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Weekend Update – May 25, 2014

This was a good week, every bit as much as it was an odd one. 

You almost can’t spell “good” without “odd.”

We tend to be creatures that spend a lot of time in hindsight and attempting to dissect out what we believe to be the important components of everything that surrounds us or impacts upon us.

Sometimes what’s really important is beyond our ability to  see or understand or is just so counter-intuitive to what we believe to be true. I’m always reminded of the great Ralph Ellison book, “The Invisible Man,” in which it’s revealed that the secret to obtaining the most pure of white paints is the addition of a drop of black paint.

That makes no sense on any level unless you suspend rational thought and simply believe. Rational thought has little role when it calls for the suspension of belief.

This past week there was no reason to believe that anything good would transpire.

Coming on the heels of the previous week, which saw a perfectly good advance evaporate by week’s end there wasn’t a rational case to be made for expecting anything better the following week. That was especially true after the strong sell-off this past Tuesday.

Rational thought would never have taken the antecedent events to signal that the market would alter its typical pattern of behavior on the day of an FOMC statement release. That behavior was to generally trade in a reserved and cautious fashion prior to the 2 PM embargo release and then shift into chaotic knee-jerks and equally chaotic post-kneejerk course corrections.

Instead, the market advanced strongly from the opening bell on that day, erasing the previous day’s losses and had no immediate reaction to the FOMC release and then in an orderly fashion moved mildly higher after the words were parsed and interpreted.

The trading on that day and its timing were entirely irrational. It was odd, but it was good.

Ordinarily it would have also been irrational to expect a rational response to the minutes that offered no new news, as in the past real news was not a necessary factor for irrational buying or selling behavior.

The ensuing rational behavior was also odd, but it, too, was good.

As another new high was set to end the week there should be concern about approaching a tipping point, especially as the number of new highs is on the down trend. However, the market’s odd behavior the past week gives me reason to be optimistic in the short term, despite a belief that the upside reward is now considerably less than the downside risk in the longer term. 

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

This was a week in which those paid to observe such things finally commented on the disappointing results coming from retailers, despite the fact that the past two or three quarters have been similar and certainly not reflective of the kind of increased discretionary spending you might expect with increasing employment statistics.

With some notable exceptions, such as LuLuLemon (LULU) and Family Dollar Store (FDO) I’ve enjoyed being in and out of retailers, although I think I’d rather be maimed than actually be in and out of anyone’s actual store.

This week a number of retailers have appeal, either on their merits or because there may be some earnings related trades seeking to capitalize on their movements. Included for their merits are in the list are Bed Bath and Beyond (BBBY), eBay (EBAY), Nike (NKE) and The Gap (GPS), while Abercrombie and Fitch (ANF) and Kors (KORS) report earnings this week.

After a disappointing earnings report Bed Bath and Beyond has settled into a trading range and gas seemed to establish some support at the $60 level. Along with so many others that have seen their shares punished after earnings the recovery of share price seems delayed as compared to previous markets. For the option seller that kind of listless trading can be precisely the scenario that returns the best results.

eBay has also stagnated. With Carl Icahn still in the picture, but uncharacteristically quiet, especially after the announcement of a repatriation of some $6 billion in cash back to the United States and, therefore, subject to taxes, there doesn’t seem to be a catalyst for a return to its recent highs. That suits me just fine, as I’ve liked eBay at the $52 level for quite a while and it has been one of my more frequent in and out kind of trades. At present, I do own two other lots of shares and three lots is my self imposed limit, but for those considering an initial entry, eBay has been seen as a mediocre performer in the eyes of those expecting upward price movement, but a superstar from those seeking premium income through the serial sale of option contracts week in and out. If you’re the latter kind, eBay can be as rewarding as the very best of the rest.

The Gap reported earnings on Friday and exhibited little movement. It’s currently trading at the high end of where I like to initiate positions, but it, too, has been a very reliable covered option trade. An acceptable dividend and a fair option premium makes it an appealing recurrent trade. The only maddening aspect of The Gap is that it is one of the few remaining retailers that oddly provides monthly same store sales and as a result it is prone to wild price swings on a regular basis. Those price swings, however, tend to be alternating and do help to keep those option premiums elevated.

You simply take the good with the odd in the case of The Gap and shrug your shoulders when the market response is adverse and just await the next opportunity when suddenly all is good again.

Despite all of the past criticism and predictions of its irrelevance in the marketplace Abercrombie and Fitch continues to be a survivor.  This past Friday was the second anniversary of the initial recommendation of taking a position for Option to Profit subscribers, although I haven’t owned shares in nearly 5 months. Since that in
itial purchase there have been 18 such recommendations, with a cumulative 71.5% return, despite shares having barely moved during that time frame.

Always volatile, especially when earnings are due, the options market is currently implying a 10.2% move in price. For me, the availability of a 1% ROI from selling put contracts at a strike level outside of the lower boundary of that implied range gets my interest. In this case shares could fall up to 13.9% before assignment is likely and still deliver that return.

Kors, also known as “Coach (COH) Killer” also reports earnings this week. It has stood out recently because it hasn’t been subject to the same kind of selling pressure as some other “momentum” stocks. The option market is implying a price movement of 7.4%, while a 1% ROI from put sales may be obtained at a strike level currently 8.8% below Friday’s closing price. However, while Abercrombie and Fitch has plenty of experience with disappointing earnings and has experienced drastic price drops, Kors has yet to really face those kinds of challenges. In the current market environment earnings disappointments are being magnified and the risk – reward proposition with an earnings related trade in Kors may not be as favorable as for that with Abercrombie.

In the case of Kors I may be more inclined to consider a trade after earnings, particularly considering the sale of puts if earnings are disappointing and shares plummet.

After last week’s brief ownership of Under Armour (UA) this week it may be time to consider a purchase of Nike, which under-performed Under Armour for the week. Shares also go ex-dividend this week and have been reasonably range-bound of late. It isn’t a terribly exciting trade, but at this stage of life, who really needs excitement? I also don’t need a pair of running shoes and could care less about making a fashion statement, but I do like the idea of its consistency and relatively low risk necessary in order to achieve a modest reward.

Transocean (RIG) is off of its recent lows, but still has quite a way to go to return to its highs of earlier in the year. Going ex-dividend this week, the 5.7% yield has made the waiting on a more expensive lot of shares to recover a bit easier. As with eBay, I already have two lots of shares, but believe that at the current level this is a good time for initial entry, perhaps considering a longer term option contract and seeking capital gains on shares, as well. As with most everything in business and economy, the current oversupply or rigs will soon become an under supply and Transocean will reap the benefits of cyclicality.

Sinclair Broadcasting (SBGI) also goes ex-dividend this week. It is an important player in my area and has become the largest operator of local television stations in the nation, while most people have never heard the name. It is an infrequent purchase for me, but I always consider doing so as it goes ex-dividend, particularly if trading at the mid-point of its recent range. CUrrently shares a little higher than I might prefer, but with only monthly options available and an always healthy premium, I think that even at the current level there is good opportunity, even if shares do migrate to the low end of its current range.

Finally, Joy Global (JOY), one of those companies whose fortunes are closely tied to Chinese economic reports, has seen a recent 5% price drop from its April 2014 highs. While it is still above the price that I usually like to consider for an entry, I may be interested in participating this week with either a put sale of a buy/write.

Among the considerations are events coming the following week, as shares go ex-dividend early in the week and then the company reports earnings later in the week.

While my preference would be for a quick one week period of involvement, there always has to be the expectation of well laid out plans not being realized. In this case the sale of puts that may need to be rolled over would benefit from enhanced earnings related premiums, but would suffer a bit as the price decrease from the dividend may not be entirely reflected in the option premium. That’s similar to what is occasionally seen on the call side, when option premiums may be higher than they rightfully should be, as the dividend is not fully accounted.

Otherwise, if beginning a position with a buy/write and not seeing shares assigned at the end of the week, I might consider a rollover to a deep in the money call, thereby taking advantage of the enhanced premiums and offering a potential exit in the event that shares fall with the guidelines predicted by the implied volatility. Additionally, it might offer the chance of early assignment prior to earnings due to the Monday ex-dividend date, thereby providing a quick exit and the full premium without putting in the additional time and risk.

 

Traditional Stocks: Bed Bath and Beyond, eBay, The Gap

Momentum: Joy Global

Double Dip Dividend: Nike (5/29 $0.24), Sinclair Broadcasting (5/28 $0.15), Transocean (5/28 $0.75)

Premiums Enhanced by Earnings: Abercrombie and Fitch (5/29 AM), Kors (5/28 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.

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Weekend Update – May 11, 2014

 A few hundred years ago Sir Isaac Newton is widely credited with formulating the Law of Universal Gravitation.

