Weekend Update – February 7, 2016

If the recently deceased Harlem Globetrotters’ great player, Meadowlark Lemon had been alive today and helping the equally great band, The Byrds, re-write their classic song, it would likely get a new title.

The title would perfectly describe what this past week was a all about.

“Spin, Spin, Spin.”

Whether it was post-Iowa Caucus result speeches by the candidates or President Obama’s comments in the aftermath of Friday’s disappointing Employment Situation Report and downward revision to the previous month, it’s easy to see the spin going around and around.

No wonder the stock market is getting dizzy and dizzier, despite its heights getting lower and lower.

With confusion coming from Iowa regarding the definition of “winning” from both sides of the aisle you could easily be excused for shaking your head as the week started.

Then, when a picture of decreasing employment numbers alongside increasing jobless claims numbers was painted as reflecting an increasingly robust economy you could have been further excused for shaking your head into the week’s end.

Politicians who want an opportunity to create a legacy, as well as lame duck politicians who want to cement a legacy are very adept at spin and the ability to portray everything in terms of black and white.

The other side is always wrong and the facts are as portrayed and not as fact.

For stock investors life was much easier when only having to deal with the paradoxical association between oil and stocks.

You simply awoke in the morning and saw where West Texas Intermediate was trading and knew that the stock market would go in the same direction.

Now they’re back into having to decide whether news they hear is good or bad and whether to react appropriately to that news or paradoxically.

Of course, that would be easier if news was really presented on a factual basis and not so quickly subjected to overwhelmingly sanctimonious spin.

With the notion that evidence of a slow down in the economy would make the likelihood of further Federal Reserve rate hikes less, bad news was once again being taken as good news. The predominance of oil, however, as a factor in the market’s direction may have been obscuring some of that newly rediscovered fractured thought process.

With the market having spent the week going back and forth with numerous large intra-day moves and some large daily moves, it all came down to Friday’s trading to determine the fate of the DJIA for the week, as it had only been 34 points lower heading into the final day of trading. That week included one day with a loss of 290 points and the following day with a gain of 193 points.

If you were among those for whom confidence could have been inspired by those kind of movements, then any kind of upcoming spin could have led you in any direction.

Of course, the direction also depended on whether you are now of the increasing frame of mind that good news is bad news.

While we awaited Friday morning’s Employment Situation Report release and the DJIA had been down only 0.2%, the broader indexes weren’t faring quite as well.

The S&P 500 had already been 1.3% lower on the week and the NASDAQ 100 was down 2.6%.

With Friday morning’s release, the data, while disappointing was likely not weak enough to give cause for much celebration for those looking for good reason to dismiss the possibility of future interest rate hikes in 2016.

What may have cast a pall on the market was the Presidential spin that focused on the 4.9% jobless rate and wage growth.

If you were among those interpreting bad news as being good, you had to interpret that kind of spin as being good news.

And that can only be bad as the FOMC had certainly not closed the door on further interest rate increases in its recent statement.

While the DJIA lost an additional 1.3% to end the week, the NASDAQ 100 tacked on an additional 3.4% to its already sizable loss for the week, while the S&P 500 lost an additional 1.9%.

Good luck trying to spin that as we begin to prepare for the coming week.

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

Having suffered the direct blow from decrease oil prices and the indirect blow from what those decreasing prices have wrought upon the market, it’s not easy to consider adding another energy position.

Who can begin to count the number of times over the past 15 months that it didn’t look as if we had hit a once in a generation kind of rock bottom bargain price for a barrel of oil?

With ConocoPhillips (NYSE:COP) having just slashed its dividend, you do have to wonder whether British Petroleum (NYSE:BP) could be next.

WHile its dividend this week is presumably safe, it’s harder to make that case for the remainder of 2016 if rude prices continue to test lows. In its defense, British Petroleum is better diversified than ConocoPhillips is after having spun off its refining assets a few years ago, but the risk of insufficient cash flow is still there.

What is also there is a very nice option premium in reflection of further risk.

Looking at the option premiums, I am inclined to look at more than a weekly option contract, as is normally my approach for positions going ex-dividend during the week.

The exaggerated volatility of the past 2 weeks is really enhancing the premium and the dividend is extraordinary, while likely having more safety than the option market may be surmising.

Also ex-dividend this week are DuPont (NYSE:DD) and International Paper (NYSE:IP).

While DuPont has gone considerably higher in the past two weeks, I believe that in the absence of general market weakness it can recapture much of what had been lost following the announcement of a complex deal with Dow Chemical (NYSE:DOW).

With some strength also seen in Dow Chemical recently, I took the opportunity to sell calls on uncovered shares and is a portion of the strategic theme for this week, I used an out of the money strike price and a longer term time frame than I would normally consider in an effort to lock in some higher volatility driven option premiums and to regain lost share value.

The same approach holds for if considering a purchase of International Paper.

While it’s recent earnings report exceeded expectations and met whisper numbers, its stock price trend for the past year has been decidedly lower and lower, even in the absence of structural or operating issues.

While its payout ratio is getting uncomfortably high, the generous premium should continue to be safe and I might consider locking in the premium for a longer term, perhaps to even encompass an additional ex-dividend date in May 2016, although upcoming earnings would also have to be considered if doing so.

For that reason, I might even consider going out to a July 2016 expiration in the anticipation that some of that lost luster in its price will be regained by then,

Although not ex-dividend this week, EMC Corporation (NYSE:EMC) is among some of those fallen angels in the technology sector and which are beginning to celebrate their newly found volatility with some enhanced option premiums.

Somehow lost in the story with EMC is that there is a buyout offer that appears to be on track for completion and at a price that is substantially higher than Friday’s closing price.

I’m not one to play in the same arena with those expert in the science and art of arbitrage, but this one seems to offer some opportunity, even as the deal isn’t expected to close until the end of the year.

While there may still be regulatory hurdles head, EMC appears to be a willing partner and while awaiting a decision, there are still some dividends to be had.

For that reason, I might consider buying shares and selling a longer term and significantly out of the money option contract. Since I also already have existing shares at $30, I might consider combining lots and selling calls at a strike below the cost of the original lot, not counting accumulated premiums and dividends.

Finally, I just don’t think that I can any longer resist buying shares of eBay (NASDAQ:EBAY) at this level.

eBay was one of my more frequent holdings until the announcement of its definitive plan to spin off its profitable PayPal (NASDAQ:PYPL) unit.

What could be more appropriate when talking about the week’s spin than to look at a post-spin eBay?

For years I loved holding eBay as it made little net movement, even as it had occasional spikes and plunges usually earnings related. All that meant was that it had an attractive option premium, with relatively little risk associated with it, as long as you didn’t mind those occasional plunges that were inevitably reversed.

WIth no real challenge ahead of it other than market risk in general, eBay is now at its post spin-off low and is offering a great option premium for what I perceive to be low risk.

WIth those premiums so attractive, but mindful that there may be near term market risk, I would probably think in terms of selling longer term and out of the money call contracts on any shares that I purchased.

While the market could continue to be further dragged down by declining oil prices and while games are still being played with what economic data really means and how it should be interpreted, you do have to wonder how any of that impacts eBay.

I know that I do.

Traditional Stocks: eBay, EMC Corporation

Momentum Stocks: none

Double-Dip Dividend: British Petroleum (2/10 $0.59), DuPont (2/10 $0.38), International Paper (2/11 $0.38)

Premiums Enhanced by Earnings:

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 25, 2015

There’s an old traditional Irish song “Johnny, We Hardly Knew Ye,” that has had various interpretations over the years.

The same title was used for a book about President John F. Kennedy, but in that case, it was fairly clear that the title was referring to the short time in which we had a chance to get to know the 35th President of the United States, whose life was cut down in its prime.

But in either case, both song and book are generally a combination of sadness over hopes dashed, although the song somehow finds a way to reflect the expression of some positive human traits even in the face of betrayal and tragedy.

While hardly on the same level as the tragedies expressed by song and written word, I hold a certain sadness for the short lived period of volatility that was taken from us far too soon.

The pain is far greater when realizing just how long volatility had been away and just how short a chance some of us had to rejoice in its return.

Even though rising volatility usually means a falling market and increasing uncertainty over future market prospects, it drives option premiums higher.

I live on option premiums and don’t spend very much time focusing on day to day price movements of underlying shares, even while fully cognizant of them.

When those premiums go higher I’m a happy person, just as someone might be when receiving an unexpected bonus, like finding a $20 bill in the pockets of an old pair of pants.

Falling prices leads to volatility which then tends to bring out risk takers and usually brings out all sorts of hedging strategies. In classic supply and demand mode those buyers are met by sellers who are more than happy to feed into the uncertainty and speculative leanings of those looking to leverage their money.

Good times.

But when those premiums dry up, it’s like so many things in life and you realize that you didn’t fully appreciate the gift offered while it was there right in front of you.

I miss volatility already and it was taken away from us so insidiously beginning on that Friday morning when the bad news contained in the most recent Employment Situation Report was suddenly re-interpreted as being good news.

The final two days of the past week, however, have sealed volatility’s fate as a combination of bad economic news around the world and some surprising good earnings had the market interpreting bad news as good news and good news as good news, in a perfect example of having both your cake and the ability to eat that cake.

With volatility already weakened from a very impressive rebound that began on that fateful Friday morning, there then came a quick 1-2-3 punch to completely bring an end to volatility’s short, yet productive reign.

The first death blow came on Thursday when the ECB’s Mario Draghi suggested that European Quantitative easing had more time to run. While that should actually pose some competitive threat to US markets, our reaction to that kind of European news has always been a big embrace and it was no different this time around.

Then came the second punch striking a hard blow to volatility. It was the unexpectedly strong earnings from some highly significant companies that represent a wide swath of economic activity in the United States.

Microsoft (NASDAQ:MSFT) painted a healthy picture of spending in the technology sector. After all, what prolonged market rally these days can there be without a strong and vibrant technology sector leading the way, especially when its a resurgent “old tech” that’s doing the heavy lifting?

In addition, Alphabet (NASDAQ:GOOG) painted a healthy picture among advertisers, whose budgets very much reflect their business and perceived prospects for future business. Finally, Amazon (NASDAQ:AMZN) reflected that key ingredient in economic growth. That is the role of the consumer and those numbers were far better than expected.

As if that wasn’t enough, the real death blow came from the People’s Bank of China as it announced an interest rate cut in an effort to jump start an economy that was growing at only 7%.

Only 7%.

Undoubtedly, the FOMC, which meets next week is watching, but I don’t expect that watching will lead to any direct action.

Earlier this past week my expectation had been that the market would exhibit some exhilaration in the days leading up to the FOMC Statement release in the anticipation that rates would continue unchanged.

That expectation is a little tempered now following the strong 2 day run which saw a 2.8% rise in the S&P 500 and which now has that index just 2.9% below its all time high.

