TheAcsMan

March 23, 2014

Weekend Update – March 23, 2014

There was a time when the Chairman of the Federal Reserve did not hold press conferences.

In the past that would have been a very good thing, as the last Chairman to not have held press conferences, Alan Greenspan, was cryptic. When he did speak, such as during congressional testimony, he could send markets gyrating to opposite extremes before even having uttered a single verb.

When Ben Bernanke succeeded him and introduced the concept of a regularly scheduled press conference people were thrilled with the idea that there would be a new era of transparency and an end to the use of words shrouded by their own opacity.

For the most part Ben Bernanke’s press conferences were yawners. Not because of a lack of interesting subject matter, but because the markets rarely reacted to any new insights and inadvertent slips of strategic policy intentions just weren’t going to come from someone who carefully measured every word.

Now it was Janet Yellen’s turn and there had even been talk of her holding such press conferences after each FOMC minutes release and not simply on an alternating monthly basis.

Yellen performed admirably, once you get over the fact that with your eyes closed she sounds like Woody Allen’s sister, never batting an eyelash when one questioner twice referred to the FOMC members as “you guys” and then herself once referred to the cultural phenomenon of “shacking up,” it was what she said or didn’t say or maybe meant or maybe didn’t mean that sent the market abruptly tumbling at 3:04 PM Wednesday afternoon.

What was learned was that in a world of imprecision, especially when discussing time frames, any lapse that leads to a more precise time frame can create reactions from people that claim to loathe uncertainty but are really more afraid of certainty. The very idea that interest rates might begin to rise as soon as 6 months from now as part of a strategic plan by the Federal Reserve was a momentary reason to panic.

But was it really because of what Janet Yellen said or more a case of traders going to a second or even third derivative of the consequences of whatever it is that she may have said or may have meant.

That seems like good enough reason to exercise the emotional part of a coherent investing strategy.

The market’s response this week showed that it is very much on edge and harbors a significant amount of nervousness, but it also shows impressive reparative ability.

Over the past few weeks it is that reparative ability that has repeatedly been tested and repeatedly met the challenge.

With continued challenges in mind, this week more of my attention is focused upon positions that may be less susceptible to a breakdown in the event of a market giving into some of the challenges that may await. While in recent weeks I haven’t been adverse to more risky or volatile positions, I once again find myself not being attracted to risk as the market is again near all time highs, despite its seeming resilience and resistance to challenges.

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

The world of a stock analyst continues to confound me. On the one hand, I saw this week’s decline in shares of Bristol Myers Squibb (BMY) as an opportunity to consider bringing it back into my portfolio, particularly since I need additional healthcare representation. However, this week came a curious assessment from analysts at The Jeffries Group who raised their price target of shares to $48 and issued a “hold” rating on shares.

Since a $48 price target is about 10% below the Friday’s close, which itself is 8% lower than where shares started the month, it does beg a question or two.

Rather than asking those questions, I like what appears to be an opportunity, having waited for shares to return to my comfort level. The fact that Bristol Myers will be paying a dividend shortly further encourages me to consider going for the trifecta; an increase in share value, an option premium and the dividend, during what is hoped to be a short period of ownership.

British Petroleum (BP) is another stock that has seen its shares fall about 8% this month. I haven’t owned shares since November 2012, but have been anxious to do so since that time, futilely hoping that it would return to the $43 level at which I had repeatedly traded its shares. Sometimes you may have to give up some hopes and perhaps come to the realization that after its 8% fall that may be the biggest gift that is to come. While its option premium is less rich than I would like the enticement of its dividend makes it one of those companies that I don’t mind owning for more than an occasional short term fling, particularly since it doesn’t appear to be poised to present undue risk, even in a falling market.

While British Petroleum may now seem to have much in the way of added risk, Holly Frontier (HFC) is not exactly be a prototypical stock to consider when looking to avoid risk. It certainly trades with some sudden and rapid moves in both directions and does so on a regular basis. Yet despite that kind of behavior it seems to also be very capable of finding its way back home. Having owned several times in the past few months and having just had shares assigned this past week, I’m interested in restoring them to my portfolio. The single caveat is that it is near the top of the range that I’ve had comfort initiating a position.

With the attentions of Nelson Peltz and Carl Icahn, Mondelez (MDLZ) and eBay (EBAY), respectively have seen their initial bursts of share appreciation moderate of late. Until Icahn came onto the scene eBay was one of my very favorite covered call trades as it

so reliably traded in a range. His sudden interest and unimaginative plan to spin off the PayPal unit was initially news divulged by eBay upon its earnings announcement and it shifted focus from mediocre performance to activist investing.

Following some fairly nasty exchanges, including a battle of words with Marc Andreessen, who sits on the board of eBay, the share price has started moderating a bit, having gone down approximately 5% from its peak earlier this month. That’s still on the high end of my trading range, but the interest is returning and would be greatly enhanced with any further drop.

Mondelez, on the other hand, has made some peace with its activist and its shares have stagnated ever since. As with eBay and so many other stocks, I like stagnation, especially if punctuated with occasional bursts of activity that keeps traders and especially potion buyers ion their toes. Mondelez goes ex-dividend this week and that has been a good time to consider entering into a new position or adding shares.

A Court of Appeals ruling on Friday regarding debit card swipe fees was greeted by differing levels of enthusiasm for shares of Visa (V) and MasterCard (MA) that appeared to adversely impact MasterCard well out of proportion to the favor found in Visa. Despite the acknowledged greater market share that Visa controls in the debit card area, analysts predominantly noted an incremental benefit to MasterCard as well, however its shares fell sharply, placing it back in the attractive price range

LuLuLemon Athletica (LULU) reports earnings this week. With a new clothing line recently released and with new leadership, as an existing shareholder with much more expensively priced shares, my hope is that they will provide guidance that casts an optimistic light on its future fortunes. No stranger to large earnings related moves there is, however, the possibility that this earnings report could be the kind that a new CEO often uses for advantage by dumping all of the bad news and dead weight so that, by comparison, future earnings reports are glowing and reflect upon the new CEO.

The option market is implying a 10.5% move when earnings are announced. By some of its own historical standards that may be an understatement of what its shares are capable of doing and the direction has been predominantly on the downside. The 1% ROI that may be able to be obtained even with a 14% drop in share price may make that risk worthy for some, especially if you believe, as I do, that this earnings report will be greeted in a positive manner.

Family Dollar Stores (FDO) has not had a good month ever since a downgrade to “sell” and disappointing earnings from Dollar General (DG). Now near its yearly lows volatility has returned to its option premiums helping to balance the risk that may be associated with this purchase, despite its historically low beta level. I already own shares and have been fighting back its price drop by attempting to take advantage of that enhanced option premium. While there may be some disagreement about what an improving retail sector means for the lower echelon of retailers, such as Family Dollar Store, I subscribe to the “high tide theory” particularly since economic recovery is leaving many behind and increasingly tethered to the lower echelon of retail.

Other than being named as one of the world’s most ethical companies, there really was no other bad news to have accounted for International Paper (IP) being unable to capitalize on the market’s advance this week. It’s current price places it close to the lower end of its trading range and makes it increasingly appealing to own. With more spin-offs of its assets planned within the next few months in pursuit of a successful strategy that has seen a number of such assets spun off, International Paper has created and optimized value without the need for outside agitation and has been a good candidate for a covered option strategy in the past year.

Finally, GameStop (GME) reports earnings this week. It received a blow to its share price when Wal-Mart (WMT) announced that it was encroaching on GameStop’s core business by offering to exchange Wal-Mart shopping credit for used video games. Whether Wal-Mart believes that they have a potentially profitable product line in used video games or simply plan to use customer entry into the stores as a means of enticing them toward other Wal-Mart purchases isn’t clear, but I think that impact on GameStop will be far less than the market has already assigned.

Wal-Mart, priding itself on offering the lowest prices, isn’t likely to offer the highest prices on its game repurchases. Secondly, only the most desperate of families is going to garnish their kid’s video games, which through some tradition have become the property of kids to do with as pleased and then trade them in for a chance for even more Wal-Mart goods. The rightful owners of those games, the kids, are going to need a really compelling reason to go into Wal-Mart.