In hindsight, that “discovery” shouldn’t really be as momentous as the discovery more than a century earlier that the sun didn’t revolve around the earth. It doesn’t seem as if it would take an esteemed mathematician to let the would know that objects fall rather than spontaneously rise. Of course, the Law is much more complex than that, but we tend to view things in their most simplistic terms.

Up until recently, the Law of Gravity seemed to have no practical implications for the stock market because prices only went higher, just as the sun revolved around the earth until proven otherwise. Additionally, unlike the very well defined formula that describe the acceleration that accompanies a falling object, there are no such ways to describe how stocks can drop, plunge or go into free fall.

For those that remember the “Great Stockbroker Fallout of 1987,” back then young stockbrokers could have gone 5 years without realizing that what goes up will come down, fled the industry en masse upon realizing  the practical application of Newton’s genius in foretelling the ultimate direction of every stock and stock markets.

The 2014 market has been more like a bouncing ball as the past 10 weeks have seen alternating rises and falls of the S&P 500. Only a mad man or a genius could have predicted that to become the case. It’s unlikely that even a genius like Newton could have described the laws governing such behavior, although even the least insightful of physics students knows that the energy contained in that bouncing ball is continually diminished.

As in the old world when people believed that the world was flat and that its exploration might lead one to fall off the edge, I can’t help but wonder what will happen to that bouncing ball in this flat market as it deceptively has come within a whisker of even more records on the DJIA and S&P 500. Even while moving higher it seems like there is some sort of precipice ahead that some momentum stocks have already discovered while functioning as advance scouts for the rest of the market.

With earnings season nearing its end the catalyst to continue sapping the energy out of the market may need to come from elsewhere although I would gladly embrace any force that would forestall gravity’s inevitable power.

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

As a past customer, I was never enamored of Comcast (CMCSA) and jumped at the first opportunity to switch providers. But while there may be some disdain for the product and especially the service, memories of which won’t easily be erased by visions of a commercial showing a comedian riding along in a service truck, you do have to admire the company’s shares. 

Having spent the past 6 months trading above $49 it has recently been range bound and that is where the appeal for me starts. It’s history of annual dividend increases, good option premiums and price stability adds to that appeal. While there is much back story at present in the world of cable providers and Comcast’s proposed purchase of Time Warner Cable (TWC) may still have some obstacles ahead, the core business shouldn’t be adversely impacted by regulatory decisions.

Also, as a one time frequent customer of Best Buy (BBY), I don’t get into their stores very often anymore. Once they switched from a perpendicular grid store layout to a diagonal one they lost me. Other people blame it on Amazon (AMZN), but for me it was all about the floor plan. But while I don’t shop there very much anymore it’s stock has been a delight trading at the $26 level.

Having had shares assigned for the fourth time in the past two months I would like to see a little bit of a price drop after Friday’s gain before buying shares again. However, with earnings coming up during the first week of the June 2014 option cycle you do have to be prepared for nasty surprises as are often delivered. There’s still more time for someone to blame cold weather on performance and this may be the retailer to do so. WIth that in mind, Best Buy may possibly be better approached through the sale of put options this week with the intent of rolling over if in jeopardy of being assigned shares prior to the earnings release.

There’s barely a week that I don’t consider buying or adding shares of Coach. I currently own shares purchased too soon after recent earnings and that still have a significant climb ahead of them to break even. However, with an upcoming dividend during the June 2014 cycle and shares trading near the yearly low point, I may be content with settling in with a monthly option contract, collecting the premium and dividend and just waiting for shares to do what they have done so reliably over the past two years and returning to and beyond their pre-earnings report level.

Mosaic (MOS) is another one of those companies that I’ve owned on many occasions over the years. Most recently I’ve been a serial purchaser of shares as its share price plunged following announcement of a crack in the potash cartel. Still owning some more expensive shares those serial purchases have helped to offset the paper losses on the more expensive shares. Following a recent price pullback after earnings I’m ready to again add shares as I expect Mosaic to soon surpass the $50 level and stay above there.

Dow Chemical (DOW) is also a company whose shares I’ve owned with frequency over the years, but less so as it moved from $42 to $50. Having recently decided that $48 was a reasonable new re-entry point that may receive some support from the presence of activist investors, the combination of premiums, dividends and opportunity for share appreciation is compelling.

Holly Frontier (HFC) has become a recent favorite replacing Phillips 66 (PSX) which has just appreciated too much and too fast. While waiting for Phillips 66 to return to more reasonable levels, Holly Frontier has been an excellent combination of gyrating price movements up and down and a subsequent return to the mean. Because of those sharp movements its option premium is generally attractive and shares routinely distribute a special dividend in addition to a regular dividend that has been routinely increased since it began three years ago.

The financial sector has been weak of late and we’ve gotten surprises from JP Morgan (JPM) recently with regard to its future investment related earnings and Bank of America (BAC) with regard to its calculation error of capital on its books. However, Morgan Stanley (MS) has been steadfast. Fortunately, if interested in purchasing shares its steadfast performance hasn’t been matched by its share price which is now about 10% off its recent high. 

With its newly increased dividend and plenty of opportunity to see approval for a further increase, it appears to be operating at high efficiency and has been trading within a reasonably tight price range for the past 6 months, making it a good consideration for a covered option trade and perhaps on a serial basis.

Since I’ve spent much of 2014 in pursuit of dividends in anticipation of decreased opportunity for share appreciation, Eli Lilly (LLY) is once again under consideration as it goes ex-dividend this week. With shares trading less than 5% from its one year high, I would prefer a lower entry price, but the sector is seeing more interest with mergers, acquisitions and regulatory scrutiny, all of which can be an impetus for increasing option premiums.

Finally, it’s hard to believe that I would ever live in an age when people are suggesting that Apple (AAPL) may no longer be “cool.” For some, that was the reason behind their reported purchase of Beats Music, as many professed not to understand the synergies, nor the appeal, besides the cache that comes with the name. 

Last week I thought there might be opportunity to purchase Apple shares in order to attempt to capture its dividend and option premium in the hope for a quick trade. As it work turn out that trade was never made because Apple opened the week up strongly, continuing its run higher since recent earnings and other news were announced. I don’t usually chase stocks and in this case that proved to be fortuitous as shares followed the market’s own ambivalence and finished the week lower.

However, this week comes the same potential opportunity with the newly resurgent Microsoft (MSFT). While it’s still too early to begin suggesting that there’s anything “cool” about Microsoft, there’s nothing lame about trying to grab the dividend and option premium that was elusive the previous week with its competition.

Microsoft has under-performed the S&P 500 over the past month as the clamor over “old technology” hasn’t really been a path to riches, but has certainly been better than the so-called “new technology.” Yet Microsoft has been maintaining the $39 level and may be in good position to trade in that range for a while longer. It neither needs to obey or disregard gravity for its premiums and dividends to make it a worthwhile portfolio addition.

 

Traditional Stocks: Comcast, Dow Chemical, Holly Frontier

Momentum: Best Buy, Coach, Morgan Stanley, Mosaic

Double Dip Dividend: Microsoft (5/13 $0.28), Eli Lilly (5/13 $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 – April 20, 2014

I really didn’t see this past week coming at all.

Coming off of an absolutely abysmal week that saw the market refuse to follow up good news with further gains and instead plunging some 400 points in 2 days there were so many reasons to believe that markets were finally headed lower and for more than just a quick dip.

While I strongly believe in not following along with the crowd there has to be some bit of you that tells the rest of you not to completely write off what the crowd is thinking or doing. On horse racing, for example, the favorite does still have its share of wins and the Cinderella long short story just doesn’t happen as often as everyone might wish.

To completely ignore the crowd is courting disaster. At least you can occasionally give the crowd their due.

But this past week wasn’t the week to have done so. This was absolutely the week to have ignored virtually everyone. Unfortunately, this was also the week that I chose not to do so and went along with the crowd. The argument seemed so compelling, but that probably should have been the first clue.

What made this past week so unusual was that hardly anyone tried to offer a reason for the inexplicable advance forward. Not only did the market climb strongly, but it even reversed a late day attempt to erase large gains and ended up closing at its highs for the day. We haven’t seen anything like that lately, as instead we’ve seen so many gains quickly evaporate. For the most part I felt like an outsider because i didn’t open very many new positions last week, but it was rewarding enough to have heard such little pontification, as few wanted to admit that the unexpected had occurred.

With the S&P 500 now less than 2% from its high, it does make you wonder whether the concept of a correction being defined on the basis of a 10% decline is relevant anymore. Although its much better to think in terms of relative changes, as expressed by percentages, but perhaps our brains are wired to better understand absolute movements. Maybe we interpret a 400 point move as being no different from any other 400 point move, regardless of what the baseline is for either and simply take the move as a signal to reverse.

