Mar142013

The Clock is Ticking on the S&P 500

Articles

The age old question and certainly having its application in the stock markets is how does one see the glass. Is it half full or half empty? Is the market going higher from the current levels or have we already seen its best days?

I often like to say that I neither believe in technical nor fundamental analyses. Saying so is probably a reflection of the denial that has me refusing to believe that my intellectual capacity has greatly diminished.

While not really spending terribly much time with charts, I do glance at them. Like the spooky kid from “The Sixth Sense,” I do think I occasionally see patterns. I suppose to some degree that’s somehow related to a very basic aspect of technical analysis.

About a month ago, I started getting a bit leery about the market’s climb and have found it increasingly difficult to commit funds to new positions. That feeling was based upon what I perceived to be a very similar path that the market was following to that exhibited in the beginning of 2012.

Both paths are the kind that covered option sellers dislike, but fortunately don’t come along very often. Both times the market has essentially done nothing but climb higher.

This Thursday morning we’re fresh off closing higher nine straight days. In fact, March 2013 has yet to see a lower close. Needless to say, my prescience has yet to be fulfilled.

The last time that the market enjoyed a nine day winning streak was in November 1996 and it do so in May 1996, as well. I can say “enjoyed” because back then i wasn’t selling call options, so I’m fairly certain that I enjoyed those periods as well.

Out of curiosity and with an abundance of time on my hands as I await something to break in one direction or another, I was interested in seeing just how the market has done historically following such consistent daily climbs higher.

The short and quick answer is that such climbs in the S&P 500 or its related trading products, such as SPDR S&P 500 ETF (SPY) do not result in a reactive and sharp drop once the string of advances has come to an end. The market continues to climb.

So much for my theory and hopes that I could return to the more fulfilling days of trading ups and downs in the market.

While the current advance should, therefore, be a source of continued optimism, there may be a competing dynamic to be considered.

Looking at the bigger picture, beginning in May 1996, when that first 9 day advance occurred, which happened to be at the beginning of a secular market climb, it seems as if some kind of pattern was appearing.

Looking at the 17 year period illustrated above there may be some reason to believe that we are in the process of completing a 52 month cycle.

In each of the two previous broad and sustained market rallies the time frame has been approximately 52 months and the rallies have been on the order of 100% or greater. For those not chased out of the market as the nadirs were reached the recoveries were satisfying.

However, that satisfaction may have been tempered by the large market drops that ensued. In both previous cases the market plunged more than 40% over the course of the subsequent 18-30 months. Greed, optimism, a sense of invincibility may all have been factors in being caught in the continued downdrafts that devoured paper profits.

In hindsight, there were certainly precipitating factors that may have played a role in these drops, not all of which could have been predicted.

While perhaps the technology bubble should have been no surprise, nor should the real estate bubble, extrinsic factors, such as the terrorist attack of September 11, 2001 contributed to market declines during an already susceptible period. However, in the period from May 1996 to the present, there have also been an astonishing 18 periods of time when the market fell 10% or more.

As hard as it is to understand that the occasional fire that burns down a beloved forest is part of a cycle that sustains and evolves the environment, so too are those market declines an apparently necessary, or at least unavoidable component of reaching greater heights.

Clearly, and again, focusing on the big picture, those intermediate declines have been part of a healthy process as the S&P 500 has appreciated by more than 130% since that nine day trading range in 1996. Of course, that’s little solace to those that did see their profits disappear and that may have exited the market and greatly delayed their re-entry.

Being prepared for those declines is the tricky part. Balancing the need to be invested with the knowledge that much of your good work can be undone by a simple hiccough is disconcerting.

As we are now in the fifth year of the current climb and may be approaching that wall that we’ve seen twice before in the past 17 years, I continue to believe that there is ample reason to create reserves and take profits, even if that means leaving some on the table. Transitioning a portfolio may be a good strategy to gradually respond to future uncertainty.

In my case, that means being less likely to rollover covered contracts into the next cycle and instead being happy to see share assignments and realization of cash proceeds. It may also mean writing longer term contracts for those positions not likely to be assigned and grabbing larger premiums, albeit at lower time adjusted ROIs, in order to have a better chance of riding out any reversal.

Timing the market is something that most sane people would agree is impossible, certainly on a consistent basis. Everyone has the same charts to look at, yet the interpretations are in a wide range, often fitting personal outlooks and human emotions. The cynic and the optimist see the same data very differently and respond consistent with their own biases.

I am, by nature, a long term optimist, but a short term pessimist. Rarely, however, have I felt this level of pessimism. Sadly, I didn’t feel it in 2007, even after first having one of those warning mini- drops of 8% in July 2007.

The nice thing about being wrong is that you can always get back, although given that scenario, I have to believe that I would be even more pessimistic, as I don’t care to chase stocks as they’ve moved higher.

The other nice thing is as today (Thursday March 14, 2013) is thus far shaping up to be the 10th straight day of gains, I can look at the data all over again and perhaps arrive at a completely different conclusion.

Just like the professionals.

 

Mar102013

Weekend Update – March 10, 2013

Weekend Update

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: Caterpillar, Lowes

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

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

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

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

 

Mar62013

Google is a Bargain

Articles

How many times have you heard the expression that “everything is relative?”

Certainly, when it comes to the price of anything, on some level a determination is made of its relative value. It can be a complicated process combining objective and subjective measures and is often re-assessed in hindsight.

That latter part is especially true with stock purchases. Buying and selling stocks that should be a simple exercise as you don’t really need to deal with intangibles, such as emotion, fear and the specter of a collapse of the Euro. At least not if you believe that the P/E ratio is a fair measure of value and a simple means by which to make comparisons. It would also helped if absolutely everyone agreed with you in that regard.

Barely a year ago it seemed as if all attention and all excitement was focused on Apple (AAPL) and what kind of price targets it could breach in its unstoppable ride. How often did analysts refer to Apple’s price movement as something unique and special?

As Apple is now having some difficulty living up to those lofty expectations it really shouldn’t come as much of a surprise that it has hit a wall faced by other invincibles of past. Being unique and special is not all that unique if history is a guide. I did my best to suggest that in a number of Apple-centric articles in the past 6 months. While history suggests that Apple will fall even further it gives reason to suspect that Google will march significantly higher.

Let’s go to the charts.

Just look at what happened to some of its sector mates about a dozen years ago. Whether Cisco (CSCO), Microsoft (MSFT) or Intel (INTC), their charts all look very similar. Although the 200,000% increase in shares of Cisco at its peak may be an outlier, Microsoft experienced a 57,000% climb, while Intel and Apple had 18,800% and 21,400% increases from their opening day close trades.

While Cisco, Microsoft and Intel all experienced their high points during the technology bubble, Apple waited the same dozen years to begin resembling the pattern of its Silicon Valley neighbors. Coincidentally, that was the length of time that Steve Jobs was estranged from Apple, before his return following the purchase of Next Computer by Apple.

By the standards of a decade ago, Apple’s share price may still have some way to go to match Microsoft’s 60% drop, Intel’s 74% retreat or Cisco’s 76% plunge. Thus far, with its recent low of $420, Apple has fallen 40% from its 2012 peak. All you need to do is slide its representation on the charts above or below over to the left 12 years and see how nicely they superimposes with the others.

But then there’s Google (GOOG). The company that’s feared, has moved into everyone’s space, is willing to fail, yet somehow garners little respect and attention. Even as it achieved its trading highs, surpassing the $800 level, analysts downplayed the achievement. Instead of discussing the juggernaut that Google is and its expansive vision, the price increase has widely been attributed to people trading out of Apple and into Google. Those are the same people that downplay market rallies by saying that it occurred on light volume. If your banker doesn’t ask about the white powder on your deposits, they’re not likely to ask if they were the result of light volume.

Google simply isn’t really generating the same kind of excitement as Apple did just a year ago. No one has even thought Google deserved an utterance of the “Law of Large Numbers” as a reason why it would have difficulty in continuing its climb.

 

Granted, Google didn’t start it’s first day of trading as a sub-$10 stock, so it is a bit more difficult to achieve a 200,000% gain. To do so, its share price would have to advance to approximately $200,000, although it could conceivably split its shares on the order of the 288 fold times that Microsoft has done. While Cisco only had to climb to $22 to increase its share price 100% after it opened for trading, Google had to climb $108 for that distinction. At $838 it is currently up less than 700% from its closing trade on its IPO day in 2004.

700%? That’s nothing by relative standards. That is the poor section of Atherton, barely even good enough to step foot into Palo Alto. Besides, even Johnson & Johnson (JNJ) was able to mount that kind of appreciation in a nine year period beginning in the mid-1980s. By historical standards there’s nothing rarefied about Google’s performance.

Certainly, by no relative measure is Google over-extended. Further, Google’s mettle has been tested and it has shown its leadership qualities. Although Google fell more than the others during the market meltdown beginning in 2007, its descent started later and ended earlier. In fact, Google started its climb back more than three months before the market bottom, having advanced more than 40% in those months preceding the market nadir.

While Apple had out-performed Google in both the periods from the October 2007 peak and the March 2009 bottom, Google has handily beaten the others.

Google’s most recent advance began November 15, 2012, moving forward 20.3%. Coincidentally, the S&P 500’s march higher (13.6%) began on November 15, 2012.

Yet the Google chart looks nothing like that of its one time glorious and subsequently fallen neighbors.

 At this point all it has done is to return and mildly surpass its 2007 peak price.

Once ad click money truly started flowing in Google has always taken the opportunity to try new and exciting ventures, most of which have been scuttled or perpetually stayed in beta. While small in the scope of the enormously growing enterprise, under the leadership of Larry Page the ventures are increasingly bold and increasingly poised to create meaningful revenue streams in addition to the growing annuity that ad click revenue has become. Even if no meaningful or immediate direct revenue is recognized from a venture, Google is a disruptor in the market place and is able to soften the underbelly of a potential competitor. Just ask Apple.