Adult gamers, on the other hand, may not have enough energy to re-direct their inertia and change their game swapping habits.

The option market is implying a 5.5% move upon earnings release and GameStop is certainly no stranger to large price swings. However, the sale of a put option at a strike price about 11% below Friday’s closing price can still return a weekly ROI of 1%. That’s the sort of fun that could have me easily glued to the ticker crawl on my stock screen.

Traditional Stocks: Bristol Myers Squibb, British Petroleum, eBay, Family Dollar Store, Holly Frontier, International Paper, MasterCard

Momentum Stocks: none

Double Dip Dividend: Mondelez (3/27)

Premiums Enhanced by Earnings: GameStop (3/27 AM), LuLuLemon Athletica (3/27 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.

March 16, 2014

Weekend Update – March 16, 2014

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

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

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

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

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

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

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

That hasn’t happened in a while.

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

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

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

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

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

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

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

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

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

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

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

Las Vegas Sands (LVS) also goes ex-dividend this week and is also a higher beta stock. While I have traded this stock w

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

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

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

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

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

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

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

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

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

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

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

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

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

As with the recent news that the FTC will b

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

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

Momentum Stocks: Freeport McMoRan

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

Premiums Enhanced by Earnings: none

March 9, 2014

Weekend Update – March 9, 2014

It was a week of conflict and uncertainty that nonetheless took the market to new highs.

That’s really not the way it’s supposed to work, as the market is said to dislike uncertainty and there’s certainly plenty of that at the moment. Then again, the market is also supposed to dislike being long going into a weekend of uncertainty, yet it can’t resist buying into the close of a trading week, having again done so the past two Friday’s, despite the breaking news and later developing situation in Crimea.

While news seemed to moderate early in the week there was new concern over escalation as the week came to its close, yet the market closed t another record high.

Granted that it was also a week in which the Employment Situation Report was released and as we all know by now that means a week in which the market goes higher, but conflicts on the ground threatened that certainty. While many finally discussed the recent relationship between the market and the Employment Situation Report, you heard it here, first, two reports ago.

Meanwhile, some of the week’s conflict may have had an historical basis going back centuries as Vladimir Putin’s Russia supported a split of Ukraine, while other conflicts, such as between Carl Icahn and Marc Andreessen are more recent and involve the split of eBay (EBAY). Despite the way in which we instinctively await the release of the monthly Employment Situation Report, the only stories that really mattered and garnered any attention were those of conflict.

Putin, Icahn and Andreessen. Two bullies and a visionary, although you can decide what role is assumed by each player, understanding that bullies can also be visionaries.

While Putin seeks to re-draw the map most of us have never really looked at, the battle between Icahn and Andreessen has temporarily pulled eBay off of my map, as it no longer trades in that comfortable range that I had come to appreciate in the quest to sell covered calls on a serial basis.

Recent reports suggest that the decision to proceed in Crimea was a strategy that emerged haphazardly and was borne out of emotion and deep grievances. In contrast, the conflict surrounding eBay is very likely one that has it its basis simply in differing opinions about where investor value resides. Still, despite what may be well reasoned positions, as with most other aspects of life, I don’t particularly care for conflict and being put in a position to either choose sides or sit and wonder where the new reality will set up shop.

It seems a little surprising that another world leader, Chancellor Angela Merkel of Germany would describe her recent conversations with Putin as being with a man that she was uncertain was in touch with reality and “in another world.” If accurate, having a world leader possess a somewhat less tenuous grasp of reality should be a concern for markets, although the eBay marketplace is likely to be indifferent as both Icahn and Andreessen toil in worlds of more objective reality.

While international conflict is underway and its outcome is still far from certain that comfortable range is also being exceeded in the market as a whole as it works it way toward new highs despite a paucity of a rational basis. Here too, there’s some conflict, as we’ve all been taught that the market is rational.

I usually have new funds to start each week as the previous week typically has share assignments. This past week was no different. However, faced with cash looking to be spent, markets again at new highs and uncertainty abounding, I’m facing personal conflict as the coming week approaches.

The conflict isn’t over whether to invest that money, as that’s always a given, but what theme to adopt in seeking to find the balance between safety and reward.

Some weeks there a sense of a need to embrace risk and volatility and other weeks there’s an abiding feeling that boring is the new chique.

This week I’m split between the two and see a role for opening the portfolio to both sides of the range. Sometimes the solution is for differing sides to simply get together and understand what each can bring to the table.

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

If I were to focus on low beta and presumed safety, at least from the perspective of my trading strategy of utilizing covered options, I would give serious consideration to shares of Altria (MO), Coca Cola (KO) and Merck (MRK) this week, as they all go ex-dividend. However, the premiums of the former are just too low. While collecting both premium and dividend would present an acceptable return, the potential for early assignment would create a poor investment choice. On the other hand, Merck offers both an appealing premium and dividend, but a frightening appearing chart, unless you believe that little can go wrong in just a week.

If you believe that to be the case, you too may be living in another world.

Part of the conflict this week is pitting the desire to find bargain prices and learning to accept the fact that share prices may be creating new normal levels that are, unfortunately, higher and bring with them increased risk, but without concomitant offsets in risk reflected in option premiums.

Both Lowes (LOW) and Home Depot (HD) are now near their yearly highs. Taking a very narrow view, both hav

e out-performed the S&P 500 since the bottom of the most recent attempt at a correction early last month. Normally, that might send me looking elsewhere for a short term opportunity, but I find some solace knowing that they have lagged a bit in the longer term. Both offer reasonable option premiums during this period of low volatility, but Home Depot also offers the potential advantage of being ex-dividend this week.

While Lowes and Home Depot may be near their highs some of the typically lesser volatile positions that I follow and also currently own are at lower prices, having lagged the market and may offer the opportunity and price combination that is becoming more difficult to locate.

There’s not too much reason to recount the recent trials of Target (TGT). In addition to its own security breach issues it has also had the unfortunate experience of being a retailer at a time that retail hasn’t fared terribly well. Following recent less than stellar earnings it did what other retailers did a few weeks ago when those earnings weren’t as disappointing as expected and shares surged. In the meantime shares have come down a bit, but are still far from their not so distant peak.

Marathon Oil (MRO) is also fairly far from its recent peak and has little reason for having suffered such a fate. It is now trading slightly above the mid-range of what had been a comfortable trading range in the past and I believe is a good entry point and hopefully an exit point as well. If Marathon Oil can stay in this range for a little while it option premiums can make this a very attractive recurrent purchase and sale of calls. Already owning some slightly more expensive shares I wouldn’t be adverse to adding to that position and using option premiums to offset paper losses on the initial lot of shares.

A portion of my Holly Frontier (HFC) holdings were assigned this week after a very unexpectedly sharp climb. Shares go ex-dividend this week after having distributed a special dividend earlier in the month. Having bounced back from some recent near term lows its shares are a little higher than that mid-point of the range that I generally like to use when considering adding shares, however the upcoming dividend adds incentive to restore the position. These shares often exhibit large price swings in a narrow time frame and those help to support a very appealing option premium that’s even more generous if the dividend is captured, as well.

While all of the recent excitement has centered around the rumored buyout of Lorillard (LO) by Reynolds American (RAI), Phillip Morris (PM) has languished of late. With events heating up a bit on the European continent perhaps increasing nerves will boost sales of their products, but more likely share price will be supported by talks of merger activity in the sector and visions of new markets in electronic cigarettes and even marijuana for domestic players. Although the prices of both Lorillard, the purchase target, and Reynolds American, the rumored purchaser fell quite a bit after the story was digested, this isn’t likely to be the end of the story. Phillip Morris has protected the $80 level of late and shouldn’t be at risk to decline if such buyout talks fail to move forward, as it didn’t participate in the rumor rally.

While prudence may dictate that priority be placed on re-populating a portfolio with lower risk positions at this time there may still be some room for more adventurous positions.

