A Put Primer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Obviously, understanding them is requisite for their use.

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

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

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

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

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

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

As long time subscribers know, I have patience.

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




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

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

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


Then it went to a Net Credit.


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




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

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

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

Hard to prove, but equally hard to argue.

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

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

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

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

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

When history repeats itself it can be a beautiful thing.

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

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

Implied Price Moves

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

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

That which is implied isn’t necessarily precise.

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

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

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

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

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

So clearly black and white can be the same.

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

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

Or frenzy.

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

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

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

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

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

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

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

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

The implied move is expressed as a percentage.

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

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

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

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

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

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

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

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

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

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

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

There are almost always other factors.

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

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

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

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

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

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

I Love Caterpillr

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

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

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

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

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

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

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

But that’s the point.

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

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

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

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

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

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

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

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

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

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

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

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


Double Dipping Demystified

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

A good place to begin, is here.

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

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

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

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

 How far in the money are the shares?

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

 How much time is still remaining on the contract?

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


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

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

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

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

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

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

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

But let’s dissect the situation further.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

Ellison Fiddles While Oracle Burns

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

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

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

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

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

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

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

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

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

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

Surely they would show up for the next earnings report.

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

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

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

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

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

Funny thing, though.

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

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

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

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

Not with me, he wouldn’t.

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

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

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

I Bought Apple

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Microsoft: What Would Munger Do?

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

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

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

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

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

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

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

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

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

WWMD? What Would Munger Do?

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

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

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

That’s the rational thing to do.

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

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

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

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

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

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

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

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


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

Just ask Verizon (VZ).

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

Additional disclosure: I may add additional shares of MSFT


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

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

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

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

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

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

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

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

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

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

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

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

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

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

The better news is the reality.

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

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

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

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

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

Jumping Into the Market

Maybe coincidentally, but over the past two days I’ve had a number of subscribers mention that they had a large amount of cash to invest.

That isn’t unusual. Whether as a result of a 401k rollover, an inheritance or just having sat on the sidelines for a while or saving up for just the right moment, it happens.

Additionally, looking at a market that seems to be able to fight off any attempts to make it back down makes people want to be a part of the fun and that means putting to money into play and to work at the same time.

And you know what? It is fun, at least until you lose some money.

I have always believed that we all come pre-packaged with bad luck and that we have to take actions to minimize the bad luck. Admittedly, it’s not really about luck but rather bad judgment, emotions or other factors that somehow seem to conspire to get in the way of forward progress.

For those with a big pile of cash and the inclination to put the money into the stock market I don’t really think there is anything like a good time or a bad time. I think it’s always a good time, as long as you follow some rules.

  • What are your objectives?

Everyone should have identifiable objectives. Are you seeking to create income streams in addition to capital appreciation? Are you looking to generate capital appreciation and are less concerned about income?

If you’re going to be selling covered options understanding what it is that you hope to achieve will determine, to a degree, what kind of strike prices you may utilize and what portion of your shares held will be hedged with option sales.


  • What are your goals?

Once you know what you are seeking in broad terms, quantifying those objectives is a good idea.. Whether it’s on the basis of comparing performance to an index or whether your income stream meets your needs, goals are the report card necessary to know whether you’re on the right path.


  • Don’t put all of your money in at once

Part of that feeling that bad luck is pervasive is the belief that If I had a big lump sum of money to invest I would probably do so at the very peak of the market and the following day my big lump sum would be that much less.

Most everyone empathized with the George Costanza character on Seinfeld when he finally came to the realization that he was far better off doing exactly the opposite of what his instincts led him to do.

I suppose that it is possible that the very next day the market could sky rocket, but ask yourself, given your luck, which direction do you think that it would go if you made the commitment?

That’s what I thought.


  • Keep some money back in reserve

When looking to put a large amount of money to work the first thing I think about is how much I want to keep in reserve in the event of a sudden decline in stock prices that may represent an opportunity. Even though you’re thinking about putting your money to work, simply think of reserve cash as a sector that is part of an overall strategy to be diversified.

To make this simple, lets talk about a hypothetical $100,000 that’s begging for a home.


  • Don’t invest your rainy day fund

Let’s also assume that this is purely discretionary money. That is, there is virtually no chance that you would have to turn to it to meet an expected or even an unexpected expense. I’ve made that mistake and I never want to make it again. In fact, when I made the mistake the market was at unheard of levels in October 1987. No one in his right mind thought that we would ever look backward again. It was a time of incredible optimism and freely flowing margin.


  • Don’t use the financial world’s answer to “Hamburger Helper”

Don’t use margin. Leverage is for other people, like those who buy options. I hate to harp on the concept of luck, but you just know that as soon as you start to leverage up will be the very moment that the market heads lower. The use of margin just serves to magnify your losses and you get to pay interest for that privilege.

Normally, I have been 100% invested over the past years,  aiming to end each week with a 20-40% turnover of portfolio from assignments and then quickly re-investing that money. But the past few months I’ve tried to bring my cash up to a 40% level at the end of each option cycle and have then proceeded to try and get the level down to about 25-30% cash. That’s because I want at least 25% cash in the event of unexpected opportunities. You may have a different amount to keep in reserve, but whatever it is, keep something. In hindsight, there’s probably very little reason to ever be fully invested.

