some company for a much more expensive lot of shares that I’ve been holding for quite some time. With the ex-dividend date this week, the stars may be aligned to do so now.

I bought some Wal-Mart shares a few weeks ago after a disastrous day in which it sustained its largest daily loss ever, following the shocking revelation that increasing employee wages was going to cost the company some money.

The only real surprise on that day was that apparently no one bothered doing the very simple math when Wal-Mart first announced that it was raising wages for US employees. They provided a fixed amount for that raise and the number of employees eligible for that increase was widely known, but basic mathematical operations were out of reach to analysts, leading to their subsequent shock some months later.

Wal-Mart shares will be getting ready to begin the week slightly higher than where I purchased my most recent shares. I don’t very often add additional lots at higher prices, but the continuing gap between the current price and where it had unexpectedly plunged from offers some continued opportunity.

As with Coach, in advance of an ex-dividend date may be a fortuitous time to open a position, particularly as the option premium and dividend are both attractive, as are the shares themselves.

Neither Best Buy nor Bed Bath and Beyond are ex-dividend this week, although Best Buy will be so the following week.

That may give reason to consider selling an extended option if purchasing Best Buy shares, but it could also give some reason to sell weekly options, but to consider rolling those over if assignment is likely.

In doing so, one strategy might be to select a rollover date perhaps two weeks away and still in the money. In that manner, there may still be reason for the holder of the option contract to exercise early in order to capture the dividend, but as the seller you would receive a relatively larger premium that could offset the loss of the dividend while at the same time freeing up the cash tied up in shares of Best Buy in order to be able to put it to use in some other income producing position.

Bed Bath and Beyond is a company that I frequently consider buying and would probably have done much more frequently, if only it had offered a dividend or consistently offered weekly options for sale and purchase.

It still doesn’t offer a dividend, but sitting near a 2 year low and never being in one of their stores without lots of company at the cash register, the shares really have their appeal during the holiday season.

Finally, even with an emphasis on financials and retail, Pfizer (PFE) continues to warrant a look.

Having purchased shares last week and having seen them assigned, there’s not too much reason to believe that their planned merger with Ireland based Allergan (AGN), is going to be resolved any time soon.

While we wait for that process to play itself out, there may be fits and starts. There will clearly be opposition to the merger, as attention will focus on many issues, but none as controversial as the tax avoidance that may be a primary motivator for the transaction.

If the news for Pfizer eventually turns out to be negative and an immovable roadblock is placed, I don’t think that very much of Pfizer’s current price
reflects the deal going to its anticipated completion.

With that in mind, the upside potential may be greater than the downside potential. As long as the option premiums are reflected any increased risk, this can be an especially lucrative trade the longer the process gets stretched out, particularly if Pfizer trades in a defined range and the position can be serially rolled over or purchased anew.

Traditional Stocks:  Bed Bath and Beyond, Morgan Stanley, Pfizer

Momentum Stocks:  Best Buy

Double-Dip Dividend: Bank of America (12/2 $0.05), Coach (12/2 $0.34), Wal-Mart (12/2 $0.49)

Premiums Enhanced by Earnings:  none

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

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Weekend Update – October 4, 2015

If you’re a parent, even if 50 years have passed since the last episode, you can probably still remember those wonderful situations when your child was having a complete meltdown, even as the kid really didn’t know what it is that they wanted.

Sometimes a child can get so out of control over something that they wanted so badly that even when finally getting it, they just couldn’t regain control. We’ve all seen kids carry on as if there was some horrible void being perceived in their lives that was still gaping and eating away at their very core even when their immediate issue had already been resolved.

I think that’s the only way to explain the market ups and downs that we’ve been seeing, starting from the week of the most recent FOMC Statement release and all the way through to the last trading day of the past week.

The market has gone from a condition of apoplexy over the very thought of an interest rate hike to a melt down when that very same interest rate hike didn’t materialize.

Whether the moves have been up or down the rational basis has become more elusive and knowing what to do in response has been difficult. It’s been a little bit easier to simply accept the fact that there is such a phenomenon as “the terrible twos” and just ride out the storm.

Trying to understand that kind of behavior is tantamount to trying to use rational thought processes when dealing with a child in the midst of an uncontrollable outburst.

Sometimes it’s just best to ignore what you see unfolding before your eyes and let events run their course. That may not be a call for total passivity, though, and completely giving up on things, but the belief that you can outsmart or out-think a rampaging child or a rampaging market is destined for failure.

Followings Friday’s 1.4% gain in the S&P 500 that index was down only about 8.7% from its summer time highs, after having been down as much as 11.9% after the first day of trading this past week.

In doing so, the market has continued its dance around that 10% correction line while having a regular series of irrational outbursts that have alternated between plunges and surges.

Like most parents, there is some pride that comes into play when a child finally is able to come to a stage in life when those uncontrollable and irrational outbursts have run their course. For most kids once they’ve gotten through that phase it never returns, although for some adults it may manifest itself in different ways.

I don’t know if this week is going to be that week when some pride is warranted, but at the very least the market took some time in-between its outbursts this week to collect itself. In doing so, it either continued to hover around that 10% correction line and avoided spiraling out of control or took some positive steps toward finally recovering from that correction.

It started with a 300+ point drop on Monday with almost nothing happening on Tuesday as it geared up for a 200+ point gain on Wednesday.

Then, it did virtually nothing again on Thursday, only to see the bottom drop out after some very disappointing Employment Situation Report numbers on Friday morning.

This time, “disappointing” meant employment numbers that were far lower than expected and lower revisions to the previous month.

Had the same numbers been put forward a few months ago they would have engendered elation, but now that market thinks it knows what it wants and as always, when it doesn’t get it there’s a tantrum at hand.

Then, suddenly, something just seemed to click, just a it occasionally does with a child. Sometimes it may simply be exhaustion or a realization of the futileness of demonstrable outbursts, but at other times a spark may get lit that creates a path to a greater understanding of things.

The morning turnaround on Friday occurred at that point at which the S&P 500 was approaching its lowest level since the correction began and had chartists scurrying to their charts to see where the next stop below awaited.

Instead, however, the S&P 500 climbed 3% from those depths having turned positive for the day by noontime and then continuing so soar even more.

Of course, while there may be some pride in what can be interpreted as a sudden realization of the unwarranted behavior in the morning, I always get wary of such large moves, even when they’re to my benefit. When seeing those kinds of intra-day reversals, my thoughts go from recognizing them as reasonably normal tantrums, to the less normal exhibition of a bipolar disorder.

With earnings season beginning at the end of this coming week, we may soon find out whether the market is capable of exhibiting some rational responses to real news.

I’m optimistic that those responses will be more appropriate than has been the case over the last 2 earnings seasons when the o
ption market had repeatedly under-estimated the magnitude of those responses.

Any sign that top line and bottom line numbers are both heading in the right direction may paint those disappointing Employment Situation Report numbers as an aberration. That could be just the spark we all need to get over the hump of interest rate worries and escape the developmental binds that throw us into fits of rage.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

I never get tired of doing the same thing over and over again. There may be a psychiatric diagnostic code for that sort of thing, but when it comes to stocks it can be a very rational way of behaving especially when those stocks start falling into a pattern of trading in a narrow price range.

However, if all those stocks did was to trade in that narrow range and didn’t have a moment of explosive behavior or two before returning to a more normal path, there would be no reason to consider owning them for any reason other than perhaps for the relative safety of their dividend income.

But those occasional moves higher and lower make the sale of calls worthwhile even when the shares are seemingly moribund. Both General Electric (NYSE:GE) and Bank of America (NYSE:BAC) are recently exhibiting the kind of behavior that can generate a very respectable return, both in relative and absolute terms, especially if the opportunity presents to buy shares on a serial basis following share assignment.

I had 2 lots of General Electric assigned this past week and would be very willing to own them for the sixth time in 6 weeks. However, following its late day turnaround on Friday, along with the rest of the market, I would probably only do so if its price came closer to $25.

With a remaining lot of shares and options set to expire this week, I would still have an eye on selling new weekly calls, but if requiring rollover at the end of the week, I would consider bypassing the cycle ending week of October 16th, and perhaps selling extended weekly calls, as General Electric will report earnings that morning.

I now own 2 lots of Bank of America and three lots at any one time is my self imposed limit, but trading at the $15.50 level has a relative feeling of safety for me. As with General Electric, however, if purchasing or adding shares, there is that little matter of upcoming earnings. While most likely beginning the process with a weekly call, if requiring a rollover as being faced with expiration rather than assignment, I would probably opt to bypass the October 16 expirations in the event of some poorly received news on earnings.

Poorly received news is an apt way to describe anything emanating from China these days. While there are lots of potential “poster child” examples of the risks associated with any stock that has exposure in China, among the more respected names has to be caterpillar (NYSE:CAT).

For many rational reasons, well known short seller Jim Chanos laid out his short thesis on caterpillar nearly 30 months ago and following a substantial move higher, the virtue of patience has begun to start its rewards.

With shares now down about 40% from a year ago, there’s still no telling if this is the bottom, but a constellation of events has me considering a position.

With its ex-dividend date the next week and then earnings the following week and a weekly option premium that reflects the near term risk, I’m ready to consider that risk.

If selling a weekly option doesn’t look as if it will result in an assignment, I would probably consider trying to roll over those options to the ex-dividend week, but with a mind toward giving up that dividend by selling a deep in the money call option in an effort to collect some additional premium, but to be out of shares prior to earnings.