While I don’t expect the same unbridled enthusiasm next week, what may greet traders is a change in wording in the FOMC Statement that may have taken note of some of the optimism contained in the combined earnings experience of Microsoft, Alphabet and Amazon as they added about $80 billion in market capitalization on Friday.

If traders stay true to form, that kind of recognition of an economy that may be in the early stages of heating up may herald the kind of fear and loathing of rising interest rates that has irrationally sent markets lower.

In that case, hello volatility, my old friend.

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

As is typically the case when the market closes on some real strength for the week, it’s hard to want to part with cash on Monday when bargains may have disappeared.

Like volatility, those bargains are only appreciated when they’re gone. Even though you may have a strong sense that they’ll be back, the waiting is just so difficult sometimes and it’s so easy to go against your better judgment.

Although the market has gone higher in each of the past 4 weeks, the predominant character of those weeks had been weakness early on and strength to close the week. That’s made a nice environment for adding new positions on some relative weakness and having a better chance of seeing those positions get assigned or have their option contracts rolled and assigned in a subsequent week.

Any weakness to begin the coming week will be a signal to part with some of that cash, but I do expect to be a little tighter fisted than I have in the past month.

If you hold shares in EMC Corporation (NYSE:EMC), as I do, you have to wonder what’s going on, as a buyout offer from privately held Dell is far higher than EMC’s current price.

The drag seems to be coming from VMWare (NYSE:VMW), which still has EMC as its majority owner. The confusion had been related to the implied value of VMWare, with regard to its contribution to the package offered by Dell.

Many believed that the value of VMWare was being over-stated. Of course, that belief was even further solidified when VMWare reported earnings that stunned the options market by plunging to depths for which there were no weekly strikes. That’s what happens when Microsoft and Amazon, both with growing cloud based web storage services, start offering meaningful competition.

With VMWare’s decline, EMC shares followed.

EMC isn’t an inherently volatile stock, however, the recent spike higher upon news of a Dell offer and the sharp drop lower on VMWare’s woes have created an option premium that’s more attractive than usual. With EMC now back down to about $26, much of the Dell induced stock price premium has now evaporated, but the story may be far from over.

Ford Motors (NYSE:F) reports earnings on Tuesday morning and is ex-dividend the following day.

Those situations when earnings and dividends are in the same week can be difficult to assess, but despite Ford’s rapid ascent in the past month, I believe that it will continue to follow the same trajectory has General Motors (NYSE:GM).

There are a number of different approaches to this trade.

For those not interested in the risk associated with earnings, waiting until after earnings can still give an opportunity to capture the dividend. Of course, that trade would probably make more sense if Ford shares either decline or remain relatively flat after earnings. If so, the consideration can be given to seeking an in the money strike price as would ordinarily be done in an attempt to optimize premium while still trying to capture the dividend.

For those willing to take the earnings risk, rather than selling an in the money option in advance of the ex-dividend date, I would sell an out of the money option in hopes of capturing capital gains, the option premium and the dividend.

I sold Seagate Technolgy (NASDAQ:STX) puts last week and true to its natur

e, even when the sector isn’t in play, it tends to move up and down in quantum like bounces. However, with its competition on the prowl for acquisitions, Seagate Technolgy may have been a little more volatile than normal in an already volatile neighborhood.

I would again be interested in selling puts this week, but only if shares show any kind of weakness, following Friday’s strong move higher. If doing so and the faced with possible assignment, I would likely accept assignment, rather than rolling over the put option, in order to be in a position to collect the following week’s dividend.

I had waited a long time to again establish a Seagate Technology position and as long as it can stay in the $38-$42 range, I would like to continue looking for opportunities to either buy shares and sell calls or to sell put contracts once the ex-dividend date has passed.

So with the company reporting earnings at the end of this week and then going ex-dividend in the following week, I would like to capitalize on the position in each of those two weeks.

Following its strong rise on Friday, I would sell calls on any sign of weakness prior to earnings. With an implied price move of 6.6% there is not that much of a cushion of looking for a weekly 1% ROI, in that the strike price required for that return is only 7.4% below Friday’s closing price.

However, in the event of opening weakness that cushion is likely to increase. If selling puts and then being faced with assignment at the end of the week, I would accept that assignment and look for any opportunity to sell call contracts the following week and also collect the very generous dividend.

AbbVie (NYSE:ABBV) reports earnings this week and health care and pharmaceuticals are coming off of a bad week after having had a reasonably good year, up until 2 months ago.

AbbVie, though, had its own unique issues this year and for such a young company, having only been spun off 3 years, it has had more than its share of news related to its products, product pricing and corporate tax strategy.

This week, though, came news calling into question the safety of AbbVie’s Hepatitis C drug, after an FDA warning that highlighted an increased incidence of liver failure in those patients that already had very advanced liver disease before initiating therapy.

I had some shares of AbbVie assigned the previous week and was happy to have had that be the case, as I would have preferred not being around for earnings, which are to be released this week.

As it turns out, serendipity can be helpful, as no investor would have expected the FDA news nor its timing. However, with that news now digested and the knee jerk reaction now also digested, comes the realization that it was the very sickest people, those in advanced stages of cirrhosis were the ones most likely to require a transplant or succumbed to either their disease or its treatment.

With the large decline prior to earnings I’m again interested in the stock. Unlike most recent earnings related trades where I’ve wanted to wait until after earnings to decide whether to sell puts or not, this may be a situation in which it makes some sense to be more proactive, even with some price rebound having occurred to close the week.

The option market is implying only a 5.1% price move next week. Although a 1% ROI may be able to be obtained at a strike level just outside the bounds defined by the option market, I would be more inclined to purchase shares in advance of earnings and sell calls, perhaps using an extended option expiration date, taking advantage of some of its recent volatility and possibly using a higher strike price.

Ali Baba (NYSE:BABA) also reports earnings this week and like much of what is reported from China, Ali Baba may be as much of a mystery as anything else.

The initial excitement over its IPO has long been gone and its founder, Jack Ma, isn’t seen or heard quite as much as when its shares were trading at a significant premium to its IPO price.

Having just climbed 32% in the past month I’d be reluctant to establish any kind of position prior to the release of earnings, especially following a 6.6% climb to close out this week.

Even if a sharp decline occurs in the day prior to earnings, I would still not sell put options prior to the report, as the option market is currently implying only an 8.5% move at a time when it has been increasingly under-estimating the size of some earnings related price moves.

However, in the event of a significant price decline after earnings some consideration can be given to selling puts at that time.

Finally, Twitter (NYSE:TWTR) was my most frequent trade of 2014 and very happily so.

2015, however, has been a very different situation. I currently have a single lot of puts at a far higher price that I’ve rolled over to January 2016 in an attempt to avoid assignment of shares and to wait out any potential stock recovery.

That wait has been far longer than I had expected and January 2016 is even further off into the future than I ever would have envisioned.

With the announcement that Jack Dorsey was becoming the CEO, there’s been no shortage of activity that is seeking to give the appearance of some kind of coherent strategy to give investors some reason to be optimistic about what comes next.

What may come next is something out of so many new CEO playbooks. That is to dump all of the bad news into the first full quarter’s earnings report during their tenure and create the optics that enables them to look better by comparison at some future date.

With Twitter having had a long history of founders and insiders pointing fingers at one another, it would seem a natural for the upcoming earnings report to have a very negative tone. The difference, however, is that Dorsey may be creating some good will that may limit any downside ahead in the very near term.

The option market is implying a move of 12.1%. However, a 1% ROI could be potentially delivered through the sale of put contracts at a strike price that’s nearly 16% below Friday’s close.

That kind of cushion is one that is generally seen during periods of high volatility or with individual stocks that are extremely volatile.

For now, though, I think that Twitter’s volatility will be on hiatus for a while.

While I think that there may be bad news contained in the upcoming earnings release, I also believe that Jack Dorsey will have learned significantly from the most recent earnings experience when share price spiked only to plunge as management put forward horrible guidance.

I don’t expect the same kind of thoughtless presentation this time around and expect investor reception that will reflect newly rediscovered confidence in the team that is being put together and its strategic initiatives.

Ultimately, you can’t have volatility if the movement is always in one direction.

Traditional Stocks: EMC Corp

Momentum Stocks: none

Double-Dip Dividend: Ford (10/28)

Premiums Enhanced by Earnings: AbbVie (10/30 AM), Ali Baba (10/27 AM), Ford (10/27 AM), Seagate Technology (10/30 AM), Twitter (10/27 PM)

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

Weekend Update – October 18, 2015

You have to be impressed with the way the market has rallied back from the morning of the most recent Employment Situation Report just 2 weeks earlier.

At the low point of that morning when the market seemed appropriately disappointed by the very disappointing numbers and the lowered revisions the S&P 500 had sunk to a point more than 11% below its recent high.

At its peak point of return since that low the S&P 500 was only 4.9% below its summer time high.

The difficulty in sustaining a large move in a short period of time is no different from the limitations we see in ourselves after expending a burst of energy and even those who are finally tuned to deliver high levels of performance.

When you think about a sprinter who’s asked to run a longer distance or bringing in a baseball relief pitcher who’s considered to be a “closer” with more than an inning to go, you see how difficult it can be to reach deep down when there’s nothing left to reach for.

Sometimes you feel as if there’s no choice and hope for the best.

You also can see just how long the recovery period can be after you’ve been asked to deliver more than you’ve been capable of delivering in the past. It seems that reaching deep down to do your best borrows heavily from the future.

While humans can often take a break and recharge a little markets are now world wide, inter-connected and plugged into a 24/7 news cycle.

While it may be boring when the market takes a rest by simply not moving anywhere, it can actually expend a lot of energy if it moves nowhere, but does so by virtue of large movements in off-setting directions.

We need a market that can now take a real rest and give up some of the histrionics, even though I like the volatility that it creates so that I can get larger premiums for the sale of options.

The seminal Jackson Browne song puts a different spin on the concept of “running on empty,” but the stock market doesn’t have the problems of a soulless wanderer, even though, as much as it’s subject to anthropomorphism, it has no soul of its own.

Nor does it have a body, but both body and soul can get tired. This market is just tired and sometimes there’s no real rest for the weary.

After having moved up so much in such a short period of time, it’s only natural to wonder just what’s left.

The market may have been digging deep down but its fuel cells were beginning to hit the empty mark.

This week was one that was very hard to read, as the financial sector began delivering its earnings and the best news that could come from those reports was that significantly decreased legal costs resulted in improved earnings, while core business activities were less than robust.

If that’s going to be the basis for an ongoing strategy, that’s not a very good strategy. Somehow, though, the market consistently reversed early disappointment and drove those financials reporting lackluster top and bottom lines higher and higher.

You can’t help but wonder what’s left to give.

