Oct132013

Weekend Update – October 13, 2013

Weekend Update

This week I’m choosing “risk on.”

For about 6 months I’ve been overly cautious, having evolved from a fully invested trader to one starting most weeks at about 40% cash reserves and maintaining about 25-30% by week’s end after initiating new positions.

Despite the belief that something untoward was right around the corner, the desire for current income through the purchase of stocks and the sale of options has been strong enough to temper the heightened caution on an ongoing basis for much of the past half year.

With uncertainty permeating the market’s mood, eased by late last week’s glimmer of hope that perhaps a short term debt ceiling increase may be at hand, “risk on” isn’t the most likely of places to find me playing with my retirement funds, but that’s often where it’s the most interesting, especially if the risk is one of perception more than one of probability.

While we may all have different operational definitions of what constitutes “risk” I consider beta, upcoming known market or stock moving events, the unknown, past price history and relative performance. Tomorrow the formula may be entirely different, as may tolerance for risk or willingness to burn down the cash reserves.

However, trying to dispassionately look at the current market and all of the talk about a correction, one metric that I’ve been using for the past few months reminds me that we’re doing just fine and that risk is still tolerable, even in the context of uncertainty.

Although I continue to believe that we can’t just keep moving higher, I’m not quite as dour when seeing that we are essentially at the same levels the S&P 500 stood on May 21, 2013 and June 18, 2013.

Those dates reflect relative high points, each of which gave way to the FOMC minutes or a press conference by Federal Reserve Chairman Bernanke.

In fact, we’re actually at a higher level than either of those two previous peaks, now trailing only the all time high of September 18, 2013 by less than 1.5%. So all in all, not too bad, especially since that 50 Day Moving Average that was breached by the S&P 500 earlier in the week was quickly remedied and the 200 Day Moving Average remains relatively distant.

From May 21 to June 5, then from June 18 to June 24, August 2 to 27 and finally September 19 to October 6, we have gone down a combined 16.7% in a cumulative trading period of 13 weeks or the equivalent of a quarter.

What more do you want? Armageddon?

For the past few months I’ve been focusing increasingly on new positions that have been trading below the May and June highs and preferably under-performing the S&P 500 at the same time. However, within that framework I’ve focused increasingly on near term dividend paying stocks and those more likely to fall into the “Traditional” category, typically low beta and attempting to avoid any known short term risk factors.

That has meant fewer “Momentum” positions and fewer earnings related trades. But up until Friday’s continuation of the hope induced rally, I had a number of “Momentum” stocks on my radar, all of which I had already owned and anticipated being assigned, but ripe for re-purchase in the pursuit of risk heightened premiums, but with less risk than readily apparent.

As it turned out Abercrombie and Fitch (ANF) got caught up in The Gaps’ same stores problem and whip-sawed in trading and I ultimately rolled over the position. Meanwhile, Mosaic (MOS) fell as investors were somehow surprised that Potash (POT) adjusted its guidance downward to reflect lower prices stemming from a collapse of the cartel.

As it would turn out Phillips 66 (PSX) was assigned, but soared, making it too expensive for repurchase, but that can change very quickly.

This week there are two deadlines. One is the end of the October 2013 option cycle, but the other is October 17, 2013, which Treasury Secretary Jack Lew proclaimed to be the day after which none of his “tricks” would be able to sustain the Treasury’s count and be able to pay our bills.

In a word? That’s when we would see the United States go into default on its obligations.

Under Senate questioning last week Lew acquitted himself quite well and demonstrated that he wasn’t very patient with regard to suffering fools. Uncharacteristically there appeared to be less self-aggrandizing statements in the form of questions coming from the committee members.

It may not be entirely coincidental that minutes after Lew’s appearance, House Speaker Boehner’s office announced that the Speaker would be making a statement reflecting upcoming meetings with the Administration, reflecting the possibility of some agreement.

For those that remember past such budgetary crises, you’ll recall that the market typically reacted to the hopes and then crashed along with the dashed hopes, in an eerily rhythmic manner.

On Saturday morning, word came from Eric Cantor (R-VA) that President Obama rejected the House offer. Unusually, GOP leadership skipped the opportunity to step up to the microphone to push their version of righteousness.

This week, in anticipation of the possibility of dashed hopes as may come from an appearing setback, my definition of “risk on” includes positions already trading at depressed levels.

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).

For dividend lovers this week offers Footlocker (FL), Colgate (CL) and Caterpillar (CAT). All under-performing the S&P 500 YTD.

Colgate, however, is higher than its June 2013 high and has a surprisingly high beta, despite the perceived sedate nature of being a consumer defensive stock. Perhaps that combination makes it a “risk on” position for me. Coupled with a dividend that is lower than the overall S&P 500 average it may not readily appear to be worth the time, but then again, how much additional downside should accrue from a US default?

I already own two lots of Footlocker and three is generally my limit, as it precluded including Mosaic in this week’s recommendations. Footlocker doesn’t report earnings until the December 2013 option cycle, so a little bit of risk is removed, although in the world of retail you are always at risk for any of your competitors that may still report monthly comparison data, just look at the pall created by The Gap (GPS) and L Brands (LTD) this past week.

While a pall was created by L Brands and it is higher than those referenced high points it is now down a tantalizing 10% in a week’s time. I’ve already owned shares on five separate occasions this year and have been waiting for an opportunity to do so again. It is a generally reliably trading stock that had simply climbed too far and for a month’s time traveled only in a single direction. That’s rarely sustainable. The combination of premium and dividend makes L Brands worthy of consideration in a sector that has been challenged of late. The lack of weekly options makes ownership less stressed by day to day events for those otherwise inclined to like weekly options.

Not to be outdone, Joy Global (JOY) is a stock that’s been worth owning on 7 distinct occasions this year. It has consistently traded in tight range and has been able to find its way home if temporarily wandering. High beta, well underperforming the S&P 500 and lower than both of the two earlier market high points continues to make it an appealing short term selection, especially with earnings still so far off in the future.

I’ve been waiting to add shares of Caterpillar for a while, having owned it only four times in 2013, as compared to nine occasions in 2012. However, the upcoming dividend makes another purchase more likely. Despite the thesis advanced by short seller Jim Chanos against Caterpillar, it has, thus far continued to maintain its existence in a tight trading range, making it an excellent covered option candidate.

JP Morgan Chase (JPM) reported its earnings this past Friday and reported a loss for the first time under Jamie Dimon’s watch. Regardless of your position on the merits of the myriad of legal and regulatory cases which have resulted in spectacular legal fees and fines, JP Morgan has acquitted itself nicely on the bottom line. While there is still unknown, but tangible punishment ahead, for which shareholders are doubly brutalized, I think a sixth round of share ownership is warranted at this price level.

Williams Sonoma (WSM) was one of the first stocks that I purchased specifically to attempt to capture its dividend and have it partially underwritten by an option premium. It fell a bit by the wayside as weekly options appeared on the scene. However, as uncertainty creeps into the market there is a certain comfort that comes from a monthly or even longer term option contract. WHile it has come down nearly 15% in the past two months and is now priced lower than during the May and June market highs, Williams Sonoma’s dirty little secret is that it has still outperformed the S&P 500 YTD by a whisker.

SanDisk (SNDK) had its eulogy written many years ago when flash memory was written off as being simply a commodity. Always volatile, especially in response to earnings, which have seen plunges on each of those last two occasions, now may not be the time to believe that “the third time is a charm,” although I do. Despite that, my participation, if any, would be in the sale of out of the money puts, as the options market is implying a move of approximately 7% and that may not be aggressive enough, given past history.

FInally, Align Technology (ALGN) reports earnings this week. In the business of making orthodontic therapy so easy that even a monkey could do it, the company’s prospects have significantly improved as its treatment solutions are increasingly geared toward children. That’s important because their traditional customer base, adults, views orthodontic treatment as discretionary and, therefore, represents an economically sensitive purchase. But most anyone with kids knows that orthodontic treatment isn’t discretionary at all. It can be as close to life and death as you would like to experience. This kind of orthodontic care represents a new profit center for many dental offices and a boon to Align Technology. While I expect good earnings numbers, shares have already had a 13% price decline in the past two weeks. I would most likely consider entering a position by means of selling out of the money puts. In this case for a single week’s position, if unassigned, as much as a 12% price drop could still yield a 1.3% ROI, as the options market is implying a 9% earnings related move.

Traditional Stocks: JP Morgan, L Brands, Williams Sonoma

Momentum Stocks: Joy Global

Double Dip Dividend: Caterpillar (ex-div 10/17), Colgate (ex-div 10/18), Footlocker (ex-div 10/16)

Premiums Enhanced by Earnings: Align Technology (10/17 PM), SanDisk (10/16 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. 

Oct62013

Weekend Update – October 6, 2013

Weekend Update

This is the time of year that one can start having regrets about the way in which votes were cast in prior elections.

Season’s Misgivings

The sad likelihood, however, is that officials elected through the good graces of incredibly gerrymandered districts are not likely to ever believe that their homogeneous and single minded neighbors represent thoughts other than what the entire nation shares.

That’s where both parties can at least agree that is the truth about the other side.