It’s tempting to think that perhaps we’re simply returning to the recent pattern of small drops on the order of 5% and then returning to unchecked climbs to new records. Of course, that would be in the realm of the "expected."

I have little expectation for what the next week may bring, as trying to figure out what is now driving the markets seems very futile of late. While I don’t think of "going along for the ride" as a very satisfying strategy I may be content to do so if the market continues moving higher for no apparent reason. But without any real indication of a catalyst I’m not terribly excited about wholeheartedly endorsing the move higher in a tangible way.

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

Not all stocks shared in last week’s glory. JP Morgan Chase (JPM) and Unitedhealth Group (UNH) in part accounted for the DJIA lagging the S&P 500 for the week.

JP Morgan and Unitedhealth both felt some backlash after some disappointing earnings reports. For JP Morgan, however, it has been about a year since there’s actually been anything resembling good news and yet its stock price, up until the past week had well out-performed the S&P 500. I’ve been waiting for a return to a less pricey entry point and after the past week it’s arrived following a 9% drop this month. With little reason to believe that there’s any further bad news ahead it seems to offer low enough risk for its reward even with some market weakness ahead.

Unitedhealth Group’s decline was just slightly more modest than that of JP Morgan and it, too, has returned to a price level that I wouldn’t mind owning shares. I haven’t done so with any regularity but the entry price is getting less expensive. As more news emerges regarding the Affordable Care Act there is potential for Unitedhealth Group to go in either direction. While its most recent earnings disappointed, there may be some optimism as news regarding enrollments by younger people.

Fastenal (FAST) is a company that I like very much, but am a little reluctant to purchase shares at this level, if not for the upcoming dividend that I would like to capture. I’ve long thought of Fastenal as a proxy for the economy and lately shares have been trading near the upper end of its range. While that may indicate some downside weakness, Fastenal has had good resilience and has been one of those monthly contracts that I haven’t minded rolling over in the past, having owned shares 5 times in the past 6 months.

You probably can’t get much more dichotomous than Kohls (KSS) and Abercrombie and FItch (ANF). While Kohls has reliably sat its current levels and doesn’t live and die by fads and arrogance, Abercrombie has had its share of ups and downs and always seems to find a way to snatch defeat from victory. Yet they are both very good covered option trades.

With Kohls having recently joined Abercrombie in the list of those stocks offering expanded weekly options it is an increasing attractive position that offers considerable flexibility, good option premiums and a competitive dividend.

Abercrombie, because of its volatility tends to offer a more attractive option premium, but still offers an attractive enough dividend. Following some recent price weakness I may be more inclined to consider the sale of puts of Abercrombie and might be willing to take assignment of shares, if necessary, rather than rolling over put contracts.

This week there are a number of companies reporting earnings that may warrant some consideration. A more complete list of those for the coming week are included in an earlier article that looks at opportunities in selling put contracts in advance of, or after earnings. Of the companies included in that article the ones that I’ll most likely consider this week are Cree (CREE), Facebook (FB) and Deckers (DECK).

All are volatile enough in the own rights, but especially so with earnings to be released. I have repeatedly sold puts on Cree over the past few months with last week having been the first in quite a while not having done so. It can be an explosive mover after earnings, just as it can be a seemingly irrational mover during daily trading. It has, however, already fallen approximately 8% in the past month. My particular preference when considering the sale of puts is to do so following declines and Cree certainly fulfills that preference, even though my target ROI comes only at a strike level that is at the very edge of the range defined by its implied volatility.

Deckers has only fallen 5% in the past month and it, too can be explosive at earnings time. As with Cree, for those that are adventurous, the sale of deep out f the money puts can offer a relatively lower risk way of achieving return on investment objectives. In this case, while the implied volatility is 10.1%, a share drop of less than 13.2% can still return a weekly 1% ROI.

Facebook has generally performed well after earnings announcements. Even the past quarter, when the initial reaction was negative, shares very quickly recovered and surpassed their previous levels. As with all earnings related trades entered through the sale of puts my goal is to not own shares at a lower price, but rather to avoid assignment by the rollover of put contracts, if necessary, in the hope of waiting out any unforeseen price declines and eventually seeing the put contracts expire, while having accumulated premiums.

Finally, it seems as if there’s hardly a week that I don’t think about adding or buying shares of Coach (COH). Having already owned it on 5 occasions in 2014 and having shares assigned again this past week, it’s notable for its stock price having essentially stayed in place. That’s what continually makes it an attractive candidate.

This week, however, there is a little more risk if shares don’t get assigned, as earnings are reported next week and Coach has been volatile at earnings for the past two years.

For that reason, this week, Coach may best be considered as a trade through the sale of puts with the possible need to rollover the puts if assignment seems likely. That rollover, if necessary, would then probably be able to be done at a lower strike price as the implied volatility will be higher in the week of earnings.

Traditional Stocks: Momentum Stocks: JP Morgan, Kohls, United Healthcare

Momentum: Abercrombie and Fitch, Coach

Double Dip Dividend: Fastenal (ex-div 4/23)

Premiums Enhanced by Earnings: Cree (4/22 PM), Deckers (4/24 PM), Facebook (4/23 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.

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Weekend Update – April 6, 2014

This week started on such a positive note with the reassuring words of a dove, yet ended so harshly.

This time of the year it’s supposed to be the other way around with the lamb having the final word as months of a less threatening nature await ahead.

Instead, after Friday’s close, whatever optimism may have been generated by setting even more record highs earlier in the week, had given way to caution and perhaps preparation for some ill winds.

Back when I was in college it wasn’t meant as a compliment if you were referred to as being a “dove.” and the proverbial lamb was always being led to slaughter.  In fact, if you were called a “dove,” that was only in polite circles. Otherwise, the words used were far more descriptive and derisive.

By the same token, the doves out there may not have had the kindest of words for the hawks, but in nature, it’s usually the hawk that triumphs. In fact, recalling the recent mauling of a peace dove that had been just released by Pope Francis and some children, it didn’t really even require a hawk. A seagull and a lowly crow were enough for the task.

This week, though, it was the dove that ruled the day and set the tone for the week. Well, at least most of it, until its fragile nature beset itself.

A fragile market can be equally susceptible even to less formidable foes, as Friday’s sell-off had little basis and came on the day of the Employment Situation Report, which for the past 20 months or so has been strongly correlated to a higher moving market on the day of release and for the week as a whole. While the week as a whole did show an advance, the former correlation stood for only a short time before strong selling set in.

Whatever doubts there may have been regarding where Janet Yellen stood on that continuum from dove to hawk following her initial press conference, she made it clear that on issues of the Federal Reserve’s actions to help lower the unemployment rate, she was an unabashed dove and while there may be more dissenting voting members than before sitting on the Federal Reserve, she still controls the hawks, but probably keeps at least one eye wary at all times.

The stock market loved that re-affirmation of policy the way we love the beauty of a dove, even though like short sellers, we may privately relish its obliteration by a swooping predator hawk.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum categories, with no “PEE” selections this week (see details).

While this was an especially brutal week for stocks on the NASDAQ and particularly for many of those stocks that had borne a disproportionate amount of everyone’s attention as they moved ever higher, many others were included in whatever wrath took hold.

With earnings season beginning this coming week there may be some return to fundamentals, however, disappointments, particularly if weather hasn’t been fully factored in or discounted may further exploit market fragility.

MasterCard (MA) was one such casualty of the stampede. There was little to account for its 2.5% drop on Friday, bringing it to its 5 month low. The previous week, faced with some potentially adverse decisions regarding swipe fees it reacted well, yet this week it did otherwise without any new challenges being sent its way. While it goes ex-dividend on Monday it’s puny dividend isn’t something that’s likely to be missed by those entering into new positions as shares find themselves at a 5 month low. Believing that last week’s selling was overdone I would consider a slightly longer option contract and the use of an out of the money strike as a means to allow some time for price repair while collecting an option premium while waiting.

While not falling quite as much as MasterCard on Friday, shares of Starbucks (SBUX) also succumbed to selling pressure. While the past week was filled with news regarding other players entering into the breakfast marketplace, including offering free cups of coffee, there was really an absence of Starbucks specific news. While breakfast taco waffles may garner some attention, Starbucks has become as much a way of life as it has a product provider. It’s current price is one where it has shown considerable strength and it too may warrant the use of slightly longer term option contracts and an out of the money strike.

Apollo Education (APOL) was a stock that I highlighted last week as a possible earnings trade. As usual, I prefer those through the sale of well out of the money put contracts prior to earnings, especially if share price is trending downward prior to earnings. In Apollo’s case shares had instead shown strength prior to the earnings release, so I stayed away from selling puts at that time. After earnings shares did sustain a drop and I then sold some out of the money puts in the hope that the drop wouldn’t continue beyond another few strike levels. While there was almost a need to roll them over on Friday as the market was crumbling, Apollo shares showed resilience, even as the market did not.

