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Weekend Update – May 10, 2015

Many years ago people were fascinated by the movie “The Three Faces of Eve.”

It was the story of a woman afflicted with what was known at the time as “Multiple Personality Disorder,” although many incorrectly believed that the story was one characteristic of an individual with schizophrenia.

For her performance of all 3 characters, none of whom was aware of any of the others, Joanne Woodward won an Oscar for “Best Actress.” Yet 30 years later, in a sign of an unjust society, neither Eddie Murphy nor Arsenio Hall received any notice whatsoever from The Academy for each portraying 4 distinct characters.

While there’s still hope that such acting genius may someday be rewarded, there’s very little hope of being able to understand just what face the market will be showing from day to day.

Doug Kass, a well known hedge fund manager is fond of Tweeting that the market has no memory from day to day and that observation, while not seeming to be offering a diagnosis, has it well characterized.

Lack of memory for important information not explained by ordinary forgetfulness is one of the cardinal signs of Dissociative Identity Disorder and this market, however one wishes to characterize it, may have the same affliction as was suffered by Eve. But as long as it keeps reaching new record highs, it too will keep winning awards for its performance.

While some may say that the market is “acting schizophrenic,” they neither know the distinction between that malady and Dissociative Identity Disorder, nor understand the use of adverbs. While volatility may also be a hallmark of the disorder the rapid alternations between market plunges and surges are doing nothing to enhance volatility. In fact, for all of the uncertainty, volatility remains within easy striking distance of its 52 week low and was virtually unchanged last week.

In a week with very little economic news scheduled until this past Friday’s Employment Situation Report and with most key companies having already reported earnings, there was little reason to expect many large moves. However, as has been the case in recent weeks, there hasn’t always been the requirement of an identifiable reason for the market making a large move. What has also been the case is that so often the very next day brought about a reversal of fortune or mis-fortune of the previous day and another subsequent Doug Kass Tweet.

Those Kass market memory Tweets are fairly common and I do believe that he recalls having sent them on many previous occasions. While I offer him no diagnosis based on those Tweets, they do perfectly sum up the market that we’ve come to know.

The problem is that which just don’t know which market will be showing up from day to day and sometimes from hour to hour.

I wonder if Eve had that same problem?

Compounding the inherent uncertainty occurs when an otherwise dependable and reliable source seems to turn on you.

Mid-week we got to see a Janet Yellen face that we had only seen once previously. It was the face that unlike its more commonly visible counter-part, wasn’t the one that sought directly or indirectly to calm and prop up stock markets.

During her tenure, especially during her post-FOMC Statement release press conferences, most of us have come to appreciate the boost of confidence Janet Yellen has supplied markets, as well as having an appreciation for the manner in which she balances pragmatic and social concerns with monetary policy.

But this week instead it was that Yellen character that questions stock market value, almost in the same way as a predecessor pointed a finger at “frothy exuberance.”

While not quite as bad as the racy and wild side of Eve that tried to murder her child, the value questioning side of Janet Yellen sent markets for a tumble. But just as after her 2014 comments about “substantially stretched” valuation metrics in bio-technology companies, the impact may be short lived, as it was this week.

Perhaps some thanks for that should go to the auspiciously timed release of the Employment Situation Report that avoided creating either a “bad news is good news” or “good news is bad news” by delivering numbers that were right in line with expectations.

Of course, when considering how much contra-distinction there has been in recent monthly Employment Situation Reports one might be excused for believing that they too suffer from Dissociative Identity Disorder and it may be injurious to one’s portfolio health to base too many actions on any given month’s data.

This coming week is another very slow one for economic news. While earnings season is now winding down the catalyst or the retardant for the market to get to the next new set of highs may be the slew of national retailers reporting earnings this week.

Some 6 months ago those retailers were among those optimistically talking about how they would benefit from increased consumer spending as a result of lower energy prices.

About that….

Those same retailers may be putting on a different face when reporting this week if those gains haven’t materialized, as there are no indications that the GDP has grown as expected.

To the contrary, actually.

Only one of the major retailers will report before this Wednesday’s Retail Sales Report, but it was the CEO of that company, Terry Lundgren, who was initially among the most optimistic regarding the prospects for Macys (NYSE:M) and who months later made the very astute observation that the energy savings experienced by consumers hadn’t accumulated sufficiently to create the feeling of actually having more discretionary cash to spend.

Sooner or later the projections for significant growth in GDP will have to be written off as just the rants of economists who had surrendered their better judgment to their racy and wild alternate egos and who can’t be blamed for their actions.

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

After the last two weeks, I think, that even after a previous lifetime of toiling away for a paycheck and not really appreciating its significance, I finally understand the meaning of “TGIF.”

The strong recoveries seen in each of the past two Fridays helped to rescue some weeks that were turning out to be fairly dour.

The downside, however, is that when the coming week is about to begin, so many of the stocks that you had been eying for a purchase were up sharply to end the previous week.

There are probably worse problems to have in life, so I won’t dwell too long on that one, but that is where this past Friday’s 267 point gain in the DJIA has us beginning the new week.

Sinclair Broadcasting (NASDAQ:SBGI) has quietly become the largest television station operators in the United States. While seemingly the only topics discussed these days are about streaming signals, satellites and cable there’s still life left in terrestrial television. The family controlled company certainly believes in the future of traditional television broadcasting as over the past several years the company has actively amassed new stations around the country.

