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Weekend Update – October 25, 2015

There’s an old traditional Irish song “Johnny, We Hardly Knew Ye,” that has had various interpretations over the years.

The same title was used for a book about President John F. Kennedy, but in that case, it was fairly clear that the title was referring to the short time in which we had a chance to get to know the 35th President of the United States, whose life was cut down in its prime.

But in either case, both song and book are generally a combination of sadness over hopes dashed, although the song somehow finds a way to reflect the expression of some positive human traits even in the face of betrayal and tragedy.

While hardly on the same level as the tragedies expressed by song and written word, I hold a certain sadness for the short lived period of volatility that was taken from us far too soon.

The pain is far greater when realizing just how long volatility had been away and just how short a chance some of us had to rejoice in its return.

Even though rising volatility usually means a falling market and increasing uncertainty over future market prospects, it drives option premiums higher.

I live on option premiums and don’t spend very much time focusing on day to day price movements of underlying shares, even while fully cognizant of them.

When those premiums go higher I’m a happy person, just as someone might be when receiving an unexpected bonus, like finding a $20 bill in the pockets of an old pair of pants.

Falling prices leads to volatility which then tends to bring out risk takers and usually brings out all sorts of hedging strategies. In classic supply and demand mode those buyers are met by sellers who are more than happy to feed into the uncertainty and speculative leanings of those looking to leverage their money.

Good times.

But when those premiums dry up, it’s like so many things in life and you realize that you didn’t fully appreciate the gift offered while it was there right in front of you.

I miss volatility already and it was taken away from us so insidiously beginning on that Friday morning when the bad news contained in the most recent Employment Situation Report was suddenly re-interpreted as being good news.

The final two days of the past week, however, have sealed volatility’s fate as a combination of bad economic news around the world and some surprising good earnings had the market interpreting bad news as good news and good news as good news, in a perfect example of having both your cake and the ability to eat that cake.

With volatility already weakened from a very impressive rebound that began on that fateful Friday morning, there then came a quick 1-2-3 punch to completely bring an end to volatility’s short, yet productive reign.

The first death blow came on Thursday when the ECB’s Mario Draghi suggested that European Quantitative easing had more time to run. While that should actually pose some competitive threat to US markets, our reaction to that kind of European news has always been a big embrace and it was no different this time around.

Then came the second punch striking a hard blow to volatility. It was the unexpectedly strong earnings from some highly significant companies that represent a wide swath of economic activity in the United States.

Microsoft (NASDAQ:MSFT) painted a healthy picture of spending in the technology sector. After all, what prolonged market rally these days can there be without a strong and vibrant technology sector leading the way, especially when its a resurgent “old tech” that’s doing the heavy lifting?

In addition, Alphabet (NASDAQ:GOOG) painted a healthy picture among advertisers, whose budgets very much reflect their business and perceived prospects for future business. Finally, Amazon (NASDAQ:AMZN) reflected that key ingredient in economic growth. That is the role of the consumer and those numbers were far better than expected.

As if that wasn’t enough, the real death blow came from the People’s Bank of China as it announced an interest rate cut in an effort to jump start an economy that was growing at only 7%.

Only 7%.

Undoubtedly, the FOMC, which meets next week is watching, but I don’t expect that watching will lead to any direct action.

Earlier this past week my expectation had been that the market would exhibit some exhilaration in the days leading up to the FOMC Statement release in the anticipation that rates would continue unchanged.

That expectation is a little tempered now following the strong 2 day run which saw a 2.8% rise in the S&P 500 and which now has that index just 2.9% below its all time high.

While I don’t expect the same unbridled enthusiasm next week, what may greet traders is a change in wording in the FOMC Statement that may have taken note of some of the optimism contained in the combined earnings experience of Microsoft, Alphabet and Amazon as they added about $80 billion in market capitalization on Friday.

If traders stay true to form, that kind of recognition of an economy that may be in the early stages of heating up may herald the kind of fear and loathing of rising interest rates that has irrationally sent markets lower.

In that case, hello volatility, my old friend.

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

As is typically the case when the market closes on some real strength for the week, it’s hard to want to part with cash on Monday when bargains may have disappeared.

Like volatility, those bargains are only appreciated when they’re gone. Even though you may have a strong sense that they’ll be back, the waiting is just so difficult sometimes and it’s so easy to go against your better judgment.

Although the market has gone higher in each of the past 4 weeks, the predominant character of those weeks had been weakness early on and strength to close the week. That’s made a nice environment for adding new positions on some relative weakness and having a better chance of seeing those positions get assigned or have their option contracts rolled and assigned in a subsequent week.

Any weakness to begin the coming week will be a signal to part with some of that cash, but I do expect to be a little tighter fisted than I have in the past month.

If you hold shares in EMC Corporation (NYSE:EMC), as I do, you have to wonder what’s going on, as a buyout offer from privately held Dell is far higher than EMC’s current price.

The drag seems to be coming from VMWare (NYSE:VMW), which still has EMC as its majority owner. The confusion had been related to the implied value of VMWare, with regard to its contribution to the package offered by Dell.

Many believed that the value of VMWare was being over-stated. Of course, that belief was even further solidified when VMWare reported earnings that stunned the options market by plunging to depths for which there were no weekly strikes. That’s what happens when Microsoft and Amazon, both with growing cloud based web storage services, start offering meaningful competition.

With VMWare’s decline, EMC shares followed.

EMC isn’t an inherently volatile stock, however, the recent spike higher upon news of a Dell offer and the sharp drop lower on VMWare’s woes have created an option premium that’s more attractive than usual. With EMC now back down to about $26, much of the Dell induced stock price premium has now evaporated, but the story may be far from over.

Ford Motors (NYSE:F) reports earnings on Tuesday morning and is ex-dividend the following day.

Those situations when earnings and dividends are in the same week can be difficult to assess, but despite Ford’s rapid ascent in the past month, I believe that it will continue to follow the same trajectory has General Motors (NYSE:GM).

There are a number of different approaches to this trade.

For those not interested in the risk associated with earnings, waiting until after earnings can still give an opportunity to capture the dividend. Of course, that trade would probably make more sense if Ford shares either decline or remain relatively flat after earnings. If so, the consideration can be given to seeking an in the money strike price as would ordinarily be done in an attempt to optimize premium while still trying to capture the dividend.

For those willing to take the earnings risk, rather than selling an in the money option in advance of the ex-dividend date, I would sell an out of the money option in hopes of capturing capital gains, the option premium and the dividend.

I sold Seagate Technolgy (NASDAQ:STX) puts last week and true to its natur
e, even when the sector isn’t in play, it tends to move up and down in quantum like bounces. However, with its competition on the prowl for acquisitions, Seagate Technolgy may have been a little more volatile than normal in an already volatile neighborhood.

I would again be interested in selling puts this week, but only if shares show any kind of weakness, following Friday’s strong move higher. If doing so and the faced with possible assignment, I would likely accept assignment, rather than rolling over the put option, in order to be in a position to collect the following week’s dividend.

I had waited a long time to again establish a Seagate Technology position and as long as it can stay in the $38-$42 range, I would like to continue looking for opportunities to either buy shares and sell calls or to sell put contracts once the ex-dividend date has passed.

So with the company reporting earnings at the end of this week and then going ex-dividend in the following week, I would like to capitalize on the position in each of those two weeks.

Following its strong rise on Friday, I would sell calls on any sign of weakness prior to earnings. With an implied price move of 6.6% there is not that much of a cushion of looking for a weekly 1% ROI, in that the strike price required for that return is only 7.4% below Friday’s closing price.

However, in the event of opening weakness that cushion is likely to increase. If selling puts and then being faced with assignment at the end of the week, I would accept that assignment and look for any opportunity to sell call contracts the following week and also collect the very generous dividend.

AbbVie (NYSE:ABBV) reports earnings this week and health care and pharmaceuticals are coming off of a bad week after having had a reasonably good year, up until 2 months ago.

AbbVie, though, had its own unique issues this year and for such a young company, having only been spun off 3 years, it has had more than its share of news related to its products, product pricing and corporate tax strategy.

This week, though, came news calling into question the safety of AbbVie’s Hepatitis C drug, after an FDA warning that highlighted an increased incidence of liver failure in those patients that already had very advanced liver disease before initiating therapy.

I had some shares of AbbVie assigned the previous week and was happy to have had that be the case, as I would have preferred not being around for earnings, which are to be released this week.

As it turns out, serendipity can be helpful, as no investor would have expected the FDA news nor its timing. However, with that news now digested and the knee jerk reaction now also digested, comes the realization that it was the very sickest people, those in advanced stages of cirrhosis were the ones most likely to require a transplant or succumbed to either their disease or its treatment.

With the large decline prior to earnings I’m again interested in the stock. Unlike most recent earnings related trades where I’ve wanted to wait until after earnings to decide whether to sell puts or not, this may be a situation in which it makes some sense to be more proactive, even with some price rebound having occurred to close the week.

The option market is implying only a 5.1% price move next week. Although a 1% ROI may be able to be obtained at a strike level just outside the bounds defined by the option market, I would be more inclined to purchase shares in advance of earnings and sell calls, perhaps using an extended option expiration date, taking advantage of some of its recent volatility and possibly using a higher strike price.

Ali Baba (NYSE:BABA) also reports earnings this week and like much of what is reported from China, Ali Baba may be as much of a mystery as anything else.

The initial excitement over its IPO has long been gone and its founder, Jack Ma, isn’t seen or heard quite as much as when its shares were trading at a significant premium to its IPO price.

Having just climbed 32% in the past month I’d be reluctant to establish any kind of position prior to the release of earnings, especially following a 6.6% climb to close out this week.

Even if a sharp decline occurs in the day prior to earnings, I would still not sell put options prior to the report, as the option market is currently implying only an 8.5% move at a time when it has been increasingly under-estimating the size of some earnings related price moves.

However, in the event of a significant price decline after earnings some consideration can be given to selling puts at that time.

Finally, Twitter (NYSE:TWTR) was my most frequent trade of 2014 and very happily so.

2015, however, has been a very different situation. I currently have a single lot of puts at a far higher price that I’ve rolled over to January 2016 in an attempt to avoid assignment of shares and to wait out any potential stock recovery.

That wait has been far longer than I had expected and January 2016 is even further off into the future than I ever would have envisioned.

With the announcement that Jack Dorsey was becoming the CEO, there’s been no shortage of activity that is seeking to give the appearance of some kind of coherent strategy to give investors some reason to be optimistic about what comes next.

What may come next is something out of so many new CEO playbooks. That is to dump all of the bad news into the first full quarter’s earnings report during their tenure and create the optics that enables them to look better by comparison at some future date.

With Twitter having had a long history of founders and insiders pointing fingers at one another, it would seem a natural for the upcoming earnings report to have a very negative tone. The difference, however, is that Dorsey may be creating some good will that may limit any downside ahead in the very near term.

The option market is implying a move of 12.1%. However, a 1% ROI could be potentially delivered through the sale of put contracts at a strike price that’s nearly 16% below Friday’s close.

That kind of cushion is one that is generally seen during periods of high volatility or with individual stocks that are extremely volatile.

For now, though, I think that Twitter’s volatility will be on hiatus for a while.

While I think that there may be bad news contained in the upcoming earnings release, I also believe that Jack Dorsey will have learned significantly from the most recent earnings experience when share price spiked only to plunge as management put forward horrible guidance.

