Oct232015

Weekend Update – October 25, 2015

Weekend Update Comment

There’s an old traditional Irish song “Johnny, We Hardly Knew Ye,” that has had various interpretations over the years.

The same title was used for a book about President John F. Kennedy, but in that case, it was fairly clear that the title was referring to the short time in which we had a chance to get to know the 35th President of the United States, whose life was cut down in its prime.

But in either case, both song and book are generally a combination of sadness over hopes dashed, although the song somehow finds a way to reflect the expression of some positive human traits even in the face of betrayal and tragedy.

While hardly on the same level as the tragedies expressed by song and written word, I hold a certain sadness for the short lived period of volatility that was taken from us far too soon.

The pain is far greater when realizing just how long volatility had been away and just how short a chance some of us had to rejoice in its return.

Even though rising volatility usually means a falling market and increasing uncertainty over future market prospects, it drives option premiums higher.

I live on option premiums and don’t spend very much time focusing on day to day price movements of underlying shares, even while fully cognizant of them.

When those premiums go higher I’m a happy person, just as someone might be when receiving an unexpected bonus, like finding a $20 bill in the pockets of an old pair of pants.

Falling prices leads to volatility which then tends to bring out risk takers and usually brings out all sorts of hedging strategies. In classic supply and demand mode those buyers are met by sellers who are more than happy to feed into the uncertainty and speculative leanings of those looking to leverage their money.

Good times.

But when those premiums dry up, it’s like so many things in life and you realize that you didn’t fully appreciate the gift offered while it was there right in front of you.

I miss volatility already and it was taken away from us so insidiously beginning on that Friday morning when the bad news contained in the most recent Employment Situation Report was suddenly re-interpreted as being good news.

The final two days of the past week, however, have sealed volatility’s fate as a combination of bad economic news around the world and some surprising good earnings had the market interpreting bad news as good news and good news as good news, in a perfect example of having both your cake and the ability to eat that cake.

With volatility already weakened from a very impressive rebound that began on that fateful Friday morning, there then came a quick 1-2-3 punch to completely bring an end to volatility’s short, yet productive reign.

The first death blow came on Thursday when the ECB’s Mario Draghi suggested that European Quantitative easing had more time to run. While that should actually pose some competitive threat to US markets, our reaction to that kind of European news has always been a big embrace and it was no different this time around.

Then came the second punch striking a hard blow to volatility. It was the unexpectedly strong earnings from some highly significant companies that represent a wide swath of economic activity in the United States.

Microsoft (NASDAQ:MSFT) painted a healthy picture of spending in the technology sector. After all, what prolonged market rally these days can there be without a strong and vibrant technology sector leading the way, especially when its a resurgent “old tech” that’s doing the heavy lifting?

In addition, Alphabet (NASDAQ:GOOG) painted a healthy picture among advertisers, whose budgets very much reflect their business and perceived prospects for future business. Finally, Amazon (NASDAQ:AMZN) reflected that key ingredient in economic growth. That is the role of the consumer and those numbers were far better than expected.

As if that wasn’t enough, the real death blow came from the People’s Bank of China as it announced an interest rate cut in an effort to jump start an economy that was growing at only 7%.

Only 7%.

Undoubtedly, the FOMC, which meets next week is watching, but I don’t expect that watching will lead to any direct action.

Earlier this past week my expectation had been that the market would exhibit some exhilaration in the days leading up to the FOMC Statement release in the anticipation that rates would continue unchanged.

That expectation is a little tempered now following the strong 2 day run which saw a 2.8% rise in the S&P 500 and which now has that index just 2.9% below its all time high.

While I don’t expect the same unbridled enthusiasm next week, what may greet traders is a change in wording in the FOMC Statement that may have taken note of some of the optimism contained in the combined earnings experience of Microsoft, Alphabet and Amazon as they added about $80 billion in market capitalization on Friday.

If traders stay true to form, that kind of recognition of an economy that may be in the early stages of heating up may herald the kind of fear and loathing of rising interest rates that has irrationally sent markets lower.

In that case, hello volatility, my old friend.

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

As is typically the case when the market closes on some real strength for the week, it’s hard to want to part with cash on Monday when bargains may have disappeared.

Like volatility, those bargains are only appreciated when they’re gone. Even though you may have a strong sense that they’ll be back, the waiting is just so difficult sometimes and it’s so easy to go against your better judgment.

Although the market has gone higher in each of the past 4 weeks, the predominant character of those weeks had been weakness early on and strength to close the week. That’s made a nice environment for adding new positions on some relative weakness and having a better chance of seeing those positions get assigned or have their option contracts rolled and assigned in a subsequent week.

Any weakness to begin the coming week will be a signal to part with some of that cash, but I do expect to be a little tighter fisted than I have in the past month.

If you hold shares in EMC Corporation (NYSE:EMC), as I do, you have to wonder what’s going on, as a buyout offer from privately held Dell is far higher than EMC’s current price.

The drag seems to be coming from VMWare (NYSE:VMW), which still has EMC as its majority owner. The confusion had been related to the implied value of VMWare, with regard to its contribution to the package offered by Dell.

Many believed that the value of VMWare was being over-stated. Of course, that belief was even further solidified when VMWare reported earnings that stunned the options market by plunging to depths for which there were no weekly strikes. That’s what happens when Microsoft and Amazon, both with growing cloud based web storage services, start offering meaningful competition.

With VMWare’s decline, EMC shares followed.

EMC isn’t an inherently volatile stock, however, the recent spike higher upon news of a Dell offer and the sharp drop lower on VMWare’s woes have created an option premium that’s more attractive than usual. With EMC now back down to about $26, much of the Dell induced stock price premium has now evaporated, but the story may be far from over.

Ford Motors (NYSE:F) reports earnings on Tuesday morning and is ex-dividend the following day.

Those situations when earnings and dividends are in the same week can be difficult to assess, but despite Ford’s rapid ascent in the past month, I believe that it will continue to follow the same trajectory has General Motors (NYSE:GM).

There are a number of different approaches to this trade.

For those not interested in the risk associated with earnings, waiting until after earnings can still give an opportunity to capture the dividend. Of course, that trade would probably make more sense if Ford shares either decline or remain relatively flat after earnings. If so, the consideration can be given to seeking an in the money strike price as would ordinarily be done in an attempt to optimize premium while still trying to capture the dividend.

For those willing to take the earnings risk, rather than selling an in the money option in advance of the ex-dividend date, I would sell an out of the money option in hopes of capturing capital gains, the option premium and the dividend.

I sold Seagate Technolgy (NASDAQ:STX) puts last week and true to its nature, even when the sector isn’t in play, it tends to move up and down in quantum like bounces. However, with its competition on the prowl for acquisitions, Seagate Technolgy may have been a little more volatile than normal in an already volatile neighborhood.

I would again be interested in selling puts this week, but only if shares show any kind of weakness, following Friday’s strong move higher. If doing so and the faced with possible assignment, I would likely accept assignment, rather than rolling over the put option, in order to be in a position to collect the following week’s dividend.

I had waited a long time to again establish a Seagate Technology position and as long as it can stay in the $38-$42 range, I would like to continue looking for opportunities to either buy shares and sell calls or to sell put contracts once the ex-dividend date has passed.

So with the company reporting earnings at the end of this week and then going ex-dividend in the following week, I would like to capitalize on the position in each of those two weeks.

Following its strong rise on Friday, I would sell calls on any sign of weakness prior to earnings. With an implied price move of 6.6% there is not that much of a cushion of looking for a weekly 1% ROI, in that the strike price required for that return is only 7.4% below Friday’s closing price.

However, in the event of opening weakness that cushion is likely to increase. If selling puts and then being faced with assignment at the end of the week, I would accept that assignment and look for any opportunity to sell call contracts the following week and also collect the very generous dividend.

AbbVie (NYSE:ABBV) reports earnings this week and health care and pharmaceuticals are coming off of a bad week after having had a reasonably good year, up until 2 months ago.

AbbVie, though, had its own unique issues this year and for such a young company, having only been spun off 3 years, it has had more than its share of news related to its products, product pricing and corporate tax strategy.

This week, though, came news calling into question the safety of AbbVie’s Hepatitis C drug, after an FDA warning that highlighted an increased incidence of liver failure in those patients that already had very advanced liver disease before initiating therapy.

