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Weekend Update – November 2, 2014

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

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

But something happened.

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

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

But that wasn’t the case.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

tributor of its products.

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

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

Or soaring.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks:   Starbucks, The Gap

Momentum: Facebook, Twitter, Las Vegas Sands

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

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

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

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Weekend Update – September 29, 2013

“There’s always a calm before the storm” is a fairly well known saying that doesn’t always accurately define a sequence of events.

Are all storms preceded by a period of calm? Is calm always followed by a storm?

The predictive capability of a period of calm hasn’t necessarily been validated among meteorological circles.

Being a meteorologist, however, is very similar to being a stock analyst or a market technician. No one really expects you to get it right, because you get it wrong so often. Besides, you would have to be a fool to fully predicate your actions on their prognostications. Neither group tends to publicly sit down and review the signals that had them sending the wrong messages.

Other than that meteorologists often get their wardrobes provided at no cost, while market analysts often get unlimited supplies of antacids. Meteorologists, though often wrong, are still very often beloved by their audience. I’m not certain the same can be said for stock analysts.

This past week was a forgettable one in just about all aspects. It was a week of calm, at least as far as potentially market moving news tend to go. Yet even in the midst of a sea of calm, the market was down over 1% and was unable to hold the 1700 level on the S&P 500, bringing us back to a level last seen about 10 days ago, when all was sunny.

While meteorologists often look to macro events, such as “El Nino,” or even global warming, the macro events that may move our markets are many and varied, but none seem to have paid a call this week. In fact, even factors that in the past sent chills of fear and uncertainty into the hearts of investors, such as a government shutdown or impending default on US obligations, have thus far barely elicited a yawn.

The perfect storm of good news and absence of bad news has simply continued. Aalthough this week was one of relative calm it’s hard to not notice dark clouds on the horizon, most of which are preceded by the fear of “what if.” What if tapering begins? What if the government is shut down? What if there is a government default?

Maybe that’s why Goldman Sachs (GS) just recommended the use of portfolio protective puts and that sentiment was quickly echoed by many that had access to a microphone. Coming in advance of the beginning of the new earnings season it reminds us that the just completed earnings season had few reasons to believe that growth was the trend at hand.

Of course, one could also be of the opinion that with everyone rallying to secure their protective puts this could be the perfect time to prepare for another market move higher.

In an effort to hedge the hedge, I am continuing to keep my cash reserves at relatively high levels but am still confident that with each week there are reasonably attractive trades that have a degree of safety and can create current income streams to help offset any market weakness.

If there is calm ahead, I prefer to look for stocks this week that are somewhat boring and have been trading in a reasonably narrow range. That kind of calm is just the tonic for covered option strategies.

This week the potential stock selections are restricted to the “Traditional” category, as no appealing choices were found in the Double Dip Dividend, Momentum and “PEE” categories this week (see details).

On an otherwise bad day to end the week, Microsoft (MSFT) danced to its own drummer, as Steve Ballmer, the outgoing CEO performed one of his characteristic morale raising dances at what is likely to be the final annual company wide meeting at which he presides. Reportedly, the day’s bump in share price came as the rumor regarding Ford (F) CEO Alan Mulally made the rounds indicating that his interest in assuming the position at Microsoft was strengthening. While it seems difficult to understand the synergy it may simply be another example of the market’s appetite for an anti-Ballmer. But without regard to immediate stories regarding transition in leadership, Microsoft just continues to offer a good combination of option premiums and dividends at this level, as it further commits itself toward creating its own ecosystem, perhaps not with an eye on increasing marketshare, but rather on retaining the loyalty of customers who might otherwise feel the lure of the competition.

While it was a good day for Microsoft it wasn’t a very good day for Intel (INTC). While the past years have seen close correlation between the fortunes of Intel and Microsoft, they certainly diverged this week. Part of the reason was some concern regarding a delay in the start of “Intel TV,” a web based television service which was thought to be a remedy for its poorly diversified revenue sources. Intel has demonstrated some resilience in the $22.50 range and like Microsoft offers a good combination of option premiums and dividends.

I liked Dow Chemical (DOW) enough to buy it last week in the hopes of capturing its dividend and option premium. However, a late afternoon spike in its share price right before going ex-dividend resulted in early assignment of shares. Following Friday’s sharp price decline, it”s right back to where it started. Still attractive, but without the dividend. It stands in sharp distinction to many of the companies that I’ve been considering over the past two months in that it s current share price is higher than where it stood at a recent market top on May 21, 2013 when the market reacted to FOMC minutes and a Ben Bernanke press conference by embarking on a quick 4% decline.

While I liked Deere (DE) last week and almost always find myself liking it, I didn’t purchase shares last week in an attempt to capture the dividend. Sometimes, especially for stocks above $50 the nearest strike prices are too far away from the current share price to offer a premium that offers sufficient reward for the risk undertaken. That was the case last week. However, if the lower prices to close the week hold at the open of this week and remain near the strike, I think the timing may be just right to add shares of Deere.