One of my favorites, despite still holding more expensive shares purchased prior to the dissolution f the potash cartel is Mosaic (MOS). While I haven’t enjoyed their continued position in my portfolio, other than their dividend income production, I have enjoyed the climb from $40 to $50, having owned shares on numerous occasions in the interim. Despite now being at the high end of its post-cartel break-up range, I think that shares are still poised to go higher and continue to offer short term opportunity. Enough so that I would consider not hedging my entire position.

Citigroup (C) is significantly below its highs reached earlier in the year. It has, however, seemed to find support at about the $48 level and responded reasonably well to some recent bad news coming from their Mexican unit. While Citigroup hasn’t been an especially good core long term holding for many, other than those smart enough to have purchased shares at its nadir, it does have the potential to be more rewarding for those looking for small and short term opportunities. Someday, perhaps in my lifetime, it may also increase its payout ratio from its current 0.9% as soon as regulators give that clearance.

Finally, Seagate Technology (STX) is a good example of a stock that saw its price exceed my own comfort level and to which I eventually adapted by accepting a new normal. In the case of Seagate that has happened on any number of occasions over the past two years as it continues to surprise by its continued relevance as a company.

After waiting for a while, I increased that comfort level from $48 to $49.50 by virtue of having sold puts this past Friday. That new higher level itself was some 20% below its January 2014 high.

However, in a tiny fraction of the time that I waited to finally adapt, I found myself having to roll over the put contract to the next week as shares suddenly added to their day’s losses, before recovering near the close. That recovery gives me some additional confidence in recognizing comfort at this level and suggesting that others do so, as well.

Hopefully, if all goes as planned, these disparate selections may find a way to get along and provide a lesson to others.

Traditional Stocks: Lowes, Marathon Oil, Phillip Morris, Target

Momentum Stocks: Citibank, Mosaic, Seagate Technology

Double Dip Dividend: Holly Frontier, Home Depot (ex-div 3/11)

Premiums Enhanced by Earnings: none

March 2, 2014

Weekend Update – March 2, 2014

“What correction?” you may rightfully ask.

Being creatures of habit it’s sometimes unusual to understand why we’re not better at identifying patterns.

Sure, we try to see things and ascribe common property characteristics to them, such as cups and handles, but we don’t necessarily see what’s staring us in the face.

While everyone was ready to accept the decline of a few weeks ago as the long delayed arrival of the correction we all knew was coming, what was overlooked was that since May 2012 every attempt at a correction was quickly stomped out and the market moved onto new highs.

“Maybe this time will be different,” is a common response to what we often know to be obvious. To our own defense, maybe this time it was, as the decline very briefly exceeded that previously impervious 5% level. As I looked back at those weeks maybe that’s what I was thinking as I was certainly in “exercise caution” mode, rather than increasingly testing the waters with the cash reserves I had built up for just that kind of moment.

It’s definitely easier to talk a game than to play in it. Despite having had a more optimistic outlook the past two weeks I didn’t necessarily put that tone into unbridled action.

With the exception of the final hour of trading this past week when the market was ostensibly reacting to what could be a degradation of events in the former Soviet Union, it was a week of being led by technical factors rather than events or news.

Mostly there was no news other than the sudden rehabilitation of much of retail, despite continuing to put forward disappointing, albeit less disappointing, numbers. With weather probably now discounted going forward they may be safe havens until the next time they reflect the reality that consumers aren’t digging into their own cash reserves.

In the meantime the only reality that had any impact was that the S&P 500 had a well defined high point and that the market was hovering around that point. Technicians ruled as the market was fully aware of the perceived importance of that level and spoke of nothing else as it was exceeded, then surrendered, then finally exceeded again, despite a Crimean assault on its integrity during those final minutes of weekly trading.

In the absence of an unfolding of continued degradation in the Crimea and eastern Ukraine, as the only world event currently on the horizon, next week continues to be one that advances on technical factors and stays ignorant of news and events, with the possible exception of Friday’s Employment Situation Report.

Despite disappointing news, despite good news, we all know what that means, especially from Thursday 3:59 PM to Friday 4:00 PM.

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

It wasn’t an especially good week for the financial sector last week but three potential trades figure prominently in this week’s list.

JP Morgan Chase (JPM), AIG (AIG) and MetLife (MET) have all lagged the S&P 500 this year and their charts look remarkably similar to one another, sharing some important characteristics, particularly with regard to where their current prices stand relative to the near past.

While AIG has an upcoming dividend this week to make it a little more appealing, it has spent the past six months range bound, which makes it an increasingly attractive consideration for a covered option strategy. It’s currently at about the mid-point of that range, which mitigates risk for entry. While its CEO, Robert Benmosche came out of retirement from his villa in Croatia, I don’t believe that AIG has a portfolio of risk in Crimea or environs, but given how far flung AIG’s non-insurance related interests used to be, it wouldn’t be overly shocking to learn that it did have some actual insurance exposure to risk in that region. Like most other natural or man made tragedies insurance companies frequently do more than survive challenges coming their way. No one can do that better than Benmosche.

JP Morgan is finally spending less time in the headlines, although in the often perverse world of share pricing, it has floundered a bit as the bad news has slowed and there isn’t word of more billions of dollars of fines coming their way. While not quite range bound, yet, shares are still 5% below their recent peak and also at a near term mid-point if considering entry.

MetLife is down a more substantial 8% from its near term high and is also now at about its mid-point trading level. While it may be responsive to increasing interest rates, there probably isn’t too much downside risk related to that same measure, even if a whispered tapering to the taper becomes reality.

Verizon (VZ) has had some unusually large price moves up and down of late while not really going anywhere. That is my kind of stock and I’ve now owned shares on four occasions since the beginning of this year. With the large alternating moves in price its option premiums have been getting more and more attractive even as market volatility has dropped. It’s hard to resist that kind of stock even though the competitive landscape is being challenged by T-Mobile (TMUS) which is enjoying its time in the sun but at some point will see the price for its strategies to capture market share.

While I’m not as focused on dividend paying stocks this week, already having a number going ex-dividend this week, one that may garner attention is VF Corp (VFC). Like so many stocks that seem to fall flat on the promise of price ap

preciation following a stock split, VF Corp has languished of late after an extended ride higher prior to the stock split. With only monthly options available this one be more of a defensive position if purchased, anticipating that even in a market decline it may be able to have some greater ability to withstand downward pressure.

One sign of my optimism is an increased consideration of “Momentum” stocks, after a period of focusing more on “Traditional” and dividend paying positions. However, some of that optimism is hedged by looking at participation in positions through the sale of put contracts rather than the use of covered calls.

I just closed a Cree (CREE) put position this past Friday about an hour after having rolled it over to the following week as I had done numerous times on several individual lot positions since October 2013. Shares having routinely bounced up and down after a very poorly received earnings report have provided that opportunity.

Although now without a position I would readily consider another sale of put contracts on Cree at any sign of price weakness. It’s high maintenance can be offset by its returns as long as it continues trading in a range and rapidly alternates price direction, as it has been doing for the past few months.

LuLuLemon Athletica (LULU) has been a disappointment for me, currently owning one lot. Having recently had another lot assigned at an even lower price after deciding to take an assignment of a put contract, Friday’s sharp drop is an enticing opportunity to try the route of a put sale once again and helping to chip away at the paper losses on the original shares. While there is some suggestion that its core demographic may be looking elsewhere I look for LuLuLemon to stage a significant push to re-establish itself as a non-misogynistic partner in fashion under its new leadership.

Deckers (DECK) was another earnings related trade highlighted last week. Despite offering a decent report of earnings, it was a perfect example of just how important future guidance can be, as its shares tumbled 13% upon disappointing guidance. While that fall was outside the implied volatility predicted by the option market it was still within the threshold 1% ROI strike price that I prefer to use.

While the news of poor guidance is being digested there may be additional opportunity to profit in the belief that shares are nearing a near term trading low. As with most earnings related trades prior to the report, I would likely consider this trade also to be one that’s made through the sale of out of the money put contracts. For those that like Deckers at this price you might like it even more if it doesn’t go lower.