Living in the Washington, DC area the impact of a federal government shutdown is perhaps much more immediately tangible than in a “geometric shape not observed in nature” congressional district elsewhere. However, there is no doubt that a shutdown has adverse effect on GDP and that impact is cumulative and wider spreading as the shutdown continues.

It’s unfortunate that elected officials seem to neither notice nor care about direct and indirect impact on individuals and financial institutions. In war that sort of thing is sanitized by referring to it as “collateral damage.” As long as it’s kept out of sight and in someone else’s congressional district it doesn’t really exist.

Pete Najarian put it in terms readily understandable, much more so than when some tried expressing the cost of a shutdown in terms of drag on quarterly GDP.

Of course, the real challenge awaits as we once again are faced with the prospect of having insufficient cash to pay debts and obligations. But for what it’s worth at least the rest of the world gets a much needed laugh and boost in national ego, while McGraw Hill Financial (MHFI) and others ponder the price of their calling it as they see it.

At the moment, that’s probably not what the economy needs, but in the perverse world we live in that may mean continued Federal Reserve intervention in Quantitative Easing. While “handouts” are decried by many who don’t see a detriment to a government shutdown, the Federal Reserve handout is one that they are inclined to accept, as long as it helps to fuel the markets.

However, as we are ready to enter into another earnings season this week many are mindful of the fairly lackluster previous earnings season that just ended. While the markets have recently been riding a wave of unexpected good news, such as no US intervention in Syria, continued Quantitative Easing and the disappearance of Lawrence Summers from the landscape, we are ripe for disappointment. We were spared any potential disappointment on Friday morning as the release of the monthly Employment Situation Report fell victim to someone being furloughed.

So what would be more appropriate than to re-introduce the concept of stock fundamentals, such as earnings, into the equation? During this past summer, when our elected officials were on vacation, that’s pretty much where we focused our attention as the world and the nation were largely quiet places. While no one is particularly effusive about what the current stream of reports will offer, a market that truly discounts the future already has its eyes set on the following earnings season that may begin to bear the brunt of any trickle down from a prolonged government shutdown.

At the moment, sitting on cash reserves, I am willing to recycle funds from shares that have been assigned this Friday (October 4, 2013), but am not willing to dip further into the pile until seeing some evidence of a bottoming to the current process that had the S&P 500 drop 2.7% since September 19, 2013 until Friday’s nice showing pared the loss down to 2%. But I need more evidence than a tepid one day respite, just as it will take more than a resolution to the current congressional impasse to believe that we wouldn’t be better served by an unelected algorithm.

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’m certain many people miss the days when a purchase of shares in Apple (AAPL) was a sure thing. While I like profits as much as the next person, I also enjoy the hunt and from that perspective I think that Apple shares are far more interesting now as we just passed the one year anniversary of having reached its peak price and tax related selling capitalizing on the loss will likely slow. Suddenly it’s becoming like many other stocks and financial engineering is beginning to play a role in attempts to enhance shareholder value.

Without passing judgment on the merits of the role of activist investors it doesn’t hurt to have additional factors that can support share price, particularly at times that the market itself may be facing weakness. Apple has increasingly been providing opportunities for short term gains as its price undulates with the tide that now includes more than just sales statistics and product releases. Capital gains or shares, an attractive dividend and generous option premiums make its ownership easier to consider at current prices. However, with earnings scheduled to be reported on October 22, 2013 I would likely focus on the sale of weekly option contracts as Apple is prone to large earnings related moves.

While Apple has done a reasonable job in price recovery over the past few months amid questions regarding whether its products were still as fashionable as they had been, Abercrombie and Fitch (ANF) hasn’t yet made that recovery from its most recent earnings report that saw a more than 20% price drop. As far as I know, and I don’t get out very much, talks of it no longer being the “cool” place to buy clothes aren’t the first item on people’s conversational agenda. The risk associated with ownership is always present but is subdued when earnings reports are still off in the distance, as they are currently. In the meantime, Abercrombie and Fitch always offers option premiums that help to reduce the stress associated with share ownership.

Ironically, the health care sector hasn’t be treating me terribly well of late, perhaps being whipsawed by the fighting on Capitol Hill over the Affordable Care Act and proposed taxes on medical devices. Additionally, a government shutdown conceivably slows the process whereby regulated products can be brought to the market. Abbott Labs (ABT), whose shares were recently assigned at $35 has subsequently dropped about 5% and will be going ex-dividend this week. Although the dividend isn’t quite as rich as some of the other major pharmaceutical companies after having completed a spin-off earlier in the year, I think the selling is done and overdone.

For me, a purchase of MetLife (MET) is nothing more than replacing shares that were just assigned after Friday’s opportune price surge and that have otherwise been a reliable creator of income streams from dividends and option premiums. At the current price levels MetLife has been an ideal covered call stock having come down in price in response to fears that in a reduced interest rate environment its own earnings will be reduced.

International Paper (IP) is an example of a covered call strategy gone wrong, as the last time I owned it was about a year ago having had shares assigned just prior to its decision to go on a sustained rise higher. While frequently cited by detractors as an argument against a covered option strategy, the reality is that such events don’t happen terribly often, nor does the investor have to eschew greed as share price is escalating or exercise perfect timing. to secure profits before they evaporate. I’ve waited quite a while for its share price to drop, but it is still far from where I last owned them. Still, the current price drop helps to restore the appeal.

Being levered to China or even being perceived as levered to the Chinese economy can either be an asset or a liability, depending on what questionable data is making the rounds at any given moment. Joy Global (JOY) is one of those companies that is heavily levered to China, but even when the macroeconomic news seems to be adverse the shares are still able to maintain itself within a comfortably defined trading range. With Friday’s strong close my shares were assigned, but I would like to re-establish a position, particularly at a price point below $52.50. If it stays true to form it will find that level sooner rather than later making it once again an appealing purchase target and source of option related income.

With the start of a new earnings season one stock that I’ve been longing to own again starts out the season. YUM Brands (YUM) is an always interesting stock to own due to how responsive it is to any news or rumors coming from China. Over the past year it’s been incredibly resilient to a wide range of reports that you would think were being released in an effort to conspire against share price. Food safety issues, poor drink selection during heat waves and Chinese economic slow down have all failed to keep the share price down. While the current price is near the top of its range I think that expectations have been set on the low side. In addition to reporting earnings this week shares also go ex-dividend the following day.

A little less exciting, certainly as compared to Abercrombie and Fitch is The Gap (GPS). In a universe of retailers going through violent price swings, The Gap has been an oasis of calm. It goes ex-dividend this week and if it can maintain that tight trading channel it would be an ideal purchase as part of a covered call strategy.

While The Gap isn’t terribly exciting, Molson Coors (TAP) and Williams Co. (WMB) are even less so. While I usually start thinking about either of them in the period preceding a dividend payment they have each found a price level that has offered some stability, thereby providing some additional appeal in the process that includes sale of near the money calls.

Finally, I have a little bit of a love-hate relationship with Mosaic (MOS). The hate part is only recent as shares that I’ve owned since May 2013 have fallen victim to the collapse of the potash cartel. In a “what have you done for me lately” kind of mentality that kind of performance makes me forget how profitable Mosaic had been as a covered call holding for about 5 years. However, the recent “love” part of the equation has come from the serial purchase of shares at these depressed levels and collecting premiums in alternation with their assignment. I have been following shares higher with such purchases as there is now some reason to believe that the cartel may not be left for dead.

Traditional Stocks: International Paper, Molson Coors, Williams Co.

Momentum Stocks: Apple, Joy Global, MetLife, Mosaic

Double Dip Dividend: Abbott Labs (ex-div 10/10), The Gap (ex-div 10/11), YUM Brands (ex-div 10/9)

Premiums Enhanced by Earnings: YUM Brands (10/8 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.

Oct12013

Double Dipping Demystified

Articles

I’ve had a number of people ask about the concept behind “Double Dip Dividends”

A good place to begin, is here.

In a nutshell some stocks have a little bit of a disconnect between the option premium and share price during the period of time that they’re going ex-dividend. What happens is that a portion of the dividend reduction in the share price is actually incorporated into the premium, when by all rights it really shouldn’t be. In effect the premium is enriched by an amount that partially offsets the reduction in share price as a result of paying the dividend.

People that refer to efficient pricing in markets conveniently overlook the particular advantages that can be had with regular dividend payments.

Note that I said “regular” dividends. The concept does not apply to special dividends that are greater than $0.125/share. In those cases the strike prices are adjusted downward to reflect the distribution of a special dividend, while such adjustment isn’t made in strike prices for regular dividends.

When stocks go ex-dividend there are some guidelines that can tell you whether your shares are likely to be assigned early if they are in the money as trading closes prior to going ex-dividend.

 How far in the money are the shares?

The further in the money after deducting the amount of the dividend, the more likely they will be assigned.

 How much time is still remaining on the contract?

The more time remaining the less likely you will see early assignment.

 

Obviously there are less clear cut combinations, such as being deeply in the money, but having lots of time remaining.

For example, a handful of people reported early assignment of all or some of their Cisco shares this morning which closed at $23.43 Monday evening and was paying a $0.17 dividend.

After deducting the dividend shares were still $0.26 in the money, although there was risk that shares could have traded lower today. On the other hand there were 4 days remaining on the contract.