While I still don’t have much confidence in the product it offers nor the manner in which it generates its revenues, that’s largely irrelevant, as it continues to offer some reasonable returns even if shares continue to experience some decline. Once again, however, I would most likely consider the sale of puts rather than an outright purchase of shares and concomitant sale of calls.

There’s probably very little that can be added to make a discussion of Herbalife (HLF) newsworthy, but when there is, it will really be worth paying attention. While Herbalife has been a good target of put sellers following the severe price drop in the wake of regulatory and legal investigations that are being escalated, it has recovered very nicely with the realization that any real news is likely to be in the distance. It too, is a position that I would likely consider entry through the sale of out of the money puts.

This week’s dividend stocks for consideration are two that
I haven’t owned for a while, as I’ve been waiting for them to return to more reasonable price levels. Sometimes the realization comes that waiting only prevents being an active participant. Aetna (AET) Abbott Labs (ABT) have long been absent from my portfolio despite continually thinking about adding them back.

With a large number of existing positions already going ex-dividend this week I’m not as anxious to add any additional ones. However, of those two, Abbott Labs is more appealing for having a higher dividend rate and for having already come off some recent price peaks. In need of additional health care sector stocks, Abbott also carries that personal appeal at this point in time. However, it reports earnings the following week so my preference, if purchasing shares, would be a quick holding and given its current option premium would even be willingly accepting of an early assignment.

Aetna has simply left me behind in the dust as I’ve been waiting for it to return to what I believed was a fair price, but apparently the market has long disagreed. While it may be some time until we all realize whether new healthcare mandates are a positive or negative for the insurers, the one thing that most everyone can agree is that the long term is always positive when your fee structure is highly responsive to actuarial data. Add to that an increasing interest rate environment and the future may be bright for insurers.

Among the shares that I had assigned this past week were Comcast (CMCSA) and Coach (COH). Following the week ending sell-off I was grateful to have as many assignments as there were, especially to replenish cash reserves in the event of buying opportunities ahead. However, among those assigned, these two are ones that I’m eager to re-incorporate into my portfolio.

Comcast, despite my personal feelings about the product and service, has just been a spectacular growth story and has had great guidance under the control of the Roberts family. My celebration of “Comcast Liberation Day” a few years ago didn’t mean that I would boycott share ownership or overlook its attributes as an investment. It’s recent 10% price drop in the past two months from its highs has offered an opportunity to find some more realistic entry points. While I’ve been following shares for quite some time, it only recently began offering weekly and expanded weekly options. For me, that was the signal, combined with the reduced share price to start initiating positions.  I envision a similar opportunity with Comcast shares on a serial basis as I have experienced with Coach.

Coach remains a stock that I feel like I could happily buy most week in and out as long as it’s trading in a $48-$54 range and have done so repeatedly when it has done so. Despite a near absence of positive news in almost two years and the company having been written off as a loser in the competitive wars, especially with Michael Kors (KORS), for those who can recognize that multiple small stock gains can be very meaningful it has been a consistent performer. With earnings approaching at the end of the month I would be less inclined to use longer term option contracts at this time, as Coach has had a recent history of sharp and unpredictable moves following earnings.

While Coach has been unable to do anything right in the eyes of many, until recently, Under Armour (UA) could do no wrong. WHile it’s still not clear whether the design of their latest skating wear for US Olympians was in any way related to their disappointing performance, Under Armour’s CEO, Kevin Plank, was a perfect study in how to present his company when under public scrutiny. 

While it received a downgrade about 3 weeks ago and subsequently fell more than 7% in that aftermath, it fell an additional 9% from that sentinel point late this week as it was carried along with the rest of the deluge. As with many others the selling was in the absence of substantive news.

With earnings season beginning this coming week, Under Armour is among those announcing early in the process on April 17, 2014. It’s volatility is commanding a health option premium at a time when many others are languishing, however, the risk may be compounded during the following week. For that reason, if considering the purchase of shares I would likely use a weekly contract and if necessary roll that over to a longer term contract in anticipation of that enhanced risk. As earnings approach, Under Armour may also turn out to be a potential earnings related trade through the sale of out of the money put options.

Finally, a number of years ago I was studying two stocks with an eye toward adding one to my regular rotation in need of another energy sector position. They were Anadarko (APC) and Apache (APA). For a while I would get their stock symbols confused and really had a difficult time discerning their differences. I still have no real idea of what those differences may be, but for some reason I gravitated toward Anadarko.

This week, that dalliance may have come to an end, at least for the time being, as my shares were assigned following an untimely and unexpected end to the Tronox litigation that was an unwelcome part of its Kerr McGee purchase.

Whatever positive comments I would normally make about Anadarko relative to its prospects for trading in a range and offering an attractive premium can now be transferred to Apache. The best part, though, is that Apache is approximately 10% below its recent high and can make me forget about Anadarko for now.

Traditional Stocks: Apache, Comcast, MasterCard, Starbucks

Momentum Stocks: Apollo Educational, Coach, Herbalife, Under Armour

Double Dip Dividend: Aetna (4/8), Abbott Labs (4/11)

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 – March 16, 2014

Most of us have, at one time or another believed that we were carrying the weight of the world on our shoulders. The reality will always be that unless we are the President of the United States with a decision to be made regarding pressing that red button, those feelings are somewhat exaggerated and unlikely to be borne out in fact.

It’s probably not an exaggeration, however, to suggest that in the past week the burden of the world weighed down heavily on the U.S. stock markets.

Slowing growth and questionable economic statistics from China and an unfolding crisis in Crimea were the culprits identified this week that sapped the momentum out of our markets. The complete list of “reasons” for last week’s performance was compiled by Josh Brown, but ultimately it all came down to our shoulders. Perhaps like a regressive tax the individual investor may feel an exaggerated impact as well when the market behaves badly and may also take longer to recover from the heavy load of losses.

In addition to the global issues then there were also issues of regulation, seeing the SEC and FTC weigh in on Herbalife (HLF), dueling words of umbrage from billionaires over eBay (EBAY) and litigation from the New York State Attorney General’s Office over General Motor’s (GM) role in potentially avoidable vehicular deaths.

What there wasn’t was anything positive or optimistic to be said during the week, other than sooner or later Spring will arrive. For the first time since the last real attempt at a correction nearly two years ago the market closed lower in each trading session of the past week.

While the weekend may change my opinion, as additional news may be forthcoming as Russian war games on Ukraine’s borders play themselves out and a Crimean referendum is held, I find myself optimistic for the coming week.

I usually try to find ten potential trades for each coming week. Last week I struggled to find just nine. This week my preliminary list was nearly twenty and I had a difficult time narrowing down to ten stocks.

That hasn’t happened in a while.

Certainly, as has been discussed in previous weeks following a downward moving market, the challenge is discerning between value and value traps. In that regard this past week is no different, but for inspiration, I look to the option seller’s best friend.

That would be volatility. It creates the kind of premiums that can make me salivate and it is the lack of volatility that makes me wonder whether anyone really cares anymore about the need for stock markets to react appropriately to fundamental factors, as opposed to simply moving higher under all circumstances.  

Since late 2011 we’ve been used to seeing historically low levels of volatility with occasional spikes representing market downturns. For those following along you know that there haven’t been many of those downturns in the past 20 months, although we did just recently quickly recover from an equally quick 7% loss. Those downturns saw spikes in volatility.

Suddenly there has been a lot of discussion about increasing volatility and for those that get excited about technical analysis, much is made of the significance of Volatility Index breaking above the 200 Day Moving Average.

What you don’t hear, however, are the video playbacks of all of the times the Volatility Index has surpassed that 200 Day Moving Average and it did not lead to a market breakdown, as suggested by many.

Instead, a quick look at the past year seems to indicate an alternating current of spikes in volatility between larger spikes and smaller ones. Simply put, I think we’re experiencing a regularly scheduled smaller spike in volatility.

I could be wrong, but that’s what hedging is all about.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum categories, with no “PEE” selections this week (see details).

As with last week, despite the uncertainty that may usher in the coming week I see some possibilities even with some higher beta positions, on a selective basis.

While I’ve been trying to emphasize dividend paying positions for the past three months, the only potential such trades that had any appeal for me this week fell into the higher beta category.

While Best Buy (BBY) is probably immune to any direct impact from an overseas crisis, it has had no difficulty in creating its own and has certainly created a crisis of faith before regaining some respectability under new leadership. But for those that have held shares that all seems so long ago after some disappointing earnings reports. Hit especially hard this most recent earnings season, Best Buy has two months left to acquit itself and another two weeks to have their cash registers ring loudly to offset any weather related disappointments. In the meantime shares do go ex-dividend this week and have been trading in a narrow range of late. In the absence of any news it may be expected to keep doing so long enough to capture a dividend and perhaps a premium or two.