Joy Global (JOY) is one of those stocks that is tethered to the fortunes of the Chinese economy and specifically its infrastructure growth and projects. Now trading at the top of the range that I like to enter into new positions there does appear to be some opportunity at strike levels below the range outlined by the implied volatility, which is always a situation that gets my attention.

Finally, It was a good week for Elon Musk last week, although it’s probably always good to be Elon Musk. Last week, I suggested that SolarCity was a potential good earnings related trade, but a funny thing happened. When 4 PM rolled around on February 24 and everyone was expecting the release, it wasn’t to be. Presumably the executives at SolarCity knew before then that they wouldn’t be ready before 4 PM. Reportedly the reason for the delay was due to accounting issues related to recent acquisitions and a change in overhead allocation related to an increase in megawatts deployed.

What?

Not surprisingly, shares nose-dived when the announcement of the delay was made. After all, who has confidence in a company when accounting issues are at hand? Inexplicably, however, shares surged the rest of the week, ending up nearly 15% higher than where it had ended the previous week. Additionally, the option market’s assignment of implied volatility had fallen from 12.8% the previous week to 8.4%, probably because the revenues part of the earnings report was released. Still, anything less than a 9.5% drop in share price after Monday’s scheduled event can result in a 1.1% ROI. While not as inviting a trade as it would have been last week when you could have derived a similar ROI as it’s cushion was an almost 18% price drop, it still has some appeal.

Traditional Stocks: JP Morgan, MetLife, Verizon

Momentum Stocks: Cree, Deckers, LuLuLemon Athletica

Double Dip Dividend: AIG (ex-div 3/7), VF Corp (ex-div 3/6)

Premiums Enhanced by Earnings: Joy Global (3/6 AM), SolarCity (3/3 PM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often cou

pling 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.

February 23, 2014

Weekend Update – February 23, 2014

When this past week was all said and done, it was hard to discern that anything had actually happened.

Sure, there was an Olympics being staged and fomenting revolution in Ukraine, but it was a week when even the release of FOMC minutes failed to be news. Earnings season was winding down, the weather was in abeyance and the legislative docket was reasonably non-partisan.

I could have spent last week watching the grass grow if it hadn’t been covered in a foot of snow.

In its own way, despite the intermediate and alternating moves approaching triple digits, the past week was a perfect example of reversion to the mean. For those that remember 2011, it was that year in a microcosm.

The coming week promises to be no different, although eight members of the Federal Reserve are scheduled to speak. While they can move markets with intemperate or unfiltered remarks, which may become more meaningful as “hawks” assume more voting positions, most people will likely get their excitement from simply reading the just released 2008 transcripts of the Federal Reserve’s meetings as the crisis was beginning to unfold. While you can learn a lot about people in times of crisis, other than potential entertainment value the transcripts will do nothing to add air to the vacuum of the past week. What they may contain about our new Chairman, Janet Yellen, will only confirm her prescience and humor, and should be a calming influence on investors.

As a covered option investor last week was the way I would always script things if anyone would bother opening the envelope to read what was inside. While I have no complaints about 2012 or 2013, as most everyone loves a rising market, 2011 was an ideal market as the year ended with no change. Plenty of intermediate movement, but in the end, signifying nothing other than the opportunity to seemingly and endlessly milk stocks for their option premiums that were nicely enhanced by volatility.

Although I’ve spent much of the past year expecting, sometimes even waiting at the doorstep for the correction to come, the past few weeks have been potentially dangerous ones as I’ve had optimism and money to spend. That can be a bad combination, but the past 18 months have demonstrated a pattern of failed corrections, at least by the standard definition, and rebounds to new and higher highs.

While there may be nothing to see here, there may be something to see there as the market may again be headed to new neighborhoods.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details). A companion article this week explores some additional earnings related trades.

In a week that Wal-Mart (WMT) again disappointed with its earnings report, once again the market failed to follow its lead. In the past year Wal-Mart has repeatedly disappointed, yet the market has disconnected form its leadership, other than for a brief two hours of panic a few months ago when Wal-Mart announced some increasing inventory levels. That panic quickly resolved once Wal-Mart explained their interpretation of inventory levels.

However, one does have to wonder under what economic circumstances does Wal-Mart not meet expectations? Is the economy thriving and people are moving to other retailers, such as Target (TGT) or even Sears (SHLD) or are they moving to Family Dollar Store (FDO)? WHile it is possible that Wal-Mart may simply be suffering from its own bad economic and internal forecasting, there isn’t much reason to be sanguine about retailing. My money is on Family Dollar.

One source that I use for information lists Family Dollar as going ex-dividend this week, however, I haven’t found that to be corroborated anywhere else and historically the first quarter ex-dividend date is in the second week of March. If shares do go ex-dividend this week I would have significant enthusiasm for adding shares, but even in the absence of that event I’m inclined to make that purchase.

Coming off two successive weeks of garnering more than the usual number of dividends, this week is relatively slim pickings. Weyerhauser (WY) and Molson Coors (TAP) both go ex-dividend this week, but both are near the bottom of my list for new purchases this week.

While I like Molson Coors, at the moment the product holds some more appeal than the stock, which is trading near its yearly high point. However, with earnings now out of the way and Canadians around the world celebrating Olympic victories, what better way to show solidarity than to own shares, even if just for a week? Other than potential technical indicators which may suggest an overbought condition, there isn’t too much reason to suspect that in a flat or higher moving market during the coming week, Molson Coors shares will decline mightily. With shares as the body and a head composed of a nice premium and dividend, it just may be time to indulge.

Weyerhauser is a perfectly boring stock. Often, i mean that in a positive sense, but in this case I’m not so certain. I’ve owned shares since May 2013 and would be happy to see them assigned. Despite Weyerhauser offering a dividend this week, my interests are more aligned with re-establishing a position in International Paper (IP). In addition to offering a weekly option, which Weyerhauser does not, its options liquidity and pricing is superior. While it is trading near its yearly high, it has repeatedly met resistance at that level. As a result, while eager to once again own shares, I would be much more willing to do so even with just a slight drop in price.

While offering only a monthly option is a detriment as far as Weyerhauser is concerned, it may be a selling point as far as Cypress Semiconductor (CY) goes. I like to consider adding shares when it is near a strike price as it was after Friday’s close. Shares can be volatile, but it tends to find its way back, especially when home is $10. WHile earnings aren’t due until April 17, 2014, that is just one day before the end of the monthly cycle. Therefore, if purchasing shares of Cypress at this time, I would be prepared to set up for ownership through the May 2014 cycle in the event that shares aren’t assigned when the March cycle comes to an end, in order to avoid being caught in a vortex if a disappointment is at hand. The dividend and the premiums will provide some solace, however.

Although I had shares of Fastenal (FAST) assigned this past week and still own some more expensive shares, this company, which I believe is a proxy for economic activity, has been a spectacular covered call trade and has lent itself to serial ownership as it has reliably traded in a defined range. It doesn’t report earnings until April 10, 2014, but it does have a habit of announcing altered guidance a few weeks earlier. That can be annoying if it comes at the end of an option cycle and potentially removes the chance of assignment or even anticipated rollover, but it’s an annoyance I can live with. After two successive quarters of reduced guidance my expectation is for an improved outlook.

I haven’t owned shares of Deere (DE) for a few months as it had gone on a ride higher, just as Caterpillar (CAT), another frequent holding, is now doing. Deere is now trading at the upper range of where I typically am interested in establishing a position, but after a 7% decline, it may be time to add shares once again. It consistently offers an option premium that has appeal and in the event of longer than anticipated ownership its dividend eases the wait for assignment.

While I would certainly be more interested in Starbucks (SBUX) if its shares were trading at a lower level, sometimes you have to accept what may be a new normal. I had nearly a year elapse before coming to that realization and missed many opportunities in that time with these shares. It does, however, appear that the unbridled move higher has come to an end and perhaps shares are now more likely to be range bound. As with the market in general it’s that range that others may view as mediocrity of performance that instead may be alternatively viewed as the basis for creating an annuity through the collection of option premiums and dividends.

