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.

Withimplied volatilitycontinuing 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 riskreward 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.

Week in Review (January 27 – 31, 2014)

 

Option to Profit Week in Review
January 27 – 31, 2014
 
NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
5 / 5 1 3 4 / 0 4 / 0 0

    

Weekly Up to Date Performance

January 27 – 31, 2014

New purchases beat the time adjusted S&P 500 this week by 1.6% and also surpassed the unadjusted index by 1.8% during a week that saw the end to the worst performing month since 2010.

The market showed a small adjusted loss for the week of 0.2% and unadjusted loss of 0.4% for the week, while new positions gained  1.3%.

For the 25 positions positions closed in 2014, performance exceeded that of the S&P 500 by an unexpectedly large 1.5%. They were up 3.5% out-performing the market by 81%.  While my expectation is for the difference to be greater than 1% in a flat or down market, I don’t expect it to continue at that great of a difference as the year continues.

If you’re looking for a positive spin it’s hard to find one as the market ended a bleak January 2014.

Okay, but there were a few positives despite the lack of a January Rally.

On a positive note, despite a third successive down Friday the market made a great recovery, as it was looking as if it would be another 200 point range loss. Unfortunately, that recovery gave way in the final 30 minutes, but I wouldn’t get overly concerned about that, as there’s little value for big players to stay long over the weekend when there is international risk.

On another positive note some may have noticed that of the three rollovers this week two actually rolled up to higher strikes as suddenly the premiums are beginning to show some life as volatility perked up.

But that’s enough spinning.

This was another of those weeks that creates nervousness. You can’t rely on good earnings from Netflix and Facebook to carry an industrial economy forward.

Next week’s Employment Situation Report will be more important than usual, coming off of last month’s abysmal report.

As earnings season starts to wind down, with most of the important barometers now having reported, we may simply fall prey more to economic reports and the developing issues in the rest of the world.

While it remains counter-intuitive more of this churning back and forth, especially as it develops nervousness, is really a good thing for those selling options. The most humane way to arrive at a good place as far as getting those fatter premiums would be a slow and methodical decline. That would make it much easier to rollover positions and would likely require fewer new purchases, as assignments would be less frequent.

Having been in bear markets and corrections before, that’s really a good place to be.

The problem though, is that declines are rarely methodical. They tend to be swift and they tend to have given plenty of clues, yet everyone acts surprised when it does finally occur.

Human nature makes it difficult to learn, because, at heart, we’re all optimists.

What’s nice about a market decline if you have some degree of hedging going on is that you can still be an optimist or at least not feel the pressure as much as the next guy.

I don’t think that next week will necessarily be a continuation of the past week or January, for that matter.

While I really dislike adding to the list of uncovered positions I think that a number are well positioned to gain back some ground in order to restore their cover. That may also be made a little easier if volatility continues to increase, as the premiums will improve and make it more likely to be worthwhile to make some of the hedging trades.

While I would have liked even more assignments this week, it was an improvement over the situation the previous two weeks and opens up the possibility of staying in the game.

Next week is another earnings busy week and I’ll have another separate article focused on some of the potential earnings plays.

I’ve been somewhat reluctant to recommend some of those earnings related trades, as they usually are done through the sale of puts. The concept of puts isn’t always intuitively grasped by all and sometimes requires greater oversight. However, I’ve been making those trades for my own account and have been, for the most part, pleased.

Sometimes frustrated, but overall, pleased.

For those that haven’t considered those trades as part of their arsenal, consider reading this article on the role of puts in a conservative investing strategy  I’ve evloved quite a bit over the years regarding the role of puts and am glad that has been the case.

For those that communicate with me you know that I always welcome the communication. For those that don’t if you have any questions or want some clarification, fire away. Some of the best opportunities may come with otherwise risky trades that have their risk understood and attenuated.

Understanding the various tools, as well as considering a different mindset as spelled out in the “D’oh Strategy” are especially useful at a time when the market may finally be ready for a little bit of a break.

