Dec152013

Weekend Update – December 15, 2013

Weekend Update

People tend to have very strong feelings about entitlements.

Prior to this week there were so many people waiting for the so-called “Santa Claus Rally” that you would have thought that it was considered to be an entitlement.

After the week we’ve just had you can probably add it to the other market axioms that haven’t really worked out this year. If anything, so far it appears that you should have taken your vacation right now along with Santa Claus, who must have not realized that his vacation conflicted with the scheduled rally. You also should probably not taken the wizened advice to vacation months ago when the traditional prevailing attitude implored you to “sell in May and go away.”

The past week saw the S&P 500 drop 1.7% to a closing level not seen in a 22 trading sessions. This week’s drop places us a full 1.8% below the recent record high. Yet, like during a number of other smallish declines in 2013, this one is also being warily eyed as being the precursor to the long overdue, but healthy, 10% decline. We have simply become so accustomed to advances that even what would ordinarily be viewed as downward blips are hard to accept.

For those that have a hard time dealing with conflict, these are not good times, as the Santa Claus Rally is being threatened by the specter of a correction in the waiting. While there’s still time for the traditional rally it’s hard to know whether Santa Claus factored the thought of an outgoing Federal Reserve Chairman presiding over his final FOMC meeting and holding his final press conference.

Oh, and then there’s also the little matter of possibly announcing the beginning of the taper to Quantitative Easing. Just a week earlier the idea that such an announcement would come in December was considered highly unlikely. Now it seems like a real possibility and not the kind that the markets were altogether comfortable with, even as they expressed comfort with the previous week’s Employment Situation Report.

While I admire Ben Bernanke and believe that he helped to rescue the world’s financial markets, it may not be far fetched to cast him as the “Grinch” who stole the Santa Claus Rally if the markets are taken off guard. Personally, I don’t believe that he will make the decision to begin the tapering, in deference to Janet Yellen, his expected successor, privilege to decide on timing, magnitude and speed.

However, I’m not really willing to commit very much to that belief and will likely exercise the same caution as I did last week.

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

Last week was one of my slowest trading weeks in a long time. Even with cash to spend there never seemed to be a signal that price stability would temper downward risk. Moving forward to this week comes the challenge of trying to distinguish between value and value trap, as many of the stocks that I regularly follow are at more appealing prices but may be at at continued risk.

With lots of positions set to expire this week, the greatest likelihood is that whatever new positions I do establish this week will be with the concomitant use of expanded weekly options or even the January 18, 2014 option, rather than options expiring this coming Friday. The options market is certainly expecting some additional fireworks this coming week as option premiums are generally considerably higher than in recent months.

Microsoft (MSFT) is one of those stocks that has come down in the past week, but like so many still has some downside potential. Of its own weight it can easily go down another 3%, but under the burden of a market in correction its next support level is approximately 8% lower. Since the market’s recent high just a few weeks ago, Microsoft has slightly under-performed the market, but it does trade with a low beta, perhaps offering some relative down side protection. As with many other stocks this week its option premium is far more generous than in the recent past making it perhaps more difficult to resist, but with that reward comes the risk.

There’s probably not much reason or value in re-telling the story of Blackberry (BBRY). Most already have an idea of how the story is going to end, but that doesn’t quiet those who dream of a better future. For some, the future is defined by a weekly option contract and Blackberry reports earnings this week. The options market is implying about a 12% move and for the really adventurous the sale of a put with a strike level almost 17% below Friday’s close could yield a weekly ROI of 1.4%. On a note that shouldn’t be construed as being positive, as the market itself appears a bit more tenuous, Blackberry’s own beta has taken a large drop in the past 3 months. The risk, still remains, however.

Although I discussed the possibility of purchasing shares of Joy Global (JOY) in last week’s article after they reported earnings, I didn’t do so, as it fell hostage to my inactivity even after a relatively large price drop. Despite a recovery from the low point of the week, Joy Global, which has been very much a range bound trading stock of late is still in the range that has worked well for covered call sales. The same is a little less so for Caterpillar (CAT) which is approaching the upper end of its range as it has worked its way toward the $87.50 level. However, with even a mild retreat I would consider once again adding shares buoyed a little bit with the knowledge that shares do also go ex-dividend near the end of the January 2014 option cycle.

Citibank (C) was another that I considered purchasing last week and following a small price drop it continues to have some appeal, also having slightly under-performed the S&P 500 in the past three weeks. However, despite its beta having fallen considerably, it is still potentially a stock that could respond far more so than the overall market. Its option premium for an at the money weekly strike is approximately 18% higher than last week, suggesting that the week may be somewhat more risky than of late.

While my shares of Halliburton (HAL) haven’t fared well in the past week, I am looking at reuniting my “evil troika” by considering purchases of both British Petroleum (BP) and Transocean (RIG), which are now also down from their recent highs. Following in a week in which Anadarko (APC) plunged after a bankruptcy court ruling from a nearly decade old case, the “evil troika” is proof that there is life after litigation and after jury awards, fines and clean up costs. While oil and oil services have been volatile of late, both British Petroleum and Transocean share with Microsoft the fact that they have already under-performed the S&P 500 during this latest downturn but have low betas, hopefully offering some relative downside protection in a faltering market. Perhaps even better is that they are beyond the point of significant downward movement emanating from judicial decisions.

Coach (COH) hasn’t been able to garner much respect lately, although there has been some insider buying when others have been disparaging the company. Meanwhile it has been trading in a fairly well defined range of late. It is a stock that I’ve owned eight times during 2013 and regret not having owned more frequently, particularly since it began offering weekly and then expanded options. Like a number of stocks that I’m considering this week, it too is still closer to the upper end of the range than I would normally initiate new positions and wouldn’t mind seeing a little more weakness.

Seagate Technology (STX) may have a higher beta than is warranted to consider at a time that the market may be labile, however it has recently traded well at the $47.50 level and offers an attractive reward for those willing to accept the frequent movements its shares make, even on an intraday basis. My expectation is that If I do consider a trade it would either be the sale of puts before Wednesday’s big events or otherwise waiting for the aftermath and looking at expanded option dates.

Finally, and yet again, it seems as if it may be time to consider a purchase of eBay (EBAY). While I’ll never really lose count of how many times I own a specific stock, going in and out of positions as they are assigned, eBay is just becoming the perfect example of a stock trading within a range. For anyone selling options on eBay, perhaps the best news was its recent downgrade that chided it for trading in a range and further expecting that it would continue range bound. Although you can’t necessarily trade on the basis of the absolute value of price movements of a stock, the next best way to do so is through buying shares and selling covered calls and then repeating the process as often as possible.

Traditional Stocks: British Petroleum, Caterpillar, eBay, Microsoft, Transocean

Momentum Stocks: Citibank, Coach, Joy Global, Seagate Technology

Double Dip Dividend: none

Premiums Enhanced by Earnings: Blackberry (12/20 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.

Dec132013

Fastenal is Fascinating

Articles

(A version of this article appeared in TheStreet)

Actually, that may be a little bit of an over-statement. Fastenal (FAST) is fairly staid, at least on a conceptual level.

In a previous life, one that included legitimate employment, I flew into a New England city on a weekly basis and would pass a Fastenal store on a lonely back road with equal frequency. On the occasional daytime landings I noticed that the parking lot and sidewalks would sometimes be packed, sometimes empty and never thought twice about it, otherwise.

During an economic period when businesses opened with great expectations and closed with great disappointment, that solitary Fastenal store was there for at least the 7 years that I drove past it. Nothing terribly fancy nor ostentatious about its appearance, just a utilitarian building, presumably delivering the literal and figurative goods.

Back then I had no idea what exactly Fastenal did, nor whether it was a publicly traded company. My assumption was that it had something to do with fasteners. “Fasten All. we fasten everything,” I envisioned their ad campaign for people in need of fasteners not knowing where else to go. I’m just smart that way.

Its location certainly couldn’t be associated with high profile consumer items and the word “technology” wasn’t anywhere to be found on the building’s edifice. But at least in the recent aftermath of the dot com bust it still had a building with its name on it. Little did I know that there were many of those buildings in the kind of places or beaten paths that I didn’t frequent very often and that they had lots more than hardware and fasteners.

Years later, when I had devoted myself to full time portfolio management I happened to pass another Fastenal site, this one in rural Delaware. On that particular day the lot was packed. A year later the same lot was empty and a few months later packed again. I may be smart in certain ways, but sometimes a sense of curiosity is helpful, as well. I don’t have much of the latter, but the laws governing osmosis are difficult to avoid.

At some point following all of those sightings I had a reasonable idea of what Fastenal was about and aware that it was about lots more than fasteners. Yet, even with a little bit of knowledge in hand I had never taken the leap and invested in shares. It’s just not one of those companies that you hear discussed very much, but it casts a fairly wide footprint among those people that actually do something tangible with their skill sets, like building and improving things that we may often take for granted.

In a world that takes great pride in and expects pant waists to ride at or above the actual waist, Fastenal was treading in a world where slippage may have been more the norm.

At some point casual observations can lead to intrigue. Certainly the idea of channel checking has some merit, but the occasional glimpse of a single store is probably not the sort of thing that channel checkers would trumpet as validating their work. Additionally, as hard as I might try to find an association or correlation to suggest that Fastenal could serve as a proxy to herald changes in GDP or broad market averages, the thesis was just lacking.

Looking at every potential investment from the perspective of a covered option writer and having started following Fastenal shares, as is my custom when my interest is piqued, for 6 months or more, I finally decided to purchase shares in June 2013 and am currently on my fifth lot of shares in that time.

The average purchase price for those 5 lots was $47.27 with the average strike price of the lots being $47.80. Based on today’s closing price of $46.41, the average price of all shares, including those of previously assigned positions is $47.45. If somehow I could magically close the book on the positions today the cumulative return would be 23.6% when shares themselves are actually trading at a loss compared to the average cost. During that same time frame the S&P 500 has advanced approximately 8.5%.

FAST ChartWhy am I telling you any of this? Sure, boasting is one reason, but despite the lack of a coherent thesis to urge the use of Fastenal as a predictive tool, what now captures my attention with regard to future opportunities is a quick look at Fastenal’s chart over the past 5 weeks.

 
The banality of variation during that time is exactly what excites a covered option strategist. While a consistent flat line wouldn’t do very much to encourage option buyers to ante up the premiums, the occasional paroxysms of price, up or down, make selling Fastenal call options an appealing complement to an overall strategy of trying to optimize share returns and dividends. More importantly, the setting of a strike price at which options are sold establishes a discipline by creating an exit point and doing what is often left undone – taking profits. While Fastenal may be staid, most of us would consider the idea of profits to be fascinating regardless of how often we would have to be subject to them.

 

FAST data by YCharts

Dec122013

A Bullish Case Going Forward

Daily Market Update

(A version of this article appeared on TheStreet.com)

The bullish case? I can’t possibly make one, having been expecting a market correction similar to that seen in April 2012 since April of this year. Besides. I’m an inveterate covered option writer and by nature see the pitfalls of every single trade that I make or suggest.

After all, why would you need protection in the form of options if your stock thesis was sound?

After nearly 30 years of marriage my wife recently told me that only about 40% of what I say turns out to actually be correct. If it was only that good when it came to selecting stocks and getting the timing just right. I’d be in the pantheon of the world’s greatest investors instead of world’s greatest husbands.

Conveniently ignoring my track record of premature pessimism, the coming week holds lots of risk for portfolios.

At a time, albeit only for a day or two, that good news was actually interpreted by the market as being good news, it was a little disconcerting that the idea of a budget deal wasn’t greeted with great enthusiasm. In fact, even the architects of the deal seemed to minimize the achievement. Considering that the current Congress would even have a difficult time agreeing on what day to celebrate New Years if it fell on a Monday, one would be excused for thinking a budget deal, well ahead of a deadline was actually monumental.

Suggesting that the market had simply discounted the deal is also convenient, but clearly without basis. Certainly watching Speaker Boehner and Majority Leader Cantor take the opportunity to rail against the Affordable Care Act, when they addressed the nation, fighting yesterday’s war instead of rallying the markets by celebrating a rare accomplishment, wasn’t helpful.

At this point, however, that’s all yesterday’s news and other than painting a picture of a squeamish market, doesn’t offer any forward looking guidance.

Where the immediate risk enters is from the coming week’s release of the FOMC minutes and perhaps more importantly Chairman Ben Bernanke’s press conference that follows.

Having sold many options with an expiration date just two days after the FOMC release, I’m forced to recall two other occasions this year when I was smugly anticipating assignment of many positions and counting the cash, when the market turned on a dime and not in the right way, either.

