Apr182014

Week in Review – April 14 -18, 2014

Week in Review Comment

 

Option to Profit Week in Review
April 14 – 18, 2014
 
NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
2 / 2 5 7 3  / 0 5   / 0 0

    

Weekly Up to Date Performance

April 14 – 18, 2014

With only 2 new purchases for the week they badly trailed the time adjusted S&P 500  by 1.6% and the unadjusted S&P 500 index by an even bigger 2.1% during a week that surprised most everyone for its strength and resilience after a dismal performance the previous week.

The market showed a spectacular adjusted gain for the week of 2.3% but an even more spectacular unadjusted gain of 2.7%, while new positions gained only 0.6%.

After some unusually large beats of the overall market for several weeks existing positions trailed by 1.3% for the week.

For positions closed in 2014 performance exceeded that of the S&P 500 by 1.6%. They were up 3.3% out-performing the market by 90.9%.

What a week.

That’s what I said last week and it was even more the case this week, except this week was a rare one for 2014, in that the market showed incredible strength.

Not only did it show strength, but it showed it while everyone was getting ready for continuing weakness from the prior week.

The real difference is that last week I was still happy with the end result, but this week I wasn’t.

Just as the previous week had seen real substantive turnarounds that had to have come as a surprise to nearly everyone, especially since there were no catalyts to have turned everything around, this week just went higher from the first opening bell, yet nothing had changed from the previous Friday’s closing bell, that left a pall of pessimism.

Given just how strong the market was this week I was very disappointed with the personal outcome, starting with having made only 2 new trades for the week.

While there was some ability to open new cover for uncovered positions and rollover a fair number of exisiting positions, I would have liked to have seen more than just 3 assignments, as that didn’t do very much to add to the cash reserve that saw nothing added the previous week.

While I didn’t mind the bottom line performance, that’s always in the past, while assignments always have you looking toward the future thinking about how next to invest the money that it generates.

As I get older I don’t want to find myself dwelling in the past. I would much rather be looking toward the future.

With only a handful of assignments to work with it may mean another week of relatively few new positions, although cash reserves can still be called upon for upping the ante if anything truly looks worthy.

With a new monthly option cycle beginnng on Monday I am still looking for whatever opportunities there are to generate income from selling new covered calls on existing positions, as a primary goal and adding new positions as a secondary goal.

Of course, it’s hard to enter the May option cycle without being reminded of the adage that even school aged kids seem to know – “Sell in May and go away.”

That hasn’t exactly been a foolproof startegy the past few years, but there will no doubt be plenty of people pointing to data that shows that it is a sound way to go.

These days, the market never really sleeps, much less for 3 or 4 months at a time, so I think old adages are cute, but that’s about it for now, until proven otherwise.

What the market has proven, one more time, is that it seems to be completely resilient to what we used to think of as obligatory corrections. At least it may have simply re-defined what a correction is for this decade.

If l;ast week is any indication, it’s just another in what is becoming a long line of quick rebounds from relatively small drops. Those rebounds then become stepping stones toward even higher highs.

Will I be putting my money where my mouth is next week?

I hope so, although i wish my cash reerves were as big as my mouth.

 

This week’s details may be seen in the Weekly Performance spreadsheet * or in the PDF file, as well as as in the summary.below

(Note: Duplicate mention of positions reflects different priced lots):

New Positions Opened:  BBY, MET

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycle:  AIG, BBY, BMY, LOW, LULU

Calls Rolled over, taking profits, into extended weekly cycle:  CMCSA (5/2)

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

Calls Rolled Over, taking profits, into a future monthly cycle: MET, SBUX

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

New STO:  CMCSA, HFC, LOW, MET, MOS

Put contracts sold and still open: none

Put contracts expired: none

Put contract rolled over: none

Long term call contracts sold:  none

Calls Assigned:   CHK, COH, MET

Calls Expired:   DRI, FDO, FDO, PM, RIG

Puts Assigned:  none

Stock positions Closed to take profits:  none

Stock positions Closed to take losses: none

Calls Closed to Take Profits: none

Ex-dividend Positions:  none

Ex-dividend Positions Next Week:  none

 

For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, BMY, C, CLF, DRI, FCX, FDO, GM,  HFC, IP, JCP, MCP, MOS,  NEM, PBR, PM, RIG, TGT, WFM, WLT, WY (See “Weekly Performance” spreadsheet or PDF file)

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

Apr172014

Daily Market Update – April 17, 2014

Daily Market Update

 

 

Daily Market Update – April 17, 2014 (8:30 AM)

As a reminder, the markets are closed on Good Friday, so today will be the weekly expiration, as well as the end of the April 2014 option cycle..

The Week in Review will be posted by 6 PM on Friday, April 18, 2014 and the Weekend Update will be posted by noon on Sunday.

Today’s possible iutcomes include:

Assignments:  CHK, MET

Rollovers:  BBY, BMY, COH, FDO ($60), LOW

Expiration:  DRI, FDO ($65), PM, RIG

Trades, if any, will be attempted to be made prior to 3:30 PM EDT.



 

 

 

 

  

Apr162014

Rolling the Dice with Earnings

Articles • Trading Strategies

With earnings season ready to begin its second full week there are again some opportunities to identify stocks whose earnings may represent risk that is over-estimated by the options market, yet may still offer attractive premiums outside of the presumed risk area.

While in a perfect world good earnings would see increased share prices and bad earnings would result in price drops, the actual responses may be very unpredictable and as a result earnings reports are often periods of great consternation and frustration.

For the buy and hold investor, while earnings may send shares higher, this is also a time when paper profits may vanish and the cycle of share appreciation has to begin anew. Other than supplementing existing positions with strategic option positions, such as the purchase of out of the money puts, the investor must sit and await the fate of existing shares.