I don’t expect the same kind of thoughtless presentation this time around and expect investor reception that will reflect newly rediscovered confidence in the team that is being put together and its strategic initiatives.

Ultimately, you can’t have volatility if the movement is always in one direction.

Traditional Stocks: EMC Corp

Momentum Stocks: none

Double-Dip Dividend: Ford (10/28)

Premiums Enhanced by Earnings: AbbVie (10/30 AM), Ali Baba (10/27 AM), Ford (10/27 AM), Seagate Technology (10/30 AM), Twitter (10/27 PM)

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

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Weekend Update – October 18, 2015

You have to be impressed with the way the market has rallied back from the morning of the most recent Employment Situation Report just 2 weeks earlier.

At the low point of that morning when the market seemed appropriately disappointed by the very disappointing numbers and the lowered revisions the S&P 500 had sunk to a point more than 11% below its recent high.

At its peak point of return since that low the S&P 500 was only 4.9% below its summer time high.

The difficulty in sustaining a large move in a short period of time is no different from the limitations we see in ourselves after expending a burst of energy and even those who are finally tuned to deliver high levels of performance.

When you think about a sprinter who’s asked to run a longer distance or bringing in a baseball relief pitcher who’s considered to be a “closer” with more than an inning to go, you see how difficult it can be to reach deep down when there’s nothing left to reach for.

Sometimes you feel as if there’s no choice and hope for the best.

You also can see just how long the recovery period can be after you’ve been asked to deliver more than you’ve been capable of delivering in the past. It seems that reaching deep down to do your best borrows heavily from the future.

While humans can often take a break and recharge a little markets are now world wide, inter-connected and plugged into a 24/7 news cycle.

While it may be boring when the market takes a rest by simply not moving anywhere, it can actually expend a lot of energy if it moves nowhere, but does so by virtue of large movements in off-setting directions.

We need a market that can now take a real rest and give up some of the histrionics, even though I like the volatility that it creates so that I can get larger premiums for the sale of options.

The seminal Jackson Browne song puts a different spin on the concept of “running on empty,” but the stock market doesn’t have the problems of a soulless wanderer, even though, as much as it’s subject to anthropomorphism, it has no soul of its own.

Nor does it have a body, but both body and soul can get tired. This market is just tired and sometimes there’s no real rest for the weary.

After having moved up so much in such a short period of time, it’s only natural to wonder just what’s left.

The market may have been digging deep down but its fuel cells were beginning to hit the empty mark.

This week was one that was very hard to read, as the financial sector began delivering its earnings and the best news that could come from those reports was that significantly decreased legal costs resulted in improved earnings, while core business activities were less than robust.

If that’s going to be the basis for an ongoing strategy, that’s not a very good strategy. Somehow, though, the market consistently reversed early disappointment and drove those financials reporting lackluster top and bottom lines higher and higher.

You can’t help but wonder what’s left to give.

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

American Express (NYSE:AXP) and Wal-Mart (NYSE:WMT) may be on very different ends of the scale, but they’ve both known some very bad days this year.

For American Express it came with the news that it was no longer going to be accepted as the sole credit card at Costco (NASDAQ:COST) stores around the nation. While that was bad enough, the really bad news came with the realization of just how many American Express card holders were actually holders of the Costco co-branded card.

There was a great Bloomberg article this week on some of the back story behind the American Express and Costco relationship and looks at their respective cultures and the article does raise questions about American Express’ ability to continue commanding a premium transaction payment from retailers, as well as continuing to keep their current Costco cardholders without the lure of Costco.

What American Express has been of late is a steady performer and the expectation should be that the impact of its loss of business in 2016 has already been discounted.

American Express reports earnings this week, but it’s option premiums aren’t really significantly enhanced by uncertainty.

Normally, I look to the sale of puts to potentially take advantage of earnings, but with American Express I might also consider the purchase of shares and the concomitant sale of calls and then strapping on for what could be a bumpy ride.

Wal-Mart, on the other hand only recently starting accepting American Express cards and that relationship was seen as a cheapening of the elite American Express brand, but we can all agree that money is money and that may trump everything else.

Apparently, however, investors didn’t seem to realize that Wal-Mart’s well known plan to increase employee salaries was actually going to cost money and they were really taken by surprise this week when they learned just how much.

What’s really shocking is that some very simple math could have spelled it out with some very reasonable accuracy since the number of workers eligible to receive the raise and the size of the raise have been known for months.

It reminds me of the shock expressed by Captain Renault in the movie “Casablanca” as he says “I’m shocked to find gambling is going on in here,” as he swoops up his winnings.

Following the decline and with a month still to go until earnings are reported, this new bit of uncertainty has enhanced the option premiums and a reasonable premium can possibly be found even when also trying to secure some capital gains from shares by using an out of the money strike price.

The Wal-Mart news hit retail hard, although to be fair, Target’s (NYSE:TGT) decline started as a plunge the prior day, when it fell 5% in the aftermath of an unusually large purchase of short term put options.

While I would look at Target as a short term trade, selling a weekly call option on shares, in the hope that there would be some recovery in the coming week, there may also be some longer term opportunities. That’s because Target goes ex-dividend and then reports earnings 2 days later during the final week of the November 2015 option cycle.

DuPont (NYSE:DD), Seagate (NASDAQ:STX) and YUM Brands (NYSE:YUM) don’t have very much in common, other than some really large share plunges lately, something they all share with American Express and Wal-Mart.

But that’s exactly the kind of market it has been. There have been lots of large plunges and very slow recoveries. It’s often been very difficult to reconcile an overall market that was hitting all time highs at the same time that so many stocks were in correction mode.

DuPont’s plunge came after defeating an activist in pursuit of Board seats, but the announcement of the upcoming resignation of its embattled CEO has put some life back into shares, even as they face the continuing marketplace challenges.

Dupont will report earnings the following week and will be ex-dividend sometime during the November 2015 option cycle.

While normally considering entering a new position with a short term option sale, I may consider the use of a monthly option in this case in an effort to get a premium reflecting its increased volatility and possibly also capturing its dividend, while hoping for some share appreciation, as well.

Seagate Technology is simply a mess at a time that hardware companies shouldn’t be and it may become attractive to others as its price plunges.

Storage, memory and chips have been an active neighborhood, but Seagate’s recent performance shows you the risks involved when you think that a stock has become value priced.

I thought that any number of times about Seagate Technology over the course of the past 6 months, but clearly what goes low, can go much lower.

Seagate reports earnings on October 30th, so my initial approach would likely be to consider the sale of weekly, out of the money puts and hope for the best. If in jeopardy of being assigned due to a price decline, I would consider rolling the contract over. The choice of time frame for that possible rollover will depend upon Seagate’s announcement of their next ex-dividend date, which should be sometime in early November 2015.

With that dividend in mind, a very generous one and seemingly safe, thoughts could turn to taking assignment of shares and then selling calls in an effort to keep the dividend.

Caterpillar (NYSE:CAT) hasn’t really taken the same kind of single day plunge of some of those other companies, but its slow decline is finally making Jim Chanos’ much publicized 2 year short position seem to be genius.

It’s share price connection to Chinese economic activity continues and lately that hasn’t been a good thing. Caterpillar is both ex-dividend this week and reports earnings. That’s generally not a condition that I like to consider, although there are a number of companies that do the same and when they are also attractively priced it may warrant some more attention.

In this case, Caterpillar is ex-dividend on October 22nd and reports earnings that same morning. That means that if someone were to attempt to exercise their option early in order to capture the dividend, they mist do so by October 21st.

Individual stocks have been brutalized for much of 2015 and they’ve been slow in recovering.

Among the more staid selections for consideration this week are Colgate-Palmolive (NYSE:CL) and Fastenal (NASDAQ:FAST), both of which are ex-dividend this week.

I’ve always liked Fastenal and have always considered it a company that quietly reflects United States economic activity, both commercial and personal. At a time when so much attention has been focused on currency exchange and weakness in China, you would have thought, or at least I would have thought, that it was a perfect time to pick up or add shares of a company that is essentially immune to both, perhaps benefiting from a strong US Dollar.

Well, if you weren’t wrong, I have been and am already sitting on an expensive lot of uncovered shares.

With only monthly option contracts and earnings already having been reported, I would select a slightly out of the money option strike or when the December 2015 contracts are released possibly consider the slightly longer term and at a higher strike price, in the belief that Fastenal has been resting long enough at its current level and is ready for another run.

Colgate-Palmolive is a company that I very infrequently own, but always consider doing so when its ex-dividend date looms.

I should probably own it on a regular basis just to show solidarity with its oral health care products, but that’s never crossed my mind.

Not too surprisingly, given its business and sector, even from peak to trough, Colgate-Palmolive has fared far better than many and will likely continue to do so in the event of market weakness. While it may not keep up with an advancing market, that’s something that I long ago reconciled myself to, when deciding to pursue a covered option strategy.

As a result of it being perceived as having less uncertainty it’s combined option premium and dividend, if captured, isn’t as exciting as for some others, but there’s also a certain personal premium to be paid for the lack of excitement.

The excitement may creep back in the following week as Colgate reports earnings and in the event that a weekly contract has to be rolled over I would considered rolling over to a date that would allow some time for price recovery in the event of an adverse price move.

Reporting earnings this week are Alphabet (NASDAQ:GOOG) and Under Armour (NYSE:UA).

Other than the controversy surrounding its high technology swim suits at the last summer Olympics, Under Armour hasn’t faced much in the way of bad news. Even then, it proved to have skin every bit as repellent as its swim suits.

The news of the resignation of its COO, who also happened to serve as CFO, sent shares lower ahead of earnings.

The departure of such an important person is always consequential, although perhaps somewhat less so when the founder and CEO is still an active and positive influence in the company, as is most definitely the case with under Armour.

However, the cynic sees the timing of such a departure before earnings are released, as foretelling something awry.

The option market is implying a price move of about 7.5%, while a 1% ROI may possibly be obtained through the sale of puts 9% below Friday’s closing price.

For me, the cynic wins out, however. Under Armour then becomes another situation that I would consider the sale of puts contracts after earnings if shares drop strongly after the report, or possible before earnings if there is a sharp decline in its advance.

I’m of the beli
ef that Google’s new corporate name, “Alphabet” will be no different from so many other projects in beta that were quietly or not so quietly dropped.

There was a time that I very actively traded Google and sold calls on the positions.

That seems like an eternity ago, as Google has settled into a fairly stodgy kind of stock for much of the past few years. Even its reaction to earnings reports have become relatively muted, whereas they once were things to behold.

That is if you ignore its most recent earnings report which resulted in the largest market capitalization gain in a single day in the history of the world.

Now, Alphabet is sitting near its all time highs and has become a target in a way that it hasn’t faced before. While it has repeatedly faced down challenges to its supremacy in the world of search, the new challenge that it is facing comes from Cupertino and other places, as ad blockers may begin to show some impact on Alphabet’s bread and butter product, Google.

Here too, the reward offered for the risk of selling puts isn’t very great, as the option market is implying a 6% move. That $40 move in either direction could bring shares down to the $620 level, at which a barely acceptable 1% ROI for a weekly put sale may be achieved.

With no cushion between what the market is implying and where a 1% ROI can be had, I would continue to consider the sale of puts if a large decline precedes the report or occurs after the report, but I don’t think that I would otherwise proactively trade prior to earnings.

