Weekend Update – August 28, 2016

I’m not entirely certain I understood what happened on Friday.

While it’s easy to understand the “one – two” punch, such as memorialized in Tennessee Ernie Ford’s song “Sixteen Tons,” it’s less easy to understand what has happened when a gift is so suddenly snatched away.

After not having attended the previous year’s Kansas City Federal Reserve Bank hosted soiree in Jackson Hole, this year Janet Yellen was there.

She was scheduled to speak on Friday morning and the market seemed to be biding its time all through the week hoping that Friday would bring some ultimate clarity.

Most expected that she would strike a more hawkish tone, but would do so in a way as to offer some comfort, rather than to instill fear, but instead of demonstrating that anticipation by buying stocks earlier in the week, traders needed the news and not the rumor.

The week was shaping up like another in a string of weeks with little to no net movement. Despite the usual series of economic reports and despite having gone through another earnings season, there was little to send markets anywhere.

Most recently, the only thing that has had any kind of an impact has been the return of the association between oil prices and the stock market and we all know that the current association can’t be one that’s sustainable.

So we waited for Friday morning.

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Weekend Update – June 26, 2016

 A week ago, the world was getting ready for what all the polls had been predicting.

Only those willing to book bets seemed to have a different opinion.

Polls indicated that Great Britain was going to vote to leave the European Union, but those willing to put their money where their mouths were, didn’t agree.

Then suddenly there was a shift, perhaps due to the tragic murder of a proponent of keeping the EU intact.

That shift was seen not only in the polls, but in markets.

Suddenly, everyone was of the belief that British voters would do the obviously right thing and vote with their economic health in mind, first and foremost.

The funny thing is that it’s pretty irrational to expect rational behavior.

In a real supreme measure of confidence, just look at the 5 day performance of the S&P 500 leading up to the vote.

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Weekend Update – May 29, 2016

We’ve all been part of one of those really disingenuous hugs.

Whether on the giving or the receiving side, you just know that there’s nothing really good coming out of it and somehow everyone ends up feeling dirty and cheapened.

Every now and then someone on the receiving end of one of those disingenuous hugs believes it’s the real thing and they are led down the wrong path or become oblivious to what is really going on.

This week the market gave a warm embrace and hug to the notion that the FOMC might actually be announcing an interest rate hike as early as its June 2016 meeting.

The chances of that even being a possibility was slight, at the very best, just 2 or 3 weeks ago. Since then, however, there has been more and more hawkish talk coming even from the doves.

The message being sent out right now is that the FOMC is like a hammer that sees everything as a nail. In that sense, every bit of economic news justifies tapping on the brakes.

Traditionally, those brakes were there to slow down an economy that was heating up and would then lead to inflation.

Inflation was once evil, but now we recognize that there are shades of grey and maybe even Charles Manson had some good qualities.

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Weekend Update – May 15, 2016

It took every last bit of my courage to jump out of a plane.

That was with a parachute and I only did so after suspending all of the logical and rational thoughts that I possessed.

Sometimes you do very uncharacteristic things when you want to impress someone for some other kind of excitement.

No other level of excitement could ever be high enough to get me to further suspend logic to engage in a free fall, though.

I don’t care how exhilarating it might be, staying alive seems more exhilarating to me.

Some free falls don’t require your consent, though and unless you’ve positioned yourself short in advance of the free fall, it’s definitely not an exhilarating process.

The past week was one in which oil wasn’t the prevailing theme even as it had its own large moves.

Instead, it was the free fall of retail, led by Macy’s (M) and Nordstrom (JWN), arguably among the best of the major national retailers, that characterized the stock market.

Of course, Macy’s and then Nordstrom took most every other retailer down with them and were able to drag along many others.

That kind of free fall, though, leaves open the question of exactly where the floor happens to be. 

On a positive note, hitting the floor after a market free fall is probably a lot better than hitting the floor following a recreational free fall and you do get the chance to play the game a bit longer.

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Weekend Update – April 10, 2016

There probably aren’t too many people willing to admit they remember The Osmond’s song “(Just Like A) Yo-Yo.”

The really cool people would look at you with some disdain, as the only thing that could have possibly made the yo-yo tolerable to mention in any conversation was if it was somehow in connection to the song of that title by “The Kinks.” 

With her dovish words just the prior week, Janet Yellen set off another round of market ups and downs that have taken us nowhere, other than to wonder who or what we should believe and then how to behave in response.

That’s been the case all through 2016, as another week of ups and downs have left the S&P 500 just 0.2% higher year to date. Of course, that’s within a 17 month context in which the S&P 500 has had no net movement, but has certainly had lots of ups and lots of downs.

Reminds me of something.

For those that do recall happier times with a yo-yo in hand, you may recall “the sleeper.”

“The Sleeper” was deceiving.

There was lots of energy involved in the phenomenon, but not so obviously apparent, unlike the clear ups and downs of the standard yo-yo move.

Both, though, ended up going nowhere.

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Weekend Update – February 28, 2016

It is really amazing that as big as the United States’ economy is, everything may now simply be part of a very delicate balancing act.

“Momentum” is a simple concept in classical mechanics and is generally expressed as the product of the mass of an object and its velocity.

The term “momentum” is often used when describing stocks, but many described as having momentum can be easily pushed off their track.

Another simple concept and part of classical physics, is that of “inertia.” Inertia is the resistance of any physical object to any change in its state of motion.

When a “momentum stock” has a relatively low market capitalization it isn’t too hard for resistance to match and overcome that momentum.

Greed and fear may play roles, too, in such cases, but those aren’t terms that Isaac Newton used very often.

The US economy may often move at what seems like a glacial speed, but its easy to overlook how difficult it is to alter its path due to its huge size.

That’s what makes the job of the FOMC so difficult. 

Outcomes resulting from their actions may take a long, long time to become obvious. Sometimes the FOMC acts to increase momentum and sometimes they have to act to increase resistance.

Stock market investors prefer the former, but history suggests that the early stages of the latter may be a great time for optimism.

While both momentum and inertia may be simple concepts, when considered together that’s not so much the case. Fortunately for the FOMC, the “Irresistible Force Paradox” suggests that there can be no such thing as an unstoppable object or an irresistible force.

Something has to give over the course of time.

While I’m no apologist for the George Bush presidency, the seeds for the beginning of an improvement in the economy often cited as beginning in about February 2009 could only have been sown much earlier. Similarly the economic stress in early 2001 could only have had its roots quite a bit earlier. However, our minds make temporal associations and credit or blame is often laid at the feet of the one lucky or unlucky enough to be in charge at the time something becomes obvious.

