Weekend Update – March 1, 2015

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

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

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

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

Candor got in the way.

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

Yet some people want even more information.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Now feels like the right time.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As expected, UAL itself went sharply higher as it and other airlines have essentially moved opposite

ly to the movements in energy prices over the past few months. However, later that same day, UAL gave up most of its gains, while Marathon Oil moved higher. A UAL share price dropped I bought shares and sold deep in the money calls.

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

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

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

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

I’m fine with being left in the dark.


Traditional Stocks: Caterpillar, Marathon Oil

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

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

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

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

Weekend Update – February 22, 2015

After setting a new high on the S&P 500 last week, the bull was asleep this holiday shortened trading week, having been virtually flat for the first 3 days of trading and having been devoid of the kind of intra-day volatility that has marked most of 2015.

That’s of course only if you ignore how the week ended, as this time the S&P 500 wasn’t partying alone, as the DJIA and other indexes joined in recording new record highs.

For the briefest of moments as the market opened for trading on Friday morning it looked as if that gently sleeping bull was going to slip into some kind of an unwarranted coma and slip away, as the DJIA dropped 100 points with no consequential news to blame.

However, as has been the case for much of 2015 a reversal wiped out that move and returned the market to that gentle sleep that saw a somnolent market add a less than impressive 0.1% to its record close from the previous week.

In a perfect example of why you should give up trying to apply rational thought processes to an irrational situation, the market then later awoke from that gentle sleep in a paroxysm of buying activity, as an issue that we didn’t seem to care about before today, took hold, thereby demonstrating the corollary to “It is what it is” by showing that it only matters when it matters.

That issue revolved around Greece and the European Union. The relationship of Greece and the EU seemed to be heading toward a potential dissolution as a new Greek government was employing its finest bluster, but without much base to its bravado. As it was all unfolding, this time around, as compared to the last such crisis a few years ago, we seemed content to ignore the potential consequences to the EU and their banking system.

While that situation was being played out in the news most analysts agreed it was impressive that US markets were ignoring the drama inherent in the EU dysfunction. The threat of contagion to other “weak sister”nations in the event of a member nation’s exit and the very real question of the continuing integrity of that union seemed to be an irrelevancy to our own markets.

Yet for some reason, while we didn’t care about the potential bad news, the market seemed to really care when the bluster gave way to capitulation, even though the result was reminiscent of the very finest in “kicking the can down the road” as practiced by our own elected officials over the past few governmental stalemates.

From that moment on, as the rumors of some sort of accord were being made known the calm of the week gave way to some irrational buying.

Of course, when that can was on our own shores, the result in our stock market was exactly the same when it was kicked, so the lesson has to be pretty clear about ever wanting to do anything decisive.

Next week, however, may bring a rational reason to do something to either spur that bull to new heights or to send it into retreat.

Forget about the impending congressiona

l testimony that Janet Yellen will be providing for 2 days next week as the impetus for the market to move. Why look for external stimulants in the form of economist-speak when you already have all of the ingredients that you need in the form of fundamentals, a language that you understand?

While “Fashion Week” was last week and exciting for some, the real excitement comes this week with the slew of earnings from major national retailers trying to sell all of those fashions. While their backward looking reports may not reflect the impact of decreased energy prices among their customers, their forward looking comments may finally bring some light to what is really going on in the economy.

With “Retail Sales” reports of the past two months, which also include gasoline purchases, having left a bad taste with investors, a better taste of things to come has already been telegraphed by some retailers in their rosy comments in advance of their earnings release.

This coming week could offer lots of rational reasons to move the market next week. Unfortunately, that could be in either direction.

With earnings reports back on center stage after a relatively quiet earnings week, stocks were mostly asleep, but, that was definitely not the case in other markets. If looking for a source of contagion there are lots of potential culprits.