Occasionally, a covered option strategy, either through the sale of puts or buy/write transactions, may offer opportunity to achieve an acceptable return on investment while limiting the apparent risk of exposure to the large moves that may accompany good, bad or downright ugly news. Although a roll of the dice has definable probabilities, when it comes to stocks sometimes you want something that seems less predicated on chance and less on human emotion or herd mentality.

As always, whenever I consider whether an earnings related trade is worth pursuing I let the “implied volatility” serve as a guide in determining whether there is a satisfactory risk-reward proposition to consider action. That simple calculation provides an upper and lower price range in which price movement is anticipated and can then be compared to corresponding premiums collected for assuming risk. It is, to a degree based on herd mentality in the option market and has varying degrees of emotion already built into values. The greater the emotion, as expressed by the relative size of the premiums for strike levels outside of the range defined by the implied volatility the more interested I am in considering a position.

My preference in addressing earnings related trades is to do so through the sale of put contracts, always utilizing the weekly contract and a strike price that is below the lower range defined by the implied volatility calculation. Since I’m very satisfied with a weekly 1% ROI, I then look to find the strike level that corresponds to at least a 1% return.

While individuals can and should set their own risk-reward parameters, a weekly 1% ROI seems to be one that finds a good balance between risk and reward, as long as the associated strike level is also outside of the implied volatility range. If the strike level is within the range I don’t assess it as meeting my criteria. I sometimes may be less stringent, accepting a strike level slightly inside the lower boundary of the range if shares have already had some decline in the immediate days preceding earnings. Conversely, if shares have moved higher in advance of earnings I’m either less likely to execute the trade or much more stringent in strike level selection or expecting an ROI in excess of 1%.

While conventional wisdom is to not sell puts on positions that you wouldn’t mind owning at a specified price, I very often do not want to own the shares of the companies that I am considering. For the period of the trade, I remain completely agnostic to everything about the company other than its price and the ability to sell contracts and if necessary, purchase and then re-sell contracts repeatedly, until the position may be closed.

However, for those having limited or no experience with the sale of put contracts, you should assume a likelihood of being assigned shares and the potential downside of having a price drop well in excess of your projections. For that reason you may want to re-consider the agnostic part and be at peace with the potential of owning shares at your strike price and helping to reduce the burden through the sale of calls, where possible.

Since my further preference is to not be assigned shares, I favor those positions that have expanded weekly options available, so that there is opportunity to roll contracts over in the event that assignment appears likely using a time frame that offers a balance between return and brevity.

This week there are a number of stocks that will release quarterly earnings that may warrant consideration as the reward may be well suited to the risk taken for those with a little bit of adventurousness.

A number of the companies highlighted are volatile on a daily basis, but more so when event driven, such as with the report of earnings. While implied volatilities may occasionally appear to be high, they are frequently borne out by past history and it would be injudicious to simply believe that such implied moves are outside the realm of probability. Stocks can and do move 10, 15 or 20% on news.

The coming week presents companies that I usually already follow. Among them are Amazon (AMZN), Cliffs Natural Resources (CLF), Cree (CREE), Deckers (DECK), Facebook (FB), Gilead (GILD), Microsoft (MSFT) and Netflix (NFLX).

The table above may be used as a guide for determining which of these stocks meets personal risk-reward parameters, understanding that re-calculations must be made as share prices, their associated premiums and subsequently even strike level targets may change.

While I most often use the list of stocks on a prospective basis in anticipation of an earnings related move, sometimes the sale of puts following earnings is a favorable trade, especially in instances in which shares have reacted in a decidedly negative fashion to earnings or to guidance.

Regardless of the timing of the sale of puts, before or after earnings are released, being more pessimistic regarding the potential for price drops may be an enticing trade for the generation of income.

Apr162014

Daily Market Update – April 16, 2014 (Close)

Daily Market Update

 

 

Daily Market Update – April 16, 2014 (Close)

For most of the day yesterday it seemed as if the feeling of confidence that Monday’s close engendered was wasted. If your eyes have gotten to the point that it identifies almost everything on the basis of the relative amounts of red and green contained in the image you know that everything seemed dreary yesterday, particularly on the east coast and that included the New York Stock Exchange

But then, without the slightest cue or catalyst, the market simply reversed itself in the final 90 minutes and had a second successive strong close.

Sometimes it’s not just the net change for the day but it’s also the character of that change and the dynamics of how we arrived at the finish line. Yesterday was yet another day to inspire confidence in the overall market and maybe just another signal that this market just can’t get much beyond a 5% drop and just can’t do so for very long.

Not that anyone should let their guard down, but this morning’s pre-open market looks like it will be extending yesterday’s strong close. The fact that after a few days of nearly 80 degree weather there is some snow and frost on the ground outside my window is in no way a metaphor for what may happen in today’s market, although these rapid changes certainly get your attention and make you more cautious about planting the season’s vegetables or planting some new positions.

Today, as it would finally turn out was completely different from the two days preceding it. The market pointed higher from before the open and never wavered.

So far the way this week has developed as unlikely a scenario as you could imagine, especially considering the previous week and how that ended. The only suggestion that things were not as dire as they appeared was that despite nothing but bad news and mounting uncertainty on Friday, the market didn’t pile on at the close when there were renewed concerns about troops amassing on the Ukraine border and sell orders amassing at the close.

Still, the predominant evidence and the predominant thinking was that this time the market was going to get serious about approaching that 10% level so that most people could agree that we’ve finally had a correction.

Maybe, and it’s still early, the lesson to be learned is that the consensus is often short sighted. Or at lest it shows that we think we know what the catalysts are or will be, but we just don’t.

If Ukraine was going to be a near term catalyst last week it would be even more so after yesterday, but that’s just not the case, unless someone wants to claim that the market considers any armed confrontation in the area as a positive catalyst.

You just know that someone will do that, citing a version of “sell on the rumor and buy on the news” when it comes to rumors of bad news.