Following an initial move higher after it reporting earnings shares gave up some ground and are now about 9% below its recent high from last month, at which time I had my previous shares assigned.

I purchased shares on 5 occasions in 2014 and have been waiting for a chance to do so in 2015. With its recent decline and with this being the final week of a monthly option cycle, I would consider once again adding shares in the hopes of a quick assignment. However, if not assigned, shares are then ex-dividend May 28th and I would consider selling either June or the July 2015 options on those shares.

Mattel (NASDAQ:MAT) has suffered of late.

It literally started 2015 off by being named one of the worst run companies of 2014 on New Years Day. Its shares continued to stumble even after its CEO unexpectedly resigned a few weeks later as the lure of its Barbie was waning in a world of electronic toys more welcomingly embraced by some of its competitors.

More recently some of the negativity that characterized 2015 had abated as the market actually embraced the smaller than expected loss at the most recent earnings report. While some of the gains have been since digested, Mattel may have now seen what the near term bottom looks like.

With earnings now out of the way for a short while and an upcoming ex-dividend date the following week, I am considering adding shares, but bypassing the week remaining on the monthly May 2015 contract and going directly to the June contract and banking on some share gains and not just option premiums and dividends for the effort.

Fastenal (NASDAQ:FAST) is one of those stocks that I always like to own, as it is an assuming kind of company that tends to reflect what is going on in the economy and is relatively immune from currency exchange issues

.

Most recently, after having positively reacted to earnings it failed to climb back toward where it had been at the time of its January earnings report. However, it does appear as if it is building a base to make that assault. As with Sinclair Broadcasting and Mattel, Fastenal only offers monthly options, so any potential purchase this week paired with an option sale could look at the May 15, 2015 contracts, effectively making it a weekly contract, or go directly to the June 2015 expirations, especially if believing that there is some capital appreciation in store for shares.

DuPont (NYSE:DD) and Teva Pharmaceuticals (NYSE:TEVA) have both spent a lot of time in the news lately and both are ex-dividend this week.

DuPont is one stock that came to mind when bemoaning the strong gains seen this past Friday, as it was definitely a beneficiary of broad market strength. It continues to be embroiled in a fight with activists which may have profound ramifications with how investors look at and value a company’s intellectual and research pursuits.

The question of how valuable research activities are to a company if they are part of a separate company is one that pits short term and long term outlooks against one another. Although I tend to trade for the short term, and while I believe that Nelson Peltz is generally a positive influence on the companies in which he has taken a significant financial stake, I disagree with the idea of splitting off assets that are at the core of developing intellectual property.

However, as long as the fighting continues, there is opportunity to see shares climb even higher. It is precisely because of the uncertainty that comes along with the ongoing conflict that DuPont is offering an exceptionally high option premium, particularly in a week that it is ex-dividend.

The world of pharmaceutical companies was once so staid. Every self respecting portfolio was required to own shares in a high dividend paying blue chip pharmaceutical company, many of whom have been swallowed up over the years in the process of creating even larger and less responsive behemoths.

From nothingness, generic drug companies and bio-pharmaceutical companies are becoming their own behemoths and are recently at center stage with seemingly daily merger and acquisition activity.

Teva has joined the crowd seeking to grow through acquisition and may be willing to fight for the opportunity to grow. Of course, its target may have some other ideas, including possibly seeking to purchase Teva itself.

Like DuPont, the uncertainty in the air has it offering a very appealing option premium even in a week that shares are ex-dividend. With shares having recently declined by about 10% in the past month, it’s possible that some of the downside risk that may be associated with a fight or a failed conquest attempt has already been discounted.

Zillow (NASDAQ:Z) reports earnings this week having declined about 25% since its last earnings report. Its CEO, a darling of cable business news blamed the prolonged regulatory process encountered during its proposed purchase of its competitor Trulia, for leaving the company “trending a couple quarters behind where we’d like to be.”

But that comment was from last month, so the expectation would be that the market is prepared for whatever may come their way as earnings are reported this week.

That kind of logic is fine until faced with counter-examples, such as SanDisk (NASDAQ:SNDK) which despite warning upon warning, still managed to surprise everyone. Of course, the same could be said for early 2014 when markets seemed to be surprised by how bad weather impacted earnings after having heard nothing but how weather was effecting sales for months.

In this case the option market is implying an 8.1% move for Zillow after earnings are reported. That’s fairly mild after the past 2 weeks of having seen declines on the order of 25% coming from companies that couldn’t place many excuses for its performance at the feet of currency exchange woes.

Finally, it takes a lot for me to consider a new stock and to think about putting it into portfolio rotation. It’s even more difficult to do that with a company that has less than 6 months of public trading behind it.

I recently found my second ever blog article, one from 8 years ago, which was about peer lending re-posted on an aggregator site. At the time, I looked at peer lending as a potential means of diversifying one’s portfolio, especially with the aim of generating income streams.

While the early leader of the concept is still around, it was LendingClub (NYSE:LC) that finally brought it to the equity markets.

Its earnings last week, despite being slightly better than the consensus, did nothing to stem the downward price spiral since the IPO. The stock’s close tracking of the 10 Year Treasury Note broke down in March, but I believe that with the stock approaching its IPO price that concordance with interest rates will soon be re-established.