We’re now facing two delicate balances.

The first is the one continually faced by the FOMC, but that has been on most everyone’s mind ever since Janet Yellen became Chairman of the Federal Reserve.

The balance between managing inflation and not stifling economic growth has certainly been on the minds of investors. Cursed by that habit of making temporal associations, the small interest rate hike at the end of 2015, which was feared by many, could be pointed to as having set the stage for the market’s 2016 correction.

That leaves the FOMC to ponder its next step. 

While stressing that its decisions are “data driven” they can’t be completely dismissive of events around them, just as they briefly made mention of some global economic instability a few months ago, widely believed to have been related to China.

This past week’s GDP sent mixed messages regarding the critical role of the consumer, even as the previous week showed an increase in the Consumer Price Index. Whether rising health care costs or rising rents, which were at the core of the Consumer Price Index increase could hardly be interpreted as representing consumer participation, the thought that comes to mind is that if you’re a hammer everything looks like a nail.

The FOMC has to balance the data and its meaning with whatever biases each voting member may have. At the same time investors have to balance their fear of rising rates with the realization that could be reflecting an economy poised to grow and perhaps to do so in an orderly way.

But there’s another delicate balance at hand.

While we’ve all been watching how oil prices have whipsawed the stock market, there’s been the disconnect between lower oil prices borne out of excess supply and stock market health.

For those pleased to see energy prices moving higher because the market has gone in the same direction, there has to be a realization that there will be a point that what is perceived as good news will finally be recognized as being something else.

It’s hard to imagine that a continuing rise in oil will continue to be received as something positive by investors. Hopefully, though, that realization will be slow in coming. Otherwise, we face having had the worst of all worlds. Stocks declining as oil declined and then stocks declining as oil moves higher.

Now that JP Morgan Chase (JPM) has let everyone know just how on the hook it may be on its oil loan portfolio, it’s becoming more and more clear why the market is following in the same direction as oil has gone.

If the price of oil goes too low there may be drains on the banking system if there are defaults on those loans. We could again be hearing the phrase “too big to fail,” although this time instead of over-leveraged individuals losing their homes, all of the beneficiaries from the US oil boom could be at risk.

Of course, if oil goes too high and does so without being fundamentally driven, it can put a damper on a consumer driven economy that isn’t looking very robust to start.

We’re just 3 weeks away from the next FOMC Statement release and Chairman Yellen’s press conference may tip some balances. For much of the past two weeks the stock market has been celebrating higher oil and data suggesting no immediately forthcoming interest rate increase.

Of course, the FOMC may have its own irresistible force at play, perhaps explaining the earlier interest rate hike which didn’t seem to be supported by economic data. That force may be. a pre-determined intention to see rates rise

The market is of the belief that oil price momentum higher won’t meet its match in the negating force of increased interest rates, but one person may hold the balance in her hands.

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

Speaking of momentum and being easily thrown of track, Cypress Semiconductor (CY) comes to mind.

It trades at a high beta and is prone to volatile moves in either direction. It’s most recent direction has been lower, after having spiked sharply higher on news of its proposed buyout of another company.

When they were stranded at the alter by another suitor shares started a sharp descent from which it may finally be ready to emerge.

With a market capitalization of less than $3 billion it was easily knocked off track, but could just as easily get back on.

With an ex-dividend date in the April 2016 option cycle and with earnings in the May 2016 option cycle, I’m likely to add shares this coming week and will probably sell the April 2016 options while doing so.

I do have some concern about the company being able to continue its dividend, but IU don’t imagine that most who are invested in Cypress Semiconductor are doing it for the dividend, so I don’t believe that would represent significant downside pressure.

While February’s nice turnaround has left the S&P 500 significantly less in the hole for 2016. the financial sector has been continuing to have a difficult time as expectations for rising interest rates have proved premature.

American International Group (AIG) is near a 52 week low, but it hasn’t been the worst of that group even as it approaches a 20% correction for 2016.

What the downward pressure in the financial sector has brought has been enhanced option premiums. With a now respectable dividend as part of the equation and an ex-dividend the following week, I would consider selling something other than a weekly option

Abercrombie and Fitch (ANF) is on a roll of late and has earnings announced this week. It has a habit of being explosive when it does announce earnings and also has a habit of quickly giving back gains from news perceived as being positive. However, it has not given back the gains since its gap higher in November 2015.

What may make consideration of Abercrombie interesting this week is that it is also ex-dividend on the same day as earnings are announced.

While I normally consider the sale of puts before or after earnings, the combination of earnings, an ex-dividend date and a 13.3% implied price move has me thinking a bit differently.

I’m thinking of buying shares and then selling deep in the money calls.

Based on Friday’s closing price of $28.50, the sale of a weekly $25 strike call option at a premium of $4 would result in an ROI of 1.8% if assigned early in order to capture the dividend.

Since the ex-dividend date is March 2nd, that early assignment would have to come on Tuesday, March 1st and would preclude earnings exposure.

If, however, early assignment does not occur, the potential ROI for a full week of holding could be 2.5%, but with earnings risk. The $25 strike price is within the lower boundary implied by the option market, so one has to be prepared for a price move that may require further action.

Weyerhauser (WY) is also ex-dividend this week and its 2016 YTD loss is nearly 15%. The consensus among analysts, who are so often very late to react to good or bad news, are solidly bullish on shares at these levels.

With its merger with Plum Creek Timber now complete, many expect significant cost savings and operational synergies. 

It’s dividend isn’t quite as high and its payout ratio is almost half that of Cypress Semiconductor, but still far too high to be sustained. REIT or no REIT, paying out more than 100% of your earnings may feel good for a while if you’re on the receiving end, but is only a formula for Ponzi schemers of “The Producers.”

For now, that doesn’t concern me, but with an eye toward the upcoming ex-dividend date, which is on a Friday, I would consider selling an extended weekly option and then wouldn’t mind terribly if the options were exercised early.

Finally, I’m not one to be very interested in getting in on a stock following a climb higher, nor am I one to spend too much time reading charts.

But Coach (COH) which is ex-dividend this week gives me some reason to be interested.

A one-time favorite of mine either right before an ex-dividend date or following a large earnings related price decline, I’ve been holding onto an uncovered lot of shares for quite some time. Only the dividend has made it tolerable.

Ordinarily, I wouldn’t be terribly interested in considering adding shares of Coach following a 16% climb in the past month. However, shares are now making their second run at resistance and there is an 11% gap higher if it can successfully test that resistance.