Finally, VMWare (NYSE:VMW) also reports earnings this week.

If you’re looking for another stock that has plunged in the past week or so, you don’t have to go much further than VMWare, unless your definition requires a drop of more than 15%.

While it has always been a volatile name, VMWare is now at the center of the disputed valuation of the proposed buyout of EMC Corp (NYSE:EMC), which itself has continued to be the major owner of VMWare.

I generally like stocks about to report earnings when they have already suffered a large loss and this one seems right.

The option market is implying about a 5.2% move next week, yet there’s no real enhancement of the put premium, in that a 1% ROI could be obtained, but only at the lower border of the implied move.

The structure of the current buyout proposal may be a factor in limiting the price move that option buyers and sellers are expecting and may be responsible for the anticipated sedate response to any news.

While that may be the case, I think that the downside may be under-stated, as has been the case for many stocks over the past few months, so the return is not enough to get me to take the risk. But, as also has been the case for the past few months, it may be worthy considering to pile on if VMWare disappoints further and shares continue their drop after earnings are released.

That should plump up the put premium as there might be concern regarding the buyout offer on the table, which is already suspect.

Traditional Stocks: American Express, DuPont, Target, Wal-Mart

Momentum Stocks: Seagate Technology, YUM Brands

Double-Dip Dividend: Caterpillar (10/22 $0.71), Colgate-Palmolive (10/21 $0.38), Fastenal (10/23 $0.28),

Premiums Enhanced by Earnings: Alphabet (10/22 PM), Under Armour (10/22 AM), VMWare (10/20 PM)

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

Posted on

Weekend Update – September 13, 2015

For those of a certain age, you may or may not recall that Marvin Gaye’s popular song “What’s Going On?” was fairly controversial and raised many questions about the behavior of American society both inside and outside of our borders during a time that great upheaval was underway.

The Groucho Marx character Rufus T. Firefly said “Why a four-year-old child could understand this report. Run out and find me a four-year-old child, I can’t make head or tail of it.”

While I could never answer that seminal question seeking an explanation for everything going on, I do know that the more outlandish Groucho’s film name, the funnier the film. However, that kind of knowledge has proven itself to be of little meaningful value, despite its incredibly high predictive value.

That may be the same situation when considering the market’s performance following the initiation of interest rate hikes. Despite knowing that the market eventually responds to that in a very positive manner by moving higher, traders haven’t been rushing to position themselves to take advantage of what’s widely expected to be an upcoming interest rate increase.

In hindsight it may be easy to understand some of the confusion experienced 40 years ago as the feeling that we were moving away from some of our ideals and fundamental guiding principles was becoming increasingly pervasive.

I don’t think Groucho’s pretense of understanding would have fooled anyone equally befuddled in that era and no 4 year old child, devoid of bias or subjectivity, could have really understood the nature of the societal transformation that was at hand.

Following the past week’s stealth rally it’s certainly no more clear as to what’s going on and while many are eager to explain what is going on, even a 4 year old knows that it’s best to not even make the attempt, lest you look, sound or read like a babbling idiot.

It’s becoming difficult to recall what our investing ideals and fundamentals used to be. Other than “buy low and sell high,” it’s not clear what we believe in anymore, nor who or what is really in charge of market momentum.

Just as Marvin Gaye’s song recognized change inside and outside of our borders, our own markets have increasingly been influenced by what’s going on outside of those borders.

If you have any idea of what is really going on outside of our borders, especially in China, you may be that 4 year old child that can explain it all to the rest of us.

The shock of the decline in Shanghai has certainly had an influence on us, but once the FOMC finally raises rates, which may come early as this week, we may all come to a very important realization.

That realization may be that what’s really going on is that the United States economy is the best in the world in relative terms and is continuing to improve in absolute terms.

That will be something to sing about.

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

With relatively little interest in wanting to dip too deeply into cash reserves, which themselves are stretched thinner than I would like, I’m more inclined to give some consideration to positions going ex-dividend in the very near future.

Recent past weeks have provided lots of those opportunities, but for me, this week isn’t as welcoming.

The two that have my attention, General Electric (NYSE:GE) and Las Vegas Sands (NYSE:LVS) couldn’t be more different, other than perhaps in the length of tenure of their Chairmen/CEOs.

I currently own shares in both companies and had shares of General Electric assigned this past week.

While most of the week’s attention directed toward General Electric is related to the European Union’s approval of its bid to buy Alstom SA (EPA:ALO), General Electric has rekindled my interest in its shares solely because of its decline along with the rest of the market.

While it has mirrored the performance of the S&P 500 since its high point in July, I would be happy to see it do nothing more than to continue to mirror that performance, as the combination of its dividend and recently volatility enhanced option premium makes it a better than usual candidate for reward relative to risk.

While I also don’t particularly like to re
purchase recently assigned shares at a higher price, that most recent purchase may very well have been at an unrealistically low price relative to the potential to accumulate dividends, premiums and still see capital appreciation of shares.

Las Vegas Sands, on the other hand, is caught in all of the uncertainty surrounding China and the ability of Chinese citizens to part with their dwindling discretionary cash. With highly significant exposure to Macau, Las Vegas Sands has seen its share price bounce fairly violently over the past few months and has certainly reflected the fact that we have no real clue as to what’s going on in China.

As expected, along with that risk, especially in a market with its own increasing uncertainty is an attractive option premium. Since Las Vegas Sands ex-dividend date is on a Friday and it does offer expanded weekly options, there are a number of potential buy/write combinations that can seek to take advantage of the option premium, with or without also capturing the dividend.

The least risk adverse investor might consider the sale of a deep in the money weekly call option with the objective of simply generating an option premium in exchange for 4 days of stock ownership. At Friday’s closing prices that would have been buying shares at $46.88 and selling a weekly $45.50 call option for $1.82. With a $0.65 dividend, shares would very likely be assigned early if Thursday’s closing price was higher than $46.15.

If assigned early, that 4 day venture would yield a return of 0.9%.

However, if shares are not assigned early, the return is 2.3%, if shares are assigned at closing.

Alternatively, a $45.50 September 25, 2015 contract could be sold with the hope that shares are assigned early. In that case the return would be 1.3% for the 4 days of risk.

In keeping with Las Vegas Sand’s main product line, it’s a gamble, no matter which path you may elect to take, but even a 4 year old child knows that some risks are better than others.

Coca Cola (NYSE:KO) was ex-dividend this past week and it’s not sold in Whole Foods (NASDAQ:WFM), which is expected to go ex-dividend at the end of the month.

There’s nothing terribly exciting about an investment in Coca Cola, but if looking for some relative safety during a period of market turmoil, Coca Cola has been just that, paralleling the behavior of General Electric since that market top.

As also with General Electric, its dividend yield is more than 50% higher than for the S&P 500 and its option premium is also reflecting greater market volatility.

Following an 8% decline I would consider looking at longer term options to try and lock in the greater premium, as well as having an opportunity to wait out some chance for a price rebound.

Whole Foods, on the other hand, has just been an unmitigated disaster. As bad as the S&P 500 has performed in the past 2 months, you can triple that loss if looking to describe Whole Foods’ plight.

What makes their performance even more disappointing is that after two years of blaming winter weather and assuming the costs of significant national expansion, it had looked as if Whole Foods had turned the corner and was about to reap the benefits of that expansion.

What wasn’t anticipated was that it would have to start sharing the market that it created and having to sacrifice its rich margins in an industry characterized by razor thin margins.

However, I think that Whole Foods will now be in for another extended period of seeing its share price going nowhere fast. While that might be a reason to avoid the shares for most, that can be just the ideal situation for accumulating income as option premiums very often reflect the volatility that such companies show upon earnings, rather than the treading water they do in the interim.

That was precisely the kind of share price character describing eBay (NASDAQ:EBAY) for years. Even when stuck in a trading range the premiums still reflected its proclivity to surprise investors a few times each year. Unless purchasing shares at a near term top, adding them anywhere near or below the mid-point of the trading range was a very good way to enhance reward while minimizing risk specific to that stock.

While 2015 hasn’t been very kind to Seagate Technology (NASDAQ:STX), compared to so many others since mid-July, it has been a veritable super-star, having gained 3%, including its dividend.

Over the past week, however, Seagate lagged the market during a week when the performance of the technology sector was mixed.

Seagate is a stock that I like to consider for its ability to generate option related income through the sale of puts as it approaches a support level. Having just recovered from testing the $46.50 level, I would consider the sale of
puts and would try to roll those over and over if necessary, until that point that shares are ready to go ex-dividend.

That won’t be for another 2 months, so in the event of an adverse price move there should be sufficient time for some chance of recovery and the ability to close out the position.

In the event that it does become necessary to keep rolling over the put premiums heading into earnings, I would select an expiration a week before the ex-dividend date, taking advantage of either an increased premium that will be available due to earnings or trading down to a lower strike price.

Then, if necessary, assignment can be taken before the ex-dividend date and consideration given to selling calls on the new long position.

Adobe (NASDAQ:ADBE) reports earnings this week and while it offers only monthly option contracts, with earnings coming during the final week of that monthly contract, there is a chance to consider the sale of put options that are effectively the equivalent of a weekly.

Adobe option contracts don’t offer the wide range of strike levels as do many other stocks, so there are some limitations if considering an earnings related trade. The option market is implying a move of approximately 6.7%.

However, a nearly 1% ROI may be achieved if shares fall less than 8.4% next week. Having just fallen that amount in the past 3 weeks I often like that kind of prelude to the sale of puts. More weakness in advance of earnings would be even better.

Finally, good times caught up with LuLuLemon Athletica (NASDAQ:LULU) as it reported earnings. Having gone virtually unchallenged in its price ascent that began near the end of 2014, it took a really large step in returning to those price levels.

While its earnings were in line with expectations, its guidance stretched those expectations for coming quarters thin. If LuLuLemon has learned anything over the past two years is that no one likes things to be stretched too thin.

The last time such a thing happened it took a long time for shares to recover and there was lots of internal turmoil, as well. While its founder is no longer there to discourage investors, the lack of near term growth may be an apt replacement for his poorly chosen words, thoughts and opinions.

However, one thing that LuLuLemon has been good for in the past, when faced with a quantum leap sharply declining stock price is serving as an income production vehicle through the sale of puts options.

I think that opportunity has returned as shares do tend to go through a period of some relative stability after such sharp declines. During those periods, however, the option premiums, befitting the decline and continued uncertainty remain fairly high.

Even though earnings are now behind LuLuLemon, the option market is still implying a price move of % next week. At the same time, the sale of a weekly put option % below Friday’s closing price could still yield a % ROI and offer opportunity to roll over the position in the event that assignment may become likely.

Traditional Stock: Coca Cola, Whole Foods

Momentum Stock: LuLuLemon Athletica, Seagate Technology

Double-Dip Dividend: General Electric (9/17 $0.23), Las Vegas Sands (9/18 $0.65)

Premiums Enhanced by Earnings: Adobe (9/17 PM)

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

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Weekend Update – July 19, 2015

There’s a lot of confusion over who was responsible for the idea that time is merely an illusion and that it is “nature’s way of preventing everything from happening all at once.”

The first part of the idea is certainly thought provoking and is beyond my ability to understand. The second part may be some attempt at a higher plane of humor in an attempt to explain the significance of what is beyond the capability of most people.