Just a few days ago there were very few believing that there was any possibility that the dreaded “taper” to Quantitative Easing could begin or be announced in December. That may be why last week’s good Employment Situation Report was greeted as good news, despite the fact it was good news. Without the fear of the taper beginning much sooner rather than later, the market rallied. But remember, that in the previous days the market sputtered as a synthetic version of tapering, the rising yield on 10 Year Treasury Notes showed us what is in store when the real thing hits.

While the outcome of what awaits next week isn’t pre-ordained, I like to know when obstacles are ahead and what lessons can be learned from the past.

I normally spend Wednesday’s scouting out potential new positions for next week’s purchases in anticipation of weekly option assignments and cash flowing into my account. The question is whether it’s time to preserve the cash or simply look for the bullish case that always exists somewhere, although can disappear in an instant.

Since I never look to hit homeruns, the names that I gravitate to for short term plays are only to achieve small returns and are the names so often dismissed by those with traditional mindsets.

No one thumps their chest pounding about a proposed 1% ROI for the week on their recommeed trades.

COH ChartHowever, eBay (EBAY), Coach (COH) and Caterpillar (CAT) gravitate to the top even when the foundation around them may be weakening. Not because they necessarily have good fundamental stories, after all, they have all had their recent share of derision, but because they have been reliable in their mediocrity and have simply traded in a range for an extended period of time.

 That range is precisely what makes them valuable to an option seller. While exercising a traditional buy and hold approach to these would have been an exercise in futility of the past year, a punctuated form of ownership, essentially a serial buy and hold technique, characterized by repeated purchases, writing of calls and assignments could be an exercise in delight, as seen in these returns in eBay, Caterpillar and Coach. The predictability of that range is more reliable than being able to time a rally or decline. The consistency of trading, particularly over the past nine months or so is the sort of thing that dreams are made of, if you have nothing else to dream about.

They may be boring and they may be out of favor among, but sometimes the bullish case is made out of adding together lots of baby cows.

As I look toward the challenge of the coming week and the message sent by today’s market, I take my seemingly eternal pessimism, but am not inclined to shrink back into my shell. Rather, the time seems exceddingly right for small victories shared with old friends

COH data by YCharts

Dec82013

Weekend Update – December 8, 2013

Weekend Update

Sometimes good things can go good.

Anyone who remembers the abysmal state of television during the turn of this century recalls the spate of shows that sought to shock our natural order and expectations by illustrating good things gone bad. There were dogs, girls, police officers and others. They appealed to viewers because human nature had expectations and somehow enjoyed having those expectations upended.

That aspect of human nature can be summed up as “it’s fun when it happens to other people.”

For those that loved that genre of television show, they would have loved the stock markets of the last few years, particularly since the introduction of Quantitative Easing. That’s when good news became bad and bad news became good. Our ways of looking at the world around us and all of our expectations became upended.

Like everyone else, I blame or credit Quantitative Easing for everything that has happened in the past few years, maybe even the continued death of Disco. Who knew that pumping so much money into anything could possibly be looked at in a negative way despite having possibly saved the free world’s economies? While many decried the policy, they loved the result, in a reflection of the purest of all human qualities – the ability to hate the sinner, but love the sin.

Then again, I suppose that stopping such a thing could only subsequently be considered to be good, but rational thought isn’t a hallmark of event and data driven investing.

With so many believing that all of the most recent gains in the market could only have occurred with Federal Reserve intervention, anything that threatens to reduce that intervention has been considered as adverse to the market’s short term performance. That means good news, such as job growth, has been interpreted as having negative consequences for markets, because it would slow the flow. Bad news simply meant that the punch bowl would continue to be replenished.

For the very briefest of periods, basically lasting during the time that it wasn’t clear who would be the successor to Ben Bernanke, the market treated news on its face value, perhaps believing that in a state of leadership limbo nothing would change to upset the party.

It had been a long time since good news resulted in a market responding appropriately and celebrating the good fortune by creating more fortunes. This past week started with that annoying habit of taking news and believing that only a child’s version of reverse psychology was appropriate in interpreting information, but the week ended with a more adult-like response, perhaps a signal that the market has come to peace with idea that tapering is going to occur and is ready to move forward on the merits of news rather than conjecture of mass behavior.

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

Coming off a nearly 200 point advance on Friday what had initially looked like relative bargains were now pricey in comparison and at risk to retrace their advances.

While last week was one in which dividends were a primary source of my happiness, unfortunately this week is not likely to be the same. As in life where I just have to get by on my looks, this week I’ll have to get by on new purchases that hopefully don’t do anything stupid and have a reasonable likelihood of being assigned or having their calls rolled over to another point in the near future. The principle reason for that is that most of the stocks going ex-dividend this week that have some appeal for me only have monthly options available. Since I’m already overloaded on options expiring at the end of the this monthly cycle my interests are limited to those that have weekly options. With volatility and subsequently premiums so low, as much as I’d like to diversify by using expanded options, they don’t offer much solace in their forward week premiums.

While the energy sector may be a little bit of a mine field these days, particularly with Iran coming back on line, Williams Companies (WMB) fits the profile that I’ve been looking for and is especially appealing this week as it goes ex-dividend. Williams has been able to trade in a range, but takes regular visits to the limits of the range and often enough to keep its option premium respectable. With no real interest in longer term or macro-economic issues, I see Williams for what it has reliably been over the course of the past 16 months and 9 trades. Despite its current price being barely 6% higher than my average cost of shares, it has generated about 35% in premiums, dividends and share appreciation.

Another ex-dividend stock this week is Macys (M). Retail is another minefield of late, but Macys has not only been faring better than most of the rest, it has also just hit its year’s high this past week. Ordinarily that would send me in the opposite direction, particularly given the recent rise. With the critical holiday shopping season in full gear, some will have their hopes crushed, but someone has to be a winner. Macys has the generic appeal and non-descript vibe to welcome all comers. While I wouldn’t mind a quick dividend and option premium and then exit, it is a stock that I could live with for a longer time, if necessary.

Citibank (C) is no longer quite the minefield that it had been. It may be an example of a good stock, gone bad, now gone good again. When I look at its $50 price it reminds me of well known banking analysts Dick Bove, who called for Citibank to hold onto the $50 price as the financial meltdown was just heating up. Fast forward five years and Bove was absolutely correct, give or take a 1 to 10 reverse split.

But these days Citibank is back, albeit trading with more volatility than back in the old days. I’m under-invested in the financial sector, which didn’t fare well last week. If the contention that this is a market that corrects itself through its sector rotation, then this may be a time to consider loading up on financials, particularly as there are hints of interest rate rises. Citibank’s beta inserts some more excitement into the proposition, however.

Like many others, Dow Chemical (DOW) took its knocks last week before recovering much of its loss. Also like many that I am attracted toward, it has been trading in a price range and has been thwarted by attempts to break out of that range. Mindful of a market that is pushing against its highs, this is a stock that I don’t mind owning for longer than most other holdings, if necessary. The generous dividend helps the patient investor wait on the event of a price reversal. For those a little longer term oriented, Dow Chemical may also be a good addition for a portfolio that sells LEAPs.

Like all but one of this week’s selections, I have owned shares of International Paper (IP) on a number of occasions in the past year. While shares are now well off of their undeserved recent lows there is still ample upside opportunity and shares seemed to have created support at the $45 level. My preference, as with some other stocks on this week’s list is that a little of the past week’s late gains be retraced, but that’s not a necessary condition for re-purchasing International Paper.

Baxter International (BAX) has been also in a trading range of late having been boxed in by worries related to competition in its hemophilia product lines to concerns over the impact of the Affordable Care Act’s tax on medical devices. Also having recovered some of its past week’s losses it, too, is trading at the mid-point of its recent range and doesn’t appear to have any near term catalysts to see it break below its trading range. The availability of expanded options provide some greater flexibility when holding shares.

Joy Global (JOY) had been on an upswing of late but has subsequently given back about 5% from its recent high. It reports earnings this week and its implied price move is nearly 6%. However, its option pricing doesn’t offer premiums enhanced by earnings for any strike levels beyond that are beyond the implied move. While a frequent position, including having had shares assigned this past week, the risk/reward is not sufficient to purchase shares or sell puts prior to the earnings release. However, in the event hat shares do drop, I would consider purchasing shares if it trades below $52.50, as that has been a very comfortable place to initiate positions and sell calls.

LuLuLemon Athletica (LULU) on the other hand, has an implied move of about 8% and can potentially return 1.1% even if the stock falls nearly 9%. In this jittery market a 9% drop isn’t even attention getting, but a 20% drop , such as LuLuLemon experienced in June 2013 does get noticed. Its shares are certainly able to have out-sized moves, but it has already weathered quite a few challenges, ranging from product recalls, the announced resignation of its CEO and comments from its founder that may have insulted current and potential customers. I don’t expect a drop similar to that seen in December 2012, but can justify owning shares in the event of an earnings related drop.

Riverbed Technology (RVBD), long a favorite of mine, is generally a fairly staid company, as far as staying out of the news for items not related to its core business. It can often trade with some volatility, especially as it has a habit of providing less than sanguine guidance and the street hasn’t yet learned to ignore the pessimistic outlook, as RIverbed tends to report very much in line with expectations. Recently the world of activist investors knocked on Riverbed’s doors and they responded by enacting a “poison pill.” While I wouldn’t suggest considering adding shares solely on the basis of the prompting from activist investors, Riverbed has long offered a very enticing risk/reward proposition when selling covered calls or puts. It is one of the few positions that I sometimes consider a longer term option sale when purchasing shares or rolling over option contracts.

Finally, and this is certainly getting to be a broken record, but eBay (EBAY) has once again fulfilled prophecy by trading within the range that was used as an indictment of owning shares. For yet another week I had two differently priced lots of eBay shares assigned and am anxious to have the opportunity to re-purchase if they approach $52, or don’t get higher than $52.50. While there may be many reasons to not have much confidence in eBay to lead the market or to believe that its long term strategy is destined to crumble, sometimes it’s worthwhile having your vision restricted to the tip of your nose.

Traditional Stocks: Baxter International, Dow Chemical, eBay, International Paper

Momentum Stocks: Citibank, Riverbed Technology

Double Dip Dividend: Macys (ex-div 12/11), Williams Co (ex-div 12/11)

Premiums Enhanced by Earnings: Joy Global (12/11 AM), LuLuLemon Athletica (12/12 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.

Dec12013

Weekend Update – December 1, 2013

Weekend Update

We may be on the verge of the Eve of Inflection.

Thanksgiving is that time of year when many sit back and think about all of their bounty and good fortune in the past year.

Sometimes the processes of reflection and introspection bring about inflection. Sometimes reviewing where you’ve been and where you appear to be heading are sufficient causes to consider a change in path or direction.

Nowhere is that more true than among many hedge fund managers now faced with the end of the year in sight and a stock market that has been out-performing their own trading and expertise. Many have already made the decision to increase risk taking behavior and eschew hedging in a last ditch effort to catch up to the averages and to secure their bonuses or save their jobs.

That may be more an example of desperation rather than introspection, but that kind of behavior may also herald an inflection point, not only in personal behavior but also in the very nature of the markets, especially if you take a contrarian view. When others change their behavior and begin to chase it may be time to take cover.

Sometimes that change in path is neither wanted nor welcome, but perhaps unavoidable. With the market hitting new highs on a nearly daily basis, what hasn’t escaped notice is that the rate of increase is itself decreasing. Most will tell you that in the case of a momentum stock a sign that its heady days are about to become a memory is when the rate of growth begins decreasing. In this case, it seems that it is the market as a whole whose rate of increase has recently been on the decline.

Depending on your perspective, if you are eternally bullish that decline is just a chance to digest some gains and prepare for the next leg higher. For the bears that slowing is the approach to the point of inflection.

Every roller coaster has them. Every stock market has them. On roller coasters, even when your eyes are closed you know when a change in slope direction is about to occur. It’s not quite as intuitive or simple in the stock market because human nature often believes that simple laws governing events can be suspended. No one thinks in a cautionary manner when the prevailing spirit is “laissez les bon temps rouler.”

While the overall market would likely find that a point of inflection would take it lower, there may be opportunity in stocks whose points of inflection may have been reached and are now bound to go higher or are already on their way.

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

Stanley Black and Decker (SWK) reported its earnings early in the most recent earnings season. It was the first to blame the government shutdown on its poorer than anticipated results and shares plummeted about 15%. Having recovered nearly half of that loss, with about another 6 weeks to go until the next earnings report, shares go ex-dividend this week. It has been a bit more than a year since the last time I owned shares, then too purchased in part because of its upcoming dividend. I think Stanley Black and Decker still has some room to move higher relative to the overall market and now offers good opportunity in advance of its next report.