It has been a prolonged drought for Coach as it was completely made irrelevant by Kors (KORS) for quite some time. During that time Kors had momentum and was also perceived as the force to stop Coach.

Time and tastes can change lots of things. That’s another delicate balance and for now, the balance seems to be back on the side of Coach.

Traditional Stocks: American International Group

Momentum Stocks: Cypress Semiconductor

Double-Dip Dividend: Coach (3/2 $0.34), Weyerhauser (3/4 $0.31)

Premiums Enhanced by Earnings: Abercrombie and Fitch (3/2 AM)

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

Weekend Update – January 10, 2016

new year starts off with great promise.

If seems so strange that the stock market often takes on a completely different persona from one day to the next.

Often the same holds true for one year to the next. despite there being nothing magical nor mystical about the first trading day of the year to distinguish it from the last trading day of the previous year.

For those that couldn’t wait to be finally done with 2015 out of the expectation conventional wisdom would hold and that the year following a flat performing year would be a well performing year, welcome to an unhappy New Year.

2015 was certainly a year in which there wasn’t much in the way of short term memory and the year was characterized by lots of ups and downs that took us absolutely nowhere as the market ended unchanged for the year.

While finishing unchanged should probably result in neither elation nor disgust, scratching beneath the surface and eliminating the stellar performance of a small handful of stocks could lead to a feeling of disgust.

Or you could simply look at your end of the portfolio year bottom line. Unless you put it all into the NASDAQ 100 (NDX) or the ProShares QQQ (NASDAQ:QQQ), which had no choice but to have positions in those big gainers, it wasn’t a very good year.

You don’t have to scratch very deeply beneath the surface to already have a sense of disgust about the way 2016 has gotten off to its start.

There are no shortage of people pointing out that this first week of 2016 was the worst start ever to a new year.

Ever.

That’s much more meaningful than saying that this is the worst start since 2019.

A nearly 7% decline in the first week of trading doesn’t necessarily mean that 2016 won’t be a good one for investors, but it is a big hole from which to have to emerge.

Of course a 7% decline for the week would look wonderful when compared to the situation in Shanghai, when a 7% loss was incurred to 2 different days during the week, as trading curbs were placed, markets closed and then trading curbs eliminated.

If you venture back to the June through August 2015 period, you might recall that our own correction during the latter portion of that period was preceded by two meltdowns in Shanghai that ultimately saw the Chinese government enact a number of policies to abridge the very essence of free markets. Of course, the implicit threat of the death penalty for those who may have knowingly contributed to that meltdown may have set the path for a relative period of calm until this past week when some of those policies and trading restrictions were lifted.

At the time China first attempted to control its markets, I believed that it would take a very short time for the debacle to resume, but these days, the 5 months since then are the equivalent of an eternity.

While China is again facing a crisis, the United States is back to the uncomfortable position of being the dog that is getting wagged by the tail.

US markets actually resisted the June 2015 initial plunge in China, but by the time the second of those plunges occurred in August, there was no further resistance.

For the most part the two markets have been in lock step since then.

Interestingly, when the US market had its August 2015 correction, falling from the S&P 500 2102 level, it had been flat on the year up to that point. Technicians will probably point to the fact that the market then rallied all the way back to 2102 by December 1, 2015 and that it has been nothing but a series of lower highs and lower lows since then, culminating in this week.

The decline from the recent S&P 500 peak at 2102 to 1922 downhill since then is its own 8.5%, putting us easily within a day’s worth of bad performance of another correction.

Having gone years without a traditional 10% correction, we’re now on the doorstep of the second such correction in 5 months.

While it would be easy to thank China for helping our slide, this past week was another of those perfect storms of international bad news ranging from Saudi-Iran conflict, North Korea’s nuclear ambitions and the further declining price of oil, even in the face of Saudi-Iran conflict.

Personally, I think the real kiss of death was news that 2015 saw near term record inflows into mutual funds and that the past 2 months were especially strong.

I’ve never been particularly good at timing, but there may be reason to believe that at the very least those putting their money into mutual funds aren’t very good at it either.

If I still had a shred of optimism left, I might say that the flow into mutual funds might reflect more and more people back in the workforce and contributing to workplace 401k plans.

If that’s true, I’m sure those participants would agree with me that it’s not a very happy start to the year. For those attributing end of the year weakness to the “January Effect” and anticipating some buying at bargain prices to drive stocks higher, that theory may have had yet another nail placed in its coffin.

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

2015 turned out to be my least active year for opening new positions since I’ve been keeping close track. Unfortunately, of those 107 new positions, 29 are still open and 15 of those are non-performing, as they await some opportunity to sell meaningful calls against them.

If you would have told me a year ago that I would not have rushed into to pick up bargains in the face of a precipitous 7% decline, I would have thought you to be insane.

While I did add one position last week, the past 2 months or so have been very tentative with regard to my willingness to ease the grip on cash and for the moment there’s not too much reason to suspect that 2016 will be more active than 2015.

With that said, though, volatility is now at a level that makes a little risk taking somewhat less of a risk.

While volatility has now come back to its October 2015 level, it is still far from its very brief peak in August 2015, despite the recent decline being almost at the same level as the decline seen in August.

Of course that 2% difference in those declines, could easily account for another 10 or so points of volatility. Even then, we would be quite a distance from the peak reached in 2011, when the market started a mid-year decline that saw it finish flat for the year.

The strategy frequently followed during periods of high volatility is to considering rolling over positions even if they are otherwise destined for assignment.

The reason for that is because the increasing uncertainty extends into forward weeks and drives those premiums relatively higher than the current week’s expiring premiums. During periods of low volatility, the further out in time you go to sell a contract, the lower the marginal increase in premium, as a reflection of less uncertainty.

For me, that is an ideal time and the short term outlook taken during a period of accelerating share prices is replaced by a longer term outlook and accumulation of greater premium and less active pursuit of new positions.

The old saying “when you’re a hammer, everything looks like a nail,” has some applicability following last weeks broad and sharp declines. If you have free cash, everything looks like a bargain.

While no one can predict that prices will continue to go lower as they do during the days after the Christmas shopping season, I’m in no rush to run out and pay today’s prices because of a fear that inventory at those prices will be depleted.

The one position that I did open last week was Morgan Stanley (NYSE:MS) and for a brief few hours it looked like a good decision as shares moved higher from its Monday lows when I made the purchase, even as the market went lower.

That didn’t last too long, though, as those shares ultimately were even weaker than the S&P 500 for the week.