For certain, so far this earnings season hasn’t done anything to add to the concern. While there’s been nothing really stellar yet, neither has there been a developing forward looking theme that paints a negative picture. So while awaiting some kind of disaster on the Russian front or some really unexpected bad Chinese economic news, there’s not to much reason to suspect that the market will now change what it has done so often in the past two years.

When faced with a downturn in prices it has just used that slightly lower level to spring to higher levels.

What may be different is that in the not too distant past we had seen many 5-10% downward moves and considered them to be a normal part of the market cycle. Now, everyone gets a minor sense of panic when the market falls 2% and strategies are immediately changed, as are behaviors that used to be reserved just for the periodic larger falls.

Maybe what’s called for is a re-definition of what constitutes a “correction.”  Maybe our minds don’t think in relative terms at all. Maybe we think in absolutes and a 5% drop when the DJIA is at 16000 seems much worse than a 5% drop at 12000.

While I had hoped that the market would use today as another opportunity to head higher, I’ve become resigned to this likely being the slowest week in years for opening new positions, although only one more is needed to tie that record and there’s still tomorrow.

Although I like to continually see positions rotate in and out of the portfolio, it’s only because I like to see positions generating fresh revenue. With cash reserves sitting at what I consider to be a minimum to really take advantage of a more classic “correction,” my hopes continue to be centered on seeing more new covered positions created and some rollovers to build up that cash level to start off the new monthly cycle on Monday.

Ultimately a sideways moving market depends much more on those rollovers than on opening new positions. It is also ultimately an easier market in which to outperform and manage positions, as well, as there are usually fewer total positions to clutter the landscape.

Hopefully that form of spring cleaning can start this week and this frost will be short lived

 

 

 

 

  

Apr162014

Daily Market Update – April 16, 2014

Daily Market Update

 

 

Daily Market Update – April 16, 2014 (9:30 AM)

For most of the day yesterday it seemed as if the feeling of confidence that Monday’s close engendered was wasted. If your eyes have gotten to the point that it identifies almost everything on the basis of the relative amounts of red and green contained in the image you know that everything seemed dreary yesterday, particularly on the east coast and that included the New York Stock Exchange

But then, without the slightest cue or catalyst, the market simply reversed itself in the final 90 minutes and had a second successive strong close.

Sometimes it’s not just the net change for the day but it’s also the character of that change and the dynamics of how we arrived at the finish line. Yesterday was yet another day to inspire confidence in the overall market and maybe just another signal that this market just can’t get much beyond a 5% drop and just can’t do so for very long.

Not that anyone should let their guard down, but this morning’s pre-open market looks like it will be extending yesterday’s strong close. The fact that after a few days of nearly 80 degree weather there is some snow and frost on the ground outside my window is in no way a metaphor for what may happen in today’s market, although these rapid changes certainly get your attention and make you more cautious about planting the season;’s vegetables or planting some new positions.

So far the way this week is developing is as unlikely a scenario as you could imagine, especially considering the previous week and how that ended. The only suggestion that things were not as dire as they appeared was that despite nothing but bad news and mounting uncertainty on Friday, the market didn’t pile on at the close when there were renewed concerns about troops amassing on the Ukraine border and sell orders amassing at the close.

Still, the predominant evidence and the predominant thinking was that this time the market was going to get serious about approaching that 10% level so that most people could agree that we’ve finally had a correction.

Maybe, and it’s still early, the lesson to be learned is that the consensus is often short sighted.

For certain, so far this earnings season hasn’t done anything to add to the concern. While there’s been nothing really stellar yet, neither has there been a developing forward looking theme that paints a negative picture. So while awaiting some kind of disaster on the Russian front or some really unexpected bad Chinese economic news, there’s not to much reason to suspect that the market will nowhan what it has done so often in the past two years.

When faced with a downturn in prices it has just used that slightly lower level to spring to higher levels.

What may be different is that in the not too distant past we had seen many 5-10% downward moves and considered them to be a normal part of the market cycle. Now, everyone gets a minor sense of panic when the market falls 2% and strategies are immediately changed, as are behaviors that used to be reserved just for the periodic larger falls.

Maybe what’s called for is a re-definition of what constitutes a “correction.”

While the market hopefully uses today as another opportunity to head higher, I’m resigned to this likely being the slowest week in years for opening new positions, although only one more is needed to tie that record.

Although I like to continually see positions rotate in and out of the portfolio, it’s only because I like to see positions generating fresh revenue. With cash reserves sitting at what I consider to be a minimum to really take advantage of a more classic “correction,” my hopes continue to be centered on seeing more new covered positions created and some rollovers to build up that cash level to start off the new monthly cycle on Monday.

Ultimately a sideways moving market depends much more on those rollovers than on opening new positions. It is also ultimately an easier market in which to outperform and manage positions, as well, as there are usually fewer total positions to clutter the landscape.

Hopefully that form of spring cleaning can start this week and this frost will be short lived

 

 

 

 

  

Apr152014

Daily Market Update – April 15, 2014 (Close)

Daily Market Update

 

 

Daily Market Update – April 15, 2014 (Close)

Yesterday was a really interesting day in the market. Today turned out to be every bit as interesting.

I didn’t get too much done yesterday but I did enjoy most of the day as that old adage about a rising tide played true.

Today most of the day wasn’t very enjoyable and I still didn’t do very much, but that rising tide came back in.

After a month or more of disappointing fizzled rallies to start the day the one from yesterday seemed to be the real thing until the final 90 minutes of trading. Today the same 90 minute theme was at play and in the same direction as yesterday’s

It seemed sort of cruel to watch paper gains disappear after putting in nearly a full day but given how the market has been going lately it should have been expected. At least if the deterioration of gains started after only an hour of trading you didn’t feel as if you had that much invested on an emotional level. But to go nearly the whole day and then watch everything disappear is really deflating.

What wasn’t expected was the reversal rally that occurred in the final 30 minutes that restored the market to its highs for the day. That bounce really went against every logical scenario that anyone could have envisioned.