Beyond those factors are individual considerations, such as how much the individual holding contracts paid for the contracts and whether that person could make more money by simply selling his contracts versus exercising the contract, collecting the dividend and then either selling or holding the underlying shares.

Let’s look at JP Morgan, which is trading ex-dividend tomorrow (October 2, 2013).

For those watching such things you may have noticed that in the final minute of trading on Tuesday, JPM shares went up $0.09 to end the day at $51.95. If you had sold the $51.50 option expiring on Friday, the critical share price would be $51.88, since the dividend was for $0.38.

Everything else being equal, you might see early assignments at JPM prices as low as $51.88.

But let’s dissect the situation further.

Since the October 4, 2013 $51.50 call option has been trading the lowest price anyone paid for it was $0.39, while the high price was $1.20

With shares closing at $51.96 on the day prior to going ex-dividend it’s price will be re-set $0.38 lower to $51.58 as trading opens on Wednesday October 2, 2013. That $0.38 decrease from Tuesday’s close to Wednesday’s opening in the pre-market represents the dividend.

Currently, the $51.50 option bid at Tuesday’s close  is $0.47, which means that there is only $0.01 of time value, as the remainder is intrinsic value, as shares closed $0.46 in the money

Remember, just yesterday we sold calls at $0.52 when shares were trading at $51.65 ($0.15 intrinsic value, $0.37 time value). A portion of that time value was due to the dividend of $0.38, however at a share price of $51.65 no rational person would exercise early to get the dividend and end up holding shares the following morning priced at $51.27 that he had to pay $51.50 to obtain and also paid a premium to purchase the options.

So from an option holder’s perspective when would it make sense to exercise the option early?

Assuming you can sell the shares for $51.58 tomorrow morning that represents an $0.08 profit from the $51.50 strike price that they paid when exercising. Add to that the $0.38 dividend to get a total of $0.46 profit.

But the lowest anyone paid for the right to do any of this was the $0.39 option premium meaning that there would be a potential for only $0.07 profit for those that timed it just perfectly.

But that profit margin, available only to some of those having bought options assumes that shares will open at least at $51.58 or higher. What the person considering the early exercise thinks about is also what is the chance that once I take hold of shares it will go down in value before I have a chance to sell the shares? Is it worth the $0.07 profit or even less?

The closer the opening price will be to the strike price the greater is that likelihood, which means taking a loss on the shares in which they just took ownership. On top of that is the cost incurred in having to purchase shares. Remember that option buyers typically  find great appeal in leveraging their investment, perhaps by 10 times or more. They don’t get much delight in buying stocks, even if only for minutes, if it means introducing portfolio risk and only getting 2x leverage.

So while JP Morgan essentially closed $0.08 in the money that makes it a risk factor for early assignment.

But there are still 3 days left on the contract. That argues against assignment.

After that it becomes luck of the draw. How much did your contract holder pay for his contracts? Anyone who paid  more than $0.46 for their options would have been better off closing their position by selling the contract for $0.47 than to exercise early.

The likelihood is that there are more options holders who purchased their options at prices greater than the low point of $0.39, so the number of individuals in a position to rationally act and exercise early would be relatively small.

My expectation is that most people will not be subject to early assignment, but I did find the last minute surge in share price very curious and made me wonder whether it was related to the ex-dividend date.

Occasionally you will also see early assignments that are completely irrational and less occasionally not see early assignments when they would have been completely rational. You can be certain that those were always products of an individual investor. While one is maddening, the other can be a nice surprise..

For those wondering about Cisco, the lowest price paid for the October 4, 2013 $23 options was $0.20. If selling shares at $23.26 that would have represented possibly a $0.26 profit (if shares didn’t head lower), plus $0.17 dividend, minus $0.20 option premium paid yielding a potential $0.23 profit per share. Of course the high price paid for option contracts was $1.18. For those paying anything more than $0.43 for their options they would have been better off simply trading out of their position and closing their option rather than trying to capture the dividend and assume the risk of ownership.

While having early assignment can sometimes be frustrating, especially when there is a last day surge in share price, as occurred with Dow Chemical last week, when able to capture both the dividend and a premium enhanced by the pricing inefficiency it is a thing of beauty.

 

Wednesday Morning Postscript:  The first thing I do on ex-dividend mornings is to check to see whether I still have all of my shares. In this case the JPM shares have stayed intact. For anyone who decided to exercise their options the pre-market is indicating a loss of $0.27 bringing shares to $51.31. Suddenly, the thin profit that a small portion of option buyers deciding to exercise thought they had last night has become a paper loss and they would find themselves regretting the decision to exercise for the sake of securing the dividend. Holding the security for a option buyer means that at least $2575 of his money is now tied up and possibly generating margin interest costs and is unable to be further leveraged in order to buy more option contracts.

Most rational contract holders would have considered that possibility very strongly before making the decision and would likely have opted to not exercise, as a result.

Sep292013

Weekend Update – September 29, 2013

Weekend Update

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Momentum Stocks: none

Double Dip Dividend: none

Premiums Enhanced by Earnings: none

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

 

 

 
 
 
 
 
 

 

Sep222013

Weekend Update – September 22, 2013

Weekend Update

Generally, when you hear the words “perfect storm,” you tend to think of an unfortunate alignment of events that brings along some tragedy. While any of the events could have created its own tragedy the collusion results in something of enormous scale.

For those that believe in the wisdom that can be garnered from the study of history, thus far September 2013 has been at variance with the conventional wisdom that tell us September is the least investor friendly month of the year.

What has thus far made this September different, particularly in contrast to our experience this past August, has been a perfect storm that hasn’t come.

Yet, but the winds are blowing.

Barely three weeks ago we were all resolved to another bout of military action, this time in Syria. History does tend to indicate that markets don’t like the period that leads up to hostilities.

Then we learned that the likely leading contender to assume the Chairmanship of the Federal Reserve, Larry Summers, withdrew his name from consideration of the position that has yet to confirm that its current Chairman will be stepping down. For some reason, the markets didn’t like prospects of Larry Summers being in charge but certainly liked prospects of his being taken out of the equation.

Then we were ready to finally bite the bullet and hear that the Federal Reserve was going to reduce their purchase of debt obligations. Although they never used the word “taper” to describe that, they have made clear that they don’t want their actions to be considered as “tightening,” although easing on Quantitative Easing seems like tightening to me.

There’s not too much guidance that we can get from history on how the markets would respond to a “taper,” but the general consensus has been that our market climb over the past few years has in large part been due to the largesse of the Federal Reserve. Cutting off that Trillion dollars each year might drive interest rates higher and result in less money being pumped into equity markets.

What we didn’t know until the FOMC announcement this past Wednesday was what the market reaction would be to any announcement. Was the wide expectation for the announcement of the taper already built into the market? What became clear was that the market clearly continues to place great value on Quantitative Easing and expressed that value immediately.

As long as we’re looking at good news our deficit is coming down fast, employment seems to be climbing, the Presidents of the United States and Iran have become pen pals and all is good in the world.

The perfect storm of good news.

The question arises as to whether any eventual bad news is going to be met with investors jumping ship en masse. But there is still one thing missing from the equation. One thing that could bring us back to the reality that’s been missing for so long.

Today we got a glimpse of what’s been missing. The accelerant, if you will. With summer now officially over, at least as far as our elected officials go, the destructive games have been renewed and it seems as if this is just a replay of last year.

Government shutdowns, debt defaults and add threats to cut off funding for healthcare initiatives and you have the makings of the perfect storm, the bad kind, especially if another domino falls.

Somewhat fortuitously for me, at least, the end of the September 2013 option cycle has brought many assignments and as a result has tipped the balance in favor of cash over open positions.

At the moment, I can’t think of a better place to be sitting as we enter into the next few weeks and may find ourselves coming to the realization that what has seemed to be too good to be true may have been true but could only last for so long.

While I will have much more cash going into the October 2013 cycle than is usually the case and while I’m fully expecting that accelerant to spoil the party, I still don’t believe that this is the time for a complete buying boycott. Even in the middle of a storm there can be an oasis of calm.

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).

After Friday’s loss, I have a difficult time in not being attracted to the idea of adding shares of Caterpillar (CAT). It has been everyone’s favorite stock to deride for its dependence on the Chinese economy and for its lack of proactive leadership in the past year. Jim Chanos publicly proclaimed his love for Caterpillar as his great short thesis for the coming year. Since it has trailed the S&P 500 by 16% on a year to date basis there may be good reason to believe that money goes into Caterpillar shares to die.

However, it has been a perfect stock with which to apply a serial covered option strategy. In 13 trades beginning July 2012, for example, it has demonstrated a 44.9% ROI, by simply buying shares, collecting dividends and premiums and then either re-purchasing shares or adding to existing shares. In that same time the index was up 28%, while Caterpillar has lost 3%.

It’s near cousin Deere (DE) also suffered heavily in Friday’s market and has also been an excellent covered option trade over the past year. Enhancing its appeal this week is that it goes ex-dividend. I currently own shares, but like Caterpillar, in smaller number than usual and purchases would provide the additional benefit of averaging down cost, although I rarely combine lots and sell options based on average cost.