While I already own 2 lots of Bank of America (NYSE:BAC), the declines in the financial sector seem extraordinarily overdone, even as the decline in the broader market may still have some more downside.

As is typically the case, that uncertainty brings an enhanced premium.

In Bank of America’s case, the premium for selling a near the money weekly option has been in the 1.1% vicinity of late. However, in the coming week, the ROI, including the potential for share appreciation is an unusually high 3.3%, as the $15.50 strike level offers a $0.19 premium, even as shares closed at $15.19.

With earnings coming up the following week, if those shares are not assigned, I would consider rolling those contracts over to January 29, 2016 or later.

At this point, most everyone expects that Blackstone (NYSE:BX) will have to slash its dividend. As a publicly traded company, it started its life as an over-hyped IPO and then a prolonged disappointment to those who rushed into buy shares in the after-market.

However, up until mid-year in 2015, it had been on a 3 year climb higher and has been a consistently good consideration for a buy/write strategy, if you didn’t mind chasing its price higher.

I generally don’t like to do that, so have only owned it on 3 occasions during that time period.

Since having gone public its dividend has been a consistently moving target, reflecting its operating fortunes. With it’s next ex-dividend date as yet unannounced, but expected sometime in early February, it reports earnings on January 28, 2015.

That presents considerable uncertainty and risk if considering a position. I don’t believe, however, that the announcement of a decreased dividend will be an adverse event, as it is both expected and has been part of the company’s history. WHat will likely be more germane is the health of its operating units and the degree of leverage to which Blackstone is exposed.

If willing to accept the risk, the premium reward can be significant, even if attenuating the risk by either selling deep in the money calls or selling equally out of the money put contracts.

I’m already deep under water with Bed Bath and Beyond (NASDAQ:BBBY), but after what had been characterized as disappointing earnings last week, it actually traded fairly well, despite the overall tone of the market.

It is now trading near a multi-year low and befitting that uncertainty it’s option premiums are extraordinarily generous, despite having a low beta,

As is often the case during periods of heightened volatility, consideration can be given to the sale of puts options rather than executing a buy/write.

However, given its declines, I would be inclined to consider the buy/write approach and utilize an out of the money option in the hopes of accumulating share appreciation and dividend.

If selling puts, I would sell an out of the money put and settle for a lower ROI in return for perhaps being able to sleep more soundly at night.

During downturns, I like to place some additional focus on dividends, but there aren’t very many good prospects in the coming week.

One ex-dividend position that does get my attention is AbbVie (NYSE:ABBV).

As it is, I’m under-invested in the healthcare sector and AbbVie is currently trading right at one support level and has some additional support below that, before being in jeopardy of approaching $46.50, a level to which it gapped down and then gapped higher.

It has a $0.57 dividend, which means that it is greater than the units in which its strike levels are defined. While earnings aren’t due to be reported until the end of the month, its premium is more robust than is usually the case and you can even consider selling a deep in the money call in an effort to see the shares assigned early. For what would amount to a 2 day holding, doing so could result in a 1.2% ROI, based upon Friday’s closing prices and a $55 strike level.

Finally, retail was especially dichotomous last week as there were some very strong days even during overall market weakness and then some very weak days, as well.

For those with a strong stomach, Abercrombie and Fitch (NYSE:ANF) is well off from its recent lows, but it did get hit hard on Friday, along with the retail sector and everything else.

As with AbbVie, the risk is that while shares are now resting at a support level, the next level below represents an area where there was a gap higher, so there is really no place to rest on the way down to $20.

The approach that I would consider for an Abercrombie and Fitch position to sell out of the money puts, where even a 6% decline in share price could still provide a return in excess of 1% for the week.

When selling puts, however, I generally like to avoid or delay assignment, if possible, so it is helpful to be able to watch the position in the event that a rollover is necessary if shares do fall 6% or more as the contract is running out.

Traditional Stocks: Bank of America, Bed Bath and Beyond

Momentum Stocks: Abercrombie and Fitch, Blackstone

Double-Dip Dividend: AbbVie (1/13 $0.57)

Premiums Enhanced by Earnings: none

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

Weekend Update – November 15, 2015

Back in March 2015, when writing the article “It’s As Clear As Mud,” there was no reason to suspect that there would be a reason for a Part 2.

After all, the handwriting seemed to be fairly clear at that time and the interest rate hawks seemed to be getting their footing while laying out the ground rules for an interest rate increase that had already been expected for months prior.

In fact, back in July 2015, I wrote another article inadvertently also entitled “It’s As Clear As Mud,” but in my defense the reason for the confusion back then had nothing to do with the FOMC or the domestic US economy, so it wasn’t really a Part 2.

It was simply a case of more confusion abounding, but for an entirely different reason.

Not that the FOMC hadn’t continued their policy of obfuscation.

But here we are, 8 months after the first article and the FOMC is back at the center of confusion that’s reigning over the market as messages are mixed, economic data is perplexing and the intent of the FOMC seems to be going counter to events on the ground.

While most understand that extraordinarily low interest rates have some appeal and can also be stimulatory, there’s also the recognition that prolonged low interest rates are a reflection of a moribund economy.

While individuals may someday arrive at a point in their lives that they’re not interested in or seeking personal growth, economies always have to be in pursuit of growth unless their populations are shrinking or aging along with the individual.

Like Japan.

Most would agree that when it comes to the economy, we don’t want to be like the Japan we’ve come to know over the past generation.

So despite the stock market being unable to decide whether an increase in interest rates would be a good thing for it, an unbiased view, one that doesn’t directly benefit from cheap money, might think that the early phase of interest rate increases would simply be a reflection of good news.

Growth is good, stagnation is not.

However, the FOMC has now long maintained that it will be data driven, but what may be becoming clear is that they maintain the right to move the needle when it comes to deciding where thresholds may be on the data they evaluate.

After years of regularly being disappointed by monthly employment gains below 200,000, October 2015’s Employment Situation Report gave us a number that was below 150,000. While that was surprising, the real surprise may have come a few weeks later when the FOMC indicated that 150,000 was a number sufficiently high to justify that rate increase.

The October 2015 Employment Situation report came at a time that traders had a brief period of mental clarity. They had been looking at negative economic news as something being bad and had been sending the market lower from mid-August until the morning of the release, when it sent the market into a tailspin for an hour or so.

Then began a very impressive month long rally that was based on nothing more than an expectation that the poor employment statistics would mean further delay in interest rate hikes.