While there was reason to believe that Citigroup’s earnings helped the market get the week off to a good start, there was plenty of reason to believe that some would take the opportunity to take some cash off the table. What there was little reason to believe was that there would be strong and sustained buying going into the close of trading.

Regardless of how you look at things its hard to come up with an interpretation that’s anything other than optimistic. Who in their right mind would rush in to save a market that had a failed effort to break out of its downward trajectory?

The fact that it actually happened that way is what made it such an interesting day. Triple digit gains and losses are a dime a dozen but that late recovery of early gains was really a thing of beauty and rarity.

Even if the pre-open futures weren‘t showing much in the way of follow through to the strong close it had to leave an encouraging feeling among those invested or thinking of investing. Unfortunately, that positive feeling didn’t linger, but it did return.

I’d like to take some of that encouragement and continue to apply it toward the rest of this holiday shortened week, but I still feel a need to stay on course and hope to secure premiums from existing positions this week instead of depleting cash even further.

Adding two to that list was nice, but still short of where I’s like to be.

My confidence could be supremely restored if I could see a nice assortment of assignments and rollovers on Thursday and toward that end some continuance of yesterday’s strength, even if muted, would be very nice.

While I’m not averse to adding new positions this week it may end up being among those very quiet weeks. With a fair number of expiring positions this week I really would prefer to have any remaining new positions expire at some other time. That may mean looking for new positions later in the week for those that will have their April 25, 2014 options appear only later in the week.

Also, with just a 4 day week, which is now down to 3 days, those premiums are somewhat lower, so there is reason to consider a slightly longer term contract.

For now I’d be happy just adding to the bottom line and letting the tide keep doing its thing as we all try to figure out where exactly the market is getting its cues.

If you haven’t been confused, you just haven’t been paying attention.

That may put you at an advantage. Trying to over-think what we’re seeing isn’t a very good strategy. Hopefully there are two more days of some strength remaining and maybe even some renewed confidence to start the next monthly cycle.

  

Apr152014

Daily Market Update – April 15, 2014

Daily Market Update

 

 

Daily Market Update – April 15, 2014 (9:15 AM)

Yesterday was a really interesting day in the market.

I didn’t get too much done but I did enjoy most of the day as that old adage about a rising tide played true.

After a month or more of disappointing fizzled rallies to start the day the one from yesterday seemed to be the real thing until the final 90 minutes of trading.

It seemed sort of cruel to watch paper gains disappear after putting a nearly a full day but given how the market has been going lately it should have been expected. At least if the deterioration of gains started after only an hour of trading you didn’t feel as if you had that much invested on an emotional level. But to go nearly the whole day and then watch everything disappear is really deflating.

What wasn’t expected was the reversal rally that occurred in the final 30 minutes that restored the market to its highs for the day. That bounce really went against every logical scenario that anyone could have envisioned.

While there was reason to believe that Citigroup’s earnings helped the market get the week off to a good start, there was plenty of reason to believe that some would take the opportunity to take some cash off the table. What there was little reason to believe was that there would be strong and sustained buying going into the close of trading.

Regardless of how you look at things its hard to come up with an interpretation that’s anything other than optimistic. Who in their right mind would rush in to save a market that had a failed effort to break out of its downward trajectory?

The fact that it actually happened that way is what made it such an interesting day. Triple digit gains and losses are a dime a dozen but that late recovery of early gains was really a thing of beauty and rarity.

Even if the pre-open futures aren’t showing much in the way of follow through to the strong close it has to leave an encouraging feeling among those invested or thinking of investing.

I’d like to take some of that encouragement and apply it toward the rest of this holiday shortened week, but I still feel a need to stay on course and hope to secure premiums from existing positions this week instead of depleting cash even further.

My confidence could be supremely restored if I could see a nice assortment of assignments and rollovers on Thursday and toward that end some continuance of yesterday’s strength, even if muted, would be very nice.

While I’m not averse to adding new positions this week it may end up being among those very quiet weeks. With a fair number of expiring positions this week I really would prefer to have any remaining new positions expire at some other time. That may mean looking for new positions later in the week for those that will have their April 25, 2014 options appear only later in the week.

Also, with just a 4 day week, which is now down to 3 days, those premiums are somewhat lower, so there is reason to consider a slightly longer term contract.

For now I’d be happy just adding to the bottom line and letting the tide keep doing its thing as we all try to figure out where exactly the market is getting its cues.

If you haven’t been confused, you just haven’t been paying attention.

That may put you at an advantage.

 

 

 

 

 

Apr142014

Daily Market Update – April 14, 2014 (Close)

Daily Market Update

 

 

Daily Market Update – April 14, 2014 (Close)

There was lots of nervousness over the weekend as concerns centered on Russian intentions over eastern Ukraine.

Since that was clearly an identified risk factor during Friday’s trading no one would have blamed traders for really accelerating the selling that was already a follow through to Thursday’s sell-off.

But it didn’t happen that way despite a very large order imbalance that should have driven the market even lower at the close of trading.

I suppose that could be taken as some sort of positive sign, but I’m more focused on personal issues.

Because what also didn’t happen was assignments of shares to help re-supply cash reserves.

When assignments occur I feel emboldened and anxious to recycle that cash and put it to work making more cash. While emboldened on the one hand, I’m also cautious about dipping deeper into reserves when the assignments are fewer than expected.

They couldn’t possibly have been any fewer than this past week, thanks to about a 400 point drop to end the week.

Maybe this week will be different?

While Citigroup, which shamefully couldn’t pass the regulator’s stress tests just a couple of weeks ago has started the pre-market off on a positive note, with what appear to be genuinely good earnings, it will be a matter of wait and see.

I want the market to be able to prove itself worthy of opening new positions, but I think that if it does, I would be much happier being able to sell calls on existing positions. I would rather generate the week’s income stream in that manner instead of by buying new positions, even if there appear to be some bargains after last week’s indiscriminate and somewhat irrational rise and then fall.