 

 

 

 

 

 

 

 

 

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

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

New Positions Opened:  BMY, CHK, FAST, IP, TXN

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycleANF, TXN

Calls Rolled over, taking profits, into extended weekly cycle:  none

CallsRolled over, taking profits, into the monthly cycle: MSFT

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

Calls Rolled Up, taking net profits into same cyclenone

New STO:  HFC

Put contracts sold and still open: none

Put contracts expired: none

Put contract rolled over: none

Long term call contracts sold:  none

Calls Assigned:  BMY, EBAY, IP, VZ

Calls Expired: C, HAL, INTC, LOW

Puts Assigned:  none

Stock positions Closed to take profits:  none

Stock positions Closed to take losses: none

Calls Closed to Take Profits: none

Ex-dividend Positions:  FAST (1/29 $0.25), TXN* (1/29 $0.30), C (1/30 $0.01)

  • some reported early assignment of TXN shares

 

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For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, APC, C, CLF, DRI, FCX,  GPS,  HAL, INTC, LB, JCP, LOW, LULU, MCP, MOS,  MRO, NEM, PBR, PM, RIG, TGT, WAG, WFM, WLT (See “Weekly Performance” spreadsheet or PDF file)

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

Daily Market Update – January 31, 2014 (Close)

  

(see all trades this option cycle)

 

Daily Market Update – January 31, 2014 (Close)

The Week in Review is now posted  and the Weekend Update will be posted by 12 Noon on Sunday.

 

 

 

 

 

 

 

 

Access prior Daily Market Updates by clicking here

OTP Sector Distribution* as of January 31, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

See all Trade Alerts for this monthly option cycle

 

Daily Market Update – January 31, 2014

  

(see all trades this option cycle)

 

Daily Market Update – January 31, 2014 (9:00 AM)

The Week in Review will be posted by 6 PM and the Weekend Update will be posted by 12 Noon on Sunday.

 

Today looks to be a tumultuous day. Possible trades include:

Assignments: BMY, EBAY, IP, TXN, VZ

RolloversANF, INTC, MSFT

Expirations: C, HAL, LOW

Trades, if any, will be attempted to be made prior to 3:30 PM (EST)

 

 

 

 

 

OTP Sector Distribution* as of January 30, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

Daily Market Update – January 30, 2014 (Close)

 

  

(see all trades this option cycle)

 

Daily Market Update – January 30, 2014 (Close)

One nice thing about the market is that it doesn’t always hold a grudge.

It can lose 200 points one day and give indications of having totally forgotten about that blow out the very next morning.

For investors that often leads to confusion because human nature prefers to see continuity and slow transition. The market, on the other hand, although it is very much a product of human behavior, doesn’t always respond in the way that we are able to grasp.

Sometimes life would be much easier if we were all able to just move forward and not be weighed down by the past and our own prejudices. On the other hand, while we may occasionally take steps backward, for the most part we are forward moving beings. The market is anything but, although the past year it has behaved in a human fashion, by only taking small steps backwards and otherwise forging ahead.

Lately, however, the market has been acting like a human in the midst of a tail spin with predominant steps backwards and only an occasional gasp of life.

Was today’s 50% recovery of yesterday’s 200 point decline a gasp or a return to life?

That split in behavior, going from a forward charging entity to one that is tentative at best and manifests great nervousness with news doesn’t generate very much short term confidence.

Wouldn’t you rather know whether something is in the throes of a death spiral or simply taking a needed rest before continuing with a vibrant life?

The underlying components of the stock market, that is the companies that comprise the market are expressing some pessimism regarding their own future prospects for growth. Record level share buy backs are reflective of record levels of cash, but also of an inability to recognize opportunities to use that cash in a constructive fashion. A number of companies, such as Caterpillar and Cisco have been accused of having buyback programs that have been purchasing shares at values much too high,just so the cash wouldn’t be on the books and to use that cash to artificially prop up share price by simple supply and demand laws.

Since cash basically has a P/E of just 1, while it may be non-intuitive, may actually serve to keep a lid on share price. The more cash you have relative to your market capitalization the lower your P/E will be.

The reason that Cisco and Caterpillar’s actions are important is that in the past share buybacks were viewed as a reflection of the company’s opinion that its shares were bargain priced and was a sign to the rest of the world that investment in those was a good idea.

Now you can’t be quite as certain, although the optics of the situation result in better earnings per share and in the short term may move shares higher on that basis, as well as a shrinking supply of shares floating in the face of stable or increasing demand can still send shares higher.

As this week is coming to an end and earnings have been somewhat better than the previous week, hopefully we will end on an up note for a change and see some acceptable combination of rollovers and assignments.

However, placing lots of trickle down hope on the basis of earnings from Facebook and Netflix and other such companies that really don’t add great economic value across the spectrum is probably not a good idea.

While cutting edge is great for growth and creation of new markets, it’s still retail, construction, infrastructure that really moves us forward with confidence.

I can’t wait to be able to Tweet out that kind of good news when it actually happens and maybe increase GDP at the same time.

 

 

 

  Access prior Daily Market Updates by clicking here

 OTP Sector Distribution* as of January 30, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

 

See all Trade Alerts for this monthly option cycle