A long time ago there was a reasonably popular song by a group that itself was reasonably popular at a time when Disco was dying, Punk Rock had out-grown its shock factor and Heavy Metal and long hair bands were taking root.
In that vacuum anything could have become reasonably popular and so it was that everyone was humming the tune of the song that cried out for the need for a new drug.
I always wondered why the lyrics didn’t include the requirement for a drug that won’t quit, as that’s the ultimate problem for anyone seeking to be taken to a better place through the modern miracle of chemistry.
At some point we develop a kind of tolerance to stimuli, to feelings and even to drugs. That’s why we always keep searching for something new. What was once good, or at least good enough, just quits on us.
Even when we may not fall prey to the human desire for more, bigger and better, we at least want to get the same kick at a bare minimum and we can’t possibly tolerate a drug or an emotion that quits on us.
This past week we came to a point when the FOMC sort of quit. It really didn’t take us any place new, even as it did finally take some action.
But as it took action it almost felt as if we were being left behind, as the market’s natural forces were getting ahead of the FOMC, that for years had been the dispenser of the remedies that kept our economy alive,
Almost like Yahoo (YHOO) waiting 3 years to let the world know of a security breach impacting a1 billion accounts, the FOMC may have been a little bit behind the curve in its decision to finally increase interest rates.
Maybe they were still smarting from the same decision a year earlier that had so poorly read the future path of the economy.
This time around, their confidence in what awaited us in 2017 was also lacking and markets didn’t like that very much, but it seems as if the bigger picture came back into focus as the week came to its end.
That bigger picture included realizing that another upcoming earnings season is in store in just a few weeks. There’s also that big newly created expectation of the promise of some real economic boosts from an incoming Trump Administration.
But as we all know, expectations can be a bad thing.
That upcoming earnings season will be the first in years when there are actually expectations for earnings that are not only better than expected, but not artificially boosted by stock buybacks.
It’s hard to say that the market’s climb since the election has in any way discounted future earnings, but you can’t entirely discount the possibility itself, even as the expectation of unbridled government spending on infrastructure may have lit the fire.
With some softening already being seen when compared to campaign rhetoric and no one having any clue where politic lines will fall once the least predictable President in anyone’s lifetime takes office, those expectations may give way to elation just as easily as they may usher in disappointment.
But at the moment, that’s all we have.
The FOMC has run out of new drugs and their every move is likely to be on the receiving end of a Presidential Tweetstorm, politicizing that which has become more political, but was always supposed to be above the fray.
We may be now entering a period when there are no new drugs to help us. Instead, it may be the time to turn toward the kind of self-help remedies that existed before the discovery of aspirin,
Either that which didn’t kill you made you stronger, as long as the foundation wasn’t neglected.
For me, that means we may finally have returned to that point that fundamentals are the drug that we need.
Good fundamentals, especially in an early stage of economic expansion should lead to stock market advances, even while sitting at or near more new highs.
After all, new highs tend to beget new highs.
Then again, there is also bad medicine and that bad medicine may be what the FOMC will have to resort to next.
For a couple of months I thought that there might be a possibility of the announcement of a 0.50% interest rate increase in December.
That would have really killed things and would have seen some real Twitter vitriol, but when was the last time we were looking at an economy with unemployment at a level less than the structural rate and talk of huge infrastructure projects looming?
Can you spell “inflation?”
If easy money and accommodative policy send markets higher, it doesn’t take much to realize that tighter policy sends markets lower.
For me, at the moment, even as more new highs are what everyone is expecting, the best drug that I can think of is cash.
It’s not a new drug, but it still works for me.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
Where do you begin to think about deploying cash when the market is at these levels?
While many practice an investing technique that attempts to capitalize on sector rotation, you always have to be suspect about sectors or individual stocks that don’t seem to be keeping up with everyone else.
I haven’t been making very many trades lately, but what I have been doing much more of late is finally beginning to capitalize on some long suffering commodities positions that have been behaving like yo-yos.
That has meant selling calls on them, even at strike prices well below their purchase prices and either seeing those calls expire or feverishly trying to avoid their assignment by rolling them over in the hope that whatever lifted shares on one day will deflate the very next day.
That has also meant adding some new positions in the hopes of a quick trade to pocket some very generous premiums that have been the result of increasing volatility in the commodities sector.
For a few months, at least for me, it was all about Marathon Oil (MRO). While I currently do have a single lot of shares with short calls at a strike well below cost, in 2016 I had opened and closed 12 new positions either with buy/writes or more commonly, put sales.
In all, between opening trades and rollovers, there were 31 option positions, as a result and I would have loved to have had even more.
But while Marathon Oil may have moved too high for now, there are a number of potential trades for those with discretionary cash and discretionary intestinal fortitude.
In other words, not for the faint of heart and definitely not with the college fund.