With a growing cash horde and a dividend in its inevitable future, Google has already one upped Apple with its proposed, albeit controversial, stock split. Arguably, the series of stock splits that Microsoft, Intel and Cisco undertook helped to fuel their stock appreciation and Google is still on the ground floor in that regard, standing to benefit from the illusory increase in value.

Most of all, Google is still such a relatively young company that is just learning to walk. Granted, it is doing so during a very different era than did its counterparts, but even by Apple’s modest 18,000% growth, which was not artificially fueled by the technology boom, Google has plenty of room to still return incredible profits to new investors, if it follows the script that has been played out by others.

Finally, I would be negligent, and certainly not mindful of my own history, to not suggest that there are covered option opportunities always available with Google. Although I do not currently own shares, Google has been a frequent source of premium income for me over the past 6 years. With extended weekly options now available as well, there are many choices among strike prices and contract length that both price bulls and bears can find appealing. Even those thinking that there may be no more than an 8% drop by April 20, 2013 can get a !% ROI for their pessimism. For those with a tighter price range the rewards can be substantial if Google stays within that range.

Google is also always an exciting play upon earnings announcement. Of course the premature announcement of two quarters ago was more excitement than many would want to repeat, especially, RR Donnelley (RRD), but Google is a frequent candidate for the “Premiums Enhanced by Earnings” strategy, either through covered calls or put sales, whether its shares move up or down. Seeking to take advantage of its historically large earnings related moves may be a good, and fairly conservative mechanism to find an entry point for those not currently holding shares.

I’ll be looking forward to earnings on April 15th and hope to be in a position to pay a fair share of taxes on the profits the next April 15th.

Mar32013

Weekend Update – March 3, 2013

Weekend Update

Sequester This.

Despite being a reasonably smart guy, I’ve never understood how to play the game of “craps.” It’s too fast, there are too many possible decisions and when you get right down to it, it’s name is probably based on something that aptly describes something you’d rather not touch or taste. A name like that should serve as fair warning to stay away. Sometimes a glance at the people playing the game sends the same message.

Not that a word like “sequester” is any better. The very sound of “sequestration” makes me want to cringe as I think about what my poor dachshund had to endure. It’s probably almost as bad as what the individual investor has to endure on a maddeningly frequent basis as markets whipsaw for no apparent reason, yet there’s never a shortage of reasons to explain the unexplainable. At least the dog never required an explanation and eventually went on his way, fully healed from the experience. I can’t say the same thing about my portfolio.

The events that spurred the past week’s early sell-off was by all accounts equal parts Italy, Federal Reserve and Sequestration. Later in the week, as the market was knocking at the gates of 2007’s record levels it was Italy, the Federal Reserve and the lack of interest in the Sequestration that were responsible for the turn of events.

What’s not to understand?

Just a few months earlier the new year’s gains were said to be due to averting the Fiscal Cliff. You may or may not recall the gyrations the market took as competing elected officials decided to vent and spew as they raised and then dashed hopes of a meaningful resolution and simply played craps with other people’s portfolios. Since we’ve all learned that ethical guidelines regarding investment portfolios of elected officials are rather lax, you had to wonder just how the “house” odds were stacked in their game of craps.

This time around as the Sequestration deadline loomed the market just kept chugging along higher. It’s hard to understand that as it seems that there can only be a downside, regardless of whether a resolution is reached or not, unless it becomes clear that there really is no danger posed by this thing they’ve called “The Sequester.”

It seems odd that many are taking great pains to paint frightening and untenable outcomes if the sequestration becomes reality. Yet no one seems to care. Not the man on the street, who based on his knowledge of geography can’t possibly have any idea of what the sequestration is, nor the markets.

To me, the ultimate game of craps was being played this week, as no one really knows what either outcome to this most recent crisis will bring the economy or the markets. Yet that didn’t stop concerned parties from dueling press conferences and then abandoning Washington, DC prior to the deadline and prior to an agreement. Most of all, it didn’t end money pouring into stocks and pushing them higher and higher.

Couple that uncertainty with the certainty that myriads of people beginning to foam at the corners of their mouths felt as we got tantalizingly closer to the heights of 2007. That’s precisely how storms are created.

Just as there were dueling certainties, we also had dueling countdown clocks this past week. Nothing good ever comes of those clocks, whether for the sequestration deadline or Dow points until 14164.

Option to Profit subscribers know that I’ve been unusually dour the past week or two out of concern for a repeat of 2012’s market month long 9% drop. The course that we’re following currently seems eerily familiar.

With that personal concern it’s somewhat more difficult to select stock picks for the coming week, particularly while also looking for opportunities to raise cash positions in preparation for bargains ahead.

However, as Jim Cramer has long said, “there’s always a bull market somewhere.”

I don’t know if that’s true, but there’s always a strategic approach to fit every circumstance.

In this case, while I strongly favor weekly options, where they are available, concerns regarding a quick and sharp downturn lead me to look more closely at monthly or even longer option opportunities in an attempt to still put money to work but to not be left empty handed after expiration of a weekly contract, while then holding a greatly devalued position. The longer term contracts, although perhaps offering lower time adjusted ROIs, do offer some opportunity to assure premium flow for more than a single week and do allow for greater time to ride out any storms.

The week’s selections are categorized as either Traditional, Momentum, Double Dip Dividend or “PEE” and include a look at premiums derived from selling weekly, remaining March 2013 options or April 2013 options (see details).

Deere (DE) was on my list last week, as well. But like most items on the list last week, it remained unpurchased as my cautionary outlook was already at work. In the past month Deere has already had a fairly big drop compared to the S&P 500. I don’t see very much sequester related risk with a position right now, but Deere does have a habit of getting dragged along with others reacting to bad industrial news.COF

Citibank (C) was also on the list last week, but was replaced by Morgan Stanley (MS) as one of the few trades of the week. Although I’m expecting some market challenges ahead, I don’t believe that the decline will be lead by financials, which have already been week of late. If the sequestration occurs and some of the forecasted job cuts become reality, in the short term, I would expect the credit side of Capital One’s (COF) business to benefit. I’ve had Capital One on my wish list in the past, but haven’t bought shares for quite a while, as its monthly only options premiums were always off putting. Now that there are weekly options available, it seems strange that I’d be looking more toward the security provided by the longer term contracts.

With all of the dysfunction at JC Penney (JCP) and Sears’ (SHLD) ambivalence about its position in retail, Kohls (KSS) is just a solid performer. Its been in the news lately, including the rumor category. My shares were recently assigned, but as earnings are out of the way and price is returning to the comfort range, Kohls, too, is another of the boring, but reliable stocks that can be especially welcome when all else is languishing.

Although I own Williams Companies (WMB) with some frequency, I’m not certain that I can refer to it as one of my “favorites.” It’s performance while holding it is usually middling, but sometimes it’s alright to be just average. Williams does go ex-dividend this week and is also in my comfort zone with its current price.

YUM Brands (YUM) is one of those stocks that seem to have a revolving door in my portfolio. It is probably as responsive to analysts interpretation of events as any stock that I’ve seen and it typically finds its way back to where it started before the poorly conceived interpretations were unleashed on the investing public. I had wanted to pick up shares last week to replace those assigned the week prior, but simply valued cash more.

Praxair (PX) is just a boring company whose big gas tanks are ubiquitous. Sometimes boring companies are just the right tonic, when the stresses of a falling market are prevailing, at least in my mind. Making a dividend payment this week makes it less boring and perhaps it still has enough helium on hand to resist falling.

Pandora (P) reports earnings this week and it is fully capable of moving 25% on that event. At the moment, the options market is factoring in approximately a 16% move. AT it’s current price, I would strongly consider taking chances of receiving a 1+% ROI in return for seeing a 25% or less price drop.

On a positive note, we can draw a parallel from an astute observation from more than a century ago. Since “everything that can be invented has been invented,” there was clearly no future need for the Patent Office. So too, with the passing of the Sequestration, there can be no other unforeseen man made fiscal crises possible, so it should all be milk and honey going forward. Don’t let the higher volatility fool you into believing otherwise.

Traditional Stocks: Deere, Capital One, Kohls

Momentum Stocks: Citibank, YUM Brands

Double Dip Dividend: Williams Company (ex-div 3/6)

Premiums Enhanced by Earnings: Pandora (3/7 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

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

 

Feb262013

Diversification 101 Redux

Daily Market Update

I received an email this morning from a subscriber. He is well known to me in that he communicates with frequency and is very constructive in comments and observations. He also has good insights and asks very good questions.

So when I received and then read his email early in the morning following a 200 point decline in the market the day before, most of which came in the final hour, I was already concerned about market direction, recent losses in the OTP portfolio and losses in my own portfolio.

To put a little perspective on the specific period of time, I had just written an article earlier in the week expressing concern that we were heading for a market drop similar to that seen in 2012. I reiterated that concern and the potential need to increase cash positions the next week in one of the Daily Market Updates.”

He was asking about his paper losses of the last two weeks. Those losses were well in excess of what I and the portfolio encountered, (not considering the 50 or so positions that have already been profitably closed in 2013.)

As it would turn out, after he graciously shared some information with me, approximately 30% of his portfolio was concentrated in 5 positions. Four of those were in “metals” and another in “energy.” What they had in common, much more importantly is that all had suffered large losses in recent weeks, even beyond what the market itself had suffered.

With that information it was easy to diagnose the problem. Diversification had been breached.

The very first blog I ever wrote was entitled “Diversification 101” back in 2007. It wasn’t really about a classic discussion of diversification, as I never seem to get involved in those, but it was an extension of the concept of portfolio diversification. Ultimately, it’s all about the management of risk and reducing risk exposure.

By its nature, the act of selling options is already an expression of desiring to manage risk, but it’s not sufficient.

Let’s get basic.

