Week in Review – January 26, 2014

What a Surprise.

Barely a week ago as the earnings season was about to begin it seemed perplexing that there was talk of seeing a 6% increase in comparable earnings. Based on retail earnings and performance from my personal barometers, Grainger (GWW) and Fastenal (FAST), there didn’t seem to be much adding to the integrity of the foundation.

As with the two previous earnings seasons the financials leading off the reporting season had reasons to be proud but there was little glory to be trickled down. It probably takes more than a growing Netflix (NFLX) subscription base to create optimism among traders, although there were some who were eager to use that news as being a sign of an improving economy, apparently believing that the first thing a newly employed individual does is to activate a Netflix subscription.

However, even with some favorable earnings reports to end the week the constellation of news coming from the rest of the world, including Chinese production disappointments, Turkey’s monetary woes and Argentinean debt had to come as a surprise as the DJIA fell over 300 points, never even making a feeble attempt to stem the flow of losses.

What we discovered about ourselves is that we much prefer the false security offered by believing that Chinese economic reports are accurate than their actual accuracy. Report after report that has final results perfectly aligned with projections should have been an early clue that perhaps the books are occasionally cooked. But as long as they supported a thesis of a growing worldwide economy there was reason to be optimistic.

That changed this week, and somehow we were surprised. What will be the ultimate question as the coming week begins is whether those new prices represent values or value traps.

Just a few days ago there was every reason to believe that the current market was beginning to settle into an historical mode, when earnings actually mattered and were what moved markets. With questions regarding tapering largely thought to have been resolved and with the worldwide economy, currencies and debt markets being reasonably calm, it seemed as if fundamentals would be back in vogue.

Surprise.

Never get too comfortable or believe what you are seeing. Increasingly, it feels as if everything that you believe to be the case should be considered as being on par with Chinese economic reports.

This week offers challenges that weren’t present last week. For the second consecutive week I had fewer positions assigned than I had anticipated and have less in cash reserves to take advantage of lowered prices than I would have liked.

However, I’m not anxious to go on a buying spree quite yet and will likely wait for some sign of stabilization in the overall market, rather than attempting to thread a needle with trades in the mistaken belief that outliers can be found in what may be a developing vortex.

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).

Among companies beating analyst’s expectations and not having done so through the optics of share buybacks were Baxter International (BAX) and Bristol Myers Squibb (BMY). Both were included in Friday’s down draft and both appear to have been impacted out of proportion to their historical volatility. While that doesn’t preclude further journeys lower it does give me some basis for believing that new positions may be better suited to outperform the S&P 500 going forward. Both offer expanded options, thereby creating greater opportunities to diversify risk on the basis of time.

A frequent candidate for share ownership is Coach. It fell, as so often has happened over the past 18 months after its earnings report last week. That shouldn’t have been too great of a surprise. What is a surprise, however, is that despite universal condemnation, it has been incredibly resilient. I sold puts last week after earnings that subsequently expired and now believe that shares, if not bridled by a lower moving market, are going to stay at this level or move higher. As a covered option position either of those are perfectly acceptable outcomes and Coach has proven itself to be more than an acceptable covered option holding ever since it has fallen out of favor.

While retail has been an abysmal place to park money, it’s hard to not finally consider shares of Kohls (KSS). In the past I would typically only consider shares in advance of the dividend and was reluctant to do so otherwise, because Kohls only offered monthly options. However, it has now joined the growing number of expanded option stocks and has many more strike levels available than before, thereby offering greater flexibility in designing exit strategies. It’s shares have fallen over 12% in the past two weeks, reportedly due to concerns over weather related sales decreases.

Fastenal , which I often look toward as a measure of how well economic growth is trickling down to smaller value added components reported earnings recently. Since they had previously guided lower the results shouldn’t have been too surprising, yet they were. It didn’t take long for shares to recover from earnings. However, with Grainger reporting its own disappointments Fastenal felt the fury. With its ex-dividend date this coming week I see it as an opportunity to add shares at what has been a safe level. Despite a somewhat higher beta, it, too appears to have been disproportionately victim of the market decline and that may offer some relative immunity in coming days.

MetLife (MET) is one of those companies, as with most financials, that should benefit from a rising interest rate environment. Like others in the sector it fell mightily on Friday and is getting to a point of again being interesting. Like many other stocks this very recent fall brings them closer to appealing prices. In this case I would prefer getting even closer to the $48 level. However, I am considering a longer term option contract, such as the March 22, 2014, which would encompass both an ex-dividend date and earnings, which take place between now and February 12, 2014 and provide some time for share recovery in the event of an adverse reaction to the report.