In essence, if you thought that the time frame described during the first seven days of creation was compressed, some physicists would suggest that it all actually happened all at once and if you had the appropriate vehicle traveling at sufficient speed you would know that first hand.

The humorous quip has been attributed to Albert Einstein, Woody Allen and others. It has also been attributed to theoretical physicist John Archibald Wheeler, who was one of Einstein’s last collaborators, which itself indicates a relative time in Einstein’s career, so it may be unlikely that Wheeler would have described himself in those terms, if he was a real believer.

You might believe that Wheeler’s single degree of separation from Einstein would suggest hat perhaps the true source of the concept would then be Einstein himself. However, Wheeler maintained that he actually saw it scrawled on a men’s room wall in an Austin, Texas cafe, that in theory would have occurred at the same time that Einstein saw the famous Theory of Relativity equation scrawled on the men’s room wall of a Dusseldorf beer garden.

The idea, though, flows from Einstein’s earlier works on time, space and travel and may have been an inspiration to some well read patron while making room for the next idea inducing purchase of a large quantity of beer, wine or spirits.

This past week may have been an example of time forgetting its role, as we saw an avalanche of important news and events that came upon us in quick succession to begin the week. The news of an apparent agreement to the resolution of the Greek debt crisis and the announcement of a deal on Iran’s march toward developing a nuclear weapon came in tandem with the non-event of a melt down of the Chinese stock market.

The majority of the 2.4% weekly gain seen in the S&P 500 was over by the time we could blink, as the rest of the week offered little of anything, but saw a continuing successful test of support in the S&P 500, nearly 5% lower, as it moved to be in a position to now test resistance.

With the near simultaneous occurrence of those important events, the real question may be whether or not they themselves are illusory or at least short-lived.

Time may be the key to tell whether the events of this week were justifiable in creating a market embrace of a rosy future.

We’ve lived through past Greek debt crises before, so there is probably little reason to suspect that this will be the last of them for Greece or even the last we’ll see in the Eurozone. When and where the next flash point occurs is anyone’s guess, but German Finance Minister Wolfgang Schäuble’s comments regarding Greece’s place in the EU continues to leave some uncertainty over the sanctity of that union and their currency.

With an Iranian deal now comes the effort to block it, which itself has a 60 day time limit for Congressional opponents to do their best to defeat the proposal and then overcome a Presidential veto. While it’s not too likely that the latter will become reality, there will be no shortage of attempts to undermine the agreement that probably contributed to continuing weakness in the energy sector in fears that Iranian oil would begin flooding markets sooner than is plausible.

The Chinese attempts at manipulating their stock markets have actually worked far longer than I would have predicted. Here too, time is in play, as there is a 6 month moratorium on the sale of some stocks and by some key individuals. That’s a long time to try and hold off real market dynamics and those forces could very well yet undermine the Chinese government’s “patriotic fight” to save its stock market.

The role that those three may have played in moving the market higher last week may now become potential liabilities until they have stood the test of time.

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

The coming week is very short on scheduled economic news, but will be a very busy one as we focus on fundamentals and earnings.

While there are lots of earnings reports coming this week the incredibly low volatility, after flirting with higher levels just 2 weeks ago, has resulted in few opportunities to try and exploit those earnings reports.

As again approaching all time highs and being very reluctant to chase new positions, I would normally focus on relatively safe choices, perhaps offering a dividend to accompany a premium from having sold call options.

This week, the only new position that may fulfill those requirements is Fastenal (NASDAQ:FAST) which offers only monthly options and reported earnings last week.

It has been mired in a narrow price range since its January 2015 earnings report and is currently trading at the low end of that range. Having just reported earnings in line with estimates is actually quite an achievement when considering that Fastenal has been on a hiring spree in 2015 and has significantly added costs, while revenues have held steady, being only minimally impacted by currency exchange rates.

Their business is a very good reflector of the state of the economy and encompasses both professional construction and weekend warrior customers. They clearly believe that their fortunes are poised to follow an upswing in economic activity and have prepared for its arrival in a tangible way.

At the current price, I think this may be a good time to add shares, capture a dividend and an option premium. I may even consider going out a bit further in time, perhaps to the November 2014 option that will take in the next earnings report and an additional dividend payment, while seeking to use a strike price that might also provide some capital gains on shares, such as the $45 strike.

DuPont (NYSE:DD) isn’t offering a dividend this week, although it will do so later in the August 2015 option cycle. However, before getting to that point, earnings are scheduled to be announced on July 28th.

Following what many shareholders may derisively refer to as the “successful” effort to defeat Nelson Peltz’s bid for a board seat, shares have plummeted. The lesson is that sometimes victories can be pyrrhic in nature.

Since that shareholder vote, which was quite close by most proxy fight standards, shares have fallen about 15%, after correcting for a spin-off, as compared to a virtually unchanged S&P 500.

However, if not a shareholder at the time, the current price may just be too great to pass up, particularly as Peltz has recently indicated that he has no intention of selling his position. While DuPont does offer weekly and expanded weekly option contracts, I may consider the sale of the August monthly contract in an attempt to capture the dividend and perhaps some capital gains on the shares, in addition to the premium that will be a little enhanced by the risk associated with earnings.

The remainder of this week’s limited selection is a bit more speculative and hopefully offers quick opportunities to capitalize by seeing assignment of weekly call options or expiration of weekly puts sold and the ability to recycle that cash into new positions for the following week.

eBay (NASDAQ:EBAY), of course, will be in everyone’s sights as it begins trading without PayPal (Pending:PYPL) as an integral part. Much has been made of the fact that the market capitalization of the now independent PayPal will be greater than that of eBay and that the former is where the growth potential will exist.

The argument of following growth in the event of a spin-off is the commonly made one, but isn’t necessarily one that is ordained to be the correct path.

I’ve been looking forward to owning shares of eBay, as it was a very regular holding when it was an absolutely mediocre performer that happened to offer very good option premiums while it tended to trade in a narrow and predictable range.

What I won’t do is to rush in and purchase shares in the newly trimmed down company as there may be some selling pressure from those who added shares just to get the PayPal spin-off. For them, Monday and Tuesday may be the time to extricate themselves from eBay, the parent, as they either embrace PayPal the one time child, if they haven’t already sold their “when issued” shares.

However, on any weakness, I would be happy to see the prospects of an eBay again trading as a mediocre performer if it can continue to have an attractive premium. Historically, that premium had been attractive even long before murmurings or demands for a PayPal spin-off became part of the daily discussion.

Following a downgrade of Best Buy (NYSE:BBY), which is no stranger to falling in and out of favor with analysts, the opportunity looks timely to consider either the sale of slightly in the money puts or the purchase of shares and sale of slightly out of the money calls.

The $2 decline on Friday allowed Best Buy shares to test a support level and is now trading near a 9 month low. With earnings still a month away, shares offer reasonable premiums for the interim risk and sufficient liquidity of options if rollovers may be required, particularly in the event of put sales.

The arguments for and against Best Buy’s business model have waxed and waned over the past 2 years and will likely continue for a while longer. As it does so, it offers attractive premiums as the 2 sides of the argument take turns in being correct.

Seagate Technology (NASDAQ:STX) will report earnings on July 31st. In the meantime, that gives some opportunity to consider the sale of out of the money puts.

While I generally prefer not to be in a position to take assignment in the event of an adverse price reaction and would attempt to rollover the puts, in this case with an upcoming ex-dividend date likely to be the week after earnings are released, I might consider taking the assignment if faced with that possibility and then subsequently selling calls, perhaps for the week after the ex-dividend date in an effort to capture that dividend and also attempt to wait out any price recovery.

Like Best Buy, Seagate Technology has been in and out of favor as its legitimacy as a continuing viable company is periodically questioned. Analysts pretend to understand where technology and consumer preferences are headed, but as is the case with most who are in the “futurist” business, hindsight often offers a very punishing report card.

Finally, GoPro (NASDAQ:GPRO) reports earnings this week. During its brief time as a publicly traded company it has seen plenty of ups and downs and some controversy regarding its lock-up provisions for insiders.

It is also a company whose main product may be peaking in sales and it has long made a case for seeking to re-invent itself as a media company, in an effort to diversify itself from dependence on consumer cycles or from its product going the commodity route.

The option market is implying a 9.9% movement in shares next week as earnings are reported. However, a 1% ROI may possibly be achieved if selling a weekly put at a strike that is 13.3% below this past Friday’s closing price.

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

Traditional Stocks: DuPont, eBay

Momentum Stocks: Best Buy, Seagate Technology

Double-Dip Dividend: Fastenal (7/29)

Premiums Enhanced by Earnings: GoPro (7/21 PM)

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

Posted on

Weekend Update – June 28, 2015

To call the stock market of this past week “a dog” probably isn’t being fair to dogs.

Most everyone loves dogs, or at least can agree that others may be able to see some positive attributes in the species. It’s hard, however, to have similar equanimity, even begrudgingly so, toward the markets this week.

What started off strongly on Monday and somehow wasn’t completely disavowed the following day, devolved unnecessarily on Wednesday and without any strong reason for doing so.

In fact, it was a week of very little economic news. We were instead focused on societal news that likely made little to no impression on the markets as a whole, although one sector did stand out.

That sector was health care, as the Supreme Court’s decision on the Affordable Care Act was a re-affirmation of a key component of the legislation and delayed any need to come up with an alternative, while still allowing Presidential contenders to criticize it heading into election season.

That’s a win – win.

It also keeps the number of uninsured at their lowest levels ever and puts more money in the pockets of hospitals and insurers, alike.

That’s another win – win.

While those two are usually on the opposite sides of most health care related arguments investors definitely agreed that the Affordable Care Act was and will continue to be additive to their bottom lines.

There is no health care flag, however.

The “Rainbow Flag” got a big thumbs up last week as the Supreme Court re-affirmed the right to dignity and the universal right to have access to divorce courts. The Court’s decision and its impact on businesses and the economy was a topic of speculation that was designed to fill air time and empty columns in the business section, as it came on a quiet day to end the week.

The Confederate Flag, of course, got a big thumbs down, after 150 years of quiet and thoughtful deliberation over its merits and what it represented. The decision by major retailers to stop sales of items with the Confederate flag on them can only mean that their demand wasn’t very significant and those items will probably be sent overseas, just as is done with the tee shirts of the losing Super Bowl team, so we can expect to see lots of photos of strangely attired impoverished third world children in the future.

And that leaves Greece, the EU, the IMF and the World Bank. For those most part, those aren’t part of our societal concerns, but they do concern markets.

Just not too much this past week.

The European Union was very forward thinking in the design of its flag. Rather than being concrete and having the 12 stars represent its member nations, those stars are said to represent characteristics of those member states. In other words Greece could leave the EU and the flag remains unchanged. Although the symbolism of the stars being arranged in a circle to represent “unity” may have to come under some scrutiny.

The growing realization is that would likely not be the same for the EU itself, as an exit by Greece would ultimately be “de minimis.” Either way, we should get some more information this week, as IMF chief Christine Legarde’s June 30th line in the sand regarding Greece’s repayment is quickly approaching.

It may be too late for a proposed “Plan B” for Greece to prevent default, as the European Union is now in its 86th trimester.

Still, despite a week of little news, somehow it was another week of pronounced moves in both directions that ultimately managed to travel very little from home.