So let’s use that amount in this example, such that of the original $100,000, I would seek to keep $25,000 available for unforeseen bargains.


  • Have a timeframe for your investment strategy

That means I have $75,000 to invest, but next I need to know over what period of time I want to funnel the money into the market. Doing so is the same as the well known “dollar cost averaging” technique. But you really need to have the discipline not to chase the market if it keeps going higher and you have to resist throwing all of your money in because you’re afraid of missing out. That’s called “FOMO,” the fear of missing out. It’s like envy and is definitely one of the seven deadly sins.

To make the math easy, let’s just assume that I want to have my $75,000 fully invested over a period of 5 weeks.

That means that I can commit $15,000 each week to new positions (or to add to existing positions).


  • Be diversified by sector

The first thing that you may see is that $15,000 isn’t that much to begin a diversified investment plan.

The next issue that becomes part of the equation is just how do you achieve diversification when you’re just starting out. That’s especially true if you’re also selling options, because there is a minimum number of shares that need to be purchased, yet your funds may be limited.

For those selling options, there’s also a good chance that your brokerage rewards you with lower total commissions per contract based on the number of contracts transacted.

Pricing power is always nice but sometimes purchasing more than 100 shares of a specific stock may put you over that $15,000 weekly limit.

More importantly, putting all of your weekly eggs into a single stock puts you hostage to that stock and leaves you entirely undiversified.

In such situations, I think you’re better off giving up some pricing power on commissions, accepting a lower ROI in return for being able to buy more than a single stock with your weekly allocation.

Again, think about your luck. The stock or the sector that you would have happily thrown all of your money toward may have picked just the wrong time to fall out of investor favor. Unless there’s a  generalized market downturn, the chances of picking two out of favor sectors just before they go out of favor is less likely, even with your luck.

And when I say “your luck,” I mean my luck, too.


  • Be diversified by risk

Part of having a diversified portfolio is not only doing so by sector, but also by risk.

For example, you know that I classify selections as either being “TRADITIONAL” or “MOMENTUM.” The TRADITIONAL category encompasses shares that are less likely to have minute to minute gyrations, or at least are more likely to revert to their mean more quickly than a MOMENTUM kind of stock.

Think of Dow Chemical as a TRADITIONAL stock and Abercrombie and Fitch as a representative MOMENTUM stock. Although Dow Chemical is currently trading with a “beta” of 1.58, as opposed to Abercrombie and Fitch’s 1.30, that measure of volatility is somewhat misleading, as anyone owning both knows that Dow Chemical will typically let you sleep more soundly at night.

Certainly their respective option premiums tell the story. Dow Chemical is simply less risky. Do you want a portfolio full of Dow Chemicals or do you want a portfolio full of Abercrombie and Fitchs?

When you set up your portfolio give strong consideration to having the risk profile of your holdings reflect your own temperament for risk.


  • Don’t stress over predictable gyrations

Stock prices go up and stock prices go down. It’s a very predictable process.

The Biblical story goes that whenever King Solomon felt extremely happy or extremely sad, he would look at his ring, which was engraved with the expression “This too shall pass.”

If the gyrations bother you, consider using longer term duration option contracts. For example, a large adverse move in share price may create less anxiety when there is a monthly contract with weeks to go as opposed to a weekly contract with only a day left until expiration. Plenty can happen over the course of weeks, while it’s much less likely that significant movement will happen in a single day.


  • Have an exit plan

For those exercising a buy and hold strategy the conventional wisdom has always been that the individual investor rarely knows when to exit a position, whether to take profits or limit losses.

There is relatively little conventional wisdom that I agree with, but this is one of the ones that I can’t find fault with. Among the things that I love about covered options is that you define an exit strategy as soon as you open the position. It’s called the strike price.You define your ROI and your time frame, although it doesn’t always work out as planned.

But in the world of “Buy and Hold,” it’s not just that the individual investor doesn’t know when to exit, neither does their investment advisor. That’s especially true when it comes to locking in profits and less so when it comes to exiting losing positions.

Professional advisors typically use a variation of the old Bernard Baruch axiom that you should liquidate positions when they hit 10% losses.

That’s great, but of course, you know that with our luck that is the precise time that the stock begins its recovery.

Again, look at enough stocks and you’ll notice that most don’t stay depressed forever. In hindsight, how many times have you sold shares at a loss and then watched them recover?

While you’re doing that little mental exercise, how many times have you watched your paper gains evaporate and then come back and maybe evaporate again? It’s as if taking profits is a bad thing.

Now add another piece of pessimism to the mix. What makes you believe that the same person that selected a loser of a stock that is now down 10% suddenly has the skill and intelligence to exchange that stock for a winner? With my luck I tend to think that I would simply exchange it for something that was about to begin its price descent.

I don’t abide by the Bernard Baruch rule, but that has potential consequences. Some stocks simply don’t recover or take a very long time to do so and may also become non-performing assets.