But then the came more and more hawkish talk from Federal Reserve Governors, an ensuing outstanding Employment Situation Report and terrible guidance from national retailers.

With a year of low energy prices, more and more people going back to work and minimum wage increases you would have good reason to think that retailers would be rejoicing and in a position to apply that basic law of supply and demand on the wares they sale.

But the demand part of that equation isn’t showing up in the top line, yet the hawkish FOMC tone continues.

The much discussed 0.25% increase isn’t very much and should do absolutely nothing to stifle an economy. While I’d love to see us get over being held hostage by the fear of such an increase by finally getting that increase, it’s increasingly difficult to understand the FOMC, which seems itself to be held hostage by itself.

Difficulty in understanding the FOMC was par for the course during the tenure of Alan Greenspan, but during the plain talk eras of Ben Bernanke and Janet Yellen the words are more clear, it’s just that there seems to be so much indecisiveness.

That’s odd, as Janet Yellen and Stanley Fischer are really brilliant, but may be finding themselves faced with an economy that just makes little sense and isn’t necessarily following the rules of the road.

We may find out some more of the details next week as the FOMC minutes are released, but if they’re confused, what chance do any of the rest of us have?

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

Last week was just a miserable week. I was probably more active in adding new positions than I should have been and took little solace in having them out-perform the market for the week, as they were losers, too.

This week has more potentially bad news coming from retail, at a time when I really expected some positive news, at least with regard to forward guidance.

But with Abercrombie and Fitch (NYSE:ANF) having fallen about 12% last week after having picked up a little strength in the previous week, I’m ready to look at it again as it reports earnings this week.

I am sitting on a far more expensive lot of Abercrombie and Fitch, although if looking for a little of that solace, I can find some in having also owned it on 6 other occasions in 2015 and 21 other times in the past 3 years.

Despite that one lot that I’m not currently on speaking terms with, this has been a stock that I’ve longed loved to trade.

It has been range-bound for much of the past 8 months, although the next real support level is about 20% below Friday’s closing price.

With that in mind, the option market is implying about a 13.3% price move next week. A 1% ROI could potentially be obtained by selling puts nearly 22% below that close.

A stock that I like to trade, but don’t do often enough has just come off a very bad single day’s performance. GameStop (NYSE:GME) received a downgrade this past week and fell 16.5%

The downgrade was of some significance because it came from a firm that has had a reasonably good record on GameStop, since first downgrading it in 2008 and then upgrading in 2015.

GameStop has probably been written off for dead more than any stock that I can recall and has long been a favorite for those inclined to short stocks.

Meanwhile, the options market is implying a 5.5% move next week, even though earnings aren’t to be reported until Monday morning of the following week.

A 1% ROI could possibly be achieved by selling a put contract at a strike level 5.8% below Friday’s close, but if doing that and faced with possible assignment resulting in ownership of shares, you need to be nimble enough to roll over the put contracts to the following or some other week in order to add greater downside protection.

For the following week the implied move is 12.5%, but part of that is also additional time value. However, the option market clearly still expects some additional possibility of large moves.

If you’re a glutton for more excitement, salesforce.com (NYSE:CRM) reports earnings this week and is no stranger to large price movements with or without earnings at hand.

Depending upon your perspective, salesforce.com is either an incredible example of great ingenuity or a house of cards as its accounting practices have been questioned for more than a decade.

The basic belief is that salesforce.com’s practice of stock based compensation will continue to work well for everyone as long as that share price is healthy, but being paid partially in the stock of a company whose share price is declining may seem like receiving your paycheck back in the days of Hungarian hyper-inflation.

Let’s hope it doesn’t come to that this week, as shares already did fall 4.6% last week.

The share price of salesforce.com has held up well even as rumors of a buyout from Microsoft (NASDAQ:MSFT) have gone away. The option market is implying a share price move of 8.1% next week and a 1% ROI might possibly be obtained if selling puts at a strike level 9.4% below Friday’s close.

Microsoft itself is ex-dividend this week and is one of those handful of stocks that has helped to create the illusion of a healthy broader market.

That’s because Microsoft, a member of both the DJIA and the S&P 500 is up nearly 14% for the year and is one of those few well performing companies that has helped

to absorb much of the shock that’s being experienced by so many other index components that are in correction or bear territory.

In fact, coming off its market correction lows in August, Microsoft shares are some 30% higher and is only about 5% below its recent high.

While that could be interpreted by some as its shares being a prime candidate for a decline in order to catch up with a flailing market, sometimes in times of weakness it may just pay to go with the prevailing strength.

While I’d rather consider its share purchase after a price decline and before its ex-dividend date, Microsoft’s ability to withstand some of the market’s stresses adds to its appeal right now.

On the other hand, Intel’s (NASDAQ:INTC) 5.1% decline last week and its 6.5% decline from its recent ex-dividend date when some of my shares were assigned away from me early, makes it appealing.

Despite a large differential in comparative performance between Microsoft and Intel in 2015, they have actually tracked one another very well through the year if you exclude two spikes higher in Microsoft shares in the past year.

With that in mind, in a week that I like the idea of adding Microsoft for its dividend, I also like the idea of adding more Intel, just for the sake of adding Intel and capturing a reasonably generous option premium, in the hopes that it keeps up with Microsoft.

Finally, also going ex-dividend in the coming week are Dunkin Brands (NASDAQ:DNKN) and Johnson & Johnson (NYSE:JNJ).

The former probably sells something that can help you if you’ve over-indulged in the former for far too long of a time.

Dunkin Brands only has monthly dividends, but this being the final week of the monthly cycle, some consideration can be given to using it as a quick vehicle in an attempt to capture both premium and dividend, or perhaps a longer term commitment in an attempt to also secure some meaningful gain from the shares.

Those shares are actually nearly 30% lower in the past 4 months and are within easy reach of a 22 year low.

I’m currently undecided about whether to look at the short term play or a longer term, but I am also considering using a longer term contract, but rather than looking for share appreciation, perhaps using an in the money option in the hopes of being assigned shares early and then moving on to another potential target with the recycled cash.

Johnson & Johnson is not one of those companies that has helped to create the illusion of a healthy market. If you factor in dividends, Johnson & Johnson has essentially mirrored the DJIA.

Over the past 5 years, with a very notable exception of the last quarter, Johnson & Johnson has tended to trade well in the few weeks after having gone ex-dividend.

For that reason I may look at the possibility of selling calls dated for the following week, or perhaps even the week after Thanksgiving and also thinking about some capital gains on shares in addition to its generous dividend, but somewhat lower out of the money premium.’