Las Vegas Sands (LVS) also goes ex-dividend this week and is also a higher beta stock. While I have traded this stock w
ith some frequency, it’s been a while since doing so as it resists going much lower. While it is at a relative low to its recent high after a 7% decline, it has still had a fairly uninterrupted trajectory. Like Best Buy, there’s not too much reason to suspect that events in Crimea will serve as a direct contagion, the higher beta may be its own heavy weight in the event of a market decline, but like cockroaches, gambling will survive even nuclear holocaust, as may Sheldon Adelson, the Chairman. It may also survive some weakness in China, as there’s no better place to bury your misery than in their Maxao casinos.

It’s usually a fallacy in the making when you use logic to convince yourself of the rationale to buy a stock. That includes the belief that if you liked a stock at one price it must certainly be even more likeable at a lower price. Yet that’s where I find myself with General Electric (GE), whose shares were just assigned from me a week ago and now find themselves priced below that earlier strike price. However, in the case of General Electric, unless there are some horrific surprises around the corner or a complete market meltdown, it’s hard to imagine that it could be classified as being a value trap at this new lower price. Down 4% in the past week and 10% YTD, if the market is heading lower, GE will have been ahead of the curve. While it’s option premium doesn’t reflect much in the way of volatility it does represent a reasonable means to surpass the performance of a flat market.

While retail has been a place that money has gone to die of late, you get a feeling that things may be reversing, at least in the minds of analysts when even Coach (COH), a literal punching leather bag for all, receives an upgrade. While my shares of Coach were assigned this week, as were my shares of Kohls (KSS), I’m ready to repurchase both in their current range, as the long fall down deserves at least a short climb higher.

Coach has shown itself to be able to faithfully defend the $46 level despite so many assaults over the past two years. That ability to consistently bounce back has made it a great covered option position, whether through outright purchase or the sale of puts.

Kohls represents exactly what I like in my stocks. That is a non-descript existence and just happily going along its way without making too much fuss, other than an occasional earnings related outburst. Dependable is far more important than being flashy and as a stock and as a company, Kohls hugs that middle lane reliably, but still provides a competitive premium thanks to those occasional outbursts.

If the thesis that retail is ready for a comeback has more of a basis than just as reflected in share price, but also reflects pent up spending from a harsh winter, MasterCard (MA) is a prime beneficiary. While already somewhat protected from the ravages of weather by virtue of being able to spend your money with just a simple mouse click, there are just some things that need to be done in the real world. Trading well below its pre-split price until recently I had not owned shares in years. Now more readily purchased in scale, I look forward to the opportunity to purchase and re-purchase these shares with some degree of regularity, WHile its dividend is paltry, there is certainly room for growth to rise to the levels of Visa (V) and Discover Financial Services (DFS). However, notwithstanding any potential bump in share price along with a dividend hike, the option premiums can make the wait worthwhile.

In a week of no industry specific news, following a flurry of changes in industry dynamics initiated by T-Mobile (TMUS), Verizon (VZ) fell 3% bringing it down to a level from which it has found significant strength. While General Electric may face some potential liability with events in Crimea or a deteriorating economy in China, I don’t see quite the same liability for Verizon. Instead, whatever burdens it has to carry will come from an increasingly competitive landscape as it and AT&T (T) are continually pushed by T-Mobile and perhaps Sprint (S). In the meantime, while trading in a range and finding support at $46, there’s always the additional lure of a 4.5% dividend.

While Verizon isn’t terribly exciting it meets its match in Intel (INTC). However, the excitement that comes from growth isn’t absolutely necessary to generate predictable profits. Intel is especially well suited when it’s share price is very close to a strike level. If volatility continues to rise the opportunity to purchase Intel expands as the price range at which it may be purchased increases, while still offering an attractive option premium which can be further enhanced by an attractive dividend.

While it was only a matter of time until retail would begin to dig its way out from under the piles of snow, no sector has brutalized me more this past year than the one that requires digging. Freeport McMoRan (FCX) is among that group that hasn’t been terribly kind to me, despite my belief that it would be the “stock of the year” for 2013.

With copper itself being brutalized this past week, despite gold’s relative strength, Freeport McMoRan has itself had the weight of the market’s response to the less than robust Chinese economy to shoulder. But the one thing that you can always count on is that data from China can easily correct reality and that explains the seemingly recurrent see-saw ride that we have been on in those sectors that are tied to their data. The true plunge in copper prices, if sustained, will not be good news for Freeport McMoRan, whose generous dividend payout could conceivably be jeopardized.

On the other hand, shares are now at a level that has repeatedly created substantial returns for those willing to test the waters.

Finally, not many companies, especially those with a newly appointed CEO had as bad a week as General Motors. You might think that having paid its first dividend in years this past Friday there would be reasons to rejoice, but finding yourself at the top of the headlines related to customer deaths isn’t an enviable place, nor one conducive to a thriving share price. When the Attorney General of any state piles on that doesn’t help.

However, with a chorus of those clamoring for General Motors to re-test the $30 level purely on a technical basis there may be reason enough to believe that won’t be the case. Having timed a purchase of shares as inopportunely as possible, I’d like nothing more than to see that position restored to some respect.

As with the recent news that the FTC will b
e investigating allegations that Herbalife was engaged in a Ponzi scheme, the bad news for General Motors, while coming as an acute event, will take a long while to play out, regardless of the merits of the cases or the human tragedies caught up in what is now a story of fines, punishment andperhaps even acquittal.

Traditional Stocks: Coach, General Electric, General Motors, Intel, Kohls, MasterCard, Verizon

Momentum Stocks: Freeport McMoRan

Double Dip Dividend: Best Buy (ex-div 3/18), Las Vegas Sands (ex-div 3/18)