There are essentially 10 or 11 sectors, depending on who is doing the counting. I rarely invest in the Utility sector, but pretty much everything else is fair game.

In a diversified portfolio you would have each sector in which you invest represent an equivalent percentage in your portfolio. For example, if your portfolio currently invests in 7 sectors, each should approximately represent 14% of your total portfolio.In a week, you may be in 6 sectors, eight or still at 7 and the representative proportions change accordingly.

Obviously, the bigger the portfolio the easier it is to be diversified, but large portfolios can also get confusing and unwieldly. It can be easy to lose track of precisely what families of companies you own when you have 20 or more stock positions.

Diversification on the basis of “sector” is a good place to start, but there’s lots more that needs to be done. Within each sector, the component stocks should be reasonably well distributed, recognizing of course that prices do change and the allocations will likewise be altered. Three stocks in a sector? Each should represent approximately one-third for that sector.

Beyond that, there may be rules for individual stocks as well, that comprise the sector. For example, a stock that is particularly volatile may be more appropriately owned at less than what may be the proportionate level.

For example, if you own stocks in a particular sector that is comprised of 5 stocks, within that sector each stock would be expected to comprise 20% of that sector. However, a more risky stock, as is usually designated as “MOMENTUM” in OTP trading alerts may warrant only a 10% position, or even less, depending on one’s individual taste for risk.

That reduced position is further diluted in a portfolio that consists of mutiple sectors.

When it comes to assembling a portfolio that is likely to change with great frequency particular attention has to be placed on monitoring diversification. To start, very often stocks that are assigned are parts of out-performing sectors. They, and their sector mates may be inappropriate to immediately add back to the portfolio because of their inflated prices. As a result, new purchases may then be in other sectors, inflating their relative proportions in your portfolio.

Additionally, very often when shares have fallen in price there is reason to consider adding additional shares as a means to erode paper losses by selling in the money calls on the new lot of shares. But by making those stock purchases you are adding to that particular sector and must do so with an eye both on the sector’s contribution to your overall portfolio as well as the individual stock’s contribution to the sector. Sometimes you feel as if you should turn a blind eye to the need for diversification because the downbeaten or under-performing shares may seem to be such bargains.

For example, I am currently unwilling to add shares of INTC or PBR because they are at their limits for their relative roles in my portfolio based upon their absolute values. If I buy more of either, despite what appear to be very appealing prices, I willl simply own too much of their shares.

In the case of CLF I’m not likely to add shares based on how great of a role I want a speculative stock, such as it is, to play in my portfolio. My CLF shares may not be of the same value as those of INTC or PBR, but I own enough “MOMENTUM” shares across all sectors. Now, especially during an unforgiving market, is not the time to stock up on volatile stocks.

One shortcoming of the methodology that I use to report ROI for Option to Profit subscribers is that there is an underlying assumption that each position is equally weighted in the OTP portfolio. In my real life trading, that isn’t the case as I try to stay within the distribution guidelines based on sector and individual stocks. In general, I spend less on initial purchases of speculative positions than I do for more “TRADITIONAL” positions.

What’s important is to resist the enticement of the premium. The risky positions will offer a greater ROI, but you can work backward to determine how many shares of such a position to purchase. For example, if you purchased 400 shares of MetLife, a “TRADITIONAL” stock and received a net premium of $0.35, how many shares of Cliffs Natural Resources would you have to buy to generate the same net $140 in option premiums?

To answer my own question, using today’s data as an example, a $13,880 purchase of MET would net, after assignment the same as a $5,200 purchase of CLF.

Remember, it’s not about “Greed,” but rather about protecting your portfolio and having it work for you and creating additional income streams.

Although Option to Profit can report sector distribution to track diversification efforts, doing so is fairly unhelpful. It is inadequate for the individual, whose portfolio may be weighted very differently.

As a general rule, each person should define for themselves, for example, what proportion of their portolio do they want invested in “MOMENTUM” stocks? Those are the kind with greater premiums, but come with greater volatility and, therefore risk.

After that, investors should keep an eye on their diversification by sector. It needn’t be precise, but you should have an overall idea, based on value of underlying shares, what kind of exposure you have to each sector. In a typical market, you’ll see under-performance in sectors on a rotating basis, which is made palatable by out-performance in other sectors. In time, the under-performers typically become out-performers, although individual stocks may lag.

The importance of having an idea of your general exposure is related to taking action on Trading Alerts.

If an alert is made for a stock in a particular sector in which you are already fully represented, or perhaps even overweight, then you would likely not want to consider taking the risk of over-exposure. Additionally, if the individual stock has a risk profile that is great, such as a “MOMENTUM” stock, you would want to consider whether within the particular sector you already have sufficient risk exposure.

Ultimately, there will be times that you wished you had been overweight in a particular stock or sector. Although I’m not a gratuitously betting person, I am willing to bet that more often than not, you’ll end up being glad you had your assets spread out and diffused the risk.

Diversification is one of those things that really works over the long term. If you want to stay in the game don’t test the odds.



Feb242013

Weekend Update – February 24, 2013

Weekend Update

We all engage in bouts of wishful thinking.

On an intellectual level I can easily understand why it makes sense to not be fully invested at most moments in time. There are times when just the right opportunity seems to come along, but it stops only for those that have the means to treat that opportunity as it deserves.

I also understand why it is dangerous to extend yourself with the use of margin or leverage and why it’s beneficial to resist the need to pass up that opportunity.

What I don’t understand is why those opportunities always seem to arise at times when the well has gone dry and margin is the only drink of water to be found.

Actually, I do understand. I just wish things would be different.

I rely on the continuing assignment of shares and the re-investment of cash on a weekly basis. My preference is for anywhere from 20-40% of my portfolio to be turned over on a weekly basis.

But this past week was simply terrible on many levels. Whether you want to blame things on a deterioration of the metals complex, hidden messages in the FOMC meeting or the upcoming sequester, the market was far worse than the numbers indicated, as the down volume to up volume was unlike what we have seen for quite a while.

On Wednesday the performances of Boeing (BA), Hewlett Packard (HPQ) and Verizon (VZ), all members of the Dow Jones Industrials Index helped to mask the downside, as the DJIA and S&P 500 diverged for the day. Thursday was more of the same, except Wal-Mart (WMT) joined the very exclusive party. So far, this week is eerily similar to the period immediately following the beginning of 2012 climb and immediately preceding a significant month long decline of nearly 10%,beginning May 2012.

That period was also preceded by the indices sometimes moving in opposite directions or differing magnitudes and those were especially accentuated during the month long decline.

So what I’m trying to say is that with all of the apparent bargains left in the carnage of this trading shortened week, I don’t have anywhere near the money that I would typically have to plow in head first. I wish I did; but I don’t. I also wish I had that cash so that I wouldn’t necessarily be in a position to have it all invested in equities.

Although that margin account is overtly beckoning me to approach, that’s something that I’ve developed enough strength to resist. But at the same time, I’m anxious to increase my cash position, but not necessarily for immediate re-investment.

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

Cisco (CSCO) was one of those stocks that I wanted to purchase last week, but like most in a wholly unsatisfying week, it wasn’t meant to be. With earnings out of the way and some mild losses sustained during the past week, it’s just better priced than before.

Although there have been periods of time that I’ve owned shares of both Caterpillar (CAT) and Deere (DE), up until about $10 ago on each stock there has rarely been a time over the past 5 years that I haven’t owned at least one of them. This past week saw some retreat in their prices and they are getting closer to where I might once again be comfortable establishing ownership.

Lockheed Martin (LMT) is one of those stocks that I really wished had offered weekly option premiums. Back in the days when there was no such vehicle this was one of my favorite stocks. This week it goes ex-dividend and that always gets me to give a closer look, especially after some recent price drops. Dividends, premiums and a price discount may be a good combination.

Dow Chemical (DOW) has been in my doghouse of late. That’s not any expression of its quality as a company, nor of its leadership. After all, back when the market last saw 14,000, Dow Chemical was among those companies whose shares, dividends and option premiums helped me to survive those frightening days. But after 2009 had gotten well entrenched and started heading back toward 14000, the rest of the market just left Dow behind. Then came weekly options and Dow Chemical didn’t join that party. More recently, as volatility has been low, it’s premiums have really lagged. But now, at its low point in the past two months for no real reason and badly lagging the broad market, it once again looks inviting.

Lorillard (LO) was on my radar screen about a month ago, but as so often happens when it came time to make a decision there appeared to be a better opportunity. This week Lorillard goes ex-dividend. Unfortunately, it no longer offers a weekly option, but this is one of those companies that if not assigned this month will likely be assigned soon, as tobacco companies have this knack for survival, much more so than their customers.

MetLife (MET) was on last week’s radar screen, but it was a week that very little went according to script. Maybe this week will be better, but like the tobacco companies that are sometimes the bane of insurance companies, even when paying out death benefits, somehow these companies survive well beyond the ability of their customers.

United Healthcare (UNH) simply continues the healthcare related theme. Already owning shares of Aetna (AET), I firmly believe that whatever form national healthcare will take, the insurance companies will thrive. Much as they have done since Medicaid and Medicare appeared on the national landscape and they moaned about how their business models would be destroyed. After 50 years of moaning you would think that we would all stop playing this silly game.

The Gap (GPS) reports earnings this week, along with Home Depot (HD) as opposed to most companies that I consider as potential earnings related trades, there isn’t a need to protect against a 10-20% drop. At least I don’t think there is that kind of need. But whereas the concern of holding shares of some of those very volatile companies is real, that’s not the case with these two. Even with unexpected price movements eventually ownership will be rewarded. The fact that Home Depot gained 2% following Friday’s upgrade by Oppenheimer to “outperform” always leads me to expect a reversal upon earnings release.