I’ve never been accused of having fashion sense, so it’s unlikely that I would ever own any Deckers (DECK) products at the right time. One minute they sell cool stuff, the next minute they don’t and then back again. Just like the story of most stocks themselves.

What is clear is that they have become cool retailers again and impressively, shares have recovered from a recent large decline. With earnings due to be announced this week the option market is implying a 12.3% potential movement in shares. In the meantime, if you can set your sights on a lowly 1% ROI for the week’s worth of risk a 16.3% drop can still leave you without the obligation to purchase the shares if having sold puts.

Less exciting, at least in terms of implied moves, is T-Mobile (TMUS). It also reports earnings this week and there has to be some thought to what price T-Mobile is paying and will be paying for its very aggressive competitive stance. While its CEO John Legere, may be a hero to some for taking on the competition, that may very quickly fade with some disappointing earnings and cautionary guidance. the option market is pricing a relatively small move of 8.7%, while current option pricing can return a 1% ROI on a strike level 9.5% lower than Friday’s close. Although that’s not much of a margin of difference, I may be more inclined to consider the sale of puts if shares drop substantively on Monday in advance of Tuesday morning’s announcement. Alternatively, if not selling puts in advance of earnings and shares do significantly fall following earnings, there may be potential to do the put sale at that time.

Finally, Abercrombie and Fitch (ANF) reports earnings this week. It is one of the most frustrating and exhilirating of stocks and I currently own two lots. My personal rule is to never own more than three, so I still have some room to add shares, or more likely sell puts in advance of its earnings. Abercrombie and FItch is a nice example of how dysfunction and lowered expectations can create a stock that is so perfectly suited for a covered option strategy. Its constant gyrations create enhanced option premiums that are also significantly impacted by its history of very large earnings related price changes.

For those that have long invested in shares the prospect of a sharp decline upon earnings can’t come as a surprise. However, with a 10.7% implied price move this coming week, one can still achieve a 1% ROI if shares fall less than 15.3%, based on Friday’s closing price.

Traditional Stocks: Deere, Family Dollar Store, Fastenal, International Paper, Starbucks

Momentum Stocks: Cypress Semiconductor

Double Dip Dividend: Molson Coors (ex-div 2/26)

Premiums Enhanced by Earnings: Abercrombie and Fitch (2/26 AM), Deckers (2/27 PM), T-Mobile (2/25 AM)

February 16, 2014

Weekend Update – February 16, 2014

Is our normal state of dysfunction now on vacation?

Barely seven trading days earlier many believed that we were finally on the precipice of the correction that had long eluded the markets.

Sometimes it’s hard to identify what causes sudden directional changes, much less understand the nature of what caused the change. That doesn’t stop anyone from offering their proprietary insight into that which may sometimes be unknowable.

Certainly there will be technicians who will be able to draw lines and when squinting really hard be able to see some kind of common object-like appearing image that foretold it all. Sadly, I’ve never been very adept at seeing those images, but then again, I even have a hard time identifying “The Big Dipper.”

Others may point to an equally obscure “Principle” that hasn’t had the luxury of being validated because of its rare occurrences that make it impossible to distinguish from the realm of “coincidence.”

For those paying attention it’s somewhat laughable thinking how with almost alternating breaths over the past two weeks we’ve gone from those warning that if the 10 year Treasury yield got up to 3% the market would react very negatively, to warnings that if the yield got below 2.6% the markets would be adverse. There may also be some logical corollaries to those views that are equally not borne out in reality.

Trying to explain what may be irrational markets, which are by and large derivatives of the irrational behaviors found in those comprising the markets, using a rational approach is itself somewhat irrational.

Crediting or blaming trading algorithms has to recognize that even they have to begin with the human component and will reflect certain biases and value propositions.

But the question has to remain what caused the sudden shifting of energy from its destruction to its creation? Further, what sustained that shift to the point that the “correction” had itself been corrected? As someone who buys stocks on the basis of price patterns there may be something to the observation that all previous attempts at a correction in the past 18 months have been halted before the 10% threshold and quickly reversed, just as this most recent attempt.

That may be enough and I suppose that a chart could tell that story.

But forget about those that are suggesting that the market is responding to better than expected earnings and seeking a rational basis in fundamentals. Everyone knows or should know that those earnings are significantly buoyed by share buybacks. There’s no better way to grow EPS than to shrink the share base. Unfortunately, that’s not a strategy that builds for the future nor lends itself to continuing favorable comparisons.

I think that the most recent advance can be broken into two component parts. The first, which occurred in the final two days of the previous trading week which had begun with a 325 point gain was simply what some would have called “a dead cat bounce.” Some combination of tiring from all of the selling and maybe envisioning some bargains.

But then something tangible happened the next week that we haven’t seen for a while. It was a combination of civility and cooperation. The political dysfunction that had characterized much of the past decade seemed to take a break last week and the markets noticed. They even responded in a completely normal way.

Early in the week came rumors that the House of Representatives would actually present a “clean bill” to raise the nation’s debt ceiling. No fighting, no threats to shut down the government and most importantly the decision to ignore the “Hastert Rule” and allow the vote to take place.

The Hastert Rule was a big player in the introduction of dysfunction into the legislative process. Even if a majority could be attained to pass a vote, the bill would not be brought to a vote unless a majority of the majority party was in favor the bill. Good luck trying to get that to occur in the case of proposing no “quid pro quo” in the proposal to raise the nation’s debt ceiling.

The very idea of some form of cooperation by both sides for the common good has been so infrequent as to appear unique in our history. Although the common good may actually have taken a back seat to the need to prevent looking really bad again, whatever the root cause for a cessation to a particular form of dysfunction was welcome news.

While that was being ruminated, Janet Yellen began her first appearance as Federal Reserve Chairman, as mandated by the Humphrey-Hawkins Bill.

Despite the length of the hearings which would have even tired out Bruce Springsteen, they were entirely civil, respectful and diminished in the use of political dogma and talking points. There may have even been some fleeting moments of constructive dialogue.

Normal people do that sort of thing.

But beyond that the market reacted in a straightforward way to Janet Yellen’s appearance and message that the previous path would be the current path. People, when functioning in a normal fashion consider good news to be good news. They don’t play speculative games trying to take what is clear on the surface to its third or fourth derivative.

Unfortunately, for those who like volatility, as I do, because it enhances option premiums, the lack of dysfunction and the more rational approach to markets should diminish the occurrence of large moves in opposite directions to one another. In the real world realities don’t shift that suddenly and on such a regular basis, however, the moods that have moved the markets have shifted furiously as one theory gets displaced by the next.

How long can dysfunction stay on vacation? Human nature being what it is, unpredictable and incapable of fully understanding reality, is why so many in need stop taking their medications, particularly for chronic disorders. I suspect it won’t be long for dysfunction to re-visit.

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

Speaking of dysfunction, that pretty well summarizes the potash cartel. Along with other, one of my longtime favorite stocks, Mosaic (MOS) has had a rough time of things lately. In what may be one of the great blunders and miscalculations of all time, there is now some speculation that the cartel may resume cooperation, now that the CEO of the renegade breakaway has gone from house arrest in Belarus to extradition to Russia and as none of the members of the cartel have seen their fortunes rise as they have gone their separate ways.

In the interim Mosaic has traded in a very nice range after recovering from the initial shock. While I still own more expensively priced shares their burden has been somewhat eased by repetitive purchases of Mosaic and the sale of call contracts. Following an encouraging earnings report shares approached their near term peak. I would be anxious to add shares on even a small pullback, such as nearing $47.50.

One position that I’ve enjoyed sporadically owning has been MetLife (MET) which reported earnings last week. As long as interest rates are part of anyone’s equation for predicting where markets or stocks will go next, MetLife is one of those stocks that received a bump higher as interest rates started climbing concurrent with the announcement of the Federal Reserve;’s decision to initiate a taper to Quantitative Easing.

Cisco (CSCO), to hear the critics tell the story is a company with a troubled future and few prospects under the continued leadership of John Chambers. For those with some memory, you may recall that Chambers has been this route before and has been alternatively glorified, pilloried and glorified again. Currently, he has been a runner-up in the annual contest to identify the worst CEO of the year.