Bond markets, precious metals and oil all continued their volatility. The 10 Year Treasury Bond, for example saw abrupt and large changes in direction this week and has seen rates head about 30% higher over the past couple of weeks after the FOMC sowed some doubt into their intentions and timing.

^TNX Chart

^TNX data by YCharts

While Janet Yellen may shed some light on FOMC next steps and their time frame, she is, to some degree held hostage by some of those markets, as traders move interest rates and energy prices around without regard to policy or to what they position they held deeply the day before.

For my part, I don’t mind the marked indecision in other markets as long as this current market in equities can keep moving forward a small step at a time in its sleep.

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

Yahoo (NASDAQ:YHOO) after all of the

se years is sadly in the position of having to establish an identity for itself, although with a market capitalization of $42 billion lots of that sadness can be assuaged.

It’s difficult to think of another situation in which a CEO has seen shares rise nearly 180% during their tenure, in this case about 30 months, yet remain so highly criticized. However, after a storied history it is a little embarrassing to be best known as the company that once owned Alibaba (NYSE:BABA), although the billions received and the billions more to come help to ease some of that awkwardness.

With Alibaba’s next lock-up expiration coming on March 18, 2015, there’s potentially some downward pressure on Yahoo which still has a sizeable stake in Alibaba, However, as has been seen over the last few years the flooding of the market with new shares doesn’t necessarily result in the logical outcome.

In the meantime, while there is some concern over the impact of that event on Yahoo shares and as Alibaba has its own uncertainties beyond the lock-up expiration, option premiums in Yahoo have gotten a little richer as shares have already come down 11% since earnings were reported. After that decline either a covered call or put sale, as an intended very short term trade may be appropriate as waiting for Yahoo to find itself before you grow too old.

For as long as Jamie Dimon remains as its CEO and Chairman, JP Morgan Chase (NYSE:JPM) isn’t likely to have any identity problems. Despite not having anywhere near the returns of Yahoo during the period of his tenure and having paid out much more in regulatory fines than Yahoo received for its Alibaba shares, the criticism is scant other than by those who battle over the idea of “too big too faii” and the actual fine-worthy actions.

However, just as the CEO of Yahoo was able to benefit from an event outside of her control, which was the purchase of Alibaba by her predecessor years earlier, Dimon stands to benefit from what will eventually be a rising interest rate rate environment. Amid some confusion over the FOMC’s comments regarding the adverse impact of low rates, but also the adverse impact of raising them too quickly, rates resumed their climb after a quick 4% decline. While the financial sector wasn’t the weakest last weak, energy had that honor, there isn’t too much reason to suspect that interest rates will return to their recent low levels.

BGC Partners (NASDAQ:BGCP) is another company that has no such identity problems as much of its identity is wrapped up in its Chairman and CEO, who has just come to agreement with the board of GFI Group (NYSE:GFIG) in his takeover bid.

For the past 10 years BGC Partners has closely tracked the interest rate on the 10 Year Treasury Note, although notably during much of 2014 it did not. Recently, however, it appears that relationship is back on track. If so, and you believe that rates will be heading higher, the opportunity for share appreciation exists. In addition to that, however, is also a very attractive dividend and shares do go ex-dividend this week. With only a monthly option contract available and large gaps between strike levels, this is a position that may warrant a longer term time frame commitment.

Also going ex-dividend this week are McDonalds (NYSE:MCD) and SanDisk (NASDAQ:SNDK).

I often think about buying shares of McDonalds, but rarely do so. Most of the time that turned out to have been a bad decision if looking at it from a covered option perspective. From a buy and hold perspective, however, it has been more than 2 years since there have been any decent entry points and returns.

With a myriad of problems facing it and a new CEO to tackle them my expectation is that more bad news is unlikely other than at the next earnings release when it wouldn’t be too surprising to see the traditional use of charges against earnings to make the new CEO’s future performance look so much better by comparison. Between now and that date in 2 months, I think there will be lots of opportunity to reap option premiums from shares, as I anticipate it trading in a narrow range or higher. Getting started with a nice dividend this week makes the process more palatable than many have been finding the menu.