On the other hand, when it comes to MolyCorp (MCP) there’s definitely that kind of need to protect against a 20% price decline. Always volatile, MolyCorp got caught in last week’s metal’s meltdown, probably unnecessarily, since it really is a different entity. Yet with an SEC overhang still in its future and some investor unfriendly moves of late, MolyCorp doesn’t have much in the way of good will on its side.

Nike (NKE) goes ex-dividend this week and its option premiums have become somewhat more appealing since the stock split.

Salesforce.com (CRM) is another of those companies that I’m really not certain what it is that they do or provide. I know enough to be aware that there is drama regarding the relationship between its CEO, Mark Benioff and Oracle’s mercurial CEO, Larry Ellison, to get people’s attention and become the basis of speculation. I just love those sort of side stories, they’re so much more bankable that technical analysis. In this case, a xx% drop in share price after earnings could still deliver a 1% ROI.

Finally, two banking pariahs are potential purchases this week. I’ve owned both Citibank (C) and Bank of America (BAC) in the past month and have lost both to assignment a few times. As quickly as their prices became to expensive to repurchase they have now become reasonably priced again.

Although Friday’s trading restored some of the temporarily beaten down stocks a bit, a number still appear to be good short term prospects. I emphasize “short term” because I am mindful of a repeat of the pattern of May 2012 and am looking for opportunities to move more funds to cash.

I don’t know if Friday’s recovery is a continuation of that 2012 pattern, but if it is, that leads to concern over the next leg of that pattern.

For that reason I may be looking at opportunities to increase cash levels as a defensive move. In the event that there are further signals pointing to a strong downside move, I would rather be out of the market and miss a continued upside move than go along for the ride downward and have to work especially hard to get back up.

I’ve done that before and don’t feel like having to do it again.

Traditional Stocks: Caterpillar, Cisco, Deere, Dow Chemical, MetLife, United Healthcare

Momentum Stocks: Citibank

Double Dip Dividend: Bank of America (ex-div 2/27), Lockheed Martin (ex-div 2/27), Lorillard (ex-div 2/27), Nike (ex-div 2/28)

Premiums Enhanced by Earnings: Home Depot (2/26 AM), MolyCorp (2/28 PM), Salesforce.com (2/28 PM), The Gap (2/28 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

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

 

Feb192013

Gloom Can Bring Good TImes

Articles

I often say that I neither believe nor follow fundamental nor technical analyses.

Maybe that’s because I’m incapable of understanding or learning the nuances of either. However, despite saying such, like so many things in life, the truth usually lies somewhere in-between.

I do look at charts, although I’m not entirely convinced that I know what I’m looking for or looking at when I stare at the graphic representation of what we observe in the market. On some primitive level I must be doing some kind of technical analysis because I do look for patterns, such as that mentioned about 9 months ago in how Apple (AAPL) was resembling the Google (GOOG) of 2008.

As someone who has been consistently selling options for more than 5 years, I can look at specific periods of time when those who criticize that technique would have been able to revel in their tremendous insight and understanding of price movements, while I would have been wallowing in introspection.

Luckily, that introspection never seems to last for very long.

One such period was from January 1, 2012 to mid-March 2012. One real characterization of that period, besides the seemingly higher close each and every day was the manner in which it happened. Coming immediately after the close of trading in 2011, a year in which triple digit moves in either direction were the norm, that initial period in 2012 was quite different. Those moves were rare. Instead, it was the same slow melt-up that we’ve witnessed thus far in 2013.

I’ll add the first 6 weeks of 2013 as a period that I haven’t been fully enamored of having sold options, although to be fully analytical, I’d have to admit that stock selection plays a role, as well. On paper, the adverse impact of Petrobras (PBR) and Cliffs Natural Resources (CLF), have to be given their due credit.

But looking back to 2012, it all just suddenly changed and made me feel much better about the strategy of selling options. It all started with those triple digit moves. Just as quickly, introspection gave way to a sense of high self-esteem.

As 2013 has been thus far following the same pattern, I’m beginning to see the light at the end of the tunnel.

Again, I’ll certainly admit to a very simplistic use of charts, but just as the charts of Apple and Google at different periods in their corporate lives looked remarkably similar and portended a future path for Apple, I am struck by the similarity in the slopes of the S&P 500 (SPY) for the two periods mentioned earlier.

Qualitatively, I could tell anyone how similar those periods were, without looking at any chart, owing to my trading results. However, the parallel slopes tell a more compelling and quantitative story. Beyond that, the time periods are identical. In the case of 2012, the ascendant period was followed by a brief two week flat period, which was followed by a quick 2% market drop. That drop was just as quickly erased, restoring investor confidence long enough to go through a 1 month and 8% decline.

On this President’s Day, coincidentally we are just concluding a two week period of calm and flat performance, with the S&P 500 having moved 2 points in that period.

There’s certainly no rule that I know of that insists that events repeat themselves. In this case, looking back at my 2012 results, I certainly hope that they do, as it is always preferable for the covered option seller to be doing so in a flat or down market.

Of course, a rational mind will ask what the stimulus might be for a market reversal or any large move regardless of direction. Whereas individual stocks may not require a publicly known stimulus to have a large and sudden move, the market itself needs some overt catalyst. Back in 2012, perhaps it was news of a double dip in the Spanish economy or Greek elections that turned out austerity. Who really knows?

On the horizon, the only known entity is the “sequester.” However, it’s really anyone’s guess where its current deadline for resolution may take us. The recent “Fiscal Cliff” was rationalized by many as being the impetus for the gains of 2013, but it’s not clear to me what effect the sequester may have, regardless of political agreement, or not. Any reduction in spending would be a positive and I believe that the market, which is still rumored to discount events six months into the future, is expecting some kind of resolution.

With less than two weeks to go for the clock to stop ticking, it’s hard to imagine the market being propelled forward on any agreement. Of course, it’s certainly easy to see how another delay or “kick of the can down the road” could be unsettling, especially to credit markets. Standard and Poors may have their own headaches right now with issuance of past credit ratings, but they still do have a job to do.

While politicians may avoid the risk of being labeled “unpatriotic” for voting in favor of defense cuts, they free themselves of that charge if no agreement is reached by March 1,2013, which is just in time for a repeat of 2012.

If I were very concrete and believed that we must stick not only to the same pattern but to the same time frame, I would paint a scenario that envisions a quick 2 week sell off while some gloom sets in regarding agreement on the sequester. That, of course, would have to be followed by another 2 week period, but this time rebounding as it appears that positive movement is occurring.

That brings us to the deadline and the charting anniversary for a large market drop as either there is agreement or there is no agreement.

Win-win, especially if you’re a covered option selling politician.

 

Feb172013

Weekend Update – February 17, 2013

Weekend Update

It’s all relative.

Sometimes it’s really hard to put things into perspective. Our mind wants to always compare objects to one another to help understand the significance of anything that we encounter. Having perspective, formed by collecting and remembering data and the environment that created that data helps to titrate our reaction to new events.

My dog doesn’t really have any useful perspective. He thinks that everyone is out to take what’s his and he reacts by loudly barking at everyone and everything that moves. From his perspective, the fact that the mailman always leaves after he has barked out reinforces that it was the barking that made him leave.

The stock market doesn’t really work the way human perspective is designed to work. Instead, it’s more like that of a dog. Forget about all of the talk about “rational Markets.” They really don’t exist, at least not as long as investors abandon rational thought processes.

It’s all about promises, projections and clairvoyance. Despite the superficial lip service given to quarterly comparisons no one really predicates their investing actions on the basis of what’s come and gone.

During earnings season one can see how all perspective may be lost. It’s hard to account for sudden and large price moves when there’s little new news. Although I can understand the swift reaction resulting in a 20% drop when Cliffs Natural Resources (CLF) announced that it was slashing its dividend, filing for a secondary stock offering and also creating a new class of mandatory convertible shares, I can’t quite say that the same understanding exists when Generac (GNRC) drops 10% following earnings and guidance that was universally interpreted as having “waved no red flags.”

Of course, the use of perspective and especially logic based upon perspective,  can be potentially costly. For example, it’s been my perspective that Cliffs and Walter Energy (WLT) often follow a similar path.

What has been true for the past year has actually been true for the past five years. So it came as a surprise to me, at least from my perspective that the day after Cliffs Natural plunged nearly 20%, that Walter Energy, which reports earnings on February 20, 2013 would rise 6% in the absence of any news. From my perspective, that just seemed irrational.

But of course, perspective, by its nature has to be individually based. That may explain why Forbes, using its unique perspective on time, published an article on February 12, 2013, just hours before Cliffs released its earnings, that it had been named as the “Top Dividend Stock of the S&P Metals and Mining Select Industry Index”, according to Dividend Channel. In this case, Cliffs was accorded that august honor for its “strong quarterly dividend history.”

Apparently, history doesn’t extend back to 2009, when the dividend was cut by 55%, but it’s all in your perspective of things. I’m not certain where Cliffs stands in the ratings 24 hours later.

What actually caught my attention the most this past week is how performance can take a back seat to  perspectives on liability, especially in the case of Halliburton (HAL) and Transocean (RIG). On Thursday, it was announced that a Federal judge approved a mere $400 million criminal settlement against it for its seminal part in the Deepwater Horizon blowout. That’s in addition to the already $1 Billion in fines it has been assessed. In return, Transocean climbed nearly 4%, while it’s frenemy Halliburton, on no news of its own climbed 6%. Poor British Petroleum (BP) which has already doled out over $20 Billion and is still on the line for more, could only muster an erasure of its early 2% decline. For Transocean, at least, the perception was that the amount wasn’t so onerous and that the end of liability was nearing.

From one perspective reckless environmental action may be a good strategy to ensure a reasonably healthy stock performance. At least that’s worked for Halliburton, which has outperformed the S&P 500 since May 24, 2010, the date of the accident.

