Author: TheAcsMan

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Weekend Update – November 16, 2014

The past week was one of the quietest ones that could have been imagined.

The biggest stories of the week were the broken scaffolding that left two window washers dangling on the edge of the new “One World Trade Center” and the successful landing of Rosetta on a faraway comet after a 10 year mission.

With the exception of a late in the week rumor of a buyout of one oilfield services company by another, there really was nothing to propel markets as it was an extraordinarily quiet week on the economic news front, only slightly punctuated by a relatively obscure statistic that suddenly may be an important one in the coming months.

Years ago the single most important economic report came on a weekly basis. If anyone remembers all the way back to the 1980s you may recall how everyone waited for Thursdays and the release of the “M2 Money Supply” statistic.

If you do remember that you may also remember the inflation in the 1980s and can understand why M2 was watched so closely. Inflation was “Enemy #1” and the M2 Supply was linked to that evil. At one time M2 was used by the Federal Reserve to steer the economy in attempting to avoid a renewed bout of inflation.

You don’t hear much talk about M2 anymore as it was replaced by a more direct reliance on interest rates, especially the “Fed Funds Rate.” We still care about interest rates, but sometimes a little too much. Right now we seem overly concerned about when the Federal Reserve will begin to finally increase interest rates forgetting how that which helps to bring about inflation is exactly what we’ve been pining for a sign of the economy finally getting some footing.

This week we finally heard about something that wasn’t really new but got lots of comments and focus. Just a few months ago Federal Reserve Chairman Janet Yellen suggested that we should start paying more attention to the “quit rate” that was included in the “Job Openings and Labor Turnover Summary” also known as the “JOLT” Summary.

That acronym may be very unintentionally appropriate, as sometimes a jolt is exactly what’s needed to get things back into gear.

While many fight over whether the monthly Employment Situation Report should be looked at through the lens of the “U-6” measure of employment, Yellen is suggesting that the decision of people to quit their jobs in the belief that they can now land another, presumably better paying job, is telling of an economy that is heading in the right path and that will introduce some wage inflation.

That’s the kind of jolt this economy has needed. Not just more jobs, but better paying jobs that allow consumers to begin consuming again. Instead of fearing inflation, there should be some realization that a degree of inflation is exactly what this economy has needed for a long time.

One of my sons will likely be included in the next “JOLT” Summary, as he quit a job in which he was more of a low priced commodity and started on a new and much better paying job. He also bought a new car that week.

See how it works? It’s all about the discretionary spending. That’s what really fuels everything, as part of a virtuous cycle of jobs and consumerism.

Given the mixed results reported by some major retailers this week there definitely needs to be some enhancements to the top line and the only thing that can bring that about is an energized consumer jolted back to life.

For anyone that has been either on the receiving end or delivery end of paddles that are meant to jolt you back to life you know just how important that kick start is, but you also know that too much of a good thing brings its own problems.

Having been witness to the late 1970s and early 1980s there is certainly a degree of hesitance when inflation enters into the equation, but somewhere there may be a person in a position to steer the economy who understands that the extremes of the continuum aren’t the only possible outcomes.

Janet Yellen gives all indications of being the person who can jolt and withdraw jolt as signs of economic life warrant.

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

Another company bound to benefit from any improvement in employment, especially the kind that results in increased ability to engage in discretionary spending is Fastenal (FAST). This is a company that I’ve come to look at as a reflection of the real economy and while it has traded in a very narrow range it has been an excellent covered call trade.

It simply sells those things that are measures of economic development and expansion to both other business, middlemen and do it yourself kind of people. What they sell reflects a wide and varied kind of activity. They sometimes have q habit of providing revised guidance a few weeks before earnings and those occasional surprises help to create a reasonable option premium in advance of earnings, in addition to the enhancement that may come with earnings.

Dow Chemical (DOW) had a few false starts this week, jumping significantly higher and then giving back much of the gains on successive days. Those moves came before and after the announcements of additional share buybacks and an increased dividend. Shares closed up nicely on Friday continuing the hesitant optimism of earlier in the week, after having fallen from its highs of the day, only to rally back in an otherwise mediocre tape.

Add into the mix the presence of an activist investor and a long tenured CEO that is as tough as he can be charming and you have the makings of a company that will continue seeing pressures from both sides in support of shares, even though that may be a by-product of a more personal kind of battle. However, as a shareholder, you don’t necessarily care how you get to your objective, as long as you get there. Having some entertainment accompany the journey can just be an added bonus.

Joy Global (JOY) is another of these companies that trades with quite a bit volatility and is highly levered to activity in China, as well as to the veracity of reports from China. None of those are particularly endearing qualities, but Joy Global has been a company that routinely bounces back from disappointment over prospects of slowdowns in Chinese construction and infrastructure activity. It will report earnings in just a few weeks and will also be ex-dividend prior to that, so there are some events that have to be considered if entering into a new position, particularly if hoping for a quick exit.

While the majority of the systemically important companies have already reported earnings, there are quite a few of the more highly volatile companies reporting earnings this week. Among those that have caught my attention for this week are Best Buy (BBY), GameStop (GME), Green Mountain Keurig (GMCR) and salesforce.com (CRM).

Rather than considering any of them on the basis of their fundamental businesses, strengths or challenges awaiting them, I see them as potential opportunities based only on their recent price behaviors.

One thing that they all have in common is that they’ve all had recent runs higher in price. Another thing that they have in common, befitting the level of risk associated with their upcoming earnings is very high option premiums.

In order to achieve a 1% ROI on the sale of put contracts Best Buy, GameStop, Green Mountain Keurig and salesforce.com could still fall by approximately 9.2%, 21.3%, 10.5%, and 7%, respectively without assignments of puts sold. Meanwhile, their respective implied volatilities are 7.5%, 12%, 8.8% and 6.2%.

However, another thing that they share in common, at least from my perspective is that due to their recent runs higher, they may be prone to even harder falls than those implied moves might indicate. For that reason, I’m more inclined to consider the sale of puts after earnings for any of those companies that may in fact fall hard upon their releases, especially for salesforce.com, which offers the least amount of cushion between the implied move and the strike at which the ROI objective is attained.

On the other hand, GameStop offers the greatest cushion, so may be one to consider the sale of put options prior to earnings. As always, the sale of puts may require some additional attention, especially if hoping to avoid assignment if share price goes below the strike level selected.

Finally, it may be yet another week to think about Twitter (TWTR). Whether using the service or not, there’s no denying that it is a company whose stock is in search of direction, very much as many believe its company is in need of direction.

While no one has been criticizing the company on the basis of its earnings there is certainly lots of confusion about what Twitter plans to be and how it will get there, especially if it can’t decide on how to measure its activities and relate those to revenues.

This past week put the Twitter story into focus. Shares soared at its first analysts day meeting, up about 10% until Standard and Poor’s delivered an unsolicited credit report on the company, placing it at a “junk” level designation.

Granted, that S&P, by virtue of having performed an unsolicited analysis didn’t have access to the same company records as it ordinarily does when assessing a company’s credit worthiness, but the market immediately reversed course and sent shares sharply lower.

As was the case last week, I already had sold Twitter puts. I rolled those over on Thursday as Twitter was falling sharply and mat sell even more puts this week, particularly if there is some opening weakness to begin the week.

For anyone following this trade, it is one that may see lots of ups and downs and may require more maintenance, particularly in deciding whether to roil over puts to a forward week or take assignment in the event of adverse movement, but it can be a serially satisfying trade. Friday’s bounce again higher, perhaps after the realization that the S&P rating may have been based on incomplete information, may simply be one of many bounces ahead.

Traditional Stocks: Dow Chemical, Fastenal

Momentum: Joy Global, Twitter

Double Dip Dividend: none

Premiums Enhanced by Earnings: Best Buy (11/20 AM), GameStop (11/20 AM), Green Mountain Keurig (11/19 PM), salesforce.com (11/19 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 – November 9, 2014

Pity the poor hedge fund manager.

For the second consecutive year hedge fund managers are, by and large, reportedly falling far short of their objectives and in jeopardy of not generating their performance fees. 

We all know that those mortgages aren’t going to pay themselves, so their choices are clear.

You can close up shop, disown the shortfalls and try to start anew; you can keep at business as usual and have your under-performance weigh you down in the coming year; or you can roll the dice.

In 2013 it may have been easy to excuse lagging the S&P 500 when that index was nearly 30% higher while you were engaging in active management and costly complex hedging strategies. This year, however, as the market is struggling to break a 10% gain, it’s not quite as easy to get a bye on a performance letdown.

The good news, however, is that the 2014 hurdle is not terribly far out of reach. Despite setting new high after new high, thus far the gains haven’t been stupendous and may still be attainable for those hoping to see daylight in 2015.

The question becomes what will desperate people do, especially if using other people’s money knowing that half of all hedge funds have closed in the past 5 years. Further more funds were closed in 2013 and fewer opened in 2014 than at any point since 2010. It has been a fallow pursuit of alpha as passivity has shown itself fecund. Yet, assets under management continue to grow in the active pursuit of that alpha. That alone has to be a powerful motivator for those in the hedge fund business as that 2% management fee can be substantial.