While thinking about what to do in the coming week, I may find myself munching on some Dunkin Donuts. That tends to bring me clarity and happiness.

Maybe I could have some delivered to the FOMC for their next meeting.

It couldn’t hurt.

Traditional Stocks:Intel

Momentum Stocks: GameStop

Double-Dip Dividend: Dunkin Donuts (11/19 $0.26), Johnson & Johnson (11/20 $0.75). Microsoft (11/17 $0.36)

Premiums Enhanced by Earnings: Abercrombie and Fitch (11/20 AM), 11/18 PM)

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

Weekend Update – October 4, 2015

If you’re a parent, even if 50 years have passed since the last episode, you can probably still remember those wonderful situations when your child was having a complete meltdown, even as the kid really didn’t know what it is that they wanted.

Sometimes a child can get so out of control over something that they wanted so badly that even when finally getting it, they just couldn’t regain control. We’ve all seen kids carry on as if there was some horrible void being perceived in their lives that was still gaping and eating away at their very core even when their immediate issue had already been resolved.

I think that’s the only way to explain the market ups and downs that we’ve been seeing, starting from the week of the most recent FOMC Statement release and all the way through to the last trading day of the past week.

The market has gone from a condition of apoplexy over the very thought of an interest rate hike to a melt down when that very same interest rate hike didn’t materialize.

Whether the moves have been up or down the rational basis has become more elusive and knowing what to do in response has been difficult. It’s been a little bit easier to simply accept the fact that there is such a phenomenon as “the terrible twos” and just ride out the storm.

Trying to understand that kind of behavior is tantamount to trying to use rational thought processes when dealing with a child in the midst of an uncontrollable outburst.

Sometimes it’s just best to ignore what you see unfolding before your eyes and let events run their course. That may not be a call for total passivity, though, and completely giving up on things, but the belief that you can outsmart or out-think a rampaging child or a rampaging market is destined for failure.

Followings Friday’s 1.4% gain in the S&P 500 that index was down only about 8.7% from its summer time highs, after having been down as much as 11.9% after the first day of trading this past week.

In doing so, the market has continued its dance around that 10% correction line while having a regular series of irrational outbursts that have alternated between plunges and surges.

Like most parents, there is some pride that comes into play when a child finally is able to come to a stage in life when those uncontrollable and irrational outbursts have run their course. For most kids once they’ve gotten through that phase it never returns, although for some adults it may manifest itself in different ways.

I don’t know if this week is going to be that week when some pride is warranted, but at the very least the market took some time in-between its outbursts this week to collect itself. In doing so, it either continued to hover around that 10% correction line and avoided spiraling out of control or took some positive steps toward finally recovering from that correction.

It started with a 300+ point drop on Monday with almost nothing happening on Tuesday as it geared up for a 200+ point gain on Wednesday.

Then, it did virtually nothing again on Thursday, only to see the bottom drop out after some very disappointing Employment Situation Report numbers on Friday morning.

This time, “disappointing” meant employment numbers that were far lower than expected and lower revisions to the previous month.

Had the same numbers been put forward a few months ago they would have engendered elation, but now that market thinks it knows what it wants and as always, when it doesn’t get it there’s a tantrum at hand.

Then, suddenly, something just seemed to click, just a it occasionally does with a child. Sometimes it may simply be exhaustion or a realization of the futileness of demonstrable outbursts, but at other times a spark may get lit that creates a path to a greater understanding of things.

The morning turnaround on Friday occurred at that point at which the S&P 500 was approaching its lowest level since the correction began and had chartists scurrying to their charts to see where the next stop below awaited.

Instead, however, the S&P 500 climbed 3% from those depths having turned positive for the day by noontime and then continuing so soar even more.

Of course, while there may be some pride in what can be interpreted as a sudden realization of the unwarranted behavior in the morning, I always get wary of such large moves, even when they’re to my benefit. When seeing those kinds of intra-day reversals, my thoughts go from recognizing them as reasonably normal tantrums, to the less normal exhibition of a bipolar disorder.

With earnings season beginning at the end of this coming week, we may soon find out whether the market is capable of exhibiting some rational responses to real news.

I’m optimistic that those responses will be more appropriate than has been the case over the last 2 earnings seasons when the o

ption market had repeatedly under-estimated the magnitude of those responses.

Any sign that top line and bottom line numbers are both heading in the right direction may paint those disappointing Employment Situation Report numbers as an aberration. That could be just the spark we all need to get over the hump of interest rate worries and escape the developmental binds that throw us into fits of rage.

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

I never get tired of doing the same thing over and over again. There may be a psychiatric diagnostic code for that sort of thing, but when it comes to stocks it can be a very rational way of behaving especially when those stocks start falling into a pattern of trading in a narrow price range.

However, if all those stocks did was to trade in that narrow range and didn’t have a moment of explosive behavior or two before returning to a more normal path, there would be no reason to consider owning them for any reason other than perhaps for the relative safety of their dividend income.

But those occasional moves higher and lower make the sale of calls worthwhile even when the shares are seemingly moribund. Both General Electric (NYSE:GE) and Bank of America (NYSE:BAC) are recently exhibiting the kind of behavior that can generate a very respectable return, both in relative and absolute terms, especially if the opportunity presents to buy shares on a serial basis following share assignment.

I had 2 lots of General Electric assigned this past week and would be very willing to own them for the sixth time in 6 weeks. However, following its late day turnaround on Friday, along with the rest of the market, I would probably only do so if its price came closer to $25.

With a remaining lot of shares and options set to expire this week, I would still have an eye on selling new weekly calls, but if requiring rollover at the end of the week, I would consider bypassing the cycle ending week of October 16th, and perhaps selling extended weekly calls, as General Electric will report earnings that morning.

I now own 2 lots of Bank of America and three lots at any one time is my self imposed limit, but trading at the $15.50 level has a relative feeling of safety for me. As with General Electric, however, if purchasing or adding shares, there is that little matter of upcoming earnings. While most likely beginning the process with a weekly call, if requiring a rollover as being faced with expiration rather than assignment, I would probably opt to bypass the October 16 expirations in the event of some poorly received news on earnings.

Poorly received news is an apt way to describe anything emanating from China these days. While there are lots of potential “poster child” examples of the risks associated with any stock that has exposure in China, among the more respected names has to be caterpillar (NYSE:CAT).

For many rational reasons, well known short seller Jim Chanos laid out his short thesis on caterpillar nearly 30 months ago and following a substantial move higher, the virtue of patience has begun to start its rewards.