Also going ex-dividend this week is Dow Chemical (DOW). This has been one of those companies that for years has been one of my favorite to own using the covered option strategy. However, unlike many others, it hasn’t shown much propensity to return to lower price levels after assignment. I don’t particularly like admitting that there are some shares that don’t seem to obey the general rule of gravity, but Dow Chemical has been one of those of late. I also don’t like chasing such stocks particularly in advance of what may be a declining market. However, with the recent introduction of weekly options for Dow Chemical I may be more willing to take a short term position.

YUM Brands (YUM) is similar in that regard to Dow Chemical. I’ve been waiting for it to come down to lower price levels, but just as it had at those lower levels, it proved very resilient to any news that would send its shares downward for a sustained period. As with Caterpillar, YUM Brands is tethered to Chinese news, but even more so, as in addition to economic reports and it’s own metrics, it has to deal with health scares and various food safety issues that may have little to no direct relationship to the company. YUM Brands does help to kick off the next earnings season October 8th and also goes ex-dividend that same week.

Continuing along with that theme, UnitedHealth Group (UNH) just hasn’t returned to those levels at which I last owned shares. In fact, in this case it’s embarrassing just how far its shares have come and stayed. What I can say is that if membership in the Dow Jones Index was responsible, then perhaps I should have spent more time considering its new entrants. However, with the Affordable Care Act as backdrop and now it being held hostage by Congressional Republicans, shares have fallen about 6% in the past week.

Mosaic (MOS) is among the companies that saw its share price plummet upon news that the potash cartel was collapsing. Having owned much more expensive shares at that time, I purchased additional shares at the much lower level in the hope that their serial assignment or option premium generation would offset some of the paper losses on the older shares. Although that has been successful, I think there is continuing opportunity, even as Mosaic’s price slowly climbs as the cartel’s break-up may not be as likely as originally believed.

If you had just been dropped onto this planet and had never heard of Microsoft (MSFT) you might be excused for believing this it was a momentum kind of stock. Between the price bounces that came upon the announcement of the Nokia (NOK) purchase, CEO Ballmer’s retirement, Analyst’s Day and the announcement of a substantial dividend increase, it has gyrated with the best of them. Those kinds of gyrations, while staying within a nicely defined trading range are ideal for a covered option strategy.

Cypress Semiconductor (CY) goes ex-dividend this week. This is a stock that I frequently want to purchase but am most likely to do so when its purchase price is near a strike level. That’s especially true as volatility is low and there is less advantage toward the use of in the money options. With a nice dividend, healthy option premiums, good leadership and product ubiquity, this stock has traded reliably in the $10-12 range to also make it a very good covered option strategy stock selection.

Every week I feel a need to have something a little controversial, as long as there’s a reasonable chance of generating profit. The challenge is always in finding a balance to the risk and reward. This week, I was going to again include Cliffs Natural Resources, as I did the previous week, however a late plunge in share price, likely associated with reports that CHinese economic growth was not going to include industrial and construction related growth, led to the need to rollover those shares. I would have been happy to repurchase shares, but not quite as happy to add them.

Fortunately, there’s always JC Penney (JCP). It announced on Friday that it was seeking a new credit line, just as real estate concern Vornado (VNO) announced its sale of all its JC Penney stake at $13. Of course the real risk is in the company being unable to get the line it needs. While it does reportedly have nearly $2 billion in cash, no one wants to see starkly stocked shelves heading into the holidays. WHether through covered options or the sale of put options, JC Penney has enough uncertainty built into its future that the premium is enticing if you can accept the uncertainty and the accompanying risk.

Finally, I had shares of MetLife (MET) assigned this past week as it was among a handful of stocks that immediately suffered from the announcement that there would be no near term implementation of the “taper.” The thesis, probably a sound one was that with interest rates not likely to increase at the moment, insurance companies would likely derive less investment related income as the differential between what they earn and what they pay out wouldn’t be increasing.

As that component of the prefect storm is removed one would have to believe that among the beneficiaries would be MetLife.

Traditional Stocks: Caterpillar, MetLife, Microsoft, UnitedHealth Group

Momentum Stocks: JC Penney, Mosaic, YUM Brands

Double Dip Dividend: Cypress Semiconductor (ex-div 9/24), Deere (ex-div 9/26), Dow Chemical (ex-div 9/26)

Premiums Enhanced by Earnings: none

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

Sep182013

Ellison Fiddles While Oracle Burns

Articles

Maybe I belong to a different generation, but I have certain expectations regarding behavior and responsibility, especially when other’s are your subordinates and maybe even extending to your shareholders.

As a short term holding I’ve always looked to Oracle (ORCL) as a potential addition to my portfolio that relies on the use of a covered call strategy.

While I have often thought of buying Oracle shares, in 2013 I’ve only done so twice, this most recent occasion being in advance of its earnings report. In hindsight, however, I wish I had done so much more frequently because of how mediocre its price performance has been.

As a covered option trader I like mediocrity, at least when it comes to share price. That’s the perfect price behavior to be able to buy shares and sell calls or simply sell puts and collect premiums, sometimes dividends and sometimes small capital gains on shares with relatively little fear of large price swings downward. With little movement in underlying shares you can do so over and over again.

Oracle was truly perfect, that is of course, as long as you ignore the two earnings reports prior to Wednesday evening’s numbers being released.

Any company can see its shares tumble after releasing earnings or providing guidance. In fact, it doesn’t even take bad numbers to do so. All it takes is for disappointment or unmet expectations to permeate the crowd. After all, the saying “buy on the rumor and sell on the news” got its start in the aftermath of what would seem like paradoxical behavior from investors.

So I think a company can sometimes be excused for what happens to its shares after earnings.

What I have a harder time excusing is the excoriating finger pointing that came on that occasion six moths ago when Oracle shares plummeted in what appeared to be a company specific issue, as its competitors didn’t fair as poorly in their reports and didn’t suffer similar market misfortunes.

Larry Ellison, the CEO, blamed his salesforce for the quarter. He cited their lack of urgency which allowed third quarter sales to slip into the fourth quarter. I don’t really now how Oracle’s sales force is compensated, but deferring sales is not a typical strategy.

When the next earnings report was released this time Ellison blamed Oracle’s performance on the poor global economic environment, stating “It was clearly an economic issue, not a product, competitive issue,” during the ensuing conference call. That, of course, despite the fact, that once again the competition seemed to not experience the same issues. I guess those sales that previously had been said to slip into this quarter remained slipped.

Surely they would show up for the next earnings report.

AS CEO it’s probably easier pointing fingers at others. That’s certainly the strategy that ruling despots use when there’s a need to deflect criticism or place blame to account for the wheat crop shortage.

At the very least Ellison has at least been visible, perhaps too visible. The world learned of his purchase of 97% of the Hawaiian island, Lanai and wondered at that point whether his attention would be diverted from the job of running Oracle, notwithstanding the presence of its President, Mark Hurd.

He was all too visible recently when referring to Google (GOOG) CEO Larry Page as “acting evil” and questioned the ability of Apple (AAPL) to survive in the absence of Steve Jobs.

In a way, perhaps that kind of presence is preferable to the CEO that fails to make any statements following tragic events on one of his cruise liners, not once, but on two occasions. Maybe Ellison won some new customers over with his goodwill.

But here we were, on the day that Oracle was primed to report earnings yet again. For my money, and I did buy shares on Monday, it was inconceivable to me that someone with as much at stake, especially on a reputational level would allow a third successive disappointing report. Whether by slashing costs, financial optics or perhaps by virtue of those sales that slipped from one quarter to the next and then to this one, I was certain that there would be no repeat of the embarrassing price slides the last two times.

Funny thing, though.

Instead of being an integral part of the earnings report and guidance, Larry Ellison was cheering on the crew of Oracle Team USA in a losing effort at today’s America’s Cup race.

Again, call me old fashioned, but I like to see my CEOs involved in what may have a substantive effect on my fortunes.

The good news is that Oracle didn’t have a meltdown after reporting its earnings. In fact shares went higher until reversing the course when the conference call started and the new disappointments were made known, including guiding significantly lower growth than had been expected.

To give Ellison some benefit of the doubt, perhaps he knew that the initial response would be relatively muted and his presence was unnecessary. Besides, was he going to be able to have credibility going back to the well again and blaming macroeconomic business conditions?

Not with me, he wouldn’t.

With two days to go until expiration of the weekly options I had sold I expect to be able to extricate myself from the position relatively easily and show a profit for the effort.

In all likelihood I’ll also look for any other opportunity to purchase shares because sometimes mediocrity is the gift that just keeps giving. As long as Ellison will be fiddling and paying attention elsewhere, I don’t mind an Oracle that simply treads water and stays in place, although I’m sure that the Larry Ellison of old would never have accepted or allowed that kind of an existence.

Herb Greenberg, of TheStreet.com is once again soliciting nominations for the worst CEO of the year. As far as I know the rules don’t exclude absentee CEOs. While Oracle is only trailing the S&P 500 by approximately 19% YTD and is certainly performing better than other companies with less than capable management, the shame factor is worthy of your vote.

Sep142013

Weekend Update – September 15, 2013

Weekend Update

Month after month of seeing market gains finally came to an end in August. The streak had started in November 2012 and for those who are prone to remember oddities, we even had a string of 20 consecutive gaining Tuesdays during that span.