As far as boring stocks go, Mondelez (MDLZ) is boring in everything other than its name. Even Nelson Peltz’s self-serving attempts to move share price by discussing why he believed it was an ideal take-over target for Pepsi (PEP) did nothing to stir share price in any meaningful or sustained way. That kind of price stability is ideally suited for a covered option strategy.

Retail has been a difficult sector recently, especially teen retail. However, just as Mondelez can make boring become interesting, so too can The Gap (GPS) make boredom the new chique. Well down from a brief earnings fueled rise, shares appear to have support at the $40 level and won’t face the challenge of earnings until mid-way through the November 2013 option cycle. In the interim, it also goes ex-dividend during the October 2013 cycle.

Following its recent earnings related drop Darden Restaurants (DRI) is trading at a much more appealing level. From a covered option trader’s perspective the strike prices below the $50 level, graduated in single dollars is much more attractive and offers many more opportunities than the sparser ones available above $50. While Darden may also be a boring kind of pick it’s interest level is also enhanced by a very nice dividend that comes during the October cycle.

Finally, Barclays (BCS) may have qualified as a “Momentum” selection based on its recent price movements but once the dust settles it should start trading in a more sedate manner. In addition to various legal worries and the backdrop of lethargic European economies, Barclays recently announced the need to meet increased capital reserve requirements. Doing so through the issuance of stock is never a great way to see shares appreciate. However, the issuance of “rights” to existing shareholders entitling them to purchase shares at approximately a 40% discount helped to drive up share price

Traditional Stocks: Barclays, Deere, Darden, Dow Chemical, Intel, Microsoft, Mondelez, The Gap

Momentum Stocks: none

Double Dip Dividend: none

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

 

 

 
 
 
 
 
 

 

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Weekend Update – August 4, 2013

To summarize: The New York Post rumors, “The Dark SIde” and the FOMC.

This was an interesting week.

It started with the always interesting CEO of Overstock.com (OSTK) congratulating Steve Cohen, the CEO of SAC Capital, on his SEC indictment and invoking a reference to Star Wars to describe Cohen’s darkness, at least in Patrick Byrne’s estimations.

It ended with The New York Post, a one time legitimate newspaper suggesting that JC Penney (JCP) had lost the support of CIT (CIT), the largest commercial lender in the apparel industry, which is lead by the charisma challenged past CEO of The NYSE (NYX) and Merrill Lynch, who reportedly knows credit risk as much as he knows outrageously expensive waiting room and office furniture.

The problem is that if CIT isn’t willing to float the money to vendors who supply JC Penney, their wares won’t find their way into stores. Consumers like their shopping trips to take place in stores that actually have merchandise.

At about 3:18 PM the carnage on JC Penney’s stock began, taking it from a gain for the day to a deep loss on very heavy volume, approximately triple that of most other days.

Lots of people lost lots of money as they fled for the doors in that 42 minute span, despite the recent stamp of approval that George Soros gave to JC Penney shares. His money may not have been smart enough in the face of yellow journalism fear induced selling.

The very next morning a JC Penney spokesperson called the New York Post article “untrue.” It would have helped if someone from CIT chimed in and set the record straight. While the volume following the denial was equally heavy, very little of the damage was undone. As an owner of shares, Thane’s charisma would have taken an incredible jump had he added clarity to the situation.

So someone is lying, but it’s very unlikely that there will ever be a price to be paid for having done so. Clearly, either the New York Post is correct or JC Penney is correct, but only the New York Post can hide behind journalistic license. In fact, it would be wholly irresponsible to accuse the article of promoting lies, rather it may have recklessly published unfounded rumors.

By the same token, if the JC Penney response misrepresents the reality and is the basis by which individuals chose not to liquidate holdings, the word “criminal” comes to my mind. I suppose that JC Penney could decide to create a “Prison within a Store” concept, if absolutely necessary, so that everyday activities aren’t interrupted.

For the conspiracy minded the publication of an article in a “reputable” newspaper in the final hour of trading, using the traditional “unnamed sources” is problematic and certainly invokes thoughts of the very short sellers demonized by Patrick Byrne in years past.

Oh, and in between was the release of the FOMC meeting minutes, which produced a big yawn, as was widely expected.

I certainly am not one to suggest that Patrick Byrne has been a fountain of rational thought, however, it does seem that the SEC could do a better job in allaying investor concerns about an unlevel playing field or attempts to manipulate markets. Equally important is a need to publicly address concerns that arise related to unusual trading activity in certain markets, particularly options, that seem to occur in advance of what would otherwise be unforeseen circumstances. Timing and magnitude may in and of themselves not indicate wrongdoing, but they may warrant acknowledgement for an investing public wary of the process. A jury victory against Fabrice Tourre for fraud is not the sort of thing that the public is really looking for to reinforce confidence in the process, as most have little to no direct interaction with Goldman Sachs (GS). They are far more concerned with mundane issues that seem to occur with frequency.