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

American Express (NYSE:AXP) and Wal-Mart (NYSE:WMT) may be on very different ends of the scale, but they’ve both known some very bad days this year.

For American Express it came with the news that it was no longer going to be accepted as the sole credit card at Costco (NASDAQ:COST) stores around the nation. While that was bad enough, the really bad news came with the realization of just how many American Express card holders were actually holders of the Costco co-branded card.

There was a great Bloomberg article this week on some of the back story behind the American Express and Costco relationship and looks at their respective cultures and the article does raise questions about American Express’ ability to continue commanding a premium transaction payment from retailers, as well as continuing to keep their current Costco cardholders without the lure of Costco.

What American Express has been of late is a steady performer and the expectation should be that the impact of its loss of business in 2016 has already been discounted.

American Express reports earnings this week, but it’s option premiums aren’t really significantly enhanced by uncertainty.

Normally, I look to the sale of puts to potentially take advantage of earnings, but with American Express I might also consider the purchase of shares and the concomitant sale of calls and then strapping on for what could be a bumpy ride.

Wal-Mart, on the other hand only recently starting accepting American Express cards and that relationship was seen as a cheapening of the elite American Express brand, but we can all agree that money is money and that may trump everything else.

Apparently, however, investors didn’t seem to realize that Wal-Mart’s well known plan to increase employee salaries was actually going to cost money and they were really taken by surprise this week when they learned just how much.

What’s really shocking is that some very simple math could have spelled it out with some very reasonable accuracy since the number of workers eligible to receive the raise and the size of the raise have been known for months.

It reminds me of the shock expressed by Captain Renault in the movie “Casablanca” as he says “I’m shocked to find gambling is going on in here,” as he swoops up his winnings.

Following the decline and with a month still to go until earnings are reported, this new bit of uncertainty has enhanced the option premiums and a reasonable premium can possibly be found even when also trying to secure some capital gains from shares by using an out of the money strike price.

The Wal-Mart news hit retail hard, although to be fair, Target’s (NYSE:TGT) decline started as a plunge the prior day, when it fell 5% in the aftermath of an unusually large purchase of short term put options.

While I would look at Target as a short term trade, selling a weekly call option on shares, in the hope that there would be some recovery in the coming week, there may also be some longer term opportunities. That’s because Target goes ex-dividend and then reports earnings 2 days later during the final week of the November 2015 option cycle.

DuPont (NYSE:DD), Seagate (NASDAQ:STX) and YUM Brands (NYSE:YUM) don’t have very much in common, other than some really large share plunges lately, something they all share with American Express and Wal-Mart.

But that’s exactly the kind of market it has been. There have been lots of large plunges and very slow recoveries. It’s often been very difficult to reconcile an overall market that was hitting all time highs at the same time that so many stocks were in correction mode.

DuPont’s plunge came after defeating an activist in pursuit of Board seats, but the announcement of the upcoming resignation of its embattled CEO has put some life back into shares, even as they face the continuing marketplace challenges.

Dupont will report earnings the following week and will be ex-dividend sometime during the November 2015 option cycle.

While normally considering entering a new position with a short term option sale, I may consider the use of a monthly option in this case in an effort to get a premium reflecting its increased volatility and possibly also capturing its dividend, while hoping for some share appreciation, as well.

Seagate Technology is simply a mess at a time that hardware companies shouldn’t be and it may become attractive to others as its price plunges.

Storage, memory and chips have been an active neighborhood, but Seagate’s recent performance shows you the risks involved when you think that a stock has become value priced.

I thought that any number of times about Seagate Technology over the course of the past 6 months, but clearly what goes low, can go much lower.

Seagate reports earnings on October 30th, so my initial approach would likely be to consider the sale of weekly, out of the money puts and hope for the best. If in jeopardy of being assigned due to a price decline, I would consider rolling the contract over. The choice of time frame for that possible rollover will depend upon Seagate’s announcement of their next ex-dividend date, which should be sometime in early November 2015.

With that dividend in mind, a very generous one and seemingly safe, thoughts could turn to taking assignment of shares and then selling calls in an effort to keep the dividend.

Caterpillar (NYSE:CAT) hasn’t really taken the same kind of single day plunge of some of those other companies, but its slow decline is finally making Jim Chanos’ much publicized 2 year short position seem to be genius.

It’s share price connection to Chinese economic activity continues and lately that hasn’t been a good thing. Caterpillar is both ex-dividend this week and reports earnings. That’s generally not a condition that I like to consider, although there are a number of companies that do the same and when they are also attractively priced it may warrant some more attention.

In this case, Caterpillar is ex-dividend on October 22nd and reports earnings that same morning. That means that if someone were to attempt to exercise their option early in order to capture the dividend, they mist do so by October 21st.

Individual stocks have been brutalized for much of 2015 and they’ve been slow in recovering.

Among the more staid selections for consideration this week are Colgate-Palmolive (NYSE:CL) and Fastenal (NASDAQ:FAST), both of which are ex-dividend this week.

I’ve always liked Fastenal and have always considered it a company that quietly reflects United States economic activity, both commercial and personal. At a time when so much attention has been focused on currency exchange and weakness in China, you would have thought, or at least I would have thought, that it was a perfect time to pick up or add shares of a company that is essentially immune to both, perhaps benefiting from a strong US Dollar.

Well, if you weren’t wrong, I have been and am already sitting on an expensive lot of uncovered shares.

With only monthly option contracts and earnings already having been reported, I would select a slightly out of the money option strike or when the December 2015 contracts are released possibly consider the slightly longer term and at a higher strike price, in the belief that Fastenal has been resting long enough at its current level and is ready for another run.

Colgate-Palmolive is a company that I very infrequently own, but always consider doing so when its ex-dividend date looms.

I should probably own it on a regular basis just to show solidarity with its oral health care products, but that’s never crossed my mind.

Not too surprisingly, given its business and sector, even from peak to trough, Colgate-Palmolive has fared far better than many and will likely continue to do so in the event of market weakness. While it may not keep up with an advancing market, that’s something that I long ago reconciled myself to, when deciding to pursue a covered option strategy.

As a result of it being perceived as having less uncertainty it’s combined option premium and dividend, if captured, isn’t as exciting as for some others, but there’s also a certain personal premium to be paid for the lack of excitement.

The excitement may creep back in the following week as Colgate reports earnings and in the event that a weekly contract has to be rolled over I would considered rolling over to a date that would allow some time for price recovery in the event of an adverse price move.

Reporting earnings this week are Alphabet (NASDAQ:GOOG) and Under Armour (NYSE:UA).

Other than the controversy surrounding its high technology swim suits at the last summer Olympics, Under Armour hasn’t faced much in the way of bad news. Even then, it proved to have skin every bit as repellent as its swim suits.

The news of the resignation of its COO, who also happened to serve as CFO, sent shares lower ahead of earnings.

The departure of such an important person is always consequential, although perhaps somewhat less so when the founder and CEO is still an active and positive influence in the company, as is most definitely the case with under Armour.

However, the cynic sees the timing of such a departure before earnings are released, as foretelling something awry.

The option market is implying a price move of about 7.5%, while a 1% ROI may possibly be obtained through the sale of puts 9% below Friday’s closing price.

For me, the cynic wins out, however. Under Armour then becomes another situation that I would consider the sale of puts contracts after earnings if shares drop strongly after the report, or possible before earnings if there is a sharp decline in its advance.

I’m of the beli

ef that Google’s new corporate name, “Alphabet” will be no different from so many other projects in beta that were quietly or not so quietly dropped.

There was a time that I very actively traded Google and sold calls on the positions.

That seems like an eternity ago, as Google has settled into a fairly stodgy kind of stock for much of the past few years. Even its reaction to earnings reports have become relatively muted, whereas they once were things to behold.

That is if you ignore its most recent earnings report which resulted in the largest market capitalization gain in a single day in the history of the world.

Now, Alphabet is sitting near its all time highs and has become a target in a way that it hasn’t faced before. While it has repeatedly faced down challenges to its supremacy in the world of search, the new challenge that it is facing comes from Cupertino and other places, as ad blockers may begin to show some impact on Alphabet’s bread and butter product, Google.

Here too, the reward offered for the risk of selling puts isn’t very great, as the option market is implying a 6% move. That $40 move in either direction could bring shares down to the $620 level, at which a barely acceptable 1% ROI for a weekly put sale may be achieved.

With no cushion between what the market is implying and where a 1% ROI can be had, I would continue to consider the sale of puts if a large decline precedes the report or occurs after the report, but I don’t think that I would otherwise proactively trade prior to earnings.

Finally, VMWare (NYSE:VMW) also reports earnings this week.

If you’re looking for another stock that has plunged in the past week or so, you don’t have to go much further than VMWare, unless your definition requires a drop of more than 15%.

While it has always been a volatile name, VMWare is now at the center of the disputed valuation of the proposed buyout of EMC Corp (NYSE:EMC), which itself has continued to be the major owner of VMWare.

I generally like stocks about to report earnings when they have already suffered a large loss and this one seems right.

The option market is implying about a 5.2% move next week, yet there’s no real enhancement of the put premium, in that a 1% ROI could be obtained, but only at the lower border of the implied move.

The structure of the current buyout proposal may be a factor in limiting the price move that option buyers and sellers are expecting and may be responsible for the anticipated sedate response to any news.

While that may be the case, I think that the downside may be under-stated, as has been the case for many stocks over the past few months, so the return is not enough to get me to take the risk. But, as also has been the case for the past few months, it may be worthy considering to pile on if VMWare disappoints further and shares continue their drop after earnings are released.

That should plump up the put premium as there might be concern regarding the buyout offer on the table, which is already suspect.

Traditional Stocks: American Express, DuPont, Target, Wal-Mart

Momentum Stocks: Seagate Technology, YUM Brands

Double-Dip Dividend: Caterpillar (10/22 $0.71), Colgate-Palmolive (10/21 $0.38), Fastenal (10/23 $0.28),

Premiums Enhanced by Earnings: Alphabet (10/22 PM), Under Armour (10/22 AM), VMWare (10/20 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 – September 27, 2015

Subscribers to Option to Profit received preliminary notification of this week’s stock selections on Friday, September 25th, 8:00 AM EDT and updated at 10:20 AM. The full article was distributed on Saturday, at 11:25 AM)

I doubt that Johnny Cash was thinking about that thin line that distinguishes a market in correction from one that is not.

jhgty

For him, walking the line” was probably a reference to maintaining the correct behavior so that he could ensure holding onto something of great personal value.

Sometimes that line is as clear as the difference between black and white and other times the difference can be fairly arbitrary.

Lately our markets have been walking a line, not necessarily borne out of a clear distinction between right and wrong, but rather dancing around the definition of exactly what constitutes a market correction, going in and out without much regard.