SanDisk is a company that was written off years ago as being nothing more than a company that offered a one time leading product that had devolved into a commodity. You don’t, however, see too many analysts re-visiting that opinion as they frequently offer buy recommendations on shares.

SanDisk is also a company that I’ve very infrequently owned, but almost always consider adding shares when I have cash reserves and need some more technology positions in my portfolio. After a week of lots of assignments both are now the case and while its dividend isn’t as generous as that of McDonalds, it serves as a good time for entry and offers a very attractive option premium even during a week that it goes ex-dividend.

Despite a 10% share price increase since earnings, it is still about 15% below its price when it warned on earnings just a week prior to the event and received a belated downgrade from “buy to hold.” WIth continuing upside potential, this is a position that I would consider either leaving some shares uncovered or using more than one strike level for call sales

Most often when considering a trade involving a company about to report earnings and selling put options, my preference is to avoid taking ownership of shares. Generally, put sales shouldn’t be undertaken unless willing to accept the potential liability of ownership, but sometimes you would prefer to only take the reward and not the risk, if you can get away with doing so.

Additionally, I generally look for opportunities where I can receive a 1% ROI for the sale of a weekly put contract that is a strike level below the lower range of the implied move determined by the option market.

However, in the cases of Hewlett Packard (NYSE:HPQ) and The Gap (NYSE:GPS) that 1% ROI is right at the lower boundary, but I would still consider the prospect of put sales because I wouldn’t shy away from share ownership in the event of an adverse price move.

The Gap, which makes sharp moves on a regular basis as it still reports monthly sales, did so just a week earlier. It seems to also regularly find itself alternating in the eyes of investors who send shares higher or lower as if each month brings deep systemic change to the company. However, taking a longer term view or simply looking at its chart, it’s clear that shares have a way of just returning to a fleece-lik

e comfortable level in the $39-$41 range.

In the event of an adverse price movement and facing assignment, puts can be rolled over targeting the next same store sales week as an expiration date or simply taking ownership of shares and then using that same date as a time frame for call sales. If rolling over puts I would be mindful of an April ex-dividend date and would consider taking ownership of shares prior to that time if put contracts aren’t likely to expire.

Since I have room for more than a single new technology position this week, Hewlett Packard warrants a look, as what was once derisively referred to as “old tech” is once again respectable. While I would consider starting the exposure through the sale of puts, with an ex-dividend date coming up in just a few weeks, I’d be more inclined to take assignment in the event of an adverse price move after earnings.

Finally, there’s still reason to believe that energy prices are going to continue to confound most everyone. The coupling and de-coupling of oil to and from the stock market, respectively has become too unpredictable to try to harness. However, given the back and forth seen in prices over the past month as a floor may have been put in oil prices, there may be some opportunity in considering a pairs trade, such as Marathon Oil (NYSE:MRO) and United Continental (NYSE:UAL).

United Continental and other airlines have essentially been mirror images to the moves in oil, although not always for clearly understandable reasons, as the relative role of hedging can vary among airlines, although United has reportedly closed out its hedged positions and may be a more pure trading candidate on the basis of fuel prices..

While it’s not too likely that either of these stocks will move in the same direction concurrently, the short term volatility in their prices and the extremely appealing premiums may allow the chance to prosper in one while awaiting the other’s turn to do the same.

The idea is to purchase shares and sell calls of both as a coupled trade with the expectation that they would be decoupled as oil rises or falls and one position or another is either rolled over or assigned, as a result. The remaining position is then managed on its own merits or possibly even re-coupled.

As with earnings related trades that I make that are usually agnostic to the relative merits of the company, focusing only on the risk – reward proposition, this trade is not one that cares too much about the merits of either company. Rather, it cares about their responses to the unpredictable movements in oil price that have been occurring on daily and even on an intra-day basis of late.