Perhaps the answer is not closer scrutiny and prosecution of more than just high profile individuals. Perhaps the answer is to let anyone say anything and on any medium, reserving the truth for earnings and other SEC mandated filings. Let the rumors flow wildly, let CEOs speak off the top of their heads even during “quiet periods” and let the investor beware. By still demanding truth in filings we would still be at least one step ahead of China.

My guess is that with a deluge of potential misinformation we will learn to simply block it all out of our own consciousness and ignore the need to have reflexive reaction due to fear or fear of missing out. In a world of rampantly flying rumors the appearance of an on-line New York Post article would likely not have out-sized impact.

Who knows, that might even prompt a return to the assessment of fundamentals and maybe even return us to a day when paradoxical thought processes no longer are used to interpret data, such that good news is actually finally interpreted as good news.

I conveniently left out the monthly Employment Situation Report that really ended the week, but as with ADP and the FOMC, expectations had already been set and reaction was muted when no surprises were in store. The real surprise was the lack of reaction to mildly disappointing numbers, perhaps indicating that we’re over the fear of the known.

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

One of last week’s earnings related selections played true to form and dropped decidedly after earnings were released. Coach (COH) rarely disappoints in its ability to display significant moves in either direction after earnings and in this case, the disappointment was just shy of the $52.50 strike price at which I had sold weekly puts. However, with the week now done and at its new lower price, I think Coach represents a good entry point for new shares. With its newest competitor, at least in the hearts of stock investors, Michael Kors (KORS) reporting earnings this week there is a chance that Coach may drop if Kors reports better than expected numbers, as the expectation will be that it had done so at Coach’s expense. For that reason I might consider waiting until Tuesday morning before deciding whether to add Coach to the portfolio.

Although I currently own two higher priced lots of its shares, I purchased additional shares of Mosaic (MOS) after the plunge last week when perhaps the least known cartel in the world was poised for a break-up. While most people understand that the first rule of Cartel Club is that no one leaves Cartel Club, apparently that came as news to at least one member. The shares that I purchased last week were assigned, but I believe that there is still quite a bit near term upside at these depressed prices. While theories abound, such as decreased fertilizer prices will lead to more purchases of heavy machinery, I’ll stick to the belief that lower fertilizer prices will lead to greater fertilizer sales and more revenue than current models might suggest.

Barclays (BCS) is emblematic of what US banks went through a few years ago. The European continent is coming to grips with the realization that greater capitalization of its banking system is needed. Barclays got punished twice last week. First for suggesting that it might initiate a secondary offering to raise cash and then actually releasing the news of an offering far larger than most had expected. Those bits of bad news may be good news for those that missed the very recent run from these same levels to nearly $20. Shares will also pay a modest dividend during the August 2013 option cycle, but not enough to chase shares just for the dividend.

Royal Dutch Shell (RDS.A) released its earnings this past Thursday and the market found nothing to commend. On the other hand the price drop was appealing to me, as it’s not every day that you see a 5% price drop in a company of this caliber. For your troubles it is also likely to be ex-dividend during the August 2013 option cycle. While there is still perhaps 8% downside to meet its 2 year low, I don’t think that will be terribly likely in the near term. Big oil has a way of thriving, especially if we’re at the brink of economic expansion.

Safeway (SWY) recently announced the divestiture of its Canadian holdings. As it did so shares surged wildly in the after hours. I remember that because it was one of the stocks that I was planning to recommend for the coming week and then thought that it was a missed opportunity. However, by the time the market opened the next morning most of the gains evaporated and its shares remained a Double Dip Dividend selection. While its shares are a bit higher than where I most recently had been assigned it still appears to be a good value proposition.

Baxter International (BAX) recently beat earnings estimates but wasn’t shown too much love from investors for its efforts. I look at it as an opportunity to repurchase shares at a price lower than I would have expected, although still higher than the $70 at which my most recent shares were assigned. In this case, with a dividend due early in September, I might consider a September 17, 2013 option contract, even though weekly and extended weekly options are available.

I currently own shares of Pfizer (PFE), Abbott Labs (ABT) and Eli Lilly (LLY) in addition to Merck (MRK), so I tread a little gingerly when considering adding either more shares of Merck or a new position in Bristol Myers Squibb (BMY), while I keep an eye of the need to remain diversified. Both of those, however, have traded well in their current price range and offer the kind of premium, dividend opportunity and liquidity that I like to see when considering covered call related purchases. As with Baxter, in the case of Merck I might consider selling September options because of the upcoming dividend.