To a degree Stanley Black and Decker and Fastenal (FAST) are related and dependent upon residential and commercial growth. This past week’s durable goods orders report didn’t necessarily send news of a robust economy, but Fastenal has been trading in a range of late which is always a reason to consider as part of a covered option strategy. I already own two lots of Fastenal, but continue to like it at its current price in anticipation that it will remain near that price.

The Gap (GPS) is one of those clothing retailers that still insists on releasing monthly comparison statistics. The past two monthly reports have sent shares moving in opposite directions as the report itself is the source of exceptionally high option premiums. With conflicting interpretations in two successive monthly reports there is little reason to believe that any volatility surrounding the monthly reports are indicative of systemic or irreparable issues at the retailer. Even with the prospect of another negative report this coming week, I don’t believe that the market will react as rashly as had occurred in October and from which point shares have now fully recovered.

While both AIG (AIG) and Halliburton (HAL) do go ex-dividend this week, their dividends alone aren’t appealing enough to focus attention on their purchase. Both, however, are sufficiently off from their recent high levels to warrant consideration. Both also represent stocks that appear to have set new baseline price levels as they have been slowly and methodically moved higher until very recently. Those are opportunities that get enhanced by the prospects of an inflection and their option premiums complemented by the possibility of also capturing dividends, albeit modest ones.

Dow Chemical (DOW) may also appear to be in the category of having fallen some from its recent high point and perhaps ready for a turnaround, with its current levels serving as that point of inflection taking the stock to a modestly higher level. While it may also be subject to some of the larger macro-economic issues such as those faced by Stanley Black and Decker and Fastenal, Dow Chemical’s dividend offers some protection during a market decline and its option premiums help to provide a cushion during either bigger picture declines or stock specific missteps.

While the previously mentioned positions are all fairly sedate choices that may be expected to do better if there is an inflection in the market, there may also be room for consideration of some more volatile additions to the portfolio, particularly as part of short term trading strategies.

Freeport McMoRan (FCX) has reversed course from its nearly 15% climb in October, simply an example of successive points of inflection in a short period of time. I think that the selling is now overdone, not only in Freeport McMoRan, but in the metals complex and that shares of Freeport are once again getting ready for another period of inflection. While I have held some positions in Freeport McMoRan much longer than my typical holding, its dividend has made the holding period more tolerable. That dividend appears to be secure, even while there is some talk of gold miners being at risk of cutting dividends if ore prices continue to decline.

For the ones really enjoying roller coaster rides, Walter Energy (WLT) may be just the thing. Its recent drop for its near term high seems to be developing a new price floor that can serve as the point of inflection taking the price higher, although I would expect that based on its recent behavior such a move might be short lived. However, that rapid alternation in direction has made Walter Energy a very good recent covered call trade, although for some the sale of puts may be a more appropriate manner to take advantage of the share’s volatility.

Finally, it’s yet another week to consider eBay (EBAY). Despite a 2.5% gain on Friday, eBay is simply proving the analysts correct, in that it continues to be a moribund stock trading in a tight range. It was decried just two weeks ago for being unable to escape from that range while the rest of the market seemed to be thriving. In the meantime, those practicing a covered call strategy and owning shares of eBay, over and over again, have fared well. Responding to the analyst’s cry, eBay did test that lower range and has now bounced back nicely to the point that it is once again in the middle of that range. That’s an ideal position to consider opening a new position or adding to an existing position.

Traditional Stocks: Dow Chemical, eBay, Fastenal, The Gap

Momentum Stocks: Freeport McMoRan, Walter Energy

Double Dip Dividend: AIG (ex-div 12/3 ), Halliburton (ex-div 12/4), Stanley Black and Decker (ex-div 12/4)

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.

Nov232013

Weekend Update – November 24, 2013

Weekend Update

Sometimes the strategy is self-defense. Sometimes it’s just doing what you need to do to keep beta at bay.

I don’t know about other people, but I’m getting a little more nervous than usual watching stocks break the 16000 level on the Dow Jones and the 1800 level on the S&P 500.

What’s next 5000 NASDAQ? Well that’s not so ludicrous. All it would take is 4 years of 6% gains and we would could set the time machine back to a different era.

In hindsight I know what I would do at the 5000 level.

For those old enough to remember the predictions of Dow 35000 all we need is a repeat of the past 56 months and we’re finally there and beyond.

This being a holiday shortened trading week adds a little bit to the stress level, because of the many axioms you hear about the markets. The one that I believe has as much validity as the best of them is that low volume can create artificially large market moves. When so many are instead focusing on the historical strength of markets during the coming week, I prefer to steer clear of any easy guide to riches.

When faced with a higher and higher moving market you could be equally justified in believing that momentum is hard to stop as you could believe that an inflection point is being approached. The one pattern that appears clear of late is that a number of momentum stocks are quickly decelerating when faced with challenges.

When I find myself a little ill at ease with the market’s height, I focus increasingly on “beta,” the measure of a stock’s systemic risk compared to the overall market. I want to steer clear of stock’s that may reasonably be expected to be more volatile during a down market or expectations of a declining market.

As a tool to characterize short term risk beta can be helpful, if only various sources would calculate the value in a consistent fashion. For example, Tesla (TSLA), which many would agree is a “momentum” stock, can be found to have a beta ranging from 0.33 to 1.5. In other words, depending upon your reference source you can walk away believing that either Tesla is 50% more volatile than the market or 67% less volatile.

Your pick.

While “momentum” and “beta” don’t necessarily have correlation, common sense is helpful. Tesla or any other hot stock du jour, despite a reported beta of 0.33, just doesn’t seem to be 67% less volatile than the overall market, regardless of what kind of spin Elon Musk might put on the risk.

During the Thanksgiving holiday week I don’t anticipate opening too many new positions and am focusing on those with low beta and meeting my common sense criteria with regard to risk. Having had many assignments to close out the November 2013 option cycle I decided to spread out my new purchases over successive weeks rather than plow everything back in at one time and risk inadvertently discovering the market’s peak.

Additionally, I’m more likely to look at either expanded option possibilities or monthly options, rather than the weekly variety this week. In part that’s due to the low premiums for the week, but also to concerns about having positions with options expiring this week caught in a possible low volume related downdraft and then being unable to find suitable new option opportunities in future weeks. If my positions aren’t generating revenue they’re not very helpful to me.

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

While eschewing risk may be in order when you think a market top is at hand, sometimes risky behavior can be just the thing when it comes to assembling a potentially profitable mix of stocks. In this case the risky behavior comes from the customers of Lorillard (LO), Philip Morris (PM) and Molson-Coors (TAP).

With word that Europeans may finally be understanding the risks associated with tobacco and may be decreasing use of their ubiquitously held cigarettes, Philip Morris shares had a rough week. The 6% drop accompanying what should be good news from a public health perspective brings shares back to a much more inviting level. Shares did successfully test an $85 support level and subsequently bounced back a bit too much for my immediate interest, but I would welcome another move toward that level, particularly as I would prefer an entry cost right near a monthly strike level.

Lorillard, on the other hand, has essentially no European exposure, but perhaps in sympathy gave up just a little bit from its 52 week high after a sustained run higher over the past 6 weeks. While there is certainly downside risk in the event of a lower moving market, shares do go ex-dividend this week and think of all of those people lighting up after a hearty Thanksgiving meal. The near term risk factors identified for Europe aren’t likely to have much of an impact in the United States market, where the only real risk factors may be use of the products.

That Thanksgiving meal may very well be complemented with a product from Molson Coors. I imagine there will also be those using a Molson Coors product while using a Lorillard product, perhaps even dousing one in the other. Shares, which are down nearly 5% from its recent highs go ex-dividend this week. Because of the strike prices available, Molson Coors is one position that I may consider using a November 29, 2013 option contract, as many more strike levels are available, something that is useful when attempting to capture both a decent option premium and the dividend, while also enticing assignment of shares.

Speaking of risky behavior, the one exception to the central theme of staying away from high beta names is the consideration of adding shares of Walter Energy (WLT). While the last 9 months have seen its shares plummet, the last three months have been particularly exciting as shares had gone up by as much as 75%. For those with some need for excitement this is certainly a candidate, with a beta value 170% greater than the average of all other recommended positions this week, the stock is no stranger to movement. But speaking of movement, although I don’t look at charts in any depth, there appears to be a collision in the making as the 50 dma is approaching the 200 dma from below. Technicians believe that is a bullish indicator. Who knows. What I do know is that the coal, steel and iron complex, despite a downgrade this past Friday of the steel sector, has been building a higher base and I believe that the recent pullback in Walter Energy is just a good opportunity for a quick trade, perhaps using the sale of puts rather than covered calls.

While not falling into the category of risky behavior, Intel’s (INTC) price movement this week certainly represents odd behavior. Not being prone to exceptionally large moves of late on Thursday it soared 3%, which by Intel’s standards really is soaring. It then fell nearly 6% the following day. While the fall was really not so odd given that Intel forecast flat revenues and flat operating profits, it was odd that the price had gone up so much the previous day. Buying on Thursday, in what may have been a frenzied battle for shares was a nice example of how to turn a relatively low risk investment into one that has added risk.

But with all of the drama out of the way Intel is now back to a more reasonable price and allows the ability to repurchase shares assigned the previous week at $24 or to just start a new position.

While I would have preferred that Joy Global (JOY) had retreated even further from its recent high, its one year chart is a nearly perfect image of shares that had spent the first 6 months of the year above the current price and the next 6 months below the current price, other than for a brief period in each half year when the relationship was reversed. Joy GLobal is an example of stock have a wide range of beta reported, as well, going from 1.14 to 2.17. However, it has also traded in a relatively narrow range for the past 6 months, albeit currently near the high end of that range.

With earnings scheduled later in the December 2013 option cycle there is an opportunity to attempt to thread a needle and capture the dividend the week before earnings and avoid the added risk. However, I think that Joy Global’s business, which is more heavily reliant on the Chinese economy may return to its recent highs as earnings are delivered.

Lowes (LOW) reported earnings this past week, and like every previous quarter since the dawn of time the Home Depot (HD) versus Lowes debate was in full force and for yet another quarter Lowes demonstrated itself to be somewhat less capable in the profit department. However, after its quick return to pricing reality, Lowes is once again an appealing portfolio addition. I generally prefer considering adding shares prior to the ex-dividend date, but the share price slide is equally compelling.

Hewlett Packard (HPQ) is one of those stragglers that has yet to report earnings, but does so this week. Had I known 35 years ago that a classmate would end up marrying its future CEO, I would likely not have joined in on the jokes. It is also one of those companies that I swore that I would never own again as it was one of my 2012 tax loss positions. I tend to hold grudges, but may be willing to consider selling puts prior to earnings, although the strike price delivering a 1% ROI, which is my typical threshold, is barely outside of the implied price move range of 8%. It’s not entirely clear to me where Hewlett Packard’s future path may lead, but with a time perspective of just a week, I’m not overly concerned about the future of the personal computer, even if Intel’s forecasts have ramifications for the entire industry.

Lexmark (LXK) is a company that I like to consider owning when there is also an opportunity to capture a dividend. That happens to be the case this week. When it announced that it was getting out of the printer business investors reacted much as you would have imagined. They dumped shares, which for most people are electronically maintained and not in printed form. After all, why own a printer company that says that printers are a dead end business? Who knew that Lexmark had other things in mind, as it has done quite nicely focusing on business process and content management solutions. While it has been prone to large earnings related moves or when shocking the investment community with such news as it was abandoning its most recognizable line of business, it has also been a rewarding position, owing to dividends and option premiums. However, always attendant is the possibility of a large news related move that may require some patience in awaiting recovery.

Finally, I find myself thinking about adding shares of eBay (EBAY) again this week, just as last week and 10 other times this past year. Perhaps I’m just obsessed with another CEO related missed opportunity. Shares didn’t fare too well based upon an analyst’s report that downgraded the company saying that shares were “range bound at $49-$54.” While that may have been the equivalent of a death siren, for me that was just validation of what had been behind the decision to purchase and repurchase shares of eBay on a regular basis. While being range bound is an anathema to most stock investors, it is a dream come true to a covered option writer.

Happy Thanksgiving.

Traditional Stocks: eBay, Intel, Lowes, Philip Morris

Momentum Stocks: Joy Global, Walter Energy

Double Dip Dividend: Lexmark (ex-div 11/26), Lorillard (ex-div 11/26), Molson-Coors (ex-div 11/26)

Premiums Enhanced by Earnings: Hewlett Packard (11/26 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.

Nov172013

Weekend Update – November 17, 2013

Weekend Update

Things aren’t always as they seem.