Traditional Stocks: JP Morgan Chase, Marathon Oil

Momentum Stocks: United Continental Holdings, Yahoo

Double Dip Dividend: BGC Partners (2/26), McDonalds (2/26), SanDisk (2/26)

Premiums Enhanced by Earnings: Hewlett Packard (2/24 PM), The Gap (2/26 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.

Weekend Update – February 15, 2015

You would think that when the market sets record closing highs on the S&P 500 that there would be lots of fireworks after the fact and maybe lots of excited anticipation before the fact.

But that really hasn’t been the case since 2007.

The “whoop whoop” sounds you may have heard coming from the floor of the NYSE had nothing to do with pitched fervor, but rather with traditional noise making at 3:33 PM on the Friday before a 3 day holiday.

The whooping noise was also in sharp contrast to the relative calm of the past week and it may have been that calm, or maybe the absence of anxiety, that allowed the market to add another 2% and set those record highs.

After a while you do get tired of always living on the edge and behaving in a hyper-caffeinated way in response to even the most benign of events.

Even back in 2007 as we were closing in on what we now realize was the high point for that year, there were so many records being set, seemingly day in and out, that it began to feel more like an entitlement rather than something special.

You whoop about something special. You don’t whoop about entitlements. There was no whooping on Friday at 4 PM. instead, it was a calm, matter of fact reaction to something we had never seen before. New highs are met with yawns and new heights aren’t as dizzying as they used to be, especially if you don’t look down.

When your senses get dulled it’s sometimes hard to see what’s going on around you, but there’s a difference between maintaining a sense of calm and having your senses dulled to the dangers of collateralized debt obligations or other evils of the era.

This calmness was good.

As opposed to those who refer to pullbacks from highs as being healthy, this calm character of this climb to a new high was what health is really all about. I feel good when my portfolio outperforms the market during a down week, but the end result is still a loss. When I really feel great is when out-performing during an up week.

Both may feel good, but only one is good in absolute terms. From my perspective, the only healthy market is one that is moving higher, but not doing so recklessly.

This week, was a continuation of a month that has characterized by calm events and an appropriate measure of acceptance of those events while moving to greater heights in a methodical way

While it may be good to not see some kind of unbridled buying fervor break out when records are reached, it does make you wonder why the same self control can’t be put on when things momentarily appear dire, as there have certainly been pl

enty of near vertical declines in the past few months that just a little calmness of mind could have avoided.

Coming from the most recent decline that ended in January 2015, the move higher has presented a circuitous path toward Friday’s new high close.

Instead of the straight line higher or the “V-shaped” recoveries that so many refer to, and that have characterized upward reversals in the past few months, this most recent reversal has been a stagger stepped one.

Rather than coming as a burst of unbridled excitement, the market has been taking the time to enjoy and digest the ride higher.

The climb was odd though when you consider that oil prices had been moving strongly higher, retail sales were disappointing, interest rates were climbing and currency troubles were plaguing US company profits. All these were happening as gold, long a proxy for the investor anxiety was gyrating with large moves.

But perhaps it was a sense of serenity and calm from overseas that offset those worrying events. Greece and the European Union appeared to be closer to an agreement on debt concerns and another Ukraine peace accord seemed likely.

The stock market simply decided that nothing could possibly happen to derail either of those potential agreements.

So there’s calmness, dulled senses and burying your head in the sand.

This week the calmness may have been secondary to some denial, but given the result, I’m all for denial, as long as it can keep reality away just a little longer.

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

What surprises me most, particularly considering a portfolio that doesn’t often hold very many DJIA positions, is that this week there are 5 DJIA members that may have reason for garnering attention.

It has been a bit more than two years since I last owned American Express (NYSE:AXP). Up until 2015, if you had looked at its performance in the time since I last owned it and happened to have also been in a vacuum at the time, it looked as if it had a pretty impressive ride.

That impression would have been upset if the vacuum was disrupted and you began to compare its performance to the S&P 500 and especially if comparing it to its rivals.