International Paper (IP) is similar to MetLife insofar as its share price has come down to a more realistic level and that it will be going ex-dividend and reporting earnings during the February 2014 option cycle. Recently, shares appear to have been trading in a 4 month cycle from low to low and we are approaching that 4 month period again, just as shares are also heading toward its lows. As with many stocks this coming week there is heightened concern that they will break below support levels and International Paper is among that group. It’s attractive dividend, and again, similar to MetLife, the use of a longer term option may provide a nice combination of dividends, option income and price protection during a period that the market may be at risk to under-perform.

Texas Instruments (TXN) reported earnings earlier last week that were in-line with estimates. That alone was reason to reward shares, as the bar may be set increasingly lower. It didn’t fare terribly during the market meltdown and that may be its theme during any upcoming market weakness. Shares go ex-dividend this week and still offer a option premium that warrants attention in light of its low beta.

The coming week is a busy one for earnings. A more detailed look at this week’s earnings considerations provides some of the criteria used in filtering companies from one another. Of a number prospects that I screened for this week the two that stand out as opportunities by virtue of meeting my criteria (give link) are Facebook (FB) and Seagate Technology (STX).

Seagate Technology, rather than becoming a dinosaur, has had been envisioned in the post-PC world has been thriving, as has its share price. Its trajectory higher is alone cause for concern, whether at earnings, during a market decline or at any other time. The options market is implying a 6.5% price movement, which would envision a lower price strike of $55. Meanwhile, a 1% ROI can be potentially obtained at the $54.5 level. That’s not a terribly wide margin of safety, so any potential seller of puts should be prepared for the possibility of assignment.

Finally, as Facebook prepares to report earnings, its scant history of doing so has been a story of monetization of the mobile interface and in general the story has been continued surprise of how well they have been able to develop that revenue source. The options market appears to be expect significant price movement upon earnings, as the implied volatility is 11%, taking shares as low as $48.50. However, a 1% ROI can potentially be obtained at a strike level as low as $47 for those with some adventure in their character. Facebook’s more rationale price trajectory and occasional pauses may however make it a less adventurous earnings related trade than compared to Seagate Technology

Traditional Stocks: Baxter International, Bristol Myers Squibb, International Paper, Kohls, MetLife

Momentum Stocks: Coach

Double Dip Dividend: Fastenal (ex-div 1/29), Texas Instruments (ex-div 1/29)

Premiums Enhanced by Earnings: Facebook (1/29 PM), Seagate Technology (1/27 PM)

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

Week in Review – January 20 – 24, 2014

 

Option to Profit Week in Review
January 20 – 24, 2014´╗┐
 
NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
7 / 7 1 2 2 / 0 7 / 0 0

    

Weekly Up to Date Performance

January 20 – 24, 2014

New purchases beat the time adjusted S&P 500 this week by 0.8% and surpassed the unadjusted index by 1.0% during a week that saw the largest loss in the S&P 500 in over 18 months. They did so, however, while being at a net loss for the week themselves.

The market showed a large adjusted loss for the week of 2.4% and unadjusted loss of 2.6% for the week, while new positions fell  1.6%.

For 21 positions positions closed in 2014, performance exceeded that of the S&P 500 by 1.2%. They were up 3.7% out-performing the market by 50.0%, a difference that I don’t expect to continue to be sustained.. 

I was right about something last week.

After the kind of week we just had it was a good thing that it lasted for only 4 trading days. It may be too bad that next week is a full trading week, especially since it will be a very busy week for earnings and as we’ve seen from this past week earnings finally matter.

But even with some decent earnings reported after Thursday’s close and before Friday’s open, there is a tone creeping into the market that is slowly, but not overly dramatically, being very cautious and being responsive to news overseas.

It has been a while since we really concerned ourselves much with what was going on in the rest of the world, other than an occasional pause to consider Chinese economic news reports which always seemed to come in right where projected.

For starters, the latest news from China wasn’t encouraging and increasingly more and more of our stock market is tethered to the Chinese economy. Putting on a cynical hat, we used to like it much better when we thought that Chinese economic data couldn’t be trusted, as opposed to when they may actually be telling the truth.

That’s something that we may not be able to handle.

It used to be that if the US sneezed, the rest of the world caught a cold. Now we’re all in close contact and no one really has immunity, especially when someone the size of China is doing the sneezing. 