New and existing home sales data suggested a strengthening in that important sector and the revised GDP indicated that the first quarter wasn’t as much of a dog as we all had come to believe. But there really wasn’t enough additional corroborating data to make anyone jump to the conclusion that core inflation was now exceeding the same objective that Janet Yellen had just stated weren’t being met.

So any concerns about improving economic news shouldn’t have led anyone to begin expressing their fears of increased interest rates by selling their stocks.

But it did.

Wednesday’s sell-off followed the news that the revised 2015 first quarter GDP was only down by 0.2% and not the previously revised 0.7%.

That makes it seem as if nerves and expectations for a long overdue correction or even a long overdue mini-correction are ruling over common sense and rational thought.

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

The coming week is a holiday shortened one and will have the Employment Situation Report coming on Thursday, potentially adding to interest rate nervousness if numbers continue to be strong.

After Micron Technology’s (NASDAQ:MU) earnings disappointment last week it may be understandable why a broad brush was used within the technology sector to drive prices considerably lower on Friday. However, it wasn’t Micron Technology that introduced the weakness. The past two weeks haven’t been particularly kind to the sector.

At a time that I’m under-invested in technology and otherwise very reluctant to commit new funds, the sector has a disproportionate share of my attention in competition for whatever little I’m willing to let go.

With Oracle (NYSE:ORCL) having also recently reported disappointing earnings and Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) and Seagate Technology (NASDAQ:STX) reporting in the next 3 weeks, it may be an interesting period.

While Micron Technology brought up concerns about PC sales, they are more dependent upon those than some others that have found salvation in laptops, tablets and mobile devices.

What was generally missing from Micron’s report, however, was placing the blame for lower revenues on currency exchange, unlike as was just done by Oracle. Micron focused squarely on decreasing product demand and pricing pressure.

That lack of adverse impact from currency exchange is a theme that I’m expecting as the upcoming earnings season begins. Whereas the previous earnings reports provided dour guidance on expectations of USD/Euro parity, the Dollar’s relative weakness in the most recent quarter may provide some upside surprises.

With share prices in Microsoft and Intel having dropped, this may be a good time to add positions in both, as they could both be significant beneficiaries of an improvement in currency exchange, as both await any bump coming from the introduction of Windows 10. I haven’t owned shares of Microsoft for a while and have been looking for a new entry point. At the same time, I do own shares of Intel and have been looking for an opportunity to average down and ultimately leave the position, or at least underwrite some of the paper losses with premiums on contracts written on an additional lot of shares.

While Seagate Technology doesn’t report its earnings until July 15th, following its weakness over the last 7 weeks, I’m considering the sale of puts in the weeks in advance of earnings. Those premiums are elevated and will become even more so during the actual week of earnings. In the event of an adverse price move, there might be a need to rollover the puts to try and avoid or delay assignment. However, at some point in the August 2015 option cycle the shares will be ex-dividend, so a shift in strategy, pivoting to share ownership maybe called for if still short the put options.

While Oracle and Cisco (NASDAQ:CSCO) don’t report earnings for a while, both have upcoming ex-dividend dates that add to their appeal. In the case of Oracle, it’s ex-dividend date is on Monday of the following week, which opens the possibility of ceding the dividend to early assignment in exchange for getting two weeks of premium and the opportunity to recycle proceeds from an assignment into another income producing position.

Also going ex-dividend on the Monday of the following week is The Gap (NYSE:GPS). It is one of my favorite stocks, even though it rarely seems to be doing anything right these days.

Part of its allure is that it continues to provide monthly sales data and the uncertainty with those report releases consistently creates option premium opportunities usually seen only quarterly for most stocks as they prepare to release earnings.

As long as The Gap continues to trade in a range, as it has done for quite some time, there is opportunity by holding shares and serially selling calls, while collecting dividends, as the company attempts to figure out what it wants to be, as it closes stores, yet announces plans to take over the Times Square Toys ‘R Us location, for those NYC tourists that just have to jet a pair of khakis to remember their trip.

Finally, American Express (NYSE:AXP) goes ex-dividend this week. It has been extremely range bound ever since the initial shock of losing its co-branding relationship with Costco (NASDAQ:COST) in 2016.

My wife informed me this morning that after about 30 years of near exclusive use of American Express, she has replaced it with another credit card. While that’s not related to the Costco news, it is something that American Express will likely be experiencing more and more in the coming months. That may, of course, explain the spate of mailings I’ve recently received to entice continuing loyalty.

While that comes at a cost, that’s still tomorrow’s problem and the market has likely discounted the costs of the partnership dissolution, as well as the lost revenues.

I like the price range and I like the option premium and dividend opportunities for as long as they may persist, but my loyalty to shares may only go for a week at a time.

Traditional Stocks: Intel, Microsoft

Momentum Stocks: Seagate Technology

Double-Dip Dividend: American Express (6/30), Cisco (7/1), Oracle (7/6), The Gap (7/6)

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.

Posted on

Weekend Update – March 15, 2015

Anyone who has seen the classic movie “Casablanca” will recall the cynicism of the scene in which Captain Renault says “I’m shocked, shocked to find that gambling is going on in here!” seconds before the croupier hands him his winnings from earlier.

This week, the Chief Global Investment Strategist of Blackrock (NYSE:BLK) in attempting to explain a sell-off earlier in the week said “You’ve got the dollar up about 23 percent from the summer lows, and people are realizing this is starting to bite into earnings.”

No doubt that a stronger US Dollar can have unwanted adverse consequences, but exactly what people was Russ Koesterich referring to that had only that morning come to that realization?

How in the world could people such as Koesterich and others responsible for managing huge funds and portfolios possibly have been caught off guard?

Was he perhaps instead suggesting that somehow small investors around the nation suddenly all had the same epiphany and logged into their workplace 401(k) accounts in order to massively dump their mutual fund shares in unison and sufficient volume prior to the previous day’s closing bell?

Somehow that doesn’t sound very likely.

I can vaguely understand how a some-what dull witted middle school aged child might not be familiar with the consequences of a strengthening dollar, especially in an economy that runs a trade deficit, but Koesterich could only have been referring to those who were capable of moving markets in such magnitude and in such short time order. There shouldn’t be too much doubt that those people incapable of seeing the downstream impacts of a strengthening US Dollar aren’t the ones likely to be influencing market direction upon their sudden realization.

Maybe it just doesn’t really matter when it’s “other people’s money” and it is really just a game and a question of pushing a sell button.

This past week was another in which news took a back seat to fears and the fear of an imminent interest rate increase seems to be increasingly taking hold just at the same time as the currency exchange issue is getting its long overdue attention.

While there are still a handful of companies of importance to report earnings this quarter, the next earnings season begins in just 3 weeks. If Intel (NASDAQ:INTC) is any reflection, there may be any number of companies getting in line to broadcast earnings warnings to take some of the considerable pressure off the actual earnings release.

The grammatically incorrect, but burning question that I would have asked Russ Koesterich during his interview would have been “And this comes to you as a surprise, why?”

In the meantime, however, those interest rate concerns seem to have been holding the stock market hostage as the previous week’s Employment Situation report is still strengthening the belief that interest rate increases are on the near horizon, despite any lack of indication from Janet Yellen. In addition, the past week saw rates on the 10 Year Treasury Note decrease considerably and Retail Sales fell for yet another month, even while gasoline prices were increasing.

The coming week’s FOMC meeting may provide some clarity by virtue of just occurring. With so many focusing on the word “patience” in the FOMC Statement, whether it remains or is removed will offer reason to move forward as either way the answer to the “sooner or later” question will be answered.

Still, it surprises me, having grown up believing the axiom that the stock market discounts events 6 months into the future, that it has come to the point that fairly well established economic cycles, such as the impact of changing currency exchange rates on earnings, isn’t something that had long been taken into account. Even without a crystal ball, the fact that early in this current earnings season companies were already beginning to factor in currency headwinds and tempering earnings and guidance, should at least served as a clue.

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

Years ago, before spinning off its European operations, Altria (NYSE:MO) was one of my favorite companies. While I have to qualify that, lest anyone believed that their core business was the reason for my favor, it was simply a company whose shares I always wanted to trade.

In academic medicine we used to refer to the vaunted “triple threats.” That was someone who was an esteemed researcher, clinician and teacher. There really aren’t very many of those kind of people. While Altria may represent the antithesis to what a triple threat in medicine is dedicated toward, it used to be a triple threat in its own right. It had a great dividend, great option premiums and the ability to have share appreciation, as well.

That changed once Phillip Morris (NYSE:PM) went on its own and the option premiums on the remainder of Altria became less and less appealing, even as the dividend stayed the course. I found less and less reason to own shares after the split.

However, lately there has been some life appearing in those premiums at a time that shares have fallen nearly 10% in just 2 weeks. With the company re-affirming its FY 2015 guidance just a week ago, unless it too has a sudden realization that its now much smaller foreign operations and businesses will result in currency exchange losses, it may be relatively immune from what may ail many others as currency parity becomes more and more of a reality.

Lately, American Express (NYSE:AXP) can’t seem to do anything right. I say that, as both my wife and I registered our first complaints with them after more than 30 years of membership. Fascinatingly, the events were unrelated and neither of us consulted
with the other, or shared information about the issues at hand, before contacting the company.

My wife, who tends to be very low maintenance, was nearly apoplectic after being passed to 11 different people, some of whom acted very “Un-American Express- like.”

The preceding is anecdotal and meaningless information, for sure, but makes me wonder about a company that received a premium for its use by virtue of its service.

With the loss of its largest co-branding partner to take effect in 2016, American Express has already sent out notices to some customers of its intent to increase interest rates on those accounts that are truly credit cards, but my guess is that revenue enhancements won’t be sufficient to offset the revenue loss from the partnership dissolution.

To that end the investing world will laud American Express for its workforce cutbacks that will certainly occur at some point, and service will as certainly decline until that point that the consumers go elsewhere for their credit needs.

That is known as a cycle. The sort of cycle that perhaps highly paid money managers are unable to recognize, until like currency headwinds, it hits them on the head.

Still, the newly introduced uncertainty into its near term and longer term prospects has again made American Express a potentially attractive covered option candidate, as it has just announced a dividend increase and a nearly $7 billion share buyback.

Based on its falling stock price, you would think that Las Vegas Sands (NYSE:LVS) hasn’t been able to do anything right of late, either.

Sometimes your fortunes are defined on the basis of either being at the right place at the right time or the wrong place at the wrong time. For the moment, Macao is the wrong place and this is the wrong time. However, despite the downturn of fortunes for those companies that placed their bets on Macao, somehow Las Vegas Sands has found the wherewithal to increase its quarterly dividend and is now at 5%, yet with a payout ratio that is sustainable.

The company also has operating and profit margins that would make others, with or without exposure to Macao envious, yet its shares continue to follow the experiences of the much smaller and poorer performing Wynn Resorts (NASDAQ:WYNN). That probably bothers Sheldon Adelson to no end, while it likely delights Steve Wynn, who would rather suffer with friends.

With shares going ex-dividend this week and trading near its yearly low, it’s hard to imagine news from Macao getting much worse, particularly as China is beginning to play the interest rate game in efforts to stimulate the economy. The risk, however, is still there and is reflected in the option premium.

Given the risk – benefit proposition, I ask myself “WWSD?”

What would Sheldon Do?

My guess is that he would be betting on his company to do more than just tread water at these levels.

The Gap (NYSE:GPS) fascinates me.