Fortunately, my heart is on it last legs and I’ve long finished with college tuition payments. It’s not quite like the morbidly obese wheel chair bound man on supplemental oxygen, with a lit cigarette in his mouth and a beer in his hand, feeding $100 bills into a high rollers slot machine in Las Vegas that I saw about 10 years ago, but it’s close.
So, this may be another week where I will try to capitalize on that volatility, especially coming off some of the declines in commodity prices last week.
There’s nothing like selling puts into weakness.
ProShares Ultra Silver ETN (AGQ) is my favorite of this week’s possible positions, but it is my least favorite trade.
That’s because the options aren’t as liquid as I would like, especially when needing to rollover a position. There’s also that pesky matter of option prices in anything other than $0.01 increments.
However, following the sharp decline seen last week in the aftermath of the FOMC decision, I am really tempted by ProShares Ultra Silver ETN again.
As an example of selling calls on an existing position that is deep out of the money, I have been doing so on a far more expensive lot ever since December 31, 2014, sometimes selling calls as low as a $32.50, despite a $40 purchase. I currently have March 2017 short calls on those shares at a $36 strike.
In the meantime, that position has generated enough premiums to still make it worthwhile when compared to the S&P 500 since that same time period.
Rather than selling puts and using a weekly timeframe, though, if adding another position, I think that I would look more at the possibility of a buy/write and would also use a $35 strike price, based on Friday’s $32.91 close, while selling a January 20. 2017 $35 call.
If the call is headed toward expiry, I would probably not take the unnecessary expense of the rollover and would just wait for a new opportunity to sell calls.
The remaining considerations for the week, Cliffs Natural Resources (CLF), Marathon Oil (MRO), Petrobras (PBR) and Transocean (RIG) are all ones that I would consider only through the sale of puts, as this time.
None of the positions has anything fundamental about it, as far as the decision to consider them for the week, except perhaps for Transocean.
What they do have in common is lots of bouncing up and down of late and lots of great premiums.
Of course, the problem with selling puts on any of these positions is that you do have to be willing to accept the possibility of ownership of the underlying shares.
Just as with selling calls on a position that is well below your cost and you have to be willing to part with the shares at a loss, you can use time as your partner in trying to avoid what you might find distasteful.
The nice thing about volatility is that even deep in the money volatile positions can have premiums that have sufficient value above and beyond intrinsic value, to make rollovers worthwhile.
The longer the time period of the rollover the greater the premium and also the more time for a price correction to perhaps help you avoid the unacceptable.
Right now, for example, I have rolled over my $17.50 Marathon Oil calls on 3 occasions in the hopes of avoiding the loss of shares to assignment. That has resulted in an $0.87 premium in 3 weeks and I certainly don’t mind this long term holding going below $17.50 and offering an opportunity to roll the dice again and again.
If it did so, I also would consider the sale of another round of put options, even though the last time I did so, it was with a $15 strike price and there isn’t very much price support between Friday’s close and that $15 level.
However, in an ideal covered option portfolio that’s what you would be doing with all of your positions if you were more interested in using those positions as a means of generating income, rather than trading them in for capital gains. Every now and then you would supplement your existing positions with a new one, maybe taking sector rotation into consideration, to replace something that has been assigned away from you.
What I never expected was that the commodity cycle, including oil, copper and iron ore, would have stayed at depressed levels for so very long.
But as oil seeks to prove that it can stay above $50 this time around, there’s the backdrop of the prospect for a heating up US economy and maybe something along those lines in China, as well.
As long as those events don’t happen overnight, there may still be lots of ups and downs as speculators take up or shed positions helping to fuel the volatility in those positions.
Cliffs Natural Resources, just as Marathon Oil offers further risk as it has had some noteworthy price appreciation of late, although it is well below the promise and hopes that existed when a successful proxy fight came to its conclusion.
Last week the move was decidedly lower and I did sell puts on 2 occasions and was actually happy to be able to roll them over, having even considered doing so while they were out of the money, just to keep the income flow alive.
When volatility is high, sometimes you do consider forgoing assignment of calls or expiration of puts just to keep the golden goose going.
Petrobras is also showing similar signs of increased volatility and indecision in direction. As it does, those premiums get more and more appealing, particularly as the stock creates what appears to be a manageable trading range.
Finally, there’s Transocean.
Transocean is a little different as it does respond to news going on around it. EVery Friday we get news regarding the number of operating rigs drilling for oil and as the price of oil increases you would expect the number of rigs to also increase.
Of course, in time, that just activates the typical supply and demand equation and eventually, in the absence of increased product demand, someone has to decide to stop drilling.
And so on and so on.
If you want a new drug, just try the adrenaline that could come from any of these positions.
Then, think about an antacid or two.
Traditional Stocks: none
Momentum Stocks: Cliffs Natural Resources, Marathon Oil, Petrobras, ProShares Ultra Silver, Transocean
Double-Dip Dividend: none
Premiums Enhanced by Earnings: none
Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.
After nearly 5 years and almost 1000 closed positions, it’s time to close “Option to Profit.”