I had some shares of AbbVie assigned the previous week and was happy to have had that be the case, as I would have preferred not being around for earnings, which are to be released this week.

As it turns out, serendipity can be helpful, as no investor would have expected the FDA news nor its timing. However, with that news now digested and the knee jerk reaction now also digested, comes the realization that it was the very sickest people, those in advanced stages of cirrhosis were the ones most likely to require a transplant or succumbed to either their disease or its treatment.

With the large decline prior to earnings I’m again interested in the stock. Unlike most recent earnings related trades where I’ve wanted to wait until after earnings to decide whether to sell puts or not, this may be a situation in which it makes some sense to be more proactive, even with some price rebound having occurred to close the week.

The option market is implying only a 5.1% price move next week. Although a 1% ROI may be able to be obtained at a strike level just outside the bounds defined by the option market, I would be more inclined to purchase shares in advance of earnings and sell calls, perhaps using an extended option expiration date, taking advantage of some of its recent volatility and possibly using a higher strike price.

Ali Baba (NYSE:BABA) also reports earnings this week and like much of what is reported from China, Ali Baba may be as much of a mystery as anything else.

The initial excitement over its IPO has long been gone and its founder, Jack Ma, isn’t seen or heard quite as much as when its shares were trading at a significant premium to its IPO price.

Having just climbed 32% in the past month I’d be reluctant to establish any kind of position prior to the release of earnings, especially following a 6.6% climb to close out this week.

Even if a sharp decline occurs in the day prior to earnings, I would still not sell put options prior to the report, as the option market is currently implying only an 8.5% move at a time when it has been increasingly under-estimating the size of some earnings related price moves.

However, in the event of a significant price decline after earnings some consideration can be given to selling puts at that time.

Finally, Twitter (NYSE:TWTR) was my most frequent trade of 2014 and very happily so.

2015, however, has been a very different situation. I currently have a single lot of puts at a far higher price that I’ve rolled over to January 2016 in an attempt to avoid assignment of shares and to wait out any potential stock recovery.

That wait has been far longer than I had expected and January 2016 is even further off into the future than I ever would have envisioned.

With the announcement that Jack Dorsey was becoming the CEO, there’s been no shortage of activity that is seeking to give the appearance of some kind of coherent strategy to give investors some reason to be optimistic about what comes next.

What may come next is something out of so many new CEO playbooks. That is to dump all of the bad news into the first full quarter’s earnings report during their tenure and create the optics that enables them to look better by comparison at some future date.

With Twitter having had a long history of founders and insiders pointing fingers at one another, it would seem a natural for the upcoming earnings report to have a very negative tone. The difference, however, is that Dorsey may be creating some good will that may limit any downside ahead in the very near term.

The option market is implying a move of 12.1%. However, a 1% ROI could be potentially delivered through the sale of put contracts at a strike price that’s nearly 16% below Friday’s close.

That kind of cushion is one that is generally seen during periods of high volatility or with individual stocks that are extremely volatile.

For now, though, I think that Twitter’s volatility will be on hiatus for a while.

While I think that there may be bad news contained in the upcoming earnings release, I also believe that Jack Dorsey will have learned significantly from the most recent earnings experience when share price spiked only to plunge as management put forward horrible guidance.

I don’t expect the same kind of thoughtless presentation this time around and expect investor reception that will reflect newly rediscovered confidence in the team that is being put together and its strategic initiatives.

Ultimately, you can’t have volatility if the movement is always in one direction.

Traditional Stocks: EMC Corp

Momentum Stocks: none

Double-Dip Dividend: Ford (10/28)

Premiums Enhanced by Earnings: AbbVie (10/30 AM), Ali Baba (10/27 AM), Ford (10/27 AM), Seagate Technology (10/30 AM), Twitter (10/27 PM)

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

Oct162015

Weekend Update – October 18, 2015

Weekend Update Comment

You have to be impressed with the way the market has rallied back from the morning of the most recent Employment Situation Report just 2 weeks earlier.

At the low point of that morning when the market seemed appropriately disappointed by the very disappointing numbers and the lowered revisions the S&P 500 had sunk to a point more than 11% below its recent high.

At its peak point of return since that low the S&P 500 was only 4.9% below its summer time high.

The difficulty in sustaining a large move in a short period of time is no different from the limitations we see in ourselves after expending a burst of energy and even those who are finally tuned to deliver high levels of performance.

When you think about a sprinter who’s asked to run a longer distance or bringing in a baseball relief pitcher who’s considered to be a “closer” with more than an inning to go, you see how difficult it can be to reach deep down when there’s nothing left to reach for.

Sometimes you feel as if there’s no choice and hope for the best.

You also can see just how long the recovery period can be after you’ve been asked to deliver more than you’ve been capable of delivering in the past. It seems that reaching deep down to do your best borrows heavily from the future.

While humans can often take a break and recharge a little markets are now world wide, inter-connected and plugged into a 24/7 news cycle.

While it may be boring when the market takes a rest by simply not moving anywhere, it can actually expend a lot of energy if it moves nowhere, but does so by virtue of large movements in off-setting directions.

We need a market that can now take a real rest and give up some of the histrionics, even though I like the volatility that it creates so that I can get larger premiums for the sale of options.

The seminal Jackson Browne song puts a different spin on the concept of “running on empty,” but the stock market doesn’t have the problems of a soulless wanderer, even though, as much as it’s subject to anthropomorphism, it has no soul of its own.

Nor does it have a body, but both body and soul can get tired. This market is just tired and sometimes there’s no real rest for the weary.

After having moved up so much in such a short period of time, it’s only natural to wonder just what’s left.

The market may have been digging deep down but its fuel cells were beginning to hit the empty mark.

This week was one that was very hard to read, as the financial sector began delivering its earnings and the best news that could come from those reports was that significantly decreased legal costs resulted in improved earnings, while core business activities were less than robust.

If that’s going to be the basis for an ongoing strategy, that’s not a very good strategy. Somehow, though, the market consistently reversed early disappointment and drove those financials reporting lackluster top and bottom lines higher and higher.

You can’t help but wonder what’s left to give.

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

American Express (NYSE:AXP) and Wal-Mart (NYSE:WMT) may be on very different ends of the scale, but they’ve both known some very bad days this year.

For American Express it came with the news that it was no longer going to be accepted as the sole credit card at Costco (NASDAQ:COST) stores around the nation. While that was bad enough, the really bad news came with the realization of just how many American Express card holders were actually holders of the Costco co-branded card.

There was a great Bloomberg article this week on some of the back story behind the American Express and Costco relationship and looks at their respective cultures and the article does raise questions about American Express’ ability to continue commanding a premium transaction payment from retailers, as well as continuing to keep their current Costco cardholders without the lure of Costco.

What American Express has been of late is a steady performer and the expectation should be that the impact of its loss of business in 2016 has already been discounted.

American Express reports earnings this week, but it’s option premiums aren’t really significantly enhanced by uncertainty.

Normally, I look to the sale of puts to potentially take advantage of earnings, but with American Express I might also consider the purchase of shares and the concomitant sale of calls and then strapping on for what could be a bumpy ride.

Wal-Mart, on the other hand only recently starting accepting American Express cards and that relationship was seen as a cheapening of the elite American Express brand, but we can all agree that money is money and that may trump everything else.

Apparently, however, investors didn’t seem to realize that Wal-Mart’s well known plan to increase employee salaries was actually going to cost money and they were really taken by surprise this week when they learned just how much.

What’s really shocking is that some very simple math could have spelled it out with some very reasonable accuracy since the number of workers eligible to receive the raise and the size of the raise have been known for months.

It reminds me of the shock expressed by Captain Renault in the movie “Casablanca” as he says “I’m shocked to find gambling is going on in here,” as he swoops up his winnings.

Following the decline and with a month still to go until earnings are reported, this new bit of uncertainty has enhanced the option premiums and a reasonable premium can possibly be found even when also trying to secure some capital gains from shares by using an out of the money strike price.

The Wal-Mart news hit retail hard, although to be fair, Target’s (NYSE:TGT) decline started as a plunge the prior day, when it fell 5% in the aftermath of an unusually large purchase of short term put options.

While I would look at Target as a short term trade, selling a weekly call option on shares, in the hope that there would be some recovery in the coming week, there may also be some longer term opportunities. That’s because Target goes ex-dividend and then reports earnings 2 days later during the final week of the November 2015 option cycle.