Failing that, however, the next step would be to attempt to roll over those shares and again selecting an expiration date that bypasses the immediate threat of earnings and then holding on tightly as one of the least respected CEOs over the past few years may again be in people’s cross-hairs.

YUM Brands (NYSE:YUM) reports earnings this week and as ubiquitous as their locations may be in the United States, it’s almost always their Chinese holdings that get the attention of investors.

Following a strong move higher on Friday, I would be reluctant to start the week by selling puts on YUM shares, as it reports earnings Tuesday afternoon, unless there is some significant giveback of those weekending gains. At the moment, the option market is implying a price move of about 5.7%.

A 1% ROI could potentially be obtained through the sale of a weekly put at a strike level 6.7% below Friday’s close, but that may be an insufficient cushion, given YUM’s earnings history, even when the CHinese economy has not been so highly questionable. However, in the event of some price pullback prior to earnings or a large price drop after earnings, I would consider a posit
ion.

In the event of a large pullback after earnings, however, rather than selling puts, as I might usually want to do, YUM is expected to have its ex-dividend date the following week, so I might consider the purchase of shares and the sale of calls. But even then, depending on the prevailing option premiums, I could possibly consider sacrificing the dividend for the premiums that could come from selling deep in the money calls and possibly using an extended option expiration date.

Equally ubiquitous, at least in some portions of the United States is Dunkin Brands (NASDAQ:DNKN). Following a disastrous reception on Thursday to their forward guidance and the barely perceptible rebound the following day, this is a stock that I’ve wanted to repurchase for nearly a year.

With only monthly options available and without a wide assortment of strike levels, this may be a good position to consider a longer term option sale, as it reports earnings at the beginning of the November 2015 cycle and will likely have its ex-dividend date in the November or December cycle.

During this latest downturn, I’ve had a more profound respect for trying to accumulate dividends, especially as the increased volatility has created option premiums that subsidize more of the dividend related price drop in shares. In doing so, sometimes there may be just as good opportunity in trying to induce early assignment of shares by selling deeper in the money calls that you usually might do in a lower volatility environment and using an extended option timeframe.

Both Verizon (NYSE:VZ) and Oracle (NYSE:ORCL) may benefit from those approaches, although when the size of the dividend is larger than the strike price unit, such as in the case of Verizon, the advantage is a bit muted.

However, with Verizon reporting earnings on October 20th, some consideration might be given toward selling an in the money option expiring on that date, in an effort to get the larger, earnings enhanced premium, even while potentially sacrificing the dividend.

Oracle doesn’t offer the same generous dividend as does Verizon, nor does it have earnings immediately at hand.

It can be approached in a much more simplistic fashion in an attempt to capture both the dividend and the option premium by considering a sale of a call hovering near the current price. because it is ex-dividend on a Friday, there may be some opportunity to enhance the yield by selling an extended weekly option, again, possibly risking early assignment, but atoning for some of that with some additional premium

Finally, how can there be anything good to say about Abercrombie and Fitch (NYSE:ANF)? I’ve been practicing Chanos like patience on a much more expensive lot of shares, but in the meantime have found some opportunity by buying shares and selling calls in the $20-22 range.

Having now done so on 4 occasions in 2015 it nay be time to do so again as it closed in at the lower end of that range. With its earnings due relatively late in the current cycle this position can be considered either through the sale of puts or as a buy/write.

Traditional Stocks: Caterpillar, Dunkin Donuts, General Electric

Momentum Stocks: Abercrombie and Fitch, Bank of America

Double-Dip Dividend: Oracle (10/9 $0.15), Verizon (10/7 $0.565)

Premiums Enhanced by Earnings: YUM Brands (10/6 PM)

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

Posted on

Weekend Update – September 20, 2015

This past Monday, prior to the market’s opening, I posted the following for Option to Profit subscribers:

“In all likelihood, at this point there are only two things that would make the market take any news badly.

The first is if no interest rate increase is announced.

Markets seem to have finally matured enough to understand that a rate hike is only a reflection of all of the good and future good things that are developing in our economy and are ready to move on instead of being paralyzed with fear that a rate hike would choke off anemic growth.

The second thing, though, is the very unlikely event of a rate hike larger than has been widely expected. That means a 0.5% hike, or even worse, a full 1% hike.

That would likely be met with crazed selling.”

Based on the way the market was trading this week as we were awaiting the FOMC Statement which was very widely expected to announce an interest rate increase, you would have been proud.

The proudness would have arisen as it seemed that the market was finally at peace with the idea that a small interest rate increase, the first in 9 years, wouldn’t be bad news, at all.

Finally, it seemed as if the market was developing some kind of a more mature outlook on things, coming to the realization that an interest rate hike was a reflection of a growing and healthy economy and was something that should be celebrated.

It always seemed somewhat ironic to me that the investing class, perhaps those most likely to endorse the concept of teaching a man how to fish rather than simply giving a handout, would be so aghast at the possibility of a cessation of a zero interest rate policy (“ZIRP”), which may have been tantamount to a handout.

The realization that ours was likely the best and most fundamentally sound economy in the world may have also been at the root of our recent disassociation from adverse market events in China.

So while the week opened with more significant weakness in China, our own markets began to trade as if they were now ready to welcome an interest rate increase and seeing it for what it really reflected.

All was well and in celebration mode as we awaited the news on Thursday.

As the news was being awaited, I saw the following Tweet. 

I don’t follow many people on Twitter, but Todd Harrison, the founder of Minyanville is one of those rare combinations of humility, great personal and professional successes, who should be followed.

I have an autographed copy of his book “The Other Side of Wall Street,” whose full title really says it all and is a very worthwhile read.

Like the beer pitchman, Todd Harrison doesn’t Tweet much, but when he does, it’s worth reading, considering and placing somewhere in your memory banks.

Many people in their Twitter profiles have a disclaimer that when they re-Tweet something it isn’t necessarily an endorsement.

When I re-Tweet something, it is always a reflection of agreement. There’s no passive – aggressiveness involved in the re-Tweet by saying “I endorse the re-Tweeting of this, but I don’t necessarily endorse its content.”

I believed, as Todd Harrison did, some 4 minutes before the FOMC statement release, that the knee jerk reaction to the FOMC decision wasn’t the one to follow.

But a funny thing happened, but not in a funny sort of way.

For a short while that knee jerk reaction would have been the right response to what should have been correctly viewed as disappointment.

What was wrong was a reversion back to a market wanting and believing that it was given another extension of the ZIRP handout. That took a market that had given up all of its substantial gains and made another reversal, this time going beyond the day’s previous gains.

With past history as a guide, going back to Janet Yellen’s predecessor, who introduced the phenomenon of the Federal Reserve Chairman’s Press Conference, the market kept going higher during the prepared statement portion of the conference and continued even higher as some clarification was sought on what was meant by “global concerns.”

Of course, everyone knew that meant China, although one has to wonder whether those global concerns also included the opinions held and expressed by Christine Legarde of the International Monetary Fund and others, who believe that it would be wrong for the FOMC to introduce an interest rate increase in 2015.

While some then began to wonder whether “global concerns” meant that the Federal Reserve was taking on a third mandate, it all turned suddenly downward.

With the exception of a very early Yellen press conference when she mischaracterized the FOMC’s time frame on rate increases and the market took a subsequent tumble, normally, Yellen’s dovish and dulcet tones are like a tonic for whatever may have been ailing the market/ This week, however, the juxtaposition of dovish and hawkish sentiments from the FOMC Statement, the subsequent press conference prepared statement and questions and answers may have been confusing enough to send traders back to their new found friend.

Logic.

Perhaps it was Yellen’s response that she couldn’t give a recipe to define what would cause the FOMC to act or perhaps it was the suggestion that the FOMC needn’t wait until their next meeting to act that sent markets sharply lower as they craved some certainty.

Or maybe it was a sudden realization that if markets had gone higher on the anticipation of a rate increase, logic would dictate that it go lower if no increase was forthcoming.

And so the initial response to the FOMC decision was the right response as the market may have shown earlier in the week that it was finally beginning to act in a mature fashion and was still capable of doing so as the winds shifted.

Perhaps the best question of that afternoon was one that pointed out an apparen
t inconsistency between expectations for full employment in the coming years, yet also expectations for inflation remaining below the Federal Reserve’s 2% target.

Good question.

Her answer “If our understanding of the inflation process is correct……we will see further upward pressure on inflation, may have represented a very big “if” to some and may have deflated confidence at the same time as a re-awakening was taking place that suggested that perhaps the economy wasn’t growing as strongly as had been hoped to support continued upward movement in the market.

That’s the downside to focusing on fundamentals.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

As the market continues its uncertainty, even as it may be returning more to consideration of fundamentals, I continue to like the idea of going with some of the relative safety that may be found with dividends.

Last week I purchased more shares of General Electric (GE), hoping to capture both the dividend and the volatility enhanced premium. Those shares, however were assigned early, but having sold a 2 week option the ROI for the 3 days of holding reflected that additional time value and was a respectable 1.1%.

Even though I still hold some shares with an October 2, 2015 $25 expiration hanging over them, this week I find myself wanting to add shares of General Electric, once again, as was the case in each of the last two weeks.

Although there is no dividend in sight for another 3 months, the $25 neighborhood has been looking like a comfortable one in which to add shares as volatility has made the premiums more and more attractive and there may also be some short term upside to shares to help enhance the return.