As I listened to Janet Yellen face her Senate inquisitors as the hearing process began for her nomination as our next Federal Reserve Chairman, the inquisitors themselves were reserved. In fact they were completely unrecognizable as they demonstrated behavior that could be described as courteous, demur and respectful. They didn’t act like the partisan megalomaniacs they usually are when the cameras are rolling and sound bites are beckoning.

That can’t last. Genteel or not, we all know that the reality is very different. At some point the true colors bleed through and reality has to take precedence.

Closing my eyes I thought it was Woody Allen’s sister answering softball economic questions. Opening my eyes I thought I was having a flashback to a curiously popular situational comedy from the 1990s, “Suddenly Susan,” co-starring a Janet Yellen look-alike, known as “Nana.” No one could possibly sling arrows at Nana.

These days we seem to go back and forth between trying to decide whether good news is bad news and bad news is good news. Little seems to be interpreted in a consistent fashion or as it really is and as a result reactions aren’t very predictable.

Without much in the way of meaningful news during the course of the week it was easy to draw a conclusion that the genteel hearings and their content was associated with the market’s move to the upside. In this case the news was that the economy wasn’t yet ready to stand on its own without Treasury infusions and that was good for the markets. Bad news, or what would normally be considered bad news was still being considered as good news until some arbitrary point that it is decided that things should return to being as they really seem, or perhaps the other way around..

While there’s no reason to believe that Janet Yellen will do anything other than to follow the accommodative actions of the Federal Reserve led by Ben Bernanke, political appointments and nominations have a long history of holding surprises and didn’t always result in the kind of comfortable predictability envisioned. As it would turn out even Woody Allen wasn’t always what he had seemed to be.

Certainly investing is like that and very little can be taken for granted. With two days left to go until the end of the just ended monthly option cycle and having a very large number of positions poised for assignment or rollover, I had learned the hard way in recent months that you can’t count on anything. In those recent cases it was the release of FOMC minutes two days before monthly expiration that precipitated market slides that snatched assignments away. Everything seemed to be just fine and then it wasn’t suddenly so.

As the markets continue to make new closing highs there is division over whether what we are seeing is real or can be sustained. I’m tired of having been wrong for so long and wonder where I would be had I not grown cash reserves over the past 6 months in the belief that the rising market wasn’t what it really seemed to be.

What gives me comfort is knowing that I would rather be wondering that than wondering why I didn’t have cash in hand to grab the goodies when reality finally came along.

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

Sometimes the most appealing purchases are the very stocks that you already own or recently owned. Since I almost exclusively employ a covered option strategy I see lots of rotation of stocks in and out of my portfolio. That’s especially true at the end of a monthly option cycle, particularly if ending in a flourish of rising prices, as was the case this week.

Among shares assigned this past week were Dow Chemical (DOW), International Paper (IP), eBay (EBAY) and Seagate Technology (STX).

eBay just continues to be a model of price mediocrity. It seems stuck in a range but seems to hold out enough of a promise of breaking out of that range that its option premiums continue to be healthy. At a time when good premiums are increasingly difficult to attain because of historically low volatility, eBay has consistently been able to deliver a 1% ROI for its near the money weekly options. I don’t mind wallowing in its mediocrity, I just wonder why Carl Icahn hasn’t placed this one on his radar screen.

International Paper is well down from its recent highs and I’ve now owned and lost it to assignment three times in the past month. While that may seem an inefficient way to own a stock, it has also been a good example of how the sum of the parts can be greater than the whole when tallying the profits that can arise from punctuated ownership versus buy and hold. Having comfortably under-performed the broad market in 2013 it doesn’t appear to have froth built into its current price

Although Dow Chemical is getting near the high end of the range that I would like to own shares it continues to solidify its base at these levels. What gives me some comfort in considering adding shares at this level is that Dow Chemical has still under-performed the S&P 500 YTD and may be more likely to withstand any market downturn, especially when buoyed by dividends, option premiums and some patience, if required.

Unitedhealth Group (UNH) is in a good position as it’s on both sides of the health care equation. Besides being the single largest health care carrier in the United States, its purchase of Quality Software Services last year now sees the company charged with the responsibility of overhauling and repairing the beleaguered Affordable Care Act’s web site. That’s convenient, because it was also chosen to help set up the web site. It too, is below its recent highs and has been slowly working its way back to that level. Any good news regarding ACA, either programmatically or related to the enrollment process, should translate into good news for Unitedhealth

Seagate Technology simply goes up and down. That’s a perfect recipe for a successful covered option holding. It’s moves, in both directions, can however, be disconcerting and is best suited for the speculative portion of a portfolio. While not too far below its high thanks to a 2% drop on Friday, it does have reasonable support levels and the more conservative approach may be through the sale of out of the money put options.

While I always feel a little glow whenever I’m able to repurchase shares after assignment at a lower price, sometimes it can feel right even at a higher price. That’s the case with Microsoft (MSFT). Unlike many late to the party who had for years disparaged Microsoft, I enjoyed it trading with the same mediocrity as eBay. But even better than eBay, Microsoft offered an increasingly attractive dividend. Shares go ex-dividend this week and I’d like to consider adding shares after a moth’s absence and having missed some of the run higher. With all of the talk of Alan Mullally taking over the reins, there is bound to be some let down in price when the news is finally announced, but I think the near term price future for shares is relatively secure and I look forward to having Microsoft serve as a portfolio annuity drawing on its dividends and option premiums.

I’m always a little reluctant to recommend a possible trade in Cliffs Natural Resources (CLF). Actually, not always, only since the trades that still have me sitting on much more expensive shares purchased just prior to the dividend cut. Although in the interim I’ve made trades to offset those paper losses, thanks to attractive option premiums reflecting the risk, I believe that the recent sustained increase in this sector is for real and will continue. Despite that, I still wavered about considering the trade again this week, but the dividend pushed me over. Although a fraction of what it had been earlier in the year it still has some allure and increasing iron ore prices may be just the boost needed for a dividend boost which would likely result in a significant rise in shares. I’m not counting on it quite yet, but think that may be a possibility in time for the February 2014 dividend.

While earnings season is winding down there are some potentially interesting trades to consider for those with a little bit of a daring aspect to their investing.

Not too long ago Best Buy (BBY) was derided as simply being Amazon’s (AMZN) showroom and was cited as heralding the death of “brick and mortar.” But, things really aren’t always as they seem, as Best Buy has certainly implemented strategic shifts and has seen its share price surge from its lows under previous management. As with most earnings related trades that I consider undertaking, I’m most likely if earnings are preceded by shares declining in price. Selling puts into price weakness adds to the premium while some of the steam of an earnings related decline may be dissipated by the selling before the actual release.

salesforce.com (CRM) has been a consistent money maker for investors and is at new highs. It is also a company that many like to refer to as a house of cards, yet another way of saying that “things aren’t always as they seem.” As earnings are announced this week there is certainly plenty of room for a fall, even in the face of good news. With a nearly 9% implied volatility, a 1.1% ROI can be attained if less than a 10% price drop occurs, based on Friday’s closing prices through the sale of out of the money put contracts.

Then of course, there’s JC Penney (JCP). What can possibly be added to its story, other than the intrigue that accompanies it relating to the smart money names having taken large positions of late. While the presence of “smart money” isn’t a guarantee of success, it does get people’s attention and JC Penney shares have fared well in the past week in advance of earnings. The real caveat is that the presence of smart money may not be what it seems. With an implied move of 11% the sale of put options has the potential to deliver an ROI of 1.3% even if shares fall nearly 17%.

Finally, even as a one time New York City resident, I don’t fully understand the relationship between its residents and the family that controls Cablevision (CVC), never having used their services. As an occasional share holder, however, I do understand the nature of the feelings that many shareholders have against the Dolan family and the feelings that the publicly traded company has served as a personal fiefdom and that share holders have often been thrown onto the moat in an opportunity to suck assets out for personal gain.

I may be understating some of those feelings, but I harbor none of those, personally. In fact, I learned long ago, thanks to the predominantly short term ownership afforded through the use of covered options, that it should never be personal. It should be about making profits. Cablevision goes ex-dividend this week and is well off of its recent highs. Dividends, option premiums and some upside potential are enough to make even the most hardened of investors get over any personal grudges.

Traditional Stocks: Dow Chemical, eBay, International Paper, Unitedhealth Group

Momentum Stocks: Seagate Technology

Double Dip Dividend: Cablevision (ex-div 11/20), Cliffs Natural (ex-div 11/20), Microsoft (ex-div 11/19)

Premiums Enhanced by Earnings: Best Buy (11/19 AM), salesforce.com (11/18 PM), JC Penney (11/20 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.

Nov142013

Cisco was a Friend of Mine

Articles

You have to be of a certain age to recognize the Cisco Kid character, but somewhat younger to be familiar with the song that paid homage to the fictional character.

After terrible earnings and poorly received guidance that stunned most everyone, Cisco (CSCO) hasn’t made many friends, but it’s still a friend of mine.

Maybe the problem is all in the name. No, not Cisco, there are worse things in the world than being confused for a food services company. Maybe the problem is in the name John Chambers.

Barely two years ago it was a John Chambers, as head of Standard and Poors’ Sovereign Debt Committee who lowered the debt rating of US Treasury debt. He wasn’t very popular at the time, as many people are put off when they can connect the dots and point fingers at the catalyst for a market wide plunge.

But the John Chambers who is the CEO of Cisco has seen his popularity mirror that of many stocks, in general, as it has gone up and down and up again.

Now it’s down.

Not too long ago John Chambers was said to be on the short list to be the Treasury Secretary in the Bush administration. He was regarded as a model CEO of the new economy and his slow drawl and transparency were welcome alternatives to the obfuscation spun by so many others. His candor during interviews in the immediate moments of earnings being released were always respected.

Then the bottom fell out from Cisco and there were calls for his ouster. Seeing share price in 2011 challenge the lows of 2009 wasn’t the sort of thing that engendered confidence and the calls went out for his head. At that point Treasury Secretary may have been looking pretty good, but that ship had long sailed.

But Chambers was eventually rehabilitated. Rising stock prices, perhaps buoyed by aggressive buybacks, will do that for you. In fact, if you conveniently have data points extend only from the lows in August 2011 to yesterday, Cisco actually out-performed the broader index.

Ironically, John Chambers is somewhat like fictional The Cisco Kid, who actually started his life as a cruel outlaw, but became regarded as being a heroic character. It’s just that Chambers can stay a hero.

Chambers has been there and done that, but now he’s back in that dark place, where people are even poking fun at his drawl and once again saying that his ship has sailed. Perhaps plunges on two successive earnings releases will create that kind of feeling. He certainly may have cut back a bit on his candor, as even his appearance yesterday offered little insight into the disappointment that awaited.

In fact, many asked, given how substantive the alterations in forward guidance were, why Cisco didn’t pre-announce or issue revised guidance weeks ago.

Personally, I don’t see the difference between getting hit with an earnings related surprise earlier, rather than when scheduled. I actually prefer knowing the date and time that i may see my shares subject to evisceration.

I owned Cisco shares and have done so on 5 different occasions this year. My shares had calls written upon them and were due to expire November 22, 2013. Barely a few hours ago they seemed certain to be assigned. Now they are more likely to be seeking rollover opportunity to a future date.

As most everyone has piled on the sell wagon, much as had occurred with Oracle (ORCL), which also had two successive share plunges after disappointing earnings, I believe that for the short term trader and particularly for the covered option trader, this most recent fall in share price is just an entry opportunity.

Yesterday, I did something that I very rarely do. I purchased shares in the after hours. Usually when I do so, in the anticipation that by morning calmer heads will prevail, I’m typically wrong. That was the case with Cisco this morning.

In addition to buying shares in the after hours, another thing that I rarely do is to purchase shares without immediately or very shortly after selling calls on those shares. In essence, both actions were counter to my overall desire to limit risk.

While I’m usually on the wrong side of momentum when entering, I look at these positions as ones to generate both capital gains from shares and option premium income, whereas for the majority of my positions I emphasize premium and dividend income.

In the case with Oracle, opportunity existed after bad news and exaggerated downward price movements. SInce I tend to be short term oriented, I only care about the opportunity and not about structural issues that may have longer term impact.

While earnings represented a risk and shares moved quite a bit more than the implied movement, suggesting that investors were surprised and unprepared, I think the risk is now greatly discounted.

I make no judgment regarding the ability of Cisco, whether under Chambers’ leadership or anyone else to compete in the marketplace and to recapture its glory or restore Chambers to a position of honor.

Instead, Cisco is nothing more than a vehicle. The Cisco Kid had his horse, John Chambers had his buybacks and for some the shares of this beleaguered company are the vehicle of the day.