DuPont (NYSE:DD), Seagate (NASDAQ:STX) and YUM Brands (NYSE:YUM) don’t have very much in common, other than some really large share plunges lately, something they all share with American Express and Wal-Mart.

But that’s exactly the kind of market it has been. There have been lots of large plunges and very slow recoveries. It’s often been very difficult to reconcile an overall market that was hitting all time highs at the same time that so many stocks were in correction mode.

DuPont’s plunge came after defeating an activist in pursuit of Board seats, but the announcement of the upcoming resignation of its embattled CEO has put some life back into shares, even as they face the continuing marketplace challenges.

Dupont will report earnings the following week and will be ex-dividend sometime during the November 2015 option cycle.

While normally considering entering a new position with a short term option sale, I may consider the use of a monthly option in this case in an effort to get a premium reflecting its increased volatility and possibly also capturing its dividend, while hoping for some share appreciation, as well.

Seagate Technology is simply a mess at a time that hardware companies shouldn’t be and it may become attractive to others as its price plunges.

Storage, memory and chips have been an active neighborhood, but Seagate’s recent performance shows you the risks involved when you think that a stock has become value priced.

I thought that any number of times about Seagate Technology over the course of the past 6 months, but clearly what goes low, can go much lower.

Seagate reports earnings on October 30th, so my initial approach would likely be to consider the sale of weekly, out of the money puts and hope for the best. If in jeopardy of being assigned due to a price decline, I would consider rolling the contract over. The choice of time frame for that possible rollover will depend upon Seagate’s announcement of their next ex-dividend date, which should be sometime in early November 2015.

With that dividend in mind, a very generous one and seemingly safe, thoughts could turn to taking assignment of shares and then selling calls in an effort to keep the dividend.

Caterpillar (NYSE:CAT) hasn’t really taken the same kind of single day plunge of some of those other companies, but its slow decline is finally making Jim Chanos’ much publicized 2 year short position seem to be genius.

It’s share price connection to Chinese economic activity continues and lately that hasn’t been a good thing. Caterpillar is both ex-dividend this week and reports earnings. That’s generally not a condition that I like to consider, although there are a number of companies that do the same and when they are also attractively priced it may warrant some more attention.

In this case, Caterpillar is ex-dividend on October 22nd and reports earnings that same morning. That means that if someone were to attempt to exercise their option early in order to capture the dividend, they mist do so by October 21st.

Individual stocks have been brutalized for much of 2015 and they’ve been slow in recovering.

Among the more staid selections for consideration this week are Colgate-Palmolive (NYSE:CL) and Fastenal (NASDAQ:FAST), both of which are ex-dividend this week.

I’ve always liked Fastenal and have always considered it a company that quietly reflects United States economic activity, both commercial and personal. At a time when so much attention has been focused on currency exchange and weakness in China, you would have thought, or at least I would have thought, that it was a perfect time to pick up or add shares of a company that is essentially immune to both, perhaps benefiting from a strong US Dollar.

Well, if you weren’t wrong, I have been and am already sitting on an expensive lot of uncovered shares.

With only monthly option contracts and earnings already having been reported, I would select a slightly out of the money option strike or when the December 2015 contracts are released possibly consider the slightly longer term and at a higher strike price, in the belief that Fastenal has been resting long enough at its current level and is ready for another run.

Colgate-Palmolive is a company that I very infrequently own, but always consider doing so when its ex-dividend date looms.

I should probably own it on a regular basis just to show solidarity with its oral health care products, but that’s never crossed my mind.

Not too surprisingly, given its business and sector, even from peak to trough, Colgate-Palmolive has fared far better than many and will likely continue to do so in the event of market weakness. While it may not keep up with an advancing market, that’s something that I long ago reconciled myself to, when deciding to pursue a covered option strategy.

As a result of it being perceived as having less uncertainty it’s combined option premium and dividend, if captured, isn’t as exciting as for some others, but there’s also a certain personal premium to be paid for the lack of excitement.

The excitement may creep back in the following week as Colgate reports earnings and in the event that a weekly contract has to be rolled over I would considered rolling over to a date that would allow some time for price recovery in the event of an adverse price move.

Reporting earnings this week are Alphabet (NASDAQ:GOOG) and Under Armour (NYSE:UA).

Other than the controversy surrounding its high technology swim suits at the last summer Olympics, Under Armour hasn’t faced much in the way of bad news. Even then, it proved to have skin every bit as repellent as its swim suits.

The news of the resignation of its COO, who also happened to serve as CFO, sent shares lower ahead of earnings.

The departure of such an important person is always consequential, although perhaps somewhat less so when the founder and CEO is still an active and positive influence in the company, as is most definitely the case with under Armour.

However, the cynic sees the timing of such a departure before earnings are released, as foretelling something awry.

The option market is implying a price move of about 7.5%, while a 1% ROI may possibly be obtained through the sale of puts 9% below Friday’s closing price.

For me, the cynic wins out, however. Under Armour then becomes another situation that I would consider the sale of puts contracts after earnings if shares drop strongly after the report, or possible before earnings if there is a sharp decline in its advance.

I’m of the belief that Google’s new corporate name, “Alphabet” will be no different from so many other projects in beta that were quietly or not so quietly dropped.

There was a time that I very actively traded Google and sold calls on the positions.

That seems like an eternity ago, as Google has settled into a fairly stodgy kind of stock for much of the past few years. Even its reaction to earnings reports have become relatively muted, whereas they once were things to behold.

That is if you ignore its most recent earnings report which resulted in the largest market capitalization gain in a single day in the history of the world.

Now, Alphabet is sitting near its all time highs and has become a target in a way that it hasn’t faced before. While it has repeatedly faced down challenges to its supremacy in the world of search, the new challenge that it is facing comes from Cupertino and other places, as ad blockers may begin to show some impact on Alphabet’s bread and butter product, Google.

Here too, the reward offered for the risk of selling puts isn’t very great, as the option market is implying a 6% move. That $40 move in either direction could bring shares down to the $620 level, at which a barely acceptable 1% ROI for a weekly put sale may be achieved.

With no cushion between what the market is implying and where a 1% ROI can be had, I would continue to consider the sale of puts if a large decline precedes the report or occurs after the report, but I don’t think that I would otherwise proactively trade prior to earnings.

Finally, VMWare (NYSE:VMW) also reports earnings this week.

If you’re looking for another stock that has plunged in the past week or so, you don’t have to go much further than VMWare, unless your definition requires a drop of more than 15%.

While it has always been a volatile name, VMWare is now at the center of the disputed valuation of the proposed buyout of EMC Corp (NYSE:EMC), which itself has continued to be the major owner of VMWare.

I generally like stocks about to report earnings when they have already suffered a large loss and this one seems right.

The option market is implying about a 5.2% move next week, yet there’s no real enhancement of the put premium, in that a 1% ROI could be obtained, but only at the lower border of the implied move.

The structure of the current buyout proposal may be a factor in limiting the price move that option buyers and sellers are expecting and may be responsible for the anticipated sedate response to any news.

While that may be the case, I think that the downside may be under-stated, as has been the case for many stocks over the past few months, so the return is not enough to get me to take the risk. But, as also has been the case for the past few months, it may be worthy considering to pile on if VMWare disappoints further and shares continue their drop after earnings are released.

That should plump up the put premium as there might be concern regarding the buyout offer on the table, which is already suspect.

Traditional Stocks: American Express, DuPont, Target, Wal-Mart

Momentum Stocks: Seagate Technology, YUM Brands

Double-Dip Dividend: Caterpillar (10/22 $0.71), Colgate-Palmolive (10/21 $0.38), Fastenal (10/23 $0.28),

Premiums Enhanced by Earnings: Alphabet (10/22 PM), Under Armour (10/22 AM), VMWare (10/20 PM)

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

Oct92015

Weekend Update – October 11, 2015

Weekend Update Comment

If you’re a fan of “American Exceptionalism” and can put aside the fact that the Shanghai stock market has made daily moves of 6% higher in the past few months on more than one occasion, you have to believe that the past week has truly been a sign of the United States’ supremacy extending to its stock markets.

We are, of optiocourse, the only nation to have successfully convinced much of the world for the past 46 years that we put a man on the moon.

So you tell me. What can’t we do?