I don’t think I’ve ever been in one of their stores, but I know their brand names and occasionally make mental notes about the parking conditions in front of their stores. Those activities are absolutely meaningless, as are The Gap’s monthly sales reports.

I don’t think that I can recall any other company that so regularly alternates between being out of touch with what the consumer wants and being in complete synchrony. At least that’s how those monthly sales statistics are routinely interpreted and share prices goes predictably back and forth.

The good thing about all of the non-sense is that the opportunities to benefit from enhanced option premiums actually occurs up to 5 times in a 3 month period extending from one earnings report to the next, as the monthly same store sales reports also have enhanced premiums. With an upcoming dividend during the same week as the next same store sales report in early April 2015, this is a potential position that I’d consider selling a longer term option, in order to take advantage of the upcoming volatility, collect the dividend and perhaps have some additional time for the price to recoup if it reacts adversely.

MetLife (NYSE:MET) has been trading in a range lately that has simply been following interest rates for the most part. As it awaits a decision on its challenge to being designated as “systemically important” it probably is wishing for rate increases to come as quickly as possible so that it can put as much of its assets to productive use as quickly as possible before the inevitable constraints on its assets become a reality.

With interest rate jitters and uncertainty over the eventual judicial decision, MetLife’s option premiums are higher than is typically the case. However, in the world of my ideal youth, the stock market would have already discounted the probabilities of future interest rate increases and the upheld designation of the company as being systemically important.

With Intel’s announcement, this wasn’t a particularly good week for “old technology.” For Seagate Technolgy (NASDAQ:STX) the difficulties this week were just a continuation since its disappointing earnings in January. After its earnings plunge and an attempted bounce back, it is now nearly 9% lower than at the depth of its initial January drop.

That continued drop in share price is finally returning shares to a level that is getting my attention. With its dividend, which is very generous and appears to be safe, still two months away, Seagate Technology may be a good candidate for the sale of put contracts and if opening such a position and faced with assignment, I would consider trying to rollover as long as possible, either resulting in an eventual expiration of the position or being assigned and then in a position to collect the dividend.

Finally, for an unprecedented fourth consecutive week, I’m going to consider adding shares of United Continental (NYSE:UAL) as energy prices have recaptured its earlier lows. Those lows are good for UAL and other airlines and by and large the share prices of UAL and representative oil companies have moved in opposite directions.

I had shares of UAL assigned again this past Friday, as part of a pairs kind of trade established a few weeks ago. I still hold the energy shares, which have slumped in the past few weeks, but would be eager to once again add UAL shares at any pullback that might occur with a bounce back in energy prices.

The volatility and uncertainty inherent in shares of UAL has made it possible to buy shares and sell deep in the money calls and still make a respectable return for the week, if assigned.

That’s a risk – reward proposition that’s relatively easy to embrace, even as the risk is considerable.

 

Traditional Stocks: Altria, American Express, MetLife, The Gap

Momentum Stocks: Seagate Technology, United Continental

Double Dip Dividend: Las Vegas Sands (3/19)

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 1, 2015

At first glance there’s not too much to celebrate so far, as the first month of 2015 is now sealed and inscribed in the annals of history.

It was another January that disappointed those who still believe in or talk about the magical “January Effect.”

I can’t deny it, but I was one of those who was hoping for a return to that predictable seasonal advance to start the new year. To come to a realization that it may not be true isn’t very different from other terribly sad rites of passage usually encountered in childhood, but you never want to give up hoping and wishing.

It was certainly a disappointment for all of those thinking that the market highs set at the end of December 2014 would keep moving higher, buoyed by a consumer led spending spree fueled by all of that money not being spent on oil and gas.

At least that was the theory that seemed to be perfectly logical at the time and still does, but so far is neither being borne out in reality nor in company guidance being offered in what is, thus far, a disappointing earnings season.

Who in their right mind would have predicted that people are actually saving some of that money and using it to pay down debt?

That’s not the sort of thing that sustains a party.

What started a little more than a month ago with a strongly revised upward projection for 2015 GDP came to an end with Friday’s release of fourth quarter 2014 GDP that was lower than expected and, at least in part validated the less than stellar Retail Sales statistics from a few weeks ago that many very quick to impugn at the time.

When the week was all said and done neither an FOMC Statement release nor the latest GDP data could rescue this January. Despite a 200 point gain heading into the end of the week in advance of the GDP data, and despite a momentary recovery from another 200 point loss heading into the close of trading for the week fueled by an inexplicable surge in oil prices, the market fell 2.7% for the week. In doing so it just added to the theme of a January that breaks the hearts of little children and investors alike and now leaves markets about 5% below the highs from just a month ago.

Like many, I thought that the January party would get started in earnest along with the start of the earnings season. While not expecting to see much tangible benefit from reduced energy costs reflected in the past quarter, my expectation was that the good news would be contained in forward guidance or in upward revisions.

Silly, right? But if you used common sense and caution think of all of the great things you would have missed out on.

While waiting for earnings to bring the party back to life the big surprise was something that shouldn’t have been a surprise at all for all those who take an expansive view of things. I don’t get paid to be that broad minded, but there are many who do and somehow no one seemed to have taken into consideration what we all refer to as “currency crosswinds.”

Hearing earnings report after earnings report mention the downside to the strong dollar reminded me that it would have been good to have been warned about that sort of thing earlier, although did we really need to be told?

Every asset class is currently in flux. It’s not just stocks going through a period of heightened volatility. Witness the moves seen in Treasury rates, currencies, precious metals and oil and it’s pretty clear that at the moment there is no real safe haven, but there is lots of uncertainty.

A quick glance at the S&P 500’s behavior over the past month certainly shows that uncertainty as reflected in the number of days with gap openings higher and lower, as well as the significant intra-day reversals seen throughout the month.

 I happen to like volatility, but it was really a party back in 2011 when there was tremendous volatility but at the end of the day there was virtually no net change in markets. In fact, for the year the S&P 500 was unchanged.

If you’re selling options in doesn’t get much better than that, but 2015 is letting the party slip away as it’s having difficulty maintaining prices as volatility seeks to assert itself as we have repeatedly found the market testing itself with repeated 3-5% declines over the past 6 weeks.

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

If you were watching markets this past Friday afternoon what was turning out to really be a terrible day was mitigated by the performance of the highest priced stock in the DJIA which added nearly 60 points to the index. That notwithstanding, the losses were temporarily reversed, as has been the case so often in the past month, by an unexplained surge in oil prices late in the trading session.

When it appeared as if that surge in oil prices was not related to a fundamental change in the supply and demand dynamic the market reversed once again and compounded its losses, leaving only that single DJIA component to buck the day’s trend.

So far, however, as this earnings season has progressed, the energy sector has not fared poorly as a result of earnings releases, even as they may have floundered as oil prices themselves fell.

Sometimes lowered expectations can have merit and may be acting as a cushion for the kind of further share drops that could reasonably be expected as revenues begin to see the impact of lower prices.

That may change this coming week as Exxon Mobil (NYSE:XOM) reports its earnings before the week begins its trading. By virtue of its sheer size it can create ripples for Anadarko (NYSE:APC) which reports earnings that same day, but after the close of trading.

Anadarko is already well off of the lows it experienced a month ago. While I generally don’t like establishing any kind of position ahead of earnings if the price trajectory has been higher, I would consider doing so if Exxon Mobil sets the tone with disappointing numbers and Anadarko follows in the weakness before announcing its own earnings.

While the put premiums aren’t compelling given the implied move of about 5%, I wouldn’t mind taking ownership of shares if in risk of assignment due to having sold puts within the strike range defined by the option market. As with some other recent purchases in the energy sector, if taking ownership of shares and selling calls, I would consider using strike prices that would also stand to benefit from some share appreciation.

Although I may not be able to tell in a blinded taste test which was an Anadarko product and which was a Keurig Green Mountain Coffee (NASDAQ:GMCR) product, the latter does offer a more compelling reason to sell puts in advance of its earnings report this week.

Frequently a big mover after the event, there’s no doubt that under its new CEO significant credibility has been restored to the company. Its relationship with Coca Cola (NYSE:KO) has certainly been a big part of that credibility, just as a few years earlier its less substantive agreement with Starbucks (NASDAQ:SBUX) helped shares regain lost luster.

The option market is predicting a 9.3% price move next week and a 1.5% ROI can be attained at a strike price outside of that range, but if selling puts, it would be helpful to be prepared for a move much greater than the option market is predicting, as that has occurred many times over the past few years. That would mean being prepared to either rollover the put contracts or take assignment of shares in the event of a larger than expected adverse move.

While crowd sourcing may be a great thing, I’m always amused when reading some reviews found on Yelp (NYSE:YELP) for places that I know well, especially when I’m left wondering what I could have possibly repeatedly kept missing over the years. Perhaps my mistake was not maintaining my anonymity during repeated visits making it more difficult to truly enjoy a hideous experience.

Yet somehow the product and the service endures as it seeks to remove the unknown from experiences with local businesses. But it’s precisely that kind of unknown that makes Yelp a potentially interesting trade when earnings are ready to be announced.

The option market has implied a 12% price move in either direction and past earnings seasons have shown that those shares can easily move that much and more. For those willing to take the risk, which apparently is what is done whenever going to a new restaurant without availing yourself of Yelp reviews, a 1% ROI can be attained by selling weekly put contracts at a strike level 16% below Friday’s closing price.

While the market didn’t perform terribly well last week, technology was even worse, which has to bring International Business Machines (NYSE:IBM) to mind. As the worst performer in the DJIA over the past 2 years it already knows what it’s like to under-perform and it hasn’t flown beneath anyone’s critical radar in that time.

However, among big and old technology it actually out-performed them all last week and even beat the S&P 500. With more controversy certain for next week as details of the new compensation package of its beleaguered CEO were released after Friday’s close, in an attempt to fly beneath the radar, shares go ex-dividend.

While there may continue being questions regarding the relevance of IBM and how much of the company’s performance is now the result of financial engineering, that uncertainty is finally beginning to creep into the option premiums that can be commanded if seeking to sell calls or puts.

With shares trading at a 4 year low the combination of option premium, dividend and capital appreciation of shares is recapturing my attention after years of neglect. If CEO Ginny Rometty can return IBM shares to where they were just a year ago she will be deserving of every one of the very many additional pennies of compensation she will receive, but she had better do so quickly because lots of people will learn about the new compensation package as trading resumes on Monday.

Also going ex-dividend this week are 2 very different companies, Pfizer (NYSE:PFE) and Seagate Technology (NASDAQ:STX), that have little reason to be grouped together, otherwise.

After a recent 6% decline, Pfizer shares are now 6% below their 4 year high, but still above the level where I have purchased shares in the past.

The drug industry has heated up over the past few months with increasing consideration of mergers and buyouts, even as tax inversions are less likely to occur. Even those companies whose bottom lines can now only be driven by truly blockbuster drugs have heightened interest and heightened option premiums associated with their shares which are only likely to increase if overall volatility is able to maintain at increased levels, as well.

Following its recent price retreat, its upcoming dividend and improving option premiums, I’m willing to consider re-opening a position is Pfizer shares, even at its current level.

Seagate Technology, after a nearly 18% decline in the past month was one of those companies that reported a significant impact of currency in offering its guidance for the next quarter, while meeting expectations for the current quarter.

While I often like to sell puts in establishing a Seagate Technology position, with this week’s ex-dividend event, there is reason to consider doing so with the purchase of shares and the sale of calls, as the premium is rich and lots of bad news has already been digested.