Nov92013

Weekend Update – November 10, 2013

Weekend Update

Is there life after momentum slows?

There was no shortage of stocks taking large price hits last week, as earnings season had already begun its slowdown phase. However, for some of the better known momentum stocks the slightest mis-steps were all the reason necessary to flee with profits.

For those who live long enough, it should never come as a surprise that some things are just destined to slow down.

Momentum fits into that category, although based on the past week it’s more of a question of falling down than slowing down for some.

After the fact, no one seemed to be surprised.

In a week that saw a decrease in the ECB’s main lending rate that was widely described as being a “surprise'” later in the day came reports that most economists expected the cut. The market clearly didn’t, however, as the economists may have neglected to pass on their views.

And then there was a surprisingly large increase in non-farm payroll jobs. Somehow everyone was taken off guard and the market responded by interpreting good news as good news and finished the week with a flourish.

What surprised me, however, was that there was such a disconnect between the anticipated numbers and the actual report, which covered the period of the government shutdown. The disconnect had to do with methodology, as forecasts didn’t take into account that government statistics considered furloughed employees to be employed, since they were to receive back, through legislative action.

Oops.

In effect, Friday’s rally was based on a misunderstanding of methodology. It will also certainly be interesting to see what impact Ben Bernanke’s statement after the market’s close may have on Monday’s trading.

I think the unemployment rate probably understates the degree of slack in the labor market. I think the employment-population ratio overstates it somewhat, because there are important downward trends in participation

Unfortunately, Friday’s gains complicate the goal of finding bargain priced stocks in the coming week, but with a little water having been thrown on the fire there may be opportunity yet.

Everyone, including me, likes to look for clues and cues that have predictive value. Parallels are drawn at every opportunity to what we know from the past in the expectation that it can foretell the future.

For some the sudden increase in IPOs coming to market and the sudden fall of many momentum stocks heralds a market top. In hindsight, if it does occur, it will be regarded as “no surprise.” If it doesn’t occur within the attention span of most paying attention it will simply be conveniently ignored.

For others the reversal of fortune may represent values and not value traps.

But no matter what the case there is life after momentum slows. It’s just a question of accommodation to new circumstances.

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

eBay (EBAY) like so many stocks that I consider tends to trade in a range. While eBay is often criticized for being “range bound” there is some comfort in knowing that it is less likely to offer an unwanted surprise than many other stocks. My shares were assigned this past week and are now trading at the upper range of where I may normally initiate a position. However, having owned shares on ten separate occasions this year I would be anxious to do so again on the slightest of pullbacks.

Although hardly a momentum stock, Mondelez (MDLZ) had some earnings woes this past week, although it did recover a bit, perhaps simply being carried along by a rallying market. Shares are still a little higher than I would like for an entry point, but I expect that as a short term selection it will match market performance, while in a market turn-down it will exceed performance.

Fastenal (FAST) is another fairly sedate company, yet its stock often has some large moves. I see Fastenal as a leading indicator of economic activity, but also very sensitive to the economy. I think its most recent price weakness will be reversed as the impact of a resolution of the government’s shutdown trickles down to the economy. I currently own shares with a contract set to expire this week, but at this price am considering doubling down on what in essence can be a weekly option contract during the final week of the November 2013 cycle.

Deere (DE) is another range bound stock, that in hindsight I should have bought on numerous occasions over the past few months. Good option premiums, a good dividend and not facing some of the same external pressures as another favorite, Caterpillar (CAT), makes Deere a perennially good selection within its sector.

I currently own shares of both Eli Lilly (LLY) and International Paper (IP), both of which go ex-dividend this week. Unlike many other stocks that I discuss, I have not owned either on multiple occasions this year and my current shares are now below their cost. Both emerged unscathed after recent earnings reports, although both are down considerably from their recent highs and both have considerably under-performed the S&P 500 from the time for its first in a series of market highs on May 21, 2013. That latter criterion is one that I have been using with some regularity as the market has continued to reach new highs in an effort to identify potential late comers to the party.

Which finally brings me to the momentum stocks that have my attention this week, some of which may be best approached through the sale of put options and may be best avoided in a weakening market.

Much has been said of the “ATM effect” on Facebook (FB), as speculation that investors were selling Facebook shares to raise money to buy Twitter (TWTR) shares. Following an abrupt reversal during its conference call when there was a suggestion that adolescents were reducing their Facebook use shares have just not regained their traction. Sometimes it’s just profit taking and not driven by the allure of a newer stock in town. But assuming that the “ATM effect” has some validity and with a large gap between the Twitter IPO price and its 7% lower price on its first full day of trading, I can’t imagine now taking the opportunity to sell Facebook in order to purchase Twitter shares. On its own merits Facebook may be a momentum stock that has a cushion of protection until its next earnings report, unless an errant comment gets in the way, again.

Chesapeake Energy (CHK) is much higher than the level at which I last owned shares at $21. Waiting for a return has been fruitless and as a result, rather than having owned shares on 15 occasions, as in 2012, thus far, I’ve only had five bouts of ownership. With the melodrama surrounding its founder and ex-CEO in its past, Chesapeake may begin trading a bit more on fundamentals rather than hopes for a return to its glory days. at such, its price action may be less unidirectional than it has been over the past four months. After last week’s earnings report related drop, while still higher than I would like, I think there may be reason to consider a new entry, perhaps through the sale of put options.

Freeport McMoRan (FCX) is a stock that has been testing my patience through the year. More precisely, however, I’ve had no real issue with Freeport McMoRan’s leadership, in fact, given metal prices, it has done quite well. What I don’t understand is how it has been taking so long for markets to appreciate its strategic initiatives and long term strategies. For much of the year my shares have been non-performing, other than for dividend payments, but with a recent run higher some are generating option premium income streams. Despite the run higher, I am considering adding more shares as the entire metals complex has been showing strength and some stability, as well.

Finally, while I’ve said before that I don’t spend too much time looking at charts, a recent experience with Tesla (TSLA) was perhaps a good reason to at least acknowledge that charts can allow you to look at the past.

While it’s probably always a good week to be Elon Musk, relatively speaking last week wasn’t so good, as both Tesla and Solar City (SCTY) were treated harshly after earnings were released. The spin put around another reported car fire that its resultant heat could be garnered to power several mud huts didn’t give shares much of a boost, perhaps because that might have cannibalized SolarCity sales, with the two companies likely having much overlap in ownership.

Tesla reported earnings last week and took a drubbing through successive days.

A reader of last week’s article asked:

“George, what are your thoughts on a sale of Puts on TSLA which reports Tuesday?”

My response was:

“TSLA isn’t one that I follow, other than watching in awe.

But purely on a glance at this week’s option pricing the implied volatility is about 12% and you can get a 1% ROI on a strike that’s about 17% lower, currently $135

It looks as if it may have price support in the $134-$139 range, but it’s hard to know, because its ascent has been so steep that there may not be much of a real resting point.

In a very speculative portion of my portfolio I might be able to find some money to justify that trade.”

As it turned out Tesla closed the week at $137.95 and now has my attention. You do have to give some credit to its chart on that one. WIth disappointment over its sales, supply chain issues and reports of car fires and even Elan Musk suggesting that “Tesla’s stock price is more than we have any right to deserve,” it has fallen by nearly 21% from the time of that comment, barely 2 weeks prior to earnings. Although to be entirely fair shares did fully recover from a 7.5% decline in the aftermath of the statement in advance of earnings.

While still not knowing where the next resting point may be in the $119-$122 range, representing as much as another 13% price drop. With earnings out of the way to enhance option premiums the risk-reward proposition isn’t as skewed toward reward. However, for those looking to recapture of bit of their own momentum, despite the realization that the end may be near, a put sale can return an ROI of approximately 1.4% at a strike price nearly 6% below Friday’s close is not breached.

The nice thing about momentum slowing is that if you fall the floor isn’t as far away as it used to be.

Traditional Stocks: Deere, eBay, Fastenal, Mondelez

Momentum Stocks: Chesapeake Energy, Facebook, Freeport McMoRan, Tesla

Double Dip Dividend: Eli Lilly (ex-div 11/13), International Paper (ex-div 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.

Disclosure: I am long CAT, CHK, DE, FAST, FCX, IP, LLY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Nov82013

A Put Primer

Articles

There was a lot of stress this week over the sale of puts on Abercrombie and Fitch.

Most of the stress was by me. Not because of the ridiculous price action, which is standard fare for these shares, but because I had to figure out how best to track the outcome of the trade when some people. including me had early assignment of the puts, while others did not and were heading toward assignment at the end of the day.

That also means different trading strategies because some would potentially have shares in hand upon which to sell calls today, while others would be faced with the decision to either roll over the puts or await assignment and hope to be able to sell calls on Monday.

The problem with that latter is that it’s hard to predicate anything on a hope, especially since today was an ideal day to rollover the puts as ANF had a large share gain intra-day. Who knows what Monday brings?

My guess, but that’s all it can ever be is that if the market is sound next week ANF will make up some more ground in advance of its earnings report on November 21, 2013.

Between the known fact that shares were stronger today and the unknowns awaiting next week, compounded by what ridiculous more news may come at earnings makes the gift horse especially appealing.

Later I’ll show you why improving price was important using some screenshots I took during the day while following shares looking for opportiunities.

But since this is a primer, let’s start at the beginning.

To start, a put is an option contract that when bought is a statement that the buyer expects the shares to go down in value, in which case the value of his option will increase.

The buyer typically wants to trade in and out of option positions, because their money is greatly leveraged. They don’t usually want to be assigned and have to take over ownership of shares.

The put seller is usually the more bullish participant in the trade. They think that the shares may go up or down, but if they go down they’re not likely to go below the strike price. The big caveat is that put sellers should be willing to own the shares just in case they are assigned and they end up owning them, as happened to me and a small number of other subscribers.

In the case of Abercrombie and Fitch its shares plummeted on the day before their planned Analysts’s Meeting, the first they had held in over two years.

On the evening before that meeting they presented revised guidance and it wasn’t very good news. I hate revised guidance, even when it’s good. There’s no way to prepare for it unless you have inside information.

I almost purchased shares in the after-hours, but decided to wait until the next day.

At first, when trading started I was upset for having waited as the price significantly improved but was still low enough to seem to warrant a position. However, just to hedge, I decided to use an out of the money put in anticipation of some continued price drop.

As an aside, but an appropriate one, I think the current market may be an appropriate one for the use of more put sales rather than initiating new positions and covered calls. That’s simply an expression of a bearish sentiment. Even though I’ve been cautious and have kept cash reserves, I’ve not used the SOS strategy as a further expression of bearishness, but I think there may be a greater role for put sales now.

Obviously, understanding them is requisite for their use.

But, back to Abercrombie and Fitch. Thanks to the utterings of the CEO, who is not terribly regarded as a person, due to his rather odd behavior and opinions,  shares suddenly went much lower during mid-day trading and then everyone on television just piled on. If you ever have any doubt about the power of basic cable television, just watch the ticker and price changes as specific stocks are discussed, especially when event driven. But even then, the continued drop surprised me, thinking that an additional 2% drop was enough of a cushion after an already 5% drop in shares.

So shares dropped even more. Normally, the escape strategy when having sold puts that are now in the money is to simply roll them over at the same strike price, assuming you continue to be reasonably bullish. Otherwise, you can roll down to a lower strike price, but that will cut into your net premium, perhaps even causing a “net debit” from the transaction.

However, Abercrombie and Fitch made any kind of transaction difficult because the more it was in the money the less became the time value of the contracts, being instead made up almost entirely of intrinsic value, that is the difference between the strike and the current value. To make it worse, there was a large gap between the bid and ask prices.

The net result was that at one point earlier in the day a rollover trade would have resulted in incurring a Net Debit.

You don’t want a net debit. You would prefer to make money, even if it’s not that much money.

In this scenario you would have still been obligated to buy shares for $35.50 a week later, but it would have cost you $0.20 of your earlier option premium profit.

As long time subscribers know, I have patience.

In this case the patience was measured in hours and not option cycles.

 

 

 

In the meantime, though the price of shares started recovering in the late morning, the Net Debit went only to break-even.

The differential between the expiring contract and that of the next week  saw naturally more erosion in the expiring contract as price moved in a direction toward the strike price. Obviously, that’s not something in your control. It’s just a measured risk, knowing that even if nothing is done you’ll end up with shares in your account on Monday morning and then just do with them as is done with every other holding.

But simply being at break-even is fine if the brokerage is your uncle. Otherwise, it’s not very satisfying.

 

Then it went to a Net Credit.

Bingo.