Of course we also eclipsed the 2007 Dow Jones and S&P 500 highs and subsequently did so on repeated occasions, all while “Chicken Littles” like me kept waiting for the correction that never came.

The small head fake correction that began near the end of May was barely a blip and was quickly erased as more new highs were established, but the trading patterns of August seemed to indicate that perhaps the rally was getting tired and the market not only began sputtering, but also lost ground as Syrian related tensions were in the air.

Anxious to see a modest correction so that I would finally have something constructive to do with the cash I had been raising, I wasn’t terribly happy with what would come in September, with the first seven trading days having seen gains.

Not only did they make gains, but there were three consecutive triple digit gains. Adding insult to injury was the root cause of those triple digit gains.

While avoiding the use of military force, at least in the near term, is somewhat comforting, the very idea that a Russian proposed plan could avert military action against Syria was about as implausible as anything that occurred in the 20th or 21st centuries, with the possible exception of the Russian President speaking directly to American citizens through an op-ed piece in the New York TImes (NYT).

Russian peace plan? Can those words even possibly all be in a single paragraph?

But with fear centered around uncertainty regarding military action against Syria temporarily tabled, the market ignored August and also ignored the historical nature of Septembers past. By Friday morning, just seconds after the opening bell, all of August’s losses had been recovered.

Somehow, I am neurologically incapable of saying “Thank you, Vladimir.”

Instead, the increasingly nervous part of me wonders what there is that awaits that will continue to send markets higher? Are there unseen catalysts or are there now more opportunities for disappointment, particularly if Russian efforts, inspired by an off the cuff remark by Secretary of State Kerry, prove to be inadequate?

I’ve been asking questions in a similar vein for months now, but the answer has always been in the affirmative, even if the catalysts weren’t always apparent.

Of course, now there’s also the question of the market’s reaction to the expected announcement of the nomination of Lawrence Summers as the next Federal Reserve Chairman. The rumor that such an announcement would come today was denied, but that should come as no surprise, as President Obama had his heart set on doing so by attaching a banner to a Tomahawk missile.

If Syria fails to deliver a market correction and neither fear of the “Taper” nor the nomination of Summers can do so, at least we will have Congress back and fully engaged so that a new round of budget crises can at least allow the market to bounce up and down, which is far more healthy for someone relying on a covered option strategy. If that happens, I can hold my head up high and point to a momentary drop lower and sat “See? That correction.”

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’ve only opened a limited number of new positions in the last few weeks and don’t anticipate seeing that pattern change this week, unless there is a substantive near term correction to last week’s price increases. Those increases, for example, are the reason why I have no Double Dip Dividend selections this coming week, as the risk of experiencing some price pullbacks outweighs the benefits of garnering option premiums and dividends. As it is, instead of the usual number of potential selections, this week’s list contains only 5 names.

Certainly a controversial place to begin looking in the new week is Apple (AAPL). I purchased shares last week following the large drop on Wednesday when disappointment began to settle in for varied reasons. The small recovery that I was expecting never really came, but instead of being disappointed by the inability to quickly close my position, I think that there is simply continued opportunity to pick up additional shares. However, as opposed to the rare instance of having purchased shares and not immediately having sold calls, I do plan to do so this time around if adding shares.

Apple, while not necessarily making significant changes to its product line is making significant changes to the way it conducts its business. From a trade-in program, to less expensive models, to not taking pre-orders on the upcoming iPhone 5S, to dividends and buybacks, they are shaking up their daily approach to existence on all fronts. From my vantage point the short term emphasis is that “cash is king” and that share price matters. I especially like Tim Cook’s philosophy that market share isn’t as important as having enough money to be in control of one’s destiny. The recent product announcements should see to it that the cash keeps pouring in and helps to secure that destiny.

Continuing with the controversial theme is Cliffs Natural Resources (CLF). I had written about the possibility of adding shares recently, but did not do so. Instead, I continued selling calls on a lower priced lot of shares to try and continue to offset substantial paper losses from older lots. That’s a slow process but I think at this current level the process can be speeded up by adding more shares. Highly levered to economic news from China does add to the risk of ownership, but Cliffs has been demonstrating some price stability at this level.

I may as well add to the controversy with Phillip Morris (PM). Whatever your opinions are about ownership of a company that directly results in countless premature deaths, it’s hard to overlook their move to increase the dividend and the reasonably narrow range in which shares trade. Combine those attributes with an appealing option premium and you have a combination that’s hard to resist and doesn’t even require nicotine to keep you hooked.

They say that there’s no such thing as bad publicity, although JP Morgan (JPM) may disagree. However, if you want to see the poster child for resilience you don’t have to look much further than this company. After an avalanche of bad news, having inherited the burden from Goldman Sachs (GS), JP Morgan has somehow been able to keep its share price respectably positioned. This week it announced plans to commit nearly $6 Billion toward legal defenses and compliance. In addition to an option premium that provides some comfort, shares will be ex-dividend during the October 2013 option cycle so I may consider using a longer term option sale and would actually welcome early assignment.

Finally, while earnings season is set to begin again in just a few weeks, Oracle (ORCL) is a laggard and reports this week. With the upcoming report the company will have had six months to make some changes, whether substantive or purely optical, to create a more positively received report. Following two successive negative reports that were not well received by the market, I think that its inconceivable that Larry Ellison would allow his name to be badly tarnished again by anything other than his own words and actions. No doubt that he is unhappy with share performance since that first disappointment.

While I usually like to consider earnings related trades on the basis of selling deep out of the money puts, Oracle may work equally well as an outright purchase and sale of calls. In the event of another price meltdown I would not go out of my way to greet Ellison if you see him in Lanai, although I don’t believe the police department was included with the sale of the island.

Traditional Stocks: JP Morgan Chase, Phillip Morris

Momentum Stocks: Apple, Cliffs Natural Resources

Double Dip Dividend: none

Premiums Enhanced by Earnings: Oracle (9/11 PM)

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

Disclosure: I am long AAPL, CLF. 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.

Additional disclosure: I may initiate positions, add shares or sell puts in AAPL, CLF, JPM, ORCL and PM

Sep112013

I Bought Apple

Articles

There are some people that just love to take in wounded birds and believe that somehow that can nurse the poor wounded creature back to health. For some sainted few that is their “raison d’etre.”

I bought shares of Apple (AAPL) this morning after it was wounded by downgrades from Bank of America (BAC), UBS (UBS), Piper Jaffray (PJC) and Credit Suisse (CS).

You’re welcome, but I’m not saint. I certainly can’t be categorized as an “Apple lover.” Neither the products nor the shares have had consistent appeal for me, but the subjectivity is out of place when it comes to capitalizing on opportunity.

Clearly, this opportunity stems from the high profile downgrades. Such downgrades confirm for me that there is greater value placed on not missing out on potential gains than there is in protecting portfolios from disappointments.

Recent history has not given strong indication that Apple shares will rally after product launch events, particularly as the quality of the leaks regarding the “news” seem to get better and better. There are few, if any, upside moving surprises. In fact, one wouldn’t be terribly far off base to suggest that the sum total of predictions of what will be announced easily exceed the capability of squeezing all of the new options into a single device. As a result there is always bound to be someone leaving the party disappointed.

For those further expecting the announcement of new relationships, such as in China, there has to be some thought that the downside to disappointment may likely exceed the upside of what may already be partially built into the price.

Yet, protecting a client’s assets takes a back seat.

My basic understanding of math tells me that it’s more difficult to recover from a $5 loss than it is to find an opportunity to make $5 in place of the opportunity you missed.

But with a short-sighted view of what the future holds, analysts have created opportunity, just perhaps not for their clients.

I almost never buy shares without concomitant sale of option contracts, but in this case I listened to my own advice from just a few weeks ago when Carl Icahn entered into the picture.

In addition to now having a more favorable entry point to re-establish a position that was recently assigned, so too does Apple find itself in a better position to further implement its buy-back program. There’s no shortage of money still unspent in that program and there may be more added to the bucket.

No doubt this will be a topic of Icahn and Tim Cook’s upcoming dinner, which Icahn confirmed a few days ago would be this month.

But now that the product offerings are well known, they have no doubt been dissected by many who can extol or pan the virtues and relative value of the innovations. To attempt to analyze the advances incorporated into the iPhone 5c and 5s is somewhat meaningless with regard to short term investing, which is all I hope to ever do.

What I hope to do is turn shares into short term realized profit vehicles. For that reason I don’t dwell on the possibility that the fingerprint reader may be an entry way into mobile secure commerce solutions.

What I dwell on is how likely is Apple to withstand this onslaught and then I’m likely to sell call options into price strength, as I expect a bounce in shares, particularly as Syria is temporarily off the table.

Apple will continue being an incredible cash machine with these new devices. Argue about their price points as much as you want, argue about cannibalization, too. The reality will be that the phones will fly off the shelves and tie up the consumer base for another year or two. After all, it’s not just about selling product, it’s also about making certain that your consumer base is effectively barred from going to the competition without the burden of additional cost.

I’m still a product holdout, but the rest of my family isn’t, some of whom only joined the parade this week.

Scoff at the superficial changes, but Apple knows better than most others that bold colors will not only drive new sales. but will instantly help distinguish itself in the hands of one adolescent as another is watching.