As the market does open it will be interesting to see where the volatility moves and whether there is any enhancement of forward week option premiums. If I had the opportunity to find cover for existing positions my preference would be to go out into forward weeks, but a beggar shouldn’t be a chooser. I would happily take what I could get.

As with past weeks I’ll likely watch during the first hour to see whether the Citigroup bump has any legs, as early optimism has frequently given way to an excuse to sell and close positions often after the first hour of trading.

Today, and you can look at this as a positive or a negative, it took until the final hour to reverse what had been a gain of Janet Yellen proportions. But if you are looking for positive or negative signals, the rebound back in the final 30 minutes after losing almost all of the gain has to be some kind of a positive sign. It’s actually hard to remember the last time anything like that had happened.

Usually these surprises leave you poorer.

Someone was optimistic. Whether that lasts until tomorrow may be questionable, but yu have to start and take a stance somewhere.

For those who believe that late last week’s selling was related to raising money from last year’s capital gains in order to meet tax payments, the expectation would be that markets would begin climbing higher as those money raising sales are completed. Of course, it really has to be new money that drives a market higher. It can’t simply be recycling. So if people had to sell stocks to pay their taxes it’s not too likely that on the day after those taxes are paid that they would suddenly have new funds to infuse into the markets.

If the markets do reverse this quick 4% drop it will simply be because the drop itself had neither rational, technical, nor a fundamental basis. It wasn’t even based on fear or uncertainty, so there’s every bit as much reason for it to return to advancing as there is for it continuing to go lower.

Today it just decided to do both. That’s all.

 

 

Apr142014

Daily Market Update – April 14, 2014

Daily Market Update

 

 

Daily Market Update – April 14, 2014 (9:15 AM)

There was lots of nervousness over the weekend as concerns centered on Russian intentions over eastern Ukraine.

Since that was clearly an identified risk factor during Friday’s trading no one would have blamed traders for really accelerating the selling that was already a follow through to Thursday’s sell-off.

But it didn’t happen that way despite a very large order imbalance that should have driven the market even lower at the close of trading.

I suppose that could be taken as some sort of positive sign, but I’m more focused on personal issues.

Because what also didn’t happen was assignments of shares to help re-supply cash reserves.

When assignments occur I feel emboldened and anxious to recycle that cash and put it to work making more cash. While emboldened on the one hand, I’m also cautious about dipping deeper into reserves when the assignments are fewer than expected.

They couldn’t possibly have been any fewer than this past week, thanks to about a 400 point drop to end the week.

Maybe this week will be different?

While Citigroup, which shamefully couldn’t pass the regulator’s stress tests just a couple of weeks ago has started the pre-market off on a positive note, with what appear to be genuinely good earnings, it will be a matter of wait and see.

I want the market to be able to prove itself worthy of opening new positions, but I think that if it does, I would be much happier being able to sell calls on existing positions. I would rather generate the week’s income stream in that manner instead of by buying new positions, even if there appear to be some bargains after last week’s indiscriminate and somewhat irrational rise and then fall.

As the market does open it will be interesting to see where the volatility moves and whether there is any enhancement of forward week option premiums. If I had the opportunity to find cover for existing positions my preference would be to go out into forward weeks, but a beggar shouldn’t be a chooser. I would happily take what I could get.

As with past weeks I’ll likely watch during the first hour to see whether the Citigroup bump has any legs, as early optimism has frequently given way to an excuse to sell and close positions.

For those who believe that the selling was related to raising money from last year’s capital gains in order to meet tax payments, the expectation would be that markets would begin climbing higher as those money raising sales are completed. Of course, it really has to be new money that drives a market higher. It can’t simply be recycling. So if people had to sell stocks to pay their taxes it’s not too likely that on the day after those taxes are paid that they would suddenly have new funds to infuse into the markets.

If the markets do reverse this quick 4% drop it will simply be because the drop itself had neither rational, technical, nor a fundamental basis. It wasn’t even based on fear or uncertainty, so there’s every bit as much reason for it to return to advancing as there is for it continuing to go lower.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Apr142014

Dashboard – April 14 – 18, 2014

Daily Market Update

 

 

 

 

 

MONDAY:   Early indications show no follow through to late last week, but no bounce back either. My primary goal this week is to raise cash through assignments, sell calls and be better positioned to start the May 2014 cycle, rather than opening too many new positions.

TUESDAY:     Great late recovery yesterday may be the story of the week. That has to inspire some confidence and even more confusion.

WEDNESDAY:  Another impressive previous day’s close, but this time there looks to be early follow through, hopefully enough to bring us closer to rollovers and assignments to round out a diminshed new position week.

THURSDAY:    An early end to the week may get off on a slightly negative note, but after a week of pleasant surprises, anything is possible to end this monthly option cycle.

FRIDAY: 

 

 



                                                                                                                                           

 

 

 





 “SNEAK PEEK AT NEXT WEEK” APPEARS ON FRIDAYS

Sneak Peek

 

 

 

 

 

 

 

 

  

Apr132014

Weekend Update – April 13, 2014

Weekend Update

Volatility is back!

Barely a month ago there was much talk about rising volatility in the face of a declining market. Those that would tend to use charts to predict the future suggested that the then rise in volatility was the precursor of the correction we had all been expecting.

Now we’re at it again.

A month ago there were clearly identified catalysts that were weighing heavily on the markets. Disappointing economic news from China coupled with the unfolding crisis in Crimea mixed the economic realm with the geo-political one.

However, back then it appeared that the rise in volatility may have been reminiscent of previous smaller “mini-VIX” rises that occurred on a regular basis, nestled between larger rises that also came on a regular basis.

As it turned out, that was precisely the case, as the volatility rise seen at that time quickly gave way and the market did what it has repeatedly done over the past 18 months. It simply recovered from short lived setbacks and went on to new highs.