The back and forth dance has, to some degree, been in response to mixed messages coming from the FOMC that have left the impression of a divergence between words and actions.

Regardless, what is at stake can hold some real tangible value, despite a stock portfolio not being known for its ability to keep you warm at night. Indirectly, however, the more healthy that portfolio the less you have to think about cranking up the thermostat on those cold and lonely nights.

It had been a long, long time since being challenged by that arbitrary 10% definition, but ever since having crossed that line a month ago there’s been lots of indecision about which direction we were heading.

This week was another good example of that, just as the final day of the week was its own good example of the back and forth that has characterized markets.

Depending on your perspective our recent indecision about which side of the line we want to be on is either creating support for a launching pad higher or future resistance to that move higher.

When you think about the quote attributed to Jim Rogers, “I have never met a rich technician,” you can understand, regardless of how ludicrous that may be, just how true it may also be.

While flipping a coin may have predictable odds in the long term, another saying has some real merit when considering the difficulty in trying to interpret charts and chart patterns,

That is “the market can stay irrational far longer than you can stay liquid.” Just a few wrong bets in succession on the direction can have devastating effects.

The single positive from the past 10 days of trading, however, is that the market has started behaving in a rational manner. It finally demonstrated that it understood the true meaning of a potential interest rate hike and then it reacted as a sane person might when their rational expectation was dashed.

Part of the indecision that we’ve been displaying has to be related to what has seemed as a lot of muddled messages coming from the FOMC and from Federal Reserve Governors. One minute there are hawkish sentiments being expressed, yet it’s the doves that seem to be still holding court, leading onlookers to wonder whether the FOMC is capable of making the decision that many believe is increasingly overdue.

In a week where there was little economic news we were all focused on personalities, instead and still stewing over the previous week’s unexpected turn of events.

It was a week when Pope Francis took center stage, then Chinese President Xi trying to cozy up to American business leaders before his less welcoming White House meeting, and then there was finally John Boehner.

The news of John Boehner’s early departure may be the most significant of all news for the week as it probably reduces the chance of another government shutdown and associated headaches for all.

It also marked something rare in Washington politics; a promise kept.

That promise of strict term limits was included in the “Contract with America” and John Boehner was a member of that incoming freshman Congressional Class of 1995 running on that platform, who has now indicated that he will be keeping that promise after only 11 terms in office.

None of that mattered for markets, but what did matter was Janet Yellen’s comments after Thursday’s market close when she said that a rate hike was likely this year and that overseas events were not likely to influence US policy.

That was something that had a semblance of a definitive nature to it and was to the market’s liking, particularly as the coming week may supply new economic information to justify the interest rate hawks gaining control.

Friday’s revised GDP data indicating a 3.9% growth rate for the year is a start, as the coming week also bring Jobless Claims, the Employment Situation Report and lots of Federal Reserve officials making speeches, including more from Janet Yellen, who had been reclusive for a while prior to the September meeting and Vice Chair Stanley Fischer.

As a prelude to the next earnings season that begins in just 2 weeks, the stage could be set for an FOMC affirmation that the economy is growing sufficiently to begin thinking about inflation for the first time in a long time.

After being on the other side of the inflation line for a long time and seeing a lost generation in Japan, it will feel good to cross over even as old codgers still dread the notion.

Both sides of the line can be the right side, but not at the same time. Now is the time to get on the right side and let rising interest rates reflect a market poised to move higher, just as low interest rates subsidized the market for the past 6 years. However, as someone who likes to sell options and take advantage of this increased volatility, I welcome continued trading in large bursts of movement up and down, as long as that line is adhered to.

Since the mean can always be re-calculated based on where you want to start your observations, this reversion to the new mean, that just happens to be 10% below the peaks of the summer, can be a great neighborhood to dance around.

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 was a little busier than has been the usual case of late with regard to opening new positions. Following the sharp sell offs to end the previous week I had a reasonably good feeling about the upcoming week, but now feel fortunate to have emerged without any damage.

I don’t feel the same level of optimism as the new week is set to begin, but there really is no reason to have much conviction one way or another, although there appears to be a more hawkish tone in the air as Janet Yellen is attempting to give the impression that actions will be aligned with words.

With the good fortune of getting some assignments as the week came to its close and having some cash in hand, I would like to build on those cash reserves but still find lots of temptations that seek to separate me from the cash.

The temptations aren’t just the greatly diminished prices, but also the enhanced premiums that accompany the uncertainty that’s characterizing the market.

That uncertainty is still low by most standards other than for the past couple of years, but taking individual stocks that are either hovering around correction or even bear market declines and adding relatively high premiums, especially if a dividend is also involved, is a difficult combination to walk away from.

The stocks going ex-dividend in the upcoming week that may warrant some attention are EMC Corporation (EMC) and Cisco (CSCO).

I own shares of both and both have recently been disappointing, Cisco, after its most recent earnings report looked as if it was surely going to be assigned away from me, but as so many others got caught up in the sudden downdraft and has fallen 14% since earnings, without any particularly bad news. EMC for its part has dropped nearly 13% in that same time period.

As is also so frequently the case as option premiums are rising, those going ex-dividend may become even more attractive as an increasing portion of the share’s price drop due to the dividend gets subsidized by the option premium.

That is the case for both Cisco and EMC. In the case of EMC, when the ex-dividend is early in the week you could even be excused for writing an in the money call with the hope that the newly purchased shares get assigned, as you could still potentially derive a 1% ROI on such a trade, yet for only a single day of holding.

Cisco, which goes ex-dividend later in the week may be a situation where it is warranted to sell an expanded weekly option for the following week that is also in the money by greater than the amount of the dividend, again in an effort to prompt an early assignment.

Doing so trades off the dividend for additional premium and fewer days of holding so that the cash may potentially be recycled into other income generating positions.

On such position is Comcast (CMCSA) which is ex-dividend the following Monday and if assigned early would have to be done so at the conclusion of this week.

While the entire media landscape in undergoing rapid change and while Comcast has positioned itself as best as it can to withstand the quantum changes, a trade this week is nothing more than an attempt to exploit the shares for the income that it may be able to produce and isn’t a vote of confidence in its strategic initiatives and certainly not of its services.

The intention with Comcast is considering the sale of an in the money October 9 or October 16, 2015 call and as with Cisco or EMC, consider forgoing the dividend.

However, for any of those three dividend related trades, I believe that their prices alone are attractive enough and their option premiums enhanced enough, that even if not assigned early, they are in good position to be candidates for serial sale of call options or even repurchases, if assigned.

As long as considering a Comcast purchase, one of my favorites in the sector is Sinclair Broadcasting (SBGI). I currently own shares and most often consider initiating a new position as an ex-dividend date is approaching.

That won’t be for a while, however, the second criteria that I look at is where its price is relative to its historical trading range and it is currently below the average of my seven previous purchases in the past 16 months.

While little known, it is a major player in the ancient area of terrestrial television broadcasting and has significant family ownership. While owners of Cablevision (CVC) can argue the merits or liabilities of a closely held public company, the only real risk is that of a proposal to take the company private as a result of shares having sunk to ridiculously low levels.

I don’t see that on the horizon, although the old set of rabbit ears may be to blame for any fuzzy forecasting. Instead of relying on high technology and still being available the old fashioned way for free viewing, Sinclair Broadcasting has simply been amassing outlets all over the county and making money the old fashioned way.

As I had done with my current lot of shares, I sold some slightly longer term call options, as Sinclair offers only the monthly variety. Since it reports earnings very early in November and will likely go ex-dividend late that month, I would consider selling out of the money calls, perhaps using the December 2015 options in an effort to capture the dividend, the option premium and some capital gains on shares.

While religious and political luminaries were getting most of the attention this past week, it’s hard to overlook what has unfolded before our eyes at Volkswagen (VLKAY). Regulatory agencies and the courts may be of the belief that you can’t spell “Fahrvergnügen,” Volkswagen’s onetime advertising slogan buzzword, without “Revenge.” Unfortunately, for those owning shares in the major auto manufacturer’s, such as General Motors (GM), last week’s news painted with a very broad brush.

General Motors hasn’t been immune to its own bad news and you do have to wonder if society places greater onus and personal responsibility on the slow deaths that may be promoted by Volkswagen’s falsified diesel emissions testing than by the instantaneous deaths caused by faulty lock mechanisms.

For its part, General Motors appears to really be bargain priced and will likely escape the continued plastering by that broad brush. With an exceptional option premium this week, plumped up by the release of some sales data and a global conference call, GM’s biggest worry after having resolved some significant legal issues will continue to be currency exchange and potential weakness in the Chinese market.

With earnings due to be reported on October 21st, if considering a purchase of General Motors shares, I would think about a weekly or expanded weekly option sale, or simply bypassing the events and going straight to December, in an effort to also collect the generous dividend and possibly some capital gains while having some additional time to recover from any bad news at earnings.

MetLife (MET) is a stock that is beautifully reflective of its dependency on interest rates. As rates were moving higher and the crowd believed that would go even higher, MetLife followed suit.

Of course, the same happened when those interest rate expectations weren’t met.

Now, however, it appears that those rates will be getting a boost sooner, rather than later, as the FOMC seems to be publicly acknowledging its interests in a broad range of matters, including global events and perhaps even stock market events.

With a recently announced share buyback, those shares are now very attractively priced, even after Friday’s nearly 2% gain.

With earnings expected at the end of the month, I would consider the purchase of shares coupled with the sale of some out of the money calls, hoping to capitalize on both capital gains and bigger than usual option premiums. In the event that shares aren’t assigned prior to earnings, I would consider then selling a November 20 call in an effort to bypass earnings risk and perhaps also capture the next dividend.

Finally, I’ve been anxious to once again own eBay (EBAY) and have waited patiently for its price to decline to a more appealing level. While most acknowledge that eBay gave away its growth prospects when it completed the PayPal (PYPL) spin-off, it has actually out-performed the latter since that spin-off, despite being down  nearly 12%.

While eBay isn’t expected to be a very exciting stock performer, it hadn’t been one for years, yet was still a very attractive covered option trading vehicle, as it’s share price was punctuated by large moves, usually earnings related. Those moves gave option buyers a reason to demand and a reason for sellers to acquiesce.

That hasn’t changed and the volatility induced premiums are as healthy as they have been in years. As that volatility rises in the stock and in the overall market, there’s more and more benefit to be gained from selling in the money options both for enhanced premium and for downside protection.

It would be good to welcome eBay back into my portfolio. Even if it won’t keep me warm, I could likely buy someone else’s flea bitten blanket at a great price, using its wonderful services.