Of course, to balance all of those wonderful healthcare related stocks, following its recent price weakness, I may be ready to add more shares of Lorillard (LO) which have recently shown some weakness. The last time its shares showed some weakness I decided to sell longer term call contracts that currently expire in September and also allow greater chance of also capturing a very healthy dividend. As with some other selections this month the September contract may have additional appeal due to the dividend and offers a way to collect a reasonable premium and perhaps some capital gains while counting the days.

Finally, Green Mountain Coffee Roasters (GMCR) is a repeat of last week’s earnings related selection. I did not sell puts in anticipation of the August 7, 2013 earnings report as I thought that I might, instead selecting Coach and Riverbed Technology (RVBD) as earnings related trades. Inexplicably, Green Mountain shares rose even higher during that past week, which would have been ideal in the event of a put sale.

However, it’s still not to late to look for a strike price that is beyond the 13% implied move and yet offers a meaningful premium. I think that “sweet spot” exists at the $62.50 strike level for the weekly put option. Even with a 20% drop the sale of puts at that level can return 1.1% for the week.

The announcement on Friday afternoon that the SEC was charging a former Green Mountain low level employee with insider trading violations was at least a nice cap to the week, especially if there’s a lot more to come.

Traditional Stocks: Barclays, Baxter International, Bristol Myers Squibb, Lorillard, Merck, Royal Dutch Shell, Safeway

Momentum Stocks: Coach, Mosaic

Double Dip Dividend: Barclays (ex-div 8/7)

Premiums Enhanced by Earnings: Green Mountain Coffee Roasters (8/7 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.

 

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Weekend Update – May 5, 2013

ADP. ISM. FOMC. ECB

They came one after another at us last week. Not to mention the Jobless Report and the Employment Situation Reports to end the week.

Following the previous week where I had temporarily gone on one of my wild and drunken spending ways buying new shares with assignment proceeds, I returned to a more cautious note this past week.

Maybe it was the soup. While I have much greater comfort when on a shopping spree, usually borne out of a bullish view of the world, this week even the comfort food was sending me some kind of misleading message, spoonful after spoonful. I don’t always listen to my soup, but when I do, I know that things are serious. This week’s message wasn’t exactly cryptic in nature. For certain, the message wasn’t “Buy, Buy, Buy.”

But to simply assume the message is correct is bordering on lunacy, so I just decided not to buy quite as much, proving that we can all get along. Besides, “sell, sell, sell,” seemed so draconian.

Although so often a drastically sharp move downward comes from unexpected or lightly regarded catalysts, there’s not too much of an excuse to overlook some potentially obvious catalysts when the market appears to be in an overbought condition. For me, already sensitized to a possible drop, the FOMC, ECB and Employment Situation were individually capable of initiating and speeding a sudden descent.

Aligned? Had the Federal Reserve given a strong hint of an end to Quantitative Easing, had they suggested an earlier timetable for interest rate hikes, or had the European Central Bank not lowered rates that combination had the makings of a nasty punch. Throw a second successive month of disappointing employment numbers, perhaps with downward revisions of previous months and now you’ve got a party.

For short sellers, at least.

While the market did have a slightly delayed reaction to the FOMC minutes, it was fairly mute, despite doubling the early losses. The following day, which is often the day the real action occurs after an FOMC meeting, had its tone already set earlier by the ECB decision to drop rates.

That just left Friday, with a little hint from Wednesday’s release of the ADP statistics. that job growth may be slowing due to some headwinds in the economy. Much of the talk on Wednesday was how fearful everyone was that the number on Friday would be terribly negative.

The fact that the number was, in fact, an indication of a growing economy and there were massive upward revisions to earlier months was the surprise that should never have been a surprise, as thesis changing revisions are routine.

So all of the important letters were aligned, as no one really cares about ISM, and there was reason for a party. The order of the day on Friday was “buy, buy, buy,” once again delaying the “Sell in May” crowd’s ascent and giving me cause to reflect as the majority of my monthly covered call positions are now in the money and do not stand to further profit in the event of a continued market rise.

Of course, if I wanted to continue the lunacy, I would simply rationalize it all and convince myself that I now have a nice cushion between share and strike prices to withstand a fall between now and May 18, 2013. Sooner or later my call for a significant market drop will have to take on broken clock qualities.

Yet, the rationalizations aren’t working. Maybe I need another spoonful of soup.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or Momentum categories, with no selections in the “PEE” category, despite earnings season still going strong (see details). Additionally, this week the emphasis is once again on dividend paying stocks and still giving greater consideration to monthly contracts, in order to lock into option premiums for a longer period in order to ride out any pauses in the runaway train. Of course, after Friday’s run higher capping off a week when the S&P 500 moved 2% higher, good luck finding any bargain priced shares. Bargains may be justifiably so. Sometimes there’s a reason no one asks you to dance. You just refuse to look in the mirror, justifiably so.