I missed an opportunity to add eBay (NASDAQ:EBAY) shares a few weeks ago in advance of earnings, as eBay was one of the first to show some currency headwinds. However, as has been the case for nearly a year, the story hasn
‘t been the business it has been all about activists and the saga of its profitable PayPal unit.

After an initial move higher on announcement of a standstill agreement with Carl Icahn, the activist who pushed for the spin-off of PayPal, shares dropped over the succeeding days back to a level just below from where they had started the process and again in the price range that I like to consider adding shares.

From now until that time that the PayPal spin-off occurs or is purchased by another entity, that’s where the opportunity exists if using eBay as part of a covered call strategy, rather than on the prospects of the underlying business. However, after more than a month of not owning any shares of a company that has been an almost consistent presence in my portfolio, it’s time to bring it back in and hopefully continue serially trading it for as long as possible until the fate of PayPal is determined.

Finally, Yahoo (NASDAQ:YHOO) reported earnings this past week, but took a page out of eBay’s playbook from earlier in the year and used the occasion to announce significant news unrelated to earnings that served to move shares higher and more importantly deflected attention from the actual business.

With a proposed tax free spin off of its remaining shares of Alibaba (NYSE:BABA) many were happy enough to ignore the basic business or wonder what of value would be left in Yahoo after such a spin-off.

The continuing Yahoo – Alibaba umbilical cord works in reverse in this case as the child pumps life into the parent, although this past week as Alibaba reported earnings and was admonished by its real parent, the Chinese government, Yahoo suffered and saw its shares slide on the week.

The good news is that the downward pressure from Alibaba may go on hiatus, at least until the next lock-up expiration when more shares will hit the market than were sold at the IPO. However, until then, Yahoo option premiums are reflecting the uncertainty and offer enough liquidity for a nimble trader to respond to short term adverse movements, whether through a covered call position or through the sale of put options.

Traditional Stocks: eBay

Momentum Stocks: Yahoo

Double Dip Dividend: International Business Machines (2/5), Pfizer (2/4), Seagate Technology (2/5)

Premiums Enhanced by Earnings: Anadarko (APC 2/2 PM), Keurig Green Mountain (2/4 PM), Yelp (2/5 PM)

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

Posted on

Weekend Update – October 5, 2014

This week’s markets didn’t respond so positively when Mario Draghi, the head of the European Central Bank failed to deliver on what many had been expecting for quite some time.

The financial markets wanted to hear Draghi follow through on his previous market moving rhetoric with an ECB version of Quantitative Easing, but it didn’t happen. After two years of waiting for some meaningful follow through to his assertion that “we will do whatever it takes” Draghi’s appearance as simply an empty suit becomes increasingly apparent and increasingly worrisome.

On a positive note, as befitting European styling, that suit is exquisitely tailored, but still hasn’t shown that it can stand up to pressure.

It also wasn’t the first time our expectations were dashed and no one was particularly pleased to hear Draghi place blame for the state of the various economies in the European Union at the feet of its politicians as John Chambers, the head of Standard and Poor’s Sovereign Debt Committee did some years earlier when lowering the debt rating of the United States.

Placing the blame on politicians also sends a message that the remedy must also come from politicians and that is something that tends to only occur at the precipice.

While the Biblical text referring to a young child leading a pack of wild animals is a forward looking assessment of an optimistic future, believing that an empty suit can lead a pack of self-interested politicians is an optimism perhaps less realistic than the original passage.

At least that’s what the markets believed.

Befitting the previous week’s volatility that was marked by triple digit moves in alternating fashion, Draghi’s induced 238 point decline was offset by Friday’s 208 point gain following the encouraging Employment Situation Report. Whereas the previous week’s DJIA saw a net decline of only 166 points on absolute daily moves of 810 points, this past week was more subdued. The DJIA lost only 103 points while the absolute daily changes were 519 points.

The end result of Friday’s advance was to return volatility to where it had ended last week, which was a disappointment, as you would like to see volatility rise if there has been a net decline in the broader market. Still, if you’re selling options, that level is better than it was two weeks ago.

While Friday’s gain was encouraging it is a little less so when realizing that such memorable gains are very often found during market downtrends. There is at least very little doubt that the market behavior during the past two weeks represents some qualitative difference in its behavior and an isolated move higher may not be very reflective of any developing trend, but rather reactive to a different developing trend.

As with Draghi, falling for the rhetoric of such a positive response to the Employment Situation Report, may lead to some disappointment.

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

Many of the positions being considered this week are recently highlighted positions made more appealing following recent price pullbacks rather than on any company specific factors. Of course, when looking at stocks whose price has recently fallen at some point the question regarding value versus “value trap” has to be entertained.

With some increase in volatility, despite the rollback this week, I’ve taken opportunity to rollover existing positions to forward weeks when expanded option contracts have been available. As those premiums have increased a bit being able to do so helps to reduce the risk of having so many positions expire concurrently and being all exposed to a short term and sudden price decline.

Just imagine how different the outcome for the week may have been if Thursday’s and Friday’s results were reversed if you were relying on the ability to rollover positions or have them assigned.

However, with the start of earnings season this week there’s reason to be a little more attentive when selecting positions and their contract expiration dates as earnings may play a role in the premiums. While certainly making those premiums more enticing it also increases the risk of ownership at a time when the relative market risk may outweigh the reward.

One stock not reporting earnings this week, but still having an enriched option premium is The Gap (GPS). It opens the week for trading on its ex-dividend date and later in the week is expected to announce its monthly same store sales, being one of the few remaining companies to do so. Those results are inexplicably confusing month to month and shares tend to make strong price movements, frequently in alternating directions from month to month. For that uncertainty comes a very attractive option premium for shares that despite that event driven volatility tend to trade in a fairly well defined range over the longer term.

When it comes to their fashion offerings you may be ambivalent, but when it comes to that kind of price movement and predictability, what’s not to like?

If you’re waiting for a traditional correction, one that requires a 10% pullback, look no farther than Mosaic (MOS). While it had been valiantly struggling to surpass the $50 level on its long road to recovery from the shock of the break-up of the potash cartel, it has now fallen about 13% in 5 weeks. Most recently Mosaic announced a cutback in phosphate production and lowered its guidance and when a market is already on edge it doesn’t need successive blows like those offered by Mosaic as it approaches its 52 week low.

Can shares offer further disappointment when it reports earnings at the end of this month? Perhaps, but for those with a longer term outlook, at this level shares may be repeating the opportunity they offered upon hitting their lows on the cartel’s dissolution for serial purchase and assignment, while offering a premium enhanced by uncertainty.

Seagate Technology (STX) is also officially in that correctio
n camp, having dropped 10% in that same 5 week period. It has done so in the absence of any meaningful news other than perhaps the weight of its own share price, with its decline having come directly from its 52 week high point.

For a company that has become fairly staid, Pfizer (PFE) has been moving about quite a bit lately. Whether in the news for having sought a tax inversion opportunity or other acquisitions, it is clearly a company that is in need of some sort of catalyst. That continuing kind of movement back and forth has been pronounced very recently and should begin making its option premium increasingly enticing. With shares seemingly seeking a $30 home, regardless of which side it is currently on and an always attractive dividend, Pfizer may start getting more and more interesting, particularly in an otherwise labile market.

Dow Chemical (DOW) is one of those stocks that used to be a main stay of my investing. It’s price climb from the $40 to $50 range made it less so, but with the realization that the $50 level may be the new normal, especially with activist investor pressure, it is again on the radar screen, That’s especially true after this week’s price drop. I had been targeting the $52.50 level having been most recently assigned at $53.50, but now it appears to be gift priced. Unfortunately, it may be a perfect example of that age old dilemma regarding value, having already greatly under-performed the market since its recent high the “value trap” part may have already been played out.

While MasterCard (MA) is ex-dividend this week, it is certainly not one to chase in order to capture its dividend. With a payout ratio far below its competitors it would seem that an increase might be warranted. However, what makes MasterCard attractive is that it has seemingly found a trading range and is now situated at about the mid-point of that range. While there is some recent tumult in the world of payments and with some continuing uncertainty regarding its presence in Russia, MasterCard continues to be worth consideration, particularly as it too has significantly under-performed the S&P 500 in the past two weeks.

Equal in its under-performance to MasterCard during that period has been Texas Instruments (TXN). I’ve been eager to add some technology sector positions for a while and haven’t done so as often as necessary to develop some better diversification. Along with Intel (INTC) which I considered last week, as well, Texas Instruments is back to a price level that has my attention. Like Intel, it reports earnings soon and also goes ex-dividend during the October 2014 option cycle. Unlike Intel, however, Texas Instruments doesn’t have a couple of gap ups in price over the past three months that may represent some additional earnings related risk.

When it comes to under-performance it is possible that Coach (COH) may soon qualify as being synonymous with that designation. Not too surprisingly its past performance in the past two weeks, while below that of the S&P 500 may be more directly tied to an improved price performance seen in its competitor for investor interest, Michael Kors (KORS). However, Coach seems to have established support at its current level and may offer a similar opportunity for serial purchase and assignment as had been previously offered by Mosaic shares.

Finally, with the exception of YUM Brands (YUM) all of the other stocks highlighted this week have under-performed the S&P 500 since hitting its recent high on September 18, 2014. YUM Brands reports earnings this week and is often very volatile when it does so. This time, hover, the options market doesn’t seem to be expecting a very large move, only about 4.5%. Neither is there an opportunity to achieve a 1% ROI through the sale of a put option at a strike outside of the range implied. However, YUM Brands is one of those stocks, that if I had sold puts upon, I wouldn’t mind owning if there was a likelihood of assignment.

So often YUM Brands share price is held hostage to food safety issues in China and so often it successfully is able to  see its share price regain sudden losses. That, however, hasn’t been the case thus far since it’s summertime loss. There are probably little expectations for an upside surprise upon release of earnings and as such there may be some limited downside, perhaps explaining the option market’s subdued pricing.

If facing assignment of puts being sold with an upcoming ex-dividend date the following week, I would be inclined to accept assignment and proceed from the point of ownership rather than trying to continue avoiding ownership of shares. However, with the slightest indication of political unrest spreading from Hong Kong to the Chinese mainland that may be a decision destined for regret, just like the purchase of an ill-fitting and overly priced suit.

Traditional Stocks: Dow Chemical, Pfizer, Texas Instruments, The Gap

Momentum: Coach, Mosaic, Seagate Technology

Double Dip Dividend:  MasterCard (10/7)

Premiums Enhanced by Earnings: YUM Brands (10/7 PM)

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

Posted on

Earnings Still Matter

Last week confirmed that I still like earnings season, which as behavioral adaptations go, is a good idea, as it never seems to end. Better to learn to like it than to fight it.

Based upon comments heard over the past few weeks, approximately 25% of the year represent critical earnings weeks. You simply can’t escape the news, nor more importantly the impact.

Or the opportunity.

Of the earnings related trades examined last week, I made trades in two: Facebook (FB) and Seagate Technolgy (STX). The former trade being before earnings and the latter after, both involving the sale of out of the money puts. Both of those trades met my criteria, as in hindsight, did Chipotle Mexican Grill (CMG), but there’s always next quarter.

While hearing stellar numbers from Netflix (NFLX) and Facebook are nice, they are not likely to lead an economy and its capital markets forward, although they can lead your personal assets forward, as long as you’re willing to accept the risks that may be heightened during a weakening market.