I generally sell big losers in order to take advantage of tax codes that allow a portion of the losses to receive favorable tax credits, but that may not be appropriate for everyone or for every kind of account.

So set your own limits. Is it 10%, 15% 25%? But whatever it is, apply it consistently. Don’t fall prey to using a rational thought process to decide which to sell and which to keep.







Wintel for the Win

There was a time that most everyone who had a computer knew exactly what the word “Wintel” meant.

The combination of Microsoft (MSFT) and Intel (INTC) vanquished the competitors. You don’t hear or see too many Commodore, Tandy or Kaypro computers these days running on their own operating systems, or at all, for that matter. The combination became especially potent after MS-DOS became simply the shell for the graphic user interface that Microsoft was luckily able to render from Apple (AAPL) for nothing more than the cost of a legal defense. Although Advanced Microdevices (AMD) computer chips are still finding their way into lower priced computer systems, others, such as Cyrix and Zilog have long since ceded the computer microprocessor space to Intel.

The timing couldn’t have been better. If you’re going to be at the top of the competitive heap what better time than during a phase of tremendous marketplace growth? The real heyday of “Wintel” began with the introduction of the Windows 95 operating system and the mass production of cheaper hardware by the likes of assemblers like Dell (DELL) and Gateway, who back during that era never manufactured a machine with anything other than a Microsoft operating system and an Intel chip.

Wintel. Windows and Intel.

While Apple and its operating system powered by varied IBM (IBM) and Motorola (MSI) chips may have been, according to devotees, a far superior consumer product, it’s market penetration was no more than a nuisance to the Wintel alliance.

But as so often happens with size comes complacency and perhaps losing sight of events going on where your toes used to be. Add to that an occasionally less than inspired leadership and supremacy can devolve into mediocrity.

Not seeing or not being adequately nimble enough to recognize and react to the revolution in personal computing, beginning with the smartphone and then the tablet, Microsoft and Intel both ceded ground to Apple and smaller chip manufacturers in markets that hadn’t previously existed. Those new markets also had the ability to cannibalize existing markets, particularly for personal computers.

Whether Qualcomm (QCOM), ARM Holdings (ARMH) or others, the mobile and tablet markets erupted with neither a “win” nor a “tel” along for the ride.

The past decade has been a veritable wasteland for both Microsoft and Intel with regard to their perceived place in consumer technology. Although Apple Computer successfully transitioned to Intel processors, they didn’t look to Intel for its explosive growth in the mobile market and for the new tablet market. When you’re the size of Intel, the addition of Apple computers to your stable isn’t the kind of stimulus that’s going to push the needle very much. It certainly wasn’t enough to fuel growth.

That’s not to say that neither Microsoft nor Intel have stood still in their own technological and product advances or taken the opportunity to expand into new areas, such as gaming consoles. But their stranglehold on households has diminished during an era when “eco-system” has become the new buzzword replacing “Wintel.”

But faster than you can say “Moore’s Law,” the landscape is changing, yet again, as it appears that Apple is now the one having some difficulty remembering where its toes are located. For more than a decade the very essence of engineering marvels that also captured the consumer’s fancy, Apple has slowed down and has become susceptible to competition.

Unless you have been hiding in a cave you haven’t seen the onslaught of Microsoft ads on television and in movie theaters. They are now pushing their own eco-system in tablets, smartphones and computers, as well as in the gaming world. Less well seen are the acquisition of data centers and ventures to move software into the cloud, including an impending partnership with Oracle (ORCL).

It was once a Windows world and Microsoft is addressing the convergence of the PC, laptop, tablet and communication devices through a singular operating system in order to ensure that it remains a Windows world, with or without Intel. Retaining control of that niche is far more important than capturing a nascent mp3-player market. Success of the Zune wasn’t necessary for continued sales of the Office Suite, but maintaining supremacy of the personal computing and tablet market is required in order for that cash cow to keep the enterprise afloat. It is far more important to get this battle won than some earlier generation diversions.

Even more of a signal of commitment toward the future is the rumored restructuring of Microsoft that will place greater emphasis on hardware as Microsoft takes control of its own destiny in support of vehicles to propagate its software platforms.

Borrowing a page from Ron Johnson, who was credited with the success of the Apple stores, and who didn’t survive his tenure as CEO at JC Penney (JCP) to see the store within a store concept play out, Microsoft, along with Samsung (SSLNF.PK) is employing the concept within a resurgent and re-energized Best Buy (BBY), putting itself directly in the eyes and into the hands of the buying public.

While Intel is no longer Microsoft’s sole and unqualified partner in their new ventures, their future is increasingly looking brighter than it has in years.

Intel is now under the new leadership of an individual who breathes operations, following a period of listless direction that was in sharp contrast to the great vision and leadership that had previously marked Intel’s executive offices. The announcement earlier in the year that Samsung, the very same company that has been eating away at Apple’s place in consumer’s hearts, had selected Intel for its new line of tablets should serve notice that Intel is back.