I jumped the gun a bit on Friday afternoon and purchased shares of Pfizer (PFE). After a very impressive share run higher, which hasn’t really occurred in the post-Viagra era, Pfizer reported earnings last week and continued the weakness that immediately preceded the report, after some European regulatory disappointments. A case of too much and too fast from my perspective, but the shares appear as a reasonably low risk over the coming weeks, particularly with a safe and healthy dividend and an upcoming ex-dividend date this week.

Wells Fargo (WFC) has been a frequent purchase target. While I do like shares, it along with so many others is more expensive than I would like. However, it has proven resilient in defending its share price when tested and the test levels have been slowly climbing higher. That’s certainly a more healthy way to see appreciation and I think offers less risk in what may become a risky environment. Additionally, their new ad campaign, “At least we’re not JP Morgan” (JPM) speaks volumes with regard to superfluous risk. As often before, my entry point is not so coincidentally synchronized with an ex-dividend date.

Weyerhauser (WY) is not a stock that I buy very often, but in hindsight I wonder why. Not because it does anything spectacular, but rather because it is so unspectacular that it has the core requirements of being an ideal covered call stock. It generally trades in a narrow range, has an options premium that is more than symbolic and pays a competitive dividend. What’s not to like, especially this week as it also goes ex-dividend.

Although I don’t have any “PEE” selections this week, Marathon Oil (MRO) does report earnings on May 7, 2013. However, unlike the usual earnings related plays that I prefer, it isn’t expected to trade in a wide range after the announcement. It’s implied move is far less than the 10% or greater that I usually look for while still offering a 1% ROI. Instead, it’s just like any other stock that happens to be reporting earnings, except that it’s approximately 5% off of its recent high, satisfying another of the criteria I look for when considering the risk associated with trading around earnings season.

I already own shares of St. Jude Medical (STJ) at a price slightly higher than Friday’s close. I rarely think about adding additional shares unless the price has had a significant drop. However, St. Judes Medical has had a fall relative to the market and certainly to the heath care sector. I don’t envision it as being at undue risk in the event of a market downturn, due to its modest existence during the upturn.

Parker Hannefin (PH) and W.W. Grainger (GWW) both go ex-dividend this week. Although their share rise on Friday adds to some reluctance to add them to the portfolio next week, if the Employment Situation statistics and the revisions are any guide, there may be very good reason to suspect that industrials and the companies that support the industrials may be ready for a little bit of a resurgence. Neither offer incredibly exciting dividends, but share appreciation may be more a part of the equation than it is for most stocks that I consider due to their option and dividend income potential.

I’ve been looking for a re-entry point in Goldman Sachs (GS) for a while. Again, hindsight told me that may have been a couple of weeks ago as shares were a relative bargain. The fact that shares have greatly under-performed the S&P 500 over the past 12 weeks has appeal for me, as I believe it marks a company that may be better equipped to out-perform going forward, particularly in a downturn.

Finally, Abercrombie and FItch (ANF) is an always exciting stock to own, especially as earnings are approaching. In this case earnings aren’t expected until May 15, 2013, so there is a little bit of breathing space to consider shares before the added volatility kicks in. When it moves, the moves are spectacular and certainly the option premiums reflect that kind of risk. My bias at the moment is that if an opportunity will arise it will likely take the form of put sales. However, that is only something that I would do if emotionally prepared to hold shares going into earnings if assigned. If so, a bit of luck may be necessary to turn the tables and sell call contracts going into earnings or sell additional puts if you’re really adventurous.

Traditional Stocks: Goldman Sachs, Marathon Oil, St. Jude Medical

Momentum Stocks: Abercrombie and Fitch

Double Dip Dividend: W.W. Grainger (ex-div 5/9), Parker-Hannefin (ex-div 5/8), Pfizer (ex-div 5/8), Wells Fargo (ex-div 5/8), Weyerhauser (ex-div 5/8)

Premiums Enhanced by Earnings: none

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.

 

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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.

 

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Weekend Update – March 10, 2013

It only seems fitting that one of the final big stories of the week that saw the Dow Jones eclipse its nearly 6 year old record high would be the latest reports of how individual banks performed on the lmost recent round of “stress tests.” After all, it was the very same banks that created significant national stress through their equivalent of bad diet, lack of exercise and other behavioral actions.

Just as I know that certain foods are bad for me and that exercise is good, I’m certain that the banks knew that sooner or later their risky behavior would catch up with them. The difference is that when I had my heart attack the effects were restricted to a relatively small group of people and I didn’t throw any one out of their homes.

Having had a few stress tests over the years myself, I know that sometimes the anticipation of the results is its own stress test. But for some reason, I don’t believe that the banks that were awaiting the results are facing the same concerns. Although I’m only grudgingly modifying my behavior, it’s not clear to me that the banks are or at least can be counted to stay out of the potato chip bag when no one is looking.