Personally, I have no opinion, but I do like the mediocrity in which shares have been mired. It’s that kind of mediocrity that creates a stream of option premiums and, in the case of Cisco, dividends, as well. With the string of disappointments continued at last week’s earnings report, Cisco did announce another dividend increase while it recovered from much of the drop that it sustained at first.

I’m never quite certain why I like Whole Foods (WFM). What this winter season has shown is that many people are content to stay at home any eat whatever gluten they can find rather than brave the elements and visit a local store for the healthier things in life. I think Whole Foods is now simply making the transition from growth stock to boring stock. If that is the case I expect to be owning it more often as with boring comes that price predictability that appeals to me so much.

This week’s potential dividend trades are a disparate group if you ignore that they have all under-performed the S&P 500 since its peak.

General Electric (GE) is just one of those perfect examples of being in the wrong place at the wrong time and perhaps not being in the right place at the right time. Much of General Electric’s woes when the market was crumbling in 2008 was its financial services group. Since the market bottom its shares have outperformed the S&P 500 by more than 50%, as GE has taken steps to reduce its financial services portfolio. Unfortunately that means that it won’t be in a position to benefit from any rising interest rate environment as can reasonably be expected to be in our future.

Still, coming off its recent price decline and offering a strong dividend this week its shares look inviting, even if only for a short term holding.

L Brands (LB) along with most of the rest of the retail sector hasn’t been reflective of a strong consumer economy. Having recovered about 50% of its recent fall and going ex-dividend this coming week I’m ready to watch it recover some more lost ground as its specialty retailing has appeared to have greater resilience than department store competitors.

Transocean (RIG) still hasn’t recovered from its recent ratings cut from “sector outperform” to “sector perform.” I’ve never understood the logic of that kind of assessment, particularly if the sector may still be in a position to outperform the broad market. However, equally hard to understand is the reaction, especially when the entire sector goes down in unison in response. Subsequently Transocean also received an outright “sell” recommendation and has been mired near its two year lows.

With a very healthy ex-dividend date this week I may have renewed interest in adding shares. While he has been quiet of late, at its latest disclosure, Icahn Enterprises (IEP) owned approximately 6% of Transocean and to some degree serves as a floor to share price, as does the dividend which is scheduled to increase to $3 annually.

However, as with L Brands, which also reports earnings on February 26, 2104, I would also consider an exit or rollover strategy for those that may want to mitigate earnings related risk that will present itself. Such strategies may include closing out the position below the purchase price or rolling over to a March 2014 option in order to have some additional time to ride out any storms.

There’s really not much reason to take sides in the validity of claims regarding the nature of Herbalife (HLF). It has certainly made for amusing theater, as long as you either stayed on the sidelines or selected the right side. With the recent suggestion that some on the long side of the equation have been selling shares this week’s upcoming earnings release may offer some opportunity, as shares have already fallen nearly 16%.

While the option market is only implying a 7.2% move in share price, the sale of a put can return a weekly 1% ROI even at a strike price 13.7% below the current price. That is about the largest cushion I recall seeing and does look appealing for those that may have an inclination to take on risk. I’m a little surprised of how low the implied price movement appears to be, however, the surprise is answered when seeing how unresponsive shares have been the past year upon earnings news.

Also reporting earnings this week is Groupon (GRPN), a stock that has taken on some credibility since replacing its one time CEO, who never enjoyed the same cycle of adulation and disdain as did John Chambers. While the “Daily Deal” space is no longer one that gets much attention, Groupon has demonstrated that all of the cautionary views warning of how few barriers to entry existed, were vacuous. Where there were few barriers were to exit the space.

In the meantime the options market is predicting a 13.9% move related to earnings, while a weekly 1.3% ROI could possibly be achieved with a price movement of less than 19%. While that kind of downward move is possible, there is some very strong support above there.

Finally, there is the frustration of owning AIG (AIG) at the moment. The frustration comes from watching for the second successive earnings report shares climb smartly higher in the after-hours and then completely reverse direction the following day. I continue to believe that its CEO, Robert Benmosche is something of a hero for the manner in which he has restored AIG and created an historical reference point in the event anyone ever questions some future day bailout of a systemically vital company.

None of that hero worship matters as far as any proposed purchased this coming week. However, shares may be well priced and in a sector that’s ready for some renewed interest.

Traditional Stocks: AIG, Cisco, MetLife, Whole Foods

Momentum Stocks: Mosaic

Double Dip Dividend: General Electric (ex-div 2/20), L Brands (ex-div 2/19), Transocean (ex-div 2/19)

Premiums Enhanced by Earnings: Groupon (12/20 PM) , Herbalife (2/18 PM)

February 9, 2014

Weekend Update – February 9, 2014

Everything is crystal clear now.

After three straight weeks of losses to end the trading week, including deep losses the past two weeks everyone was scratching their heads to recall the last time a single month had fared so poorly.

What those mounting losses accomplished was to create a clear vision of what awaited investors as the past week was to begin.

Instead, it was nice to finish on an up note to everyone’s confusion.

When you think you are seeing things most clearly is when you should begin having doubts.

Who saw a two day 350 point gain coming, unless they had bothered to realize that this week was featuring an Employment Situation Report? The one saving grace we have is that for the past 18 months you could count on a market rally to greet the employment news, regardless of whether the news met, exceeded or fell short of expectations.

That’s clarity. It’s confusing, but it’s a rare sense of clarity that comes from being so successful in its ability to predict an outcome that itself is based upon human behavior.

As the week began with a 325 point loss in the DJIA voices started bypassing talk of a 10% correction and starting uttering thoughts of a 15-20% correction. 10% was a bygone conclusion. At that point most everyone agreed that it was very clear that we were finally being faced with the “healthy” correction that had been so long overdue.

When in the middle of that correction nothing really feels very healthy about it, but when people have such certainty about things it’s hard to imagine that they might be wrong. With further downside seen by the best and brightest we were about to get healthier than our portfolios might be able to withstand.

It was absolutely amazing how clearly everyone was able to see the future. What made things even more ominous and sustaining their view was the impending Employment Situation Report due at the end of the week. Following last month’s abysmal numbers, ostensibly related to horrid weather across the country, there wasn’t too much reason to expect much in the way of an improvement this time around. Besides, the Nikkei and Russian stock markets had just dipped below the 10% threshold that many define as a market correction and as we’re continually reminded, it’s an inter-connected world these days. It wasn’t really a question of “whether,” it was a matter of “when?”

Then there was all that talk of how high the volatility was getting, even though it had a hard time even getting to October 2013 levels, much less matching historical heights. As everyone knows, volatility comes along with declining markets so the cycle was being put in place for the only outcome possible.

After Monday’s close the future was clear. Crystal clear.

Instead, the week ended with an 0.8% gain in the S&P 500 despite that plunge on Monday and a highly significant drop in volatility. The market responded to a disappointing Employment Situation Report with what logically or even using the “good news is bad news” kind of logic should not have been the case.

Now, with a week that started by confirming the road to correction we were left with a week that supported the idea that the market is resistant to a classic correction. Instead of the near term future of the markets being crystal clear we are left beginning this coming week with more confusion than is normally the case.

If it’s true that the market needs clarity in order to propel forward this shouldn’t be the week to commit yourself. However, the only thing that’s really clear about our notions is that they’re often without basis so the only reasonable advice is to do as in all weeks – look for situational opportunities that can be exploited without regard to what is going on in the rest of the world.

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

If you’re looking for certainty, or at least a company that has taken steps to diminish uncertainty, Microsoft (MSFT) is the one. With the announcement of the appointment of Satya Nadella, an insider, to be its new CEO, shares did exactly what the experts said it wouldn’t do. Not too long ago the overwhelming consensus was that the appointment of an outsider, such as Alan Mullaly would drive shares forward, while an insider would send shares tumbling into the 20s.