That ride got considerably more bumpy this past week as it will be losing a major co-branding partner, Costco (NASDAQ:COST) in 2016. While the possibility of that partnership coming to an end had been well known, the market’s reaction suggests that either it was ignored or calmness doesn’t reside when mediocre rewards programs are threatened with extinction.

But a 10% plunge seems drastic. The co-branding effort allowed American Express to dip its toes into the credit card business and deal with normal folks who don’t always pay their credit card charges in full, but do pay interest charges. Given the Costco shopper demographic that seemed like a nice middle ground for risk and reward that will be difficult to replace. However, American Express shares are now on sale, having reached 16 month lows and the excitement injects some life into its option premiums.

Intel (NASDAQ:INTC) recovered some of its losses since my last purchase, but not enough to make it within easy striking distance of an assignment.

While it was a great performer in 2014 it has badly trailed the S&P 500 in 2015. While it may be subject to currency crosswinds, nothing fundamental has changed in its story to warrant its most recent decline, particularly as “old tech” has had its respect restored.

While its option premium is not overly exciting enough to consider using out of the money options, there is enough reason to believe that there is some additional potential for price recovery left in its shares to consider not covering all new shares.

Coca Cola (NYSE:KO) continues to be derided and maybe for good reason as it needs something to both change its image of being out of touch with contemporary tastes and some diversification of its product lines.

The former isn’t likely to happen overnight, nor is any revenue related calamity expected to strike with suddeness, at least not before its next dividend, which is expected in the next few weeks. In the meantime, as with Intel, there may be some reason to believe that some price recovery may be part of the equation when deciding to sell calls on the position.

In the cases of DJIA components Johnson and Johnson (NYSE:JNJ) and General Electric (NYSE:GE) their upcoming ex-dividend dates this week add to their interest.

Johnson and Johnson, when reporting earnings last month was one of the first to remind us of the darkness associated with a strong US dollar and its shares are still lower, having trailed the S&P 500 by nearly 8% since earnings release on January 20th. Most of that decline, however, has come since the market began its turnaround once February started.

Uncharacteristically, Johnson and Johnson’s option premium has become attractive, even in
a week that has a significant dividend event. As with its fellow DJIA members, Intel and Coca Cola, I would consider some possibility of trying to also capitalize on share appreciation to complement the option premium and the dividend.

General Electric is the least appealing of the DJIA components considered this week as its option premium is fairly small as it goes ex-dividend. However, General Electric is a stock that I repeatedly can’t understand why I haven’t owned with much greater regularity.

It has traded in a fairly predictable range, has offered an excellent and growing dividend and reasonable option premiums for an extended period of time. That’s a great combination when considering a covered option strategy.

Add Kellogg (NYSE:K) to the list of companies bemoaning the impact of a strong dollar on their earnings and future prospects for profits. Down nearly 5% on its earnings and a more impressive 9.6% in the past 3 weeks it also has to deal with falling cereal sales, which likely played a role in analyst downgrades this week. While currencies continually fluctuate and at some point will shift to Kellogg’s benefit, those sagging sales adjusted for currency effect, is a cause for concern, but not right away.

As with American Express that price decline brings shares to a more reasonable price point, well below where I last owned shares less 2 months ago. With an upcoming dividend in the March 2015 option cycle and only offering monthly options, I would consider selling March options bypassing what remains of the February contract in anticipation of some price recovery.

Facebook (NASDAQ:FB) has been uncharacteristically quiet since it reported earnings last month, as investor attention has shifted to Twitter (NYSE:TWTR).

Its share price has been virtually unchanged over the past 3 months but its option premiums have remained very attractive and continue to be so, even as it may have recently fallen off investor’s radar screens despite having avoided mis-steps that characterize so many young companies with great growth.