An extension of the chart presented last month to illustrate the cyclic nature of the “maxi-VIX and mini-VIX” pattern shows that would was a possible “mini-VIX” in the making turned out to be exactly that and as short lived as its predecessors and its rise ended at a level right where previous smaller VIX rises had ended.

Now, the question has evolved into whether the current rise in volatility is part of a developing “maxi-VIX” formation. The timing is right and certainly few would disagree that it has been a long time since we’ve had a downward move that could be classified as a “correction.”

The significance, of course, is that the market tends to go lower as volatility rises. While people may disagree as to whether volatility is predictive in nature or simply a by product of events, it does paint a picture of the health of markets.

The glaring difference between this month’s rise and that of last month is that there are no obvious catalysts, although that would never stop those from offering hypotheses.

The past week saw a 600 point reversal in the DJIA in the latter half of the week. That move was framed in the context of elation tied to an FOMC that appeared to be supportive of continued lower interest rates to the fears that interest rates would rise.

It was a week that saw clear flight to safety before the elation and “risk on” behavior the very next day, which then gave way to universal flight.

Whatever the cause for the abrupt turnaround it did validate the old aphorism that you shouldn’t count your chickens before they’re hatched, as this past week was a rare one in which I had no positions assigned, after having already plotted exactly how I would be spending all of that money that at mid-week I knew would be pouring in from assignments.

While the coming week may have even more of the “bargains” that have been lacking lately, I’m neither as anxious to commit toward their ownership nor do I have as much in my cash reserves as I would like to really capitalize on opportunities.

If a “maxi-VIX” pattern is in the making it would be reasonable to expect even lower prices in the coming weeks. Although this past week was fairly dreadful, mitigated somewhat by hedging positions, the 4.1% decline from the recent high is still far from satisfying the expectations of those awaiting a standard correction. I’ve been waiting for one of those so long that I may also learn the truth of another aphorism and learn to regret what I had been wishing for.

The potential benefit of increasing volatility for the option seller is that premiums are likely to perk up and that may especially become apparent for the longer term options, such as for the standard monthly variety. During a period of uncertainty the use of longer term contracts can help to ride out any near term weakness while paying you to wait.

While the aphorism “there’s no such thing as a free lunch,” may be true, at least the premiums from those option sales offer a bit of a discount.

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

In a week that was fairly indiscriminate in which stock was dragged lower the one that really received my attention was one that I was certain would be assigned on Friday. MetLife (MET) was one of those that fell victim to fears of rising interest rates and fell more sharply than it had risen on the immediately preceding belief that rates would remain low. Whether the elation or the fears were warranted sometimes it is possible to simply have an overly exaggerated reaction and MetLife had them in both directions during the week as it went along for the rides. Any respite in interest rate theories, regardless of what direction, should allow MetLife to show some stability, which in the past has made it an excellent covered option position.

Perhaps it’s just an unintended juxtaposition that would have discussion of the merits of an insurance company precede discussion of Lorillard (LO). Since Lorillard only offers monthly option contracts I’m especially drawn to it during the final week of a monthly cycle or before an ex-dividend date. In this case it’s the former, but it’s appeal goes beyond the time of month. Potentially in play as a take over target die to its reported lead in the e-cigarette area, much of that premium in its price has now been discounted, due to the tangled web of relationships between the various tobacco companies. Instead, Lorillard is simply a cash machine that is seeking to expand its user base, despite denials of that strategy.

Of course, while e-cigarettes may or may not enhance the need for fastidious oral hygiene, the real thing does and while Colgate Palmolive certainly makes products other than toothpaste, as a one time Pediatric Dentist, that’s the one that I can readily associate with Colgate. What I can also associate with shares is its dividend and potential refuge for those seeking safety. It goes ex-dividend this week and offers an attractive premium. The single caveat is that shares are trading near the yearly highs and earnings are reported the following week. However, as with some other positions being considered this week, there is added reason to consider the sale of May 2014 option contracts to secure additional premium and insulate oneself s a little from near term market weakness.

In retail, The Gap (GPS) and L Brands (LB) frequently infuriate me and delight me, respectively.

The Gap is yet another company that I had expected to be assigned this past week. For some reason it continues to provide monthly same store sales statistics and for me, their timing is usually less than fortuitous. However, The Gap always seems to have a way of reversing the disappointments and has been a very reliable covered option trade, despite the histrionics displayed by an investing community that interprets each month’s worth of data as being reflective of the company’s prospects in perpetuity.

L Brands, on the other hand is a company that simply executes among its various brands, although it, too, provides those comparable sales statistics. Down about 8% in the past week in part as a result of lower same store sales, L Brands is a company that I frequently like to consider owning during the final week of a monthly option cycle, as with Lorillard, particularly if its price has moderated. A nice dividend, good option premiums and reliable management is a good combination, especially when the market itself can’t be trusted to act rationally.

Best Buy (BBY), while certainly a volatile stock over the past few years has lately settled into somewhat of a comfort zone, punctuated by flights higher and lower. While I may not want to be holding shares in advance of earnings, that is still 5 weeks away and in the interim there’s not too much reason to believe that it will be disrupted for long from its recent path. After weakness last week it’s price is at the lower end of that range and seems to be offering a good entry point even in a rocky market.

Among those reporting earnings this week are Yahoo (YHOO) and SanDisk (SNDK).

Yahoo has fallen about 15% in the past month and it’s not likely that they will be in a position to blame the winter weather for their quarterly results. Other than the promise of riches from its piece of Ali Baba which will be coming public, it’s hard to know what drives Yahoo forward, just as it’s hard to know whether its CEO, Marissa Mayer, warrants accolades for any initiatives that are increasingly difficult to categorize. A weakening IPO market may disproportionately impact Yahoo share prospects and would certainly detract from Mayer’s scorecard.