I usually have one or more of the “Evil Troika” in my portfolio, but at the moment, only British Petroleum is there, at its lagged its mates considerably over the past weeks. Sadly, Transocean will no longer be offering weekly options, so I’m less likely to dabble in its shares, even as Carl Icahn revels in the prospects of re-instating its dividend.

Perhaps the day will come when stocks are again measured on the basis of real fundamentals, like the net remaining after revenues and expenses, rather than distortions of performance and promises of future performance, but I doubt that will be the case in my lifetime.

In fact, the very next day on Friday, both Transocean and Walter Energy significantly reversed course. On Friday, the excuse for Transocean’s 5% drop was the same as given for Thursday’s 4% climb. Walter Energy was a bit more nebulous, as again, there was no news to account for the 3% loss.

So what’s your perspective on why the individual investor may be concerned?

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

Technology stocks haven’t been blazing the way recently, as conventional wisdom would dictate as a basic building block for a burgeoning bull market. My biggest under-performing positions are in technology at the moment, patiently sitting on shares of both Microsoft (MSFT) and Intel (INTC). Despite Tuesday’s ex-dividend date for Microsoft, I couldn’t bear to think of adding shares. However, despite a pretty strong run-up on price between earnings reports, Cisco (CSCO) looks mildly attractive after a muted response to its most recent earnings report. Even if its shares do not move, the prospect of another quiet week yet generating reasonable income on the investment for a week is always appealing.

Although I was put shares of Riverbed Technology (RVBD) this week, which is not my favorite way of coming to own shares, it’s a welcome addition and I may want to add more shares. That’s especially true now that Cisco, Oracle (ORCL) and Juniper (JNPR) have either already reported or won’t be reporting their own earnings during the coming option cycle. With those potential surprises removed from the equation there aren’t too many potential sources of bad news on the horizon. The healing from Riverbed’s own fall following earnings can now begin.

MetLife (MET) is, to me a metaphor for the stock market itself. Instead of ups and downs, it’s births and deaths. Like other primordial forms of matter, such as cockroaches, life insurance will survive nuclear holocaust. That’s an unusual perspective with which to base an investing decision, but shares seem to have found a comfortable trading range from which to milk premiums.

Aetna (AET) on the other hand, may just be a good example of the ability to evolve to meet changing environments. Regardless of what form or shape health care reform takes, most people in the health care industry would agree that the health care insurers will thrive. Although Aetna is trading near its yearly high, with flu season coming to an end, it’s time to start amassing those profits.

It’s not easy to make a recommendation to buy shares of JC Penney (JCP). It seems that each day there is a new reason to question its continued survival, or at least the survival of its CEO, Ron Johnson, who may be as good proof as you can find that the product you’re tasked with selling is what makes you a “retailing genius.” But somehow, despite all of the extraneous stories, including rumored onslaughts by those seeking to drive the company into bankruptcy and speculation that Bill Ackman will have to lighten up on his shares as the battle over Herbalife (HLF) heats up, the share price just keeps chugging along. I think there’s some opportunity to squeeze some money out of ownership by selling some in the money options and hopefully being assigned before earnings are reported the following week.

The Limited (LTD) is about as steady of a retailer as you can find. I frequently like to have shares as it is about to go ex-dividend, as it is this coming week. With only monthly options available, this is one company that I don’t mind committing to for that time period, as it generally offers a fairly low stressful holding period in return for a potential 2-3% return for the month.

While perhaps one may make a case that Friday’s late sell-off on the leak of a Wal-Mart (WMT) memo citing their “disastrous” sales might extend to some other retailers, it’s not likely that the thesis that increased payroll taxes was responsible, also applied to The Limited, or other retailers that also suffered a last hour attack on price. Somehow that perspective was lacking when fear was at hand.

McGraw Hill (MHP) has gotten a lot of unwanted attention recently. If you’re a believer in government led vendettas then McGraw Hill has some problems on the horizon as it’s ratings agency arm, Standard and Poors, raised lots of ire last year and is being further blamed for the debt meltdown 5 years ago. It happens to have just been added to those equities that trade weekly calls and it goes ex-dividend this week. In return for the high risk, you might get am attractive premium and a dividend and perhaps even the chance to escape with your principal intact.

I haven’t owned shares of Abercrombie and Fitch (ANF) for a few months. Shares have gone in only a single direction since the last earnings report when it skyrocketed higher. With that kind of sudden movement and with continued building on that base, you have to be a real optimist to believe that it will go even higher upon release of earnings.

What can anyone possibly add to the Herbalife saga? It, too, reports earnings this week and offers opportunity whether its shares spike up, plunge or go no where. I don’t know if Bill Ackman’s allegations are true, but I do know that if the proposition that you can make money regardless of what direction shares go is true, then I want to be a part of that. Of course, the problem. among many, is that the energy stored within the share price may be far greater than the 17% or so price drop that the option premiums can support while still returning an acceptable ROI.

Also in the news and reporting earnings this week is Tesla (TSLA). This is another case of warring words, but Elon Musk probably has much more on the line than the New York Times reporter who test drove one of the electric cars. But as with Herbalife and other earnings related plays, with the anticipation of big price swings upon earnings comes opportunity through the judicious sale of puts or purchase of shares and sale of deep in the money calls.

From my perspective these are enough stocks to consider for a holiday shortened week, although as long as earnings are still front and center, both Sodastream (SODA) and Walter Energy may also be in the mix.

The nice thing about perspective is that while it doesn’t have to be rational it certainly can change often and rapidly enough to eventually converge with true rational thought.

If you can find any.

Traditional Stocks: Aetna, Cisco, MetLife

Momentum Stocks: JC Penney, RIverbed Technology

Double Dip Dividend: The Limited (ex-div 2/20), McGraw Hill (ex-div 2/22)

Premiums Enhanced by Earnings: Abercrombie and Fitch (2/22 AM), Herbalife (2/19 AM), Tesla (2/20 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

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

 

Feb102013

Weekend Update – February 10, 2013

Weekend Update

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

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

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

It’s a new world.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: British Petroleum, Southwestern Energy, The Limited

Momentum Stocks: Baidu, Riverbed Technology

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

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

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

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

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Feb32013

Weekend Update – February 3, 2013

Weekend Update

On Wednesday evening, Bloomberg Rewind host, Matt Miller tweeted that he was interviewing Wilbur Ross in a live segment in a few moments and was soliciting questions for one of the century’s greatest investors and serial turnaround artists.

Never really needing a reason to Tweet, I was nonetheless pleased that my question was chosen, but I especially liked the ultimate answer. I simply wanted to know if the cool and calm demeanor that Wilbur Ross always displays when on television was ever belied by emotion that got in the way of a business or management decision.

The answer was, to me, at least, incredibly profound and absolutely reflective of the persona that we get to see when he makes appearances. Ross said that in takeovers things often do not go as planned, but you have to “roll with the punches.” He further went on to point out that emotions conspire to work against you in making decisions and taking actions. He was calm and collected in his response and barely showed any facial grimacing or twitching when the question was being asked.

I, on the other hand was twitching, contorting and breathing rapidly at the mere use of my question. I do the same with every tick up and down of every stock I own.

My initial thought was that was probably among the best pieces of advice that could ever be given, but it was just too bad that human nature so reflexively intervenes.

One of the things that I like about buying stocks and then selling calls is that it takes so much of the emotion out of the equation. It also frees you from being held hostage to each and every dive that shares can take for no rational reason. This week alone we watched Petrobras (PBR) drop nearly 10% as it announced fuel increases that Deutsche Bank (DB) described as a “positive” action and Chesapeake Energy (CHK) surge 10% on news that their founder and CEO, Aubrey McClendon, would be leaving in 3 months. In the case of Chesapeake Energy that surge was dissipated in just a day, although that may have been as irrational as the initial move.

Recently, large adverse moves impacted shares of Tiffany (TIF) and YUM Brands (YUM) as downgrades, stories, rumors, a smattering of data and a myriad of other factors took their turns at poking holes in whatever support existed for share price. Of course, they weren’t alone in the cross hairs of the barrage of often transiently irrelevant “facts.”

But by and large, if you sell covered options you can roll with the punches. Instead of feeling the anguish when your stock takes a hit it’s similar to seeing road-kill. It’s terrible, it’s a tragedy, but for the most part you realize that in the big picture it’s all just a blip. Those options that someone else was kind enough to buy from you protect you from having to suffer through the anguish and gives you a chance to get over the initial emotional reaction so that when it is time to make a decision, such as at the end of the option period, you can do so with a far less clouded mind.

Wouldn’t it be nice to have a little Wilbur Ross inside of all of us? Maybe even better would be to be his sole heir, though.

As everyone seemed to be giddy about the fact that the DJIA briefly crossed 140000 for the first time since 2007, I reminded myself of how short a period of time it remained there and then saw that the slopes of the periods preceding the 2007 and 2013 tops are remarkably similar. If anything, maybe a bit more steep this time around?

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Fortunately for me that was the time I learned to start going with the punches and had already started protecting my stocks with calls and then used the premiums generated to purchase more shares during the ensuing drops.

Not that history is ever in a position to repeat itself, but we’ve seen this before.

As always, this week’s potential stock positions are all intended as part of a covered option strategy, whether through the sale of covered calls or puts. The selections fall into the usual categories of Traditional, Momentum, Double Dip Dividends or “PEE” stocks (see details).

As the market found itself celebrating jobs on Friday, one sector that was left behind was retail. Among my favorites this year has been The Gap (GPS). They’re mundane, not terribly innovative, but they are ubiquitous and always a safe fashion choice. Although its next support level appears to be 10% lower it does offer an appealing enough option premium to accept that risk of wearing brown shoes with a tuxedo.

Murphy Oil (MUR) just took a large hit after announcing earnings. More and more I question the extreme earnings related reactions. What seems to separate some stocks from one another is the rapidity at which they recover from those reactions. The faster the recovery the easier it is to call it an over-reaction. Otherwise, if I own such shares and they don’t rebound quickly, it’s just a case of them being under-appreciated. In Murphy Oil’s case, I think it was a welcome over-reaction.