If that proves to be the case and there is a suggestion that the bond market may now be on the right path in predicting the inevitable rise in rates, the LendingClub and its shares are likely to prosper.

Like an unusual number of stocks presented this week, LendingClub also offers only monthly options. However, without a dividend to consider, I would look at any potential purchase of shares as a short term trade and would sell the May 2015 options, which are offering a very attractive premium as the possibility of further share price declines are being factored in by the options market.

Traditional Stocks: Fastenal, Mattel, Sinclair Broadcasting

Momentum Stocks: LendingClub

Double Dip Dividend: DuPont (5/13), Teva Pharmaceuticals (5/15)

Premiums Enhanced by Earnings: Zillow (5/12 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 – November 9, 2014

Pity the poor hedge fund manager.

For the second consecutive year hedge fund managers are, by and large, reportedly falling far short of their objectives and in jeopardy of not generating their performance fees. 

We all know that those mortgages aren’t going to pay themselves, so their choices are clear.

You can close up shop, disown the shortfalls and try to start anew; you can keep at business as usual and have your under-performance weigh you down in the coming year; or you can roll the dice.

In 2013 it may have been easy to excuse lagging the S&P 500 when that index was nearly 30% higher while you were engaging in active management and costly complex hedging strategies. This year, however, as the market is struggling to break a 10% gain, it’s not quite as easy to get a bye on a performance letdown.

The good news, however, is that the 2014 hurdle is not terribly far out of reach. Despite setting new high after new high, thus far the gains haven’t been stupendous and may still be attainable for those hoping to see daylight in 2015.

The question becomes what will desperate people do, especially if using other people’s money knowing that half of all hedge funds have closed in the past 5 years. Further more funds were closed in 2013 and fewer opened in 2014 than at any point since 2010. It has been a fallow pursuit of alpha as passivity has shown itself fecund. Yet, assets under management continue to grow in the active pursuit of that alpha. That alone has to be a powerful motivator for those in the hedge fund business as that 2% management fee can be substantial.

So I think desperation sets in and that may also be what, at least in part, explained the November through December outperformance last year as the dice were rolled. Granted that over the past 60 years those two months have been the relative stars, that hasn’t necessarily been the case in the past 15 years as hedge funds have become a part of the landscape.

Where it has been the case has been in those years that the market has had exceptionally higher returns which usually means that hedge funds were more likely to lag behind and in need of catching up and prone to rolling the dice.

While the hedging strategies are varied, very complex and use numerous instruments, rolling the dice may explain what appears to be a drying up in volume in some option trading. As that desperation displaces the caution inherent in the sale of options motivated buyers are looking at intransigent sellers demanding inordinately high premiums. With the clock ticking away toward the end of the year and reckoning time approaching, the smaller more certain gains or enhancements to return from hedging positions may be giving way to trying to swing for the fences.

The result is an environment in which there appears to be decreased selling activity, which is especially important for those that have already sold option contracts and may be interested in buying them back to close or rollover their positions. In practice, the environment is now one of low bids by buyers, reflecting low volatility but high asking prices by sellers, often resulting in a chasm that can’t be closed.

Over the past few weeks I’ve seen the chasm on may stocks closed only in the final minutes of the week’s trading when it’s painfully obvious that a strike price won’t be reached. Only then, and again, a sign of desperation, do ask prices drop in the hopes of making a sale to exact a penny or two to enhance returns.

So those hedge fund managers may be more likely to be disingenuous in their hedging efforts as they seek to bridge their own chasms over the next few weeks and they could be the root behind a flourish to end the year.

Other than a continuing difficulty in executing persona trades, I hope they do catch up and help to propel the market even higher, but I’m not certain what may await around the corner as January is set to begin.

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

I already own shares of Cypress Semiconductor (CY) and am continually amazed at the gyrations its price sees without really going very far. In return for watching the shares of this provider of ubiquitous components go up and down, you can get an attractive option premium that reflects the volatility, but doesn’t really reflect the reality. In addition, if holding shares long enough, there is a nice dividend to be had, as well. Selling only monthly call options, I may consider the use of a December 2014 option and may even consider going to the $11 strike, rather than the safer $10, borrowing a page from the distressed hedge fund managers.

I had my shares of Intel (INTC) assigned early this week in order to capture the dividend. I briefly had thoughts of rolling over the position in order to maintain the dividend, but in hindsight, having seen the subsequent price decline, I’m happy to start anew with shares.

Like the desperate hedge fund managers, I may be inclined to emphasize capital gains on this position, rather than seeking to make most of the profit from option sales, particularly as the dividend is now out of the equation.

I may be in the same position of suffering early assignment on existing shares of International Paper (IP) as it goes ex-dividend this week. With a spike in price after earnings and having a contract that expires at the end of the monthly cycle, I had tried to close the well in the money position, but have been faced with the paucity of reasonable ask prices in the pursuit of buying back options. However, even at its current price, International Paper may be poised to go even higher as it pursues a strategy of spin-offs and delivery of value to its investors.

With decent option premiums, an attractive dividend and the chance of further price appreciation, it remains a stock that I would like to have in my portfolio.