 

Traditional Stocks:  eBay, General Motors, MetLife, Sinclair Broadcasting

Momentum Stocks: none

Double-Dip Dividend: Comcast (10/5 $0.25), Cisco (10/1 $0.21), EMC Corp (9/29 $0.12)

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 – December 28, 2014

A week ago, it seemed as perhaps the President of Russia, Vladimir Putin was the cause for the sudden turnaround in market fortunes and was the giver of the gift that we had all been expecting this December.

His relative calm demeanor and reasonable words surrounding the sudden collapse of the Ruble and surging interest rates helped to put an equally sudden stop to market fears.

Thank you, Vladimir, but what have you done for us lately?

At least, even with his finger pointing, there hasn’t been any saber rattling and no new obligatory face saving demonstrable shows of bravado on the international front. At least, not yet, but it can get awfully cold in Russia this time of the year. Luckily for them, heating fuel is unusually inexpensive right now, although maybe not so much in Ruble terms.

Fortunately, it seems that there may be others willing to take up the mantle of prodding our markets forward when challenges appear, although it’s not very likely that they would want to do anything to lend us a helping hand or be part of the gift giving.

For the purists, there are still a steady stream of economic reports that can move markets depending on what kind of lens is used to interpret the data. Global personalities playing global games are just ephemeral distractions, even though a day old key economic report is also just as quickly forgotten when the next day’s, often contradictory report, is released.

Then it’s just a question of “what report have you delivered to me lately?”

Everyone should have expected good news coming from this week’s GDP report as the first glimpses of the impact of lower energy prices were revealed. That’s especially the case as 70% of GDP is said to be comprised of consumer spending and most everyone you know feels more wealthy. That’s not because of any great stock market rally but because of falling energy prices. Despite hitting a new record high an average of once each week in 2014 for most people that’s not where the feeling of wealth has come from this year.

The market still rallied in surprise. It was a case of good news being interpreted as good news, the way most normal people would have interpreted it.

What we can now await is the next GDP report which comes the morning after the next FOMC Statement release in January. Being data driven, it may be reasonable to expect that the FOMC may look at the initial data streams reflecting increasing consumer activity and GDP growth and throw “patience” out the window.

Then, we will simply be at the mercy of the lenses that decide whether that news is good or bad for markets as interest rate increases may seem to be warranted sooner than the last FOMC Statement led us to believe.

But this past week, it became clear that
if a Santa Claus Rally does await us these final days of 2014 as the DJIA closed at another record high, the real benefactor may be the diminutive leader of a nation that mandates haircut style and prohibits the personal use of “Dear Leader’s” actual name by anyone other than “Dear Leader” himself.

I don’t want to mention him by name, however, as I don’t deal well with threats or cyber-attacks of any kind, so we’ll just say that we may be able to thank Kim Jong Doe for this week’s establishment of more new closing record highs and setting the stage for the year end rally.

The lunacy surrounding the release of an otherwise inconsequential movie displaced most of our thoughts about the price of oil. While “Dear Leader” said nothing in a calming manner, offering threats rather than constructive strategies, the change of topic was a welcome relief, as oil continued to be a drag on the overall market, but no longer holds it in hostage, at least as long as it can continue to trade in the $54-60 range.

The alleged antics of a nation and a leader so far away was far better to focus upon than anything of substantive value, or anything that could have had us put on one of those lenses that interprets good news as being bad.

As a nation witnessed markets pass the 18000 level for the very first time, en route to setting its 51st record close of the year, more interest was directed at the outrage associated with a self-imposed censorship that appeared to be an acquiescence to external threats from someone with a funny haircut.

When the very idea of seeing a movie, that may turn out to be sophomorically delightful, is construed by reasonable and educated people as the patriotic thing to do, you know that no one is really paying attention to much else going on around them.

This week that was a good thing and I hope the final few trading days of the year are equally vacuous and that the market will continue rising in a vacuum.

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

I’m generally not a big user of ETF vehicles, although they do lend themselves to a covered option strategy, this week may be a little different.

While each of the past two weeks has offered an opportunity to dip a toe back into the energy sector, this week, rather than using individual names there may be reason to think about the most beaten down among the beaten down.

If you own anything in the oil services sector, as I already do, you know which sub-section of the energy sector that happens to be. The oil services sector has been absolutely abysmal, but like the rest of the sector has shown some ability to respond to anything resembling good news. At this point, however, simply being able to tread water would be a major victory for components of that sector.

The Market Vectors Oil Services ETF (NYSEARCA:OIH) can give you either the best or the worst way to establish a position or hedge existing positions. While some components may still be at risk of eliminating or reducing a dividend, there’s not too much doubt that at the first sign of oil prices creeping higher there will be some increase in drilling activity and the reward, at these low price levels, may now finally be greater than the risk.

While not an ETF, the United States Brent Oil Fund (NYSEARCA:BNO) tracks the price of its namesake very closely and offers a way to take a position on the direction and magnitude of future pricing. While I don’t believe that oil prices will be turning higher in the near term, the opportunity doers exist, however, to use a covered call strategy and elect to sell a longer term out of the money strike, if you believe that prices will be heading higher. At the moment, with shares trading at $23.26, for example, selling a $28 April 17, 2014 call option would deliver a premium of $0.80 while awaiting shares to return to a closing price last seen on December 1, 2014.

Pharmaceutical companies, long considered a conservative kind of investment, have been anything but that in recent months. Between the flurry of merger and inversion activity and the very recent across the board drops as a cheaper alternative to the management of Hepatitis C may become the drug of choice by those paying for coverage, the entire sector has responded poorly.

Merck (NYSE:MRK) was one of those companies that appeared to be simply caught in the crosswinds between battling insurance companies and those who play in role in delivering health care and want to be paid for their services. A quick 6% drop in Merck shares isn’t something that happens with any regularity and it can be a suitable longer term covered option position, particularly with its dividend in mind.

In addition the Healthcare Select SPDR (NYSEARCA:XLV) is off of its recent highs in response to the same assault, although not to the degree of some individual names. It offers a reasonable option premium with greater diversification of risk, but without sacrificing inordinately on the reward side of the equation. Like so many surprises, in this case, the decision of a pharmacy benefit management company to squeeze profits, the initial response by investors is swift and often in over-reaction to events. The Healthcare Select SPDR may be a good vehicle to capitalize on some of the immediate reaction as some of the recovery has already begun to take form.

EMC Corp (NYSE:EMC) and VMWare (NYSE:VMW) continue to have the kind of relationship that is too close for many, particularly those who believe that EMC should capitalize by selling its large remaining holding in VMWare.

EMC shares are ex-dividend this week and despite having considered adding shares over the past few weeks, instead, I’ve just watched its price climb higher from the brief drop it took along with the rest of the market, as falling oil prices indiscriminately took most everything lower.

Whether on the basis of its own businesses, its appeal to other larger technology companies or because of its stake in VMWare, EMC remains a steadfast company that has offered moderate share appreciation, a marginally acceptable dividend and competitive option premiums. Individually, none of those is spectacular, but that reflects the kind of company that EMC is in a universe of higher profile and higher risk companies.

VMWare, on the other hand offers no dividend, but does offer some more excitement, and therefore, higher option premiums, than does EMC. I haven’t owned shares in a

while, but might consider entering into a position by first selling puts and rolling over, if necessary, if assignment is trying to be avoided. With earnings being reported in a month, the evening before EMC reports its earnings, there may be additional opportunities to leverage the put premium in advance of earnings, particularly as VMWare is prone to large earnings moves.

There’s nothing terribly exciting about considering adding either Apple (NASDAQ:AAPL) or AT&T (NYSE:T) to a portfolio. With cellphone companies under some pressure, in part due to the popularity of Apple’s offerings, share price is attractive, although there may be some additional surprises as earnings season begins next month and may reflect not only on the competitive pressures, but also on the costs of having Apple as a partner.

AT&T, despite a nice recovery in the past week is still nearly 5% lower than just a month ago. With its generous dividend up for distribution the following week and earnings still nearly 3 weeks after that date, there may be opportunity to create a short term position to collect the dividend and some option premiums in the interim.

There aren’t very many insights that can be offered on Apple. It continues to be on most everyone’s wish list and continues to command premium pricing, even when there may be reasons to believe that competitors may have reasonable alternatives to offer.

Despite having gone more than 20% higher since its stock split, the climb has been reasonably orderly over the past 6 months. However, in the past month, despite the 2% climb to end last week, it has significantly under-performed the S&P 500 during December. I think that if the Santa Claus Rally is for real, Apple shares are bound to atone for some of that drop, just as there is likelihood that all of those consumers feeling more wealthy from the nice surprise of lower oil prices may have treated themselves or a loved one to a new iPhone.

Finally, this will likely be just another week where someone finds reason to either extol or criticize the leadership skills of Marissa Mayer, the CEO of Yahoo (NASDAQ:YHOO).

Like EMC, at least some of Yahoo’s fortunes are tied up in the performance of another company. However, that other company hasn’t yet been tested in any meaningful manner since its recent IPO.

For that matter neither has Marissa Mayer since her ascension, but shares have done nicely during her tenure, perhaps due to a very fortunate situation that she inherited

In the meantime as all of the speculation mounts as to what Yahoo will do with all of its cash, the shares have settled into a narrow range over the past month, having significantly trailed the S&P 500. However, in that time, it has also significantly out-performed shares of Ali Baba (NYSE:BABA), the company to which most believe its fortunes are intimately tied.

Yahoo will report earnings a week before Ali Baba and if considering a position I would probably want to consider one, perhaps the sale of puts, that might allow some reasonable ability to be out of the position before Yahoo’s earnings. If not, I’d especially want to be
out before those of Ali Baba, amid reports that it spent more than $160 million in the past year countering fake listings on its websites.

While I trust that Santa Claus exists, Jack Ma’s request of “trust” may need a little more time to be earned, as apparently trustworthiness may not be a core quality extending very deeply into those who fuel the money making enterprise that took Wall Street by storm just a few months ago.

Traditional Stocks: Apple, AT&T, Healthcare Select SPDR, Merck

Momentum Stocks: United States Brent Oil Fund, Market Vectors Oil Services ETF, VMWare, Yahoo

Double Dip Dividend: EMC Corp (12/30)

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.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in AAPL, BNO, EMC, MRK, OIH, T, VMW, XLV, YHOO over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Weekend Update – December 14, 2014

On a cruise ship you only know the answer to the question of “How low can you go” once you’ve met the physical limits of your body and the limit of your ability to balance yourself.

Other than losing a little self-respect, maybe a little embarrassment in front of a bunch of drunken strangers, there’s not too much downside to playing the game.

When it comes to the price of oil the answer isn’t so clear, mostly because the answer seemed so clear for each of the past few weeks and has turned out to be anything other than clear. Besides the lack of clarity, the game has consequences that go well beyond self-respect and opening yourself up to embarrassment.

While we all know that at some point the law of “Supply and Demand” will take precedence over the intrusion of a cartel, the issue becomes one of time and how long it will take to set in motion the actions that are in response to the great opportunities created by low cost energy.