Southwestern Energy (SWN) has been lagging behind some of its sector mates thus far in 2013, but that situation is reversed if looking at the one year comparisons. It reports earnings early in the March 2013 option cycle and I believe may be poised to challenge its 52 week high.

I’m somewhat reluctant to consider adding Intel shares (INTC) this week. The only lure is the dividend that comes along with it as it goes ex-dividend on February 5, 2013. My reluctance stems from the fact that if I add shares my Intel position will be too large and it has been a disappointingly under-performing asset in the months I’ve held shares, having waited a long time for something of a rebound. While I don’t expect $24 or $25 any day soon, I’m comfortable with $21, a dividend and some option premiums. At least that would ease some of the paper cuts on my wrists.

Starbucks (SBUX) another favorite is a reluctant choice this week, as well, but only because of its strong gain in Friday’s trading and the fact that its option contracts are spread a bit too far apart. With more and more options being offered at strike prices in $1 and even $0.50 gradations the $2.50 and $5 differences seen with some stocks makes them less appealing, especially if selling options to optimize income production over share gains. What’s really needed is for more people to read these articles and drive up the option trading voliume as they realize what an opportunity exists.

Chesapeake Energy has been in the news quite a bit this year, but for all of the wrong reasons. AS usual, its high profile story this week concerned its founder and CEO, Aubrey McClendon. The market quickly added 10% to share value upon learning that McClendon will be leaving the company in April 2013. It quickly gave that gain up during the course of the rest of this week. This is a position, that if I decide to enter, would likely be done on the basis of selling put options. That has been a common theme as I’ve re-entered Chesapeake Energy positions over the years.

What again distinguishes this week’s target stocks is that there is greater emphasis on risk, specifically earnings related risk, as Friday’s jobs data numbers fueled a strong week ending rally that further added to already high stock prices, making bargains harder to find.

Acme Packet (APKT) was one of the first earnings related situations that I described in an article entitled “Turning Hatred into Profits” that sought to create income from either disappointment or reaffirmation. It’s share price is higher now than it was the last time around, but I think that a 1% or more ROI for the chance that it’s share price may go down 10% or less after earnings is a reasonable risk-reward venture. If it works again, I may even try to understand what it is that Acme Packet does the next time earnings season rolls around.

Baidu (BIDU) has been on my lists for the past 2 months or so and has been purchased several times. Under the best and calmest of circumstances it is a volatile stock and is sometimes a frustrating one to match strike price premiums with anticipated objectives because the price moves so quickly. As it gets ready to report earnings, it too can easily move 10% in either direction, yet still meet my threshold of 1% ROI for the level of risk taken.

When it comes to stocks that are capable of making big moves in either direction on any given day and especially on earnings, there aren’t many that are better at doing so than Green Mountain Coffee Roasters (GMCR). This is certainly a stock that has required “going with punches” over the past few years, but it has been a mainstay of my speculative slice of my portfolio for quite a while. I typically think in terms of 25% moves when it comes to earnings. In this case I’m looking at about a 25 to 1 proposition. A 25% drop for securing a 1% profit for one week. If not, then it’s just back to the usual Green Mountain “grind” and selling calls until shares are assigned.

While Herbalife (HLF) has been having all of the fun and getting all of the attention, poor NuSkin (NUS) has been ignored. But, it too, reports earnings this week. I have no opinion on whether NuSkin or any other company are engaged in questionably ethical business practices, I just see it as a vehicle to throw off option premium with relatively little risk, despite it’s overall risky persona. It’s not a stock that I would want to hold for very long, so the availability of only monthly options is of some concern.

Riverbed Technology (RVBD) was one of the most early and most frequent members of my covered call strategy. It always feels strange when I don’t have shares. As it gets ready to report earnings this coming week I’m reminded why it so often makes numerous and sizable movements, especially in response to earnings. It has a bad habit of giving pessimistic guidance, but after a long courtship you learn to accept that failing because even if punished after conference calls it always seems to get right back up.

Finally, Panera Bread (PNRA) reports earnings next week. It too is highly capable of having large earnings related movements. Its CEO has lots of Howard Schultz-like characteristics in that he truly knows the business and every intricate detail regarding his company. Interestingly, it went up almost 4% just 2 trading days before earnings are released. That kind of investor “commitment” before a scheduled event always concerns me, but I’m not yet certain just how much it scares me.

Traditional Stocks: Murphy Oil, The Gap, Southwestern Energy

Momentum Stocks: Chesapeake Energy

Double Dip Dividend: Intel (ex-div 2/5), Starbucks (ex-div 2/5)

Premiums Enhanced by Earnings: Acme Packet (2/4 PM), Baidu (2/4 PM), Panera Bread (2/5 PM), Green Mountain Coffee Roasters (2/6 PM), NuSkin (2/6 AM), Riverbed Technology (2/7 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

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

 

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Jan272013

Weekend Update – January 27, 2013

Weekend Update

By Thursday evening I had already lost track of how many records and new highs had been set as trading was getting ready to enter the final week of January. Depending on the parameters and definitions it seems as if every minute someone was referring to one new market high of one sort or another.

Sometimes I think that the Wilshire 5000 doesn’t get its due recognition, but if the trend continues it will join the party, even if only to have set a record for intra-day trading level on a Tuesday following inauguration.

If they weren’t calling new records they were hyper-focused on just how far we were from a new record. By the way, just for the record, the WIlshire 5000 is 1.3% away from its all time record high.

After a while the meaning of a record becomes less and less. I certainly didn’t feel the special nature of whatever was being watched so closely. S&P 500 at 1500? For me, the only record that counts is 14,164 for the Dow and 1565 on the S&P 500, both more than 5 years ago.

But even those records are meaningless, because all that really matters is where your own assets are residing.

I’d also lost track of how many consecutive gaining days we had other than to remember that last January seemed to be the very same. Like through a million cuts we went higher each and every day, simply setting a record for the number of slices.

You don’t have to be a short seller to bemoan a relentless upward path, but it’s a little more excruciating when there’s no apparent reason for what has caused such despair. At least Ackman knows where Loeb lies.

Alright, it hasn’t really been excruciating and it hasn’t really been a period of despair to live and die by covered option sales. That may be a bit of an exaggeration, as you do share in the market’s gains, but maybe not as much. Of course, that assumes that the next guy is actually taking their profits rather than falling prey to human nature and letting it all ride. I like taking profits on a very regular basis and moving on before the welcome is outstayed.

Records don’t mean very much. Just ask the performance enhanced athletes that are being denied recognition for their accomplishments. I don’t really know what exactly is juicing the markets right now, but I do know that there’s little reason to believe that the recent heights are deserved.

Ultimately, looking back at the record highs of October 2007, I realize that the best performance enhancer since then has been ignoring the occasional mindless melt ups and doing the conservative thing. Collecting penny by penny selling those options until the sum of the parts is greater than the whole. I continually maintain that you don’t have to be a great stock picker or market timer to have your records beat theirs.

And get there sooner.

As volatility keeps setting its own record lows it does become more challenging to get more pennies for your efforts in selling options. Although I’ve never been much of a fan of earnings season, at the very least it does its part to enhance premiums, if you don’t mind the enhanced risk, as well. As a covered call seller risk is not high on the list of favorite things, but there has no be some solace in knowing that a uni-directional move sooner or later has to come to an end. Hopefully, when it does, it won’t be quite as bruising as has been the descent of Apple (AAPL) after its one way journey higher.

As always, the week’s selections are categorized as either being Traditional, Momentum, Double Dip Dividend, or “PEE” (see details).

What strikes me this week is how I had a very difficult time identifying a “Traditional” candidate. Over the past month the least well performing sector, Utilities, has nonetheless delivered growth. The makes it difficult to spot potential targets that are also fairly priced.

That brings me to the elephant in the room. For the second week in a row Apple is back on the list. Last week it was a possible earnings related trade. Up until an hour before the close of Wednesday’s trading I thought of selling weekly $480 puts, but decided that having done the same with Mellanox (MLNX) and F5 Networks (FFIV) enough was enough. What exactly does that say when either Mellanox or F5 Networks is thought to be less risky than Apple? It probably says something about my delusional diagnostic methodology rather than the respective companies. But as Apple is now near the last price at which I owned it and closer to a $425 support level, it just seems harder to ignore. I think that once Tim Cook replaces the “WWJD” bracelet on his wrist and gets a new one from which to draw inspiration and guidance, things will get back to normal. The new bracelet would simply be inscribed “WWJD.” The difference? What Would Jobs Do?

With the “Traditional” category so quickly dispatched, it’s another week and another reason to think about adding shares of AIG (AIG). Of course, I wouldn’t have to consider doing that if my one and two week old lots hadn’t been assigned. But the reality is that the shares are always welcome back home. I look at the option premiums as being something like the rent you might collect from your adult child living in the basement.

I wanted so much to pick up shares of Baidu (BIDU) once again last week but it just didn’t get to a good price point. By that I mean that as opposed to barely a month or two ago the extraordinarily low volatility is taking its toll on intrinsic value and making the sale of in the money calls somewhat less of a slam dunk, particularly when the intrinsic value is more than half of the difference between two strike prices. I’m hoping to see Baidu trade within $2 or less of a lower strike price early in the week.

YUM Brands (YUM) should probably have the ticker symbol “YOYO.” It responds more to the conflicting daily rumors regarding the vitality of the Chinese economy than do traditional metrics of growth, such as copper and iron ore. Today’s drop was just another in the recent series of rumors regarding safety of the chicken offerings. It’s hard to imagine that YUM Brands is delivering a lower quality or unsafe product than is generally available to the growing consumer base in China.