With shares now down about 40% from a year ago, there’s still no telling if this is the bottom, but a constellation of events has me considering a position.

With its ex-dividend date the next week and then earnings the following week and a weekly option premium that reflects the near term risk, I’m ready to consider that risk.

If selling a weekly option doesn’t look as if it will result in an assignment, I would probably consider trying to roll over those options to the ex-dividend week, but with a mind toward giving up that dividend by selling a deep in the money call option in an effort to collect some additional premium, but to be out of shares prior to earnings.

Failing that, however, the next step would be to attempt to roll over those shares and again selecting an expiration date that bypasses the immediate threat of earnings and then holding on tightly as one of the least respected CEOs over the past few years may again be in people’s cross-hairs.

YUM Brands (NYSE:YUM) reports earnings this week and as ubiquitous as their locations may be in the United States, it’s almost always their Chinese holdings that get the attention of investors.

Following a strong move higher on Friday, I would be reluctant to start the week by selling puts on YUM shares, as it reports earnings Tuesday afternoon, unless there is some significant giveback of those weekending gains. At the moment, the option market is implying a price move of about 5.7%.

A 1% ROI could potentially be obtained through the sale of a weekly put at a strike level 6.7% below Friday’s close, but that may be an insufficient cushion, given YUM’s earnings history, even when the CHinese economy has not been so highly questionable. However, in the event of some price pullback prior to earnings or a large price drop after earnings, I would consider a posit

ion.

In the event of a large pullback after earnings, however, rather than selling puts, as I might usually want to do, YUM is expected to have its ex-dividend date the following week, so I might consider the purchase of shares and the sale of calls. But even then, depending on the prevailing option premiums, I could possibly consider sacrificing the dividend for the premiums that could come from selling deep in the money calls and possibly using an extended option expiration date.

Equally ubiquitous, at least in some portions of the United States is Dunkin Brands (NASDAQ:DNKN). Following a disastrous reception on Thursday to their forward guidance and the barely perceptible rebound the following day, this is a stock that I’ve wanted to repurchase for nearly a year.

With only monthly options available and without a wide assortment of strike levels, this may be a good position to consider a longer term option sale, as it reports earnings at the beginning of the November 2015 cycle and will likely have its ex-dividend date in the November or December cycle.

During this latest downturn, I’ve had a more profound respect for trying to accumulate dividends, especially as the increased volatility has created option premiums that subsidize more of the dividend related price drop in shares. In doing so, sometimes there may be just as good opportunity in trying to induce early assignment of shares by selling deeper in the money calls that you usually might do in a lower volatility environment and using an extended option timeframe.

Both Verizon (NYSE:VZ) and Oracle (NYSE:ORCL) may benefit from those approaches, although when the size of the dividend is larger than the strike price unit, such as in the case of Verizon, the advantage is a bit muted.

However, with Verizon reporting earnings on October 20th, some consideration might be given toward selling an in the money option expiring on that date, in an effort to get the larger, earnings enhanced premium, even while potentially sacrificing the dividend.

Oracle doesn’t offer the same generous dividend as does Verizon, nor does it have earnings immediately at hand.

It can be approached in a much more simplistic fashion in an attempt to capture both the dividend and the option premium by considering a sale of a call hovering near the current price. because it is ex-dividend on a Friday, there may be some opportunity to enhance the yield by selling an extended weekly option, again, possibly risking early assignment, but atoning for some of that with some additional premium

Finally, how can there be anything good to say about Abercrombie and Fitch (NYSE:ANF)? I’ve been practicing Chanos like patience on a much more expensive lot of shares, but in the meantime have found some opportunity by buying shares and selling calls in the $20-22 range.

Having now done so on 4 occasions in 2015 it nay be time to do so again as it closed in at the lower end of that range. With its earnings due relatively late in the current cycle this position can be considered either through the sale of puts or as a buy/write.

Traditional Stocks: Caterpillar, Dunkin Donuts, General Electric

Momentum Stocks: Abercrombie and Fitch, Bank of America

Double-Dip Dividend: Oracle (10/9 $0.15), Verizon (10/7 $0.565)

Premiums Enhanced by Earnings: YUM Brands (10/6 PM)

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

Weekend Update – August 2, 2015

Like many people I know who have seen the coming attractions for “Vacation,” I’m anxious to see the film having laughed out loud on the two occasions that I saw the coming attractions.

That’s one of the benefits of diminishing short term memory and ever lower standards for what I find entertaining.

My wife and I usually rotate over who gets to select the next movie we see, although it usually works out to a 3 to 1 ratio in her favor. We tend to like different genres. But on this one, we’re both in agreement.

I’m under no illusions that the upcoming “vacation” being taken by the Federal Reserve and its members will have anywhere near the hijinks that the scripted “Vacation” will likely have.

For a short while the usually very visible and very eager to share their opinion members of that august institution will not garner too much attention and the stock market will be left to its own devices to try and interpret the meaning of incoming economic data in a vacuum.

The greatest likelihood is that the Federal Reserve Governors and the members of the FOMC will also be busily evaluating the economic data that will continue to accrue during the remainder of the summer, even as they have a much abridged speaking schedule in August.

I count only 3 scheduled appearances for August, which means less opportunity to go off script or less opportunity to speak one’s own mind, regardless of how that mind may lack influence where it really matters.

That then translates into less opportunity to move markets through casual comments, observations or expressions of personal opinion, even when that opinion may carry little to no weight.

While FOMC members may be taking a vacation from their public appearances for a short while, they’ll be able to give some thought to the most recent economic data which isn’t painting a picture of an economy that is expanding to the point of worry or perhaps not even to the point of justifying action.

The GDP data reported this week came in below estimates and further there was no indication of wage growth. For an FOMC that continually stresses that it will be “data driven” one has to wonder where the justification would arise to consider an interest rate increase even as early as September.

This coming week’s Employment Situation Report could alter the landscape as could the upcoming earnings reports from retailers that will begin in about 2 weeks.

With less attention being paid to when an interest rate hike may or may not occur, perhaps more attention will be paid to the details that would trigger such an increase and interpret those details on their surface, such that good news is greeted as good news and bad news as bad. That would mean a greater consideration of fundamental criteria rather than interpretation of the first or second order changes that those fundamentals might trigger.

Meanwhile, the market continues to be very deceiving.

While the S&P 500 is only about 1.5% below its all time high and the DJIA is about 3.5% below its high, it’s hard to overlook the fact that 40% of the latter’s component companies are in bear market correction.