While everyone enjoys talking about “the big picture,” today’s downgrades and market reaction have been anything but mindful of that more encompassing view.

This is what opportunities are made of, despite the fact that risk shares the same parent. Having been very critical of Apple over the past 15 months, and questioning why people had not taken profits before they evaporated, I’ve nonetheless found a number of opportunities over that time to re-establish short term positions. In the past the drivers of those decisions were predominantly based upon option premiums and dividends. This time, however, the catalyst is share appreciation as the market will realize that its immediate reaction was unwarranted.

Sep102013

How Much Do I Need to Make Some Money?

Daily Market Update

How Much is Enough?How much is enough?

I still vividly remember the Tolstoy short story “How Land Does a Man Need?“

That story tells of “Pahom” who surprisingly needed much less land than he thought.

Eschewing greed has always been a tenet of the Option to Profit strategy, but I don’t think that it derived from any Tolstoy influence on me during childhood. I was probably influenced by Soupy Sales and The Marx Bothers much more than Tolstoy.

When I was younger, I looked at everything through the lens of the “The 1964 Zenith 25 Inch Color TV” metric. I don’t think that the word “metric” was really a word then, but like “algorithm,” it sounds like you have credibility when you sprinkle casual conversation with those words, especially if you master the art of subliminal suggestion..

G-spot.

In essence, for me the question was always distilled down to “how many Zenith Color TV’s, using 1964 prices, could be purchased with the amount of money in question?”

For standardization purposes, a single such TV was about $500 back then.

I remember when my father was offered a job paying $25,000 a year.

Totally unaware of such mundane things as taxes and other asset drainers, I just looked at that sum as meaning we could buy a new color TV each and every week.

Now, nearly 25 years later, Zenith is gone, your SUV glove compartment is probably bigger than 25 inches and $25,000 isn’t really that much.

So how much do you need?

I started using the covered call strategy and actively trading in and out of positions while I was still getting a regular paycheck. At the time, the income stream was a nice adjunct and I was only devoting about 25% of my portfolio to the strategy.

Now, I don’t work and I’ve devoted 100% of my stock portfolio to the strategy.

Did I mention that my wife, coincidentally, became known as “Sugar Momma” once I devoted myself to plunking my butt on the La-Z-Boy and trading full time?

I’ve always maintained that you can generate 2-4% per month of income from your assets. That shouldn’t be confused with “profit.” My goal is to use my assets to create income, while limiting downside risk in a down market and accepting the fact that my capital gains may be lessened during a bull run.

I’m OK with that.

Even if the market is going down and your portfolio may show paper losses, you can still generate that 2-4% that can become a source of income or “the source of income”

Since I tend to be a conservative guy, let’s make some assumptions.

Firstly, the upper range of the 2-4% return is during periods of market volatility and utilizing near the money option sales. You want higher than 4%, that can be done, too, but you have to also dismiss “fear” as you would need to devote more of your assets to “momentum” stocks or more speculative plays, like Green Mountain Coffee Roasters, Amazon, Netflix and MolyCorp, to name a few. Maybe even those “evil” leveraged ETF’s and ETN’s, such as ProShares UltraSilver and UltraShort Silver, Barclays Volatility ETN and others.

Secondly, the upper range also assumes that most, if not all of your holdings will be hedged, thus creating income streams.

So, now lets assume that it’s not very volatile out there and only 50% of your holdings are hedged and you’re not a momentum risk taking kind of guy.

I’ll call that 1%.

So how big of a portfolio do you need to make a monthly 1% income stream meaningful to you? What is your personal “Pahom” telling you that you need?

Well, let’s not forget to throw the monthly $200 subscription fee in there (once I increase it to that amount).

That means to reach a break even, your portfolio would have to be at least $20,000.

The bad news is that if that’s all you have, you may be in the 1% for income stream, but you’re probably not in the 1% by “Occupy Wall Street” standards.

Beyond that, even if you wanted to put the strategy into effect and accept a 0% income flow, after your subscription costs, $25,000 really isn’t enough to be diversified and have some pricing efficiency, even with your Uncle Vinnie acting as your discount broker.

So, you can easily do the math at different asset levels and different income stream rates.

From my perspective, after expenses, at that 1%, I’d need a $75,000  portfolio to get one new Zenith 25 inch color TV every month.

You may have your own metric.

Obviously, the next question is how much would it take to make a meaningful difference in your life?

I’m also assuming that your investments are discretionary. That is, you’re not playing with money that you may need in a moment of desperation. Those moments always seem to come when you’re stocks are at their low points. There’s nothing worse than taking losses, unless it’s taking losses when you’re arm is being twisted to do so.

Been there. But you’ll have to read “Option to Profit” for the story.

G-spot.

 

 

RETURN HOME

 

Sep62013

Weekend Update – September 8, 2013

Weekend Update

Employment Situation Report, Taper, new Yahoo! (YHOO) logo, Syria.

Not a line from a new, less catchy Billy Joel song, but a transition week going from the quietude of summer, which was mostly focused on fundamentals to the event driven and emotional rest of the year when the world seems to be perennially on fire, jumping from crisis to crisis.

In a few days traffic in my part of the country returns back to its normal heinous condition as our nation’s elected officials return from a much deserved 37 day vacation that they were unable to truncate by a few days to address some outstanding issues.

Just to be clear, it’s the electorate that deserved the break, but now they’re back and we can settle into our more normal state of dysfunction, while decreasing our focus on such mundane things as earnings. For the record, I don’t get out onto the roads very much anymore, having given up gainful employment for a life of ticker watching, but it’s not as easy to escape the results of having exercised our democratic rights.

Once things get back to “normal” it will seem just like old times as we are likely to give up the relative trading calm of the past two months and re-introduce a rapidly alternating volley of ups and downs as melodrama plays out in the nation’s capital. Watching the hairpin reversal as Russian Premier Putin suggested supporting the other side of the conflict and then watching a more gradual reversal during President Obama’s somewhat somnolent press conference is more like what we have become accustomed to seeing.

This morning’s Employment Situation Report which seems perfectly timed as the gateway to next week’s return to “business as usual” neither delighted nor frightened and gave no clue as to whether the “taper” is coming sooner rather than later. The revisions to previous months gave some solace that perhaps a delay was in order.

My metric is a simple one. It was the packed parking lot of a rural Delaware Fastenal (FAST) retail outlet that I saw two weeks ago that may have been part of the announcement yesterday of improved August sales for the company that has an early and ongoing part in lots of construction and industrial applications.

With those packed parking lots at Fastenal, or at least one packed parking lot, the current conventional wisdom regarding heavy machinery may be unwarranted. I currently own shares of Caterpillar (CAT), Joy Global (JOY) and Deere (DE) and I believe that all three are fairly priced to either open new positions or add to existing ones. Their moves higher during Friday’s trading makes me less likely to take that plunge immediately, although Deere is coming off an explicable large decline on Thursday and may be most enticing.

The question may no longer be when the dreaded taper is coming but by how much and has the market already discounted its early appearance.

I think it has and the expectation is for a $10-15 Billion taper to start off the process. Any short term adverse response to the initiation of the taper would likely give way to rally mode once again if surprises are few.

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).

With potential military action coming against Syria as early as September 9, 2013, timing of new purchases may be critical, as you might expect a near term market decline upon action and perhaps a relief rally afterward. My preference this week would be to tread slowly with creating new positions and perhaps focusing on sectors that may be a bit more resilient to the specter of armed conflict.

Healthcare in one such sector and I will be looking to replace assigned shares of Baxter International (BAX). The fact that Merck (MRK) will be ex-dividend this week makes that a likely choice, particularly as it has been trading in a very narrow range for the past 3 months.

Although Eli Lilly (LLY) is not ex-dividend this week, it is down about 10% from its recent high level and has some price support at about the $50 level. I think that it is a good defensive position in the event of a market that begins reacting to external events.

Retail has been a very mixed bag this earnings season but suddenly laggards like JC Penney (JCP) and even Sears Holdings (SHLD) have seen some buying support. While there is suggestion that their resurgence may come at the expense of retailers such as Macys (M), it is difficult to find fault with Macys at its current price and likely relative immunity from a Syria related market decline. Besides, it goes ex-dividend this week and offers an attractive option premium all helping to reduce risk of ownership.

The Gap (GPS) is another retailer that has been said to be at risk if some of the retail laggards start to catch-up. I’ve been waiting a while for The Gap’s share price to decline, but following a 13% drop from its recent peak, I think the time may now be here.

LuLuLemon Athletica (LULU) has been in the news this year for lots of reasons, some good and some not so good. While it may offend a portion of the shopping public by not offering an expanded selection of sizes and offending another portion of the public by having removed the defective too sheer products off the shelves, it has been a retailing success story and can be an exciting stock to own if you like that sort of thing. If you do, LuLuLemon reports earnings this week and it does have a history of explosive moves and occasionally throwing in some unexpected surprises, such as the departure of a respected CEO.

Shares still haven’t quite recovered from its most recent 20% earnings related decline. However, those who have a tolerance for risk may find good opportunity in either buying shares and selling deep in the money calls or selling deep in the money puts. For me, the most appealing action at the moment is selling $62.50 strike weekly puts that would return approximately 1.3% in the event that shares fall less than 11% upon earnings. The option market itself is expecting an approximately 9% move in either direction.