Microsoft simply stayed on its path with the news of an inside candidate taking the reigns. Regardless of its critics, Microsoft’s strategy is more coherent than it gets credit for and this leadership decision was a quantum leap forward, certainly far more important than discussions of screen size. With this level of certainty also comes the certainty of a dividend and attractive option premiums, making Microsoft a perennial favorite in a covered option strategy.

The antithesis of certainty may be found in the smallest of the sectors. With the tumult in pricing and contracts being promulgated by T-Mobile (TMUS) and its rebel CEO John Legere, there’s no doubt that the margins of all wireless providers is being threatened. Verizon (VZ) has already seen its share price make an initial response to those threats and has shown resilience even in the face of a declining market, as well. Although the next ex-dividend date is still relatively far away, there is a reason this is a favorite among buy and hold investors. As long as it continues to trade in a defined range, this is a position that I wouldn’t mind holding for a while and collecting option premiums and the occasional dividend.

Lowes (LOW) is always considered an also ran in the home improvement business and some recent disappointing home sales news has trickled down to Lowes’ shares. While it does report earnings during the first week of the March 2014 option cycle, I think there is some near term opportunity at it’s current lower price to see some share appreciation in addition to collecting premiums. However, I wouldn’t mind being out of my current shares prior to its scheduled earnings report.

Among those going ex-dividend this week are Conoco Phillips (COP), International Paper (IP) and Eli Lilly (LLY). In the past month I’ve owned all three concurrently and would be willing to do so again. While International Paper has outperformed the S&P 500 since the most recent market decline two weeks ago, it has also traded fairly rangebound over the past year and is now at the mid-point of that range. That makes it at a reasonable entry point.

Conoco Phillips appears to be at a good entry point simply by virtue of a nearly 12% decline from its recent high point which includes a 5% drop since the market’s own decline. With earnings out of the way, particularly as they have been somewhat disappointing for big oil and with an end in sight for the weather that has interfered with operations, shares are poised for recovery. The premiums and dividend make it easier to wait.

Eli Lilly is down about 5% from its recent high and I believe is the next due for its turn at a little run higher as the major pharmaceutical companies often alternate with one another. With Pfizer (PFE) and Merck (MRK) having recently taken those honors, it’s time for Eli Lilly to get back in the short term lead, as it is for recent also ran Bristol Myers Squibb (BMY) that was lost to assignment this past week and needs a replacement, preferably one offering a dividend.

Zillow (Z) reports earnings this week. In its short history as a publicly traded company it has had the ability to consistently beat analyst’s estimates and then usually see shares fall as earnings were released. That kind of doubled barrel consistency warrants some consideration this week as the option market is implying an 11% move this week. While that is possible, there is still an opportunity to generate a 1% ROI for the week if the share price falls by anything less than 16%.

While I’m not entirely comfortable looking for volatility among potential new positions two that do have some appeal are Coach (COH) and Morgan Stanley (MS).

Coach is a frequent candidate for consideration and I generally like it more when it’s being maligned. After last week’s blow-out earnings report by Michael Kors (KORS) the obvious next thought becomes how their earnings are coming at the expense of Coach. While there may be truth to that and has been the conventional wisdom for nearly 2 years, Coach has been able to find a very comfortable trading range and has been able to significantly increase its dividend in each of the past 4 years in time for the second quarter distribution. It’s combination of premiums, dividends and price stability, despite occasional swings, makes it worthy of consistent consideration.

I’ve been waiting for a while for another opportunity to add shares of Morgan Stanley. Down nearly 12% in the past 3 weeks may be the right opportunity, particularly as some European stability may be at hand following the European Central Bank’s decision to continue accommodation and provide some stimulus to the continent, where Morgan Stanley has interests, particularly being subject to “net counterparty exposure.” It’s ride higher has been sustained and for those looking at such things, it’s lows have been consistently higher and higher, making it a technician’s delight. I don’t really know about such things and charts certainly aren’t known for their clarity being validated, but its option premiums do compel me as do thoughts of a dividend increase that it i increasingly in position to institute.

Finally, if you’re looking for certainty you don’t have to look any further than at Chesapeake Energy (CHK) which announced a significant decrease in upcoming capital expenditures, which sent shares tumbling on the announcement. Presumably, it takes money to make money in the gas drilling business so the news wasn’t taken very well by investors. A very significant increase in option premiums early in the week suggested that some significant news was expected and it certainly came, with some residual uncertainty remaining in this week’s premiums. For those with some daring this may represent the first challenge since the days of Aubrey McClendon and may also represent an opportunity for shareholder Carl Icahn to enter the equation in a more activist manner.

Traditional Stocks: Lowes, Microsoft, Verizon

Momentum Stocks: Chesapeake Energy, Coach, Morgan Stanley,

Double Dip Dividend: Conoco Phillips (ex-div 2/13), International Paper (ex-div 2/12), Eli Lilly (ex-div 2/12)

Premiums Enhanced by Earnings: Zillow (2/12 PM)

February 1, 2014

Weekend Update – February 2, 2014

Volatility is back!

That’s all you heard this week as the S&P 500 dropped 0.4% to end the unrequited January Rally that we had all been told was the historical norm.

As a covered option seller I have learned to embrace the uncertainty that ushers in a period of volatility, although I make no pretense of really understanding exactly how “volatility works. Like many things in life sometimes it’s simply easier to take one’s word for it.

Just like when you’re told that volatility is back.

Or when social media suggests a relationship that isn’t borne out in historical fact, such as very notably in 2010 or about 50% of the other times January opened the year with a loss in the past 63 years.

While the expression “greed is good,” may be far more memorable, there’s not much debate for those who follow it that “volatility is good.” Not only does it create enhanced option premiums but it may also be the ultimate portfolio insurance.

For many people hearing that volatility has returned the only reasonable course of action is to head for the exits, because the very mention of the word is associated with wild rides, mostly in the wrong direction. For them volatility is far from good and is something to be feared and avoided.

That picture isn’t entirely accurate. Volatility is simply a measure of uncertainty and size. 2013 was a year of low volatility as there was a high degree of certainty when you arose each morning that the stock market would move higher on any given day. Additionally, it did so in a largely non-dramatic fashion. The movements were small, but consistent and sustained.

Suddenly the movements are now larger and can just as easily go in one direction as in the opposite one. The range has expanded, too. You don’t need a complex formula to have a qualitative sense that something is different. Not necessarily bad, just different.

But as long as we were talking about historical norms and how disappointing it was waiting for the historically predicted January Rally that never came, the cries welcoming back volatility may have lost track of what historical levels of volatility have been.

The volatility of this past week hasn’t even reached the levels seen in October 2013 back when the S&P 500 stood at 1655, which represented a loss similar to that currently at hand. The current level of volatility is certainly dwarfed by that seen in 2011, which itself was far smaller than that seen in late 2008.

2011 which was one of my favorite years saw the S&P 500 end the year precisely unchanged. However, during the course of the year there were regular triple digit moves, often in alternating direction and ultimately accomplishing nothing. That was a covered option seller’s greatest fantasy come true.

Yet the cries of the return of volatility weren’t making the rounds in October and spreading the specter of an imminent collapse of all that has preceded the market’s climb. While so many have spoken of a 5-10% decline being a healthy thing, some began to utter an heretofore unheard 15-20% range correction in the making.

For those that have been counting on an inflow of money that has been said to still reside on the sidelines to continue fueling the market’s rise the past week’s $12 billion in outflows from equity funds represented the highest level in two years. That represents selling that won’t likely be put back at risk very quickly, but it also represents money that won’t contribute to downward pressure on prices any time soon.

While volatility has risen significantly in the past week it has done so from 5 year lows. There is also certainly more upside to volatility than there is downside. It is with an understanding of the mathematical basis for volatility that there comes an appreciation for the manner in which volatility may be quickly magnified far beyond the seeming disruption in the market.

So no. Volatility isn’t back yet, but it can be in an imperceptible instant.

With the uncertainty that awaits low beta stocks may have special value and the sale of options may increasingly become inviting even at out of the money strike levels, something that hasn’t been the case in quite a while. The market may be said to not like uncertainty but it does have its rewards.