What we can do very well is turn bad news into good news and that appears to be the path that we’ve returned to, as the market’s climb may be related to a growing belief that interest rate hikes may now be delayed and the party can continue unabated.

While it was refreshing for that short period of time when news was taken at face value, we now are faced with the prospect of markets again exhibiting their disappointment when those interest rate hikes truly do finally become reality.

Once the market came to its old realizations it moved from its intra-day lows hit after the most recent Employment Situation Report and the S&P 500 rocketed higher by 6% as a very good week came to its end on a quiet note.

While much of the gain was actually achieved when the Shanghai markets were closed for the 7 day National Day holiday celebration, it may be useful to review just what rockets are capable of doing and perhaps looking to China as an example of what soaring into orbit can lead to.

Rockets come in all sizes and shapes, but are really nothing more than a vehicle launched by a high thrust engine. Those high thrust rocket engines create the opportunities for the vehicle. Some of those vehicles are designed to orbit and others to achieve escape velocity and soar to great heights.

And some crash or explode violently, although not by design.

As someone who likes to sell options the idea of a stock just going into orbit and staying there for a while is actually really appealing, but with stocks its much better if the orbit established is one that has come down from greater heights.

That’s not how rockets usually work, though.

But for any kind of orbiting to really be worthwhile, those premiums have to be enriched by occasional bumps along the path that don’t quite make it to the level of violent explosions.

It’s just that you never really know when those violent explosions are going to come and how often. Certainly Elon Musk didn’t expect his last two rocket launches to come to sudden ends.

In China’s case those 6% increases have been followed by some epic declines, but that’s not unusual whenever seeing large moves in either direction.

As we get ready to start earnings season for real this week we may quickly learn whether our own 6% move higher was just the first leg of a multi-stage rocket launch or whether it will soon discover that there is precious little below to offer much in the way of support.

Prior to that 6% climb it was that lack of much below that created a situation where many stocks had gone into orbit, taking a rest to regain strength for a bounce higher. That temporary orbit was a great opportunity to generate some option premium income, as some of the risk of a crash was reduced as those stocks had already migrated closer to the ground.

While I don’t begrudge the recent rapid rise it would be nice to go back into orbit for a while and refuel for a slower, but more sustainable ride higher.

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

There aren’t too many data points to go on since that turnaround last week, but Apple (NASDAQ:AAPL) has been uncharacteristically missing from the party.

It seems as if it’s suddenly becoming fashionable to disparage Apple, although I don’t recall Tim Cook having given Elon Musk a hard time recently. With the opening of the movie, Steve Jobs, this week may or may not further diminish the luster.

Ever since Apple joined the DJIA on March 19, 2015 it has dragged the index 109 points lower, accounting for about 11% of the index’s decline, as it has badly lagged both the DJIA and S&P 500 during that period. The truth, however, is that upon closer look, Apple has actually under-performed both for most of the past 3 year period, even when selecting numerous sub-periods for study. The past 6 months have only made the under-performance more obvious.

With both earnings and an ex-dividend date coming in the next month, I would be inclined to consider an Apple investment from the sale of out of the money puts. If facing assignment, it should be reasonably easy to rollover those puts and continuing to do so as earnings approach. If, however, faced with the need to rollover into the week of earnings, I would do so using an extended weekly option, but one expiring in the week prior to the week of the ex-dividend date. Then, if faced with assignment, I would plan to take the assignment and capture the dividend, rather than continuing to attempt to escape share ownership.

In contrast to Apple, Visa (NYSE:V) which joined the DJIA some 2 years earlier, coincidentally having split its shares on the same day that Apple joined the index, actually added 49 points to the DJIA.

For Visa and other credit card companies there may be a perfect storm of the good kind on the horizon. With chip secured credit cards just beginning their transition into use in the United States and serving to limit losses accruing to the credit card companies, Visa is also a likely beneficiary of increasing consumer activity as there is finally some evidence that the long awaited oil dividend is finding its way into retail.

When it comes to bad news, it’s hard to find too many that have taken more lumps than YUM Brands (NYSE:YUM) and The Gap (NYSE:GPS).

Despite a small rebound in YUM shares on Friday, that came nowhere close toward erasing the 19% decline after disappointing earnings from its China operations.

YUM Brands was a potential earnings related trade last week, but it came with a condition. That condition being that there had to be significant give back of the previous week’s gains.

Instead, for the 2 trading days prior to earnings, YUM shares went higher, removing any interest in taking the risk of selling puts as the option market was still anticipating a relatively mild earnings related move and the reward was really insufficient.

Now, even after the week ending bounce, YUM’s weekly option premium is quite high, especially factoring in its ex-dividend state. As discussed last week, the premium enhancement may be sufficient to look into the possibility of selling a deep in the money weekly call option and ceding the dividend in order to accrue the premium and exit the position after just 2 days, if assigned early.

You needn’t look to China to explain The Gap’s problems. Slumping sales under its new CEO and the departure of a key executive from a rare division that was performing have sent shares lower and lower.

The troubles were compounded late this past week when The Gap did, as fewer and fewer in retail are doing, and released its same store sales figures and they continued to disappoint everyone.

Having gone ex-dividend in the past week that lure is now gone for a few months. The good news about The Gap is that it isn’t scheduled to report news of any kind of news for another month, when it releases same store sales once again, followed by quarterly results 10 days later.

The lack of any more impending bad news isn’t the best of compliments. However, unlike a rocket headed for a crash the floors for a stock can be more forgiving and The Gap is approaching a multi-year support level that may provide some justification for a position with an intended short term time frame as its option premiums are increasingly reflecting its increased volatility.

Coach (NYSE:COH) has earnings due to be reported at the end of this month. It is very often a big mover at earnings and despite some large declines had generally had a history of price recovery. That, however, hasn’t been the case in nearly 2 years.

Over the past 3 years I’ve owned Coach shares 21 times, but am currently weighed down by a single lot that is nearly 18 months old. During that time period I’ve only seen fit to add shares on a single occasion, but am again considering doing so as it seems to be building upon some support and may be one of those beneficiaries of increased consumer spending, even as its demographic may be less sensitive to energy pricing.

With the risk comes a decent weekly option premium, but I might consider sacrificing some of that premium and attempting to use a higher priced strike and perhaps an extended weekly option, but being wary of earnings, even though I expect an upward surprise.

The drug sector has seen its share of bad news lately, as well and has certainly been the target of political opportunism and over the top greed that makes almost everyone cringe.

AbbVie (NYSE:ABBV) is ex-dividend this week and is nearly 20% lower from the date that the S&P 500 began its descent toward correction territory. Since its spin-off from Abbott Labs (NYSE:ABT), which is also ex-dividend this week, AbbVie has had more than its share of controversy, including a proposed inversion and the pricing of its Hepatitis C drug regimen.

Shares seem to have respected some price support and have returned to a level well below where I last owned them. With its equally respectable option premium and generous dividend, this looks like an opportune time to consider a position, but I would like it as a short term holding in an attempt to avoid being faced with its upcoming earnings report at the end of the month.

Finally, Netflix (NASDAQ:NFLX) reports earnings this week and had been on a tear until mid-August, when a broad brush took nearly every company down 10% or more.

Of course, even with that 10% decline, Icahn Enterprises (NASDAQ:IEP), would have been far better off not having sold its shares and incurring its own 13% loss in 2015.

With earnings coming this week I found it interesting that Netflix would announce a price increase for new customers in advance of earnings. In having done so, shares spiked nearly 10%.

The option market is implying a 14% price move, however, a 1% ROI could possibly be achieved by selling a weekly put at a strike level 19% below Friday’s closing price.

That’s an unusually large cushion even as the option market has been starting to recover from a period of under-estimating earnings related moves in the past quarter.

While the safety net does appear wide, my cynical side has me believing that the subscription increase was timed to offer its own cushion for what may be some disappointing numbers. Given the emphasis on new subscriber acquisitions, I would believe that metric will come in strong, otherwise this wouldn’t be an opportune time for a price increase. However, there may be something lurking elsewhere.

With that in mind, I would consider the same approach as with YUM Brands last week and would only consider the sale of puts if preceded by some significant price pullback. Otherwise, I would hold off, but might become interested again in the event of a large downward move after earnings are released.