Until a few days ago we thought we were in recently uncharted territory, believing that the reduction in oil prices was due to an increase in supply that itself was simply due to increasing production in the United States.

However, with Friday’s release of China’s Industrial Production data, as well as an earlier remark by a Saudi Arabian Oil Minister, there was reason to now believe that the demand side of the equation may not have been as robust as we had thought.

While there’s not a strong correlation between sharply declining oil prices and recession, that has to now be considered, at least for much of the rest of the world.

The United States, on the other hand, may be going in a very different direction as is the rest of the world, until such factors as the relative strength of the US dollar begin to catch up with our good fortunes, as an example of yet another kind of cycle that has real meaning on an every day basis in an ever more inter-connected world.

While there may not be a substantive decoupling between the US and other world economies, at the moment all roads seem to be leading to our shores and cheap oil can keep that road a one way path longer than is usually the case with economic cycles.

When considering the amount of evil introduced into the world as a result of oil profits supporting nefarious activities and various political agenda in countries many of us never even knew existed, the idea that energy self-reliance is paramount strategically becomes tangible. It also should make us wonder why we’ve essentially ignored doing anything for the past 40 years and why we would delay, even for another second the ability to break free from a position of submissiveness.

While most free market capitalists don’t like the idea of a government hand, there is something to be said for government support of US oil production and exploration activities particularly when they are suffering from low prices due to their successes and might have to curtail activity, as some in the world would like to see.

Insofar as the success of US producers adds to the tools with which we may face the rest of the sometimes less than friendly world, there is reason for our government to act as an anti-cartel a

t times and keep prices artificially low, while protecting local producers from short term pain they endure that helps to make the nation lass susceptible to pressures from other nations who are more than happy to control our destiny.

Great time to increase the Strategic Petroleum reserve, anyone?

In the meantime, though, that pain is being shared among investors in most every sector, as the volatility index, which usually moves in a direction opposite the market, is again moving higher as it has a habit of doing every two months, or so.

As an option seller that’s one bar I like seeing moved higher and higher, until someone asks the obvious question”

“How high will it go?”

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

From just about every perspective the stocks considered this week reads as a “Who’s Who of Losers.”

Sometimes there are good reasons, other times the reasons aren’t quite as clear, but even as oil prices may be playing a game of “how low can you go,” individual stocks across all sectors are being taken along for a nasty ride, that thus far has been nothing more than a 3.5% move from its recent high.

McDonalds (NYSE:MCD) is an example of a stock that continually finds itself on the wrong side of $100 and periodically finds itself on the wrong side of public opinion, as well. At the moment, it’s on the wrong side of each of those challenges and there is probably an association between the two.

While the news can get worse for McDonalds, a DJIA component, as it releases more US and international sales data, it is finally doing something that its franchisees have been wanting for quite a while, as it returns to some sense of simplicity in its menu. That simplicity will help reign in costs that can then reign in customers who have to balance cost and health consciousness.

Another DJIA component, Verizon (NYSE:VZ) also had a bad week, as it lowered profit forecasts and is feeling the pain of its competition with other carriers. It is also feeling the pain of underwriting the true costs of the wildly popular iPhone 6.

Having patiently waited for shares to return to the $47.50 level, it breezed right through that, heading straight to its low point for 2014.

With an upcoming dividend and option premiums increasing along with the volatility of its share price, Verizon is again becoming appealing, although there will be the matter off those earnings next month, that we’ve already been warned about, but are still likely to come as a surprise when reality hits.

Yet another DJIA component, Caterpillar (NYSE:CAT) was on everyone’s “worst company and worst CEO” list and was even famously Jim Chanos’ short of the year back in July 2013. As most know, shares have traded well above those July 2013 levels and even with its recent 20% decline, it is still well above those levels.

While Caterpillar has some Chinese exposure there is often a reaction that is out of proportion to that exposure and that brings opportunity. I have long liked shares at $85, but it has been a long time since that level has been seen, much to Jim Chaos’ dismay. On the other hand, $90 may be close enough to consider initiating a position following this most recent round of weakness.

While EMC Corporation (NYSE:EMC) isn’t close to being a member of the DJIA it certainly wasn’t shielded from the losses, as it fell 6.5% on the week that was harsh to the technology sector, despite it being difficult to draw a straight line connecting oil and technology sectors.

Just a week or two ago I was willing to buy EMC shares at $30, but now, as with so many stocks, the question of “how low will it go?” must be raised, even if there is no logical reason to suspect anything lower, as long as it’s majority owned VMWare (NYSE:VMW) can do better than a 12% decline for the week.

The China story is reflected in 3 stocks highlighted this week and none of the stories are very good. Neither Joy Global (NYSE:JOY), Las Vegas Sands (NYSE:LVS) nor YUM Brands (NYSE:YUM) had very good weeks, as a combination of stories from China struck at the core of their respective businesses.

Las Vegas Sands goes ex-dividend this week and despite its name, has significant interests in Macao. The gaming news coming from Macao has been a stream of negativity for the past 4 months, including such issues as the impact of smoking bans on casino income.

I already own 2 lots of Las Vegas Sands and have traded in and out of some additional lots these past few months, It’s Chinese exposure certainly has risk at the moment, but the dividend and premiums at this very low price level can serve as a good entry point or even to average down on existing shares.

YUM Brands has had years of experience in the Chinese marketplace and has had numerous challenges and obstacles come its way. Public health scares of airborne diseases, tainted food supplies and more, in addition to the normal cycles that economies go through.

Somehow, YUM Brands has been able to survive an onslaught of challenges, although it has been relatively slow in boun

cing back from the latest food safety related issue. It lowered its profit forecasts this past week and took a very large hit, however, it subsequently recovered about half of the loss during the final two days of the week when the broader market was substantially lower.

Joy Global reports earnings next week and tumbled on Friday upon release of Chinese government data. The drop would seem consistent with Joy Global’s interests in China. However, what has frequently been curious is that Joy Global often paints a picture of its activity and importantly its forward activity in a light different from “official” government reports.

Following Friday’s pessimistic report from China, Joy Global plunged to its 5 year low in advance of earnings. Ideally, that is a more favorable condition if considering a position in advance of earnings, particularly if selling puts, as the concern for further drops can amplify the premiums on the puts and potentially provide a more appealing entry point for shares.

Blackberry (NASDAQ:BBRY) also reports earnings next week and it, too, has fallen significantly in the past month, having declined nearly 20% in that time.

I’m not really certain that anyone knows what its CEO John Chen has in mind for the company, but most respect his ability to do something constructive with the carcass that he was left with, upon arriving on the scene.

My intuition tells me that his final answer will be a sale to a Chinese company, as a last resort, and that will understandably be met with lots of resistance on both security and nationalism concerns. Until then, there’s always hope for making some money from the shares, but once that kind of sale is scuttled, the Blackberry story will have sailed.

For now, however, the option market is implying an 11.6% move in shares upon earnings news. Meanwhile, a 1.5% weekly ROI can be achieved through the sale of puts if shares do not fall more than 15%

Finally, after nothing but horrid news from the energy sector over the past weeks, at some point there comes a time when it just seems appropriate to pull the trigger and commit to a turnaround that is hopefully coming sooner, rather than later.

There is no shortage of names to choose from among, in that regard, but the one that stands out for me is the one that was somewhat ahead of the curve and has taken more pain than others, by virtue of having eliminated its dividend, which had been unsustainably high for quite a while.

Seadrill (NYSE:SDRL) is now simply an offshore drilling and services company, that is beleaguered like all of the rest, but not any longer encumbered by its dividend.

What it offers may be a good example of just how low something can go and still be a viable and respectable company, while offering a very attractive option premium that reflects the risk or the opportunity that is implied to come along with ownership of shares.

Although the bar on Seadrill’s price may still be lowered if more sector bad news is forthcoming, Seadrill may also be the first poised to pop higher once that

cycle reawakens.

Traditional Stocks: Caterpillar, EMC Corporation, McDonalds, Verizon

Momentum: Seadrill, YUM Brands

Double Dip Dividend: Las Vegas Sands (12/16 $0.50)

Premiums Enhanced by Earnings: Joy Global (12/17 AM), Blackberry (12/19 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 – November 30, 2014

An incredibly quiet and uneventful week, cut short by the Thanksgiving Day holiday, saw the calm interrupted as a group of oil ministers from around the world came to an agreement.

They agreed that couldn’t agree, mostly because one couldn’t trust the other to partner in concerted actions what would turn out to be in everyone’s best interests.

If you’ve played the Prisoner’s Dilemma Game you know that you can’t always trust a colleague to do the right thing or to even do the logical thing. The essence of the game is that your outcome is determined not only by your choice, but also by the choice of someone else who may or may not think rationally or who may or may not believe that you think rationally.

The real challenge is figuring out what to do yourself knowing that your fate may be, to some degree, controlled by an irrational partner, a dishonest one or one who simply doesn’t understand the concept of risk – reward. That and the fact that they may actually enjoy stabbing you in the back, even if it means they pay a price, too.

Given the disparate considerations among the member OPEC nations looking out for their national interests, in addition to the growing influence of non-OPEC nations, the only reasonable course of action was to reduce oil production. But no single nation was willing to trust that the other nations would have done the right thing to maintain oil prices at higher levels, while still obeying basic laws of supply and demand, so the resulting action was no action. The stabbing in the back was probably in the minds of some member nations, as well.

If the stock market was somehow the partner in a separate room being forced to make a buying or selling decision based on what it thought the OPEC members would do, a reasonable stock market would have expected a reduction in supply by OPEC members in support of oil prices. After all, reasonable people don’t stab others in the back.

That decision would have resulted in either buying, or at least holding energy shares in advance of the meeting and then being faced with the reality that those OPEC members, hidden away, whose interests may not have been aligned with those of investors, made a decision that made no economic sense, other than perhaps to pressure higher cost producers.

And so came the punishment the following day, as waves of selling hit at the opening of trading. Not quite a capitulation, despite the large falls, because panic was really absent and there was no crescendo-like progression, but still, the selling was intense as many headed for the exits.

While fleeing, the question of whether this decision or lack of decision marked the death of the OPEC cartel, meaning that oil would start trading more on those basic laws and not being manipulated by nations always seeking the highest reward.

The more religious and national tensions existing between member nations and the more influence of non-member nations the less likely the cartel can act as a cartel.

The poor UAE oil minister at a press conference complained that it wasn’t fair for OPEC to be blamed for low oil prices, forgetting that once you form a cartel the concept of fairness is already taken off of the table, as for more than 40 years the cartel has unfairly squeezed the world for every penny it could get.

With the belief that the death of OPEC may be at hand comes the logical, but mistaken belief that the ensuing low oil prices would be a boon for the stock market. That supposition isn’t necessarily backed up by reality, although logic would take your mind in that direction.