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 – February 9, 2014

Everything is crystal clear now.
After three straight weeks of losses to end the trading week, including deep losses the past two weeks everyone was scratching their heads to recall the last time a single month had fared so poorly.
What those mounting losses accomplished was to create a clear vision of what awaited investors as the past week was to begin.
Instead, it was nice to finish on an up note to everyone’s confusion.
When you think you are seeing things most clearly is when you should begin having doubts.
Who saw a two day 350 point gain coming, unless they had bothered to realize that this week was featuring an Employment Situation Report? The one saving grace we have is that for the past 18 months you could count on a market rally to greet the employment news, regardless of whether the news met, exceeded or fell short of expectations.
That’s clarity. It’s confusing, but it’s a rare sense of clarity that comes from being so successful in its ability to predict an outcome that itself is based upon human behavior.
As the week began with a 325 point loss in the DJIA voices started bypassing talk of a 10% correction and starting uttering thoughts of a 15-20% correction. 10% was a bygone conclusion. At that point most everyone agreed that it was very clear that we were finally being faced with the “healthy” correction that had been so long overdue.
When in the middle of that correction nothing really feels very healthy about it, but when people have such certainty about things it’s hard to imagine that they might be wrong. With further downside seen by the best and brightest we were about to get healthier than our portfolios might be able to withstand.
It was absolutely amazing how clearly everyone was able to see the future. What made things even more ominous and sustaining their view was the impending Employment Situation Report due at the end of the week. Following last month’s abysmal numbers, ostensibly related to horrid weather across the country, there wasn’t too much reason to expect much in the way of an improvement this time around. Besides, the Nikkei and Russian stock markets had just dipped below the 10% threshold that many define as a market correction and as we’re continually reminded, it’s an inter-connected world these days. It wasn’t really a question of “whether,” it was a matter of “when?”
Then there was all that talk of how high the volatility was getting, even though it had a hard time even getting to October 2013 levels, much less matching historical heights. As everyone knows, volatility comes along with declining markets so the cycle was being put in place for the only outcome possible.
After Monday’s close the future was clear. Crystal clear.
Instead, the week ended with an 0.8% gain in the S&P 500 despite that plunge on Monday and a highly significant drop in volatility. The market responded to a disappointing Employment Situation Report with what logically or even using the “good news is bad news” kind of logic should not have been the case.
Now, with a week that started by confirming the road to correction we were left with a week that supported the idea that the market is resistant to a classic correction. Instead of the near term future of the markets being crystal clear we are left beginning this coming week with more confusion than is normally the case.
If it’s true that the market needs clarity in order to propel forward this shouldn’t be the week to commit yourself. However, the only thing that’s really clear about our notions is that they’re often without basis so the only reasonable advice is to do as in all weeks – look for situational opportunities that can be exploited without regard to what is going on in the rest of the world.
As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).
If you’re looking for certainty, or at least a company that has taken steps to diminish uncertainty, Microsoft (MSFT) is the one. With the announcement of the appointment of Satya Nadella, an insider, to be its new CEO, shares did exactly what the experts said it wouldn’t do. Not too long ago the overwhelming consensus was that the appointment of an outsider, such as Alan Mullaly would drive shares forward, while an insider would send shares tumbling into the 20s.
Microsoft simply stayed on its path with the news of an inside candidate taking the reigns. Regardless of its critics, Microsoft’s strategy is more coherent than it gets credit for and this leadership decision was a quantum leap forward, certainly far more important than discussions of screen size. With this level of certainty also comes the certainty of a dividend and attractive option premiums, making Microsoft a perennial favorite in a covered option strategy.
The antithesis of certainty may be found in the smallest of the sectors. With the tumult in pricing and contracts being promulgated by T-Mobile (TMUS) and its rebel CEO John Legere, there’s no doubt that the margins of all wireless providers is being threatened. Verizon (VZ) has already seen its share price make an initial response to those threats and has shown resilience even in the face of a declining market, as well. Although the next ex-dividend date is still relatively far away, there is a reason this is a favorite among buy and hold investors. As long as it continues to trade in a defined range, this is a position that I wouldn’t mind holding for a while and collecting option premiums and the occasional dividend.
Lowes (LOW) is always considered an also ran in the home improvement business and some recent disappointing home sales news has trickled down to Lowes’ shares. While it does report earnings during the first week of the March 2014 option cycle, I think there is some near term opportunity at it’s current lower price to see some share appreciation in addition to collecting premiums. However, I wouldn’t mind being out of my current shares prior to its scheduled earnings report.
Among those going ex-dividend this week are Conoco Phillips (COP), International Paper (IP) and Eli Lilly (LLY). In the past month I’ve owned all three concurrently and would be willing to do so again. While International Paper has outperformed the S&P 500 since the most recent market decline two weeks ago, it has also traded fairly rangebound over the past year and is now at the mid-point of that range. That makes it at a reasonable entry point.
Conoco Phillips appears to be at a good entry point simply by virtue of a nearly 12% decline from its recent high point which includes a 5% drop since the market’s own decline. With earnings out of the way, particularly as they have been somewhat disappointing for big oil and with an end in sight for the weather that has interfered with operations, shares are poised for recovery. The premiums and dividend make it easier to wait.
Eli Lilly is down about 5% from its recent high and I believe is the next due for its turn at a little run higher as the major pharmaceutical companies often alternate with one another. With Pfizer (PFE) and Merck (MRK) having recently taken those honors, it’s time for Eli Lilly to get back in the short term lead, as it is for recent also ran Bristol Myers Squibb (BMY) that was lost to assignment this past week and needs a replacement, preferably one offering a dividend.
Zillow (Z) reports earnings this week. In its short history as a publicly traded company it has had the ability to consistently beat analyst’s estimates and then usually see shares fall as earnings were released. That kind of doubled barrel consistency warrants some consideration this week as the option market is implying an 11% move this week. While that is possible, there is still an opportunity to generate a 1% ROI for the week if the share price falls by anything less than 16%.
While I’m not entirely comfortable looking for volatility among potential new positions two that do have some appeal are Coach (COH) and Morgan Stanley (MS).
Coach is a frequent candidate for consideration and I generally like it more when it’s being maligned. After last week’s blow-out earnings report by Michael Kors (KORS) the obvious next thought becomes how their earnings are coming at the expense of Coach. While there may be truth to that and has been the conventional wisdom for nearly 2 years, Coach has been able to find a very comfortable trading range and has been able to significantly increase its dividend in each of the past 4 years in time for the second quarter distribution. It’s combination of premiums, dividends and price stability, despite occasional swings, makes it worthy of consistent consideration.
I’ve been waiting for a while for another opportunity to add shares of Morgan Stanley. Down nearly 12% in the past 3 weeks may be the right opportunity, particularly as some European stability may be at hand following the European Central Bank’s decision to continue accommodation and provide some stimulus to the continent, where Morgan Stanley has interests, particularly being subject to “net counterparty exposure.” It’s ride higher has been sustained and for those looking at such things, it’s lows have been consistently higher and higher, making it a technician’s delight. I don’t really know about such things and charts certainly aren’t known for their clarity being validated, but its option premiums do compel me as do thoughts of a dividend increase that it i increasingly in position to institute.
Finally, if you’re looking for certainty you don’t have to look any further than at Chesapeake Energy (CHK) which announced a significant decrease in upcoming capital expenditures, which sent shares tumbling on the announcement. Presumably, it takes money to make money in the gas drilling business so the news wasn’t taken very well by investors. A very significant increase in option premiums early in the week suggested that some significant news was expected and it certainly came, with some residual uncertainty remaining in this week’s premiums. For those with some daring this may represent the first challenge since the days of Aubrey McClendon and may also represent an opportunity for shareholder Carl Icahn to enter the equation in a more activist manner.
Traditional Stocks: Lowes, Microsoft, Verizon
Momentum Stocks: Chesapeake Energy, Coach, Morgan Stanley,
Double Dip Dividend: Conoco Phillips (ex-div 2/13), International Paper (ex-div 2/12), Eli Lilly (ex-div 2/12)
Premiums Enhanced by Earnings: Zillow (2/12 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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Taking Solace in an Earnings Challenged Coach

(A version of this article appeared in TheStreet)

It has been very easy to be disparaging of Coach (COH) these days.

In 2013, including dividends, an investment in Coach shares witnessed a 3.1% ROI, as compared to 29.6% for the S&P 500, exclusive of dividends.

Perhaps the root cause of the quantitative disappointment has been the near universal acknowledgement that Coach was no longer a very interesting place to shop, as Michael Kors (KORS) had displaced it in the hearts and more importantly, the literal and figurative pocketbooks of shoppers.

The first hint of trouble presented itself in August 2011 when shares plunged 6.5% after announcing earnings, following years of running higher, that took only a short rest in June 2010. While shares went bacl to their old ways of climbing higher under CEO and Chairman Lew Frankfort that climb came to a decided halt shortly after the Michael Kors IPO.

COH ChartIn 2013 Coach knew only large price moves following earnings reports, following the pattern that began in 2012. The difference, however, was that in 2013 all but one of those large price moves was higher, with -16.1%, +9.8%, -7.8% and -7.5% earnings related responses greeting increasingly wary and frustrated shareholders.

Coach reports its second quarter earnings on January 22, 2014 prior to the market’s open. The option market is implying a nearly 10% move upon that event, which comes on the heels of a 6.3% decline in shares in the past week.

For most, that may mean that this would be a good time to steer clear of Coach shares or even consider exiting existing psoitions, especially as the retail sector has been struggling to get consumers to part with their discretionary cash.

In the past year, while Coach has been a non-entity, I have owned it and sold calls on shares, or sold puts on eight occasions. Included in those trades were three sales of put options on the day prior to earnings and one purchase of shares and sale of calls on the day following disappointing earnings.

COH data by YCharts

During that time Coach has fulfilled two of my cardinal requirements in that it has been a model of mediocrity, but still has something to offer and will do more than simply make a pretense of maintaing a business model.

My goal with Coach, as with all positions upon which I use a covered option strategy is to make a small rate of return and in a short time frame. My ideal trade is one that returns a 1% profit in a week’s time and surpasses the performance of the S&P 500 during the time period of the trade.

During 2013, the cumulative return from the eight Coach trades was 25.4% and the average holding period was 28 days. The average trade had an ROI of 3.2%, which when adjusted for the average holding period was less than the 1% goal, consistent with the lower premiums obtained in a low volatiity period. However, during the same time periods for each trade, the results surpassed the S&P 500 performance for the same time periods by 18.5%.

Coach 2013 Performance - Option to Profit

While I don’t place too much credibility on annualizing performance, the annualized performace of Coach, utilizing the serial covered option strategy, with some trades timed to coincide with earnings was 41.5%, while the annualized S&P 500 return was 34.7%. A longer period of observation also yielded similar favorable results

In the case of potential trades seeking to reach those objectives when earnings are to be released, my preference is to see whether there is an option premium available for the sale of puts that is at the extreme end of the implied volatility range or beyond. For Coach, the implied volatility suggests expectations of a price move in the $47.50 to $57.50 range, based on Friday’s closing price of $52.56.

The $47 January 24, 2014 put premium satisfies the quest for a 1% return and is at a strike price slightly outside of the implied volatility range. Essentially, the risk-reward proposition is a 1% return in the event of anything less than a 10% drop in share price. Anything more than a 10% price drop creates additional possibilities to generate returns, but extends the period of the trade.

As always, the sale of puts should only be undertaken if you’re prepared to take ownsership of shares at the strike price specified. While I wouldn’t shy away from share ownership in the event of a larger than anticipated price drop, I would be inclined to consider rolling over the put sale into a new expiration date and ideally at a lower strike price, if possible, repeating that process until expiration finally arrives.