Traditional Stocks: Apple, The Gap, Visa

Momentum Stocks: Coach

Double-Dip Dividend: AbbVie (10/13), YUM Brands (10/14)

Premiums Enhanced by Earnings: Netflix (10/14 PM)

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

Oct32015

Weekend Update – October 4, 2015

Weekend Update Comment

If you’re a parent, even if 50 years have passed since the last episode, you can probably still remember those wonderful situations when your child was having a complete meltdown, even as the kid really didn’t know what it is that they wanted.

Sometimes a child can get so out of control over something that they wanted so badly that even when finally getting it, they just couldn’t regain control. We’ve all seen kids carry on as if there was some horrible void being perceived in their lives that was still gaping and eating away at their very core even when their immediate issue had already been resolved.

I think that’s the only way to explain the market ups and downs that we’ve been seeing, starting from the week of the most recent FOMC Statement release and all the way through to the last trading day of the past week.

The market has gone from a condition of apoplexy over the very thought of an interest rate hike to a melt down when that very same interest rate hike didn’t materialize.

Whether the moves have been up or down the rational basis has become more elusive and knowing what to do in response has been difficult. It’s been a little bit easier to simply accept the fact that there is such a phenomenon as “the terrible twos” and just ride out the storm.

Trying to understand that kind of behavior is tantamount to trying to use rational thought processes when dealing with a child in the midst of an uncontrollable outburst.

Sometimes it’s just best to ignore what you see unfolding before your eyes and let events run their course. That may not be a call for total passivity, though, and completely giving up on things, but the belief that you can outsmart or out-think a rampaging child or a rampaging market is destined for failure.

Followings Friday’s 1.4% gain in the S&P 500 that index was down only about 8.7% from its summer time highs, after having been down as much as 11.9% after the first day of trading this past week.

In doing so, the market has continued its dance around that 10% correction line while having a regular series of irrational outbursts that have alternated between plunges and surges.

Like most parents, there is some pride that comes into play when a child finally is able to come to a stage in life when those uncontrollable and irrational outbursts have run their course. For most kids once they’ve gotten through that phase it never returns, although for some adults it may manifest itself in different ways.

I don’t know if this week is going to be that week when some pride is warranted, but at the very least the market took some time in-between its outbursts this week to collect itself. In doing so, it either continued to hover around that 10% correction line and avoided spiraling out of control or took some positive steps toward finally recovering from that correction.

It started with a 300+ point drop on Monday with almost nothing happening on Tuesday as it geared up for a 200+ point gain on Wednesday.

Then, it did virtually nothing again on Thursday, only to see the bottom drop out after some very disappointing Employment Situation Report numbers on Friday morning.

This time, “disappointing” meant employment numbers that were far lower than expected and lower revisions to the previous month.

Had the same numbers been put forward a few months ago they would have engendered elation, but now that market thinks it knows what it wants and as always, when it doesn’t get it there’s a tantrum at hand.

Then, suddenly, something just seemed to click, just a it occasionally does with a child. Sometimes it may simply be exhaustion or a realization of the futileness of demonstrable outbursts, but at other times a spark may get lit that creates a path to a greater understanding of things.

The morning turnaround on Friday occurred at that point at which the S&P 500 was approaching its lowest level since the correction began and had chartists scurrying to their charts to see where the next stop below awaited.

Instead, however, the S&P 500 climbed 3% from those depths having turned positive for the day by noontime and then continuing so soar even more.

Of course, while there may be some pride in what can be interpreted as a sudden realization of the unwarranted behavior in the morning, I always get wary of such large moves, even when they’re to my benefit. When seeing those kinds of intra-day reversals, my thoughts go from recognizing them as reasonably normal tantrums, to the less normal exhibition of a bipolar disorder.

With earnings season beginning at the end of this coming week, we may soon find out whether the market is capable of exhibiting some rational responses to real news.

I’m optimistic that those responses will be more appropriate than has been the case over the last 2 earnings seasons when the option market had repeatedly under-estimated the magnitude of those responses.

Any sign that top line and bottom line numbers are both heading in the right direction may paint those disappointing Employment Situation Report numbers as an aberration. That could be just the spark we all need to get over the hump of interest rate worries and escape the developmental binds that throw us into fits of rage.

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

I never get tired of doing the same thing over and over again. There may be a psychiatric diagnostic code for that sort of thing, but when it comes to stocks it can be a very rational way of behaving especially when those stocks start falling into a pattern of trading in a narrow price range.

However, if all those stocks did was to trade in that narrow range and didn’t have a moment of explosive behavior or two before returning to a more normal path, there would be no reason to consider owning them for any reason other than perhaps for the relative safety of their dividend income.

But those occasional moves higher and lower make the sale of calls worthwhile even when the shares are seemingly moribund. Both General Electric (NYSE:GE) and Bank of America (NYSE:BAC) are recently exhibiting the kind of behavior that can generate a very respectable return, both in relative and absolute terms, especially if the opportunity presents to buy shares on a serial basis following share assignment.

I had 2 lots of General Electric assigned this past week and would be very willing to own them for the sixth time in 6 weeks. However, following its late day turnaround on Friday, along with the rest of the market, I would probably only do so if its price came closer to $25.

With a remaining lot of shares and options set to expire this week, I would still have an eye on selling new weekly calls, but if requiring rollover at the end of the week, I would consider bypassing the cycle ending week of October 16th, and perhaps selling extended weekly calls, as General Electric will report earnings that morning.

I now own 2 lots of Bank of America and three lots at any one time is my self imposed limit, but trading at the $15.50 level has a relative feeling of safety for me. As with General Electric, however, if purchasing or adding shares, there is that little matter of upcoming earnings. While most likely beginning the process with a weekly call, if requiring a rollover as being faced with expiration rather than assignment, I would probably opt to bypass the October 16 expirations in the event of some poorly received news on earnings.

Poorly received news is an apt way to describe anything emanating from China these days. While there are lots of potential “poster child” examples of the risks associated with any stock that has exposure in China, among the more respected names has to be caterpillar (NYSE:CAT).

For many rational reasons, well known short seller Jim Chanos laid out his short thesis on caterpillar nearly 30 months ago and following a substantial move higher, the virtue of patience has begun to start its rewards.

With shares now down about 40% from a year ago, there’s still no telling if this is the bottom, but a constellation of events has me considering a position.

With its ex-dividend date the next week and then earnings the following week and a weekly option premium that reflects the near term risk, I’m ready to consider that risk.

If selling a weekly option doesn’t look as if it will result in an assignment, I would probably consider trying to roll over those options to the ex-dividend week, but with a mind toward giving up that dividend by selling a deep in the money call option in an effort to collect some additional premium, but to be out of shares prior to earnings.

Failing that, however, the next step would be to attempt to roll over those shares and again selecting an expiration date that bypasses the immediate threat of earnings and then holding on tightly as one of the least respected CEOs over the past few years may again be in people’s cross-hairs.

YUM Brands (NYSE:YUM) reports earnings this week and as ubiquitous as their locations may be in the United States, it’s almost always their Chinese holdings that get the attention of investors.

Following a strong move higher on Friday, I would be reluctant to start the week by selling puts on YUM shares, as it reports earnings Tuesday afternoon, unless there is some significant giveback of those weekending gains. At the moment, the option market is implying a price move of about 5.7%.

A 1% ROI could potentially be obtained through the sale of a weekly put at a strike level 6.7% below Friday’s close, but that may be an insufficient cushion, given YUM’s earnings history, even when the CHinese economy has not been so highly questionable. However, in the event of some price pullback prior to earnings or a large price drop after earnings, I would consider a position.

In the event of a large pullback after earnings, however, rather than selling puts, as I might usually want to do, YUM is expected to have its ex-dividend date the following week, so I might consider the purchase of shares and the sale of calls. But even then, depending on the prevailing option premiums, I could possibly consider sacrificing the dividend for the premiums that could come from selling deep in the money calls and possibly using an extended option expiration date.

Equally ubiquitous, at least in some portions of the United States is Dunkin Brands (NASDAQ:DNKN). Following a disastrous reception on Thursday to their forward guidance and the barely perceptible rebound the following day, this is a stock that I’ve wanted to repurchase for nearly a year.

With only monthly options available and without a wide assortment of strike levels, this may be a good position to consider a longer term option sale, as it reports earnings at the beginning of the November 2015 cycle and will likely have its ex-dividend date in the November or December cycle.