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

Apple (AAPL) briefly closed below $500 this week. Since not too many stocks occupy that kind of rarefied neighborhood it’s not too surprising that the last couple of times a big fuss was made about a stock falling below $500 it was Apple eliciting the anguish. While there has certainly been lots of debate following Apple’s recent disappointing sales, especially of its iPhone franchise, it does go ex-dividend this week and in its short history of paying a dividend it has generally performed well in its short term aftermath. That alone has me interested in addition to Apple’s low beta and head start on any market inspired drop. Others can debate Apple’s near term future and product cycles and innovations, but the combination of dividend and volatility enhanced premiums makes it look especially good as a choice for this week. The fact that Carl Icahn seems to have made a longer term commitment and has increasingly increased that commitment at least allows for misery to have company if the short term thesis is incorrect.

Another stock that has taken quite a significant fall in the past two weeks has been Starbucks (SBUX) down nearly 10% YTD and even down 4% since its earnings related jump in share price on a day when the market itself tumbled. Perhaps the market is concerned that CEO Howard Schultz may be removing himself more from daily operations, recalling the last time that occurred. However, the root cause of Starbucks’ difficulties earlier last decade, the unbridled expansion during a period of economic contraction, isn’t likely to be repeated. Starbucks is ex-dividend this week and may also be ahead of the curve of any further market declines. It too is showing some enhancement of its option premiums, particularly when dividend capture is also considered.

EMC Corporation (EMC) and its spin off VMWare (VMW) both reported earnings last week. Both declined as a result, with EMC suffering its own disappointment and also bearing some of the VMWare burden, owing to its continuing 80% ownership. While much attention was directed toward Microsoft (MSFT) this week as speculation heated up that an insider, whose own emphasis was on cloud based strategies would be the new CEO, EMC stock continues to languish in relative obscurity and trades in a fairly defined range. A low beta, despite its connection to VMWare,a decent dividend and option premium makes EMC an ever present consideration when seeking to round out the technology sector of my portfolio without wanting to take on undue risk.

On January 8th Transocean (RIG) was cut to “sector perform” from “sector outperform.” A week later it started a decline from the $48 level but without any company specific news, although similar companies, such as Seadrill (SDRL) and ENSCO (ESV) moved in unison. Transocean, after its decline is sitting at an 18 month low which occurred at the time of the temporary suspension of its dividend. With a dividend rate now standing at over 5% and a miniscule payout ratio, combined with its option premium it is one of those few stocks that I would consider owning at this moment without concomitant call sales on shares.

Mondelez (MDLZ) is most everyone’s idea of a lackluster and unexciting company. Because of its perceived mediocrity and uninspired leadership it has gotten the attention of the activist investment community. Unfortunately for pre-existing shareholders the ascension of Nelson Peltz to the Board of Directors was accompanied by the statement that he wouldn’t pursue a deal with PepsiCo (PEP) and subsequently shares significantly under-performed the S&P 500, despite a very low beta. As a result of its recent increased volatility its option premium is beginning to perk up and is getting interesting as it share price is returning to a more manageable level.

Joy Global (JOY) and Las Vegas Sands (LVS) speak to the differing fortunes found in China. While construction and infrastructure projects are slowing, as is the manufacturing index, apparently gaming is alive and well in Macao. After an initial plunge in shares in the after hours as Las Vegas Sands reported its earnings a better understanding of the details behind the report saw a quick reversal.

Las Vegas Sands was frequently owned stock in 2012, but less so in 2013 as I had been waiting for a price retreat that never came. The recent drop from $82 may be the best such drop to be had. While shares do trade at a higher beta than I am interested in pursuing to broadly round out my existing portfolio, indications are that the engines running Las Vegas Sands’ operations aren’t going to slow down in response to Chinese economic woes.

Joy Global on the other hand has engines that literally could be stalled by a faltering Chinese economy. Like many other companies highlighted this week it has greatly underperformed the broad market of late. While doing so shares have returned to near the mid-point of a very comfortable trading range and continues to offer an option premium in line with its volatility.

The coming week is another busy one for earnings. A more detailed look at this week’s earnings related trade considerations is available in an accompanying article. This week more candidates stand out as opportunities by virtue of meeting my ROI and risk criteria in addition to Twitter (TWTR) and Green Mountain Coffee Roasters (GMCR) identified in this article.

Green Mountain Coffee Roasters somehow continues to confound everyone by remaining relevant. While shrouded in controversy it has to be hailed as one of the great share comebacks in recent years, although it is throwing so many concepts into the air these days one has to wonder whether focus is getting dissipated as its core product lines increasingly become commodities and held hostage by agreements with other companies, such as Starbucks.

However, for an earnings related trade those issues may share a lack of relevancy with the company’s future prospects. Always volatile around earnings, with 20% price moves not unusual, the options market is implying an 11% earnings related move. For those content with a 1% ROI for a trade that may last a week or less, a price move of less than 15% lower could fulfill that objective.

Twitter reports its first earnings since its IPO this week.

That thought should be enough to convince people to stay away from shares even had it not had such a surge in share price since a shaky start. Last week it held onto Facebook’s earnings coattails and rose even higher. This week as it faces its first real scrutiny and potential pressure on shares, the options market is implying a 15.8% move in either direction. Again, for those content with a 1% ROI a strike price 22% below Friday’s close can deliver the reward. With at least one good support level and a couple of additional minor ones below that, the risk appears attenuated enough for at least consideration. That is until the next real challenge in mid-February when the first lock-up period comes to an end.

Finally, what’s a week without owning shares of eBay (EBAY)? After announcing earnings the week before last which were widely expected to be disappointing came the announcement from eBay itself that Carl Icahn had taken a position and was putting forward some ideas. The initial reaction was to propel shares toward the high point of its trading range, but eBay CEO Donahoe was quick to dismiss the idea of separating the PayPal unit from eBay and he seemed to have convinced the world that Icahn offered nothing new. He also convinced the world to give back the knee jerk gains.

While shares fared reasonably well this past week they are back in the range that I like to consider ownership, albeit at the upper end of that range. However, eBay, for all of the reasons people have disparaged its ownership has consistently been an excellent covered option purchase and wouldn’t be expected to melt under the pressure of a market at siege.

In the absence of any market moving international news particularly in the currency or debt markets I don’t expect much in the way of increasing volatility this coming week, but I wouldn’t mind the opportunity to party like it’s 2011.

Traditional Stocks: eBay, EMC, Mondelez, Transocean

Momentum Stocks: Joy Global, Las Vegas Sands

Double Dip Dividend: Apple (ex-div 2/6), Starbucks (ex-div 2/4)

Premiums Enhanced by Earnings: Green Mountain Coffee Roasters (2/5 PM), Twitter (2/5 PM)

January 31, 2014

Earnings Still Matter

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

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

Or the opportunity.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

January 31, 2014

Week in Review (January 27 – 31, 2014)

Option to Profit Week in ReviewJanuary 27 – 31, 2014

NEW POSITIONS/STO	NEW STO	ROLLOVERS	CALLS ASSIGNED/PUTS EXPIRED	CALLS EXPIRED/PUTS ASSIGNED	CLOSED
5 / 5	1	3	4 / 0	4 / 0	0

Weekly Up to Date Performance

January 27 – 31, 2014

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

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

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

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

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

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

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

But that’s enough spinning.

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

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

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

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

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

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

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

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

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

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

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

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

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

Sometimes frustrated, but overall, pleased.

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

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

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

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

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

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

Puts Closed in order to take profits: none

Calls Rolled over, taking profits, into the next weekly cycle: ANF, TXN

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

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

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

Calls Rolled Up, taking net profits into same cycle: none

New STO: HFC

Put contracts sold and still open: none

Put contracts expired: none

Put contract rolled over: none

Long term call contracts sold: none

Calls Assigned: BMY, EBAY, IP, VZ

Calls Expired: C, HAL, INTC, LOW

Puts Assigned: none

Stock positions Closed to take profits: none

Stock positions Closed to take losses: none

Calls Closed to Take Profits: none

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

some reported early assignment of TXN shares

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