Add to that the growing presence of Intel chips in smartphones, including those made by Motorola Mobility, which is now owned by Google (GOOG), and you have the largest of the mobile phone operating systems able to be run by a new generation of Intel chips and easily transferred into Android tablets, as well.

Take that ARM.

Thus far both Intel and Microsoft have outperformed the S&P 500 in 2013.

In 2012 Microsoft continued to receive its share of disparaging comments by analysts taking delight in referring to it as “dead money.” Those jeers ended when shares surpassed $30 at which point everyone seemed to climb aboard. Of course that heralded the end of the upward climb. In 2013 very much the same phenomenon was repeated when shares again broke through the $30 barrier and it again became acceptable to admit that Microsoft was part of your portfolio.

I do not currently own shares but am anxious to purchase them once again if share price returns to the $30 level, as I have used Microsoft as an annuity for years, collecting dividends and premiums from having sold options.

Intel is a bit of a different story. While it too has traded in a fairly narrow range and hasn’t been terribly exciting unless collecting dividends and option premiums, I think that it is fair priced at current levels and would add additional shares below $25.

While the world may no longer be quite the Wintel world it was 10 years ago, as a stock investor, Wintel is a winning combination even if they are going increasingly their own separate ways in the consumer marketplace.

Individually or together, Microsoft and Intel can serve as linchpins of a portfolio, if you’re ready to go for the win.


Why Raising the Retirement Age is a Bad Idea

Retirement LineThe recent suggestion to increase the minimum wage to $15 has received some spirited and predictable reactions on both sides of the issue.

I read Felix Salmon’s Seeking Alpha article that offers a reasoned analysis of why doing so should be cause for back slapping all around. other than the fact that the lack of legislative backbone would preclude it from ever happening.

Now that I’m no longer in the business of paying employees, I wholeheartedly agree with the need to provide higher levels of pay for those at the bottom of the economic ladder. Perhaps legislating a minimum wage is an entitlement of sorts, but it is also a means of introducing some justice into what can devolve into a merciless system of indenture.

While we’ve been hearing about trickle down economics for nearly 30 years, the raising of the minimum wage would likely create a “trickle up” phenomenon, as it seems fairly logical that the same amount of money in the hands of people that have basic unmet needs is more likely to be spent on goods and services than is money in the hands of the most wealthy.

Certainly investing newly found money in stocks does nothing to propel the economy forward unless you continue to believe that money will generate dividends and capital gains that themselves find their way into the economy, rather than simply being re-invested.

But we all know that on the whole, that just isn’t the case. The money essentially disappears from circulation and adds nothing to economic growth. It often just adds to the tally in the game of “who can die with the most to his name.”

Surely the argument that trickle down would create jobs has by now been dismissed. The US population has grown nearly 35% in the past 30 years since the start of the 1982 bull market and the implementation of supply side economic theory. According to the Bureau of Labor Statistics, based upon preliminary May 2013 data, approximately 34% more jobs have been created in that same time span.

Most everyone will agree that the creation of jobs has by and large been in service sectors and increasingly entry level wages have replaced higher wages of many in the workforce, particularly after “right sizing.”

As an investor and avid capitalist, I can live with reduced profit margins by the likes of Wal-Mart (WMT), McDonald’s (MCD), Disney (DIS) and others. Investors and a market that clings to the gospel of Price/Earnings ratios can learn to re-acclimate, as we get used to the new normal for corporate profit margins and realize that there’s really no need to see stock prices adjusted accordingly. How in the world Apple (AAPL) can call it’s store employees “Geniuses” and pay them minimum wage is a curious thing. Maybe that’s why Einstein couldn’t afford a new sweater or a haircut.

But the capitalist in me takes a little different view when it comes to changing the retirement age. Is it really an entitlement if you have paid for it and have further had limitations placed upon how the funds could be invested while you waited some 40 years for their disbursement in tiny aliquots?

Look, to start, I’m already biased on this issue. Not that I’ve been objective ever before, but for some reason this time I feel compelled to make full disclosure.

I’m 59 and work about zero days a year, down from about 10 days just 2 years ago. My “Sugar Momma,” who coincidentally has increased her time away from home as I’ve devoted my life to staying at home doesn’t like it when I refer to myself as being “semi-retired”. I just enjoy having moved the retirement age border closer and closer to my current age. Mentally, I retired about 30 years ago, but in some form of transfigurative migration, I had left my soul behind as I dutifully trudged off to work in places past.

Over the past few years we’ve heard various economists turned social engineers deign to suggest that our society can’t afford retirement at its current age levels. They want to raise the age at which workers can retire and collect benefits.

What are they possibly thinking?

The same story has already made its round on the European continent, where citizens are far more capable of genteelly indicating their displeasure with changes in government policy by letting their Molotov cocktails do the talking for them.

In Athens, the cradle of democracy, a nation that arguably, per capita, has contributed more to mankind throughout civilization’s history, has sadly been in great turmoil for the past two years. The last thing anyone there wants to do is to keep working longer at a job that they’ve barely worked on during the span of their lives.