Mosaic (MOS) is a stock that I have had as an inactive component of my portfolio after having traded it quite frequently earlier in the year at levels higher than its current price and last year as well, both below and above the current price. It appears that it may have established some support and despite a bounce from that lower level, I believe it may offer some capital appreciation opportunities, as with Intel. As opposed to Intel, however, the dividend is still in the equation, as shares will go ex-dividend on December 2, 2014. With the availability of expanded weekly options there are a mix of strategies to be used if opening this position.

It seems as if there’s barely a week that I don’t consider adding shares of eBay (EBAY). At some point, likely when the PayPal division is spun off, the attention that I pay to eBay may wane, but for now, it still offers opportunity by virtue of its regular spikes and drops while really going nowhere. That t

ypically creates good option premium opportunities, especially at the near the money strikes.

I currently own shares of Sinclair Broadcasting (SBGI) a company that has quietly become the largest owner of local television stations in the United States. It is now trading at about the mid-point of its lows and where it had found a comfortable home, prior to its price surge after the Supreme Court’s decision that this past week finally resulted in Aereo shutting down its Boston offices and laying off employees, as revenue has stopped.

Sinclair Broadcasting will be ex-dividend early in the December 2014 option cycle and offers a very attractive option. It reported higher gross margins and profits last week, as short interest increased in its shares the prior week. I think that the price drop in the past week is an opportunity to initiate a position or add to shares.

Mattel (MAT) is a company that I haven’t owned in years, but am now attracted back to it, in part for its upcoming dividend, its option premium and some opportunity for share appreciation as it has lagged the S&P 500 since its earnings report last month.

However, while holiday shopping season is approaching and thoughts of increased discretionary consumer spending may create images of share appreciation, Mattel has generally traded in a very narrow range in the final 2 months of the year, which may be just the equation for generating some reasonable returns if factoring in the premiums and dividend.

Twitter (TWTR) continues to fascinate me as a stock, as a medium and as a source of so many slings and arrows thrown at its management.

Twitter has always been a fairly dysfunctional place and with somewhat of a revolving door at its highest levels before and after the IPO. While it briefly gained some applause for luring Anthony Noto to become its CFO, the spotlight heat has definitely turned up on its CEO, Dick Costolo.

Last week I sold Twitter puts in the aftermath of its sharp decline upon earnings release. While the puts expired, I did roll some over to a lower strike price as the premium was indicating continued belief in the downside momentum.

This week I’m considering adding to the position, and selling more puts, especially after the latest round of criticisms being launched at Costolo. At some point, something will give and restore confidence. It may come from the Board of Directors, it  may come from Costolo himself or it may even come from activists who see lots of value in a company that could really benefit from the perception of professional management.

I’m not certain how many times I’ve ended a weekly column with a discussion of Abercrombie and Fitch (ANF), but it’s not a coincidence that it frequently warrants a closing word.

Abercrombie and Fitch has been one of my most rewarding and frustrating recurrent trades over the years. At the moment, it’s on the frustrating end of the spectrum following Friday’s revelations regarding sales that saw a 17% price drop. That came the day after an inexplicable 5% rise, that had me attempting to rollover an expiring contract but unable to find a willing seller for the expiring leg.

Over the course of a cumulative 626 days of ownership, spanning 21 individual transactions, my Abercrombie and Fitch activity has had an annualized return of 32% and has seen some steep declines in the process, as occurred on Friday.

This has been an unnecessarily “in the news” kind of company whose CEO has not weathered well and for whom a ticking clock may also be in play. Over the past years each time the stock has soared it has then crashed and when crashing seems to resurrect itself.

Earnings are expected to be reported the following week and premiums will be enhanced as a result. While I currently have an all too expensive open lot of shares I’m very interested in selling puts, as had been done on nine previous occasions over those 626 days. In the event assignment looks likely I would attempt to rollover those puts which would then benefit from enhanced premiums and likely be able to be rolled to a lower strike.

However, if then again faced with assignment, I would consider accepting the assignment, as Abercrombie and Fitch is due to go ex-dividend sometime early in the December 2014 option cycle. However, I would also be prepared for the possibility of the dividend being cut as its payout ratio is unsustainable at current earnings.

 

 

Traditional Stocks:  Cypress Semiconductor, eBay, Intel, Mattel, Mosaic, Sinclair Broadcasting

Momentum: Abercrombie and Fitch, Twitter

Double Dip Dividend: International Paper (11/13)

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.

Visits: 16

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Weekend Update – May 25, 2014

This was a good week, every bit as much as it was an odd one. 

You almost can’t spell “good” without “odd.”

We tend to be creatures that spend a lot of time in hindsight and attempting to dissect out what we believe to be the important components of everything that surrounds us or impacts upon us.

Sometimes what’s really important is beyond our ability to  see or understand or is just so counter-intuitive to what we believe to be true. I’m always reminded of the great Ralph Ellison book, “The Invisible Man,” in which it’s revealed that the secret to obtaining the most pure of white paints is the addition of a drop of black paint.

That makes no sense on any level unless you suspend rational thought and simply believe. Rational thought has little role when it calls for the suspension of belief.

This past week there was no reason to believe that anything good would transpire.

Coming on the heels of the previous week, which saw a perfectly good advance evaporate by week’s end there wasn’t a rational case to be made for expecting anything better the following week. That was especially true after the strong sell-off this past Tuesday.