A covered option strategy is at its best when the same stock can be used over and over again as a vehicle to generate premiums and dividends. For now, General Electric may be that stock.

Verizon (VZ) doesn’t have an upcoming dividend this week, but it will be offering one within the next 3 weeks. In addition to its recently increased dividend, the yield was especially enhanced by its sharp decline in share price at the end of the week as it gave some dour guidance for 2016.

There’s not too much doubt that the telecommunications landscape is changing rapidly, but if I had to put my confidence in any company within that smallest of sectors to survive the turmoil, it’s Verizon, as long as their debt load isn’t going to grow by a very unneeded and unwanted purchase of a pesky competitor that has been squeezing everyone’s margins.

I see Verizon’s pessimism as setting up an “under promise and over deliver” kind of scenario, as utilities typically find a way to thrive, but rarely want to shout up and down the streets about how great things are, lest people begin taking notice of how much they’re paying for someone else’s obscene profits.

Among those being considered that are going to be ex-dividend this week are Cypress Semiconductor (CY) and Green Mountain Keurig (GMCR).

I already own shares of Cypress Semiconductor and have a way to go to reach a breakeven on those shares which I purchased after its proposed buyout of another company fell through. I’ve held shares many times over the years and have become very accustomed to its significant and sizable moves, while somehow finding a way to return back to more normative pricing.

Following this past Friday’s decline its well below the $10 level that I’ve long liked for adding shares. With an ex-dividend date on Tuesday, if the trade is to be made, it will be likely done early in the week.

However, the other consideration is that Cypress Semiconductor is among the early earnings reporters and it will be reporting  on the day before its next option contract expires. For that reason, if considering a share purchase, I would probably look at a contract expiration beyond October, in the event of further price erosion.

Also going ex-dividend but not until Monday of the following week are Deere (DE) and Dow Chemical (DOW).

Like so many other stocks, they are badly beaten down and as a result are featuring an even more alluring dividend yield. However, their Monday ex-dividend date is something that can add to that allure, as any decision to exercise the option has to be made on the previous Saturday.

That presents opportunity to look at strategies that might seek to encourage early assignment through the sale of in the money call options utilizing expanded weekly options.

While Caterpillar (CAT) and others are feeling the pain of China’s economic slowdown, that’s not the case for Deere, but as is often the case, there are sympathy pains that become all too real.

Dow Chemical, on the other hand has continued to suffer from the belief that its fortunes are closely tied to oil prices. It;s CEO refuted that barely 9 months ago and subsequent earnings reports have borne out his contention, yet Dow Chemical continues to suffer as oil prices move lower.

If looking for a respite from dividends, both Bank of America (BAC) and Bed Bath and Beyond (BBBY) may be worth a look this week.

The financial sector was hard hit the past few days and Bank of America was additionally in the spotlight regarding the issue of whether its CEO should also hold the Chairman’s title.

As with Jamie Dimon before him who successfully faced the same shareholder issue and retained both designations, no one is complaining about the performance of Brian Moynihan.

Even as I sit on some more expensive shares that have options sold on them expiring in two weeks, I have no reason to complain.

Following a second consecutive day of large declines, Bank of America is trading near its support that has seemed to hold up well under previous assault attempts. As with other stocks that have suffered large declines, there is greater ability to attempt to capitalize on price gains without giving up much in the way of option premiums.

Bed Bath and Beyond reports earnings this week and has seen its price in steady decline for the past 4 months. Unlike others that have had a more precipitous decline as they’ve approached the pleasure of a 20% decline, Bed Bath and Beyond has done it in a gradual style.

While those intermediate points along the drop down may represent some resistance on the way back up, that climb higher is made easier when the preceding decline
wasn’t vertical.

When considering an earnings related trade I usually look for a weekly return of 1% or greater by selling put options at a strike price that’s below the bottom range implied by the option market. The preference is that the strike price that provides that return be well below that lower boundary, The lower, the better the safety cushion.

For Bed Bath and Beyond the implied move is about 6.3%, but there is no safety cushion below a $56.50 strike level to yield that 1% return. Therefore, instead of selling puts before earnings, I would consider, as has been the predominant strategy of the past two months, of considering the sale of puts after earnings are announced, but only if there is a significant price decline.

Finally, Green Mountain Keurig is going ex-dividend this coming week, but it hardly qualifies as being among the relatively safe universe of stocks that I would prefer owning right now.

I usually like to think about opening a position in Green Mountain Keurig through the  sale of puts. However, with the ex-dividend date this week that would be like subsidizing someone who was selling those puts for the dividend related price decline.

Other than the dividend, there’s is little that I could say to justify a long term position on Green Mountain and even have a hard time justifying a short term position.

However, Green Mountain’s ex-dividend day is on Friday and expanded weekly options are available.

I would consider the purchase of shares and the concomitant sale of deep in the money expanded weekly calls in an attempt to see those shares assigned early.

As an example, with Green Mountain closing at $56.74 on Friday, the October 2, 2015 $54.50 call option would have delivered a premium of $3.08.

For a rational option buyer to consider early exercise on Thursday, the price of shares would have to be above $54.79 and likely even higher than that, due to the inherent risk associated with owning shares, even if only for minutes on Friday morning after taking their possession.

However, if assigned early, there would be a 1.5% ROI for the 4 days of holding even if the shares fell somewhat less than 3.4%.

Their coffee and their prospects for continued marketplace success may both be insipid, but I do like the tortured logic and odds of the dividend related trade as we look ahead to a week where logic seeks to re-assert itself.

 

Traditional Stock: General Electric, Verizon

Momentum Stock: Bank of America

Double-Dip Dividend: Cypress Semiconductor (9/22), Deere (9/28), Dow Chemical (9/28), Green Mountain Keurig (9/25)

Premiums Enhanced by Earnings: Bed Bath and Beyond (9/24 PM)

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

Posted on

Weekend Update – August 23, 2015

It wasn’t too long ago that China did what it continues to believe that it does best.

It dictated and restricted behavior.

You really can’t blame them, as for the past 67 years the government has done a very good job of controlling everything within its borders and rarely had to give up much in return.

This time it believed that it could control natural market forces with edicts and with the imposition of a very market un-natural prohibition against selling shares in a large number of stocks.

In the immediate aftermath of that decision nearly 2 months ago, the Shanghai Index had actually fared quite well, especially when you consider that in the month prior that index had taken a free fall and dropped 30% over the course of 27 days.

A subsequent 21% rebound over 15 days after the introduction of new “rules” to inactivate gravitational pull, likely re-inforced the belief that the government was omnipotent and emboldened it as it went forth with a series of rapid and significant currency devaluations, even while sending confusing signals when it moved in to support its currency.

I’ve often wondered about people who engage in risky behaviors, such as free fall jumping. What goes on in their mind, besides the obvious thrill, that tells them they can battle nature and natural laws and be on the winning side?

As with lots of things in life, we have the tendency to project in a very optimistic way. A single victory against all odds suddenly becomes the expected outcome in the future, as if nature and its forces had never heard of the expression “fool me once, shame on me….”

Given China’s track record in getting what it wants they can’t be blamed for believing that they are bigger than the laws that govern markets.

When you believe that you are right or invincible, you don’t really think about such pesky matters as consistency and the likelihood that things will eventually catch up with you.

While it may not be unusual to place some restrictions on trading when things are looking dire, the breadth of the Chinese stock trading restrictions was really broad. The suggestion that those responsible for rampant speculation and “malicious” short selling might suffer anirreversible form of punishment simply sought to ensure that any remaining miscreants severed their alliance with their normal behavior.

But when you’re on a streak and no one questions you, what reason is there to not continue in the same path that got you there? It’s just like not selling your stock positions and pocketing the gains.

Since those restrictions were imposed the Shanghai Index has actually gone 1% higher, which is considerably better than our own S&P 500 which has declined 5% after today’s free fall.

So clearly erecting a dam, even if on the wrong side of the natural flow, has helped and the score is Chinese Government 1, Natural Forces 0.

Except of course if you drill down to the past few days and see a drop of about 13%, while the S&P 500 has gone down 6%.

When the dam breaks, it’s not just the baby in the bath water that’s going to get wet, but more on that, later. That downdraft that we felt on our shores blew in from China as we got sucked in by the vacuum created from their free fall.

As with other instances of trying to do battle with nature there may be the appearance of a victory if you have a very, very short timeframe, but at some point the dam is going to burst and only time can really get things back under control enough to allow an opportunity to rebuild.

This past week was the worst in over 4 years as the S&P 500 fell 5.8%. At this point people are looking at individual stocks and are no longer marveling about how many are in correction territory, but rather how many are approaching or are in bear territory.

I haven’t kept track, but 2015 has been a year in which it seems that the most uttered phrase has been “and the markets have now given up all of their gains for the year.”

While I don’t spend too much time staring at charts and thinking about technical factors, you would have had a very difficult time escaping the barrage of comments about the market having dipped below its 200 Day Moving Average.

The level that I had been keeping my eye on as support was the 2045 level on the S&P 500 and that was breached in the final hour of trading on Thursday, leaving the 2000 level the next likely stop.

That too was left behind in the dust, as is the usual case when in free fall.

As mentioned earlier in the month, those technicals were showing a series of lower highs and higher
lows, which is often interpreted as meaning that a break-out is looming, but gives no clue as to the direction.

Now we know the direction, not that it helps any after the fact.