While I generally consider the sale of puts in advance of earnings and frequently would prefer not to take assignment of shares, Facebook is an exception to that preference. While I would consider entering a position through the sale of puts if shares move adversely the market for its options is liquid enough to likely allow put rollovers, or if taking assignment create an easy path for selling calls on the position.

Finally, I don’t really begin to make believe that I understand the dynamics of oil prices, nor understand the impact of prices on the various industries that either get their revenue by being some part of the process from ground to tank or that see a large part of their costs related to energy pricing. I certainly don’t understand “crack spreads” and find myself more likely to giggle than to ask an informed question or add an insight when the topic arises.

United Continental Holdings (NYSE:UAL) is one of those that certainly has a large portion of its costs tied up in fuel prices. While hedging of fuel can

certainly be a factor in generating profits, it can also be a tool to generate losses, as they have learned.

With about $1 billion in hedging related losses expected in 2015 United shares are down nearly 10% since having reported earnings. That’s only fair as its price trajectory higher over the previous months was closely aligned with the perception that falling jet fuel prices would be a boon for airlines, without real regard to the individual liabilities held in futures contracts.

As with energy companies over the past few months the great uncertainty created by rapidly moving prices created greatly enhanced option premiums. With oil prices having significant gains this week but still a chorus of those calling for $30 oil, it’s anyone’s guess where the next stop may be. However, any period of stability or only mildly higher fuel prices may still accrue benefit to those airlines that had been hedged at far higher levels, such as United.

While we think about an “energy sector,” there’s no doubt that its comprised of a broad range of companies that fit in somewhere along that continuum from discovery to delivery. It’s probably reasonable to believe that not all portions of the sector experience the same level of response to price changes of crude oil.

Western Refining (NYSE:WNR) is ex-dividend this week and reports earnings the following week. It’s in a portion of the energy sector that doesn’t suffer the same as those in the business of drilling when crude oil prices are plunging, as evidenced by the refiner’s performance relative to the S&P 500 in 2015.

If previous earnings reports from many others in the sector are to act as a guide, although there have been some exceptions, any disappointing earnings are already anticipated and Western Refining’s report will be well received.

For that reason, I might consider, as with Kellogg, bypassing the February 2015 option contract and considering a sale of the March 2015 contract, which also provides nearly a month for share price to recover in the event of a move lower upon earnings.

Traditional Stocks: American Express, Coca Cola, Intel, Kellogg

Momentum Stocks: Facebook, United Continental Holdings

Double Dip Dividend: General Electric (2/19), Johnson and Johnson (2/20), Western Refining (2/18)

Premiums Enhanced by Earnings: none

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

Weekend Update – February 8, 2015

There’s not too much doubt that this past week had a character that was very different from nearly every week that had preceded it thus far in 2015, which has been predominated by sad faces.

The problem encountered in January and helping to create a sea of sad faces is that we were all expecting to begin seeing evidence of an improving economy. That kind of anticipation timed along with what we often believe to be a traditionally positive January market easily set the stage for disappointment.

The narrative that seemed so logical and convincing included more jobs, higher wages and newfound personal wealth due to slashed energy prices. The problem, though, was that when the time came for corroborating data to take the narrative into the realm of non-fiction it just wasn’t on the same page.

Retail Sales weren’t what we were expecting and neither was the GDP. Manufacturing data was falling and the early results from earnings season were less than stellar, as good news failed to materialize or coalesce into a coherent story in support of the narrative.

However, this past week caught glimpses of good news to come, as some prominent national retailers provided improved guidance that was finally in line with the theory that we had come to accept as gospel. Finally there was some indication that lower energy prices were going to result in more discretionary spending. What was especially encouraging was that the improvement on the retail side was no longer being confined to the more luxurious end of the spectrum.

I preferred this week’s “happy face” version of 2015, even if the week did end on a little bit of a down note after a day that featured a near flawless “Employment Situation Report,” that included some sizeable revisions to previous months.