With the option market implying an approximate 7% earnings related move in shares, there may be some opportunity in the sale of puts outside of that range, but the opportunities, that is the risk/reward balance would be more enticing if the overall market was not in continued deterioration.

SanDisk, on the other hand is also seeing an implied move of 7%, however, it does offer a slightly improved reward for the risk. Perhaps more importantly, in contrast to Yahoo, its strategic direction is clear. While Yahoo passively rescued itself from oblivion through its Ali Baba stake, SanDisk rescued itself from the oblivion of commoditization through active and creative product development. Since shares also go ex-dividend later in the month, if making this earnings trade through the sale of puts and being faced with assignment, I might consider that possibility, whereas ordinarily I would seek to roll over puts and await a price turnaround and subsequent exit from the position via expiration.

Finally, to me it almost seems ironic that during a week that saw a less than gracious welcome for IPO offerings, one of the most recently memorable disappointing IPOs, that may have signaled a market top comes to mind. Blackstone (BX) reports earnings this week and has been increasingly responsible for this era’s new initial public offerings. This week, for example, La Quinta (LQ) went public again to less than enthusiastic demand. The cynical might suggest that Blackstone’s use of the IPO process for its own properties is an example of opportunism at its very finest and might suggest that a market top is in the vicinity.

To that I would argue that opportunism at its finest is when you use IPO proceeds to completely cash out. While that may not currently be the case, one does have to wonder whether there will be enough dinghies for all of us once we come to realize what Blackstone has in the past so well demonstrated that it is capable of doing.

Meanwhile, as opposed to many earnings related  trades that I would make via the sale of put contracts and prefer to execute only as part of a very short lived strategy, Blackstone is one that I could envision a longer relationship. While in general reluctant to take possession of shares if put to me, Blackstone is one that is far more than a vehicle to exploit excesses in option premiums.

Traditional Stocks: L Brands, Lorillard, MetLife, The Gap

Momentum Stocks: Best Buy

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

Premiums Enhanced by Earnings: SanDisk (4/16 PM), Yahoo (4/15 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.

Apr112014

Week in Review – April 7 – 11, 2014

Daily Market Update

 

Option to Profit Week in Review
April 7 – 11, 2014
 
NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
7 / 7 5 8 0  / 0 7   / 0 0

    

Weekly Up to Date Performance

April 7 – 11, 2014

New purchases beat the time adjusted S&P 500 this week by 2.1% and the unadjusted S&P 500 index by 2.3% during a week that saw the highs and the lows of trading behavior.

The beat of the index was the largest that I can recall, but as always that kind of thing , especially to that magnitude, will only occur during significant market weakness.

The market showed a large adjusted loss for the week of 2.5% and an even larger 2.7% unadjusted loss for the week, while new positions lost 0.4%.

It’s like standing next to a much uglier group of people. You always do well in the comparisons.  

Existing positions out-performed the market by 0.4% for the week after unusually large beats in each of the two previous weeks, which was predominantly due to the ability to keep rolling over and selling new cover for uncovered positions. 

Since this week was an unusual one in which no positions were assigned, thank you Thursday and Friday, for positions closed in 2014 the performance is the same as last week.  

Performance exceeded that of the S&P 500 by 1.6%. They were up 3.6% out-performing the market by 90.9%.

What a week.

While there’s never a shortage of reasons to explain what is going on it’s amazing how one day’s truth becomes the next day’s fallacy.

This week in less than 24 hours, in fact, in about just 20 hours we went from the joy of believing that low interest rates were to be upon us for the foreseeable future to fretting about rising interest rates.

Or at least that’s the best interpretation that anyone could put on the 450 point turnaround from Wednesday to Thursday’s closing bell and that continued to be the story that most people were sticking with as another 140 points were dropped to end the week.

This was a good week to learn the old adage of not counting your chickens until they’re hatched, but it was also another good week to be hedged and to wonder if anyone really knows what’s going on around them.

Barely 48 hours ago it looked as if there would be loads of assignments and what wouldn’t be assigned would simply be rolled over.

How did that work out?

While I felt fortunate last week to have gotten all of those assignments and rollovers, as the market finished the week on a very strained note, this week evened things out, at least as far as assignments go. Fortunately, there was some opportunity to get a limited number of rollovers completed.

What that likely means for next week is that even with what appear to be more bargains than we’ve seen in a while, I won’t be aggressively seeking them out. I’m going to be much more interested in finding any opportunity to sell calls on existing uncovrered positions, especially since this week added a number to that list after a few weeks of reducing their numbers and put those stocks to work.

While I would have liked to have rolled over more positions as the market disappointed my hopes for a bounce higher today, sometimes there is a limit to what you believe is an acceptable reward.

Today it was difficult to find those rewards and I found myself preferring to wait until the next to see whether things get any better.

What had me a little optimistic enough to defer some rollovers was that the mid-afternoon concerns that there might be a “geo-political” event over the weekend did not drive stocks lower and news that there was a large sell order imbalance at the close also didn’t drive shares lower, either.

Those both could have easily sent the markets into a sustained sell-off, but that never happened. That has to give some reason to think that there may be a better day ahead.

The technicians on the other hand will point to the NASDAQ closing a hair below the 4000 level, which they view as portending more selling.

Still, when the market goes down is when you often most readily see the benefits of being wary, as both new positions and existing positions significantly out-performed the market, despite the fact that shares were also further lowered due to the fairly large number of ex-dividend positions this week.

At least that money will come back to the account.

Hopefully next week will see more come back into the account on paper, as shares bounce back, but more importantly some real cash hits the accounts as contracts are sold.

With markets now down about 4.5% from their highs we’re simply back to having the same discussion as about a month ago. Since then we just fell back into the same patter and exceeded the old highs.

At some point even well worn patterns find their exceptions, but there’s certainly nothing fundamentally deteriorating around us that should give cause and reason for the market to suddenly change its fundamental behavior, especially since by the mist basic of measures it isn’t expensive. 