There was a time, before Apple, that Texas Instruments (TXN) reporting earnings set the tone for the market. Those days are long gone. In fact, no one really sets that tone anymore, not even IBM (IBM), whose own great earnings and share performance did nothing more than be the sole reason for the Dow’s positive performance on Tuesday, while the S&P fell flat. In the meantime, Texas Instruments has survived its own earnings report and has a decent dividend this week in addition to income streams from its weekly option offerings.

Fastenal (FAST) is just a remarkably stable company whose products are ubiquitous yet out of view. Somehow, the fact that they have about 2600 company owned stores has escaped my view, but somehow they haven’t escaped the end user. More important than the company’s stability is the stability of shares over time. The dividend is fairly meager, but added to its option premium a reasonably safe place to leave money for a little while.

US Steel (X) is a recent and current holding. It is among a large group of high profile companies that are reporting earnings this week and may satisfy being plugged in to the equation that evaluates premiums of put sales relative to potential earnings related stock dives. For US Steel accepting the possibility of a 5% decline can still result in a 1% gain.

Lexmark (LXK) was also a recent holding. I still don’t fully understand where their earnings come from now that they are getting out of the printer business. However. it has shown resilience after the revelation that people on wireless devices just aren’t printing as much as the next guy tethered to a desk and computer. It too may offer an appealing award for accepting the possibility of a sharp earnings related decline.

VMWare (VMW), a one time high flier has settled into a good place. Although it is capable of making large moves after earnings, those moves on a percentage basis are fairly modest. Yet it does regularly offer premiums that are attractive. It’s one time parent EMC Corp (EMC) reports earnings in the morning and may offer some insights for the later reporting VMWare.

And finally, there’s Facebook. I still get a little smirk thinking about the vitriol directed toward me when making the case for buying shares following expiration of the first lock-up period. Just as with Apple, your portfolio isn’t a very good place to park your emotions. Whatever your opinion may be on Facebook the shares, Facebook the IPO, Facebook the company or Facebook the hoodie, it is an appealing trade based upon its earnings release this week.

Traditional Stocks: Apple

Momentum Stocks: AIG, Baidu, YUM Brands

Double Dip Dividend: Fastenal (ex-div 1/30), Texas Instruments (ex-div 1/29)

Premiums Enhanced by Earnings: Lexmark (1/29 AM), Facebook (1/30 PM), US Steel (1/29 AM), VMWare (1/28 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

 

Jan202013

Weekend Update – January 20, 2013

Weekend Update

Stocks should never be boring.

People do stupid things when they’re bored.

Trust me, I know. If I were a betting person I would bet that you know that to be true, as well.

After starting with a more than 4% gain in the S&P 500 in the first week of 2013, the subsequent two weeks have been incredibly boring.

When over the course of five trading days the S&P closes at 1472 on four of those days, there’s something missing. In my case, it was trading.

As someone who sells covered options, I love that the concept “reversion to the mean” seems to be realized with great regularity. But if there wasn’t lots of intervening noise from Point A right back to Point A, there wouldn’t be much of a market for buying the options that I was so intent upon selling. Boring markets are an anathema and together its accompanying low volatility conspire to reduce the joy of selling options by increasing risk taking in order to meet income targets from having sold option contracts.

This past week was one of those weeks when the intra-day action was in a state of deep hibernation for much of the time. For me the pinnacle came on Wednesday, but as it would turn out that was wholly appropriate, as Jane Wells, of CNBC pointed out that was “National Do Nothing Day.” She explained the “holiday” in her blog and if you look at the associated video, you can even catch a glimpse of me (want even more?). Somehow, everyone got back to work on Thursday and the market showed some vestiges of past life and excitement, just in time to plan for an upcoming week highlighted by high profile earnings reports.

That should be exciting. Apple (AAPL), Google (GOOG), IBM (IBM) and much more.

For as long as I’ve been selling options, I did find the timing of Google’s earnings release interesting. Of course, nothing could be as interesting as Google’s last quarter, when it blamed RR Donnelly (RRD) for having released earnings 3 hours earlier than anyone expected or wanted. This time, however, instead of reporting earnings at the close of trading on the Thursday prior to the last day of the monthly option cycle, Google is actually releasing earnings on the first day of the new monthly option cycle.

I’ve always liked the former timing. Now, selling deep out of the money weekly puts on Google shares in anticipation of 5-10% moves in either direction will have too much time to trade on such things as merits and other non-emotional and highly charged issues. Although it’s not on my list this week there still may be good reason to make it happen.

Although this week the potential selections are still categorized as being either Traditional, Momentum, Double Dip Dividend and Premiums Enhanced by earnings, at the moment, in my mind I’m categorizing them as either being Exciting or Boring (see details).

Capital One Finance (COF) has been on my radar screen for a couple of months, but got too expensive on the week that I had initially thought of making the purchase. After getting hit badly on Friday on disappointing earnings, it is right at the price target that had appeal for me in November. The very recent weakness in credit card titans Visa (V) and MasterCard (MA) are felt even more by those that incur credit risk, but Capital One is here to stay.

Starbucks (SBUX) although also reporting earnings this coming week and having a premium enhanced by the prospects of a significant reaction to earnings, has been a good and steady position to own and sell options upon for the past 6 months. I especially look forward to Howard Schultz’s post-earnings interviews. No one knows the marketplace better than he does. Even when the shares are punished after earnings he has credibility and clarity that restores confidence.

Not that I would condone doing so, but for many a cup of coffee and a cigarette go hand in hand. Lorillard (LO) has just concluded its share split and offers an attractive option premium with relatively little undue risk, besides to one’s health and well-being.

Anadarko (APC) is one of those positions that pains me a bit, having happily owned it several times in the past few months. Despite in now trading $5 above my last purchase price and having lost it to assignment, it continues to look attractive, both on the basis of the potential for price appreciation and its option premium. If you never knew joy you would never know pain.

Freeport McMoRan (FCX) continues to be my favorite pick for 2013. The materials sector was a bad under-performer this past week, but I continue to labor under the thesis that China will be forced to expand its GDP more than may be healthy in order to maintain domestic peace during political transfer. We can worry about the effect of over-expansion some other time. In the meantime, Freeport also reports earnings next week, but will do so before the first trade of the week is made.

AIG (AIG) is probably my single most mentioned stock and the one that I most often regret for not having purchased. Over the past month or so I’ve been heeding my own advice and keeping shares on a revolving door basis. As long as they trade in a tight range, even if assigned, it has been worthwhile to repurchase shares.

Baidu (BIDU) is another stock that I’ve owned several times over the past few months. Despite it’s torrid run to $110, I think that there are still opportunities, particularly in selling deep in the money call options. After all, if you can still achieve a 0.5% or higher gain for a week of holding those shares before losing them to assignment at a lower price, is that not better than the S&P 500 is able to do on most weeks?

I haven’t owned shares of Citibank (C) since before the 10:1 reverse split. There’s something unsettling about a bank that trades with a beta of nearly 2, but I think the future is bright as far as price support goes, as there is increasing discussion about the value of Citibank’s component parts. That is very much the same kind of talk that has spurred price appreciation of Bank if America (BAC). While rediscovering price stability, Citibank continues to offer an attractive call premium and makes the risk-reward equation skew toward reward.

What can anyone say about Apple ? I certainly haven’t been shy about expressing my bearish opinion on shares and to the increasingly adverse external environment to which the company was subject. Apple reports earnings after Wednesday’s market close. Although I don’t believe that it will test a support at $425, I do believe that there are opportunities to either sell deep in the money calls or sell deep out of the money puts. If I’m wrong, I will be left owning shares for the first time since $450. It would be as if almost nothing had happened in-between. With so many people now piling on and blasting Apple, it’s beginning to look better and better.

Western DIgital (WDC) is just another of those exciting stocks. I’m not really certain why that’s the case, as the product isn’t terribly exciting and is hard to differentiate from a commodity. It too, reports earnings on Wednesday if you have the stomach for even more excitement.

I don’t look at charts very often or in great depth, but Mellanox Technologies (MLNX) will definitely get your attention if you like charts with slopes approaching infinity. Mellanox makes some very sudden and pronounced moves. With earnings coming up on January 23, 2013 another vertical move may be awaiting anyone with incredible risk tolerance. Since even 20% moves aren’t unheard recently for this semiconductor design and sales company, the option premiums are priced accordingly. Among the caveats is that only month long option contracts are offered and that may be a very long time to sit on a roller coaster. I’m currently looking at selling puts as being more appealing and in the event that Mellanox surprises with an upside move after earnings, I would vacate the position as fast as humanely possible.

Finally, Williams-Sonoma (WSM) is the sole dividend play this week. It too has been bruised by the market’s reaction to its earnings. Somehow Williams Sonoma has the ability to withstand the economy and even when things look grim for the consumer it just keeps on going. It’s a place where you can escape the cares of the real world and pamper yourself before returning to reality. It’s not a terribly exciting stock, but after a week of potentially lots of excitement a little serenity may be a good thing.

Traditional Stocks: Anadarko, Capital One Finance, Lorillard

Momentum Stocks: AIG, Baidu, Citibank, Freeport McMoRan

Double Dip Dividend: Williams Sonoma (ex-div 1/23)

Premiums Enhanced by Earnings: Apple (1/23 PM), Mellanox (1/23 PM), Starbucks (1/24 PM), Western Digital (1/23 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

 

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Jan132013

Weekend Update – January 13, 2013

Weekend Update

Your portfolio is your Preidential Cabinet.

In a week when the biggest story was the signature of the man selected by President Obama to succeed Timothy Geithner as Treasury Secretary it’s not too surprising that not much happened in the markets.

After more than a 4% gain the prior week a breather was welcome., as shares assigned from my portfolio must have felt as if they had outstayed their welcome.

They hadn’t, but sometimes it’s just time to leave.