 A constellation and convergence of news from China of slowing industrial growth and currency worries in Turkey, credit worries in Argentina and Brazil have placed a lot of pressure on a market that was beginning to shift to an emphasis on fundamentals at a time when the fundamentals weren’t so great.

Things also moved more quickly than we’ve been accustomed too lately. The deteriorations were swift.

News that a company like WW Grainger had disappointing earnings brings into question the strength of any economic recovery, much in the same way as when Fastenal disappoints. Coupled with almost universally horrible retail statistics and it will be interesting to see what the next move
by the Federal Reserve will be, under its new leader, and then how that will be interpreted by the markets.

I felt happy to see the week end and to be able to escape with a handful of assignments and even a rollover. Plunging Fridays are my least favorite kind of days, unless everything I owned was about to be assigned otherwise. My expectations, even this morning was for more assignments and more rollovers, but the market never gave that a chance.

Looking forward, with less cash in hand as I would like to start the week I’m still not fully bowled over by some lower prices. I do see some volatility sneaking into some forward week premiums which indicates an expectation that the decline will continue.

During a period of decline there is sometimes opportunity to take advantage of weakness in existing positions by selling calls even if the strike price represents a loss, if assigned. The reason that becomes appealing is that as volatility increases, so do the premiums and you may be able to find an appealing premium that is a strike price or two out of the money.

The key, however, is to not let that assignment happen, unless a tax loss is a competing objective. Some may have noticed that as personal trades the past three weeks that is what I had done with shares of Anadarko, as its premium was moving higher. With today’s rollover the strike price has crept up with each sale, going from $82.5 to $83 and now to $84 while collecting net premiums of $1.04, subject to the need to trade again next Friday.

In such cases, if assignment looks likely, the call contract is bought back, sometimes at a loss. That looked like it might have been a possibility with Anadarko shares on Wednesday, as it went higher on word of David Einhorn taking a position.

But the anticipation is that assignment won’t happen and instead, while there is systemic weakness you hope to add some additional income stream to your positions. Essentially  you are adding reward when you believe the additional risk, that is losing the position at a price lower than your purchase, is tolerable.

While this is entirely premature and would be an over-statement, that is the kind of trading that was very instrumental in dealing with the declines of 2008 and 2009. Doing so is sometimes a little more stressful than a straightforward trade, but can really feel very rewarding when successfully managed.

I’ve often said that the best times are when the market is either non-committal or going lower. The use of a more aggressive trading strategy with existing positions is one way to make it so.

Get ready and keep your cash reserves safe, but at hand.

 

 

 

 

 

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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:  AIG, C, COP, CREE (puts), FAST, INTC, MOS,

Puts Closed in order to take profits:  CREE

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

Calls Rolled over, taking profits, into extended weekly cycle:  CSCO (2/7)

Calls Rolled over, taking profits, into the monthly cycle: none

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

Calls Rolled Up, taking net profits into same cyclenone

New STO:  CPB

Put contracts sold and still open: none

Put contracts expired: nonr

Put contract rolled over: none

Long term call contracts sold:  none

Calls Assigned:  CHK

Calls Expired: HFC, LULU, MOS, MRO, WAG, WLT

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:  none

 

 

.

 

 

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

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<

p style=”text-align: center;”>* If you don’t have a program to read or modify spreadsheets, you can download the OpenOffice Suite at no cost.´╗┐

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Week in Review (January 13-17, 2014)

 

Option to Profit Week in Review
January┬á13 – 17, 2014
 
NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
6 / 6 1 6 4 / 1 7 / 0 0

    

Weekly Up to Date Performance

January 13-17, 2014

New purchases again trailed the time adjusted S&P 500 this week, this time by 0.1%, but beat the unadjusted index by 0.2%.

The market showed an adjusted gain for the week of 0.4%, while the market actually lost 0.2% for the week. New positions, by contrast, advanced 0.5% for the week.

For the┬á18 positions┬ápositions┬áclosed in 2014, performance exceeded that of the S&P 500 by┬á1.1%. They┬áwere up 3.8% out-performing the market by 38.4%┬áas the number of data points begins to increase. While very pleased with that level of out-performance, I don’t expect┬áit to continue at that pace, particularly if the market continues higher and volatility remains so low.

For the second consecutive week I’m not really certain how I felt about performance.

As always, the bottom┬áline is always the most important outcome, but it’s┬áalways good to look at the component pieces that create the bottom line and whether objectives are realized.