Rational thought would never have taken the antecedent events to signal that the market would alter its typical pattern of behavior on the day of an FOMC statement release. That behavior was to generally trade in a reserved and cautious fashion prior to the 2 PM embargo release and then shift into chaotic knee-jerks and equally chaotic post-kneejerk course corrections.

Instead, the market advanced strongly from the opening bell on that day, erasing the previous day’s losses and had no immediate reaction to the FOMC release and then in an orderly fashion moved mildly higher after the words were parsed and interpreted.

The trading on that day and its timing were entirely irrational. It was odd, but it was good.

Ordinarily it would have also been irrational to expect a rational response to the minutes that offered no new news, as in the past real news was not a necessary factor for irrational buying or selling behavior.

The ensuing rational behavior was also odd, but it, too, was good.

As another new high was set to end the week there should be concern about approaching a tipping point, especially as the number of new highs is on the down trend. However, the market’s odd behavior the past week gives me reason to be optimistic in the short term, despite a belief that the upside reward is now considerably less than the downside risk in the longer term. 

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

This was a week in which those paid to observe such things finally commented on the disappointing results coming from retailers, despite the fact that the past two or three quarters have been similar and certainly not reflective of the kind of increased discretionary spending you might expect with increasing employment statistics.

With some notable exceptions, such as LuLuLemon (LULU) and Family Dollar Store (FDO) I’ve enjoyed being in and out of retailers, although I think I’d rather be maimed than actually be in and out of anyone’s actual store.

This week a number of retailers have appeal, either on their merits or because there may be some earnings related trades seeking to capitalize on their movements. Included for their merits are in the list are Bed Bath and Beyond (BBBY), eBay (EBAY), Nike (NKE) and The Gap (GPS), while Abercrombie and Fitch (ANF) and Kors (KORS) report earnings this week.

After a disappointing earnings report Bed Bath and Beyond has settled into a trading range and gas seemed to establish some support at the $60 level. Along with so many others that have seen their shares punished after earnings the recovery of share price seems delayed as compared to previous markets. For the option seller that kind of listless trading can be precisely the scenario that returns the best results.

eBay has also stagnated. With Carl Icahn still in the picture, but uncharacteristically quiet, especially after the announcement of a repatriation of some $6 billion in cash back to the United States and, therefore, subject to taxes, there doesn’t seem to be a catalyst for a return to its recent highs. That suits me just fine, as I’ve liked eBay at the $52 level for quite a while and it has been one of my more frequent in and out kind of trades. At present, I do own two other lots of shares and three lots is my self imposed limit, but for those considering an initial entry, eBay has been seen as a mediocre performer in the eyes of those expecting upward price movement, but a superstar from those seeking premium income through the serial sale of option contracts week in and out. If you’re the latter kind, eBay can be as rewarding as the very best of the rest.

The Gap reported earnings on Friday and exhibited little movement. It’s currently trading at the high end of where I like to initiate positions, but it, too, has been a very reliable covered option trade. An acceptable dividend and a fair option premium makes it an appealing recurrent trade. The only maddening aspect of The Gap is that it is one of the few remaining retailers that oddly provides monthly same store sales and as a result it is prone to wild price swings on a regular basis. Those price swings, however, tend to be alternating and do help to keep those option premiums elevated.

You simply take the good with the odd in the case of The Gap and shrug your shoulders when the market response is adverse and just await the next opportunity when suddenly all is good again.

Despite all of the past criticism and predictions of its irrelevance in the marketplace Abercrombie and Fitch continues to be a survivor.  This past Friday was the second anniversary of the initial recommendation of taking a position for Option to Profit subscribers, although I haven’t owned shares in nearly 5 months. Since that in

itial purchase there have been 18 such recommendations, with a cumulative 71.5% return, despite shares having barely moved during that time frame.

Always volatile, especially when earnings are due, the options market is currently implying a 10.2% move in price. For me, the availability of a 1% ROI from selling put contracts at a strike level outside of the lower boundary of that implied range gets my interest. In this case shares could fall up to 13.9% before assignment is likely and still deliver that return.

Kors, also known as “Coach (COH) Killer” also reports earnings this week. It has stood out recently because it hasn’t been subject to the same kind of selling pressure as some other “momentum” stocks. The option market is implying a price movement of 7.4%, while a 1% ROI from put sales may be obtained at a strike level currently 8.8% below Friday’s closing price. However, while Abercrombie and Fitch has plenty of experience with disappointing earnings and has experienced drastic price drops, Kors has yet to really face those kinds of challenges. In the current market environment earnings disappointments are being magnified and the risk – reward proposition with an earnings related trade in Kors may not be as favorable as for that with Abercrombie.

In the case of Kors I may be more inclined to consider a trade after earnings, particularly considering the sale of puts if earnings are disappointing and shares plummet.

After last week’s brief ownership of Under Armour (UA) this week it may be time to consider a purchase of Nike, which under-performed Under Armour for the week. Shares also go ex-dividend this week and have been reasonably range-bound of late. It isn’t a terribly exciting trade, but at this stage of life, who really needs excitement? I also don’t need a pair of running shoes and could care less about making a fashion statement, but I do like the idea of its consistency and relatively low risk necessary in order to achieve a modest reward.