During this latest downturn, I’ve had a more profound respect for trying to accumulate dividends, especially as the increased volatility has created option premiums that subsidize more of the dividend related price drop in shares. In doing so, sometimes there may be just as good opportunity in trying to induce early assignment of shares by selling deeper in the money calls that you usually might do in a lower volatility environment and using an extended option timeframe.

Both Verizon (NYSE:VZ) and Oracle (NYSE:ORCL) may benefit from those approaches, although when the size of the dividend is larger than the strike price unit, such as in the case of Verizon, the advantage is a bit muted.

However, with Verizon reporting earnings on October 20th, some consideration might be given toward selling an in the money option expiring on that date, in an effort to get the larger, earnings enhanced premium, even while potentially sacrificing the dividend.

Oracle doesn’t offer the same generous dividend as does Verizon, nor does it have earnings immediately at hand.

It can be approached in a much more simplistic fashion in an attempt to capture both the dividend and the option premium by considering a sale of a call hovering near the current price. because it is ex-dividend on a Friday, there may be some opportunity to enhance the yield by selling an extended weekly option, again, possibly risking early assignment, but atoning for some of that with some additional premium

Finally, how can there be anything good to say about Abercrombie and Fitch (NYSE:ANF)? I’ve been practicing Chanos like patience on a much more expensive lot of shares, but in the meantime have found some opportunity by buying shares and selling calls in the $20-22 range.

Having now done so on 4 occasions in 2015 it nay be time to do so again as it closed in at the lower end of that range. With its earnings due relatively late in the current cycle this position can be considered either through the sale of puts or as a buy/write.

Traditional Stocks: Caterpillar, Dunkin Donuts, General Electric

Momentum Stocks: Abercrombie and Fitch, Bank of America

Double-Dip Dividend: Oracle (10/9 $0.15), Verizon (10/7 $0.565)

Premiums Enhanced by Earnings: YUM Brands (10/6 PM)

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

Sep262015

Weekend Update – September 27, 2015

Weekend Update Comment

Subscribers to Option to Profit received preliminary notification of this week’s stock selections on Friday, September 25th, 8:00 AM EDT and updated at 10:20 AM. The full article was distributed on Saturday, at 11:25 AM)

I doubt that Johnny Cash was thinking about that thin line that distinguishes a market in correction from one that is not.

jhgty

For him, walking the line” was probably a reference to maintaining the correct behavior so that he could ensure holding onto something of great personal value.

Sometimes that line is as clear as the difference between black and white and other times the difference can be fairly arbitrary.

Lately our markets have been walking a line, not necessarily borne out of a clear distinction between right and wrong, but rather dancing around the definition of exactly what constitutes a market correction, going in and out without much regard.

The back and forth dance has, to some degree, been in response to mixed messages coming from the FOMC that have left the impression of a divergence between words and actions.

Regardless, what is at stake can hold some real tangible value, despite a stock portfolio not being known for its ability to keep you warm at night. Indirectly, however, the more healthy that portfolio the less you have to think about cranking up the thermostat on those cold and lonely nights.

It had been a long, long time since being challenged by that arbitrary 10% definition, but ever since having crossed that line a month ago there’s been lots of indecision about which direction we were heading.

This week was another good example of that, just as the final day of the week was its own good example of the back and forth that has characterized markets.

Depending on your perspective our recent indecision about which side of the line we want to be on is either creating support for a launching pad higher or future resistance to that move higher.

When you think about the quote attributed to Jim Rogers, “I have never met a rich technician,” you can understand, regardless of how ludicrous that may be, just how true it may also be.

While flipping a coin may have predictable odds in the long term, another saying has some real merit when considering the difficulty in trying to interpret charts and chart patterns,

That is “the market can stay irrational far longer than you can stay liquid.” Just a few wrong bets in succession on the direction can have devastating effects.

The single positive from the past 10 days of trading, however, is that the market has started behaving in a rational manner. It finally demonstrated that it understood the true meaning of a potential interest rate hike and then it reacted as a sane person might when their rational expectation was dashed.

Part of the indecision that we’ve been displaying has to be related to what has seemed as a lot of muddled messages coming from the FOMC and from Federal Reserve Governors. One minute there are hawkish sentiments being expressed, yet it’s the doves that seem to be still holding court, leading onlookers to wonder whether the FOMC is capable of making the decision that many believe is increasingly overdue.

In a week where there was little economic news we were all focused on personalities, instead and still stewing over the previous week’s unexpected turn of events.

It was a week when Pope Francis took center stage, then Chinese President Xi trying to cozy up to American business leaders before his less welcoming White House meeting, and then there was finally John Boehner.

The news of John Boehner’s early departure may be the most significant of all news for the week as it probably reduces the chance of another government shutdown and associated headaches for all.

It also marked something rare in Washington politics; a promise kept.

That promise of strict term limits was included in the “Contract with America” and John Boehner was a member of that incoming freshman Congressional Class of 1995 running on that platform, who has now indicated that he will be keeping that promise after only 11 terms in office.

None of that mattered for markets, but what did matter was Janet Yellen’s comments after Thursday’s market close when she said that a rate hike was likely this year and that overseas events were not likely to influence US policy.

That was something that had a semblance of a definitive nature to it and was to the market’s liking, particularly as the coming week may supply new economic information to justify the interest rate hawks gaining control.

Friday’s revised GDP data indicating a 3.9% growth rate for the year is a start, as the coming week also bring Jobless Claims, the Employment Situation Report and lots of Federal Reserve officials making speeches, including more from Janet Yellen, who had been reclusive for a while prior to the September meeting and Vice Chair Stanley Fischer.

As a prelude to the next earnings season that begins in just 2 weeks, the stage could be set for an FOMC affirmation that the economy is growing sufficiently to begin thinking about inflation for the first time in a long time.

After being on the other side of the inflation line for a long time and seeing a lost generation in Japan, it will feel good to cross over even as old codgers still dread the notion.

Both sides of the line can be the right side, but not at the same time. Now is the time to get on the right side and let rising interest rates reflect a market poised to move higher, just as low interest rates subsidized the market for the past 6 years. However, as someone who likes to sell options and take advantage of this increased volatility, I welcome continued trading in large bursts of movement up and down, as long as that line is adhered to.

Since the mean can always be re-calculated based on where you want to start your observations, this reversion to the new mean, that just happens to be 10% below the peaks of the summer, can be a great neighborhood to dance around.

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

Last week I was a little busier than has been the usual case of late with regard to opening new positions. Following the sharp sell offs to end the previous week I had a reasonably good feeling about the upcoming week, but now feel fortunate to have emerged without any damage.

I don’t feel the same level of optimism as the new week is set to begin, but there really is no reason to have much conviction one way or another, although there appears to be a more hawkish tone in the air as Janet Yellen is attempting to give the impression that actions will be aligned with words.

With the good fortune of getting some assignments as the week came to its close and having some cash in hand, I would like to build on those cash reserves but still find lots of temptations that seek to separate me from the cash.

The temptations aren’t just the greatly diminished prices, but also the enhanced premiums that accompany the uncertainty that’s characterizing the market.

That uncertainty is still low by most standards other than for the past couple of years, but taking individual stocks that are either hovering around correction or even bear market declines and adding relatively high premiums, especially if a dividend is also involved, is a difficult combination to walk away from.

The stocks going ex-dividend in the upcoming week that may warrant some attention are EMC Corporation (EMC) and Cisco (CSCO).

I own shares of both and both have recently been disappointing, Cisco, after its most recent earnings report looked as if it was surely going to be assigned away from me, but as so many others got caught up in the sudden downdraft and has fallen 14% since earnings, without any particularly bad news. EMC for its part has dropped nearly 13% in that same time period.

As is also so frequently the case as option premiums are rising, those going ex-dividend may become even more attractive as an increasing portion of the share’s price drop due to the dividend gets subsidized by the option premium.

That is the case for both Cisco and EMC. In the case of EMC, when the ex-dividend is early in the week you could even be excused for writing an in the money call with the hope that the newly purchased shares get assigned, as you could still potentially derive a 1% ROI on such a trade, yet for only a single day of holding.

Cisco, which goes ex-dividend later in the week may be a situation where it is warranted to sell an expanded weekly option for the following week that is also in the money by greater than the amount of the dividend, again in an effort to prompt an early assignment.

Doing so trades off the dividend for additional premium and fewer days of holding so that the cash may potentially be recycled into other income generating positions.