So I think desperation sets in and that may also be what, at least in part, explained the November through December outperformance last year as the dice were rolled. Granted that over the past 60 years those two months have been the relative stars, that hasn’t necessarily been the case in the past 15 years as hedge funds have become a part of the landscape.

Where it has been the case has been in those years that the market has had exceptionally higher returns which usually means that hedge funds were more likely to lag behind and in need of catching up and prone to rolling the dice.

While the hedging strategies are varied, very complex and use numerous instruments, rolling the dice may explain what appears to be a drying up in volume in some option trading. As that desperation displaces the caution inherent in the sale of options motivated buyers are looking at intransigent sellers demanding inordinately high premiums. With the clock ticking away toward the end of the year and reckoning time approaching, the smaller more certain gains or enhancements to return from hedging positions may be giving way to trying to swing for the fences.

The result is an environment in which there appears to be decreased selling activity, which is especially important for those that have already sold option contracts and may be interested in buying them back to close or rollover their positions. In practice, the environment is now one of low bids by buyers, reflecting low volatility but high asking prices by sellers, often resulting in a chasm that can’t be closed.

Over the past few weeks I’ve seen the chasm on may stocks closed only in the final minutes of the week’s trading when it’s painfully obvious that a strike price won’t be reached. Only then, and again, a sign of desperation, do ask prices drop in the hopes of making a sale to exact a penny or two to enhance returns.

So those hedge fund managers may be more likely to be disingenuous in their hedging efforts as they seek to bridge their own chasms over the next few weeks and they could be the root behind a flourish to end the year.

Other than a continuing difficulty in executing persona trades, I hope they do catch up and help to propel the market even higher, but I’m not certain what may await around the corner as January is set to begin.

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

I already own shares of Cypress Semiconductor (CY) and am continually amazed at the gyrations its price sees without really going very far. In return for watching the shares of this provider of ubiquitous components go up and down, you can get an attractive option premium that reflects the volatility, but doesn’t really reflect the reality. In addition, if holding shares long enough, there is a nice dividend to be had, as well. Selling only monthly call options, I may consider the use of a December 2014 option and may even consider going to the $11 strike, rather than the safer $10, borrowing a page from the distressed hedge fund managers.

I had my shares of Intel (INTC) assigned early this week in order to capture the dividend. I briefly had thoughts of rolling over the position in order to maintain the dividend, but in hindsight, having seen the subsequent price decline, I’m happy to start anew with shares.

Like the desperate hedge fund managers, I may be inclined to emphasize capital gains on this position, rather than seeking to make most of the profit from option sales, particularly as the dividend is now out of the equation.

I may be in the same position of suffering early assignment on existing shares of International Paper (IP) as it goes ex-dividend this week. With a spike in price after earnings and having a contract that expires at the end of the monthly cycle, I had tried to close the well in the money position, but have been faced with the paucity of reasonable ask prices in the pursuit of buying back options. However, even at its current price, International Paper may be poised to go even higher as it pursues a strategy of spin-offs and delivery of value to its investors.

With decent option premiums, an attractive dividend and the chance of further price appreciation, it remains a stock that I would like to have in my portfolio.

Mosaic (MOS) is a stock that I have had as an inactive component of my portfolio after having traded it quite frequently earlier in the year at levels higher than its current price and last year as well, both below and above the current price. It appears that it may have established some support and despite a bounce from that lower level, I believe it may offer some capital appreciation opportunities, as with Intel. As opposed to Intel, however, the dividend is still in the equation, as shares will go ex-dividend on December 2, 2014. With the availability of expanded weekly options there are a mix of strategies to be used if opening this position.

It seems as if there’s barely a week that I don’t consider adding shares of eBay (EBAY). At some point, likely when the PayPal division is spun off, the attention that I pay to eBay may wane, but for now, it still offers opportunity by virtue of its regular spikes and drops while really going nowhere. That t

ypically creates good option premium opportunities, especially at the near the money strikes.

I currently own shares of Sinclair Broadcasting (SBGI) a company that has quietly become the largest owner of local television stations in the United States. It is now trading at about the mid-point of its lows and where it had found a comfortable home, prior to its price surge after the Supreme Court’s decision that this past week finally resulted in Aereo shutting down its Boston offices and laying off employees, as revenue has stopped.

Sinclair Broadcasting will be ex-dividend early in the December 2014 option cycle and offers a very attractive option. It reported higher gross margins and profits last week, as short interest increased in its shares the prior week. I think that the price drop in the past week is an opportunity to initiate a position or add to shares.

Mattel (MAT) is a company that I haven’t owned in years, but am now attracted back to it, in part for its upcoming dividend, its option premium and some opportunity for share appreciation as it has lagged the S&P 500 since its earnings report last month.

However, while holiday shopping season is approaching and thoughts of increased discretionary consumer spending may create images of share appreciation, Mattel has generally traded in a very narrow range in the final 2 months of the year, which may be just the equation for generating some reasonable returns if factoring in the premiums and dividend.

Twitter (TWTR) continues to fascinate me as a stock, as a medium and as a source of so many slings and arrows thrown at its management.

Twitter has always been a fairly dysfunctional place and with somewhat of a revolving door at its highest levels before and after the IPO. While it briefly gained some applause for luring Anthony Noto to become its CFO, the spotlight heat has definitely turned up on its CEO, Dick Costolo.

Last week I sold Twitter puts in the aftermath of its sharp decline upon earnings release. While the puts expired, I did roll some over to a lower strike price as the premium was indicating continued belief in the downside momentum.

This week I’m considering adding to the position, and selling more puts, especially after the latest round of criticisms being launched at Costolo. At some point, something will give and restore confidence. It may come from the Board of Directors, it  may come from Costolo himself or it may even come from activists who see lots of value in a company that could really benefit from the perception of professional management.

I’m not certain how many times I’ve ended a weekly column with a discussion of Abercrombie and Fitch (ANF), but it’s not a coincidence that it frequently warrants a closing word.

Abercrombie and Fitch has been one of my most rewarding and frustrating recurrent trades over the years. At the moment, it’s on the frustrating end of the spectrum following Friday’s revelations regarding sales that saw a 17% price drop. That came the day after an inexplicable 5% rise, that had me attempting to rollover an expiring contract but unable to find a willing seller for the expiring leg.

Over the course of a cumulative 626 days of ownership, spanning 21 individual transactions, my Abercrombie and Fitch activity has had an annualized return of 32% and has seen some steep declines in the process, as occurred on Friday.

This has been an unnecessarily “in the news” kind of company whose CEO has not weathered well and for whom a ticking clock may also be in play. Over the past years each time the stock has soared it has then crashed and when crashing seems to resurrect itself.

Earnings are expected to be reported the following week and premiums will be enhanced as a result. While I currently have an all too expensive open lot of shares I’m very interested in selling puts, as had been done on nine previous occasions over those 626 days. In the event assignment looks likely I would attempt to rollover those puts which would then benefit from enhanced premiums and likely be able to be rolled to a lower strike.

However, if then again faced with assignment, I would consider accepting the assignment, as Abercrombie and Fitch is due to go ex-dividend sometime early in the December 2014 option cycle. However, I would also be prepared for the possibility of the dividend being cut as its payout ratio is unsustainable at current earnings.

 

 

Traditional Stocks:  Cypress Semiconductor, eBay, Intel, Mattel, Mosaic, Sinclair Broadcasting

Momentum: Abercrombie and Fitch, Twitter

Double Dip Dividend: International Paper (11/13)

Premiums Enhanced by Earnings: none

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

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Weekend Update – November 2, 2014

 It’s really hard to know what to make of the past few weeks, much less this very past one.

On an intra-day basis having the S&P 500 down 9% from its high point seemed to be the stop right before that traditional 10% level needed to qualify as a bona fide “correction.”

But something happened.

What happened isn’t really clear, but if you were among those that credited the words of Federal Reserve Governor James Bullard, who suggested that the exit from Quantitative Easing should be delayed, the recovery that ensued now appears more of a coincidence than a result.

That’s because a rational person would have believed that if the upcoming FOMC Statement failed to confirm Bullard’s opinion there would be a rush to the doors to undo the rampant buying of the preceding 10 days that was fueled under false pretenses.

But that wasn’t the case.

In fact, not only did the FOMC announce what they had telegraphed for almost a year, but the previously dissenting hawks were no longer dissenters and a well known dove was instead the one doing the dissenting.

I don’t know about you, but the gains that ensued on Thursday, had me confused, just as the markets seemed confused in the two final trading hours after the FOMC Statement release. You don’t have to be a “perma-bear” to wonder what it’s going to take to get some of your prophesies to be fulfilled.

Even though Thursday’s gains were initially illusory owing to Visa’s (V) dominance of the DJIA, they became real and broadly applied as the afternoon wore on. “How did that make any sense?” is a question that a rationally objective investor and a perma-bear might both find themselves asking as both are left behind in the dust.