The biggest disappointment this week was the inability to get decent rollover opportunities on a number of positions after they opened lower today, distancing themselves from strike prices too much to make the trades worthwhile.

Those included Campbell Soup, Phillip Morris, L Brands, Transocean and Darden Restaurants. Three of those went up nicely just yesterday and gave me hopes of getting those trades done, perhaps even seeing assignments.

While the assignments could have been done yesterday the cost to buy back shares was just too high, especially due to the day’s buying strength. In hindsight it makes you think that it’s better to take what is there to be taken rather than risking the chance that it will be gone tomorrow.

On the other hand a fair number of rollovers and assignments occurred helping to replenish cash reserves and create the opportunity to seek new positions next week without necessarily digging into baseline reserves.

It was also a nice week for dividends, but by and large those positions had difficult times maintaining price, as they showed weakness after going ex-dividend.

With the market having ended the week so flat, I would have anticipated a better performance on new positions. While they did outperform the market, they fell short of the 1% threshold in a week that it should have been relatively easily attained.

The way the market lost steam as it headed into the final hour was deflating in any number of ways, but especially where it counted the most.

It may be good to have a little extra time off this coming week for everyone to get back on the same page.

Trading is listless and without theme and, as seen so often this week, marked by large and sudden moves that seem irrational for their lack of known catalyst.

This was a week, that if you followed closely, had lots and lots of intra-day swings in individual stocks, which is something that you don’t see terribly often. The swings went in both directions and weren’t very long lived, for the most part, so conclusions aren’t obvious other than occasional conviction in selling and then conviction in buying, but those swings can be disruptive to individual strategies.

As mentioned last week, the previous two quarters┬áas a ┬águide, the financials did do quite well, with the exception of Citigroup, yet that didn’t really help the more broad market. Next week sees the non-financial beginning to report their numbers and it still surprises me that the call has been for a 6% increase in earnings, unless share buybacks can have so significant of an effect.

That’s not really a sustainable strategy for growth. Sooner or later there has to actually be economic activity that moves a stock’s fortunes forward.

I anticipate next week being one that will be responsive to earnings, in the absence of much other scheduled activity. I don’t anticipate being overly active in adding new positions next week, but would like to see some further weakness or at least tentativeness in trading to begin the week, as some prices are beginning to look a little more attractive.

I just don’t want to jump the gun and ask the same question asked when someone tells a tasteless joke.

“Too soon?”

 

 

This week’s details may be seen in the Weekly Performance spreadsheet┬á* 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:  HFC, LB, LOW, VZ, WAG, YUM

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycle: none

Calls Rolled over, taking profits, into extended weekly cycle:  ANF, HAL

CallsRolled over, taking profits, into the monthly cycle: none

Calls Rolled Over, taking profits, into a future monthly cycle:  FCX, HAL, LXK, WY

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

New STO:  LLY

Put contracts sold and still open: **

Put contracts expired: ANF

Put contract rolled over: none

Long term call contracts sold:  none

Calls Assigned:  CY, FAST, MDLZ, MOS

Calls Expired: AGQ, CPB, DRI, GPS, LB, PM, RIG, WFM

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:  CHK (1/13 $0.09), FCX (1/13 $0.31), WFM (1/15 $0.12), YUM (1/15 $0.37), LOW (1/17 $0.18)

 

 

** Some people had early assignment of ANF puts on November 8, 2013. Subsequently OTP Trading Alerts were sent to sell new calls on ANF, as well as to roll over puts. The strike prices on the two trades differ, but the premium differentials have this far been virtually identical through a third round of rollovers, with strike prices adjusted on calls and puts to $36 and $35, respectively, from the original $35.50 put sale.

 

 

For the coming week the existing positions have lots that still require the sale of contracts:┬á┬á┬áAGQ, APC, CLF,┬á CPI, DRI, FCX,┬á GPS, LB, JCP, MCP, MOS, NEM, PBR,┬áPM, RIG, TGT, WFM, WLT (See “Weekly Performance” spreadsheet or PDF file)

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

Week in Review (January 6 – 10, 2013)

 

Option to Profit Week in Review
January 6 – 10, 2014´╗┐
 
NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
4/ 4 1 5 9 / 0 1 / 0 2

    

Weekly Up to Date Performance

January 6-10, 2014

For the first full week of 2014, new purchases trailed the time adjusted S&P 500 by 0.3% and also trailed the unadjusted index by 0.2%.