On such position is Comcast (CMCSA) which is ex-dividend the following Monday and if assigned early would have to be done so at the conclusion of this week.

While the entire media landscape in undergoing rapid change and while Comcast has positioned itself as best as it can to withstand the quantum changes, a trade this week is nothing more than an attempt to exploit the shares for the income that it may be able to produce and isn’t a vote of confidence in its strategic initiatives and certainly not of its services.

The intention with Comcast is considering the sale of an in the money October 9 or October 16, 2015 call and as with Cisco or EMC, consider forgoing the dividend.

However, for any of those three dividend related trades, I believe that their prices alone are attractive enough and their option premiums enhanced enough, that even if not assigned early, they are in good position to be candidates for serial sale of call options or even repurchases, if assigned.

As long as considering a Comcast purchase, one of my favorites in the sector is Sinclair Broadcasting (SBGI). I currently own shares and most often consider initiating a new position as an ex-dividend date is approaching.

That won’t be for a while, however, the second criteria that I look at is where its price is relative to its historical trading range and it is currently below the average of my seven previous purchases in the past 16 months.

While little known, it is a major player in the ancient area of terrestrial television broadcasting and has significant family ownership. While owners of Cablevision (CVC) can argue the merits or liabilities of a closely held public company, the only real risk is that of a proposal to take the company private as a result of shares having sunk to ridiculously low levels.

I don’t see that on the horizon, although the old set of rabbit ears may be to blame for any fuzzy forecasting. Instead of relying on high technology and still being available the old fashioned way for free viewing, Sinclair Broadcasting has simply been amassing outlets all over the county and making money the old fashioned way.

As I had done with my current lot of shares, I sold some slightly longer term call options, as Sinclair offers only the monthly variety. Since it reports earnings very early in November and will likely go ex-dividend late that month, I would consider selling out of the money calls, perhaps using the December 2015 options in an effort to capture the dividend, the option premium and some capital gains on shares.

While religious and political luminaries were getting most of the attention this past week, it’s hard to overlook what has unfolded before our eyes at Volkswagen (VLKAY). Regulatory agencies and the courts may be of the belief that you can’t spell “Fahrvergnügen,” Volkswagen’s onetime advertising slogan buzzword, without “Revenge.” Unfortunately, for those owning shares in the major auto manufacturer’s, such as General Motors (GM), last week’s news painted with a very broad brush.

General Motors hasn’t been immune to its own bad news and you do have to wonder if society places greater onus and personal responsibility on the slow deaths that may be promoted by Volkswagen’s falsified diesel emissions testing than by the instantaneous deaths caused by faulty lock mechanisms.

For its part, General Motors appears to really be bargain priced and will likely escape the continued plastering by that broad brush. With an exceptional option premium this week, plumped up by the release of some sales data and a global conference call, GM’s biggest worry after having resolved some significant legal issues will continue to be currency exchange and potential weakness in the Chinese market.

With earnings due to be reported on October 21st, if considering a purchase of General Motors shares, I would think about a weekly or expanded weekly option sale, or simply bypassing the events and going straight to December, in an effort to also collect the generous dividend and possibly some capital gains while having some additional time to recover from any bad news at earnings.

MetLife (MET) is a stock that is beautifully reflective of its dependency on interest rates. As rates were moving higher and the crowd believed that would go even higher, MetLife followed suit.

Of course, the same happened when those interest rate expectations weren’t met.

Now, however, it appears that those rates will be getting a boost sooner, rather than later, as the FOMC seems to be publicly acknowledging its interests in a broad range of matters, including global events and perhaps even stock market events.

With a recently announced share buyback, those shares are now very attractively priced, even after Friday’s nearly 2% gain.

With earnings expected at the end of the month, I would consider the purchase of shares coupled with the sale of some out of the money calls, hoping to capitalize on both capital gains and bigger than usual option premiums. In the event that shares aren’t assigned prior to earnings, I would consider then selling a November 20 call in an effort to bypass earnings risk and perhaps also capture the next dividend.

Finally, I’ve been anxious to once again own eBay (EBAY) and have waited patiently for its price to decline to a more appealing level. While most acknowledge that eBay gave away its growth prospects when it completed the PayPal (PYPL) spin-off, it has actually out-performed the latter since that spin-off, despite being down  nearly 12%.

While eBay isn’t expected to be a very exciting stock performer, it hadn’t been one for years, yet was still a very attractive covered option trading vehicle, as it’s share price was punctuated by large moves, usually earnings related. Those moves gave option buyers a reason to demand and a reason for sellers to acquiesce.

That hasn’t changed and the volatility induced premiums are as healthy as they have been in years. As that volatility rises in the stock and in the overall market, there’s more and more benefit to be gained from selling in the money options both for enhanced premium and for downside protection.

It would be good to welcome eBay back into my portfolio. Even if it won’t keep me warm, I could likely buy someone else’s flea bitten blanket at a great price, using its wonderful services.

 

Traditional Stocks:  eBay, General Motors, MetLife, Sinclair Broadcasting

Momentum Stocks: none

Double-Dip Dividend: Comcast (10/5 $0.25), Cisco (10/1 $0.21), EMC Corp (9/29 $0.12)

Premiums Enhanced by Earnings:  none

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

Sep182015

Weekend Update – September 20, 2015

Weekend Update Comment

This past Monday, prior to the market’s opening, I posted the following for Option to Profit subscribers:

“In all likelihood, at this point there are only two things that would make the market take any news badly.

The first is if no interest rate increase is announced.

Markets seem to have finally matured enough to understand that a rate hike is only a reflection of all of the good and future good things that are developing in our economy and are ready to move on instead of being paralyzed with fear that a rate hike would choke off anemic growth.

The second thing, though, is the very unlikely event of a rate hike larger than has been widely expected. That means a 0.5% hike, or even worse, a full 1% hike.

That would likely be met with crazed selling.”

Based on the way the market was trading this week as we were awaiting the FOMC Statement which was very widely expected to announce an interest rate increase, you would have been proud.

The proudness would have arisen as it seemed that the market was finally at peace with the idea that a small interest rate increase, the first in 9 years, wouldn’t be bad news, at all.

Finally, it seemed as if the market was developing some kind of a more mature outlook on things, coming to the realization that an interest rate hike was a reflection of a growing and healthy economy and was something that should be celebrated.

It always seemed somewhat ironic to me that the investing class, perhaps those most likely to endorse the concept of teaching a man how to fish rather than simply giving a handout, would be so aghast at the possibility of a cessation of a zero interest rate policy (“ZIRP”), which may have been tantamount to a handout.

The realization that ours was likely the best and most fundamentally sound economy in the world may have also been at the root of our recent disassociation from adverse market events in China.

So while the week opened with more significant weakness in China, our own markets began to trade as if they were now ready to welcome an interest rate increase and seeing it for what it really reflected.

All was well and in celebration mode as we awaited the news on Thursday.

As the news was being awaited, I saw the following Tweet. 

I don’t follow many people on Twitter, but Todd Harrison, the founder of Minyanville is one of those rare combinations of humility, great personal and professional successes, who should be followed.

I have an autographed copy of his book “The Other Side of Wall Street,” whose full title really says it all and is a very worthwhile read.

Like the beer pitchman, Todd Harrison doesn’t Tweet much, but when he does, it’s worth reading, considering and placing somewhere in your memory banks.

Many people in their Twitter profiles have a disclaimer that when they re-Tweet something it isn’t necessarily an endorsement.

When I re-Tweet something, it is always a reflection of agreement. There’s no passive – aggressiveness involved in the re-Tweet by saying “I endorse the re-Tweeting of this, but I don’t necessarily endorse its content.”

I believed, as Todd Harrison did, some 4 minutes before the FOMC statement release, that the knee jerk reaction to the FOMC decision wasn’t the one to follow.

But a funny thing happened, but not in a funny sort of way.

For a short while that knee jerk reaction would have been the right response to what should have been correctly viewed as disappointment.

What was wrong was a reversion back to a market wanting and believing that it was given another extension of the ZIRP handout. That took a market that had given up all of its substantial gains and made another reversal, this time going beyond the day’s previous gains.

With past history as a guide, going back to Janet Yellen’s predecessor, who introduced the phenomenon of the Federal Reserve Chairman’s Press Conference, the market kept going higher during the prepared statement portion of the conference and continued even higher as some clarification was sought on what was meant by “global concerns.”