I include myself in that camp, as I didn’t take advantage of what turned out to be the market lows as now new closing highs have been set.

Those new highs came courtesy of the Bank of Japan on Friday as it announced the kind of massive stimulus program that we had been expecting to first come from the European Central Bank.

While the initial reaction was elation and set the bears further into despair it also may have left them wondering what, if any role rational thought has left in the processes driving stocks and their markets.

Many, if not most, agree that the Federal Reserve’s policy of Quantitative Easing was the primary fuel boosting U.S. stock markets for years, having drawn foreign investor demand to our shores. Now, with Japan getting ready to follow the same path and perhaps the ECB next in line, we are poised to become the foreigners helping to boost markets on distant shores.

At least that what a confused, beaten and relatively poorer bear thinks as the new week gets underway.

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

I love listening to Howard Schultz defending shares of Starbucks (SBUX) after the market takes the stock lower after earnings. No one defends his company, its performance and its outlook better than Howard Schultz.

But more importantly, he has always followed up his assertions with results.

As with many stocks over the past two weeks, Starbucks is one, that in hindsight I should have purchased two weeks ago, while exercising rational thought processes that got in the way of recognizing bargain prices. Friday’s drop still makes it too late to get shares at their lows of 2 weeks ago, but I expect Schultz to be on the correct side of the analysis once again.

There’s not much disagreement that it has been a rough month for the energy sector. While it did improve last week, it still lagged most everything else, but I think that the Goldman Sachs (GS) call for $75 oil is the turning point. Unfortunately, I have more energy stocks than I would have liked, but expect their recovery and am, hesitatingly looking to add to the position, starting with British Petroleum (BP) as it is ex-dividend this week. That’s always a good place to start, especially with earnings already out of the way.

While I continue to incorrectly refer to BP as “British Petroleum” that is part of my legacy, just as its Russian exposure and legal liabilities are part of its legacy. However, I think that all of those factors are fully  priced in. Where I believe the opportunity exists is that since the September 2014 highs up to the Friday’s highs, BP hasn’t performed as well as some of its cohorts and may be due for some catch-up.

I purchased shares of Intel (INTC) the previous week and was hoping to capture its dividend, as its ex-dividend date is this week. 

Last week Intel had quite a ride as it alternated 4% moves lower and then higher on Thursday and Friday. 

Thursday’s move, which caught most everyone by surprise was accompanied by very large put option trading, including large blocks of aggressive in the money puts with less than 2 days until expiration and even larger out of the money puts expiring in 2 weeks.

Most of the weekly puts expired worthless, as there was fairly low activity on Friday, with no evidence of those contracts getting rolled forward, as shares soared.

While initially happy to see shares take a drop, since it would have meant keeping the dividend for myself, rather than being subject to early assignment, I now face that assignment as shares are again well above the strike. 

However, while entertaining thoughts of rolling those shares over to a higher strike at the same expiration date or the same strike at next week’s expiration, I may also consider adding additional shares of Intel,  for its dividend, premiums and share appreciation, as well. Given some of the confusion recently about prospects for the semi-conductor industry, I think Intel’s vision of what the future holds is as good as the industry can offer if looking for a crystal ball.

What can possibly be said about Herbalife (HLF) at this point that hasn’t already been said, ad nauseum. I’m still somewhat stunned that a single author can write 86 or so articles on Herbalife in a 365 day period and find anything new to say, although there is always the chance that singular opinion expressed may be vindicated.

The reality is that we all need to await some kind of regulatory and/or legal decisions regarding the fate of this company and its business practices.

So, like any other publicly traded company, whether under an additional microscope or not, Herbalife reports earnings this week, having announced it also reached an agreement on Friday regarding a class action suit launched by a past dis

tributor of its products.

The options market is predicting a 16% movement in shares upon earnings release. At its Friday closing price, the lower end of that range would find shares at approximately $44. However, a weekly 1% ROI could still be obtained if selling a put option 35% below Friday’s close.

That is an extraordinary margin, but it may be borne out of extraordinary circumstances, as Monday’s earnings release may include other information regarding pending lawsuits, regulatory or legal actions that could conceivably send shares plummeting.

Or soaring.

On a more sedate, and maybe less controversial note, Whole Foods (WFM) reports earnings this week. I’m still saddled with an expensive lot of shares, that has been offset a bit by the assignment of 4 other lots this year, including this past week.

After a series of bad earnings results and share declines I think the company will soon be reporting positive results from its significant national expansion efforts.

While I generally use the sale of puts when considering an earnings related trade, usually because I would prefer not owning shares, Whole Foods is one that I would approach from either direction. While its payout ratio is higher than its peers, I think there may also be a chance that there will be a dividend increase, particularly as some of the capital expenditures will be decreasing.

While not reporting earnings this week, The Gap (GPS) is expected to provide monthly same store sales. It continues to do so, going against the retail tide, and it often sees its shares move wildly. Those moves are frequently on a monthly alternating basis, which certainly taxes rational thought.

Last month, it reported decreased same store sales, but also coupled that news with the very unexpected announcement that its CEO was leaving. Shares subsequently plummeted and have been very slow to recover.

As expected, the premium this week is significantly elevated as it reflects the risk associated with the monthly report. As with Whole Foods, this trade can also justifiably be approached wither from the direction of a traditional buy/write or put sale. In either case, some consideration should also be given to the fact that The Gap will also report its quarterly earnings right before the conclusion of the November 2014 option cycle, which can offer additional opportunity or peril.

Also like Whole Foods, I currently own a much more expensive lot of Las Vegas Sands (LVS), but have had several assigned lots subsequently help to offset those paper losses. Shares have been unusually active lately, increasingly tied to news from China, where Las Vegas Sands has significant interests in Macao.

Share ownership in Las Vegas Sands can be entertaining in its own right, as there has lately been a certain roller coaster quality from one day to the next, helping to account for its attractive option premium. In the absence of significant economic downturn news in China, which was the root cause of the recent decline, it appears that shares have found some support at its current level. Together with those nice premiums and an attractive dividend, I’m not adverse to taking a gamble on these always volatile shares, even in a market that may have some uncertainty attached to it.

Finally, Facebook (FB) and Twitter (TWTR) each reported earnings last week and were mentioned as potential earnings related trades, particularly through the sale of put options.

Both saw their shares drop sharply after the releases, however, the option markets predicted the expected ranges quite well and for those looking to wring out a 1% weekly ROI even in the face of post-earnings price disappointment were rewarded.

I didn’t take the opportunities, but still see some in each of those companies this week.

While Twitter received nothing but bad press last week and by all appearances is a company that is verging on some significant dysfunction, it is quietly actually making money. It just can’t stick with a set of metrics that are widely accepted and validated as having relevance to the satisfaction of analysts and investors.

It also can’t decide who to blame for the dysfunction, but investors are increasingly questioning the abilities of its CEO, having forgotten that Twitter was a dysfunctional place long before having gone public and long before Dick Costolo became CEO.

At its current price and with its current option premiums the sale of out of the money puts looks as appealing as they did the previous week, as long as prepared to rollover those puts or take assignment of shares in the event the market isn’t satisfied with assurances.

Facebook, on the other hand is far from dysfunctional. Presumably, its shares were punished once Mark Zuckerberg mentioned upcoming increased spending. Of course, there’s also the issue of additional shares hitting the markets, as part of the WhatsApp purchase.

Both of those are reasonable concerns, but it’s very hard to detract from the vision and execution by Zuckerberg and Cheryl Sandberg.

However, the option market continues to see the coming week’s options priced as if there was more than the usual amount of risk inherent in share pricing. I think that may be a mistake, even while its pricing of risk was well done the previous week.

Bears may be beaten and wondering what hit them, but a good tonic is profit and the sale of puts on Facebook could make bears happy while hedging their bets on a market that may put rational thought to rest for a little while longer.

Traditional Stocks:   Starbucks, The Gap

Momentum: Facebook, Twitter, Las Vegas Sands

Double Dip Dividend: British Petroleum (11/5), Intel (11/5)

Premiums Enhanced by Earnings: Herbalife (11/3 PM), Whole Foods (11/5 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.

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Weekend Update – October 26, 2014

It’s too bad that life doesn’t come with highly specific indicators that give us direction or at least warn us when our path isn’t the best available.

Parents are supposed to do that sort of thing, but in real life the rules are pretty simple. You don’t go swimming for 30 minutes after a meal, you don’t kill people and you don’t swallow your chewing gum.

The seven additional commandments are really just derivative of those critically important first three.

Knowing the difference between right and wrong gives one the ability to change direction when getting too close to what is known to be on the wrong side of what society finds acceptable. Most people get the concept and also apply it to their personal safety.

In stock investing it’s not that simple, although there are lots of rules and all kinds of advance warning signals that may or may not work, depending on whether you were giving or receiving the information. As opposed to adolescents who eventually become adults and lose the “it can never happen to me” mentality, investors often feel a sense of immunity from what may await just beyond that point that others would avoid.