While the DJIA ended the week down a bit more than 10% off from its all time highs, allowing this to now be called a “correction,” the broader S&p 500 is only 7.8% lower. While many elected to sell on their way out in the final hour of the week, I wasn’t, but don’t expect to be very actively buying next week, without some sign of a functioning parachute or at least some very soft land at the bottom.

Buying is something that I will probably leave to those people who are more daring than I tend to be.

However, even they seem to have been a little more careful as this most recent sell-off hasn’t shown much in the way of enticing dare devils to buy on the substantial dips.

Even people prone to enjoying the thrill of a nice free fall are exercising some abundance of caution. While I prefer not to join them on the way down, I don’t mind keeping their company for now.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

I succumbed a little to the sell off late in the week on Thursday and purchased some shares of Bank of America (NYSE:BAC) in the final hour, right before another leg downward in a market that at that point was already down nearly 300 points.

That simply was a lesson in the issue that faces us all when prices seem to be so irrationally low. Distinguishing between a value priced stock and one that is there to simply suck money out of your pocket isn’t terribly easy to do.

As the sell off continued the following day to bring the August 2015 option cycle to its end the financial sector continued to be hit very hard as interest rates continued their decline.

It wasn’t very long ago that the 10 Year Treasury was ready to hit 2.5% and many were looking at that as being the proverbial “hand writing on the wall,” but in the past month those rates have fallen more than 40% and suddenly that wall is as clean as that baby that is continually mentioned as having been thrown out with the bath water, which coincidentally may be the second most uttered phrase of late.

After committing some money to Bank of America, I’m actually considering adding more financial sector positions in the expectation that the decline in interest rates will be coming to an end very soon as there’s some reason to believe that the FOMC’s dependence on data may be lip service.

Generally, the association between interest rates and the performance of stocks in the financial sector is reasonably straight forward. With some limitations, an increasing interest rate environment increases the margins that such companies can achieve when they put their own money to work.

MetLife (NYSE:MET) is a good example of that relationship and its share price has certainly followed interest rates lower in the past few weeks, just as it dutifully followed those rates higher.

The decline in its shares has been swift and has finally brought them back to the mid-point of the range of the past dozen purchases. While that decline has been swift, the range has been fairly consistent and as the lower end of that range is approached there’s reason to consider braving some of the prevailing winds.

With the swiftness of the decline and with the broader market exhibiting volatility, the option premiums now associated with MetLife are recapturing some of the life that they had earlier in this year and all throughout 2014.

I often like to consider adding shares of MetLife right before an ex-dividend date, but I find the current stock price level to be compelling reason enough to consider a position and perhaps consider a longer term option contract to ride out any storm that may continue to be ahead.

Blackstone (NYSE:BX) hasn’t exactly followed that general rule, but lately it has fallen back in line with that very general rule, as it has plunged in share price since its earnings report and news of some insider selling.

As an example of how easy it has been to be too early in expressing optimism, I thought that Blackstone might be ready for a purchase just 2 weeks ago, but since then it has fallen 12%, although having had nothing but positive analyst comments directed toward it during those weeks. It, too, seems to have been caught in a significant downdraft and continued uncertainty in its near term fortunes are reflected in the very rich option premiums it’s now offering.

My major concern with Blackstone at the moment is whether its dividend, now at an 8.4% yield, can be sustained.

At a time when uncertainty is the prevailing mood, there’s some comfort that could come from having dividends accrue, as long as those dividends are safe.

While it’s dividend isn’t huge, at 2.5% and very safe, Sinclair Broadcasting (NASDAQ:SBGI) again looks inviting as it followed other media companies lower this week and is now at a very appealing part of its trading range.

They have no worries about exchange rates, the Chinese economy or any of those “stories du jour” that have everyone’s attention.

Having reached an agreement with DISH Network earlier in the week to allow retransmission of its signal it saw shares plummet the following day.

Sinclair Broadcasting is ubiquitous around the nation but not exactly a household name, even in its home turf in the Mid-Atlantic. It offers only monthly options and has generally been a longer holding for me, having owned shares on six occasions in the past 15 months.

Lexmark (NYSE:LXK) was one of the early and very pronounced casualties of this most recent earnings season and it has shown no sign of recovery. The market didn’t even cheer as Lexmark announced workforce reductions.

What Lexmark has done since earnings hasn’t been encouraging as its total decline has been in excess of 30%, with a substantial portion of that coming after the initial wave of selling upon earnings being released.

Lexmark also only offers monthly options and it has a dividend yield that’s both enticing and unnerving. The good news is that expected earnings for the next quarter are sufficient to cover the dividend, but there has to be some concern going forward, as Lexmark has found itself in the same situation as its one time parent IBM (NYSE:IBM) having pivoted from its core business and perhaps needing to do so again.

With virtually no exposure to China you might have thought that Deere (NYSE:DE) would have had somewhat of an easier time of things as reporting its earnings for the past quarter.

If so, you would have been wrong, but getting it right hasn’t been the norm of late, regardless of what company is being considered.

The drop seen in Deere shares definitely came as a surprise to the options markets and to most everyone else as they became yet another to beat on earnings, but to miss on revenues.

As is the general theme, as volatility is climbing, at nearly its highest level in 3 years, the premiums are welcoming greater risk taking, even as they provide some cushion to risk.

Following its loss on Friday, even Starbucks (NASDAQ:SBUX) is now among those in correction, having sustained that decline over the past 2 weeks. With some significant exposure in China it may be understandable why Starbucks was a full participant in the market’s weakness.

Like many other stocks, the sudden decline in the context of a market decline that has led to a surge in volatility, option premiums are beginning to look better and better.

As volatility increases, which itself is a reflection of increasing risk, there is the seeming paradox of more of that risk being mollified through the sale of in the money options. The cushion provided by those in the money options increases as the volatility increases, so that the relative risk is reduced more than an upward moving market.

Starbucks, after a prolonged period of very mediocre option premiums is now beginning to show some of the reason why option sellers prefer high volatility. It’s not only for the increased premium, but also for the premium on that premium which allows greater reward even when willing to see shares assigned at a loss.

As an example, at Starbuck’s closing price of $52.84, the weekly $52 option sale would have delivered a premium of $1.64, which would net $0.80, a 1.5% yield, if shares were assigned, even if those shares fell 1.6%.

Those kind of risk and reward end points on otherwise low risk stocks haven’t been seen in a few years and is very exciting for those who do sell options on a regular basis.

Finally, not many companies have had their obituaries prepared for release as frequently as GameStop (NYSE:GME) has had to endure for many years.

Somehow, though, even as we think that the model for gaming distribution is changing there exists a strong core of those still yearning for physicality, even if in a virtual world.

GameStop reports earnings this week and it is no stranger to strong moves. The option market, however is implying only an 8.8% move, which seems substantial, but as this most recent earnings season will attest, may be under-stated.

For those bold enough to consider the sale of puts before earnings, a 1% ROI can be achieved if shares fall less than 12.1%.

As with a number of other earnings related trades over the past few months, I’m not so bold as to consider the trade in advance of earnings, but might consider selling puts after earnings in the event of a large move downward.

Lately, that has been a better formula for balancing reward and risk, although it may result in some lost opportunities in the event that shares don’t plummet beyond the strike prices implied by the option market. That, however, can be a small price to pay when the moves have so frequently been out-sized in their magnitude and offering a reward that ends up being dwarfed by the risk.

Considering that GameStop has fallen only 4.6% from its highs, it may be under additional pressure in the event of even a mild disappointment or less than optimistic guidance.

While it may be premature to begin the flow of tears and recount the good memories of GameStop and a youth wasted, I would be cautious about discounting the concerns entirely as far as the market’s reaction may be concerned.

Traditional Stock: Blackstone, Deere, General Electric, MetLife, Starbucks

Momentum Stock: none

Double-Dip Dividend: Lexmark (8/26 $0.36), Sinclair Broadcasting (8/28 $0.16)

Premiums Enhanced by Earnings: GameStop (8/27 PM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

Posted on

Weekend Update – July 5, 2015

I used to work with someone who used the expression “It’s as clear as mud,” for just about every occasion, even the ones that had obvious causes, answers or paths forward.

Initially, most of us thought that was just some kind of an attempt at humor until eventually coming to the realization that the person truly understood nothing.

Right now, I feel like that person, although the fact that it took a group of relatively smart people quite a while to realize that person had no clue, may be more of a problem.

It should have been obvious. That’s why we were getting the big bucks, but the very possibility that someone who was expected to be capable, was in reality not capable, wasn’t even remotely considered, until it, too, became painfully obvious.

I see parallels in many of life’s events and the behavior of stock markets. As an individual investor the “clear as mud” character of the market seems apparent to me, but it’s not clear that the same level of diminished clarity is permeating the thought processes of those who are much smarter than me and responsible for directing the use of much more money than I could ever dream.

What often brings clarity is a storm that washes away the clouds and that perfect storm may now be brewing.

Whatever the outcome of the Greek referendum and whatever interpretation of the referendum question is used, the integrity of the EU is threatened if contagion is a by-product of the vote and any subsequent steps to resolve their debt crisis.

Most everyone agrees that the Greek economy and the size of the debt is small potatoes compared to what other dominoes in the EU may threaten to topple, or extract concessions on their debt.

Unless the stock market has been expressing fear of that contagion, accounting for some of the past week’s losses, there should be some real cause for concern. If those market declines were only focused on Greece and not any more forward looking than that, an already tentative market has no reason to do anything other than express its uncertainty, especially as critical support levels are approached.