The economic and financial engines in Greece are a mess, but certainly not the only mess in the world. Protesters tossing Molotov cocktails, police firing tear gas, all while in the shadow of the great wonders of the world, are sad. In some other places those events may pass for national reconciliation day activities, but in the civilized world, people take notice and wonder if the same thing could overcome their basic civility.

The idea of significantly raising taxes, dropping social and government services and increasing the retirement age is a hard one to swallow, especially if, as a citizen, you blame external forces for your economic crisis, just as the today’s initial market decline was being blamed on China or Ben Bernanke was blamed for the recent precipitous market decline.

I really don’t have the motivation to look up the details, but Greek citizens can retire far younger than can the typical American and they certainly have figured out a mechanism to avoid paying taxes. While some pseudo-economists distort the American story and claim that 50% of US citizens pay no income taxes, it isn’t quite that skewed.

While I do understand the need to raise revenues and decrease services, as a general strategy during difficult times, it’s the retirement issue that bothers me.

I actually have not been effected by the gradual increase in our own social security age eligibility, although my Sugar Momma is effected.

But besides the fact that I didn’t really want to work any longer, there are some very pragmatic reasons why increasing the US retirement age may not be the way to go, at least not with the direction that the economy has been headed these past few years. While the markets were wildly enthusiastic about the June 2013 Employment situation Report, if you listened to Ben Bernanke, the growth in employment is not yet sufficient to cause a tapering of the current level of Quantitative Easing.

We simply don’t have a sufficient number of jobs for our current population.

Unless you’ve been hiding away someplace for the past 20 years, certain jobs are disappearing from the United States. The jobs and industries that were created to replace those missing sectors of our economy are now disappearing, as well. I’m also now old enough to remember when unions were decried and criticized for acting like Chicken Little when suggesting that technology and automation would replace humans in the equation.

Nonsense, was the polite response to that uncanny ability to see into the future of the American workplace.

Have you seen the unemployment rate lately? Everyone seems to agree that number is under-stated due to the people that have simply given up even looking for employment.

It’s hard to believe that anyone would actually give up on the search unless they were already within sight of retirement. Push that age higher and the unemployment rate goes with it.

As our population grows, albeit, it is now growing slowly, newly minted adults will need jobs. But where are those jobs coming from? Increasing the retirement age, coupled with decreasing standards of living simply dry up the existing pool of available jobs, as the now elderly won’t even be able to afford to retire.

Of course, from an employer’s short-term perspective, given the expense of a codger like employee pool and their attendant medical needs, a cheaper and healthier alternative may be irresistibly beckoning toward them to fire those highly experienced leeches.

Disequilibrium in immigration, birth rates, death rates and retirement rates can have drastic effects on our society.

Instead of listening to annual summertime stories of how inner city youth are unable to find summer employment and how that bodes poorly for street crime statistics, lets transport that model to every population around the entire country.

Take your choice. Marauding gangs of unemployed and disaffected youth or hobbling throngs of terminated geezers eating away at the fabric of American society, all clawing for the few jobs left in the United States.

So where will the job-seeking migration send Americans? It’s not like the south or southwest are going to be booming anytime soon. It’s also not very likely that China will find itself with a shortage in its labor pool. Libya’s burgeoning domain shortening industry is mostly run by an savant in a basement somewhere in Detroit, so that’s not going to be the solution, either.

Right now we look at Greece. Not long ago we looked at Tunisia. Well educated, yet high unemployment.

That turned out to be a good combination for civil unrest.

I’m just trying to do my part as a citizen who cares about our youth’s future livelihood and don’t want to see generational warfare in the streets.

I’m more than happy to stay at home, especially on those days that I can make more money by just tapping a few keyboard entries.

So I’m trying to do my part. I’m staying away from the employment market, despite Sugar Momma’s recent exhortations.

What can I say. I’m just a patriot who doesn’t want to see fellow citizens rioting in the streets.

You’re welcome.


A Final Thought About the Pfizer Tender Offer

In the weeks since Pfizer’s (PFE) announcement that it was offering the remainder of its 400+ million holding in Zoetis (ZTS) in exchange for Pfizer shares many opinions have been offered regarding the relative merits of the tender offer.

My own opinion, previously cast some skepticism regarding what appeared to be a very favorable offer that might provide as much as a 7.52% premium for individuals offering their shares of Pfizer in exchange for Zoetis shares.

I did not offer my shares for tender, with the deadline for having done so, passing on Monday, June 17, 2013.

However, Pfizer has announced that its tender offer for exchange of its shares for Zoetis shares has been over-subscribed and that the offer has been automatically extended, as provided by the terms of the tender offer.

“The final exchange ratio is 0.9898 because the upper limit is in effect. Accordingly, the exchange offer has been automatically extended by its terms until 12:00 midnight, New York City time, on June 21, 2013”

That simple phrase means one very important thing for those that had believed a quick pay day by selling their new shares of Zoetis..

As explained in the prospectus, plainly in sight on the cover page, although the exchange premium was 7.52%, it was subject to an “upper limit” of 0.9898 shares of Zoetis for each share of Pfizer exchanged. The prospectus warned that the actual amount of in-kind value received could end up being substantially less if the “upper limit” was reached.