It would have been really, really nice if there was some kind of warning system that both alerted us to an upcoming decline and especially the fact that it would be abruptly followed by a reversal.

Much has been said about the various kinds of recoveries that can be seen, but if this most recent bounce higher will in fact be the recovery to the nearly 9% drop on an intra-day basis, then it is certainly of the “V-shape” variety.

This week came word that by a very large margin the activity in personal 401(k) retirement accounts had been to move out of equities, after the declines, and into fixed income instruments, after those interest rates had seen a 15% increase.

What may really complicate things is that there really is no society to provide guidance and set the boundaries. There are short sellers who like to see movement in one direction and then there are the rest of us, although we can all change those roles at any moment in time that seems to suit us.

For those that depended on the “key reversal” of a few weeks ago as a sign to buy or dipping below the 200 day moving average as a sign to sell, the past few weeks have frustrating.

On the other hand, news of rampant selling in 401(k) accounts may offer precisely the kind of prognostic indicator that many have been looking for, as being a perfectly contrarian signal and indication that the time to buy had come once again.

But what caused the sudden change that created the “V shape?”

Technicians and chart watchers will point to the sudden reversal seen on October 15th in the early afternoon as the DJIA had fallen more than 400 points. However, that 260 point mid-day reversal was lost, almost in its entirety at the following morning’s opening bell.

However, we may also want to thank serendipity that IBM (IBM) and Coca Cola (KO) didn’t report their earnings last week, and that reports of a New York City Ebola patient didn’t surface until market and contagion fears had abated.

It wasn’t until the afternoon following that 400 point drop that St. Louis Federal Reserve Governor James Bullard suggested that the Federal Reserve should consider delaying its ending of Quantitative Easing.

If you were looking for a turning point, that was it.

Even those that are critical of the Federal Reserve for its QE policies have been happy to profit from those very same policies. The suggestion that QE might continue would be a definite reason to abandon fear and buy what appear to be bargain priced stocks, especially as the fixed income side’s sudden 15% increase in rates made bonds less of a bargain..

I was either flatfooted or disbelieving in the sudden climb higher, not having made any new purchases for the second consecutive week. I was almost ready to make some purchases last Thursday, following what Wednesday’s decline, but that was followed by a 120 point gap up the following morning. Instead of adding positions I remained content to watch fallen asset values recapture what had been lost, still in the belief that there was another shoe to drop while en-route perhaps to a “W-shape”

That other shoe may come on Wednesday as the FOMC releases its monthly statement. Lately, that has been a time when the FOMC has given a boost to markets. This time, however, as we continue so consumed by the nuances or changes in the wording contained in the statement, there could be some disappointment if it doesn’t give some indication that there will be a continuing injection of liquidity by the Federal Reserve into markets.

If Bullard was just giving a personal opinion rather than a glimpse into the majority of opinion by the voting members of the FOMC there may be some price to be paid.

While there will be many waiting for such a word confirming Bullard’s comments to come there also has to be a sizable faction that would wonder just how bad things are if the Federal Reserve can’t leave the stage as planned.

Welcome back to the days of is good news bad news.

As usual, the week’s potential stock selections ar

e classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.

While the move higher this week was more than impressive, there’s still no denying that these large moves higher only happen in downturns. The question that will remain to be answered is whether the very rapid climb higher from recent lows will have any kind of sustainability.

For the coming week I expect another quiet one, at least personally. The markets may be anything but quiet, as they certainly haven’t been so for the past few weeks, but trying to guess where things may go is always a dicey prospect, just seemingly more so, right now.

Despite what may be continuing uncertainty I have increased interest in earnings related and momentum stocks in the coming week.

Among those is Joy Global (JOY) a stock whose fortunes are closely aligned with Chinese economic growth. Those prospects got somewhat of a boost as Caterpillar (CAT) delivered better than expected earnings during a week that was a cavalcade of good earnings, despite some high profile disappointments. While the S&P 500 advanced 4.1% for the week and Caterpillar rose 4.6%, Joy Global may just be warming up following only a 2.1% climb higher, but still trading well below its mean for the past year.

In that year it has generally done well in recovering from any downward moves in price and after two months in that kind of trajectory may be ready to finally make that recovery.

With “old technology” continuing to do well, EMC Corp (EMC) held up surprisingly well after its majority owned VMWare (VMW) fell sharply after its own earnings were announced. EMC typically announces its earnings the morning after VMWare announces and while showing some impact from VMWare’s disappointment, rapidly corrected itself after its own earnings were released.

EMC has simply been a very steady performer and stands to do well whether staying as an independent company, being bought out pr merged, or spinning off the large remainder of its stake in VMWare. Neither its dividend nor option premium is stunning, but there is a sense of comfort in its stability and future prospects.

Halliburton (HAL) has been trading wildly of late and is well below the cost of my most recent lot of shares. WHile the entire energy sector has fallen on some hard times of late, there’s little reason to believe that will continue, even if unusually warm weather continues. Halliburton, as have others, have been down this path before and generally investors do well with some patience.

That will be what I practice with my more expensive lot. However, at its current price and volatility, Halliburton, with its just announced dividend increase offers an exceptional option premium that is worthy of consideration, as long as patience isn’t in short supply.

Another stock having required more patience than usual has been Coach (COH). It reports earnings this week and as has been the case over the past 3 years it wouldn’t be unusual to see a large price move in shares.

The options market is expecting a 7% move in shares, although in the past the moves have been larger than that and very frequently to the downside. Lately, however, Coach seems to have stabilized as it has gotten a reorganization underway and as its competitor in the hearts and minds of investors, Michael Kors (KORS) has also fallen from its highs and stagnated.

The current lot of shares of Coach that I purchased were done so after it took a large earnings related decline and I didn’t believe that it would continue doing so. This time around, I’m likely to wait until earnings are announced and if shares suffer a decline I may be tempted to sell puts, with the objective of rolling over those puts into the future if assignment appears to be likely.

For those that like dabbling in excitement, both Facebook (FB) and Twitter (TWTR) announce their earnings this week.

< span style="font-size: medium;">I recently came off an 8 month odyssey that began with the sale of a Twitter put, another and another, but that ultimately saw assignment as shares dropped about $14. During that period of time, until shares were assigned, the ROI was just shy of 25%. I wouldn’t mind doing that again, despite the high degree of maintenance that was required in the process.

The options market’s pricing of weekly options is implying a price movement of about 13% next week. However, at current premiums, a drop of anywhere less than 18% could still deliver a weekly ROI of about 1.2%. I look at that as a good return relative to the risk undertaken, albeit being aware that another long ride may be in store. Since Twitter is, to a large degree, a black box filled with so many unknowns, especially regarding earnings and growth prospects, even that 18% level below could conceivably be breached.

Facebook seems to have long ago quieted its critics with regard to its strategy and ability to monetize mobile platforms. In the 2 years that it has been a publicly traded company Facebook has almost always beaten earnings estimates and it very much looks like a stock that wants to get to $100.

The option market is implying a much more sedate 7.5% in price movement upon earnings release and the decline cushion is only about 9.5% if one is seeking a 1% ROI.

Both Facebook and Twitter are potentially enticing plays this coming week and the opportunities may be available before and after earnings, particularly in the event of a subsequent share decline. If trying to decide between one or the other, my preference is Twitter, as it hasn’t had the same upside move, as Facebook has had and I generally prefer selling puts into price weakness rather than strength.

After some disappointing earnings Ford Motor (F) goes ex-dividend this week. Everyone from a recent Seeking Alpha reader who commented on his Ford covered call trade to just about every talking head on television is now touting Ford shares.

Normally, the latter would be a sign to turn around and head the other way. However, despite still being saddled with shares of a very beleaguered General Motors (GM), I do like the prospects of Ford going forward and after a respite of a few years it may be time to buy shares again. The dividend is appealing and more importantly, appears to be safe and the option premiums are enough to garner some interest as shares are just slightly above their yearly low.

Finally, I don’t know of anyone that has anything good to say about Abercrombie and FItch (ANF), regardless of what the perspective happens to be. It, along with some other teen retailers received some downgrades this past Friday and its shares plummeted.

I have lost count of how often that’s been the case with Abercrombie and FItch shares and I’ve come to expect them to rise and plunge on a very regular basis. If history is any guide Abercrombie and Fitch will be derided for being out of touch with consumers and then will surprise everyone with better than expected earnings and growth in one sector or another.

I’ve generally liked to jump on any Abercrombie post-plunge opportunity with the sale of puts and while I’d be inclined to roll those over in the event of likely assignment, I wouldn’t be adverse to taking possession of shares in advance of its earnings and ex-dividend date, which are usually nearly concurrent, with earnings scheduled for November 20t, 2014.

Traditional Stocks: EMC, Halliburton

Momentum: Abercrombie and Fitch, Joy Global

Double Dip Dividend: Ford (10/29)

Premiums Enhanced by Earnings: Coach (10/28 AM), Facebook (10/28 PM), 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 19, 2014

 After Friday’s nearly 300 point move higher, it’s absolutely inconceivable that anyone can have a clear idea of what comes next.