Over the past year I’ve held shares in Goldman Sachs (GS), JP Morgan Chase (JPM), Wells Fargo (WFC), Citibank (C), Bank of America (BAC) and Morgan Stanley (MS), still currently holding the latter two. They have been, perhaps, the least stressful of my holdings the past year or so, but I must admit I was hoping that some among that group would just go and fail so that they could become a bit more reasonably priced and perhaps even drag the market down a bit. But in what was, instead, a perfect example of “buy on the rumor and sell on the news,” success led to most stressed bank shares falling.

The other story is simply that of the market. Now that its surpassed the 2007 highs it just seems to go higher in a nonchalant manner, not giving any indication of what’s really in the works. I’ve been convinced for the past 2 or three weeks that the market was headed lower and I’ve taken steps for a very mild Armageddon. Raising cash and using longer term calls to cover positions seemed like a good idea, but the only thing missing was being correct in predicting the direction of the market. For what it’s worth, I was much closer on the magnitude.

The employment numbers on Friday morning were simply good news icing on the cake and just added to my personal stress, which reflected a combination of over-exposure to stocks reacting to speculation on the Chinese economy and covered call positions in a climbing market.

Fortunately, the news of successful stress test results serves to reduce some of my stress and angst. With news that the major banking centers have enough capital to withstand severe stresses, you do have to wonder whether they will now loosen up a bit and start using that capital to heat up the economy. Not to beat a contrarian horse to death, but since it seems inevitable that lending has to resume as banking portfolios are reaching maturity, it also seems inevitable that the Federal Reserve’s exit strategy is now in place.

For those that believe the Federal Reserve was the prime sponsor of the market’s appreciation and for those who believe the market discounts into the future, that should only spell a market that has seen its highs. Sooner or later my theory has to be right.

I’m fine with that outcome and would think it wonderfully ironic if that reversal started on the anniversary of the market bottom on March 10, 2009.

But in the meantime, individual investment money still has to be put to work. Although I continue to have a negative outlook and ordinarily hedge my positions by selling options, the move into cash needs to be hedged as well – and what better way to hedge than with stocks?

Not just any stocks, but the boring kind, preferably dividend paying kind, while limiting exposure to more controversial positions. People have their own unique approaches to different markets. There’s a time for small caps, a time for consumer defensive and a time for dividend paying companies. The real challenge is knowing what time it is.

As usual, this week’s selections are categorized as being either Traditional, Momentum or Double Dip DIvidend (see details). As earnings season is winding down there appear to be no compelling earnings related trades in the coming week.

Although my preference would be for shares of Caterpillar (CAT) to approach $85, I’m heartened that it didn’t follow Deere’s (DE) path last week. I purchased Deere and subsequently had it assigned, as it left Caterpillar behind, for the first time in 2013, as they had tracked one another fairly closely. With the latest “news du jour” about a Chinese government commitment to maintaining economic growth, there may be enough positive news to last a week, at which point I would be happy to see the shares assigned and cash redeployed elsewhere.

Along with assigned shares of Deere were shares of McGraw Hill (MHP). It’s price spiked a bit early in the week and then returned close enough to the strike price that a re-purchase, perhaps using the same strike price may be a reasonable and relatively low risk trade, if the market can mai
ntain some stability.

There’s barely a day that goes by that you don’t hear some debate over the relative merits of Home Depot (HD) and Lowes (LOW). Home Depot happens to be ex-dividend this week and, unless it causes havoc with you need to be diversified, there’s no reason that both companies can’t be own concurrently. Now tat Lowes offers weekly options I’ve begun looking more frequently at its movement, not just during the final week of a monthly option cycle, which coincidentally we enter on Monday.

I rarely find good opportunity to purchase shares of Merck (MRK). It’s option premium is typically below the level that seems to offer a fair ROI. That’s especially true when shares are about to go ex-dividend. However, this week looks more appealing and after a quick look at the chart there doesn’t appear to be much more than a 5% downside relative to the overall market.

Macys (M) is another company that I’ve enjoyed purchasing to capture its dividend and then hold until shares are assigned. It’s trading about 6% higher than when I last held shares three weeks ago and is currently in a high profile legal battle with JC Penney (JCP). There is certainly downside in the event of an adverse decision, however, it now appears as if the judge presiding over the case may hold some sway as he has suggested that the sides find a resolution. That would be far less likely to be draconian for any of the parties. The added bonuses are that Macys is ex-dividend this week and it too has been added to the list of those companies offering weekly option contracts.

Cablevision (CVC) is one of New York’s least favorite companies. The distaste that people have for the company goes well beyond that which is normally directed at utilities and cable companies. There is animus director at the controlling family, the Dolans, that is unlike that seen elsewhere, as they have not always appeared to have shareholder interests on the list of things to consider. But, as long as they are paying a healthy dividend that is not known to be at risk, I can put aside any personal feelings.