As it happens, rising oil prices, especially when due to demand outstripping supply makes for a good stock market, as it reflects accelerating economic growth. Falling oil prices, if due to decreased demand is certainly not a sign of future economic activity. However, we are now in some uncharted territory, as falling prices are due to supply that is greater than demand and without indication that those falling prices are going to result in a near term virtuous cycle that would send markets higher.

What we do know is that creates its own virtuous cycle as consumers will be left with more money to spend and federal and state governments will see gas taxes revenues increase as people drive more and pay less.

The dilemma now facing investors is whether there are better choices than energy stocks at the moment, despite what seems to be irrationally low pricing. The problem is that those irrational people in the other room are still in control of the destinies of others and may only begin to respond in a rational manner after having experienced maximum pain.

As much as I am tempted to add even more energy stocks, despite already suffering from a disproportionately high position, the lesson is clear.

When in doubt, don’t trust the next guy to do the right thing.

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

When Blackstone (NYSE:BX) went public a number of years ago, just prior to the financial meltdown, imagine yourself being held an a room and being given the option of investing your money in the market, without knowing whether the privately held company would decide to IPO. On the surface that might have sounded like a great idea, as the market was heading higher and higher. But the quandary was that you were being asked to make your decision without knowing that Blackstone was perhaps preparing an exit strategy for a perceived market top and was looking to cash out, rather than re-invest for growth.

Had you known that the money being raised in the IPO was going toward buying out one of the founders rather than being plowed back into the company your decision might have been different. Or had you known that the IPO was an attempt to escape the risks of a precariously priced market you may have reacted differently.

So here we are in 2014 and Blackstone, which is the business of buying struggling or undervalued businesses, nurturing them and then re-selling them, often through public markets, is again selling assets.

Are they doing so because
they perceive a market peak and are securing profits or are they preparing to re-invest the assets for further growth? The dilemma faced is across the entire market and not just Blackstone, which in the short term may be a beneficiary of its actions trying to balance risk and reward by reducing its own risk.

The question of rational behavior may be raised when looking at the share price response to Dow Chemical (NYSE:DOW) on Friday. In a classic case of counting chickens before they were hatched I was expecting my shares to be assigned on Friday.

While I usually wait until Thursday or Friday to try to make rollovers, this past shortened week I actually made a number of rollovers on Tuesday, which were serendipitous, not having expected Friday’s weakness. The rollover trade that didn’t get made was for Dow Chemcal, which seemed so likely to be assigned and would have offered very little reward for the rollover.

Who knew that it would be caught up in the energy sell-off, well out of proportion to its risk in the sector, predominantly related to its Kuwaiti business alliances? The question of whether that irrational behavior will continue to punish Dow Chemical shares is at hand, but this drop just seems like a very good opportunity to add shares, both as part of corporate buybacks as well as for a personal portfolio. With my shares now not having been assigned, trading opportunities look beyond the one week horizon with an eye on holding onto shares in order to capture the dividend in late December.

The one person that I probably wouldn’t want to be in the room next to me when I was being asked to make a decision and having to rely on his mutual cooperation, would be John Legere, CEO of T-Mobile (NYSE:TMUS). He hasn’t given too much indication that he would be reluctant to throw anyone under the bus.

However, with some of the fuss about a potential buyout now on hiatus and perhaps the disappointment of no action in that regard now also on hiatus, shares may be settling back to its more sedate trading range.

That would be fine for me, still holding a single share lot and having owned shares on 5 occasions in the past year. Its option volume trading is unusually thin at times, however, and with larger bid – ask spreads than I would normally like to see. At its current price and now having withstood the pressures of its very aggressive pricing campaigns for about a year, I’m less concerned about a very bad earnings release and see upside potential as it has battled back from lower levels.

EMC Corp (NYSE:EMC) may also have had some of the takeover excitement die down, particularly as its most likely purchaser has announced its own plans to split itself into two new companies. Yet it has been able to continue trading at its upper range for the year.

EMC isn’t a terribly exciting company, but it has enough movement from buyout speculation, earnings and speculation over the future of its large VMWare (NYSE:VMW) holding to support an attractive option premium, in addition to an acceptable dividend.

I currently own sh

ares of both Coach (NYSE:COH) and Mosaic (NYSE:MOS). They both are ex-dividend this coming week. Beyond that they also have in common the fact that I’ve been buying shares and selling calls on them for years, but most recently they have been mired at a very low price level and have been having difficulty breaking resistance at $38 and $51, respectively.

While they have been having difficulty breaking through those resistance levels they have also been finding strength at the $35 and $45 levels, respectively. Narrowing the range between support and resistance begins to make them increasingly attractive for a covered option trade, especially with the dividend at hand.

I’ve been sitting on some shares of General Motors (NYSE:GM) for a while and they are currently uncovered. I don’t particularly like adding shares after a nice rise higher, as General Motors had on Friday, but at its current price I think that it is well positioned to get back to the $35 level and while making that journey, perhaps buoyed by lower fuel prices, there is a nice dividend next week and some decent option premiums, as well. What is absolutely fascinating about the recent General Motors saga is that it has been hit with an ongoing deluge of bad news, day in and day out, yet somehow has been able to retain a reasonably respectable stock price.

Finally, it’s another week to give some thought to Abercrombie and Fitch (NYSE:ANF). That incredibly dysfunctional company that has made a habit of large price moves up and down as it tries to break away from the consumer irrelevancy that many have assigned it.

Abercrombie and Fitch recently gave some earnings warnings in anticipation of this week’s release and shares tumbled at that time. If you’ve been keeping a score card, lately the majority of those companies offering warnings or revising guidance downward, have continued to suffer once the earnings are actually released.

The options market is anticipating a 9.1% price move this week in response to earnings. However, it would still take an 11.8% decline to trigger assignment at a strike level that would offer a 1% ROI for the week of holding angst.

That kind of cushion between the implied move and the 1% ROI strike gives me reason to consider the risk of selling puts and crossing my fingers that some surprise, such as the departure of its always embattled CEO is announced, as a means of softening any further earnings disappointments.

Traditional Stocks: Blackstone, Dow Chemical, EMC Corp, General Motors

Momentum: T-Mobile

Double Dip Dividend: Coach (12/3), Mosaic (12/2)

Premiums Enhanced by Earnings: Abercrombie and Fitch (12/3 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 – October 26, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As usual, the week’s potential stock selections ar

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: EMC, Halliburton

Momentum: Abercrombie and Fitch, Joy Global

Double Dip Dividend: Ford (10/29)

Premiums Enhanced by Earnings: Coach (10/28 AM), Facebook (10/28 PM), Twitter (10/27 PM)

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

Weekend Update – April 14, 2013

Increasingly modern science is helping to bring great clarity to an understanding of the very essence of our universe’s existence. Yet there remain some questions that will likely forever escape our ability to comprehend.

Some questions, such as the perennial “what is the meaning of life?” do not have a “Higgs-Boson” to provide a unifying hypothesis and can simultaneously provide contentment as well as contention.

I prefer to ask a very basic question that rarely has an answer. “What were they thinking?” Sometimes I ask a variant of that question – “What was I thinking?” Lately I’ve been asking the latter quite a bit.

What perplexes me, though, is how such two groups of smart people can convincingly commit themselves to opposite sides of an investment or so convincingly change their allegiances. I suppose that same observation can be applied toward the issue of nations going to war and then pursuing peace. The reasons aren’t always clear, yet the convictions are rock solid.

In this case, it’s one of my long time favorites and most recently under-performing stocks, Microsoft (MSFT) that is at the center of my attention. It happens to report earnings this coming week and any significant price changes ahead of earnings reflect conviction and large bets to back up that conviction.

For many, Microsoft has been an under-performer for a decade. I don’t look at it quite like that because of its option premiums and dividends while trading in a reasonably narrow price range. Lately, however, I haven’t been selling options as regularly as I had over nearly a decade of nearly continual share ownership. That’s because that price range had significantly narrowed and was well below my cost.

But this week really got my attention as shares skyrocketed, at least by Microsoft’s standards, about 6% over 2 days and surpassed $30. You may remember that $30 level, because that was just a bit above the level that many “smart” people finally publicly declared their love of the shares, just in tome to get in before a pronounced course reversal.

That was over a year ago. The price course higher was slow and under the radar. It’s rise, just as what happens to a frog in a pot of water that is slowly heated to the boiling point, went totally unrecognized by those that get paid for the opinions. The subsequent retreat, however was faster, but not of epic proportion.

But it was different this week. On no real news earlier in the week, shares surged. I don’t really recall the last time Microsoft had that kind of move higher without very positive news to propel it. I would assume, given it is a Dow Jones Index stock that it took the money of many smart people to make it rise as high and as quickly as it had done. I guess there was conviction behind the buying ahead of earnings. What else could account for the very high profile movement?

Then, just as quickly, actually even more quickly, the “smartest guys in the room” at Goldman Sachs (GS) downgraded Microsoft from “Neutral” to “Sell,” causing shares to fall 5% at time that the overall market was reaching for yet another new high. To be fair, Goldman Sachs tempered its conviction, having started at “Neutral” and not regressing downward to its “Conviction Sell” category.

Yet the market reacted with great conviction while I sat and asked the age old questions, happily having sold $29 calls earlier in the monthly cycle, finally getting back in that game as shares once again started a slow, below the radar ascent.

The reversals of late are frequent and very often without obvious catalyst, such as may be seen with shares of Baidu (BIDU) and Whole Foods (WFM). Then again, there weren’t necessarily catalysts to send them downward, either.

Sometimes reversing direction may take on a personal nature, as I’ve been bearish for more than a month and reluctant to commit to new positions while building cash and using longer term option contracts, where possible as often as possible. There does come a point when you begin to wonder what carries the greater cost. Missing out on further advances or chasing those advances. Although we don’t experience annual 20-30% gains very often, they do happen and they do have to start someplace. Maybe 10% over the first three months of the year is that place.

What’s missing though, is the conviction. My certainty of a correction was greater that is my current uncertainty. Having been wrong thus far shouldn’t be part of the equation, but it is hard to ignore.

For my personal trades I continue to be inclined to consider the increased safety of longer term monthly contracts, as I continue to expect some market correction, but I’m getting tired of waiting and missing out on some short term opportunities. Whatever convictions I may have or be evolving toward, I want to hedge those convictions.

In other words, I either have no convictions or am very flexible on them.

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

Walgreen (WAG) is one of those stocks that I regret having sold covered call options u
pon. It was also one of those rare instances in the past year that I waited to sell the options because I believed that shares would recover quickly from a precipitous drop. What i didn’t realize was just how great the recovery would be. Lately, the recoveries seem to be less quick and less robust, as the market appears to be more wary of mis-steps, even while in the midst of general enthusiasm. Despite impressive gains for the year, well ahead of the Health Care Index SPDR (XLV), Walgreen continues to be well poised to navigate through any health care model.