In a perfect example of the concept that “as an investor and a consumer you can not have your cake and eat it, too” the market went higher, but so did 10 Year Treasury rates and energy prices, but within reason that can be a good trade-off.

2015 has been pretty dizzying thus far. All you have to do is take a look at an S&P 500 chart since having reached market highs at the end of December 2014. It doesn’t take long to realize that market tests have been coming at a far greater frequency or on a more compressed time frame than they had been coming in almost 3 years.

The good news is that the alternating plunges and surges are creeping into option premium pricing for those selling. The bad news is that the alternating plunges and surges are creeping into option premium pricing for those buying.

The activity seen in 2015 will lead some to believe that it demonstrates the market’s resilience, while others will be less optimistic and point out that large moves higher, as have been commonplace in 2015 are typically seen in or approaching bear markets.

Fortunately, we will have hindsight to guide us.

Until that point that hindsight kicks in there is the problem of deciding whether it’s a smiling face or a
sad face that awaits in the near future.

With the otherwise under-appreciated JOLT Survey, which Janet Yellen has said held increasing importance as it may indicate workforce optimism and another Retail Sales report coming this week, there may be more reason to add to the trickle of evidence that may validate last week’s happy faces.

Of course, while official government reports and data are certainly meaningful, despite a propensity toward revision, the really meaningful data may start coming in just a few weeks. At that time the major retailers begin to release their earnings. Perhaps more importantly than those earnings ending in December 2014, they will have also had 2 additional months of observation to either validate or negate the narrative and also provide changed forward guidance.

I have my “happy face” mask within easy reach, although the sad face is never far away.

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

One of the reasons that I like Fastenal (NASDAQ:FAST) so much is that it is prone to large and decisive movements, but is otherwise a fairly staid stock that has a nice habit of seeing its price revert toward the mean.

Fastenal reported good earnings just a few weeks ago, but this past week reported weaker than expected January sales resulting in another of those decisive movements that rippled through to its competitors, as well.

The hindsight tool indicates that over the past few years these kind of drops from about the $45 level have proven to be a good time to purchase or add shares. While only offering a monthly options contract there are now only 2 weeks remaining on the February 2015 cycle. However, during the 10 occasions that I have owned shares in the past 18 months I’ve held them through only a single monthly option cycle just once, so it does tend to be a longer holding.

While “old tech” was weak last weak and Microsoft (NASDAQ:MSFT) has been weak since releasing its earnings, a nearly 10% drop seems excessive, but a welcome return to a price level last seen 6 months ago.

Among my favorite kind of option contract sales, but ones that I only infrequently get to execute, are for those going ex-dividend on a Monday. In such cases, early assignment has to occur on the previous Friday. If selling an option contract expiring the same week as the ex-dividend date and shares are assigned early to capture the dividend, the contract seller won’t get the dividend, but does get an additional week of premium and a return of cash from the assignment which can then be re-invested to generate more income.

Microsoft shares go ex-dividend on Tuesday February 17th, the day after the Presidents Day holiday. That means if an option contract is to be exercised early it must be done on the preceding Friday and may offer one of those opportunities to benefit whe

ther the option is exercised early or not.

Royal Dutch Shell (NYSE:RDS.A) also goes ex-dividend this week. While oil was nearly 10% higher for the week and may reasonably be expected to undergo some short term profit taking, as too many have foregone their bearish sentiment, Royal Dutch Shell’s decision to decrease its capital expenditures is just another in the steps necessary to nudge the supply-demand equilibrium toward a balance favoring price.

The process, however, unless there is an unexpected event or change in policy, such as Saudi Arabia cutting production in exchange for Russia’s support of the Syrian regime, is a slow one. I would, therefore, look at a holding in Royal Dutch Shell to be of a longer term nature and the absence of weekly options removes some of the risk of short term volatility.

However, if it’s volatility that you’re looking for, then Market Vectors Gold Miners ETF (NYSEARCA:GDX) may be just the thing, as precious metals has seen a very clear increase in its volatility and has trickled down to the level of the miners.