And it was.

At the conclusion of the initial phase of the tender offer, more than 800 million shares of Pfizer had been tendered for about 400 million shares of Zoetis.

That means that on a pro-rated basis an individual will have less than half of their tendered Pfizer shares accepted for exchange. The potential impact and costs associated with small share lots was discussed in my previous article that included the impact of transaction administrative fees that could wipe out any potential profit for those seeking to immediately sell shares in order to capitalize on any exchange premium.

While the final exchange rate is known, 0.9898 shares of Zoetis for each share of Pfizer tendered and accepted, it isn’t yet known what the pro-rated figure will be. In other words, what proportion of each 100 shares of Pfizer tendered will be accepted. It will likely be less than the current ratio. The greater the additional number of shares tendered the greater the adverse impact on small share holders.

For those still considering tendering shares, you have until midnight, Friday, June 22, 2013 to do so.

The following may be helpful:

At Zoetis’ current price of $30.19 after the close of trading on Thursday, June 20, 2013, each share of Pfizer that is accepted for tender will be worth $29.88, as compared to the Pfizer actual closing price of $28.64 on Thursday. That represents a 4.32% premium, which is substantially below the initial 7.52% premium.

Since the tender offer was made public Zoetis shares have subsequently fallen more on a percentage basis than have Pfizer shares and the premium has contracted. The Zoetis share price may or may not be maintained at that level when trading begins, so even that reduced premium may or may not be realized for those seeking to sell their new Zoetis shares.

For those that decide to accept the extended offer and had sold June 22, 2013 call options on their shares, you must be certain that your shares were not assigned. Strictly speaking, option contracts that expire at the end of a monthly cycle, do not expire until Saturday, which is after the extended deadline to tender shares.

If you accept the tender offer and your Pfizer shares were subsequently discovered to have been assigned you would still be obligated to deliver Pfizer shares in exchange for Zoetis shares and could do so by purchasing them in the after-market. That has additional risk if the price of Pfizer shares increase while the price of Zoetis shares decrease.

What to do?

Stick with Pfizer. If and when there is a time to own Zoetis shares you can always do so based on its own merits and without a clock ticking away in the background.

Picking a Winner in the Pfizer-Zoetis Divorce

Strictly speaking, Pfizer’s (PFE) decision to separate from Zoetis (ZTS) is called a spin-off.

It did so initially on February 1, 2013 and there was much excitement about the prospects of being able to invest in the pets and livestock healthcare business, which was being touted as that portion of Pfizer that had the greater growth potential and by inference the greatest likelihood of out-performing the market and certainly out-performing stodgy old Pfizer, itself.

Certainly, if you are able to remember back to the heady days of Pfizer when Viagra was brought to an eager consumer demographic, there isn’t much reason to believe that sort of growth is in Pfizer’s future. From every logical point of view the best way to unlock shareholder value was to unleash hidden gems that were buried inside of a behemoth.

Additionally, if you look at the recent experience of the spin off by Conoco Phillips (COP) of its refiner arm, Phillips 66 (PSX) you might be of the belief that such spin-offs are akin to a license to print money.

By now Pfizer shareholders may have received the offer to exchange shares of Pfizer for Zoetis. With consummation of this offer, the separation of the two entities will be complete.

Pfizer refers to it as an “exchange offer to separate the Zoetis animal health business from Pfizer’s bio-pharmaceutical businesses in a tax-efficient manner, thereby enhancing stockholder value and better positioning Pfizer to focus on its core bio-pharmaceutical business.”I call that a divorce.

In some situations, I suppose that the children of divorce could see themselves as winners, particularly if they are able to leverage their parents against one another, but that sort of thing may be more common in situational comedies than in real life.

Perhaps shareholders of Pfizer see themselves as winners, as well, although, Zoetis shareholders may have a very different view of melding families.

On the surface, the offer looks very attractive. In a nutshell Pfizer shareholders are being given the opportunity to exchange $100 worth of their Pfizer shares for approximately $107.52 of Zoetis shares.

When in a red hot stock market, that kind of exchange is actually more than just appealing. Where else can you get a 7.52% return from one minute to the next?

For me, the decision isn’t quite so straightforward, as I have sold Pfizer calls with an expiration of June 22, 2013, while the deadline to respond to the offer is on June 17, 2013. There is no mechanism in the option market, particularly for contracts that may be exercised to identify those Pfizer shares that have been offered for tender.

There may, in fact, be some liability if, having sold calls and accepted the tender offer, the shares are subsequently assigned as a result of option exercise. That would be potentially onerous, especially if Zoetis shares were to go on a run higher, but I’m not overly concerned about that occurring.

But forget about me and my problems, or the problems of an option buyer. For the ordinary buy and hold investor the decision should be a fairly easy one to make.


Well not so fast.

For starters, the likelihood of being able to exchange all of your shares is small. There are over 7 billion shares of Pfizer and only about 400 million shares of Zoetis being offered. That’s good enough reason to inform shareholders that the exchange may be made on a pro-rata basis. Unlike a Facebook (FB) IPO offering you’re not likely to get more shares than you imagined.