Even during the climbs higher over the past two years no one really had a clue of what the next day would bring, but there was an entirely different “gestalt” about the market than we have now.

During that earlier time the sum of its parts seemed somewhat irrelevant as the market as a whole was just greater than those parts and had a momentum that was impervious to the usual challenges and patterns.

The most obvious of those challenges that hadn’t come to a fruition was the obligatory periodic 10% correction. Instead, while we really didn’t know what was coming next, at least we had a clear idea of what was not coming next.

Can you say the same today?

After a month of the kind of daily moves that we really haven’t seen since the latter half of 2011, their alternating basis can only keep people off guard.

People generally fall into two categories on days when the market spikes as it did on Friday, particularly after a torrent of plunges. They either see that as evidence that we’ve turned the corner or that it’s just another trap to lure you in so that your money can wither away while feeding the beast.

For some, those optimists among us, they will have identified a capitulation as having occurred this week. They believe that kind of blow off selling marks the beginning of a return to a climb higher.

For the pessimists among us, they see that most every out-sized market one day gain has occurred during an overall downtrend.

While I remain confused about what the next week will bring, I’m not too confused about what my course of action is likely to be.

I don’t agree with the optimists that we’ve seen a capitulation. Those tend to be marked by a frenzy of selling. It’s not just a 400 point decline, it’s the rapid acceleration of the losses that shows no evidence of letting up that is usually the hallmark. The following day is also usually marked by selling during the open and then cautious buying that becomes a flood of bargain hunters.

So capitulation? Probably not, but the market very well still could have found a near term bottom this week as that 400 point loss did evaporate. That near bottom did bring us to about a 9% overall decline in the S&P 500 over the past 4 weeks, so perhaps you might hear the optimists asking “can a brother get some slack on 1%?” in the hopes that we can all move on and return to the carefree ways of 2012 and 2013.

On the other hand, those pessimists do have data on their side. You don’t need very fancy kinds of analysis to show that those 200, 300 and higher point moves over history have only served to suck money out of people’s pockets under false pretenses.

Over the past four weeks with the possible exception of the advances higher in the latter half of this past week, every strong advance led to disappointment. Every time it looked as if there was value to be had it was another value trap, as a whole.

My course of action last week was one that still has me in shock.

I didn’t execute a single new position trade last week, after having only added 2 new positions the previous week.

I’d better get used to that shock, because I don’t expect to add many, if any, new positions this week, unless there’s some reason to believe that a period, even if very short, of stability will step in.

Perhaps continuing good earnings news will be the catalyst for the market to take a breather from its recent mindless journeys to the depths and to the heights. Good news form the financial sector, some good indications from industrials and some good news from the technology companies that really matter could be a wonderful prelude to improved retail earnings.

Or maybe none of that will matter and we’ll again focus on things like moving averages, support levels, mixed messages from Federal Reserve Governors and news of continuing economic dysfunction in the European Union, all while watching the smartest guys in the room, the bond traders have their own gyrations as interest rates on 10 Year Treasury notes resemble a yo-yo, having had an enormous 10% spread in the past week.

Most of all, I want to focus on not being duped and trying to put uncovered positions to work. That means continuing to try and resist what appear to be screaming bargains, even after Friday’s march higher and higher.

But, we’re only human and can only resist for so long.

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

As I look at prices, even after some runs higher on Friday, what’s not to like? That still doesn’t mean, however, that you have to end up committing to anything.

What makes the temptation even stronger, despite a big drop in volatility on Friday, are the option premiums that can now be had when selling. The challenge, however, is finding the option buyer, as call volume is diminished, probably reflecting a paucity of belief that there will be sudden price jumps in underlying shares.

Part of the strategy accommodation that may be made if grappling with paper losses following the past four weeks is to now consider using out of the money strike prices that will still return the same ROI on the premium portion, but also potentially add some meaningful capital gains on the shares.

As with last week, I’m not terribly interested in the back story behind the week’s selections, but more in the recent price history, with particular attention to those that may have been overly and inappropriately punished.

MetLife (MET) is one of those among so many, that l have been waiting to repurchase. With the recent interest rate gyrations that actually brought the 10 Year rate below 2% there may be some rational to the price drop seen in MetLife, but with the 10% increase in rates some life was breathed back into floundering shares.

eBay (EBAY) is still a company that is always on my radar screen. Whether that will continue to be the case after the PayPal spin-off may be questionable, but for now, at its new low, low price, having taken a little bit of a beating from its just posted earnings, it really is beginning to feel irresistible.

Among sectors getting my attention this week is Healthcare. Following the drop in Merck (MRK), Baxter International (BAX) and the continued weakness of Walgreen (WAG).

With a 10% drop in shares of Merck in the past week, taking it to an 8 month low in the absence of any meaningful news one has to wonder when will the craziness end? Now
in
its own personal correction phase it wouldn’t be entirely an ill-conceived idea to believe that shares have either no reason to continue under-performing the market. With an attractive dividend and option premiums reflecting that downward spiral, Merck is one position that could warrant resisting the need to resist.

Baxter International is also in its own personal correction, although its time frame as been a month for that 10% decline. Despite having just released earnings and offering improved guidance shares continued to flail even as most everything else was showing some recovery. While there may be some logical explanation my interest in entertaining it may be subsumed by an interest in picking up shares.

Walgreen continues to be mired down at a price level to which it plunged after calling off any potential tax inversion plans. Being stuck in that trading range, however, has helped Walgreen to outperform the S&P 500 since it hit its highs last month. For it to continue trading in that range might be the kind of comfort that could provide some smiles even while everything else around is crumbling, particularly if the upcoming dividend is captured, as well.

Marathon Oil (MRO) is just another of those really hard hit energy stocks that has to cause some head shaking as it is in a personal correction and then some, even after 2 days of strength. The list need not end with Marathon Oil if considering adding energy sector positions, as there is no shortage of viable candidates. FOr me, Marathon Oil is one position that I’ve longed to return to my portfolio, but do understand that there may continue to be some downward pricing pressure in oil, before the inevitable bounce higher.

FInally, how can you not at least consider taking sides in the great Apple (AAPL) saga? Whether there will be a gold mine ahead as the new products hit the stores or deep disappointment, its earnings report this week is not likely to reflect anything other than great phone sales and lagging sales in most, if not all other product lines.

The option market, however, isn’t expecting too much action, with an implied price movement of only 4.4% next week. With barely a 1% premium at a strike level right at the lower edge defined by the implied move there isn’t really any enhancement in its premiums, especially as there is a general increase in volatility buoying most option premiums.

However, the sale of puts at the lower level strike may offer the opportunity to enter a position, particularly in front of the upcoming dividend at a better price than has been seen in over 2 months, or may simply offer a decent one week return.

Traditional Stocks: Baxter International, eBay, Marathon Oil, Merck, MetLife, Walgreen

Momentum: none

Double Dip Dividend: none

Premiums Enhanced by Earnings: Apple (10/20 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.

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Weekend Update – October 12, 2014

As The Federal Reserve’s policy of “Quantitative Easing” comes to an end the next phase considered should perhaps be one of instituting some form of “Quantitative Muzzling.”

Given comments contained in this past week’s FOMC statement had recognized global economic concerns, perhaps the Federal Reserve should consider expanding its dual mandate and reaching across the ocean to affix, adjust and tighten the right remedy.

As most of us learned sometime in childhood, words have consequences. However, we tend not to mind when the consequences are positive for us or when what we all know is left unsaid and ignored.

In each of the past two weeks words from the European Central Bank’s President Mario Draghi have had adverse impacts on global markets. While no one is overtly suggesting that ECB President’s should be seen and not heard, undoubtedly at least one person is thinking that, having applied a sloppy test of correlation to the market’s moves and Draghi’s words.

Such sloppy tests may have at least as much validity as the much discussed “key reversal” seen as trading closed on Wednesday and said to presage a bullish turnaround to the downtrend.

How did that work out for most people?

This week Draghi told us what everyone knows to be the truth, but what no one wants to hear. He simply said that there can be no growth in the European economies without economic reform.

That’s not different from what he said the previous week, as he pointed out that political solutions were necessary to deal with economic woes.

We also all know if it we have to rely on politicians to do the right thing, or make the difficult decisions, we’re not going to fare terribly well, hence the sell-offs. Why the Europeans can’t simply kick things down the road and then forget about it is a question that needs to be asked.

Compare the response to Draghi’s comments to the absolutely effusive response to this past week’s FOMC statement that simply said nothing and ignored answering the question that everyone wanted to ignore.

Despite everyone knowing what Draghi has been saying to be true, having had the same scolding take place in the U.S. just two years ago, no one with an investment portfolio wants to hear of such a thing, especially when it’s followed up with downgrades of Finland’s and France’s credit ratings.

Add to the mix the International Monetary Fund’s cut to its global growth forecast and you have spoken volumes to an already wary US market that was now eagerly eying any breach of the 200 day S&P 500 moving average (dma), as that had taken the place of the “key reversal” in the hearts and minds of technicians and foisted upon investors as being the gateway to what awaits.