Moving somewhat to the right on the world map, or the left, depending on how much you’re willing to travel, there is news that The People’s Republic of China is establishing a market-stabilization fund aimed at fighting off the biggest stock selloff in years and fears that it could spread to other parts of the economy. Despite the investment of $120 billion Yuan (about $19.3 billion USD) by 21 of the largest Chinese brokerages, the lesson of history is that attempts to manipulate markets tends not to work very well for more than a day or so.

That lesson seems to rarely be learned, as market forces can be tamed about as well as can forces of nature.

The speculative fervor in China and the health of its stock markets can create another kind of contagion that may begin with US Treasury Notes. Whether that means an increased escape to their safety or cashing in massive holdings is anyone’s guess. Understanding that is far beyond my ken, but somehow I don’t think that those much smarter than me have any clue, either.

Back on our own shores, this week is the start of another earnings season, although that season never really seems to end.

While I’ve been of the belief that this upcoming series of reports will benefit from a better than expected currency exchange situation, as previous forward guidance had been factoring in USD/Euro parity, the issue at hand may be the next round of forward guidance, as the Euro may be coming under renewed pressure.

Disappointing earnings at a time that the market is only 3% below its all time highs together with international pressures seems to paint a clear picture for me, but what do I know, as you can’t escape the fact that the market is only 3% below those highs.

The upcoming week may be another in a succession of recent weeks that I’ve had a difficult time finding a compelling reason to part with any money, even if that was merely a recycling of money from assigned positions.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double-Dip Dividend, Momentum or “PEE” categories.

Much of my interests this week are driven purely by performance relative to the S&P 500 over the previous 5 trading days and the belief that the extent of those price moves were largely unwarranted given the storm factors.

One exception, in that it marginally out-performed the S&P 500 last week, is International Paper (NYSE:IP). However, that hasn’t been the case over the past month, as the shares have badly trailed the market, possibly because its tender offer to retire high interest notes wasn’t as widely accepted as analysts had expected and interest payment savings won’t be realized to the anticipated degree.

Subsequently, shares have traded at the low end of a recent price cut target range. As it’s done so, it has finally returned to a price that I last owned shares, nearly a year ago and this appears to be an opportune time to consider a new position.

With that possibility, however, comes an awareness that earnings will be reported at the end of the month, as analysts have reduced their paper sales and expectations and profit margins have been squeezed as demand has fallen and input costs have risen.

DuPont’s (NYSE:DD) share decline wasn’t as large as it seemed as hitting a new 52 week low. That decline was exaggerated by about $3.20 after the completion of their spin-off of Chemours (NYSE:CC).

As shares have declined following the defeat of Nelson Peltz’s move to gain a seat on the Board of Directors, the option premium has remained unusually high, reflecting continued perception of volatility ahead. At a time when revenues are expected to grow in 2016 and shares may find some solace is better than expected currency exchange rates.

Cypress Semiconductor (NASDAQ:CY) has been on my wish list for the past few weeks and continues to be a possible addition during a week that I’m not expecting to be overly active in adding new positions.

What caused Cypress Semiconductor shares to soar is also what was the likely culprit in its decline. That was the proposed purchase of Integrated Silicon Solution (NASDAQ:ISSI) that subsequently accepted a bid from a consortium of private Chinese investors.

What especially caught my attention this past week was an unusually large option transaction at the $12 strike and September 18, 2015 expiration. That expiration comes a couple of days before the next anticipated ex-dividend date, so I might consider going all the way out to the December 18, 2015 expiration, to have a chance at the dividend and also to put some distance between the expiration and earnings announcements in July and October.

Potash (NYSE:POT) is ex-dividend this week and was put back on my radar by a reader who commented on a recent article about the company. While I generally lie to trade Mosaic (NYSE:MOS), the reader’s comments made me take another look after almost 3 years since the last time I owned shares.

The real difference, for me at least, between the 2 companies was the size of the dividend. While Potash has a dividend yield that is about twice the size of that of Mosaic, it’s payout ratio is about 2.7 times the rate of that of Mosaic.

While that may be of concern over the longer term, it’s not ever-present on my mind for a shorter term trade. When I last traded Potash it only offered monthly options. Now it has weekly and expanded weekly offerings, which could give opportunity to manage the position aiming for an assignment prior to its earnings report on July 30th.

During a week that caution should prevail, there are a couple of “Momentum” stocks that I would consider for purchase, also purely on their recent price activity.

It’s hard to find anything positive to say about Abercrombie and Fitch (NYSE:ANF). However, if you do sell call options, the fact that it has been trading at a reasonably well defined range of late while offering an attractive dividend, may be the best nice thing that can be said about the stock.

I recently had shares assigned and still sit with a much more expensive lot of shares that are uncovered. I’ve had 2 new lots opened in 2015 and subsequently assigned, both at prices higher than the closing price for the past week. There’s little reason to expect any real catalyst to move shares much higher, at least until earnings at the end of next month. However, perhaps more importantly, there’s little reason to expect shares to be disproportionately influenced by Greek or Chinese woes.

Trading in a narrow range and having a nice premium makes Abercrombie and Fitch a continuing attractive position, that can either be done as a covered call or through the sale of puts.

Bank of America (NYSE:BAC) is another whose shares were recently assigned and has given back some of its recent price gains while banks have been moving back and forth along with interest rates.

With the uncertainty of those interest rate movements over the next week and with earnings scheduled to be released the following week, I would consider a covered call trade that utilizes the monthly July 17, 2015 option, or even considering the August 21, 2015 expiration, to get the gift of time.

Finally, Alcoa (NYSE:AA) reports earnings this week after having sustained a 21.5% fall in shares in the past 2 months. That’s still not quite as bad as the 31% one month tumble it took 5 years ago, but shares have now fallen 36% in the past 7 months.

The option market is implying a 5% price movement next week, which on the downside would bring shares to an 18 month low.

Normally, I look for the opportunity to sell a put option in advance of earnings if I can get a 1% ROI for a weekly contract at a strike price that’s below the lower level determined by the option market’s implied movement. I usually would prefer not to take possession of shares and would attempt to delay any assignment by rolling over the short put position in an effort to wait out the price decline.

In this case the ROI is a little bit less than 1% if the price moves less than 6%, however, at this level, I wouldn’t mind taking ownership of shares, especially if Alcoa is going to move back to a prolonged period of share price stagnation as during 2012 and 2013.

That was an excellent time to be selling covered calls on the shares as premiums were elevated as so many were expecting price recovery and were willing to bet on it through options.

You can’t really go back in time, but sometimes history does repeat itself.

At least that much is clear.

Traditional Stocks: Cypress Semiconductor, DuPont, International Paper

Momentum Stocks: Abercrombie and Fitch, Bank of America

Double-Dip Dividend: Potash (7/8)

Premiums Enhanced by Earnings: Alcoa (7/8 PM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

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Weekend Update – June 21, 2015

No matter how old you are, people love getting gifts.

That may even be the case when you end up paying for them yourself.

Sometimes, that’s the real surprise.

Last year, for example, I received a surprise birthday gift when hitting one of those round numbers. It was a trip to my favorite city, New Orleans, and I was further surprised by friends and family that had assembled there and then individually popped up at totally unexpected times and places.

The real surprise was when I received the hotel bill and then subsequently the other bills. While I’ll be forever remembering the moment a tap on my shoulder at a busy restaurant announced, “Sir, your drinks are here,” only to turn around and see one of my sons unexpectedly turn up holding a platter of shots. Priceless, but as long as we’re talking about price, I think that I would have chosen less costly libations had I known what was to be in store for me.

In hindsight, though, it was a great gift, but I paid the price as many expect will be the case after years of the Federal Reserve injecting liquidity into the system and keeping interest rates at historic lows, much as is now occurring throughout Europe and the world.

Following the FOMC Statement release this past week was Janet Yellen’s press conference and as one person said to me, hers was the “best tightrope walking” he’d ever seen.

Janet Yellenda, has a nice ring to it and she certainly did a great job of staying on course while questions came at her trying their best to throw her off message. Many of those questions were posed to see her lose her tight cling to the carefully nuanced words that served to tantalize, while hinting of what was ahead.

Instead of seeing the gift for what it was, they wanted to know when the bill would be coming due and maybe who was going to end up holding the bag when the celebrations were all over.

Of course, there are those really sick people for whom the gift would be seeing someone else fail or fall off that tightrope wire, but Yellen was better than any gust of wind that could come her way.

For those that had so recently come to expect that perhaps the FOMC would raise interest rates with this past week’s statement release, the market made it clear that they considered the delay as a real gift, even if the celebration and enjoyment lasted just for a day or so.

Sooner or later, there’s also a price that needs to be paid.

That gift, withholding the interest rate increase that just a couple of weeks ago seemed as if it might come this past week, not only was being delayed, but perhaps being delayed all the way to September. As if that gift wasn’t enough, there was a suggestion that any rate increase wasn’t necessarily going to be part of a planned series of regular rate increases, as had been the practice during the Greenspan era.

Could it get any better? At least that was how most heard her words as she delicately balanced them against one another, saying only those things that could be construed by willing ears as “Laissez les bons temps rouler,” as they like to say in New Orleans.

On Thursday, the day after the FOMC Statement release and press conference, it didn’t seem that it could get any better, as the market celebrated what could only be interpreted as a gift for stock investors.