Lexmark (LXK) is a great example of a company that has re-invented itself and appears to be doing well by having done so, at least in the metric that matters to most – its share price.

About a year ago Lexmark announced that they were exiting the printing business, as if anyone knew that they had any other kind of business. With printers having become a low margin commodity and widespread reports that people were using printers far less as tablets have penetrated the market, the timing seemed opportune to find more cyan pastures. Following a significant drop in share price over the past 3 weeks Lexmark appears to be fairly priced, although there is still more downside potential following an impressive rise higher over the past six months.

While the Energy sector is always a risky play, especially during the uncertainties that may arise during conflict, a company such as Williams Cos. (WMB) may have some degree of immunity from events far away, as its natural gas operations are focused in North America. It does go ex-dividend this week and although I have two pe-existing lots at the current price, it too has traded in a narrow range providing a degree of safety while still offering very attractive returns from option premiums, dividends and potentially share appreciation, as well.

Finally, Abercrombie and Fitch is an always exciting purchase. Along with the rest of the teen retailers it has been punished this earning’s season and because of its high profile it is often used as an example of their precarious market position. While many are quick to say that Abercrombie is no longer considered “cool” by their target demographic and how fickle that audience is, my interests always revolve around short term trading opportunities and not long term prospects or liabilities. Shares are really well over-sold and there are no near term head winds. Abercrombie always offers an exceptional option premium relative to the risk and its regular price gyrations offer opportunity to escape or re-enter positions with frequency, making it an ideal covered call position for the investor with some tolerance for that kind of excitement.

Traditional Stocks: Caterpillar, Deere, Eli Lilly, The Gap

Momentum Stocks: Abercrombie and Fitch, Lexmark, Joy Global

Double Dip Dividend: Macys (ex-div 9/12), Merck (ex-div 9/12), Williams Co (ex-div 9/11)

Premiums Enhanced by Earnings: LuLuLemon (9/12 AM)

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

 

Sep32013

Microsoft: What Would Munger Do?

Articles

For a company that many have said represents nothing but “dead money,” Microsoft (MSFT) has certainly been up and kicking lately.

Fresh off the post-Ballmer resignation news and subsequent rally, Microsoft shares gave back everything in this day’s trading, as it announced plans to purchase its smart phone partner, Nokia (NOK).

Nokia itself is no stranger to having been left for dead, as it’s one-time dominance has seen it eclipsed by Apple (AAPL) in sales, and by others in perceived technological prowess.

In executing a purchase of Nokia it also started speculation that they were in effect “buying” their one-time employee, Stephen Elop, most recently CEO of Nokia, as a prime candidate to be Ballmer’s successor.

I say “most recently” because Elop has stepped down as CEO of Nokia so as not to give the appearance of Nokia actually being the superior party in the deal, in the event that Elop becomes Microsoft’s new CEO.

While Berkshire Hathaway (BRK.A) has no current position in Microsoft, the ties between their founders, Warren Buffett and Bill Gates, respectively, is well know and runs deep, much like a river, which is coincidentally the origin of the name “Nokia.”

Buffett’s less known partner, Charlie Munger, who is almost 90 years old, is rarely in the public eye. He is, however, a legendary investor who takes a back seat to no one. When asked the secret to his success his reply was simply “I’m rational. That’s the answer. I’m rational.”

Today, that seemed to be in short supply, as news came out of Microsoft’s $7.2 Billion deal. The immediate reaction in share price was to drop market capitalization by about $17 Billion.

That seems irrational, perhaps as irrational as a similar increase in market capitalization barely a week ago when Ballmer announced his plans.

WWMD? What Would Munger Do?

For me, that was reason to purchase shares, just as Ballmer’s resignation announcement was reason to sell shares. I was willing to pick up new shares had Microsoft fallen back to $33, never expecting an opportunity to occur so quickly in the absence of a general market meltdown.

As with most of my holdings the Microsoft shares were covered with options. In this case the $33 strike price was eclipsed, but buying back the options at a loss was rational, because the share price accelerated more than did the “in the money” premium. In those rare occasions that I do that, I always sell the shares as soon as the options positions are close. To do otherwise invites the possibility, or with my lick, the probability that the underlying shares will drop just as quickly as they rose, thereby making it a losing proposition all around.

Of course, you might also make the case that you wouldn’t have expected a major deal, such as this one to have occurred under the leadership of a lame duck CEO, but Microsoft is no ordinary company and Steve Ballmer is no ordinary CEO. Whatever talk you may hear about “the law of large numbers,” there is no denying that those large numbers allow you to act with a certain amount of impunity and have a greater long term vision.

That’s the rational thing to do.

Tellingly, the decision to consummate this deal was made without informing ValueAct Capital Management of the decision. The activist shareholder was just informed that they would be receiving a seat on the Board of Directors, but they were not in the loop on this deal. Besides, how rational would it have been to let a 1% equity stake get in the way?

However, even if the Nokia purchase follows in the path of other Microsoft initiatives and its purchase is written off in its entirety, the $7 Billion purchase price is of little significance to Microsoft and presents a far less liability than it seems on the “Surface,” which is in its own liability category.

To start, the funds for this purchase are from cash held overseas. Unless there is a sudden change in United States corporate tax laws, those funds sit idly, reducing the Price to Earnings ratio. The only use for the funds is further overseas investment. The $7 Billion being spent on Nokia represents approximately 10% of Microsoft’s overseas cash. Even if Ballmer goes on a wildly drunken global spending spree it would be incredibly difficult to make a dent in that overseas pile.

For their money Microsoft escapes US taxes and receives tax advantages related to the purchase. The taxes saved alone are approximately $1.5 Billion had they repatriated the money. Additionally any expenses incurred in the United STates further reduce tax liability.

But there is more to the deal to offset the cost that just financial optics and tax engineering. The margins on Lumina units will jump from approximately $10 for software royalties to $50 for hardware. With a projected sale of 30 million units net revenue just increased by $1.5 Billion. Again, in absolute terms that’s not much for Microsoft, but relative to the cost of the Nokia purchase, it is substantial.

What is clear is that what we now think of as smart phones, in some form or another, will evolve into our personal computers. Without a strategy to be part of that evolution money in the bank is insufficient to ensure continued relevance.

Google (GOOG) gets it and secured their foothold with Motorola, a cell phone manufacturer that had also seen better and more heady days, but with a great patent portfolio. Microsoft is now making a commitment to go down a similar path and also securing potentially valuable patents along with the manufacturer of 80% of the Windows OS phones on the market.

I’ve long liked Microsoft because of its option premiums when utilizing a covered call strategy and its recent history of dividend increases. The company is widely expected to announce yet another dividend increase, but even at its current rate of nearly 3% it is far ahead of the mean yield for S&P 500 companies, even when considering only those that pay dividends.

WWMD?

It would be presumptuous to pretend to know, but Microsoft at the currently irrationally depressed level appears to be poised to out-perform the broad index and is preparing itself to leave behind its reactive ways for what we all know to be a lucrative communications market.

Just ask Verizon (VZ).

Disclosure: I am long MSFT. 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.

Additional disclosure: I may add additional shares of MSFT

Sep22013

Notifications

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For those existing subscribers who would like to opt-in, you can now receive notification to your e-mail address of any updates to web site pages. Notification is sent upon publishing of any blog updates or web site messages. The notifications are in addition to your current preference for receiving e-mail Trading Alerts, if eligible.

To receive Notifications, simply go to the “My Account” page. There you will see a tab for “Notification Settings.” You can specify what kind of updates you would like to receive and in what format.

If you do opt-in, you can choose to opt-out at any time or change any of the parameters.

New subscribers are automatically enrolled but may easily opt-out or change their notification parameters

Aug302013

Weekend Update – September 1, 2013

Weekend Update

Behind every “old wives’ tale” there has to be a kernel of truth. That’s part of the basis for it being handed down from one generation to the next.

While I don’t necessarily believe that the souls of dead children reside in toads or frogs, who knows? The Pets.com sock puppet was real enough for people to believe in it for a while. No one got hurt holding onto that belief.

The old saw “Sell in May and go away,” has its origins in a simpler time. Back when The Catskills were the Hamptons and international crises didn’t occur in regular doses. There wasn’t much reason to leave your money in the stock market and watch its value predictably erode under the hot summer sun back in the old days.

Lately, some of those old wives’ tales have lost their luster, but the Summer of 2013 has been pretty much like the old days. With only a bare minimum of economic news and that part of the world that could impact upon our stock market taking a summer break, it has been an idyllic kind of season. In fact, with the market essentially flat from Memorial Day to Labor Day it was an ideal time to sell covered options.

So you would think that Syria could have at least waited just another week until the official end to the summer season, before releasing chemical weapons on its own citizens and crossing that “red line,” that apparently has meaning other than when sunburn begins and ends.

Or does it?

On Monday, Secretary of State John Kerry made it clear where the United States believed that blame lay. He used a kind of passion and emotion that was completely absent during his own Presidential campaign. Had he found that tone back in 2004 he might be among that small cadre of “President Emeritus” members today. On Friday he did more of the same and sought to remove uncertainty from the equation.