Unfortunately, the message being sent with that technical indicator is a bearish one. While it has been breached on numerous occasions in the past 5 years, the most pronounced and prolonged stay below the 200 dma came in the latter half of 2011, a period when triple digit daily moves were commonplace and volatility was more than double the now nearly 2 year high level.

I miss those days.

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

When I first started thinking about a theme for this week’s article I decided to focus on stocks that had already undergone their own personal 10% correction.

That list grew substantially by the time the week came to its close following a brief FOMC induced rally mid-week and that thesis was abandoned.

As trading in the coming week opens at a DJIA level lower than where it began the year, there’s not much reason to start the week with any sense of confidence.

While the S&P 500 is only 5.2% below its recent high, putting it on par with numerous “mini-corrections” over the past two years, you don’t have to do a quantitative assessment to know that this decline feels differently from the others, as volatility is at a two year high point. The sudden appearance of triple digit moves have now gone from the mundane 100 point variety and have added 200 and 300 point ones into the arsenal.

For me, this week may be a little different. Heading into the week I have less cash reserves than I would like and less confidence than I would ordinarily need to dwindle it down further.

While it appears as if there are so many values to be had I would prefer to see some sign of stability before committing resources in my usual buy/write manner. Instead, I may be more likely to add new positions through the sale of out of the money puts, unless there is a dividend involved.

Additionally, while individual stocks may have compelling reasons to consider their purchases, this week I’m less focused on those specific reasons rather than the nature of their recent price declines and the ability to capitalize on the heightened option premiums associated with their recent volatility.

One of the benefits of this rising volatility environment is that option premiums grow as does the uncertainty. The sale of puts and anticipation of the need to rollover those puts in the event of further price erosion may be better suited to an environment of continuing price declines, rather than utilizing a traditional buy/write strategy.

Furthermore, as the premiums become more and more attractive, I find myself more inclined to attempt to rollover positions that might otherwise be assigned, as the accumulation of premiums can offer significant downside protection and reduces the need to find alternative investment candidates.

If you’re looking for a sector that is screaming “correction” you really don’t have to look beyond the Energy Sector. Hearing so many analysts calling for continued
decline in oil prices may be reason enough to begin considering adding positions.

Over the years I’ve lost track of how many times I’ve owned Halliburton (HAL), but other than during the 2008-2009 market crash, the time of the Deepwater Horizon disaster and during the tumultuous market of 2011, there haven’t been such precipitous declines in its price, as it has just plunged below its own 200 dma.

Although Halliburton doesn’t report earnings until the following week, next week’s premiums are reflective of the volatility anticipated. For anyone considering this position through a buy/write one factor to keep in mind is that it will be imperative to rollover the contract if expiration looks likely. That is the case because earnings are reported on the following Monday morning before trading opens so there won’t be a chance to create a hedging position unless done the previous week.

I have been waiting for an opportunity to repurchase shares of Anadarko Petroleum (APC) ever since a bankruptcy judge approved a pollution related settlement, that was part of its years earlier purchase of Kerr-McGee. Like Halliburton, it is now trading below its 200 dma, but it doesn’t report earnings until a week after Halliburton. However, it also offers exceptionally high option premiums as the perceived risk remains heightened in anticipation of further sector weakness.

Owing to its drops the final two days of the previous week, Dow Chemical (DOW) is now also trading below its 200 dma. It, too, is demonstrating an option premium that is substantially higher than has been the case recently, although the risk appears to be considered less than that seen for both Halliburton and Anadarko. With the exception of having received an “outperform” rating those past two days, Dow Chemical appears to have just been caught up in the market’s downturn.

Fastenal (FAST) has traded below its 200 dma since its last earnings report in July 2014 and was not helped by its latest report this past Friday. That was the case despite generally good revenues, but with softer margins that were expected to continue. Unlike the preceding stocks the option premiums are not expanded in reflection of heightened risk. In the event that this position is initiated with a put sale that is likely to be assigned, I would consider taking possession of shares rather than rolling over the puts, as shares go ex-dividend during the November 2014 option cycle.

For a stock whose price hasn’t done very much, eBay (EBAY) has been getting lots and lots of attention and perhaps it is that attention which has prompted it to finally decide to do what so many have suggested, by releasing plans to spin off its PayPal unit. eBay reports earnings this week and is always a prospect to exhibit a sizeable move. It is currently trading below the point that consider the mid-point of the price range that I like to see when considering a new position. As with some other potential earnings trades, it is a candidate for out of the money put sales before earnings or for those more cautious the sale of puts after earnings in the event of a large price drop upon earnings having been released.

Intel (INTC) reports earnings this week after having already been brutalized this past week along with the rest of the chip sector. Most recently I discussed some hesitancy regarding a position in Intel because it had two price gaps higher in the past few months. However, thanks to the past week it has now erased one of those price gaps that represented additional risk. As with Fastenal there is an upcoming ex-dividend date that may be a consideration in any potential trade.

Following YUM Brands’ (YUM) earnings report last week, many over-reacted during after hours trading and shares quickly recovered to end the following day higher, perhaps buoyed by the enthusiasm following the FOMC Statement. Shares did trend lower the rest of the week, but fared much better than the overall market. This coming week YUM Brands is ex-dividend and based upon its option premium is a veritable sea of calm, although it too is demonstrating growth in premiums as risk is generally heightened.

Finally, Best Buy (BBY) is one of those stocks that has seen its own personal correction, having fallen nearly 13% since the market high just 3 weeks ago. With so much attention having been placed on European concerns it’s hard to think of too many stocks that are so well shielded from some of those perceived risks. Although it doesn’t report earnings for more than a month, this is a position that I would like to maintain for an extended period of time, particularly with its currently bloated option premiums, heading into earnings, which I believe will reflect an improving discretionary spending environment, to Best Buy’s benefit.

Unless of course the muzzle falls off, in which case all bets are off for this week.

Traditional Stocks: Anadarko Petroleum, Dow Chemical, Fastenal, Halliburton

Momentum: Best Buy

Double Dip Dividend: YUM Brands (10/15)

Premiums Enhanced by Earnings: eBay (10/15 AM), Intel (10/14 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 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.

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Weekend Update – September 21, 2014

Somewhere along the line most of us have tried the proven strategy of hanging out with people who were uglier or stupider than we perceived ourselves to be, in order to make ourselves look better by comparison.

There’s nothing really wrong in admitting that to be the case. It’s really the ultimate in victimless opportunism and can truly be a win-win for everyone involved.

The opportunist hopes to break away from that crowd and the crowd feels elevated by its association, or so goes the opportunist’s rationalization.

Markets are no different and this past week was as good of an example of that tried and tested phenomenon as you might ever find. In this case, the opportunist was the US equity market, but it really can rarely be a win-win situation.

Bonds, currencies and precious metals?

Ugly and stupid.

There were three potentially market rocking stories this week that could have struck fear in stock investors, but neither an upcoming FOMC statement, a pending independence referendum in Scotland, nor history’s largest IPO could do what common sense said should occur, particularly with liquidity being threatened from multiple directions.

You can probably thank the less than attractive alternatives for making stocks look so good to investors.

U.S. equity markets just did what we’ve become so accustomed to, other than for brief moments over the past two years, as the week ended on yet another new record high with the DJIA moving higher each day of the week.

Last week was like a perfect storm, except that the winds blew from all different directions during the latter half of the week.

The week started a bit ominously, but after a while it was clear that selling was narrow in scope and appeared to be limited to profit taking in some of the year’s big gainers, ostensibly to raise cash for any hoped for Alibaba (BABA) allocation, that was unlikely to materialize for most retail investors.

But when the competition is weak, it doesn’t take much to shine and stand out from the crowd. With the week’s first challenge being whether the FOMC was going to accelerate their time table for raising interest rates, all it took was The Wall Street Journal’s Jon Hilsenrath expressing the belief that the phrase “considerable time,” would remain intact to allow stocks to stand out from the crowd.

Never mind that Hilsenrath had yet to demonstrate an inside track to the Yellen Federal Reserve, as he seemed to have had during the Bernanke era. Also forget about the fact that the FOMC has been using that phrase since March 2014 and sooner or later it has to give way to the relization that “considerable time” has already passed. That’s best left to deal with at some other time in the future.

Neither of those were important as all of the other options were looking worse.

With the outcome of the independence referendum being far from certain stocks had been smart enough not to have predicted the eventual outcome and put itself in jeopardy if independence was ratified. Instead the risk was borne by currencies and foreign stock markets.

Precious metals? Who in the world has been putting new money into precious metals of late?

So stocks looked great, but after getting a makeover last week, suddenly the crowd may not look so unappealing. Even precious metals may find some suitors because they just don’t want to chase after stocks and wind up getting disappointed.

Who knew that the high school experience could have taught so much about the behavior of stocks?

The behavior of stocks this week, was also similar to how high school “A-listers” may have acted when pulling in someone from the “losers.” The welcome isn’t always a full and complete embrace and somewhat circumspect or still maintaining an aura of superiority.