Transocean (RIG) is off of its recent lows, but still has quite a way to go to return to its highs of earlier in the year. Going ex-dividend this week, the 5.7% yield has made the waiting on a more expensive lot of shares to recover a bit easier. As with eBay, I already have two lots of shares, but believe that at the current level this is a good time for initial entry, perhaps considering a longer term option contract and seeking capital gains on shares, as well. As with most everything in business and economy, the current oversupply or rigs will soon become an under supply and Transocean will reap the benefits of cyclicality.

Sinclair Broadcasting (SBGI) also goes ex-dividend this week. It is an important player in my area and has become the largest operator of local television stations in the nation, while most people have never heard the name. It is an infrequent purchase for me, but I always consider doing so as it goes ex-dividend, particularly if trading at the mid-point of its recent range. CUrrently shares a little higher than I might prefer, but with only monthly options available and an always healthy premium, I think that even at the current level there is good opportunity, even if shares do migrate to the low end of its current range.

Finally, Joy Global (JOY), one of those companies whose fortunes are closely tied to Chinese economic reports, has seen a recent 5% price drop from its April 2014 highs. While it is still above the price that I usually like to consider for an entry, I may be interested in participating this week with either a put sale of a buy/write.

Among the considerations are events coming the following week, as shares go ex-dividend early in the week and then the company reports earnings later in the week.

While my preference would be for a quick one week period of involvement, there always has to be the expectation of well laid out plans not being realized. In this case the sale of puts that may need to be rolled over would benefit from enhanced earnings related premiums, but would suffer a bit as the price decrease from the dividend may not be entirely reflected in the option premium. That’s similar to what is occasionally seen on the call side, when option premiums may be higher than they rightfully should be, as the dividend is not fully accounted.

Otherwise, if beginning a position with a buy/write and not seeing shares assigned at the end of the week, I might consider a rollover to a deep in the money call, thereby taking advantage of the enhanced premiums and offering a potential exit in the event that shares fall with the guidelines predicted by the implied volatility. Additionally, it might offer the chance of early assignment prior to earnings due to the Monday ex-dividend date, thereby providing a quick exit and the full premium without putting in the additional time and risk.

 

Traditional Stocks: Bed Bath and Beyond, eBay, The Gap

Momentum: Joy Global

Double Dip Dividend: Nike (5/29 $0.24), Sinclair Broadcasting (5/28 $0.15), Transocean (5/28 $0.75)

Premiums Enhanced by Earnings: Abercrombie and Fitch (5/29 AM), Kors (5/28 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.

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Weekend Update – August 25, 2013

You’re only as good as your earnings. Having stopped making an honest living a little on the early side, I still need to make money, or otherwise my wife would insist that I do something other than watch a moving stock ticker all day.

Since there’s far too much competition on the highway exit near our home and my penmanship has deteriorated due to excessive keyboard use, I’ve come to realize that stock derived earnings, predominantly from the sale of options and accrual of dividends, are the only thing keeping me from joining those less fortunate.

I’m under no delusions. I am only as good as my earnings, just as Bob Greifeld, CEO of NASDAQ (NDAQ) should be under no delusions, as he is only as good as his response to the most recent NASDAQ failing.

On that count, I may have the advantage, although he may have better hygiene and a wardrobe that includes a clean hoodie.

There was a time that we thought of stocks in very much the same earnings centric way. If earnings were good the stock was good. There was a time that we didn’t dwell quite as much on the macro-economic data and we certainly didn’t spend time thinking about Europe or China.

However, after this most recent earnings season, which will come to an end a few days before the next season is kicked off on October 8, 2013, maybe it’s a good thing that it’s only during the otherwise slow summer months when other news is sparse, that we focus on earnings.

If you’ve been paying attention, this hasn’t been a particularly encouraging month, especially as far as retail sales go, which are about as good a reflection of discretionary spending as you can find. Beyond that, listening to guidance can make shivers run down one’s spine as less than rosy earnings pictures are being painted for the future. The very future that our markets are supposed to be discounting.

As it is the S&P 500 is now about 0.3% below the earlier all time high that was hit on May 21, 2013. That in turn gave way to a rapid 5.7% fall and equally rapid 8.6% recovery to new highs. By all historical measures that post-May 21st drop was small as compared to the gains since November 2012 and we are right back to that level.

Perhaps once summer is over and our elected officials return to Washington, DC, not only would they have an opportunity to see me at a highway exit, but they may also get back to doing the things that create the dysfunction that makes earnings less salient.

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

Most of the positions considered this week are themselves lower than they were at the low point following the May 21st peak and have underperformed the S&P 500 since that time. For the moment, as I contribute to cling to the idea that there will be some additional market weakness, my comfort level is increased by focusing on positions that don’t have as much to fall.

I’ve been anxious to buy either Cisco (CSCO) or Oracle (ORCL) ever since Cisco’s disappointing earnings report. During more vibrant markets a drop in the share price of an otherwise good company would stand out as a buying opportunity. However, recently there has been more competition among those companies suffering precipitous earnings related price drops. While striving to keep my cash reserves at sufficient levels to allow me to go on a wild spending spree, I’ve resisted opportunities in CIsco and Oracle. Both, however, are getting more and more appealing as their prices sink further.

Oracle will report its earnings right before the end of the September 2013 option cycle and I have a very hard time believing that it could be three disappointments in a row, especially after some high profile remarks by CEO Larry Ellison regarding leadership at Apple (AAPL) that could come back to haunt him, even if only in terms of comparative share performance.