Michael Kors (KORS) isn’t very consistent with the overall theme of staid, dividend paying stocks. After a nice earnings related trade a few weeks ago and rise in share price, Kors ran into a couple of self-made walls. First, it announced a secondary offering and then the founder, Michael Kors, announced a substantial sale of personal shares. It also may have more downside potential if you are one that likes looking at charts. However, from a consumer perspective, as far as retailers go, it is still” hot” and offers weekly options with appealing enough premiums for the risk. This turned out to be one of the few selections for which I couldn’t wait until the following week and sent out a Trading Alert on Friday morning.

Seagate Technology (STX) is another theme breaker. In the past I have had good fortune selling puts after price drops, which are frequent and sudden. The additional downside is that when drops do come, the recoveries are relatively slow, so patience may be required, as well as some tolerance for stress if selling puts and the price starts approaching the strike.

The final theme buster is Transocean (RIG). Is there anything that Carl Icahn is not involved with these days? Transocean has been a frequent trading vehicle for me over the years. Happy when weekly options became available, I was disappointed a few weeks ago when they disappeared. It is part of the “Evil Troika” that I often own concurrently. If purchased, Transocean will once again join British Petroleum (BP) in the portfolio, replacing Halliburton (HAL) which was assigned on Friday. Transocean has re-instituted the dividend, although it will still be a few months until the first such payment. Icahn believes that it is too little and too late. I don’t know how he would have the wherewithal to change the “too late” part, but most people would be happy with the proposed 4+% dividend.

Traditional Stocks: Caterpillar, Lowes

Momentum Stocks: McGraw Hill, Michael Kors, Seagate Technology, Transocean

Double Dip Dividend: Cablevision (ex-div 3/13), Home Depot (ex-div 3/12), Macys (ex-div 3/13), Merck (ex-div 3/13)

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.

 

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Weekend Update – February 10, 2013

On Wednesday of this week, the Postmaster General, Patrick Donahoe, made the announcement that many of us had been expecting for years as the red ink lived up to its a visual onomatopoeia name and hemorrhaged.

No more Saturday delivery for ordinary mail. Unless I’m going away to summer camp this year, I’m not anticipating any extended grieving period for the loss, although like so many other things, the principal wags the principle.

It was a major news story in an otherwise slow news week. Surprisingly, what had gone unnoticed was the additional comment that effective immediately gloom of night would be sufficient cause to suspend delivery. Rain and snow are now also potential impediments to service, regardless of a centuries old social contract.

It’s a new world.

Forget about social contracts or expectations of behavior. Although if you follow the stock market you’re probably accustomed to broken dreams and hopes and rarely come to expect the expected.

Increasingly, data is ignored for its objective and descriptive properties. For example, when The Gap (GPS) announces great quarterly sales, as it did this week, it’s shares fell 4%, despite everyone agreeing that the results were extraordinary.

Equally common is the incredible emphasis now placed upon guidance, as if those issuing guidance have any greater ability to read the future than does the head of a close knit household. As much as I thought I knew about my family I don’t think I ever guessed anything correctly even a day into the future.

Have you ever visited a physicians office and browsed through some dated magazines? As it turns out, with near universal application, those whom we consider to be futurists have a fairly poor track record. Yet, when it comes to guidance, it is the closest thing we have to the gospel and fortunes are made or lost on the basis of the prognostications of people every bit as flawed as the guy you ignore on the subway platform every day.

For me, the past few weeks have broken some personal and inter-personal social contracts. As a die hard covered option investor, risk is the antithesis of everything I value. But as the market has been climbing higher and higher, it’s become harder and harder to find new places to park money. Additionally, the reduced premiums resulting from reduced volatility make it harder to live that life style to which I’ve become so accustomed.

That means only one thing and the devil has to be embraced.

Over the past few weeks I’ve had difficulty finding well priced and conservative investments that would feed my insatiable appetite. As a result, there have been more high beta name and more earnings related plays, not to mention lots more antacids. But sometimes you just do what has to be done.

This coming week looks to be a little different thanks to some market hesitancy. Blame it on Europe, blame it on Draghi, or just blame it on burn-out, I don’t really care, because as bad as we are at telling the future, we’re at least equally as bad at recognizing causation and correlation. It’s not like pornography. You don’t necessarily know it when you see it. But for whatever reason, this week, unlike the preceding month, it seemed easier to spot some lesser risk potential investments

As always, stocks are categorized as being either Traditional, Momentum, Double Dip Dividend or “PEE” (see details).

British Petroleum (BP) has no shortage of legal issues still awaiting it. To me it’s mind boggling that judgments and fines of $20 Billion could possibly have come as good news, but that is how news is interpreted. For some, perhaps more rational, British Petroleum’s inability to have its share price keep up with the likes of its partners in evil, Halliburton (HAL) and Transocean (RIG) is a sign of the legal liability overhang.