With “implied volatility” continuing to serve as my guide there are a number of companies that are expected to make large earnings related moves this week and they have certainly done so in the past.

Again, while I seek a 1% ROI on an investment that is hoped to last only
for the week, the individual investor can always adjust the risk and the reward. My preference continues to be to locate a strike price that is outside the range suggested by the implied volatility, yet still offers a 1% or greater ROI.

Typically, the stocks that will satisfy that demand already trade with a high degree of volatility and see enhanced volatility as earnings and guidance are issued.

The coming week is another busy one and presents more companies that may fit the above criteria. Among the companies that I am considering this coming week are Anadarko (APC), British Petroleum (BP), Green Mountain Coffee Roasters (GMCR), International Paper (IP), Michael Kors (KORS), LinkedIn (LNKD), Twitter (TWTR), Yelp (YELP) and YUM Brands (YUM).

As with all earnings related trades I don’t focus on fundamental issues. It is entirely an analysis of whether the options market has provided an opportunity to take advantage of the perceived risk. A quick glance at those names indicates a wide range of inherent volatility and relative fortunes during the most recent market downturn.

Since my preference is to sell puts when there is already an indication of price weakness this past week has seen many such positions trading lower in advance of earnings. While they may certainly go lower on disappointing news or along with broad market currents, the antecedent decline in share price may serve to limit earnings related declines as previous resistance points may be encountered and serve as brakes to downward movement. Additionally, the increasing volatility accompanying the market’s recent weakness is enhancing premiums, particularly if sentiment is further eroding on a particular stock.

Alternatively, rather than following the need for greed, one may decide to lower the strike price at which puts are sold in order to get additional protection wile still aiming for the ROI objective.

As always when considering these trades, especially through the sale of put options, the investor must be prepared to own the shares if assigned or to manage the options contract until some other resolution is achieved.

Strategies to achieve an exit include rolling the option contract forward and ideally to a lower strike or accepting assignment and then selling calls until assignment of shares.

The table above may be used as a guide for determining which of selected companies may meet the risk–reward parameters that an individual sets, understanding that adjustments may need to be made as prices and, therefore, strike prices and premiums may change.

The decision as to whether to make the trade before or after earnings is one that I make based on perceived market risk. During a period of uncertainty, such as we are presently navigating, I’m more inclined to look at the opportunities after earnings are announced, particularly for those positions that do see their shares declining sharply.

While it may be difficult to find the courage to enter into new positions during what may be the early stages of a market correction, the sale of puts is a mechanism to still be part of the action, while offering some additional downside protection if using out of the money puts, while also providing some income.

That’s not an altogether bad combination, but it may require some antacids along the way.

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Weekend Update – November 17, 2013

Things aren’t always as they seem.

As I listened to Janet Yellen face her Senate inquisitors as the hearing process began for her nomination as our next Federal Reserve Chairman, the inquisitors themselves were reserved. In fact they were completely unrecognizable as they demonstrated behavior that could be described as courteous, demur and respectful. They didn’t act like the partisan megalomaniacs they usually are when the cameras are rolling and sound bites are beckoning.

That can’t last. Genteel or not, we all know that the reality is very different. At some point the true colors bleed through and reality has to take precedence.

Closing my eyes I thought it was Woody Allen’s sister answering softball economic questions. Opening my eyes I thought I was having a flashback to a curiously popular situational comedy from the 1990s, “Suddenly Susan,” co-starring a Janet Yellen look-alike, known as “Nana.” No one could possibly sling arrows at Nana.

These days we seem to go back and forth between trying to decide whether good news is bad news and bad news is good news. Little seems to be interpreted in a consistent fashion or as it really is and as a result reactions aren’t very predictable.

Without much in the way of meaningful news during the course of the week it was easy to draw a conclusion that the genteel hearings and their content was associated with the market’s move to the upside. In this case the news was that the economy wasn’t yet ready to stand on its own without Treasury infusions and that was good for the markets. Bad news, or what would normally be considered bad news was still being considered as good news until some arbitrary point that it is decided that things should return to being as they really seem, or perhaps the other way around..

While there’s no reason to believe that Janet Yellen will do anything other than to follow the accommodative actions of the Federal Reserve led by Ben Bernanke, political appointments and nominations have a long history of holding surprises and didn’t always result in the kind of comfortable predictability envisioned. As it would turn out even Woody Allen wasn’t always what he had seemed to be.

Certainly investing is like that and very little can be taken for granted. With two days left to go until the end of the just ended monthly option cycle and having a very large number of positions poised for assignment or rollover, I had learned the hard way in recent months that you can’t count on anything. In those recent cases it was the release of FOMC minutes two days before monthly expiration that precipitated market slides that snatched assignments away. Everything seemed to be just fine and then it wasn’t suddenly so.

As the markets continue to make new closing highs there is division over whether what we are seeing is real or can be sustained. I’m tired of having been wrong for so long and wonder where I would be had I not grown cash reserves over the past 6 months in the belief that the rising market wasn’t what it really seemed to be.

What gives me comfort is knowing that I would rather be wondering that than wondering why I didn’t have cash in hand to grab the goodies when reality finally came along.

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).

Sometimes the most appealing purchases are the very stocks that you already own or recently owned. Since I almost exclusively employ a covered option strategy I see lots of rotation of stocks in and out of my portfolio. That’s especially true at the end of a monthly option cycle, particularly if ending in a flourish of rising prices, as was the case this week.

Among shares assigned this past week were Dow Chemical (DOW), International Paper (IP), eBay (EBAY) and Seagate Technology (STX).

eBay just continues to be a model of price mediocrity. It seems stuck in a range but seems to hold out enough of a promise of breaking out of that range that its option premiums continue to be healthy. At a time when good premiums are increasingly difficult to attain because of historically low volatility, eBay has consistently been able to deliver a 1% ROI for its near the money weekly options. I don’t mind wallowing in its mediocrity, I just wonder why Carl Icahn hasn’t placed this one on his radar screen.

International Paper is well down from its recent highs and I’ve now owned and lost it to assignment three times in the past month. While that may seem an inefficient way to own a stock, it has also been a good example of how the sum of the parts can be greater than the whole when tallying the profits that can arise from punctuated ownership versus buy and hold. Having comfortably under-performed the broad market in 2013 it doesn’t appear to have froth built into its current price

Although Dow Chemical is getting near the high end of the range that I would like to own shares it continues to solidify its base at these levels. What gives me some comfort in considering adding shares at this level is that Dow Chemical has still under-performed the S&P 500 YTD and may be more likely to withstand any market downturn, especially when buoyed by dividends, option premiums and some patience, if required.

Unitedhealth Group (UNH) is in a good position as it’s on both sides of the health care equation. Besides being the single largest health care carrier in the United States, its purchase of Quality Software Services last year now sees the company charged with the responsibility of overhauling and repairing the beleague
red Affordable Care Act’s web site. That’s convenient, because it was also chosen to help set up the web site. It too, is below its recent highs and has been slowly working its way back to that level. Any good news regarding ACA, either programmatically or related to the enrollment process, should translate into good news for Unitedhealth

Seagate Technology simply goes up and down. That’s a perfect recipe for a successful covered option holding. It’s moves, in both directions, can however, be disconcerting and is best suited for the speculative portion of a portfolio. While not too far below its high thanks to a 2% drop on Friday, it does have reasonable support levels and the more conservative approach may be through the sale of out of the money put options.

While I always feel a little glow whenever I’m able to repurchase shares after assignment at a lower price, sometimes it can feel right even at a higher price. That’s the case with Microsoft (MSFT). Unlike many late to the party who had for years disparaged Microsoft, I enjoyed it trading with the same mediocrity as eBay. But even better than eBay, Microsoft offered an increasingly attractive dividend. Shares go ex-dividend this week and I’d like to consider adding shares after a moth’s absence and having missed some of the run higher. With all of the talk of Alan Mullally taking over the reins, there is bound to be some let down in price when the news is finally announced, but I think the near term price future for shares is relatively secure and I look forward to having Microsoft serve as a portfolio annuity drawing on its dividends and option premiums.

I’m always a little reluctant to recommend a possible trade in Cliffs Natural Resources (CLF). Actually, not always, only since the trades that still have me sitting on much more expensive shares purchased just prior to the dividend cut. Although in the interim I’ve made trades to offset those paper losses, thanks to attractive option premiums reflecting the risk, I believe that the recent sustained increase in this sector is for real and will continue. Despite that, I still wavered about considering the trade again this week, but the dividend pushed me over. Although a fraction of what it had been earlier in the year it still has some allure and increasing iron ore prices may be just the boost needed for a dividend boost which would likely result in a significant rise in shares. I’m not counting on it quite yet, but think that may be a possibility in time for the February 2014 dividend.

While earnings season is winding down there are some potentially interesting trades to consider for those with a little bit of a daring aspect to their investing.

Not too long ago Best Buy (BBY) was derided as simply being Amazon’s (AMZN) showroom and was cited as heralding the death of “brick and mortar.” But, things really aren’t always as they seem, as Best Buy has certainly implemented strategic shifts and has seen its share price surge from its lows under previous management. As with most earnings related trades that I consider undertaking, I’m most likely if earnings are preceded by shares declining in price. Selling puts into price weakness adds to the premium while some of the steam of an earnings related decline may be dissipated by the selling before the actual release.

salesforce.com (CRM) has been a consistent money maker for investors and is at new highs. It is also a company that many like to refer to as a house of cards, yet another way of saying that “things aren’t always as they seem.” As earnings are announced this week there is certainly plenty of room for a fall, even in the face of good news. With a nearly 9% implied volatility, a 1.1% ROI can be attained if less than a 10% price drop occurs, based on Friday’s closing prices through the sale of out of the money put contracts.

Then of course, there’s JC Penney (JCP). What can possibly be added to its story, other than the intrigue that accompanies it relating to the smart money names having taken large positions of late. While the presence of “smart money” isn’t a guarantee of success, it does get people’s attention and JC Penney shares have fared well in the past week in advance of earnings. The real caveat is that the presence of smart money may not be what it seems. With an implied move of 11% the sale of put options has the potential to deliver an ROI of 1.3% even if shares fall nearly 17%.

Finally, even as a one time New York City resident, I don’t fully understand the relationship between its residents and the family that controls Cablevision (CVC), never having used their services. As an occasional share holder, however, I do understand the nature of the feelings that many shareholders have against the Dolan family and the feelings that the publicly traded company has served as a personal fiefdom and that share holders have often been thrown onto the moat in an opportunity to suck assets out for personal gain.

I may be understating some of those feelings, but I harbor none of those, personally. In fact, I learned long ago, thanks to the predominantly short term ownership afforded through the use of covered options, that it should never be personal. It should be about making profits. Cablevision goes ex-dividend this week and is well off of its recent highs. Dividends, option premiums and some upside potential are enough to make even the most hardened of investors get over any personal grudges.

Traditional Stocks: Dow Chemical, eBay, International Paper, Unitedhealth Group

Momentum Stocks: Seagate Technology

Double Dip Dividend: Cablevision (ex-div 11/20), Cliffs Natural (ex-div 11/20), Microsoft (ex-div 11/19)

Premiums Enhanced by Earnings: Best Buy (11/19 AM), salesforce.com (11/18 PM), JC Penney (11/20 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.