Incidentally, about 75% of Pfizer’s shares are institutionally owned. The greatest likelihood is that those holdings are in excess of 100 shares per institution, but more on that later.

Assuming that everyone in the world salivates at the prospect of that 7.52% premium and the ability to cash in by selling shares of Zoetis, there are a number of considerations before counting your profits.

Among those considerations is that institutions, which currently only own approximately 18% of Zoetis shares, would be more facile in being able to unload shares quickly, as they are freely transferable upon exchange. That 7.52% premium may not be destined to withstand a lack of buyers, even if some discipline existed and there was an attempt to create orderly selling.

With the differential in the number of shares between the two companies, assuming that all shares were tendered, each shareholder would receive an allocation of about 6% of their request.

Before you get exposed to too much math, you should also know that there is a $30 fee to exchange shares. As with all investing transactions, there is an economy achieved in volume, especially when there’s a fixed price involved.

In the event that someone holds 100 shares of Pfizer, approximately 6 of those would be eligible for exchange, based on the assumption that all outstanding Pfizer shares would be offered for tender. The final number of shares of Zoetis received in exchange for Pfizer shares will be based upon an exchange rate as determined by the 3 day weighted closing price as announced on June 19, 2013, or after, if the deadline is extended by Pfizer.

For illustrative purposes, let’s assume the final Pfizer share price was $29. That would entitle the shareholder to $31.18 worth of Zoetis shares.

Your 6 share allocation would mean a profit on the exchange of $13.08, less the $30 transaction fee, leaving you with a loss of nearly $17.

That is an example of snatching defeat from the jaws of victory.

Of course if less than all shares are tendered the 100 share stock owner would fare better. If only 3 billion shares are offered for exchange he would break even.

Or would he?

The next part of the equation is what happens to Zoetis. At the moment the float is approximately 500 million shares, which will increase from one moment to the next to 900 million shares.

Then comes the real fun as there will certainly be those looking to quickly capitalize on that 7.52% differential before the opportunity disappears.

One can only imagine that would put some downward pressure on share price, which incidentally hasn’t fared terribly well since the initial spin-off.

Zoetis became a publicly traded company in a successful IPO, having been priced above expectations and closing up 19% on its first day of trading, from an IPO price of $26. Unlike Phillips 66, however, it hasn’t left its parent in the dust.

In fact, despite an early positive showing, Zoetis has lagged Pfizer in its performance, while both have trailed the S&P 500.

As with many stocks that hold the promise of growth, Zoetis doesn’t offer a terribly appealing dividend, although that could change as it has already been increased for Phillips 66. Currently the Zoetis yield is 0.8%. Compare that to the stodgy Pfizer that is yielding 3.4%

Ultimately. in terms of the offer itself, the fewer that express an interest, the far better the offer would likely be as allocations would be increased and pricing pressure on Zoetis would be decreased.

A classic battle of greed versus common sense.

As an inveterate option seller, I have an additional consideration. Zoetis does offer option contracts, but unlike Pfizer it does not offer weekly contracts, nor does it have a multitude of unit denominated strike prices, making the prospects of holding shares less attractive for me.

With a bit more than two weeks until a decision is required my initial reaction to the offer has undergone quite a transformation, but I’ll still end up following the numbers and determining whether some additional return can be squeezed out of the transaction owing to the size of my Pfizer position

While I now anticipate the possibility of continuing to hold onto my Pfizer shares, I do hope that perhaps someone who hasn’t given the subject too much thought may end up exercising their $29 option early, at a price below the strike, as they may perceive Pfizer priced at anything greater than $27 to be the equivalent of Zoetis priced at $29 and hope to make a killing in what they believe to be an arbitrage opportunity.

Maybe divorce isn’t that bad? At least if you don’t think about it too much.


Shame on you, Apple

Oh, and congratulations, too.

Shame and congratulations on you for completing the world’s most successful corporate issuance of bonds. $52 Billion in bids clamoring for $17 Billion of product.

Remember when Apple (AAPL) products had that kind of demand?

Remember when its stock had that kind of demand?

Remember, the cynics say that dividends and stock buybacks are the sort of things that you do when you can’t propel the business forward.

A few years ago, in a ruling that will forever remain controversial, the United States Supreme Court essentially ruled, that in at least a narrow definition, corporations were people.

For most purposes that designation is somewhat non-sensical, but for the all important world of campaign financing making corporations animate objects had a great benefit. Namely, the privilege of donating obscene amounts of money to political campaigns.

But along with all of the great privileges of belonging to the human race, there have to be some downsides, as well. Social obligations and the burdens and joys of human emotions come to mind.

Like Adam and Eve in the Garden of Eden, one of the very first human traits that they exhibited after they had done something very wrong and against the “rules” was to feel shame. Ironically, what they did wrong was to have eaten from “The Apple.”

This week, Apple should feel shame.

They borrowed money, as much as 75 basis points above US Treasuries in order to fund a planned $50 Billion buyback and the costs of three years worth of dividend payments.