Strangely, while Kerry’s initial words and intent earlier in the week seemed to have been very clear, the market, which so often snaps to judgment and had been in abeyance awaiting his delayed presentation, didn’t know what to do for nearly 15 minutes. In fact, there was a slightly positive reaction at first and then someone realized the potentially market adverse meaning of armed intervention.

Finally, someone came to the realization that any form of warfare may not be a market positive. Although selling only lasted a single day, attempts to rally the markets subsequently all faded into the close as a variant on another old saying – “don’t stay long going into the weekend,” seemed to be at play.

That’s especially true during a long weekend and then even more true if it’s a long weekend filled with uncertainty. As it becomes less clear what our response will be, paradoxically that uncertainty has led to some calm. But at some point you can be assured that there will be a chorus of those questioning President Obama’s judgment and subsequent actions and wondering “what would Steve Jobs have done.”

John Kerry helped to somewhat answer that question on Friday afternoon and the market ultimately settled on interpreting the message as being calming, even though the message implied forceful action. What was clear in watching the tape is that algorithms were not in agreement over the meaning of the word “heinous.”

With the market having largely gone higher for the past 20 months the old saying seeking to protect against uncertainty during market closures has been largely ignored during that time.

But now with uncertainty back in the air and the summer season having come to its expected end, it is back to business as usual.

That means that fundamentals, such as the way in which earnings have ruled the market this past summer take a back seat to “events du jour” and the avalanche of economic reports whose relevance is often measured in nano-seconds and readily supplanted by the next bit of information to have its embargo lifted.

This coming week is one of great uncertainty. I made fewer than the usual number of trades last week and if i was the kind that would be prone to expressing regret over some of them, I would do so. I expect to be even more cautious this week, unless there is meaningful clarity introduced into the equation. While wishing for business as usual, that may not be enough for it to become reality.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and , Momentum categories, with no suitable “PEE” selections this week (see details).

While I currently own more expensive shares of Caterpillar (CAT), I almost always feel as if it’s a good time to add shares. Caterpillar has become everyone’s favorite stock to disparage, reaching its peak with famed short seller Jim Chanos’ presentation at the “Delivering Alpha Conference” a few weeks ago. as long as it continues trading in a $80-$90 range it is a wonderful stock for a covered call writing strategy and it has reliably stayed in that range.

Joy Global (JOY) reported its earnings last week and beat analysts estimates and reaffirmed its 2014 guidance. Nonetheless it was brutalized in the aftermath. Although already owning shares I took the opportunity to sell weekly put options in the belief that the reaction was well overdone.

If the reports of an improving Chinese economy are to be believed, and that may be a real test of faith, then Joy Global stands to do well. Like Caterpillar, it has traded in a reasonably narrow range and is especially attractive in the $48-53 neighborhood.

eBay (EBAY) is simply on sale, closing the week just below the $50 level. With no news to detract from its share price and having traded very well in the $50 -53 range, it’s hard to justify why it fell along with other stocks in the uncertainty that attended the concerns over Syria. It’s certainly hard to draw a straight line from Syria related fears to diminished earnings at eBay.

By the recent measure that I have been using, that is the comparison to the S&P 500 performance since May 21, 2013, the market top that preceded a small post-Ben Bernanke induced correction, eBay has well underperformed the index and may be relatively immune from short term market pressure.

Baxter International (BAX) is one of those stocks that I like to own and am sad to see get assigned away from me. Every job has its negative side and while most of the time I’m happy seeing shares assigned, sometimes when it takes too long for them to return to a reasonable price, I get forlorn. In this case, timing is very serendipitous, because Baxter has fallen in price and goes ex-dividend this week.

Coach (COH) also goes ex-dividend this week and that increases its appeal. At a time when retail has been sending very mixed messages, and at a time when Coach’s position at the luxury end is being questioned as Michael Kors (KORS) is everyone’s new darling, COach is yet another example of a stock that trades very well in a specific range and has been very well suited to covered option portfolios.

In general, I’ve picked the wrong year to be bullish on metals and some of my patience is beginning to wear thin, but I’ve been seeing signs of some stability recently, although once again, the risk of putting too much faith into a Chinese recovery may carry a steep price. BHP Billiton (BHP) is the behemoth that all others bow to and may soon receive the same kind of fear and respect from the potash industry, as it is a prime reason the cartel has lost some of its integrity. BHP Billiton also goes ex-dividend this week and is now about 6% below its recent price spurt higher.

Seagate Technology (STX) isn’t necessarily for the faint of heart. but it is down nearly 20% from its recent high, at a time when there is re-affirmation that the personal computer won’t be disappearing anytime soon. While many of the stocks on my radar screen this week have demonstrated strength within trading ranges, Seagate can’t necessarily lay claim to the same ability and you do have to be mindful of paroxysms of movement which could take shares down to the $32 level.

While Seagate Technology may offer the thrills that some people need and the reward that some people want, Walgreen (WAG) may be a happy compromise. A low beta stock with an option premium that is rewarding enough for most. Although Walgreen has only slightly under-performed the S&P 500 since May 21st, I think it’s a good choice now, given potential immunity from the specific extrinsic issues at hand, particularly if you are under-invested in the healthcare sector.

Another area in which I’m under-invested is in the Finance sector. While it hasn’t under-performed the S&P 500 recently, Bank of New York Mellon (BK) is still about 7% lower in the past 5 weeks and offers a little less of a thrill in ownership than some of my other favorites, JP Morgan Chase (JPM) and Morgan Stanley (MS). Sometimes, it’s alright giving up on the thrills, particularly in return for a competitive option premium and the ability to sleep a bit sounder at night.

Finally, with the excitement about Steve Ballmer finally leaving Microsoft (MSFT) after what seems like an eternity of such calls, the share price has simply returned to a more inviting re-entry levels. In fact, when Ballmer announced his decision to leave the CEO position in 12 months, I did something that I rarely do. I bought back my call options at a loss and then sold shares at the enhanced share price. Occasionally you see a shares appreciation outstrip the appreciation in the in the money premium and opportunities are created to take advantage of the excitement not being reflected in future price expectations.

At the post-Ballmer excitement stage there is still reason to consider share ownership, including the anticipation of another dividend increase and option premiums while awaiting assignment of shares

Traditional Stocks: Bank of New York Mellon, Caterpillar, eBay, Microsoft, Walgreen

Momentum Stocks: Joy Global, Seagate Technology

Double Dip Dividend: Baxter International (ex-div 9/4), BHP Billiton (ex-div 9/4), Coach (ex-div 9/5)

Premiums Enhanced by Earnings: none

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

Aug272013

Dividends

Articles

I received a very nice text message from a subscriber this morning.

I think that if I’m ever in the market for a publicist for Option to Profit, my search need go no further.

His message, in its entirety was “Option to Profit: Come for the premiums, stay for the dividends.”

My guess is that he’s been seeing a stream of dividends coming in lately. Today alone had Lorillard, Weyerhauser and Molson-Coors.

Some of you know that I have mixed feelings about dividends and am not really a big fan.  (I Don’t Understand Dividends and The Myth of Dividends) but as long as there appear to be some pricing inefficiencies in option premiums when dividends are about to be paid (Double Dipping Dividends), why would you want to pass up that opportunity?

I’ve been increasingly putting an emphasis on dividends as market volatility has declined, in order to increase over all yield and I have to admit that I don’t mind receiving those brokerage alerts telling me when a dividend check has been deposited into my account (Dividends? Forget DRIP and Go PRIP).

Because of my belief in attempting to exploit those pricing inefficiencies when they appear is why I send out queries on ex-dividend mornings for those positions that were in the money at the time of going ex-dividend. It’s all about collecting the data and validating the strategy and the information that so many of you regularly provide is very helpful and appreciated.

I’ve been looking for a good way to express the OTP portfolio’s dividend yield for a while but it’s difficult to really get a good fix and one that accurately depicts the reality, especially if seeking to project annual return.

Since I like to compare everything to the S&P 500 Index, it makes sense that I do the same for dividend yield.

Currently the average S&P 500 stock offers a 2.06% dividend yield. However, that is impacted by the 82 stocks in the index that pay no dividends.

So for the 412 dividend paying stocks in the index, the average yield is 2.46%. In 2012 the average dividend paying stock had a 2.7% yield. The current year’s lower yield reflects generally higher stock prices.

If you look at the Weekly Performance spreadsheet you may have noticed for the past two months or so some calculations on each page that assesses dividend yield of open positions and projects that yield on an annual basis.

I had not been planning on saying anything about those spreadsheet scribblings until the end of the year, until having received this morning’s message.

The good news is that with increased data collection the model for creating projections is beginning to resemble reality.

The better news is the reality.

The dividend yield for positions closed in 2012, all 272 of them was 2.9%

Thus far the yield for positions closed in 2013 is 2.7%

Both of those reflect all positions and not just those paying dividends. As a result the gap is 0.7% and in a very favorable direction.

At the moment, not including new purchases this week, the remaining open positions in the OTP portfolio are delivering an annualized dividend yield of 2.9%, again that includes both dividend and non-dividend paying positions.

For those that are a bit more traditional than I am and have long appreciated dividends I finally see your perspective as those account credits have been adding up.

Aug242013

Weekend Update – August 25, 2013

Weekend Update

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Momentum Stocks: Cliffs Natural Resources

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

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

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