The market showed an adjusted gain for the week of 0.7% and unadjusted gain of 0.6% for the week, while new positions advanced only 0.4%.

For the 12 positions positions closed in 2014, performance exceeded that of the S&P 500 by 1.1%. They were up 2.9% out-performing the market by 62.8% for the data-challenged year to date. I don’t expect that kind of out=-performance to continue, however, with the current low volatility.

I’m not really certain how I felt about this week.

While I suppose that the bottom line should be the bottom line and that was improved, it still felt very empty.

Prior to today’s assignments, I was at my lowest cash level for a while, yet don’t feel as if I have quite that much to show for it. Beside that, there were only four new position purchases for the week and they really didn’t fare too well, even with lots of cushion built into their strike prices.

On the other hand, there were all of those assignments and the ability to replenish cash reserves, as well as the ability to rollover all but one non-assigned position and to be more time diversified when it was all said and done.

But then there was that lost dividend in Verizon that spiked up for no reason at all on the day before ex-dividend.

Of course, the ambivalence is further reflected in the happiness that I wasn’t holding Verizon after it plunged the next day, also for no reason at all.

So, after all of that, there’s this emptiness that even with a week that had an FOMC release and an Employment Situation Report, not much happened.

Ordinarily, those are the best of all weeks and that might explain the emptiness.

On weeks that the market doesn’t do much other than tread water there’s every reason to expect out-performance. Not only out-performance, but also beating the 1% threshold for new purchases.

This week, as has occurred before, you do get to see how when only opening a small number of new positions it’s very easy to greatly out-perform or under-perform,on the basis of a single stand out.

Following this lackluster week, both in the markets and in personal performance, we’re faced with a monthly expiration, with positioned being well positioned for both assignments and rollovers, although anything goes.

Based on the market’s performance through the first week of yearly trading the idea that “anything goes” is well founded. There basically is very low predictive capability when the first week of an otherwise predicitive month is lower.

However, the market really wasn’t lower. It just felt that way and no one has done any statistical analysis based on the way things feel.

With cash coming and enough positions expiring next week, once again the focus will be on expanded options or February monthly options.

As earnings get underway in earnest next week the market tone may be set by the financials. such as JP Morgan, Citibank, Morgan Stanley and others that all report next week.

If the past two quarters are any guide, the financials will do well, but that won’t necessarily set the stage for the others in the S&P 500. As we’ve seen, retail has been incredibly weak of late and even Macys. which is widely regarded as the best performing right now, has announced large layoffs.

Still, with challenges and risk come opportunity.

I anticipate being a little more active next week, if only to be able to camouflage any under-performers for the week and will be mindful of when companies report earnings. Knowing those dates allows the option of either avoiding, embracing or dancing around those companies.

 

     ´╗┐

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:  CHK, DRI, EBAY, WLT

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycle: none

Calls Rolled over, taking profits, into extended weekly cycleCSCO, LULU, MRO, MSFT, WLT,

Calls Rolled over, taking profits, into the monthly cycle: none

Calls Rolled Over, taking profits, into a future monthly cycle: &nb
sp;none

Calls Rolled Up, taking net profits into same cyclenone

New STO:  ANF

Put contracts sold and still open: **

Put contracts expired: none

Put contract rolled over: none

Long term call contracts sold:  none

Calls Assigned:  ANF, BMY, EMC, HFC, JPM, NLY, SBUX, WAG

Calls Expired: CLF

Puts Assigned:  none

Stock positions Closed to take profits:  CCL, M 

Stock positions Closed to take losses: none

Calls Closed to Take Profits: none´╗┐

Ex-dividend Positions:  EMC (1/6 $0.10), GPS (1/6 $0.20), DRI (1/8 $0.55)

 

 

** Some people had early assignment of ANF puts on November 8, 2013. Subsequently OTP Trading Alerts were sent to sell new calls on ANF, as well as to roll over puts. The strike prices on the two trades differ, but the premium differentials have this far been virtually identical through a third round of rollovers, with strike prices adjusted on calls and puts to $36 and $35, respectively, from the original $35.50 put sale.

 

 

´╗┐

For the coming week the existing positions have lots that still require the sale of contracts:   APC, CLFFCXJCP, LLY, MCP, MOS, NEM, PBRTGT, WLT (See “Weekly Performance” spreadsheet or PDF file)

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<

p style=”text-align: center;”>* If you don’t have a program to read or modify spreadsheets, you can download the OpenOffice Suite at no cost.´╗┐

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