Still, the reality is that while we are winding down a monetary policy era that has likely been to the benefit of our stock markets, the rest of the world is now beginning on that path and may offer stiff winds for us as the bill gets tallied.

The gales coming from Europe were evident this past week as the market was also reacting to the tightrope walk that Greece was doing as it vacillated between being reasonable and unrealistic.

Telling its IMF and ECB safety nets that there were better safety nets out there, while forgetting that neither Russia nor China has ever saved anyone without exacting a price that makes simple interest paid to the IMF and ECB look absolutely charitable, our own markets swayed along with those cross currents of uncertainty.

There may be lots of those cross currents ahead, so that balancing skill may come in very handy while waiting for earnings season to begin again in July and offering the possibility of getting grounded in fundamental reality.

As usual, the week’s potential stock selections are classified as being in Traditional, Double-Dip Dividend, Momentum or “PEE” categories.

Last week marked the second consecutive week in which I didn’t open any new positions, something that would have been unimaginable to me at any point during the past 7 or more years. This coming week I can see more of the same, as there’s very little compelling news ahead to make we want to let go of the cash in my hand. As the bill may be ready to come due soon, I’d like to be ready with that cash on hand to balance the cha
llenge of uncertainty.

Of course, as is usually the case, once the reality of the bill finally settles in, most of the time that represents an opportunity to again start moving forward.

For now, unless there is some further compelling reason to come from upcoming GDP, Retail Sales, Employment Situation and JOLTS reports to believe that the economy is heating up sufficiently to warrant a rate increase in July, the next catalyst may very well come from earnings.

This past week Oracle (NYSE:ORCL) reported earnings. It is among a very small handful of significant companies that report late in the cycle. In fact, their report was almost 3 months following the close of the quarter upon which they reported. While many of those reported soon after earnings season started, less than 2 weeks after the close of that quarter, the expectation for currency related revenue declines was so high at that time, that those companies didn’t see stock prices harshly punished for the dollar’s strength.

Now? Not so much.

Most, in fact, took the previous earnings report opportunity to provide decreased forward guidance as the expectation was that we were headed for US Dollar and Euro parity.

Nearly 3 months later that projection hasn’t become reality, as the US dollar has weakened significantly since March 31, 2015 and that can be expected to show up in the next quarter’s earnings reports. Unfortunately for Oracle share holders, had the company reported in April, there’s a chance that they would have gotten the same free pass as did others at that time.

Sinclair Broadcasting (NASDAQ:SBGI) and Comcast (NASDAQ:CMCSA) are both firmly in the control of their founding families and are on different ends of the spectrum when it comes to their approach to bringing content into the home.

The family nature of Comcast was highlighted this past Friday with the passing of its founder, Ralph Roberts, at age 95. My mother used to say, “they should never go younger,” and while I was never a fan of their product and service, the man was an outlier in many good ways.

With Comcast having recently been extricated from a potential buyout of another cable company, it’s also finding that there are opportunities outside of people’s television sets and streaming devices, as its ownership of Universal Studios makes it the beneficiary of some blockbuster movie releases.

On the downside, it is near its 52 week high as it gets ready to go ex-dividend the week after next. That gives some reason for pause, although neither Greece nor currency headwinds should be an issue, although rising interest rates can be particularly hurtful for a capital intensive company.

However, I especially like Monday ex-dividend dates and like the idea of being assigned early on those positions, as you can get an additional week of premium in exchange for giving up the dividend and holding the stock position for a shorter period of time than planned, while having the opportunity to re-invest the assignment proceeds into another position. With the availability of expanded weekly options on Comcast there are a number of different expiration dates that can be used in an effort to capture additional time premium or try to find the right balance between premium, dividend and time.

Sinclair Broadcasting is in the terrestrial business and just keeps getting larger and larger. It’s not particularly an exciting stock, but does trade with a fairly large price range without any particularly moving news.

It is now at a price that is still above its range mid-point, but that however, has been a reliable launching pad for new positions. With only monthly options available the time commitment is longer as the July 2015 cycle begins this coming week. With earnings coming during the August 2015 cycle any short term price decline necessitating a rollover may look to bypass additional earnings risk and go to a September 2015 expiration, which would also include an upcoming dividend.

Philip Morris (NYSE:PM) and Blackberry (NASDAQ:BBRY) can both elicit some emotional responses, but for very different reasons. Both have upcoming events this week that can offer some opportunity.

Philip Morris is ex-dividend this week and that dividend is very attractive. The company recently stopped its aggressive buyback program as it was feeling the pain of currency exchange and did so, ostensibly, in favor of the dividend. With a history of annual dividend increases coming for the third quarter of each year, there is some question as to wh
ether that will be possible this year, as cash flow is decreased from both currency and declining sales.

Earnings are scheduled to be reported on the day prior to the end of the July 2015 monthly cycle, so in the event that shares haven’t been assigned prior to that, I would consider attempting to rollover any expiring option to a date that may give sufficient time to recover from any price decline.

Blackberry reports earnings this week and is sitting precariously near its yearly lows. The options market is implying an 8% price move when earnings are released on Tuesday morning.

Blackberry usually has released earnings on Friday mornings over the past few years and I’ve generally overlooked it because my preference is to sell a weekly put on most earnings related trades. I further prefer those that report early in the week, so as to have time for some price recovery if at risk for assignment, particularly as some price recovery could ease the ability to rollover the position to delay or avoid assignment.

With a Tuesday morning report and the chance of achieving a 1% ROI at a strike just outside the range implied by the options market, the interest in a short put position is rekindled. However, the greatest likelihood is that I would be more inclined to consider a put sale after earnings, if the price declines, as the premium can really get further enhanced as the price challenges that 52 week low.

I currently own shares of Dow Chemical (NYSE:DOW) and am at risk of having those shares assigned in order to capture the dividend. With those contracts expiring on July 2, 2015 and the ex-dividend date of Friday, June 26th, the $0.42 dividend would require a price of at least $53.92 for the $53.50 options to be assigned early. If that looks like a possibility as trading nears it close on Thursday, I may consider rolling over the option position in order to secure the dividend.

However, with any price decline in shares, particularly if coming early in the week, I would consider adding additional shares and again consider selling call options for the following, holiday shortened week, or even for the week afterward.

Dow Chemical has recently been trading well off its lows that were fueled by decreasing oil prices. CEO Andrew Liveris, who has come under fire on his own for allegedly using his position to finance his lifestyle, did an excellent job in convincing investors that Dow Chemical was a beneficiary of decreasing oil prices, rather than a victim, as it was being treated early in 2015, prior to his going on the offensive.

I think that even if oil prices head moderately higher in the near term, Andrew Liveris would be able to convince people that was also to the benefit of Dow Chemical, just as I expect he’ll be able to convince internal Dow Chemical “watch dogs” that his personal actions were entirely appropriate.

Finally, I had Bank of America (NYSE:BAC) shares assigned this past week, but following weakness among financials on Friday, as well as following the week’s peak in interest rates, shares declined.

That decline, although still leaving shares near a 6 month high, does provide another entry point opportunity. While its shares may continue to be pressured if the bond market bids interest rates lower, the bond market knows exactly where interest rates are going to be headed and financials should be following along.

While the premiums aren’t spectacular, I would look at a potential purchase of shares with an eye toward a longer term holding trying to capitalize on share gains supplemented by option premiums while awaiting the reality of rate increases to come.

Traditional Stocks: Sinclair Broadcasting

Momentum Stocks: Bank of America

Double-Dip Dividend: Comcast (6/29), Dow Chemical (6/26), Philip Morris (6/23)

Premiums Enhanced by Earnings: Blackberry (6/23 AM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

Posted on

Weekend Update – March 1, 2015

It was interesting listening to the questioning of FOMC Chairman Janet Yellen this week during her mandated two day congressional appearance.

The market went nicely higher on the first day when she was hosted by the more genteel of the two legislative bodies. The apparent re-embrace of her more dovish side was well received by the stock market, even as bond traders had their readings of the tea leaves called into question.

While the good will imparted by suggesting that interest rate increases weren’t around the corner was undone by the Vice-Chair on Friday those bond traders didn’t get vindicated, but the stock market reacted negatively to end a week that reacted only to interest rate concerns.

His candor, or maybe it was his opinion or even interpretation of what really goes on behind the closed doors of the FOMC may be best kept under covers, especially when I’m awaiting the likelihood of assignment of my shares and the clock is ticking toward the end of the trading week in the hope that nothing will get in the way of their appointed rounds.

Candor got in the way.

But that’s just one of the problems with too much openness, particularly when markets aren’t always prepared to rationally deal with unexpected information or even informed opinion. Sometimes the information or the added data is just noise that clutters the pathways to clear thinking.

Yet some people want even more information.

On the second day of Yellen’s testimony she was subjected to the questioning of those who are perennially in re-election mode. Yellen was chided for not being more transparent or open in detailing her private meetings. It seemed odd that such non-subtle accusations or suggestions of undue influence being exerted upon her during such meetings would be hurled at an appointed official by a publicly elected one. That’s particularly true if you believe that an elected official has great responsibility for exercising transparency to their electorate.

Good luck, however, getting one to detail meetings, much less conversations, with lobbyists, PAC representatives and donors. You can bet that every opacifier possible is used to make the obvious less obvious.

But on second thought, do we really need even more information?