A technology company that always intrigues me, if at the price point relative to its option contract strikes, is Cypress Semiconductor (CY). It’s products and technology are quietly everywhere. However, its CEO, T.J. Rodgers has become precisely the opposite, as he is increasingly appearing in the media and offering political and policy opinions that make you wonder whether he is getting detached from the business, as perhaps may be said of Ellison. In Cypress Semiconductor’s case I think the business is small and focused enough that it can withstand some diversions. It is one of the few positions that has outperformed the S&P 500 since May 21st.

Among companies reporting earnings this week is salesforce.com (CRM), which also has Larry Ellison connections. the most recent of which is a great example of how business and strategic needs may trump personal feelings. For those who would innocently suffer collateral damage otherwise, that is the way it should be, as two companies seek to have the sum of their parts create additional value. While I do own shares of salesforce.com, I would be inclined to consider the sale of puts as a means to add additional shares and achieve an earnings stream of 1% for the week while awaiting the market’s reaction to earnings. My only hesitancy is that the strike at which that return can be achieved as more close to the strike of the implied move downward than I would ordinarily like.

Having recently lost shares of Eli Lilly (LLY) to early assignment in order to capture its dividend, I’ve wanted to re-purchase shares. Along with Bristol Myers Squibb (BMY) that I have been wanting to add for a while, they both offer attractive option premiums and are both 5% below their May 21st prices, which I believe limits their short term risk, during a period that I prefer to be somewhat defensive. Additionally, Bristol Myers offers extended weekly options that can be used as part of a broader strategy to attempt and stagger option expiration dates and perhaps infusions of cash back into portfolios for new purchases.

Sinclair Broadcasting Group (SBGI) is a local television broadcasting powerhouse that just purchased the important Washington, DC ABC affiliate. But it is far more than a local presence, as it has quietly become the nation’s largest operator of television stations, barely 4 years after fears of bankruptcy. Of course its recent buying spree may put pressures on the bottom line, but for now it is coming off a nearly 8% earnings related price decline and goes ex-dividend this week. Both of those work for me.

JP Morgan (JPM) which is increasingly becoming the poster child for everything wrong with big banks, at least from the point of view of regulators and the Department of Justice, finally showed a little bit of price stability by mid-week. Although I don’t know how any initiatives directed toward JP Morgan will work out, I’m reasonably sure that talk of looking at Jamie Dimon as a potential Treasury Secretary won’t be rekindled anytime soon. At current price levels, however, I think shares warrant another look.

While I’m not a terribly big fan of controversy, I think it may be time to publicly proclaim support for Cliffs Natural Resources (CLF). Having suffered through ownership beginning prior to the dividend cut, it has been an uncomfortable experience, ameliorated a bit by occasional purchase of additional shares and sacrificing them for their option premiums. Beginning with a report approximately 6 weeks ago that China had purchased a massive amount of nickel in the London commodity market, Cliffs has been slowly showing strength that may suggest demand for iron ore is increasing. Held hostage to our perceptions of the health of the Chinese economy, which can vary wildly from day to day, Cliffs’ share price can be equally volatile, but I believe will be rewarding for the strong of stomach.

Finally, Abercrombie and Fitch (ANF) was widely criticized as no longer being “cool.” That suits me just fine, figuratively, but not literally, as I resist wearing anyone’s logo with compensation. However, after joining other teen retailers in receiving earnings related punishment, I sold puts on its shares and happily saw them expire. Long a favorite stock of mine on which to generate option premium income, I think it’s at a price level that may offer some stability even with a demographic customer base that may not offer the same stability. This has been a great company to practice serial covered call writing, as long as you have a parallel strategy during the week of earnings release. In this case, that leaves three months of evaluating opportunities and perhaps even receiving a dividend before the next quarterly challenge.

Traditional Stocks: Bristol Myers Squibb, Cisco, Cypress Semiconductor, Eli Lilly, JP Morgan, Oracle

Momentum Stocks: Cliffs Natural Resources

Double Dip Dividend: Abercrombie and Fitch (ex-div 8/29), Sinclair Broadcasting (ex-div 8/28)

Premiums Enhanced by Earnings: salesforce.com (8/29 PM)

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 – May 26, 2013

That was the crash, dummy.

“I’ll know it when I see it,” is a common refrain when you’re at a loss for just the right descriptors or just can’t quite define what it is that should be obvious to everyone.

While there are definitions for what constitutes a recession, for example, an individual may have a very good sense of personally being in one before anyone else recognizes or confirms its existence.

Certainly there’s also a distinction between a depression and a recession, but it’s not really necessary to know the details, because you’ll probably know when you’ve transitioned from one to another.

The same is probably true when thinking about the difference between a market crash and a market correction. While people may not agree on a standard definition of what constitutes either, a look at your own portfolio balance can be all the definition that you need.

I’ve been waiting, even hoping for a correction for over two months now. That hoping came to a crescendo as a covered option writer with the expiration of many May 2013 contracts and finding more cash than I would have liked faced with the aspects of either being re-invested at a top or sitting idly.

Then came Federal Reserve Chairman Ben Bernanke’s congressional testimony and the mixed signals people perceived. Was it tapering or not tapering? Was it now or later?