That’s what you want. In fact, you can see from the timestamp on this image and the previous one, that even though the price of shares was more favorable earlier, the premium differential actually improved as the clock was ticking, even though shares moved away from the strike.

 

 

 

The problem was that the bid-ask spread was still on the large side, leaving only a small net profit

Here’s where it’s helpful to look at the call side of things.

Even though pricing isn’t always rational, it’s reasonable to expect that whatever irrationality there is would be equally distributed between call buyers and put buyers.

Hard to prove, but equally hard to argue.

On the call side of things the equivalent trade, that is selling the November 16, 2013 $35.50 call was yielding a bid of $0.18 with a more normal differential between bid and ask.

So in placing a trade to rollover the puts, rather than using the bid on the sale and the ask on the purchase (as outlined here), for a Net Credit of $0.08, use an intermediate figure determined on the call side of the aisle.

For those that haven’t owned Abercrombie and Fitch in the past, it is a stock that can be very rewarding with a modicum of patience and has been ideally suited for a covered option strategy, but all in all I would much rather see put sales expire and simply decide whether I want to pursue the stock on my own terms the following week, as was recently done with Coach, another company that takes big price hits, but always seems to work its way back into good graces.

In general, if your put sale shares are just slightly in the money you are usually much better off simply rolling over the puts just as you would normally rollover a call position sold on shares that you own.

Unfortunately, I don’t have it documented with screenshots, but for my personal trades some of you may have noticed that I’ve been doing that with the ProShares Ultra Silver ETN (AGQ) speculative hedging position. In this case using a $20 strike price I haven’t really cared too much whether the price was above or below the strike. I just allowed events to dictate whether rolling over when expecting a price increase in silver or sitting on the sidelines when expecting price increases. As with stocks, it’s all about being able to do the trades on a serial basis and watching the premiums add up.

When history repeats itself it can be a beautiful thing.

If this is your first foray with Abercrombie and Fitch I believe that this is a good price at which to do it over and over again, whether through the sale of puts of through the use of covered calls.

I’ll leave the personal feelings about the CEO to others, as long as there is a way to milk some dividends from this pig.

Nov22013

Weekend Update – November 3, 2013

Daily Market Update

Some things are just unappreciated until they’re gone.

If you can remember those heady days of 2007, it seemed as if every day we were hitting new market highs and everyone was talking about it when not busy flipping houses.

Some will make the case that is the perfect example of a bubble about to burst, similar to when a bar of gold bullion appears on the cover of TIME magazine, just in time to mark the end of a bull run.

On the other hand, when everyone is suddenly talking about perhaps currently being in a bubble it may be a good time to plan for even more of a good thing.

That’s emblematic of the confusion swirling in our current markets. Earnings are up. Better than expected by most counts, yet revenues are down. The stock market can do only one thing and so it goes higher.

In case you haven’t been paying attention, 2013 has been a year of hitting record after record. Yet the buzz is absent, although house flipping is back. Not that I go to many social events but not many are talking about how wild the market has been. That’s markedly different from 2007.

Listening to those who purport to know about human behavior and markets, that means that we are not yet in a stock market bubble and as such, the market will only go higher, yet that’s at odds with the rampant bubble speculation that is being promoted in some media.

I’m a little more cynical. I see the paucity of excitement as being reflective of investors who have come to believe that consistently higher markets are an entitlement and have subsequently lost their true value. No one seems to appreciate a new record setting close, anymore. The belief in the right to a growing portfolio is no different from the right to use a calculator on an exam. Along with that right comes the loss of ability and appreciation of that ability.

Without spellchecker, the editors at Seeking Alpha would have a hard time distinguishing me from a third grader, but spelling really isn’t something I need to due. It’s just done for me.

While many were unprepared in 2007 because they were caught up in a bubble, 2013 may be different. In 2007 the feeling was that it could only get better and better, so why exercise caution? But in 2013 the feeling may be that there is nothing unusual going on, so what is there to be cautious about?

AS markets do head higher those heights are increasingly met with ennui instead of wonder and awe. It’s barely been more than five years since we last felt the wrath of an over-extended market but I’m certain that the new daily records will be missed once they’re gone.

As a normally cautious person when it comes to investing, but not terribly willing to sacrifice returns for caution my outlook changes with frequency as new funds find their way into my account after the previous week’s assignment of options I had sold.

This past week I didn’t have as many assignments as I had expected owing to some late price drops on Friday, so I’m not as likely to go on a spending spree this coming week, as I don’t want to dig deeply into my cash reserve. This week I’m inclined to think more in terms of dividend paying stocks and relatively few higher beta names, although opportunity is situational and Monday morning’s opening bell may bring surprise action. I appreciate surprise and for the record, I appreciate every single bit of share appreciation and income that comes my way as a gift from this market.

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

I currently own shares of MetLife (MET) and have done so several times this year. MetLife reported earnings this past week. They reported a nearly $2 billion turnaround in profits, but missed estimates, despite strength in every metric. They re-affirmed that a lower interest rate environment, as might be expected with a continuation of Quantitative Easing, could impact its assets’ performance in the coming year. That was the same news that created a buying opportunity in the previous quarter, so it should not have come as too much of a surprise. What did, however come as a surprise was the announcement that MetLife would no longer be offering earnings per share guidance. According to its CEO “we will instead expand our discussion of key financial metrics and business drivers, creating a more informed view of MetLife’s future prospects.” The price drop and it’s ex-dividend date this week make it a likely candidate for using my limited funds this week.

I’ve long believed that Robert ben Mosche, CEO of AIG (AIG) was something of a saint. Coming out of comfortable retirement in Croatia to attempt an AIG rescue, he continued on his quest even while battling cancer and still found the time to re-pay AIG’s very sizeable debt to US taxpayers. Who needs that sort of thing when you can live like royalty off the Mediterranean coast?

AIG was punished after reporting earnings this past week. It’s hard to say whether the in line earnings, but slightly lower revenue was to blame for the nearly 7% drop or whether joining forces with MetLife was to blame. Not that they literally joined forces, it’s just that ben Mosche announced that AIG will no longer comment on its “aspirational goals,” which was a way of saying that they too were no longer going to provide guidance. I haven’t owned shares in 2 months and that was at a lower price point than even after the large Friday drop, but I think the opportunity has re-arrived.

Wells Fargo (WFC) goes ex-dividend this week and as much as I’ve silently prayed for its share price to drop back to levels that I last owned them, it just hasn’t worked out that way. To a large degree Wells Fargo has stayed above the various banking controversies and has deflected much of the blame and scrutiny accorded others. At some point it becomes clear that prices aren’t likely to drop significantly in the near term, so it may be time to capitulate and get back on the wagon. However, what does give me some solace is that shares have trailed the S&P 500 during the three time frames that I have been recently using, each representing a near term top of the market; May 21, August 2 and September 19, 2013.

In the world of big pharma, Merck (MRK) has shared in little of the price strength seen by some others. In fact, of late, the best Merck has been able to do to prompt its shares higher have all come on the less constructive side of the ledger. Only the announcement of workforce reductions and other cost cutting steps have been viewed positively.

But at some point a value proposition is created which isn’t necessarily tied to pipelines or other factors pertinent to long term price health. In this case, a quick 7% price drop is enough to warrant consideration of a company paying an attractive dividend and offering appealing enough option premiums to sustain interest in shares even if they stagnate while awaiting the next price catalysts. Besides, if you’re selling covered calls, there’s nothing better than share price stagnation.

What is a week without drawing comparisons between Michael Kors (KORS) and Coach (COH)? Coach has become everyone’s favorite company to disparage, although on any given day it may exchange places with Caterpillar. Kors, is of course, the challenger that has displaced Coach in the hearts of investors and shoppers. Having sold Coach puts in advance of earnings and then purchasing shares even after those expired, those were assigned this past week. However, at this price level Coach is still an appealing covered option purchase and well suited for a short term strategy, even if there is validity to the thesis that it is ceding ground to Kors.

Kors, on the other hand, is doing everything right, including entering the S&P 500. It’s hard not to acknowledge its price ascent, even after a large secondary offering. While I know nothing of fashion and have no basis by which to compare Coach and Kors, I do know that as Kors reports earnings this week the option market is implying approximately 7.5% price move in either direction. However, anything less than a 10% decline in price can still deliver a 1% ROI

Williams Companies (WMB) is one of those companies that seems to fly under the radar. Although I’ve owned shares many times there has never been a reason compelling me to do so on the basis of its business fundamentals. Instead, ownership has always been prompted by an upcoming dividend or a sudden price reversal. In this case I just had shares assigned prior to earnings, which initially saw a big spike in price and then an equally large drop, bringing it right back to the level that I have found to be a comfortable entry point.

Riverbed Technology (RVBD) reported earnings last week and I did not purchase additional shares or sell puts, as I thought I might. Too bad, because the company acquitted itself well and shares moved higher. I think that shares are just starting and while RIverbed Technology has probably been my most lucrative trading partner over the years, purely on the basis of option premiums, this time around I am unlikely to write call options on all new shares, as I think $18 is the next stop before year end, particularly if the overall market doesn’t correct.

What can anyone add to the volumes that have been said about Apple (AAPL) and Intel (INTC)? Looking for insights is not a very productive endeavor, as the only new information is likely to currently exist only as insider information. Both are on recent upswings and both have healthy dividends that get my attention because of their ex-dividend dates this week. Intel offers nothing terribly exciting other than its dividend, but has been adding to its price in a stealth fashion of late, possibly resulting in the assignment of some of my current shares that represent one of the longest of my holdings, going back to September 2012. While I have always liked Intel it hasn’t always been a good covered call stock because when shares did drop, such as after earnings, the subsequent price climbs took far too long to continually be able to collect option premiums. However, without any foreseeable near term catalysts for a significant price drop it offers some opportunities for a quick premium, dividend and perhaps share appreciation, as well.

Finally, in its short history of paying dividends Apple’s shares have predominantly moved higher after going ex-dividend, although there was one notable exception. Given the factors that may be supporting Apple’s current price levels, including pressure from activist investors and Apple’s own buybacks, I’m not overly concerned about the single historical precedence and think that the triumvirate of option premium, dividend and share appreciation makes it a good addition to even a conservative portfolio.

Traditional Stocks: AIG, Merck, Williams Companies

Momentum Stocks: Coach, Riverbed Technology

Double Dip Dividend: Apple (ex-div 11/6), Intel (ex-div 11/5), MetLife (ex-div 11/6), Wells Fargo (ex-div 11/6)

Premiums Enhanced by Earnings: Michael Kors (11/5 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.

Oct292013

Implied Price Moves

Articles

On rare occasion I actually get some indication that someone is reading these articles.

In this case I was recently asked a question about “implied moves,” citing the fact that I refer to that concept with some frequency in articles. For me, that implied someone actually having read at least one article. The use of the word “frequency” further implied that I did so either on multiple occasions in a single article or perhaps in many articles.

That which is implied isn’t necessarily precise.

There are lots and lots of different metrics and measures that are used in assessing stock charts and stock fundamentals. I have long maintained doubts about the validity of many of those measures, at  least the ones most frequently cited and presented. It always appears that for every expert’s interpretation of data there is another equally esteemed expert who takes an opposing position.

For someone who had spent about 20 years in academic environments and who respects the “scientific method,” I prefer common sense approaches to investing.

You can be certain that for the widely used tools and measures everyone under the sun has already applied the tools and the chances of an eye popping discovery that flies below the radar is not likely. So why bother?

The same may or may not be true of more closely held metrics or proprietary tools. Presumably the PhDs in statistics, physics and applied mathematics are being paid princely sums for their algorithms because they produce results at the margins.

If you followed the announcement of this year’s Nobel Prize in Economics you may have thought it to be ironic that the prize was shared by Eugene Fama and Robert Schiller. The ironic part is that one was recognized for his work supporting rational markets, while the other was awarded on the basis of endorsing irrational markets.

So clearly black and white can be the same.

While I only passingly glance at charts and various measures and completely ignore the traditional measures used to characterize options, better known as “The Greeks,” I do consider the option market equivalent of crowd sourcing, better known as a measure of a stock’s  “implied price move.”

While I believe that the option market usually gets it wrong, which is a good thing, because those are the people that are buying the goods that you’re selling, the crowd does provide some guidance. As in real life, it’s often good to stay away from the crowd, despite the fact that crowds can create a sense of comfort or security.

Or frenzy.

In this case the guidance provided by option market participants is an estimation of how much the option market believes a stock’s price will move during the period in question by looking at both the bull and the bear perspective as based on the most fundamental of all criterion.

What is considered is the price that someone is willing to pay to either buy a call option or a put option at a specific strike price.