While I started this week looking forward to having a week much like the previous one, i can’t say the same for next week. While I look forward to it, I do so in the hope that the relative out-performance continues, but at least is accompanied by some absolute gains, as well.

It’s easy to get used to those and I don’t know about you, but I need my fix.

 

  

     

This week’s details may be seen in the Weekly Performance spreadsheet * or in the PDF file, as well as as in the summary.below

(Note: Duplicate mention of positions reflects different priced lots):



New Positions Opened:  CHK, CMCSA, COH, CY, LOW, MET, SBUX

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycle:  AIG, BMY, COH, SBUX

Calls Rolled over, taking profits, into extended weekly cycle:  C (4/25), GM (5/2), GPS (4/25), VZ (4/25)

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

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

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

New STO:  EBAY, FDO, LULU, MA, PM

Put contracts sold and still open: none

Put contracts expired: none

Put contract rolled over: none

Long term call contracts sold:  none

Calls Assigned:  

Calls Expired:   BMY, CMCSA, HFC, LOW, MET, MOS, TGT

Puts Assigned:  none

Stock positions Closed to take profits:  none

Stock positions Closed to take losses: none

Calls Closed to Take Profits: none

Ex-dividend Positions:  CHK (4/10 $0.09), GPS (4/7 $0.22), MA (4/7 $0.11), VZ (4/8 $0.53), DRI (4/8 $0.55), FCX (4/11 $0.31), WFM (4/9 $0.12)

Ex-dividend Positions Next Week:  none

 

 

For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, BMY, C, CLF, CMCSA, FCX, GM,  HFC, IP, JCP, LOW, MCP,  MET, MOS,  NEM, PBR, RIG, TGT, WFM, WLT, WY (See “Weekly Performance” spreadsheet or PDF file)



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



Apr112014

Daily Market Update – April 11, 2014

Daily Market Update

 

Daily Market Update – April 11, 2014 (8:30 AM)

The Week in Review will be posted by 6 PM and the Weekend Update will be posted by noon on Sunday.

Today’s possible trade outcomes, in what may be a volatile session, include:

Assignment:  none

Rollover:  COH, LOW,

Expiration:  BMY, BMY, CMCSA, GPS, HFC, MET, MOS, SBUX, TGT

 

 

 

 

 

 

 

 

 

 

 

 

 

Apr102014

Daily Market Update – April 10, 2014 (Close)

Daily Market Update

 

 

Daily Market Update – April 10, 2014 (Close)

What a day today turned out to be.

After yesterday’s really unexpected gain, that was simply a re-affirmation of what everyone should have already known, that Janet Yellen was more dove than hawk, it looked like today may be a day of rest.

Worries about low inflation seemed to be just the thing that the market wanted to hear and confirmed that the Federal Reserve would continue to be a friend. Of course, when you come to rely on someone or something so much you also set yourself up for disappointment. It’s sort of like the crash after a sugar high.

That’s what today was , as suddenly there were fears of higher interest rates.

Where is the logic or reasoning behind that? What could have possibly changed to drive the markets to wipe out a nerly 200 point gain the day before? Granted that gain may not have been warranted, but as most everyone’s mother used to say “two wrongs don’t make a right.”

But as with most days whatever signals may be sent early in the morning before the official bell rings may not have much bearing on what’s to come. Lately there has really been a dearth of substantive news and the markets have been reacting in fairly random ways, certainly not following any patterns or themes.

Add today to that list of days.

If you listen to the talking heads you can distinguish this recent period from others in the split between those thinking we’re going higher versus those believing that we’re bound to go in the opposite direction. Contrast that to times when there is a preponderance of opinion in one direction or another.

In the latter cases it often pays to be a contrarian, but when everyone seems to disagree about what happens next the market seems to make  geniuses out of everybody, depending on what day it is. Alternating ups and downs with much fury signifying nothing.

Following today’s sell off the preponderance of thoughts was that we are now heading for a long overdue correction.

Ultimately, if I could choose what kind of a market I would like to be trading in, this is the one. Markets that go up and down, just as individual stocks that go up and down, yet don’t advance or decline very much on a net basis are absolutely the best to be owning stocks if you actively manage them and capitalize on their  perceived value to others.

Hopefully you didn’t go down as much as the market did today and hopefully you are ahead for the year. This is the kind of market where that should be an achievable goal.

With more new purchases this week in quite a while I would like to see the week come to an end with either a lot of assignments or at least rollovers, but that’s not much different from any other week. After today’s session I’d be more than happy to just get rollovers, remembering that last week ended with a sell-off, as well, and I felt relieved to have gotten out of it with a nice combination of assignments and rollovers.

What was different about today as it began was that I was anxious to see the same thing happen again next week although I had still preferred to see myself better diversified in terms of contract expiration dates.

When the day settled out I find myself still anxious to do the same next week but uncertain just how much I’m willing to commit to new positions if there aren’t sufficient assignments tomorrow. It’s again a question of are these prices now opportunities or traps, but I sure would like to have some excess capital in hand to be in a position to find out for myself.

But that too will happen again as it seems that volatility has been experiencing some kind of cyclic pattern in the past couple of years having spikes, valleys, mini-spikes, valleys and spikes again over a 4 to 6 month span.

Just about a month ago we had one of those mini-spikes and have since descended into the valley.

If the spike begins to return, as it now appears to be in the process of doing so,  there will be better opportunity to find forward week options more easily and also more opportunity to make DOH trades, which also are keyed to volatility. If that is to be the case that would also mean some market decline is ahead, as increased volatility is usually accompanied by a declining market.

It’s just an example of how you have to take the good and take the bad, as long as the net outcome is good.

On the flip side, if volatility has to be low, as long as the higher market moves aren’t happening without your participation it can just be nice going along for that ride.

But what fun is a ride without some volatility? Those roller coaster photos would never be very exciting if there was no plunge in the making.

I hope you’re having fun.