I still have a certain fondness for the old days when only an elite few had timely information and you had to go to the library to seek out an updated copy of Value Line in the hopes that someone else hadn’t already torn out the pages you were seeking.

Back then the closest thing to transparency was the thinness of those library copy pages, but back then markets weren’t gyrating wildly on news that was quickly forgotten and supplanted the next day. That kind of news just didn’t exist.

You didn’t have to worry about taking the dog out for a walk and returning to a market that had morphed into something unrecognizable simply because a Federal Reserve Governor had offered an opinion in a speech to businessmen in Fort Worth.

Too much information and too easy access and the rapid flow of information may be a culprit in all of the shifting sands that seem to form at the base of markets and creating instability.

I liked the opaqueness of Greenspan during his tenure at the Federal Reserve. During that time we morphed from investors largely in the dark to investors with unbelievable access to information and rapidly diminishing attention spans. Although to be fair, that opaqueness created its own uncertainty as investors wouldn’t panic over what was said but did panic over what was meant.

If I had ever had a daughter I would probably apply parental logic and suggest that it might be best to “leave something to the imagination.” I may be getting old fashioned, but whether it’s visually transparent or otherwise, I want some things to be hidden so that I need to do some work to uncover what others may not.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.

It’s difficult to find much reason to consider a purchase of shares of Chesapeake Energy (NYSE:CHK), but exactly the same could have been said about many companies in the energy sector over the past few months. There’s no doubt that a mixture of good timing, luck and bravery has worked out for some willing to take the considerable risk.

What distinguishes Chesapeake Energy from so many others, however, is that it has long been enveloped in some kind of dysfunction and melodrama, even after severing ties with its founder. Like a ghost coming back to haunt his old house the legacy of Aubrey McClendon continues with accusations that he stole confidential data and used it for the benefit of his new company.

Add that to weak earnings, pessimistic guidance, decreasing capital expenditures and a couple of downgrades and it wasn’t a good week to be Chesapeake Energy or a shareholder.

While it’s hard to say that Chesapeake Energy has now hit rock bottom, it’s certainly closer than it was at the beginning of this past week. As a shareholder of much more expensive shares I often like to add additional lower cost lots with the intent of trying to sell calls on those new shares and quickly close out the position to help underwrite paper losses in the older shares. However, I’ve waited a long time before considering doing so with Chesapeake.

Now feels like the right time.

Its elevated option premiums indicate continuing uncertainty over the direction its shares will take, but I believe the risk-reward relationship has now begun to become more favorable as so much bad news has been digested at once.

It also wasn’t a very good week to be Bank of America (NYSE:BAC) as it well under-performed other large money center banks in the wake of concerns regarding its capital models and ability to withstand upcoming stress tests. It’s also never a good sign when your CEO takes a substantial pay cut.

If course, if you were a shareholder, as I am, you didn’t have a very good week, either, but at least you had the company of all of those analysts that had recently upgraded Bank of America, including adding it to the renowned “conviction buy” list.

While I wouldn’t chase Bank of America for its dividend, it does go ex-dividend this week and is offering an atypically high option premium, befitting the perceived risk that continues until the conclusion of periodic stress testing, which will hopefully see the bank perform its calculations more carefully than it did in the previous year’s submission to the Federal Reserve.

After recently testing its 2 year lows Caterpillar (NYSE:CAT) has bounced back a bit, no doubt removing a little of the grin that may have appeared for those having spent the past 20 months with a substantial short position and only recently seeing the thesis play out, although from a price far higher than when the thesis was originally presented.

While it’s difficult to find any aspect of Caterpillar’s business that looks encouraging as mining and energy face ongoing challenges, the ability to come face to face with those lows and withstand them offers some encouragement if looking to enter into a new position. Although I rarely enter into a position with an idea of an uninterrupted long term relationship, Caterpillar’s dividend and option premiums can make it an attractive candidate for longer term holding, as well.

Baxter International (NYSE:BAX) is a fairly unexciting stock that I’ve been excited about re-purchasing for more than a year. I generally like to consider adding shares as it’s about to go ex-dividend, as it is this week, however, I had been also waiting for its share price to become a bit more reasonable.

Those criteria are in place this week while also offering an attractive option premium. Having worked in hospitals for years Baxter International products are ubiquitous and as long as human health can remain precarious the market will continue to exist for it to dominate.

Las Vegas Sands (NYSE:LVS) has certainly seen its share of ups and downs over the past few months with very much of the downside being predicated on weakness in Macao. While those stories have developed the company saw fit to increase its dividend by 30%. Given the nature of the business that Las Vegas Sands is engaged in, you would think that Sheldon Adelson saw such an action, even if in the face of revenue pressures, as being a low risk proposition.

Since the house always wins, I like that vote of confidence.

Following a very quick retreat from a recent price recovery I think that there is more upside potential in the near term although if the past few months will be any indication that path will be rocky.

This week’s potential earnings related trades were at various times poster children for “down and out” companies whose stocks reflected the company’s failing fortunes in a competitive world. The difference, however is that while Abercrombie and Fitch (NYSE:ANF) still seems to be mired in a downward spiral even after the departure of its CEO, Best Buy (NYSE:BBY) under its own new CEO seems to have broken the chains that were weighing it down and taking it toward retail oblivion.

As with most earnings related trades I consider the sale of puts at a strike price that is below the lower range dictated by the implied move determined by option premiums. Additionally, my preference would be to sell those puts at a time that shares are already heading noticeably lower. However, if that latter condition isn’t met, I may still consider the sale of puts after earnings in the event that shares do go down significantly.

While the options market is implying a 12.6% move in Abercrombie and Fitch’s share price next week a 1% ROI may be achieved even if selling a put option at a strike 21% below Friday’s close. That sounds like a large drop, but Abercrombie has, over the years, shown that it is capable of such drops.

Best Buy on the other hand isn’t perceived as quite the same earnings risk as Abercrombie and Fitch, although it too has had some significant earnings moves in the recent past.

The options market is implying a 7% move in shares and a 1% ROI could potentially be achieved at a strike 8.1% below Friday’s close. While that’s an acceptable risk-reward proposition, given the share’s recent climb, I would prefer to wait until after earnings before considering a trade.

In this case, if Best Buy shares fall significantly after earnings, approaching the boundary defined by the implied move, I would consider selling puts, rolling over, if necessary to the following week. However, with an upcoming dividend, I would then consider taking assignment prior to the ex-dividend date, if assignment appeared likely.

Finally, I end how I ended the previous week, with the suggestion of the same paired trade that sought to take advantage of the continuing uncertainty and volatility in energy prices.

I put into play the paired trade of United Continental Holdings (NYSE:UAL) and Marathon Oil (NYSE:MRO) last week in the belief that what was good news for one company would be bad news for the other. But more importantly was the additional belief that the news would be frequently shifting due to the premise of continuing volatility and lack of direction in energy prices.

The opening trade of the pair was initiated by first adding shares of Marathon Oil as it opened sharply lower on Monday morning and selling at the money calls.

As expected, UAL itself went sharply higher as it and other airlines have essentially moved opposite
ly to the movements in energy prices over the past few months. However, later that same day, UAL gave up most of its gains, while Marathon Oil moved higher. A UAL share price dropped I bought shares and sold deep in the money calls.

In my ideal scenario the week would have ended with one or both being assigned, which was how it appeared to be going by Thursday’s close, despite United Continental’s price drop unrelated to the price of oil, but rather related to some safety concerns.

Instead, the week ended with both positions being rolled over at premiums in excess of what I usually expect when doing so.

Subsequently, in the final hour of trading, shares of UAL took a precipitous decline and may offer a good entry point for any new positions, again considering the sale of deep in the money calls and then waiting for a decline in Marathon Oil shares before making that purchase and selling near the money calls.

While the Federal Reserve may be data driven it’s hard to say what exactly is driving oil prices back and forth on such a frequent and regular basis. However, as long as those unpredictable ups and downs do occur there is opportunity to exploit the uncertainty and leave the data collection and interpretation to others.

I’m fine with being left in the dark.

 

Traditional Stocks: Caterpillar, Marathon Oil

Momentum Stocks: Chesapeake Energy, Las Vegas Sands, United Continental Holdings

Double Dip Dividend: Bank of America (3/4), Baxter International (3/9)

Premiums Enhanced by Earnings: Abercrombie and Fitch (3/4 AM), Best Buy (3/4 AM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

Posted on

Weekend Update – January 11, 2015

Somewhere buried deep in my basement is a 40 year old copy of the medical school textbook “Rapid Interpretation of EKG’s.”

After a recent bout wearing a Holter Monitor that picked up 3000 “premature ventricular contractions” I wasn’t the slightest bit interested in finding and dusting off that copy to refresh my memory, not having had any interest nearly 40 years ago, either.

All I really cared about was what the clinical consequence of those premature depolarizations of the heart’s ventricle meant for me and any dreams I still harbored of climbing Mount Everest.

Somewhere in the abscesses of my mind I actually did recall the circumstances in which they could be significant and also recalled that I never aspired to climb Mount Everest.

But it doesn’t take too much to identify a premature ventricular contraction, even if the closest you ever got to medical school was taking a class on Chaucer in junior college.

Most people can recognize simple patterns and symmetry. Our mind is actually finally attuned to seeing breaks in patterns and assessing even subtle asymmetries, even while we may not be aware. So often when looking askance at something that just seems to be “funny looking,” but you can’t quite put your finger on what it is that bothers you, it turns out to be that lack of symmetry and the lack of something appearing where you expect it to appear.