That seems to be such an incongruous condition and the failure to break out beyond resistance levels after successfully testing support could be pointing to a developing dynamic of higher lows, but lower highs. That’s something that technicians believe may be a precursor to a breakout, but of indeterminate direction.

A lot of good that is.

The fact remains that the market has been extremely unpredictable from week to week, exhibiting something resembling a 5 steps forward and almost 5 steps backward kind of pattern throughout 2015.

With this past week being one that moved higher and bringing markets closer to its resistance level, the coming week could be an interesting one if China remains under control and fundamentals coming from earnings and economic data paint a picture of good news.

Given my low volume of trading over the past few weeks I feel that I’ve been on an extended, but unplanned vacation. Unfortunately, there are no funny tales to recount and the weeks past feel like weeks lost.

Although I’ve never really understood those who complained about having “too much quality family time” and welcomed heading back to work, I think I now have a greater appreciation for their misery.

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

PEE” categories.

Last week I purchased shares of Texas Instruments (NASDAQ:TXN) with dividend capture in mind. However, on the day before the ex-dividend date shares surged beyond my strike price and I decided to roll those options over in a hope that I could either retain the dividend and get some additional premium, or, in the event of early assignment, simply retain the additional premium.

This week, despite semi-conductors still being embattled, I’m interested in adding shares of Intel (NASDAQ:INTC), also going ex-dividend during the week.

While patiently awaiting the opportunity to sell new calls on a much more expensive existing position, I’m very aware that Intel is one of those DJIA components in correction mode. However, I don’t believe Intel will be additionally price challenged unless caught in a downward spiraling market. While I’d love to see some rebound in price for my existing shares, I’d be more than satisfied with a quick turnaround of a new lot of shares and capture of dividend and option premium.

MetLife (NYSE:MET) is also ex-dividend this week. It, too, may be in the process of developing higher lows and lower highs, which may serve as an alert.

With interest rates under pressure in the latter half of the week, MetLife followed suit lower, with both peaking mid-week. Any consideration of adding shares of MetLife for a short term holding should probably be done in the context of the expectation for interest rates climbing. If you believe that interest rates are still headed lower, the prospect of dividend capture and option premium may not offset the risk associated with the share price being pulled toward its support level.

MetLife shares are currently a little higher priced than I would like, but with a couple of days of trading prior to the ex-dividend date, I would be more enticed to consider a dividend capture trade and the use of an extended weekly option if there is price weakness early in the week.

I haven’t owned shares of Capital One Financial (NYSE:COF) in a number of years, although it’s always on my watch list. I almost included it in last week’s selection list following it’s impressive earnings related plunge of about 13%, but decided to wait to see if it could show any attempt to stem the tide.

In a sector that has generally had positive earnings this past quarter the news that Capital One was setting aside 60% more for credit losses came as a stunner, as its profitability ratio also fell.

Some price stability came creeping back last week, however, although still leaving shares well off their highs from less than 2 weeks ago. Even after some price recovery, Capital One Financial joins along with those DJIA stocks that are in correction mode and may offer some opportunity after being oversold.

Despite still owning a much too expensive lot of shares of Abercrombie and Fitch (NYSE:ANF), I’m always attracted to its shares, even when I know that they are likely not to be good for me.

There’s something perverse about that facet of human nature that finds attraction with what most know is bound to be a train wreck, but it can be so hard to resist the obvious warning signals.

While having that expensive lot of shares the recent weakness in Abercrombie and Fitch shares that have taken it below the tight range within which it had been trading makes me want to consider adding shares for the fourth time in 2015.

The option premiums are generally attractive, befitting its penchant for large moves and there is nearly 4 weeks to go until it reports earnings, so there may be some time to manage a position in the event of an adverse price movement.

I might consider the sale of puts with Abercrombie, rather than a buy/write. The one caveat about doing so and it also pertains to being short calls, is that if the ensuing share price is sharply deviating from the strike price when looking to execute a rollover, the liquidity may be problematic and the bid-ask spreads may be overly large and detrimental to someone who feels pressure to make a trade.

Finally, for those that have real intestinal fortitude, both Green Mountain Keurig (NASDAQ:GMCR) and Herbalife (NYSE:HLF) have been in the cross hairs of well known activists and both report earnings this week.

The Green Mountain Keurig saga is a long one and began some years ago when questions arose regarding its accounting practices and issues of inventory. Thrown later into the equation were questions regarding the sale of stock by its founder who had also served as CEO and Chairman until he was fired.

What Green Mountain has shown is that second acts are possible, as it has, very possibly through a lifeline offered by Coca Cola (NYSE:KO), emerged from a seeming spiral into oblivion.

Somewhat ominously, at its recent earnings report and conference, Coca Cola made no mention of its investment in Green Mountain, which has seen its share price fall by more than 50% in the past 9 months. It has been down that path before, having fallen by about 65% just 4 years ago in 2 month period.

Are there third and fourth acts?

The options market is implying a price move of about 10.7%. Meanwhile, one can potentially obtain a 1% ROI for the week if selling a put contract at a strike as much as 14% below this past Friday’s close.

In light of how this current earnings season has punished those disappointing with their earnings, even that fairly large cushion between the implied move and the strike that could deliver a 1% ROI still leads to some discomfort. However, I would very much consider the sale of puts after the earnings report if shares do plunge.

Herbalife has had its own ongoing and long saga, as well, that may be coming toward some sort of a resolution as the FTC probe is nearly 18 months old and follows allegations of illegality made nearly 3 years ago.

Following a fall to below $30 just 6 months ago, a series of court victories by Herbalife have helped to see it realize its own second act, as shares have jumped by 65% since that time.

The options market is implying a share price move of about 16%.

Considering that any day could bring great peril to Herbalife shareholders in the event of an adverse FTC decision, that implied move isn’t unduly exaggerated, as more than business results are in play at any given moment.

However, if that intestinal fortitude does exist, especially if also venturing a trade on Green Mountain, a 1% ROI may possibly be obtained by selling puts at a strike nearly 29% below Friday’s closing price.

Now that’s a cushion, but it may be a necessary one.

If the news is doubly bad, combining disappointing earnings and the coincidental release of an FTC ruling the same week that Bill Ackman would immensely enjoy, I might recommend a vacation, if you can still afford one.

Traditional Stocks: Capital One Finance

Momentum Stocks: Abercrombie and Fitch

Double-Dip Dividend: Intel (8/5), MetLife (8/5)

Premiums Enhanced by Earnings: Green Mountain Keurig (8/5 PM), Herbalife (8/5 PM)

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