^SPX ChartIn this case the “A-list” DJIA greatly outperformed other major indexes this past week as the advance didn’t fully embrace a broader selection of stocks.

Despite last week’s nice gains against the odds, in this perfect storm, everything went right. Yet the embrace was with less conviction than it appeared.

That doesn’t mean that I want to go and join the losers, but I may be circumspect of the superficial appearance of those “A-listers” as next week is about to begin.

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

By comparison, Yahoo (YHOO) looks even less appealing now that it has given up a portion of its stake in Alibaba.

I purchased a small Yahoo position late this past Thursday, when noticing that the in the money option premium was rising even as shares were declining.

The following day I closed those positions shortly after Alibaba started trading as the gain in shares wasn’t matched by a similar gain the premium, resulting in a net credit greater than allowing the position to be assigned.

The funny thing was that the position never would have been assigned as reportedly Yahoo shares were being used a proxy to shorting Alibaba and share price went substantially lower, as a result, even while the value of Yahoo’s remaining stake in Alibaba appreciated by about an additional 37% from the IPO price.

While that kind of short selling strategy may continue, Yahoo is also reportedly becoming the focus of attention from other sources, while it may still stand to benefit from its continuing Alibaba position.

With lots of attention being directed toward its still unproven CEO, Marissa Mayer, as to what she will do with the IPO proceeds, I expect that the Yahoo option premium will remain elevated as so many factors are now coming into play.

While I like those prospects and expect to re-purchase shares, I don’t think that I’ll be allocating too much to this position because of all of the uncertainty involved, but do like the evolving soap opera.

When it comes to comparisons, there’s little that Blackberry (BBRY) can do to make itself look appealing. Where exactly can it hang out to be able to stand out in the crowd and get the attention of those that vote on popularity? Still, under the leadership of John Chen, Blackberry has ended its slide toward oblivion and at least gives appearances of now having a
s
trategy and the ability to execute.

Blackberry reports earnings this coming week and thanks to a lift provided by a Morgan Stanley (MS) analyst out-performed the NASDAQ 100 for the week. 

The option market has assigned an implied move of 9.7% for the coming week and at Friday’s closing price a 1% ROI could be obtained even if shares fell by 13.7%. That kind of comparison makes Blackberry look good to me.

While maybe not looking good in comparison to its chief competitor, CVS Health (CVS) on the basis of its self proclaimed status of the guardians of the nation’s health after belatedly eliminating the sale of cigarettes from its stores, Walgreen looks food to me. That’s especially the case now that it seems to be settling into a trading range after it, too, belatedly, decided against a tax inversion strategy.

Walgreen, as with many other stocks trading in a range, but occasionally punctuated by substantive price moves related to earnings or other events, offers a nice option premium that may exceed the current risk of share ownership.

Until recently the comparison to gold during the summer worked out well for Market Vectors Gold Miners ETF (GDX), having out-performed the SPDR Gold Trust (GLD). More recently, however, the Miners Index has had an abysmal month of September and is approaching a 2 year low. However, its beta is still quite low and shares are now trading below their yearly mid-point range, while offering a premium that may offset what I believe to be limited downside risk.

I don’t look at ETF vehicles very often, but this one may be right in terms of timing and price. The availability of expanded weekly options, strike prices in $0.50 increments and manageable bid-ask spreads makes this potentially a good candidate for serial rollover if it finds some support and begins trading in a range.

Fastenal (FAST) is one of those stocks that may not have much glamour and may not stand out sufficiently to get noticed. To me, though, it is a superstar in the world of covered options as it has traded reliably within a range and consistently returned to the mid-point of that range, where it currently resides.

Having rolled over shares this past Friday after a mid-session drop below the strike, I watched as it recovered enough to close above the strike. Had it been assigned, as originally thought would occur, I knew that at its current price I wanted to re-purchase shares. Instead, now I want to add shares, but being mindful that it will report earnings in just a few weeks.

Despite Alibaba’s successful IPO, it’s still difficult for me to have too much confidence in stocks that have either a heavy reliance on the Chinese economy or are Chinese companies. Fortunately or unfortunately, I do make exceptions for both situations, although far fewer for the latter.

Joy Global (JOY) has extensive interests in China and is very dependent on continued growth of the Chinese economy, which is difficult to measure with reliability. Of course with our own GDP being reported this coming Friday, we know all too well, based on the recent pattern of revisions, that data should always be viewed warily.

With some weakness in this sector, witness the recent drop in Caterpillar (CAT), Joy Global is approaching correction territory over the past month and is beginning to once again look appealing, not having owned shares in nearly a year. These shares can be volatile, but with patience and an inner sense of serenity, the option premiums can atone for moments of anxiety.

Despite still holding a very expensive lot of Coach (COH) shares for far too long, it is still one of my favorite stocks over the longer term time frame, having owned it on 21 occasions over 25 months.

Smarting from the pain of that lot I still hold, it took a while before finding the courage to purchase an additional lot, but that recent lot was assigned this past week and I’m ready to add another in its place, as it seems that Coach has found some support at its current level. In the past Coach has been an excellent covered option trade when it traded in a range. The reason for it offering attractive option premiums was due to its predictably large earnings related moves. However, in the past, it had a wonderful habit of its price reverting to the mean.

If so, I don’t mind executing serial trades, reaping premiums and the occasional premium to help offset the existing paper loss. As the luster from Kors (KORS) seems to be waning there is also less populist battering of Coach, which remains very popular internationally. It’s commitment to maintaining its dividend makes it easy to hold shares while awaiting what I hope is an inevitable, albeit, unusually slow recovery.

Whole Foods (WFM) is another of those companies that I own that is currently well below its purchase price. As with Coach, I eventually found the courage to purchase more shares and have done so 4 times in the past 3 months, as it appears to have also found some price support.

Recently its premiums have become more attractive as the company has become a topic of speculation regarding activist intervention. While I don’t think there’s too much to come of that speculation, I do believe that shares are poised to continue climbing and hopefully in a slow and sustained manner. It goes ex-dividend this week and while not the most generous of dividends it does supplement the potential return offered by also selling call options on shares sufficiently to make it an attractive consideration.

Finally, Oracle (ORCL) is back in the news and in the last couple of years that hasn’t really been a good thing. After a number of disappointing earnings reports over that time, its Chairman and CEO, Larry Ellison, blasted those around him, finding plenty of places to lay blame. His absence from last year’s earnings report and conference in order to attend Oracle Team USA’s effort in the Americas Cup race struck me as inappropriate.

Now the news of Ellison stepping down as CEO, while retaining the Chairmanship, preceded this most recent quarter’s disappointing earnings. It also  was a prelude to the announcement of a power sharing plan with the appointment of co-CEOs, because we all know how much high achievers like to share power and glory.

Yet, with this past Friday’s price decline in Oracle it is again becoming a potentially attractive purchase candidate, particularly with an upcoming, albeit modest dividend coming on October 6, 2014.

That happens to be a Monday, and I wish there were more such Monday opportunities for those stocks that I follow. Those are often the best of the “Double Dip Dividend” selections, as early assignment to capture the dividend must occur on the preceding Friday and typically means receiving an entire week’s option premium, while being able to reinvest the exercise proceeds to generate even more income.

 

Traditional Stocks: Fastenal, Market Vectors Gold Miners ETF, Oracle, Walgreen

Momentum: Coach, Joy Global, Yahoo

Double Dip Dividend: Whole Foods (9/24 $0.12)

Premiums Enhanced by Earnings: Blackberry (9/23 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 – September 14, 2014

Two weeks ago the factors that normally move markets were completely irrelevant. Instead, investors focused much of their attention on the tragic story that ended with the passing of Joan Rivers, while allowing the market to go on auto-pilot.

The fact that economic and geo-political news was ignored during that week wasn’t really much of a concern as markets went on to secure their fifth straight weekly gain.

This past week was essentially another one where the the typical kind of news we look to was irrelevant, at least as far as gaining our attention. This week most of our efforts focused on the unfortunate story of a talented, but abusive football player and the introduction of new products from Apple (AAPL).

There was a time, not so very long ago, when that football player was considered a soft spoken role model. In fact, somewhere is a photo of my wife, in a Baltimore Ravens jersey, and he at a charitable event, one of many that he attended and supported.

Amazingly, as the home Baltimore Ravens played their game on Thursday night, there were reportedly many female fans wearing the jersey of that abusive player, even though there were plenty of offers and incentives to exchange such jerseys in for pizza, drinks and other items.

The memory of the past is apparently more relevant than the reality of the present, sometimes.

There was a time, also not so very long ago, that Apple’s fate was the same as the fate of the markets, except that when Apple went higher, the market lagged and when Apple went lower, the market outpaced in the decline. Now, its ability to lead is less evident and so its place in the week’s news was mostly as a products release event, rather than as a marking moving event.

Those days of past are now irrelevant and Apple’s reality is tied and the market routinely part ways.