So it’s probably not too difficult to identify where this (non-life threatening) premature ventricular contraction (PVC) is occurring.

While stock charts don’t necessarily have the same kind of patterns and predictability of an EKG, patterns aren’t that unheard of and there has certainly been a pattern seen over the past two years as so many have waited for the classic 10% correction.

 

What they have instead seen is a kind of periodicity that has brought about a “mini-correction,” on the order of 5%, every two months or so.

The quick 5% decline seen in mid-December was right on schedule after having had the same in mid-October, although the latter one almost reached that 10% level on an intra-day basis.

But earlier this week we experienced something unusual. There seemed to be a Premature Market Contraction (NYSE:PMC), occurring well before the next scheduled mini-correction.

You may have noticed it earlier this week.

The question that may abound, especially following Friday’s return to the sharp market declines seen earlier in the week is just how clinically important those declines, coming so soon and in such magnitude, are in the near term.

In situations that impact upon the heart’s rhythm, there may be any number of management approaches, including medication, implantation of pacemakers and lifestyle changes.

The market’s sudden deviation from its recently normal rhythm may lend itself to similar management alternatives.

With earnings season beginning once again this week it may certainly serve to jump start the market’s continuing climb higher. That may especially be the case if we begin to see some tangible evidence that decreasing energy prices have already begun trickling down into the consumer sector. While better than expected earnings could provide the stimulus to move higher, rosy guidance, also related to a continuing benefit from decreased energy costs could be the real boost looking forward.

Of course, in a nervous market, that kind of good news could also have a paradoxical effect as too much of a good thing may be just the kind of data that the FOMC is looking for before deciding to finally increase interest rates.

By the same token, sometimes it may be a good thing to avoid some other stimulants, such as hyper-caffeinated momentum stocks that may be particularly at risk when the framework supporting them may be suspect.

This week, having seen 5 successive days of triple digit moves, particularly given the context of outsized higher moves tending to occur in bear market environments, and having witnessed two recent “V-Shaped” corrections in close proximity, I’d say that it may be time to re-assess risk exposure and take it easier on your heart.

Or at least on my heart.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.

Dividends may be just the medication that’s needed to help get through a period of uncertainty and the coming week offers many of those opportunities, although even within the week’s upcoming dividend stocks there may be some heightened uncertainty.

Those ex-dividend stocks that I’m considering this week are AbbVie (NYSE:ABBV), Caterpillar (NYSE:CAT), Freeport McMoRan (NYSE:FCX), Whole Foods (NASDAQ:WFM) and YUM Brands (NYSE:YUM).

AbbVie is one of those stocks that has been in the news more recently than may have been envisioned when it was spun off from its parent, Abbott Labs (NYSE:ABT), both of which are ex-dividend this week.

AbbVie has been most notably in the news for having offered an alternative to Gilead’s (NASDAQ:GILD) product for the treatment of Hepatitis C. Regardless of the relative merits of one product over another, the endorsement of AbbVie’s product, due to its lower cost caused some short term consternation among Gilead shareholders.

AbbVie is now trading off from its recent highs, offers attractive option premiums and a nice dividend. That combination, despite its upward trajectory over the past 3 months, makes it worth some consideration, especially if your portfolio is sensitized to the whims of commodities.

Caterpillar is finally moving in the direction that Jim Chanos very publicly pronounced it would, some 18 months ago. There isn’t too much question that its core health is adversely impacted as economic expansion and infrastructure projects slow, as it approaches a 20% decline in the past 2 months.

That decline takes us just a little bit above the level at which I last owned shares and its upcoming dividend this week may provide the impetus to open a position. I suppose that if one’s time frame has no limitation any thesis may find itself playing out, for Chanos‘ sake, but for a short time frame trade the combination of premium and dividend at a price that hasn’t been seen in about a year seems compelling.

It has now been precisely a year since the last time I purchased shares of YUM Brands and it is right where I last left it. Too bad, because one of the hallmarks of an ideal stock for a covered option position is no net movement but still traveling over a wide price range.

YUM Brands fits that to a tee, as it is continually the recipient of investor jitteriness over the slowing Chinese economy and food safety scares that take its stock on some regular roller coaster rides.

I’m often drawn to YUM Brands in advance of its ex-dividend date and this week is no different, It combines a nice premium, competitive dividend and plenty of excitement. While I could sometimes do without the excitement, I think my heart and, certainly the option premiums, thrive on the various inputs that create that excitement, but at the end of the day seem to have no lasting impact.

Whole Foods also
goes ex-dividend this week and while its dividend isn’t exactly the kind that’s worthy of being chased, shares seem to be comfortable at the new level reached after the most recent earnings. That level, though, simply represents a level from which shares plummeted after a succession of disappointing earnings that coincided with the height of the company’s national expansion and the polar vortex of 2014.

I think that shares will continue to climb heading back to the level to which they were before dropping to the current level more than a year ago.

For that reason, while I usually like using near the money or in the money weekly options when trying to capture the dividend, I’m considering an out of the money February 2015 monthly option in consideration of Whole Foods’ February 11th earnings announcement date.

I don’t usually follow interest rates or 10 Year Treasury notes very carefully, other than to be aware that concerns about interest rate hikes have occupied many for the entirety of Janet Yellen’s tenure as the Chairman of the Federal Reserve.

With the 10 Year Treasury now sitting below 2%, that has recently served as a signal for the stock market to begin a climb higher. Beyond that, however, declining interest rates have also taken shares of MetLife (NYSE:MET) temporarily lower, as it can thrive relatively more in an elevated interest rate environment.

When that environment will be upon us is certainly a topic of great discussion, but with continuing jobs growth, as evidenced by this past week’s Employment Situation Report and prospects of increased consumer spending made possible by their energy dividend, I think MetLife stock has a bright future. 

Also faring relatively poorly in a decreasing rate environment has been AIG (NYSE:AIG) and it too, along with MetLife, is poised to move higher along with interest rates.

Once a very frequent holding, I’ve not owned shares since the departure of Robert ben Mosche, whom I believe deserves considerable respect for his role in steering AIG in the years after the financial meltdown.

In the meantime, I look at AIG, in an increasing rate environment as easily being able to surpass its 52 week high and would consider covering only a portion of any holding in an effort to also benefit from share price advances.

Fastenal (NASDAQ:FAST) isn’t a very exciting company, but it is one that I really like owning, especially at its current price. Like so many others that I like, it trades in a relatively narrow range but often has paroxysms of movement when earnings are announced, or during the occasional “earnings warnings” announcement.

It announces earnings this week and could easily see some decline, although it does have a habit of warning of such disappointing
numbers a few weeks before earnings.

Having only monthly options available, but with this being the final week of the January 2015 option cycle, one could effectively sell a weekly option or sell a weekly put rather than executing a buy/write.

However, with an upcoming dividend early in the February 2015 cycle I would be inclined to consider a purchase of shares and sale of the February calls and then buckle up for the possible ride, which is made easier knowing that Fastenal can supply you with the buckles and any other tools, supplies or gadgets you may need to contribute to national economic growth, as Fastenal is a good reflection on all kinds of construction activity.

Bank of America (NYSE:BAC) also reports earnings this week and I unexpectedly found myself in ownership of shares last week, being unable to resist the purchase in the face of what seemed to be an unwarranted period of weakness in the financial sector and specifically among large banks.

Just as unexpectedly was the decline it took in Friday’s trading that caused me to rollover shares that i thought had been destined for assignment, as my preference would have been for that assignment and the possibility of selling puts in advance of earnings.

Now, with shares back at the same price that I liked it just last week, its premiums are enhanced this week due to earnings. In this case, if considering adding to the position I would likely do so by selling puts. However, unlike many other situations where I would prefer not to take assignment and would seek to avoid doing so by rolling over the puts, I wouldn’t mind taking assignment and then turning around to sell calls on a long position.

Finally, while it may make some sense to stay away from momentum kind of stocks, Freeport McMoRan, which goes ex-dividend this week may fall into the category of being paradoxically just the thing for what may be ailing a portfolio.

Just as stimulants can sometimes have such paradoxical effects, such as in the management of attention deficit hyperactivity disorder, a stock that has interests in both besieged metals, such as copper and gold, in addition to energy exploration may be just the thing at a time when weakness in both of those areas has occurred simultaneously and has now become well established.

Freeport McMoRan will actually report earnings the week after next and that will present its own additional risk going forward, but I think that the news will not be quite as bad as many may expect, particularly as there is some good news associated with declining energy prices, as they represent the greatest costs associated with mining efforts.

I’ve suffered through some much more expensive lots of Freeport McMoRan for the past 2 years and have almost always owned shares over the past 10 years, even during that brief period of time in which the dividend was suspended.

As surely as commodity prices are known to be cyclical in nature at some point Freeport will be on the right end of climbs in the price of its underlying resources. If both energy and metals can turn higher as concurrently as they turned lower these shares should perform exceptionally well.

After all, they’ve already shown that they can perform exceptionally poorly and sometimes its just an issue of a simple point of inflection to go from one extreme to the next.

Traditional Stocks: AIG, MetLife

Momentum Stocks: none

Double Dip Dividend: AbbVie (1/13), Caterpillar (1/15), Freeport McMoRan (1/13), Whole Foods !/14), YUM Brands (1/14)

Premiums Enhanced by Earnings: Bank of America (1/15 AM), Fastenal (1/15 AM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.