Stock market investing is all about risk and reward and sometimes you do have to stick your neck out.
There is no reward without risk.
It’s sort of like those who say that you will never understand happiness without having experienced sadness.
My preference, however, it to simply experience varying levels of happiness and to ignore anything that might detract anything from the lowest level of happiness.
I ignore lots of things, much to the consternation of those around me.
But I ignore that consternation.
The same thing isn’t really possible with investing as not only is happiness so often of a very temporary nature and fleeting, the only way to avoid risk right now is to look at bonds or your mattress and those carry lots of opportunity risk.
Also, there’s a big difference between the qualitative feel of personal happiness and the quantitative nature of investing.
In other words, instead of being a giraffe, you would have to be an ostrich, although the ostrich is actually doing something of value when their head is below ground.
So you do have to stick your neck out if your happiness is defined in the form of stock gains.
I wasn’t very happy in 2015, but am very happy with 2016, to date.
Much of that has to do with the fact that the very stocks that disappointed me in 2015 are the ones delighting in 2016, even as they still have lots to do to erase the stink of 2015.
Sitting on some substantial year to date gains comes as the market has not only hit its all time high, for the first time in over a year, but did so again and again.
The post-Brexit turnaround has been stunning.
From the lows following the swift decline after the Brexit vote was confirmed, the S&P 500 has climbed 8%. For its part, the DJIA had climbed nearly 1400 points.
All of that has come in just 13 trading sessions and there have been scant few breathers during the ascent.
That makes some technicians nervous, as they like to see those breathers establish support levels. Other technicians see the unimpeded climb higher as conformation of a breakout whose limits can’t be quantified other than in hindsight.
People like to talk about periods of risk on and risk off and if you’re sitting on cash at the moment, you are certainly faced with a question of whether to take on risk in trying to deal with your fear of missing out on the party.
With more cash being freed up in my account this past week than has been the case since 2015, I would have been ecstatic had that been the case had markets not just climbed 8%.
The challenge is what to do with that money that won’t make you feel like an idiot because of your action or like a moron because of your inaction.
With earnings season having just started in earnest during the latter half of last week, there wasn’t the kind of very guarded Brexit related guidance that I was expecting from JP Morgan (JPM) and that I thought could set the tone to bring an end to the market’s march higher.
Nor did any of the 13 speaking appearances by members of the Federal Reserve shake anyone’s confidence.
It only made sense that as very few were expecting anything good, that the market should take the occasion to move decidedly higher.
However, now as more are beginning to believe that there’s still time to get on board, I’m feeling more reluctant to stick my neck out and don’t mind the thought of burying my head in a pile of cash.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
I don’t think there’s very much appealing about Potash Corporation of Saskatchewan (POT), other than perhaps its name being fun to say. Potash is one of those stocks that I swore that I would never buy again, as most stocks that I’ve sold for a loss are forever dead to me.
But that was almost 4 years ago and it now seems like an eternity has come and gone as Potash shares are at multi-year lows.
What I do find appealing, however, is that those shares seem to have settled in at a fairly stable price range while still offering an attractive option premium.
With earnings coming up the following week, I think that if considering opening a position, now that the ex-dividend date has recently passed, I would do so through the sale of put options.
While the premium is attractive enough to use an out of the money or near the money strike price on a weekly option contract, if faced with possible assignment of shares, I would very strongly consider rolling those puts out by a few weeks or perhaps into the monthly cycle.
At the current price, I think that much of the risk has been removed, although I might have some concern about the safety of its dividend.
What I look at with Potash, is the possibility of it being a vehicle for serial purchase or rollover, while awaiting a move to the upside.
If looking for an example of a breakout, look no further than Seagate Technology (STX). It did so last week while offering some improved guidance, but probably more importantly announcing some very large reductions in its work force.
Ultimately, I will never understand how that can be good news, but for a day here or a day there, the market looks at that kind of cost cutting as good news, even as it may portend some ominous news in the future.
However, I think that the move higher in those shares is simply the long overdue correction to some unduly large declines the previous quarter following revised downward guidance and then disappointing earnings.
While I like to see support levels established to punctuate climbs higher, with Seagate Technology getting ready to report earnings in a couple of weeks, my anticipation is that there will be further upside surprise, just as in the previous quarter there was further downside surprise.
While I would likely consider starting a position with the sale of puts, if faced with assignment, I would accept the assignment rather than rolling over those puts, as there will also be an upcoming ex-dividend date.
AS with Potash, but even more so, the safety of that dividend has to be in question. I had been of the belief that a dividend decrease had been discounted to a degree, but with the recent price surge, I think that now leaves more room to fall in the event of bad news.
If assigned shares, I would look to sell longer dated out of the money calls in an effort to take advantage of the earnings enhanced premium and the possibility of retaining the dividend, while also retaining some opportunity for price appreciation.
Starbucks (SBUX) hasn’t gotten too much attention in the past couple of weeks as it has trailed the S&P 500 in the days after the recovery from Brexit worries.
It really hasn’t recovered from its last earning’s related decline, which is fairly unusual, as it has traditionally done so quite quickly after any strong downward movement, as its CEO, Howard Schultz has typically been able to convince the world that any such declines were entirely unwarranted.
I generally consider the sale of puts in advance or after earnings, but I believe that this time around I would entertain a standard buy/write trade and with an upcoming ex-dividend date, would likely use a longer term call option.
Doing so, such as using the August 2016 monthly expiration, would offer a larger option premium, some time to ride out any price decline and a greater opportunity to capture the dividend.
Even with a decline in shares after earnings are released, there is some reasonable support at a level that could easily be staging ground for writing new call options if the monthly options expire and there is a desire to generate additional income while waiting for price recovery.
Finally, while reading about it may get old, reveling in it never does.
Once again, this week, I’m thinking about another position in Marathon Oil(MRO).
While I already have a short call position expiring this week and just had a short put position expire last week, I don’t mind the prospect of mindless repetition.
One thing that I did do with that open short call position is something that I had done frequently at one time, but not very often in the past few years.
That is to have rolled over the short call position even when it was highly likely that the position was going to be assigned.
There is something nice about having sufficient volatility in a position to generate large premiums, but to be of a mind that the downside risk is limited or might be short lived.
That has definitely characterized Marathon Oil of late and I decided to roll over the short call position, at a point when even a 2.5% decline would still allow assignment, in return for an additional 1.3% premium.
That risk-reward proposition seemed safe enough to stick my neck out and to give up some of the security of cash.
With any decline in oil on Monday and presumably with Marathon Oil, as well, I would like to consider once again selling short put options.
The risk, however, is that in the event of an adverse price move and the subsequent need to roll over the position, you run closer to the additional risk associated with earnings, which occur the following week.
In that event I would choose an expiration date to bypass earnings, but would also be mindful of an upcoming ex-dividend at the end of the August 2016 option cycle.
From my perspective, being short put options on the ex-dividend date is an unwarranted ceding of reward while taking on additional risk.
Traditional Stocks: none
Momentum Stocks: Marathon Oil, Potash, Seagate Technology
Double-Dip Dividend: none
Premiums Enhanced by Earnings: Starbucks (7/21 PM)
Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.