The week was a busy one in Executive Office politics as it was the time honored tradition of appointed cabinet officials knowing that it was time to leave . The week demonstrated a strategy to fill cabinet positions that many are finding to be uncomfortable. Some people like the security that comes with known names and entities, while others relish in the unknown and “out of the box” thinkers..

Professional sports is like the former. How else can you explain the consistent recycling of proven losers, while promising new leaders go languishing as they await an opportunity to strut their stuff and lead their teams to victory?

As opposed to the process of assembling a Presidential cabinet under George W. Bush when every face was a very hackneyed and familiar one, this week’s events were quite the opposite, as the choices ranged from the unknown to the disliked. Norv Turner may have qualified for an appointment in the Bush Administration, but not here and not now.

What could confidently be said about Jack Lew, the Treasury Secretary designee, is that his signature suggests that he would be comfortable working together with Federal Reserve Chairman Bernanke and add a few extra “zeroes” to the money supply. After all, why stop at just a Trillion Dollar Coin? It’s like 5 minute Abs.

President Obama’s cabinet during his first term was noted for its infrequent turnover and familiar names. That’s how my portfolios used to be and I can’t necessarily complain about its performance. The portfolio was always comprised of well known names, never any speculative issues and they all stayed a long time, through good and bad performance, then good performance and then bad performance, again and again.

As Secretary of Labor Hilda Solis announced her departure, ostensibly lured by an irresistible Herbalife (HLF) ethnocentric marketing campaign, Raymond LaHood is one of the few leftovers and he should stay just for the humorous name.

That’s not a good enough criterion for stocks, though. These days, I like rapid turnover, but still only have comfort with familiar names. I too may have chosen Donald Rumsfeld, but likely would have been a little distressed if he had not departed within 40 days, or so. I like a portfolio that is more of a sleep-over than a relationship.

After veering significantly from last week’s script in an effort to find lots of replacements for assigned shares, I’m again faced with needing lots of replacements, but at least this past week the overall market wasn’t terribly difficult to top. Think of it as having to find a replacement for Treasury Secretary John Snow. Henry Paulson was pretty good in his own right, but by comparison he really shined.

Still, the challenge of finding potential candidates that aren’t at or near 52 week highs is difficult. Normally, my list is comprised of the same old and reliable names, but this week there are some newcomers that hopefully will get a chance to strut their stuff and then be gone before outwearing their welcome. That’s especially on my mind this week as a number offer only monthly option contracts. I tend to be more willing to consider those stocks in the final week of a monthly cycle, but if they’re not assigned that starts preparing the way to push the 40 day envelope.

As usual, stocks are categorized as either being Traditional, Momentum, Double, Dip Dividend or PEE (see details). As earnings season goes into full gear this week there were actually a large number of candidates to consider for earnings related trades, but often the best opportunities come with some of the lesser known or higher flying names than with the button down early reporters.

I’m not certain that I know anyone that would admit to having, much less using a Discover credit card. I still spend a good portion of my time trying to find a place that will allow me to decide between my Diners Club or Discover. Yet Discover FInancial (DFS) is a reasonable alternative to Visa (V) and MasterCard (MA). Although Discover has outperformed its more respected cousins in the past year, it has greatly under-performed in the past month.

DuPont (DD) used to be one of my favorites. That was back in the days when there were no weekly options, it had an artificially high dividend and great option premiums. These days, I’m not quite as enthused, as the years have taken their toll. But during the last week of an option cycle? Why not? Besides, with all of the portfolio new comers, it’s good to have a familiar face or two to keep things grounded.

Speaking of grounds, Starbucks (SBUX), although higher than the last time I owned it, just a few months ago, appears to be running on all cylinders. I’m not certain that anyone knows and understands his company as well as Howard Schultz understands Starbucks. Even in the face of a negative earnings report two quarters ago, Schultz effused so much confidence in responding to the market’s reflexive response to “bad” news, that you had to be inspired about the company’s prospects.

These days, I’m not certain that I should still categorize AIG (AIG) along with my other “Momentum” stocks. Its option premiums are less and less like those of others in that category. AIG is a stock that I often wish I had read my own weekly words and bought much more frequently than I had done. Along the lines of inspiration, every time I see its CEO, Robert BenMosche on air, I think that he is truly a hero of American business and finance. Instead of remembering the villains, we should laud the heroes.

US Steel (X) could be one of my newcomer stocks this week. I don’t have any particular thesis. I simply like the premium, but am respectful of the risk. US Steel does report earnings on January 29, 201 and am not certain that I would want to be holding shares going into earnings. Since it does trade a weekly option, there would be at least two escape opportunities prior to earnings.

Yahoo! (YHOO) is another stock that I haven’t owned in a while, having waited for its return to $16. Following its drop this past week I feel a bit more comfortable considering a purchase after its resurrection.

Footlocker (FL) is another one of the new comers that doesn’t necessarily inspire me on the basis of any underlying theme. Like Us Steel it has a nice option premium, but only trades a monthly option. The upcoming dividend may tip the scales for me as the stock hasn’t had the same kind of run-up that its products should equip the owner for.

Lowes (LOW), for all of its commendable performance, is a stock that I only look toward as it approaches its ex-dividend date. It too offers only a monthly option, but like Foot Locker, going ex-dividend in the final week of the monthly option cycle makes ownership more palatable.

eBay (EBAY) is another stock that I own too infrequently. That may change as it’s come over to the weekly options family. It reports earnings this week and will likely be as good as its PayPal division allows it to be. It’s no longer the highly volatile stock of yesterday, but still offers a reasonable risk-reward ratio in the same 5% range on strike price.

Having missed the entire move in the entire housing sector doesn’t preclude entry, it just includes risk. Lennar (LEN) will report earnings this coming week and I expect a break in its upward trajectory. In the past its shares have not over-responded to earnings news, so the risk reward may be present at the 5% level, rather than the 10% level that I often find comfort in. If prices hold up prior to earnings release and I can obtain a 1% premium for selling a put at a strike 5% below the current price or selling an in the money call at a similar strike, this may be a good candidate for a short term dalliance.

Traditional Stocks: Discover Financial, DuPont, Starbucks

Momentum Stocks: AIG, US Steel, Yahoo!

Double Dip Dividend: Foot Locker (ex-div 1/16), Lowes (ex-div 1/18)

Premiums Enhanced by Earnings: eBay (1/16 PM), Lennar (1/15 AM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

May92012

Collecting Crumbs

Articles

 It’s that time of the month again.


No, I’m not being visited by Aunt Flo, as the euphamism would go, if indeed it were germane.


CrumbsNo, it’s the end of yet another options cycle in just a few short days. Time to see if there are any crumbs left out there just waiting to be taken. And you do have to act quickly, because before you know it those crumbs get smaller and smaller, before they disappear entirely.


I suppose that since I now try to find as many weekly options opportunities as possible, that third Friday of each month has lost a bit of its significance. Now its more or less like any other Friday.


I’ve never had a visit from Aunt Flo, but I can’t imagine that her dropping by on a weekly basis would be very good.


In a way, I guess that’s as sad as when you know that Aunt Flo won’t be visiitng anymore. Fortunately, that single long hair on my chin that popped up after Flo disappeared is obscured by my full beard.


By the same token, most people I know no longer deal in euphamisms, anyway. They get right down to brass tacks, no sense beating around the bloody bush.


Hmm, now I’m not certain if the preceding itself was a euphamism for something, but no matter, I just like using uniquely British adjectives.


Since options premiums keep me afloat, I have a need to trade, but times like these offer the biggest dilemmas. Those times are when I have shares that are at a paper loss and haven’t had option premiums written on them for the most recent cycle, whether weekly or monthly.


Holding on to so many positions that are significantly below their purchase prices, it’s hard to justify trying to optimize options premiums by writng near the money contracts when their assignment would result in meaningful capital losses.


Although I always check my spreadsheets to see how much in accumulated premiums each position has captured, I still have a reluctance to take the loss by selling a near the money option, even when it is mitigated or even fully offset by those premiums.


I’m not beyond rationalizing my actions, though.


But when you see the clock ticking away on the one hand, you also see the possibility of that silver lining in depressed stock prices, or at the very least the lack of support in silver prices, as I sometimes own unhedged shares of an UltraShort Silver ETF.


Will there be some good news coming out of the European Union sending our markets for a nice climb? I sure wouldn’t want to miss out on recouping some of those paper losses, but those crumbs, those 0.5% options premiums, do I really want to leave those on the table?


The answer to those questions are “who knows” and “not really”


The full answer to the latter question is actually “not really, but I don’t want to feel like a schmuck”.


But you do have to eat, you can’t really let pride get in the way. As small as they may be, those crumbs can add up.


And so, in a measured reaction to a meandering day, I often take the opportunity to scrape some last remaining crumbs, by seling options with just a day or two left until their expiration.


I want those premiums, even if their just a matter of pennies.


Pennies count.


The risk you take when taking crumbs, trying to milk every last penny out of an under-performing position is that there will be a wild, completely unexpected explosion to the upside in the hours that remain on the contract.


Opportunities potentially lost. That ends up being the performance metric, but since I don’t harbor regrets, I also rarely learn lessons. You can fool me over and over again as long as those premiums add up and losses have some strategic value in reducing tax liability.


When I did add the crumbs up it was worth the risk, given the reward and the need to be able to feed Laszlo the Dog.


It’s either crumbs or go back to work, not to mention the shriveled carcass of a wiener dog.


Hmmm. Weiner dog.


If anyone reading this is old enough to remember Bob Denver’s character, Maynard G. Krebs, you would know my reaction to the very thought of “work”.


So wherever and whenever you can get those crumbs, get them.


Tomorrow? Who knows what tomorrow brings. New rumors, maybe some actual news, maybe not.


No matter. The week always ends in a few days and a whole new world of opportunities comes along.


And with each week you can hope for the whole loaf and gladly take the crumbs, too.


  


  


 





 


 


 


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