While not everyone appreciates leather, everyone can appreciate investment profits, even if they come at the expense of corporate losses and a fall from grace.

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Weekend Update – January 19, 2014

As you get older you realize certain truths and realities and they aren’t always warm and fuzzy.

One of those realities is that often many years of marriage come to an end once the children have left the household. Without the diversion of children always in need comes the realization that there is nothing of substance to hold together a failing foundation. Sometimes the realization is there, but swept under the rug as other events take precedence, but you always know that someday reality can no longer be delayed.

With my youngest child having graduated college that appears to be the story that we’ve heard on multiple occasions from like aged acquaintances and friends. Like most everything else in life there are parallels to the stock market.

We now find ourselves in a market faced with certain realities but without the diversions offered by European monetary crises, sequestration, fiscal cliffs, government shutdowns, quantitative easing, credit downgrades and budgetary deadlines. Those diversions conveniently removed focus from the very foundation upon which stocks find their fair price and to which markets have traditionally responded.

All that is now left behind is earnings and it’s not a pretty prospect.

Perhaps in a manner similar to those in long standing unions who suddenly suffer from improved judgment following a youth blinded by the superficial, the market went through a period of not being terribly discerning and always finding reason to go higher. Interpreting economic news to be something other than what it is has its counterpart in idealizing the idea more than the hard facts.

The reality that is being faced is that of earnings and the failing of earnings to support an ongoing rise in the stock market.

Early suggestions that this earnings season would result in a 6% increase could only be the result of optics as publicly held shares have diminished through massive stock buybacks. However, it doesn’t take much insight to realize that the abysmal state of retail earnings has to have some meaning with regard to the ability of individuals to find discretionary spending within their reality.

As with the past two quarters with the big money financial centers reporting positive earnings, there is little reason to believe that will extend to the other members of the S&P 500 as they begin their reporting in earnest this week.

I’m prepared for the reality, but I still like the fantasy, so I expect to continue playing along this week, just a little more mindful of the obstacles that have a lot of catching up to do.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

Among those reporting earnings this week is Coach (COH) which had fallen 6.2% last week, in preparation for what has become a near regular occurrence in the past 18 months upon earnings. While its most recent past has been to shed significant value when all is bared the option market is expecting an implied move of nearly 10%, in addition to the recent weakness. While Coach has had its competitive challenges it has somehow been able to find a fairly well defined trading range, punctuated with some significant moves and periods of recovery or occasionally, decline. In 2013, I traded Coach for all earnings reports, three of which were through the sale of puts. Despite the dramatic moves following all of last year’s earnings reports, predominantly lower, Coach has been and may continue to be an erratic position that offers acceptable reward for defined risk.

Cypress Semiconductor (CY) also reports earnings this week. Just a few months ago, prior to its last report, it did what many have been doing of late and offered some earnings warnings and saw shares plummet more than 20%, leaving virtually nothing more to fall. Like Coach, Cypress Semiconductor has a habit of seeing its share price gravitate back toward a set level with some regularity. Having already fallen approximately 4% in the past two weeks. While the option market is implying a 9% move this week as earnings are announced, I think that it will be much less pronounced and more likely to have some upside potential. After having shares assigned this past Friday, rather than selling puts,as I often do when earnings are at hand, I am considering the purchase of shares and sale of calls on only a portion of shares or at both the $10 and $11 levels to potentially capitalize on share appreciation.

Anadarko (APC) had a brief spike in price this past week, nearly three weeks after plummeting upon news that it might be facing a $14 billion judgment in a case involving a company that it had purchased several years ago. The spike came as Anadarko stated that it believed the judge in the case set damages that were punitive, rather than remedial and believed that the appropriate amount was more in the $2 billion range. It will likely take a long time to come to some resolution, but even at $14 billion there is certainty and the ability to move forward. As shares seem to be creating a new base I think this is a good entry point, as well as a good point to add shares to start the process of offsetting the paper losses from older shares.

Chesapeake Energy (CHK), while trading in a range of late, has also been trading with relatively large daily and intra-day moves. As a result shares enjoy generous option premiums that reflect the volatility, despite having traded in a very stable range for the past 5 months. Offering expanded weekly options I would consider selecting an expiration prior to the scheduled February 20, 2014 earnings report date.

Having already announced earnings Unitedhealth Group (UNH) added to its recent losses and is now down approximately 5% since its recent high. It appears to have some price support a dollar lower than its current price, which may be a good thing considering the unknowns that await as more news trickles in regarding registration demographics and utilization among newly enrolled health care policy holders. While I never move into a position with the idea that it will be a long term holding, I don’t hold too much concern for that unwanted possibility as it’s as likely to recover from any price drops as most anything else and could easily be justified as being a core holding.

The potential dividend choices this week share a “household theme” covering aspects of the kitchen, laundry room and bathroom, but represent different ends of the consumer spectrum when defensive investing is foremost.

While Clorox (CLX) and Colgate Palmolive (CL) may be best known for consumer staples and nothing terribly ostentatious, Williams Sonoma (WSM) offers products that are every bit as critical to some. Those who would sacrifice anything to ensure that they can purchase an oversized block of Mediterranean pink salt have money every bit as valuable as those that like bright white shirt collars and bright white teeth.

More importantly, at least for me, they have all recently under-performed the S&P 500 and all trade with a low beta at a time that I want to balance risk and still generate a reasonable income stream from premiums and dividends. While both Clorox and Colgate Palmolive have earnings reports due in the February option cycle, WIlliams Sonoma, which tends to trade with more volatility upon earnings, does not report until the end of the March 2014 cycle.

Finally, for those who really seek reckless adventure, perhaps only frolicking in a landfill brimming with its products offers more excitement than considering shares of LED light bulb maker Cree (CREE) in advance of earnings. The last time I considered an earnings related trade in Cree I didn’t recommend the purchase or sale of puts to my subscribers, but did make the put sale for my personal account. However, I did so only after earnings, believing that the 16% drop offered sufficient protection to make an out of the money put sale with relative impunity.

Like some other stocks this past week that continued to fall even days after earnings plunges, that’s what Cree did. Rolling over the puts on a few occasions, eventually taking assignment and then selling calls until its final assignment at a strike level 5% higher than the original put strike price made it worthwhile, but more thrilling than necessary.

So unnecessary that I may be ready to do so again.

Traditional Stocks: Anadarko, Unitedhealth Group

Momentum Stocks: Chesapeake Energy

Double Dip Dividend: Colgate Palmolive (ex div 1/22), Clorox (ex-div 1/27), Williams Sonoma (ex-div 1/22)

Premiums Enhanced by Earnings: Cree (1/21 PM), Coach (1/22 AM), Cypress Semiconductor (1/22 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.

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Weekend Update – December 15, 2013

People tend to have very strong feelings about entitlements.

Prior to this week there were so many people waiting for the so-called “Santa Claus Rally” that you would have thought that it was considered to be an entitlement.

After the week we’ve just had you can probably add it to the other market axioms that haven’t really worked out this year. If anything, so far it appears that you should have taken your vacation right now along with Santa Claus, who must have not realized that his vacation conflicted with the scheduled rally. You also should probably not taken the wizened advice to vacation months ago when the traditional prevailing attitude implored you to “sell in May and go away.”

The past week saw the S&P 500 drop 1.7% to a closing level not seen in a 22 trading sessions. This week’s drop places us a full 1.8% below the recent record high. Yet, like during a number of other smallish declines in 2013, this one is also being warily eyed as being the precursor to the long overdue, but healthy, 10% decline. We have simply become so accustomed to advances that even what would ordinarily be viewed as downward blips are hard to accept.

For those that have a hard time dealing with conflict, these are not good times, as the Santa Claus Rally is being threatened by the specter of a correction in the waiting. While there’s still time for the traditional rally it’s hard to know whether Santa Claus factored the thought of an outgoing Federal Reserve Chairman presiding over his final FOMC meeting and holding his final press conference.

Oh, and then there’s also the little matter of possibly announcing the beginning of the taper to Quantitative Easing. Just a week earlier the idea that such an announcement would come in December was considered highly unlikely. Now it seems like a real possibility and not the kind that the markets were altogether comfortable with, even as they expressed comfort with the previous week’s Employment Situation Report.

While I admire Ben Bernanke and believe that he helped to rescue the world’s financial markets, it may not be far fetched to cast him as the “Grinch” who stole the Santa Claus Rally if the markets are taken off guard. Personally, I don’t believe that he will make the decision to begin the tapering, in deference to Janet Yellen, his expected successor, privilege to decide on timing, magnitude and speed.

However, I’m not really willing to commit very much to that belief and will likely exercise the same caution as I did last week.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

Last week was one of my slowest trading weeks in a long time. Even with cash to spend there never seemed to be a signal that price stability would temper downward risk. Moving forward to this week comes the challenge of trying to distinguish between value and value trap, as many of the stocks that I regularly follow are at more appealing prices but may be at at continued risk.