What came as a result was what some called a “Key Reversal Day.” That is a day when the market reaches new highs and then suddenly reverses to go even lower than the previous day’s low. It’s thought that the greater the range of movement and the greater the trading volume the more reliable of an indicator is the reversal,

On both counts the aftermath of the reaction to Bernanke’s words, or as the “Bond King” Bill Gross of PIMCO called “talking out of both sides of his mouth” was significant.

Was that the beginning of the long over-due correction? After all we are now in the 52nd month of the current bull run, which has been the duration of the past two.

With news that the Japanese market lost more than 7% overnight following our own key reversal day was the sense that the correction may take on crash-like qualities, but instead our own markets almost had another key reversal day, but this time in the other direction. After an early 150 point drop and subsequent recovery all that was missing was to have exceeded the previous day’s high point.

Correction? Crash? That was so yesterday. It’s time to move on, dummy

While hopeful that some kind of correction might bring some meaningful opportunities to pick up some bargains, the correction was too shallow and the correction to the correction was too quick.

So this week is more of the same. Nearly 50% cash and no place to go other than to be mindful of a great 1995 article by Herb Greenberg that has some very timeless investing advice in the event of a crash, having drawn upon some Warren Buffett, Bob Stovall and Jeremy Siegel wisdom.

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

Already owning shares of both Deere (DE) and Caterpillar (CAT), as I often do, a frequent companion is their more volatile counter-part, Joy Global (JOY). Always sensitive to news regarding the Chinese economy, Joy Global reports earnings this week, as well, which certainly adds to its risk profile. Most recently the news coming out of China has pointed toward slowing growth, although historically the Chinese data have demonstrated as much ability to contradict themselves longitudinally as the US data. I believe bad news is already incorporated into the current prices of the heavy machinery sector and all three of these companies are trading within a long established price range that provides me some level of comfort, even in a declining market. For that reason, I may also add shares of Deere, particularly if it approaches $85.

Morgan Stanley (MS) has gone along the uphill ride with the rest of the financial sector in recent weeks. It was among the many stocks whose shares I lost to assignment at the end of the May 2013 cycle, but it too, has been a constant portfolio companion. It tends to have greater European exposure than its US competitors, but for the time being it appears as if much of the European drama is abating. Over the past year it’s shares have traded in a wide range but has shown great resilience when the price has been challenged and has offered very attractive premiums to help during the periods of challenge.

Unlike the prior week, this past week wasn’t very good for the retailers. WIth earnings now past, one of the elite, JW Nordstrom (JWN) goes ex-dividend this week. While it still has downside room, even after a 3% earnings related drop along with the rest of the more “high end” oriented retailer sector, it will likely out-perform other lesser retailers in the event of a market pause.

Also in the higher end range, Michael Kors (KORS) has been one of my recent favorites, although I must admit I didn’t see the reason for the excitement on a retail level during a recent early morning trip to the mall. No matter, I’m not in their demographic. What I do know is that their shares move with great ease in either direction, other reversing course during the trading session and it offers an appealing option premium. That premium is a bit more enhanced as it reports earnings this week and I may look to establish a position after having shares also assigned recently.

I approach any purchases in the Technology sector with some concern for being over-invested in such shares. Although Cypress Semiconductor (CY) is now trading 10% higher from where I had shares recently assigned on two previous occasions it continues to offer a reasonably attractive options premium and trades in a stable price range.

Lexmark (LXK) is now well above the strike price that I had shares recently assigned. It’s appeal is enhanced by being ex-dividend this week and the knowledge that it appears to have gotten beyond the initial shock that this “printer maker” was getting out of the “Printer maker” business. Thus far, it appears as if the transition to a more content management and solutions oriented company is proceeding smoothly.

Also going ex-dividend this week is one of the little known, but largest owner of television stations around the nation. Sinclair Broadcasting (SBGI). It may be in position to pick up a rare gem as an ABC station in Washington, DC is rumored to be available for purchase. While it has appreciated significantly in the past two months, it’s shares are down approximately 7% from recent highs.

Not that I would suggest lighting up one of their products while watching a fine situation comedy being broadcast by SInclair, but Lorillard (LO), which assuages some of its health related guilt by offering a rich dividend, does go ex-dividend this week. It too, has been trading higher of late, but is down just a bit from its recent high.

Finally, Salesforce.com (CRM) reported earnings after this past Thursday’s (May 23, 2013) closing bell. The market assessed an 8% penalty for its disappointing numbers, but that should just be a minor bump in their road and not likely a deep pothole. Unfortunately, I didn’t execute the earnings related put sale trade last week as I thought I might, which would have returned 1% even in the face on an 8% drop in share price, but this week brings new opportunity, only on the share purchase and option sale side.

In fact, I was so convinced by the previous paragraph that I sent out that Trading Alert on Friday rather than waiting for Tuesday.



Traditional Stocks: Cypress Semiconductor, Deere, Morgan Stanley, Salesforce.com

Momentum Stocks: none

Double Dip Dividend: JW Nordstrom (ex-div 5/29), Lexmark (ex-div 5/29), Lorillard (ex-div 5/29), Sinclair Broadcasting ex-div 5/29)

Premiums Enhanced by Earnings: Joy Global (5/30 AM), Michael Kors (5/29 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 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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