I only use “implied movement” when a known event is coming, such as earnings being released. I want to get an idea of just how much the option market believes that the stock is likely to move based on the event that is going to occur.

In articles I refer to the phenomenon of “Premiums Enhanced by Earnings” or “PEE.” During such times the uncertain way in which stocks may respond to earnings news drives option premiums higher. It’s all a case of risk and reward.

But because earnings introduces additional risk I look for a measure that may suggest to me that I have an advantage over the crowd.

The calculation of the “implied move” is very simple, but is most accurate for a weekly contract, because that minimizes the impact of time on option premium.

To begin, you just need to identify the strike price that is most close to the current share price and then find the respective call and put bid premiums. By adding those together and dividing by the strike price you arrive at the “implied move.” which tells you that the option market is anticipating a move in either direction of that magnitude.

IMPLIED PRICE MOVE = (Call bid + put bid)/Strike price,  where Strike price is that closest to current share price

The implied move is expressed as a percentage.

Using Facebook as an example, the graphic below was from the day prior to the announcement of earnings and with approximately 3 1/2 days left to expiration.

Facebook was trading at $49.53 and the $49.50 November 1, 2013 call option bid was $3.10, while the corresponding put option bid was $3.05



At a point that shares were trading at $49.53 and using the $49.50 strike level, the combined call and put premium of $6.20 would result in an implied move of approximately 12.5%. That would mean that the stock market was anticipating an earnings related trading range from approximately $43 to $56.

Great, but how do we capitalize on that bit of information, which may or may not have validity, especially since it is based on prices that in part are determined by option buyers, who frequently get it wrong?

I use my personal objective, which is a 1% ROI for each new trade.

In the case of Facebook, whether buying shares accompanied by the sale of calls or simply selling puts, the ROI is based upon the premiums received, plus or minus capital gains or losses from the underlying shares and of course, trading costs.

In general, there is a slight advantage in earnings related trades to the sale of puts rather than using a covered call strategy. Doing so also tends to reduce transaction costs.

In the case of Facebook, the first strike price that would yield a 1% ROI is at $42, because the bid premium at that strike is $0.44 and the amount of cash put at risk is $42.

The key question then is whether that 1% ROI could be achieved by a position that is outside of the implied range. The further outside that range the more appealing the trade becomes.

Again, in this case, with shares trading at $49.53, it would require a 15.2% decline in price to trigger the possibility of assignment. That is outside the range that the crowd believes will be the case.

In this case, I’m currently undecided as to whether to make this trade because of other factors.

There are almost always other factors.

First, the positive factor is that I prefer to sell puts on shares that have already started showing weakness in advance of earnings. That increases the put premiums available and perhaps gets some of that weakness out of its system, as the more squeamish share holders are heading for the exits in a more orderly fashion, rather than doing it as part of a rushing crowd.

The negative factor is that tomorrow is another event that may impact the overall market. That is the release of the FOMC minutes. Although I don’t expect much of a reaction in the event of a surprise or nuanced language the market could drag Facebook along with it, possibly compounding any earnings related downdraft.

So in this case I’m likely to wait until after 2 PM tomorrow to make a decision.

By that time the likelihood of any FOMC related influence will be known, but there will also need to be a recalculation of implied move as premiums will change both related to any changes in share price, as well as to decreased option value related to the loss of an additional day of premium.

In general, everything else being equal, waiting to make such a trade reduces the ROI or increases the risk associated with the trade.

Aren’t you glad you don’t read these articles?

Oct272013

Weekend Update – October 27, 2013

Weekend Update

Watching Congressional testimony being given earlier this week by representatives of the various companies who were charged with the responsibility of assembling a functioning web site to coordinate enrollment in the Affordable Care Act it was clear that no one understood the concept of responsibility.

They did, however, understand the concept of blame and they all looked to the same place to assign that blame.

As a result there are increased calls for the firing or resignation of Kathleen Sebelius, Secretary of Health and Human Services. After all, she, in essence, is the CEO.

On the other hand, it was also a week that saw one billionaire, Bill Gross, the “Bond King” of PIMCO deign to give unsolicited advice to another billionaire, Carl Icahn, in how he should use his talents more responsibly. But then again, the latter made a big splash last week by trying to convince a future billionaire, Tim Cook, of the responsible way to deal with his $150 billion of cash on hand. Going hand in hand with a general desire to impart responsibility is the tendency to wag a finger.

Taking blame and accepting responsibility are essentially the same but both are in rare supply through all aspects of life.

This was an incredibly boring week, almost entirely devoid of news, other than for earnings reports and an outdated Employment Situation Report. The torrent of earnings reports were notable for some big misses, lots of lowered guidance and a range of excuses that made me wonder about the issue of corporate responsibility and how rarely there are cries for firings or resignations by the leaders of companies that fail to deliver as expected.

For me, corporate responsibility isn’t necessarily the touchy-feely kind or the environmentalist kind, but rather the responsibility to know how to grow revenues in a cost-efficient manner and then make business forecasts that reflect operations and the challenges faced externally. It is upon an implied sense of trust that individuals feel a certain degree of comfort or security investing assets in a company abiding by those tenets.

During earnings season it sometimes becomes clear that living up to that responsibility isn’t always the case. For many wishing to escape the blame the recent government shutdown has been a godsend and has already been cited as the reason for lowered guidance even when the business related connection is tenuous. Instead of cleaning up one’s own mess it’s far easier to lay blame.

For my money, the ideal CEO is Jamie Dimon, of JP Morgan Chase (JPM). Burdened with the legacy liabilities of Bear Stearns and others, in addition to rogue trading overseas, he just continues to run operations that generate increasing revenues and profits and still has the time to accept responsibility and blame for things never remotely under his watch. Of course, the feeling of being doubly punished as an investor, first by the losses and then by the fines may overwhelm any feelings of respect.

Even in cases of widely perceived mismanagement or lack of vision, the ultimate price is rarely borne by the one ultimately responsible. Instead, those good earnings in the absence of revenues came at the expense of those who generally shouldered little responsibility but assumed much of the blame. While Carl Icahn may not be able to make such a case with regard to Apple, the coziness of the boardroom is a perfect place to abdicate responsibility and shift blame.

Imagine how convenient it would be if the individual investor could pass blame and its attendant burdens to those wreaking havoc in management rather than having to shoulder that burden of someone else’s doing as they watch share prices fall.

Instead, I aspire to “Be Like Jamie,” and just move on, whether it is a recent plunge by Caterpillar (CAT) or any others endured over the years.

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

Andrew Liveris, CEO of Dow Chemical (DOW) was everyone’s favorite prior to the banking meltdown and was a perennial guest on financial news shows. His star faded quickly when Dow Chemical fell to its lows during the financial crisis and calls for his ouster were rampant. Coincidentally, you didn’t see his ever-present face for quite a while. Those calls have halted, as Liveris has steadily delivered, having seen shares appreciate over 450% from the market lows, as compared to 157% for the S&P 500. Shares recently fell after earnings and is closing in to the level that I would consider a re-entry point. Now offering weekly option contracts, always appealing premiums and a good dividend, Dow Chemical has been a reliable stock for a covered option strategy portfolio and Andrew Liveris has had a reliable appearance schedule to match.

A company about to change leadership, Coach (COH) has been criticized and just about left for dead by most everyone. Coach reported earnings last week and for a short while I thought that the puts I had sold might get assigned or be poised for rollover. While shares recovered from their large drop, I was a little disappointed at the week ending rally, as I liked the idea of a $48 entry level. However, given its price history and response to the current level, I think that ownership is still warranted, even with that bounce. Like Dow Chemical, the introduction of weekly options and its premiums and dividend make it a very attractive stock in a covered call strategy. Unlike Dow Chemical, I believe its current price is much more attractive.

I’m not certain how to categorize the CEO of Herbalife (HLF). If allegations regarding the products and the business model prove to be true, he has been a pure genius in guiding share price so much higher. Of course, then there’s that nasty fact that the allegations turned out to be true.

Herbalife reports earnings this week and if you have the capacity for potential ownership the sale of out of the money puts can provide a 1.2% return even of shares fall 17%. The option market is implying a 10% move. That is the kind of differential that gets my attention and may warrant an investment, even if the jury is still out on some of the societal issues.

In the world of coffee, Dunkin Brands (DNKN) blamed K-Cups and guided toward the lower end of estimates. Investors didn’t care for that news, but they soon got over it. The category leader, Starbucks (SBUX) reports earnings this week. I still consider Howard Schultz’s post-disappointing earnings interview of 2012 one of the very best in addressing the issues at hand. But it’s not Starbucks that interests me this week. It’s Green Mountain Coffee Roasters (GMCR). Itself having had some questionable leadership, it restored some credibility with the appointment of its new CEO and strengthening its relationships with Starbucks. Shares have fallen about 25% in the past 6 weeks and while not reporting its own earnings this week may feel some of the reaction to those from Starbucks, particularly as Howard Schultz may characterize the nature of ongoing alliances. Green Mountain shares have returned to a level that I think the adventurous can begin expressing interest. I will most likely do so through the sale of puts, with a strike almost 5% out of the money being able to provide a 1.2% ROI. The caveat is that CEO Brian Kelley may soon have his own credibility tested as David Einhorn has added to his short position and has again claimed that there are K-cup sales discrepancies. Kelley did little to clear up the issue at a recent investor day meeting.

Baxter International (BAX) has held up reasonably well through all of the drama revolving around the medical device tax and the potential for competition in the hemophilia market by Biogen Idec (BIIB). WIth earnings out of the way and having approached its yearly low point I think that it is ready to resume a return to the $70 range and catching up to the S&P 500, which it began to trail in the past month when the issues of concern to investors began to take root.

MetLife (MET) has settled into a trading range over the past three months. For covered calls that is an ideal condition. It is one of those stocks that I had owned earlier at a much lower price and had assigned. Waiting for a return to what turned out to be irrationally low levels was itself irrational, so I capitulated and purchased shares at the higher level. In fact, four times in the past two months, yielding a far better return than if shares had simply been bought and held. Like a number of the companies covered this week it has that nice combination of weekly option contracts, appealing premiums and good dividends.

Riverbed Technology (RVBD) reports earnings this week, along with Seagate Technology (STX). Riverbed is a long time favorite of mine and has probably generated the greatest amount of premium income of all of my past holdings. However, it does require some excess stomach lining, especially as earnings are being released. I currently own two higher cost lots and uncharacteristically used a longer term call option on those shares locking in premium in the face of an earnings report. However, with recent price weakness I’m re-attracted to shares, particularly when a 3 week 1.7% ROI can be obtained even if shares fall by an additional 13%. In general, I especially like seeing price declines going into earnings, especially when considering the sale of puts just in advance of earnings. Riverbed Technology tends to have a history of large earnings moves, usually due to providing pessimistic guidance, as they typically report results very closely aligned with expectations.

Seagate Technology reports earnings fresh off the Western Digital (WDC) report. In a competitive world you might think that Western Digital’s good fortunes would come at the expense of Seagate, but in the past that hasn’t been the case, as the companies have traveled the same paths. With what may be some of the surprise removed from the equation, you can still derive a 1% ROI if Seagate shares fall less than 10% in the earnings aftermath through the sale of out of the money put contracts.

ConAgra (CAG) and Texas Instruments (TXN) both go ex-dividend this week. I think of them both as boring stocks, although Texas Instruments has performed nicely this year, while ConAgra has recently floundered. On the other hand, Texas Instruments is one of those companies that has fallen into the category of meeting earnings forecasts in the face of declining revenues by slashing worker numbers.

Other than the prospect of capturing their dividends I don’t have deeply rooted interest in their ownership, particularly if looking to limit my new purchases for the week. However, any opportunity to get a position of a dividend payment subsidized by an option buyer is always a situation that I’m willing to consider.

Finally, as this week’s allegation that NQ Mobile (NQ), a Chinese telecommunications company was engaged in “massive fraud” reminds us, there is always reason to still be circumspect of Chinese companies. While the short selling firm Muddy Waters has been both on and off the mark in the past with similar allegations against other companies they still get people’s attention. The risk of investing in companies with reliance on China carries its own risk. YUM Brands (YUM) has navigated that risk as well as any. With concern that avian flu may be an issue this year, that would certainly represent a justifiable shifting of blame in the event of reduced revenues. At its recent lower price levels YUM Brands appears inviting again, but may carry a little more risk than usual.

Traditional Stocks: Baxter International, Dow Chemical, MetLife

Momentum Stocks: Coach, Green Mountain Coffee Roasters, YUM Brands

Double Dip Dividend: ConAgra (ex-div 10/29), Texas Instruments (ex-div 10/29)

Premiums Enhanced by Earnings: Herbalife (10/28 PM), Riverbed Technology (10/28 PM), Seagate Technology (10/28 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.