From a business perspective, Apple should be congratulated, having found a way to satisfy increasingly noisy shareholders and hold the tax man at bay. Although I do wonder why they even had to go 75 basis points above US Treasuries, you can’t argue with the success of the initiative. You would, however, think that Apple was more credit worthy than our own government, but apparently they don’t even measure up to Microsoft (MSFT) in that regard.

While the interest payments are a deductible expense, the real beauty is that Apple is able to put cash directly and perhaps indirectly back in the hands of shareholders without the need to repatriate tons of foreign cash and pay US taxes once having done so. Of course, they also figured out a way to turn down the heat on Tim Cook, just a bit.

Having been an Apple shareholder as recently as last week, I suppose I would have lauded that move by Tim Cook, but now, I find it shameful.

Firstly, not that I expect any devastating news at Apple, but suddenly shareholders have taken a subordinate position to new bond buying stakeholders. The risk to shareholders is certainly small in that regard, but it is also certainly unnecessary.

Secondly, what happened to the ideals?

Although he was a ruthless competitor, the late Steve Jobs had ideals. First and foremost, they related to the products offered by Apple. But they also extended to the financial practices that eschewed capital markets and were ruggedly self-reliant in order to meet its corporate objectives.

While Apple still has exquisite products, among my previous critiques of the company quality of products has never been at issue, they are straying from the founder’s ideals on all counts.

While it can be safely said that the last time Apple ventured into the bond market, it did so to save itself from financial ruination, Steve Jobs had not yet returned to the company. We’ll never know whether Apple under Jobs’ leadership would have been driven to the point of desperation, but we do know that in the 25 subsequent years that source was never tapped again.

Whatever the basis for his ideals, they included a disdain for share buybacks and dividends. As recently as a 2010 shareholder meeting, Jobs stated that Apple needed to keep its cash for growth opportunities and further said that paying a dividend or buying back stock would not change the stock price. You can argue those points, but what you can’t argue is that Jobs’ idealism exchanged the illusory effects of dividends and buybacks for the real effects of stock appreciation.

So here we are. Shares had fallen in excess of $300, the pipeline appears dry and questions regarding TIm Cook’s continuing leadership have popped up.

In response, Apple has gone where the beleaguered go. They have gone the route of buybacks and dividends. Nothing terribly creative, but a step designed to quiet some of the complaints from shareholders and activists.

Yet, they went to the bond markets to get the necessary cash to perform what may in and of itself been unnecessary. By all reports they did so to avoid repatriation of foreign held cash and to avoid paying U.S. taxes upon those funds.

Remember the 2012 elections? Remember candidate Romney and the controversy surrounding his taxes? There was never a question as to whether Romney had broken the law or done anything illegal. It was an issue of his taking advantage of every loophole in the tax code that was imaginable. Not illegal, but most people innately believed that there was just something wrong about navigating a path that no one creating regulation or legislation could have imagined would exist.

Bill Gates and Warren Buffett believe that to be the case. I suppose that’s another way that Apple doesn’t measure up to Microsoft.

On its surface you know that there is something wrong when an individual can have an IRA valued in excess of $100 Million. Not because the amount is so large, but rather because of the annual contribution thresholds. For example, assuming Mr. Romney made a maximum $5,000 contribution each year for 30 years and achieved an annual 35% return, he would still only have $40 million.


Yet here Apple has garnered its own shame. Exploiting the tax code in a way that the average person, perhaps even investors in Apple, intuitively know is wrong. Maintaining a significant cash reserve overseas to avoid paying taxes just doesn’t pass the smell test for most people, despite being legal.

But by so doing, they are also not re-investing any significant portion of their $150 Billion cash reserve into the business, nor are they pursuing meaningful acquisitions. The money sits in a low interest environment.

Given that shameful disregard for shareholders,you could understand why there was a growing chorus for something substantive to be done.

While corporations traditionally did not have social responsibilities, that too is a burden of now joining the human race. Among the social responsibilities is to put their money to work and to pay taxes, without hiding behind the loopholes or the unanticipated escape routes found in existing regulations and legislation.

I’m not really certain whatever happened to Adam and Eve after their banishment from the Garden of Eden. Their expulsion was swift, and perhaps the entire human race paid a steep price for their actions.

I think Apple’s recent action will result in the same steep price for its shareholders as the euphoria around the offering has already disappeared. The future looks less optimistic as Apple settles into a state where they are no different from the rest and beginning to rely on smoke, mirrors and lapses in tax policy to perpetuate their leadership.

In the meantime, without anything substantive in its future, Apple will remain a trading vehicle that may offer risk to those looking at it as a long term value.

While I can’t hold Apple in esteem for their anti-social behavior, and blatant thumbing of its corporate nose at its responsibilities, I do think that if offers some exceptional short term opportunities, especially when coupled with a covered call program.

I look forward to more of those positions as shares come back down in price to the $410-420 range, which I anticipate occurring prior to next week’s ex-dividend date.

As long as they’ve already made a deal with the devil, I may as well get my piece.


The Clock is Ticking on the S&P 500

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.