EMC Corp (EMC) in recent years has been defined by its wildly successful spin-off, VMWare (VMW). Following VMWare’s most recent disappointing guidance EMC has been defined by that guidance. I currently own shares and have also had other share lots assigned in the past few months. EMC reports earnings during the first week of the May 2013 option cycle, but appears to have developed support in the $23 level. I may consider adding shares or selling puts in advance of earnings, even though I am over-invested in the Technology sector and it has been under-performing.

McGraw Hill (MHP) continues its share rehabilitation after being put in the crosshairs of those that blame its actions for the past fiscal crisis. Whether it can successfully implement the famed “I was just doing my job” defense or not, it is still well below its previous trading levels.

Now that my cardiac rehabilitation has been completed, I don’t think I’ll ever need to don a pair of sneakers again. Fortunately, Footlocker (FL) can draw upon a population that isn’t very much like me and also sees fashion in pieces of rubber and cloth that are assembled far away by those that couldn’t qualify to work at FoxConn. It goes ex-dividend this week and although there is not a terribly large advantage to selling the option and attempting to also secure the dividend, it may be a good opportunity in a week that the general market is not showing large gains

As Chesapeake Energy (CHK) re-approached the $20 level that was my signal to purchase shares again after having owned numerous lots over the course of 2012. With much of the drama gone and the well deserved condemnation of telegraphing their need to sell assets at levels approaching distressed pricing, I think shares will actually even offer long term prospects, not just as a conduit for generating option premium income.

Joy Global (JOY) is one of those stocks that is very responsive to rumors concerning the Chinese economy, As much as Caterpillar (CAT) is increasingly levered to Chinese growth, Joy Global is much more so and has correspondingly larger moves upon news. Although I own Caterpillar and Deere (DE) at the moment, and those heavy movers are a little out of favor, with Joy Global near its yearly low and with earnings still a few weeks away, I may be tempted to pick up shares and capitalize on its always high option premium.

As the financial sector has been alternating between ups and downs in response to hypothetical stress tests and real stresses, none has been more responsive than Bank of America (BAC). After JP Morgan (JPM) and Wells Fargo (WFC) reported earnings on Friday, April 12, 2013, it will be Bank of America’s turn next week. Having owned shares several times already this year, its shares have shown great resilience during that period. Although current option pricing doesn’t seem to be expecting a significant drop after earnings are released, it certainly is possible. However, the resilience provides me some reason to believe that even with a drop it won’t take an undue length of time to see shares ultimately assigned. The presence of extended weekly options on Bank of America also offers an expansion of strategies and premium price points.

Finally, Align Technology (ALGN) is just an incredible profit center for dentists that use the product. Speaking as a one time practicing dentist, basically an idiot can perform an increasingly wide range of orthodontic services utilizing the technology. It is one of the first stocks that I started following in order to validate the “PEE” thesis. Shares are very capable of large earnings related moves, but most recently the put premiums have become a little less welcoming, However, anything less than a 10% drop in share price can still result in a 1.3% ROI for the week. If you don’t mind the fact that its shares have dropped by 30% in the past in the aftermath of earnings that can be a good risk-reward offering, at least for some.

Traditional Stocks: EMC, McGraw Hill, Walgreen

Momentum Stocks: Chesapeake Energy, Joy Global

Double Dip Dividend: Footlocker (ex-div 4/17)

Premiums Enhanced by Earnings: Align Technology (4/18 PM), Bank of America (4/17 AM), Microsoft (4/18 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.

 

Weekend Update – January 27, 2013

By Thursday evening I had already lost track of how many records and new highs had been set as trading was getting ready to enter the final week of January. Depending on the parameters and definitions it seems as if every minute someone was referring to one new market high of one sort or another.

Sometimes I think that the Wilshire 5000 doesn’t get its due recognition, but if the trend continues it will join the party, even if only to have set a record for intra-day trading level on a Tuesday following inauguration.

If they weren’t calling new records they were hyper-focused on just how far we were from a new record. By the way, just for the record, the WIlshire 5000 is 1.3% away from its all time record high.

After a while the meaning of a record becomes less and less. I certainly didn’t feel the special nature of whatever was being watched so closely. S&P 500 at 1500? For me, the only record that counts is 14,164 for the Dow and 1565 on the S&P 500, both more than 5 years ago.

But even those records are meaningless, because all that really matters is where your own assets are residing.

I’d also lost track of how many consecutive gaining days we had other than to remember that last January seemed to be the very same. Like through a million cuts we went higher each and every day, simply setting a record for the number of slices.

You don’t have to be a short seller to bemoan a relentless upward path, but it’s a little more excruciating when there’s no apparent reason for what has caused such despair. At least Ackman knows where Loeb lies.

Alright, it hasn’t really been excruciating and it hasn’t really been a period of despair to live and die by covered option sales. That may be a bit of an exaggeration, as you do share in the market’s gains, but maybe not as much. Of course, that assumes that the next guy is actually taking their profits rather than falling prey to human nature and letting it all ride. I like taking profits on a very regular basis and moving on before the welcome is outstayed.

Records don’t mean very much. Just ask the performance enhanced athletes that are being denied recognition for their accomplishments. I don’t really know what exactly is juicing the markets right now, but I do know that there’s little reason to believe that the recent heights are deserved.

Ultimately, looking back at the record highs of October 2007, I realize that the best performance enhancer since then has been ignoring the occasional mindless melt ups and doing the conservative thing. Collecting penny by penny selling those options until the sum of the parts is greater than the whole. I continually maintain that you don’t have to be a great stock picker or market timer to have your records beat theirs.

And get there sooner.

As volatility keeps setting its own record lows it does become more challenging to get more pennies for your efforts in selling options. Although I’ve never been much of a fan of earnings season, at the very least it does its part to enhance premiums, if you don’t mind the enhanced risk, as well. As a covered call seller risk is not high on the list of favorite things, but there has no be some solace in knowing that a uni-directional move sooner or later has to come to an end. Hopefully, when it does, it won’t be quite as bruising as has been the descent of Apple (AAPL) after its one way journey higher.

As always, the week’s selections are categorized as either being Traditional, Momentum, Double Dip Dividend, or “PEE” (see details).

What strikes me this week is how I had a very difficult time identifying a “Traditional” candidate. Over the past month the least well performing sector, Utilities, has nonetheless delivered growth. The makes it difficult to spot potential targets that are also fairly priced.

That brings me to the elephant in the room. For the second week in a row Apple is back on the list. Last week it was a possible earnings related trade. Up until an hour before the close of Wednesday’s trading I thought of selling weekly $480 puts, but decided that having done the same with Mellanox (MLNX) and F5 Networks (FFIV) enough was enough. What exactly does that say when either Mellanox or F5 Networks is thought to be less risky than Apple? It probably says something about my delusional diagnostic methodology rather than the respective companies. But as Apple is now near the last price at which I owned it and closer to a $425 support level, it just seems harder to ignore. I think that once Tim Cook replaces the “WWJD” bracelet on his wrist and gets a new one from which to draw inspiration and guidance, things will get back to normal. The new bracelet would simply be inscribed “WWJD.” The difference? What Would Jobs Do?

With the “Traditional” category so quickly dispatched, it’s another week and another reason to think about adding shares of AIG (AIG). Of course, I wouldn’t have to consider doing that if my one and two week old lots hadn’t been assigned. But the reality is that the shares are always welcome back home. I look at the option premiums as being something like the rent you might collect from your adult child living in the basement.

I wanted so much to pick up shares of Baidu (BIDU) once again last week but it just didn’t get to a good price point. By that I mean that as opposed to barely a month or two ago the extraordinarily low volatility is taking its toll on intrinsic value and making the sale of in the money calls somewhat less of a slam dunk, particularly when the intrinsic value is more than half of the difference between two strike prices. I’m hoping to see Baidu trade within $2 or less of a lower strike price early in the week.

YUM Brands (YUM) should probably have the ticker symbol “YOYO.” It responds more to the conflicting daily rumors regarding the vitality of the Chinese economy than do traditional metrics of growth, such as copper and iron ore. Today’s drop was just another in the recent series of rumors regarding safety of the chicken offerings. It’s hard to imagine that YUM Brands is delivering a lower quality or unsafe product than is generally available to the growing consumer base in China.

There was a time, before Apple, that Texas Instruments (TXN) reporting earnings set the tone for the market. Those days are long gone. In fact, no one really sets that tone anymore, not even IBM (IBM), whose own great earnings and share performance did nothing more than be the sole reason for the Dow’s positive performance on Tuesday, while the S&P fell flat. In the meantime, Texas Instruments has survived its own earnings report and has a decent dividend this week in addition to income streams from its weekly option offerings.

Fastenal (FAST) is just a remarkably stable company whose products are ubiquitous yet out of view. Somehow, the fact that they have about 2600 company owned stores has escaped my view, but somehow they haven’t escaped the end user. More important than the company’s stability is the stability of shares over time. The dividend is fairly meager, but added to its option premium a reasonably safe place to leave money for a little while.

US Steel (X) is a recent and current holding. It is among a large group of high profile companies that are reporting earnings this week and may satisfy being plugged in to the equation that evaluates premiums of put sales relative to potential earnings related stock dives. For US Steel accepting the possibility of a 5% decline can still result in a 1% gain.

Lexmark (LXK) was also a recent holding. I still don’t fully understand where their earnings come from now that they are getting out of the printer business. However. it has shown resilience after the revelation that people on wireless devices just aren’t printing as much as the next guy tethered to a desk and computer. It too may offer an appealing award for accepting the possibility of a sharp earnings related decline.

VMWare (VMW), a one time high flier has settled into a good place. Although it is capable of making large moves after earnings, those moves on a percentage basis are fairly modest. Yet it does regularly offer premiums that are attractive. It’s one time parent EMC Corp (EMC) reports earnings in the morning and may offer some insights for the later reporting VMWare.

And finally, there’s Facebook. I still get a little smirk thinking about the vitriol directed toward me when making the case for buying shares following expiration of the first lock-up period. Just as with Apple, your portfolio isn’t a very good place to park your emotions. Whatever your opinion may be on Facebook the shares, Facebook the IPO, Facebook the company or Facebook the hoodie, it is an appealing trade based upon its earnings release this week.

Traditional Stocks: Apple

Momentum Stocks: AIG, Baidu, YUM Brands

Double Dip Dividend: Fastenal (ex-div 1/30), Texas Instruments (ex-div 1/29)

Premiums Enhanced by Earnings: Lexmark (1/29 AM), Facebook (1/30 PM), US Steel (1/29 AM), VMWare (1/28 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.