With lots of positions set to expire this week, the greatest likelihood is that whatever new positions I do establish this week will be with the concomitant use of expanded weekly options or even the January 18, 2014 option, rather than options expiring this coming Friday. The options market is certainly expecting some additional fireworks this coming week as option premiums are generally considerably higher than in recent months.

Microsoft (MSFT) is one of those stocks that has come down in the past week, but like so many still has some downside potential. Of its own weight it can easily go down another 3%, but under the burden of a market in correction its next support level is approximately 8% lower. Since the market’s recent high just a few weeks ago, Microsoft has slightly under-performed the market, but it does trade with a low beta, perhaps offering some relative down side protection. As with many other stocks this week its option premium is far more generous than in the recent past making it perhaps more difficult to resist, but with that reward comes the risk.

There’s probably not much reason or value in re-telling the story of Blackberry (BBRY). Most already have an idea of how the story is going to end, but that doesn’t quiet those who dream of a better future. For some, the future is defined by a weekly option contract and Blackberry reports earnings this week. The options market is implying about a 12% move and for the really adventurous the sale of a put with a strike level almost 17% below Friday’s close could yield a weekly ROI of 1.4%. On a note that shouldn’t be construed as being positive, as the market itself appears a bit more tenuous, Blackberry’s own beta has taken a large drop in the past 3 months. The risk, still remains, however.

Although I discussed the possibility of purchasing shares of Joy Global (JOY) in last week’s article after they reported earnings, I didn’t do so, as it fell hostage to my inactivity even after a relatively large price drop. Despite a recovery from the low point of the week, Joy Global, which has been very much a range bound trading stock of late is still in the range that has worked well for covered call sales. The same is a little less so for Caterpillar (CAT) which is approaching the upper end of its range as it has worked its way toward the $87.50 level. However, with even a mild retreat I would consider once again adding shares buoyed a little bit with the knowledge that shares do also go ex-dividend near the end of the January 2014 option cycle.

Citibank (C) was another that I considered purchasing last week and following a small price drop it continues to have some appeal, also having slightly under-performed the S&P 500 in the past three weeks. However, despite its beta having fallen considerably, it is still potentially a stock that could respond far more so than the overall market. Its option premium for an at the money weekly strike is approximately 18% higher than last week, suggesting that the week may be somewhat more risky than of late.

While my shares of Halliburton (HAL) haven’t fared well in the past week, I am looking at reuniting my “evil troika” by considering purchases of both British Petroleum (BP) and Transocean (RIG), which are now also down from their recent highs. Following in a week in which Anadarko (APC) plunged after a bankruptcy court ruling from a nearly decade old case, the “evil troika” is proof that there is life after litigation and after jury awards, fines and clean up costs. While oil and oil services have been volatile of late, both British Petroleum and Transocean share with Microsoft the fact that they have already under-performed the S&P 500 during this latest downturn but have low betas, hopefully offering some relative downside protection in a faltering market. Perhaps even better is that they are beyond the point of significant downward movement emanating from judicial decisions.

Coach (COH) hasn’t been able to garner much respect lately, although there has been some insider buying when others have been disparaging the company. Meanwhile it has been trading in a fairly well defined range of late. It is a stock that I’ve owned eight times during 2013 and regret not having owned more frequently, particularly since it began offering weekly and then expanded options. Like a number of stocks that I’m considering this week, it too is still closer to the upper end of the range than I would normally initiate new positions and wouldn’t mind seeing a little more weakness.

Seagate Technology (STX) may have a higher beta than is warranted to consider at a time that the market may be labile, however it has recently traded well at the $47.50 level and offers an attractive reward for those willing to accept the frequent movements its shares make, even on an intraday basis. My expectation is that If I do consider a trade it would either be the sale of puts before Wednesday’s big events or otherwise waiting for the aftermath and looking at expanded option dates.

Finally, and yet again, it seems as if it may be time to consider a purchase of eBay (EBAY). While I’ll never really lose count of how many times I own a specific stock, going in and out of positions as they are assigned, eBay is just becoming the perfect example of a stock trading within a range. For anyone selling options on eBay, perhaps the best news was its recent downgrade that chided it for trading in a range and further expecting that it would continue range bound. Although you can’t necessarily trade on the basis of the absolute value of price movements of a stock, the next best way to do so is through buying shares and selling covered calls and then repeating the process as often as possible.

Traditional Stocks: British Petroleum, Caterpillar, eBay, Microsoft, Transocean

Momentum Stocks: Citibank, Coach, Joy Global, Seagate Technology

Double Dip Dividend: none

Premiums Enhanced by Earnings: Blackberry (12/20 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

A Bullish Case Going Forward

(A version of this article appeared on TheStreet.com)

The bullish case? I can’t possibly make one, having been expecting a market correction similar to that seen in April 2012 since April of this year. Besides. I’m an inveterate covered option writer and by nature see the pitfalls of every single trade that I make or suggest.

After all, why would you need protection in the form of options if your stock thesis was sound?

After nearly 30 years of marriage my wife recently told me that only about 40% of what I say turns out to actually be correct. If it was only that good when it came to selecting stocks and getting the timing just right. I’d be in the pantheon of the world’s greatest investors instead of world’s greatest husbands.

Conveniently ignoring my track record of premature pessimism, the coming week holds lots of risk for portfolios.

At a time, albeit only for a day or two, that good news was actually interpreted by the market as being good news, it was a little disconcerting that the idea of a budget deal wasn’t greeted with great enthusiasm. In fact, even the architects of the deal seemed to minimize the achievement. Considering that the current Congress would even have a difficult time agreeing on what day to celebrate New Years if it fell on a Monday, one would be excused for thinking a budget deal, well ahead of a deadline was actually monumental.

Suggesting that the market had simply discounted the deal is also convenient, but clearly without basis. Certainly watching Speaker Boehner and Majority Leader Cantor take the opportunity to rail against the Affordable Care Act, when they addressed the nation, fighting yesterday’s war instead of rallying the markets by celebrating a rare accomplishment, wasn’t helpful.

At this point, however, that’s all yesterday’s news and other than painting a picture of a squeamish market, doesn’t offer any forward looking guidance.

Where the immediate risk enters is from the coming week’s release of the FOMC minutes and perhaps more importantly Chairman Ben Bernanke’s press conference that follows.

Having sold many options with an expiration date just two days after the FOMC release, I’m forced to recall two other occasions this year when I was smugly anticipating assignment of many positions and counting the cash, when the market turned on a dime and not in the right way, either.

Just a few days ago there were very few believing that there was any possibility that the dreaded “taper” to Quantitative Easing could begin or be announced in December. That may be why last week’s good Employment Situation Report was greeted as good news, despite the fact it was good news. Without the fear of the taper beginning much sooner rather than later, the market rallied. But remember, that in the previous days the market sputtered as a synthetic version of tapering, the rising yield on 10 Year Treasury Notes showed us what is in store when the real thing hits.

While the outcome of what awaits next week isn’t pre-ordained, I like to know when obstacles are ahead and what lessons can be learned from the past.

I normally spend Wednesday’s scouting out potential new positions for next week’s purchases in anticipation of weekly option assignments and cash flowing into my account. The question is whether it’s time to preserve the cash or simply look for the bullish case that always exists somewhere, although can disappear in an instant.

Since I never look to hit homeruns, the names that I gravitate to for short term plays are only to achieve small returns and are the names so often dismissed by those with traditional mindsets.

No one thumps their chest pounding about a proposed 1% ROI for the week on their recommeed trades.

COH ChartHowever, eBay (EBAY), Coach (COH) and Caterpillar (CAT) gravitate to the top even when the foundation around them may be weakening. Not because they necessarily have good fundamental stories, after all, they have all had their recent share of derision, but because they have been reliable in their mediocrity and have simply traded in a range for an extended period of time.

 That range is precisely what makes them valuable to an option seller. While exercising a traditional buy and hold approach to these would have been an exercise in futility of the past year, a punctuated form of ownership, essentially a serial buy and hold technique, characterized by repeated purchases, writing of calls and assignments could be an exercise in delight, as seen in these returns in eBay, Caterpillar and Coach. The predictability of that range is more reliable than being able to time a rally or decline. The consistency of trading, particularly over the past nine months or so is the sort of thing that dreams are made of, if you have nothing else to dream about.

They may be boring and they may be out of favor among, but sometimes the bullish case is made out of adding together lots of baby cows.

As I look toward the challenge of the coming week and the message sent by today’s market, I take my seemingly eternal pessimism, but am not inclined to shrink back into my shell. Rather, the time seems exceddingly right for small victories shared with old friends

COH data by YCharts