For me, it is finally down enough that I am interested in re-purchasing shares last owned a month ago, which to me seems like an eternity, since at the moment I own neither its shares, nor Halliburton or Transocean, usually mainstays of my portfolio. The dividend this week is a bonus.

As long as on the energy theme, Southwestern Energy (SWN) was a potential selection from last week that went unrequited. At this level it still looks like a reasonable trade and resultant ROI after selling an in the money option, in a market that may be taking a little break

The Limited (LTD) is one of those retailers that I never seem to own often enough, which is odd since I’m a serial re-purchaser of stocks that I’ve owned and that subsequently are assigned due to the use of covered calls. It has a good dividend, including regular use of special dividends and trades in a reasonably tight range. During the final week of a monthly option it becomes a bit more appealing to me. However, if not assigned next Friday
and faced with owning shares for at least an additional month, it dies go ex-dividend early in the March 2013 option cycle. Although I own more retailers than I would like, at the moment, this is one for which it may be worth bending some diversification rules.

DuPont (DD) was one of those stocks that I regularly owned when I first started selling options. A combination of good premiums, reliable dividends and price appreciation, especially after early 2009 made it a great income generator. These days, lower volatility has taken its toll on the premiums and the availability of only monthly options has made me look elsewhere. However, this week DuPont goes ex-dividend, and as the final week of the monthly option cycle it effectively trades as a weekly option, although you have to be prepared to own it through the next cycle or longer.

Walter Energy (WLT) and Cliffs Natural Resources (CLF) seem to go hand in hand in the speculative corner of my portfolio. It goes ex-dividend this week and always offers a nice option premium in exchange for the risk that is being taken on. A caveat that should be considered for adding new shares is that if shares are not assigned by the end of the week, Walter Energy reports earnings the following week and that may be more excitement than many would want to accept. Writing a deeper in the money call or a longer duration call may be strategies to reduce that kind of stress.

Baidu (BIDU) is one of the very few Chinese companies that I ever consider purchasing. I do, however, miss the days when Muddy Waters would live up to its name and cast aspersions on the accounting practices of some Chinese companies. That always represented a good opportunity to sell puts a few days later and then merrily go on your way when the waters calmed. Someday, I’m fairly confident that most, if not all of the fears that we have regarding accounting practices will become reality. I’m hopeful that it’s not this week, as I already own shares of Baidu by virtue of being assigned $97.50 puts on Friday (February 7, 2013). If you don’t mind wild swings within a 10% range on a seemingly regular basis, Baidu is a good way to generate income. My experience with shares has been that a moment or two after its price performance looks bleak, it bounces right back. It is a good example of why gloom shouldn’t be a deterrent, but I doubt the Postmaster General is paying any attention to me.

Riverbed Technology (RVBD) was a potential earnings choice last week. As usual it’s price movements tend to be exaggerated after it announces earnings, particularly since they tend to give pessimistic guidance. Back in the old days you would give pessimistic guidance and then shares would soar when earnings surpassed the forecast. That was so yesterday’s social contract. RIverbed reported record revenues, in-line EPS data, but offered a weak outlook. SO what else is new? Its shares have been one of my greatest option premium producers for years and I look for every opportunity to either own shares or sell puts.

Buffalo Wild Wings (BWLD) is one of those places that I would love to visit, but know that it may not be worth trading off a few years of my life. It is also one of those companies that tends to have exaggerated moves following earnings release. In this case about 1.4% for a 10% drop in share price. The biggest caveat is that Buffalo Wild Wings has shown that it can easily drop 15% on earnings release.

Cliffs Natural Resources is not for the faint of heart. It bounces around on rumors of the Chinese economy’s well being and global growth. It is a good example of forecaster’s inability to forecast, as it recently fully recovered from a recent major downgrade from Goldman Sachs (GS), which at least was consistent in demonstrating that predicting commodity prices was not one of its strengths. On top of its usual volatility, Cliffs Natural reports earnings this week and has yet to announce its next dividend, which is currently at nearly 7%. I already own shares and have so, on and off for a few months. If I did anything, it would most likely be through the sale of well out of the money puts, seeking to return 1-1.5% for the week.

Finally, it’s yet another retailer, Michael Kors (KORS), and it is a difficult one to ignore as it reports its earnings this week. As with most all “PEE” selections, it is very capable of making large moves upon releasing earnings and providing guidance. In this case, the ratio that may lure me into committing to another retailer is a 1% ROI in exchange for a 10% or less drop in share price.

Traditional Stocks: British Petroleum, Southwestern Energy, The Limited

Momentum Stocks: Baidu, Riverbed Technology

Double Dip Dividend: British Petroleum (ex-div 2/13), DuPont (ex-div2/13), Walter Energy (ex-div 2/13)

Premiums Enhanced by Earnings: Buffalo Wild Wings (2/12 PM), Cliffs Natural (2/12 PM), Kors (2/12 AM)

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.

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

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