Over the past 2 months this has been one of my favorite trades as I’ve rolled over existing positions numerous times, sometimes more than once in a week and even electing to rollover when assignment was nearly certain in order to keep deriving income from the holding.

As seen this past week and nearly every week in the past 2 months these shares can move up and down very quickly, but for those who believe that precious metals or some proxy should be in the speculative portion of their portfolio, this may be a suitable addition, especially as uncertainty abounds in stocks, bonds, currencies and metals.

While I only have room for one energy sector position, Marathon Oil also goes ex-dividend this week and has reasons to be considered.

While its dividend is far below that of Royal Dutch Shell, it has also suffered a far greater decline from its recent high level. While I think that decline near its end, it does have earnings to report on February 18, 2015, a week after its ex-dividend date.

Marathon Oil (NYSE:MRO), unlike Royal Dutch Shell does offer weekly option contracts providing opportunities to focus on either or both events by selecting different expiration dates. In the case of Marathon, as we’ve seen with many others in the energy sector reporting their earnings, the reality has been better than the fears and shares have done well in the aftermath. With that in mind I look at Marathon as potentially offering a good dividend and upside potential from earnings, in addition to an option premium that;’s enhanced by the upcoming earnings as well as the added volatility surrounding energy names.

International Paper (NYSE:IP) also is ex-dividend this week and while it is near its 52 week high and 20% higher from its earnings release in October 2014, its near term prospects don’t appear to hold a return to that level. Instead, I think that there is still room for some capital appreciation, or at least continuing to trade in its recent range, while offering the opportuni

ty to accumulate premiums.

The company has been very shareholder friendly with spin-offs, increasing share buybacks and dividend increases in each of the past 5 years. That’s a nice combination for those who need something to offset the lack of excitement in its actual businesses.

After announcing record earnings, but weak forward guidance, shares of Activision Blizzard (NASDAQ:ATVI) briefly suffered a sharp fall. However, when there was some opportunity to really evaluate the increased share buyback announced and the increased dividend analysts dismissed the importance of the lowered guidance and shares recovered.

Other than experiencing some currency headwinds, margins on its products are expected to increase as it its share of digital download revenues. After all, what is a “millennial” going to spend their newly found cash on if not gaming? In return, Activision may have some upside share potential supported by its buyback and a nice option premium to help atone for the adventure that may await with share ownership.

Finally, what’s a day without the report of a new cyber-hack and the theft of personal data? Last week’s report of a massive and successful attack of a healthcare insurer, that made away with personally identifying data and not just credit card numbers, may be the start of massive headaches for many in the 14 states served by that insurer who may find that joining the witness protection program and changing their name and date of birth may be the best remedy.

While retaining FireEye (NASDAQ:FEYE) after the hack isn’t terribly different from closing the barn door a little too late, it certainly raises the profile of companies in the cyber-security arena even higher.

FireEye reports earnings this week and if you only looked at a 6 month chart you would think that it had done well in scratching its way back toward its August 2014 level. However, a look beyond 6 months shows just how far shares have fallen in the past year.

The option market is implying an 11.7% move upon earnings and based on past history that may be an under-estimate of what may be possible. However, one may be able to obtain a 1% ROI by selling a weekly put option at a strike level that is about 15.7% Friday’s closing price.

However, since shares are already up about 12% in the past week, I would consider the sale of puts only if there is a meaningful price decline prior to earnings, or if that doesn’t occur, if there is a significant decline after earnings, as FireEye has disappointed in the past and it’s a fickle stock market that has to decide whether the past is more important than the future.

Traditional Stocks: Fastenal

Momentum Stocks: Activision Blizzard, Market Vectors Gold Miners ETF

Double Dip Dividend: International Paper , Marathon Oil (2/11), Microsoft (2/17), Royal Dutch Shell (2/11)

Premiums Enhanced by Earnings: FireEye (2/11 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.