Oct232013

I Love Caterpillr

Articles

That may be a bit of an over-statement. There’s probably a psychiatric diagnosis for someone who professes deep emotional attachment to inanimate objects.

But when it comes to being a poster child for a covered option strategy, not too many can do a better job of demonstrating what is possible than Caterpillar (CAT).

Caterpillar reported earnings this morning and by noon its shares were about 5% lower. Its earnings and its reduced guidance were not the sort of things that inspire confidence. It’s CEO, Douglas Oberhelman, has been vilified, pilloried and himself been used as a poster child of an “out of touch” CEO in the past. Today’s news confirms that feeling for many. If there is such a thing as a “rational market,” today’s response is reflective of that kind of market.

Even objective people, such as Herb Greenberg of TheStreet.com described Oberhelman’s appearance on CNBC this morning as seeming or sounding “distraught.” That’s not a terribly good image to present if one’s objective is to inspire confidence in leadership and offer support for share price.

Caterpillar has long been the stock that everyone loves to hate. Down almost 6% year to date, essentially all of it coming today, it has certainly lagged the broader market and has had very tangible opportunity costs, even prior to today’s disappointments.

The smart money bid shares up quite strongly yesterday, approaching $90, a level not seen in 7 months. Presumably, it was the smart money, because it seems unlikely that individual investors would commit with such urgency in advance of a scheduled risk factor.

Certainly, the very high profile position taken by famed short seller, Jim Chanos, calling a short of Caterpillar as his best trade idea of 2014 and pointing out that Oberhelman “routinely misses forecasts,” hasn’t done much to propel shares forward.

But that’s the point.

What has made Caterpillar such a wonderful covered option stock, whether owning shares and selling calls or selling puts, is its mediocrity. It has simply traded in a narrow price range alternating between disappointment and hope. That creates the perfect environment in which to put a stock to work, not be capital appreciation of shares, but rather through production of premium income and dividends.

In the example illustrated below, representing Trading Alerts sent to subscribers during a 15 month period, there were 14 different occasions initiating new positions or selling puts. The average share price was slightly above today’s noon time price of Caterpillar shares. In essence indicating no movement in price over that time. Including dividends, however, Caterpillar shares would have shown a 2.4% ROI during that period.

By contrast, the approach of serial purchase of shares or sale of puts, awaiting assignment or rolling over option contracts when possible, as expiration occurs or is likely to occur has had an ROI of 47%, assuming equal lots of shares purchased in all transactions. During that same time period the S&P 500 appreciated 30.8%

In the example above very little of the gain can be attributed to capital appreciation of shares. In fact, most of the share purchases was coupled with the sale of in the money or near the money options in an effort to optimize option premiums at the expense of capital gains.

Over the course of the time period evaluated Caterpillar shares did reach a high of $99 on February 1, 2013. Perhaps not coincidentally, that occurred during a period of time that I didn’t own shares, having had shares assigned in early January 2013 and not finding a comfortable re-entry point until March.

For the buy and hold investor with perfect timing who had purchased shares on July 2, 2013 and sold them on February 1, 2013, the ROI including dividends would have been 18.9% for the 7 month period.

I’m one usually loathe to annualize, because I believe it tends to inflate returns, but assuming the 18.9% return could be maintained for an entire year, the annual ROI would have been 32.4%

Not shabby, but remember, that required perfect timing and the ability, discipline and foresight to sell at the top and further assumed that performance could be replicated.

Compare that to sticking with the mediocrity exhibited by Caterpillar and using it as a tool of convenience. Trading in and out of positions as its price indicated, rather than based on technical or fundamental factors. That can be left to the smart money.

With shares taking today’s hit I’m likely to consider adding shares, with already two open lots in hand, one of which is set to expire next week at $84 and the other at the end of the November 2013 cycle with an $87.50 strike price.

If not now, the one thing that I feel fairly certain about is that Caterpillar will present other opportunities and price points at which to find entry and capitalize on its inability to thrive in a thriving market.

Thank you, Doug Oberhelman. We need more CEOs who can walk that share price tight wire and stay within narrow confines. It would take the strain of thought and luck out of the investing process.

 

Oct202013

Weekend Update – October 20, 2013

Weekend Update

With the S&P 500 having reached an all time high this past week you could certainly draw the conclusion that a government shutdown is a good thing and flirting with default is a constructive strategy. At a reported cost of only $24 Billion associated with closure and nothing more than a symbolic “Fitch slap” credit watch issued, perhaps we should look forward to the next potential round in just a few months.

For me, this past week marked the slowest week of opening new positions that I can recall since the 2009 market bottom. Although history suggests that the eleventh hour is a charm, the zeal of some more newly elected officials was reminiscent of a theological premise that believes in order to save it you must first destroy the world. That kind of uncertainty is the kind in which you get your affairs in order rather than embarking on lots of new and exciting initiatives.

With manufactured uncertainty temporarily removed the market can focus on earnings and other things that most of us believe are somewhat important.

One thing that will be certain is that wherever possible the next earnings season will attempt to lay some blame for any disappointments upon the government shutdown. This past week it certainly didn’t take Stanley Black and Decker (SWK) and eBay (EBAY) very long to already take advantage of that excuse. Who knew that government purchasing agents were unable to use eBay for Blackhawk helicopter replacement parts during their unexpected furlough?

As with the previous earnings season the financial sector started off the reports in a promising way, although early in the season the results are mixed, with some significant surges and plunges. What is clear is that investors are paying particular attention to guidance.

One earnings report that caught my attention was from Pet Smart (PETM). My father always believed that no matter what the economic environment, people would always find the wherewithal to spend on the pets and their kids. Pet Smart’s disappointing earnings focused on a “challenged consumer” and lower customer traffic. That can’t be a good sign. If pets are going wanting what does that portend for the rest of us?

Yet, on the other hand, Align Technology (ALGN) discussed last week, was a different story. Certainly representing discretionary spending and not benefiting from any provisions in the Affordable Care Act, their orthodontic appliances see no barriers from the economy ahead, as they reported great earnings and guidance.

Also clouding the picture, perhaps both literally and figuratively, is the positive guidance provided by Peabody Energy (BTU). For a nation that has been said to “move on coal,” that has to be a signal of something positive going forward.

This week, with lots of cash from assignments of October 2013 option contracts, I’m anxious to get back to business as usual, but still have a bit of wariness. However, despite the appearances of a reluctant consumer, I’m encouraged by recent activity in the speculative portion of my portfoli0, enough so to consider adding to those positions, even at market highs.

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

The news from Peabody Energy in addition to some recent price stabilization in Walter Energy (WLT), Cliffs Natural Resources (CLF) and Freeport McMoRan (FCX) have me in a hopeful mood after long having suffered with positions in all three.

A year ago at this time I believed that Freeport McMoRan would be among the best performers in 2013, but subsequent to that it has only recently started on its recovery from the price plunge it sustained when announcing plans to acquire Plains Exploration and Production, as it planned to expand its asset base to include oil and natural gas. While the long term vision may be someday vindicated, 2013 has not been a stellar year. But, like some others this week, there has been a steady strengthening in its price, despite significantly lower gold, oil and copper prices, year to date. While its dividend has made holding shares marginally tolerable through the year, I think it is now ready to start a sustained climb and it offers appealing call premiums to create income or provide downside protection. Earnings are reported this week, but the option market is not expecting a very large move.

Another company slowly climbing higher, but still with a great distance to travel is Walter Energy . In addition to suffering through a proxy fight this year and significant challenges to management, declining coal prices and a slashed dividend, I believe that it is also poised to continue climb higher. I recently tested the waters and added shares along with selling in the money calls. Those were just assigned, but I think that I’m ready to dip deeper.

Sticking to the same theme, Cliffs Natural Resources goes hand in hand with Walter Energy, at least in its price behavior and disappointments. It too has slashed its dividend and its CEO has retired. Like Walter Energy, I recently started adding shares and had them assigned this week. Cliffs reports earnings this week and unlike Freeport McMoRan, the option market is expecting a larger price move.

While I rarely do more than glance at charts, in the case of Cliffs Natural Resources the 5 Year price chart may suggest a long term pattern that has shares at the beginning of a sustained climb higher.

As with many positions that are preparing to report earnings, I typically consider potential entry through the sale of put options.

Also reporting earnings this week is Cree (CREE). Thanks to legislation its LED light bulbs have become ubiquitous in home improvement stores and homes. It has the features of companies that make potentially alluring earnings trades. In this case, this always volatile moving company can sustain up to a 14% price decline and still return a 1% ROI for the week. The only real consideration is that it is capable of making that decline a reality, so if selling puts you do have to be prepared to take ownership.

While already having reported earnings and falling into the “disappointing” category, Fastenal (FAST), which I look at as being an economic barometer kind of company has already started regaining its price decline. It will be ex-dividend this week offering an additional reason to consider its purchase, even though I already own lower priced shares and rarely buy additional lots at higher prices. However, with W.W. Grainger (GWW) recently reporting positive earnings I’m encouraged that Fastenal will follow, but in the meantime the dividend and option premium make it easier to wait.

Also going ex-dividend this week is Williams-Sonoma (WSM). I considered its purchase last week, but it fell victim to a week of my inaction. While perhaps at risk to suffer from decreased spending at some higher end stores it has already fallen about 11% from its recent high point. However, since it reports earnings just prior to the expiration of the November 2013 option cycle, I might consider utilizing a December 2013 covered call sale.

The Gap (GPS) isn’t at risk of losing too many high end customers, it has just been losing customers, at least on the basis of its most recent monthly report. It is one of those retailers that still reports monthly comparison figures. That’s just one more bullet that needs to be dodged in addition to potential surprises during earnings season. Shares went precipitously lower with its most recent retail report and caught me along with it. It is near a price support level and represents an opportunity to either purchase additional shares to attempt to offset paper losses of an earlier lot or to establish an initial covered position.

While eBay may not sell used Blackhawk helicopter parts it somehow found a way to link its coming fortunes to the government shutdown. Suffering a significant price drop following earnings and guidance shares were once again in a channel of great familiarity. Having traded reliably in the $50-$52.50 range the sight of it falling was well received. However, late in the trading session on Friday someone else must have seen the same appeal as shares suddenly jumped $1.65 in about 20 minutes. That takes away some of the appeal. What takes away more of the appeal was the explanation by CEO Donahoe that spurred the surge, when he explained that he and his CFO did not mean to sound so dour about holiday prospects, it’s just that they both had colds.

On the other hand UnitedHealth Group (UNH) is a company that may be able to justifiably point its finger at the Federal government when it reports earnings again in January 2014. Already suffering a nearly 10% drop in the past week related to 2014 guidance, UnitedHealth is a major player in the options available on the Affordable Health Care Act exchanges. While perhaps not being able to blame the shutdown for any revenue related woes, disappointing enrollment statistics may be in the making. The additional price drop on Friday, following the large drop on Thursday may be related to enrollment challenges rather than projections of lower Medicare funding in the coming year. However, nearing a price support and following such a large price drop provides a combination that makes ownership appealing. Perhaps eBay employees should consider signing up en masse in the event they are all prone to colds that effect their ability to perform. In enough numbers that may be helpful to UnitedHealth Group’s 2014 revenues.

Of course, while the market seemed to rejoice at what could only be construed as the return to health of the eBay executives, Groupon (GRPN) is another example of a stock whose price has returned to more lofty levels following surgical removal of its CEO. It is one of a handful of stocks that I sold last year taking a capital loss and swore that I would never buy again. Now down about 15% from its recent high, which itself was up approximately 500% from its not too distant low, Groupon is a different company in leadership, product and prospects. While still a risky position

Finally, a name that everyone seems to disparage these days is Coach (COH). While there is certainly sufficient reason to believe that retailers, even the higher end retailers are being challenged, Coach is beginning to be perceived as taking a back seat to retailer Michael Kors (KORS). SHares have certainly been volatile, especially at earnings and Coach reports earnings this week. Having owned shares a number of times in the past year, my preference is to sell puts in advance of earnings in anticipation of a large drop. Currently, the option market is implying nearly a 9% move. A 1% ROI for the week can be obtained through such a sale if the price drop is less than 12%.

Traditional Stocks: eBay, The Gap, United Health Group

Momentum Stocks: Groupon, Walter Energy

Double Dip Dividend: Fastenal (ex-div 10/23), Williams Sonoma (ex-div 10/23)

Premiums Enhanced by Earnings: Coach (10/22 AM), Freeport McMoRan (10/22), Cree (10/22 PM), Cliffs Natural Resources (10/24 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.