Unfortunately, that football player’s brutish actions made the new iPhone 6’s planned publicity campaign appear to be ill-conceived. Equally unfortunate was that this past week’s irrelevancies weren’t sufficient to allow markets to return to auto-pilot and instead snapped that weekly winning streak, as fears of liquidity may have captured investor’s attention.

Weeks filled with irrelevancy are likely to come to an end as the coming week is filled with lots of challenges that could easily build upon the relatively mild losses that broke that successive streak of weekly gains.

In the coming week there is an FOMC statement release as well as the Chairman’s press conference. Many are expecting some change in wording in the FOMC statement that would indicate a willingness to commence interest rate increases sooner than originally envisioned. That could have an adverse impact on equity markets as a drying up of liquidity could result.

Perhaps even more of a impetus for decreased liquidity is the planned Ali Baba (BABA) IPO. Likely to be the largest ever for US markets, the money to pay for those shares has to be coming from someplace and could perhaps have contributed to this week’s preponderance of selling. It’s not too likely that a lot of money will be coming off the sidelines for these share purchases, so it’s reasonable to expect that funds have been and will be diverted.

Unfortunately, the IPO comes at the end of the week, so I don’t expect much in the way of discretionary spending to buy markets before that, unless some nice surprise in the way the FOMC’s statement is interpreted.

Let’s not also forget this week’s referendum on Scotland’s independence. No one knows what to expect and a nervous market doesn’t like surprises, nor sudden adverse shifts in currency rates.

It’s hard to know whether these events will be more relevant than some of the irrelevancies of preceding weeks, but they certainly represent upcoming challenges.

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

This is a week that I don’t have too much interest in earnings or in “momentum” kind of stocks, unless there’s also a dividend involved in the equation. Having watched some well known and regarded companies take their knocks during this past week, yet fully aware that the market is not even 2% below its recent high level, there’s not too much reason to be looking for risk.

As volatility rises concurrent with the market dropping, the option premiums themselves should show evidence of the perceived increased risk and can once again make even the most staid of stocks start looking appealing.

With my personal cash reserves at lower levels than I would like, I’m not eager to make many new purchases this week, despite what appear to be some relative bargains.

While the market was broadly weak I was fortunate in having a few positions assigned and may be anxious to re-purchase those very same positions at any sign of weakness or even if they stay near their Friday closing prices.

Those stocks were British Petroleum (BP), T-Mobile (TMUS) and Walgreen (WAG). Although they’re not included in this week’s listing, they may be among the first potential purchases that I look toward completing and may be satisfied being an onlooker for the rest of the week.

Among other stocks that may warrant some interest are those that have under-performed the S&P 500 since the beginning of the summer, a completely arbitrary measure that I have been using for the past few weeks, particularly during the phase of the market’s continuing climb.

^SPX ChartGeneral Electric (GE) is

one of those staid stocks whose option premiums of late have been extraordinarily low. It goes ex-dividend this week and is starting to look a little bit more inviting. Having now spun off some of its financial assets and made preparations to sell its appliances divisions to my old bosses at Electrolux (ELUXY), General Electric is slowly refocusing itself and while not having looked as a stellar performer, it has greatly out-paced the S&P 500 since the bottom of the financial crisis in 2009. In hindsight it is a position that I’ve owned far too infrequently over those years.

Dow Chemical (DOW) and DuPont (DD) have both lagged the S&P 500 over the past two months, much of it having come in the past week. Those drops have brought shares back to levels that I would entertain share re-purchases.

The option premium pricing may indicate some greater risk in Dow Chemical, however both companies have some activists interests that may help to somewhat offset any longer term pressures.

I’ve been waiting for Verizon (VZ) shares to drop for a while and while it has done so in the past week, it’s still not down to the $47.50 level that I my eyes on. However, its current level may offer sufficient attraction to re-enter a position in advance of its upcoming, and increased dividend.

Without a doubt the mobile telephone sector has been an active one of late and I suspect that T-Mobile’s very aggressive strategy to acquire customers will soon show up in everyone’s bottom line and not in the way most would like. However, with strong price support at $45, a combination of option premiums and dividends could help ownership of Verizon shares offset those pressures while awaiting assignment of shares.

While Intel (INTC) hasn’t followed the pattern of the preceding selections and has performed well since the beginning of summer, it did give back enough ground in the past week to return to a level that interests me. On the downside is the credible assertion that perhaps shares of Intel have accelerated too much in the past few months and can be an easy target for any profit taking. WHile that may certainly be true, by all appearances the once moribund Intel has new life and I suspect will be reflected in earnings, should the goal of short term ownership turn into something longer.

As with Verizon, and hopefully General Electric, as its option premiums could still stand to improve, the combination of a strong dividend yield and option premiums can be helpful in waiting out any unexpectedly large and sudden price declines.

Given the mediocrity of performance by eBay (EBAY) over the past couple of years, it may be hard for anyone to find much relevance in the company, except for that potential jewel, PayPal. I purchased more shares last week and did expect that there might be some downside pressure if Apple announced a new payment system, as had been widely expected. Moving higher into the upcoming Apple event shares did go strikingly lower once details of “Apple Pay” became known. The use, however, of an expanded weekly option provided a rich premium related to the uncertainty surrounding the Apple event and time to dig out of any hole.

The bounce back came sooner than expected as some rumors regarding Google’s (GOOG) interest in eBay made their rounds. Whether valid or not, there’s not too much question that the pressure to consider a spin off of the PayPal unit is ramping up and may, in fact, be seen as necessary by eBay if it perceives any erosion on PayPal’s value as a result of a successful Apple Pay launch. In such a case, it’s far better to spin off that asset while it is still in its ascendancy, rather than to await some evidence of erosion. That is known as the “take the money and run” strategy and may serve eBay’s interests well, despite earlier assertions that PayPal functioned best and provided greatest value as an eBay subsidiary division.

While Visa (V) has announced its alignment with Apple, MasterCard (MA) always seems to be somewhat left out or at least not in a proactive position in the changing payments landscape. Yet even while it has ceded much of the debit card arena to Visa, it continues to be a very steady performer trading in a reasonably narrow range and offering an equally reasonable premium for the risk of owning shares. While selling those options also gives up the potential for upside share appreciation, that upside potential has been limited since the stock split. Much in the way as with eBay, the consideration of a covered option trade may be warranted and a means to generate returns from a position that has little net movement.

Las Vegas Sands (LVS) is the lone momentum stock for the week and it has a dividend this week that warrants some consideration. Having been brutalized in the last few weeks as the gaming sector, particularly those with interests in Macao have seen significant price erosion it appears to be developing some support in the $62.50 level. While I wish I knew that with certainty, what I do know with some degree of confidence is that when Las Vegas Sands does find that level of support it has consistently been a very good covered options position.

Finally, I jumped the gun with one of this week’s selections, having purchased shares of Cypress Semiconductor (CY) on Friday afternoon. I particularly like this company for non-investing reasons because it has been a fertile breeding ground for innovation in an number of different areas. However, by the same token, the same broad thinking that allows it to serve as an incubator also has its CEO spend too much time in the spotlight on policy related issues, when all I really want is for its share price to grow and to return to profitability.

In this case I was eager to purchase shares again in anticipation of its upcoming dividend early in the October 2014 option cycle. However, I also wouldn’t mind early assignment, having sold a deep in the money option. EIther way, the prospects of a satisfactory return look good, as even if not assigned early, there is a potential ROI of 2.5% even if shares fall nearly 5% from the purchase price.

The one caveat, if you find such things to be relevant, is that earnings will be released just two days before the end of the October cycle so there may be reason to consider rolling this forward at that point that the November 2014 options are available for sale.

Of course, all relevancy is in the eye of the

beholder and sometimes it is nice to not have any weighty issues to consider. After this coming week we may find ourselves wishing for those mindless days glued to “Access Hollywood” rather than the stock ticker.

Traditional Stocks: Cypress Semiconductor, Dow Chemical, DuPont, eBay, Intel, MasterCard, Verizon

Momentum: none

Double Dip Dividend: General Electric (9/18), Las Vegas Sands (9/18)

Premiums Enhanced by Earnings: none

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

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Weekend Update – September 7, 2014

There was no shortage of news stories that could have prevented the market from setting yet another new closing high this week.

While much of the week was spent on discussing the tragic sequence of events leading to the death of Joan Rivers, markets still had a job to do, but may have been in no position to stop the momentum, regardless of the nature of more germane events.

Despite what everyone agrees to have been a disappointing Employment Situation Report, the market shrugged off that news and closed the week at another new record. They did so as many experts questioned the validity of the statistics rather than getting in the way of a market that was moving higher.

As the saying goes “you don’t step in front of a moving train.”

The previous day, with the announcement by ECB President Mario Draghi of further decreases in interest rates and more importantly the institution of what is being referred to as “Quantitative Easing Lite,” the market chose to ignore the same reasoning that many believed was behind our own market’s steady ascent and could, therefore, pose a threat to that continued ascent. 

Continue reading “Almost Nothing Can Stop a Runaway Train” on Seeking Alpha

 

 

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