Of course, everyone knew that meant China, although one has to wonder whether those global concerns also included the opinions held and expressed by Christine Legarde of the International Monetary Fund and others, who believe that it would be wrong for the FOMC to introduce an interest rate increase in 2015.

While some then began to wonder whether “global concerns” meant that the Federal Reserve was taking on a third mandate, it all turned suddenly downward.

With the exception of a very early Yellen press conference when she mischaracterized the FOMC’s time frame on rate increases and the market took a subsequent tumble, normally, Yellen’s dovish and dulcet tones are like a tonic for whatever may have been ailing the market/ This week, however, the juxtaposition of dovish and hawkish sentiments from the FOMC Statement, the subsequent press conference prepared statement and questions and answers may have been confusing enough to send traders back to their new found friend.

Logic.

Perhaps it was Yellen’s response that she couldn’t give a recipe to define what would cause the FOMC to act or perhaps it was the suggestion that the FOMC needn’t wait until their next meeting to act that sent markets sharply lower as they craved some certainty.

Or maybe it was a sudden realization that if markets had gone higher on the anticipation of a rate increase, logic would dictate that it go lower if no increase was forthcoming.

And so the initial response to the FOMC decision was the right response as the market may have shown earlier in the week that it was finally beginning to act in a mature fashion and was still capable of doing so as the winds shifted.

Perhaps the best question of that afternoon was one that pointed out an apparent inconsistency between expectations for full employment in the coming years, yet also expectations for inflation remaining below the Federal Reserve’s 2% target.

Good question.

Her answer “If our understanding of the inflation process is correct……we will see further upward pressure on inflation, may have represented a very big “if” to some and may have deflated confidence at the same time as a re-awakening was taking place that suggested that perhaps the economy wasn’t growing as strongly as had been hoped to support continued upward movement in the market.

That’s the downside to focusing on fundamentals.

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

As the market continues its uncertainty, even as it may be returning more to consideration of fundamentals, I continue to like the idea of going with some of the relative safety that may be found with dividends.

Last week I purchased more shares of General Electric (GE), hoping to capture both the dividend and the volatility enhanced premium. Those shares, however were assigned early, but having sold a 2 week option the ROI for the 3 days of holding reflected that additional time value and was a respectable 1.1%.

Even though I still hold some shares with an October 2, 2015 $25 expiration hanging over them, this week I find myself wanting to add shares of General Electric, once again, as was the case in each of the last two weeks.

Although there is no dividend in sight for another 3 months, the $25 neighborhood has been looking like a comfortable one in which to add shares as volatility has made the premiums more and more attractive and there may also be some short term upside to shares to help enhance the return.

A covered option strategy is at its best when the same stock can be used over and over again as a vehicle to generate premiums and dividends. For now, General Electric may be that stock.

Verizon (VZ) doesn’t have an upcoming dividend this week, but it will be offering one within the next 3 weeks. In addition to its recently increased dividend, the yield was especially enhanced by its sharp decline in share price at the end of the week as it gave some dour guidance for 2016.

There’s not too much doubt that the telecommunications landscape is changing rapidly, but if I had to put my confidence in any company within that smallest of sectors to survive the turmoil, it’s Verizon, as long as their debt load isn’t going to grow by a very unneeded and unwanted purchase of a pesky competitor that has been squeezing everyone’s margins.

I see Verizon’s pessimism as setting up an “under promise and over deliver” kind of scenario, as utilities typically find a way to thrive, but rarely want to shout up and down the streets about how great things are, lest people begin taking notice of how much they’re paying for someone else’s obscene profits.

Among those being considered that are going to be ex-dividend this week are Cypress Semiconductor (CY) and Green Mountain Keurig (GMCR).

I already own shares of Cypress Semiconductor and have a way to go to reach a breakeven on those shares which I purchased after its proposed buyout of another company fell through. I’ve held shares many times over the years and have become very accustomed to its significant and sizable moves, while somehow finding a way to return back to more normative pricing.

Following this past Friday’s decline its well below the $10 level that I’ve long liked for adding shares. With an ex-dividend date on Tuesday, if the trade is to be made, it will be likely done early in the week.

However, the other consideration is that Cypress Semiconductor is among the early earnings reporters and it will be reporting  on the day before its next option contract expires. For that reason, if considering a share purchase, I would probably look at a contract expiration beyond October, in the event of further price erosion.

Also going ex-dividend but not until Monday of the following week are Deere (DE) and Dow Chemical (DOW).

Like so many other stocks, they are badly beaten down and as a result are featuring an even more alluring dividend yield. However, their Monday ex-dividend date is something that can add to that allure, as any decision to exercise the option has to be made on the previous Saturday.

That presents opportunity to look at strategies that might seek to encourage early assignment through the sale of in the money call options utilizing expanded weekly options.

While Caterpillar (CAT) and others are feeling the pain of China’s economic slowdown, that’s not the case for Deere, but as is often the case, there are sympathy pains that become all too real.

Dow Chemical, on the other hand has continued to suffer from the belief that its fortunes are closely tied to oil prices. It;s CEO refuted that barely 9 months ago and subsequent earnings reports have borne out his contention, yet Dow Chemical continues to suffer as oil prices move lower.

If looking for a respite from dividends, both Bank of America (BAC) and Bed Bath and Beyond (BBBY) may be worth a look this week.

The financial sector was hard hit the past few days and Bank of America was additionally in the spotlight regarding the issue of whether its CEO should also hold the Chairman’s title.

As with Jamie Dimon before him who successfully faced the same shareholder issue and retained both designations, no one is complaining about the performance of Brian Moynihan.

Even as I sit on some more expensive shares that have options sold on them expiring in two weeks, I have no reason to complain.

Following a second consecutive day of large declines, Bank of America is trading near its support that has seemed to hold up well under previous assault attempts. As with other stocks that have suffered large declines, there is greater ability to attempt to capitalize on price gains without giving up much in the way of option premiums.

Bed Bath and Beyond reports earnings this week and has seen its price in steady decline for the past 4 months. Unlike others that have had a more precipitous decline as they’ve approached the pleasure of a 20% decline, Bed Bath and Beyond has done it in a gradual style.

While those intermediate points along the drop down may represent some resistance on the way back up, that climb higher is made easier when the preceding decline wasn’t vertical.

When considering an earnings related trade I usually look for a weekly return of 1% or greater by selling put options at a strike price that’s below the bottom range implied by the option market. The preference is that the strike price that provides that return be well below that lower boundary, The lower, the better the safety cushion.

For Bed Bath and Beyond the implied move is about 6.3%, but there is no safety cushion below a $56.50 strike level to yield that 1% return. Therefore, instead of selling puts before earnings, I would consider, as has been the predominant strategy of the past two months, of considering the sale of puts after earnings are announced, but only if there is a significant price decline.

Finally, Green Mountain Keurig is going ex-dividend this coming week, but it hardly qualifies as being among the relatively safe universe of stocks that I would prefer owning right now.

I usually like to think about opening a position in Green Mountain Keurig through the  sale of puts. However, with the ex-dividend date this week that would be like subsidizing someone who was selling those puts for the dividend related price decline.

Other than the dividend, there’s is little that I could say to justify a long term position on Green Mountain and even have a hard time justifying a short term position.

However, Green Mountain’s ex-dividend day is on Friday and expanded weekly options are available.

I would consider the purchase of shares and the concomitant sale of deep in the money expanded weekly calls in an attempt to see those shares assigned early.

As an example, with Green Mountain closing at $56.74 on Friday, the October 2, 2015 $54.50 call option would have delivered a premium of $3.08.

For a rational option buyer to consider early exercise on Thursday, the price of shares would have to be above $54.79 and likely even higher than that, due to the inherent risk associated with owning shares, even if only for minutes on Friday morning after taking their possession.

However, if assigned early, there would be a 1.5% ROI for the 4 days of holding even if the shares fell somewhat less than 3.4%.

Their coffee and their prospects for continued marketplace success may both be insipid, but I do like the tortured logic and odds of the dividend related trade as we look ahead to a week where logic seeks to re-assert itself.

 

Traditional Stock: General Electric, Verizon

Momentum Stock: Bank of America

Double-Dip Dividend: Cypress Semiconductor (9/22), Deere (9/28), Dow Chemical (9/28), Green Mountain Keurig (9/25)

Premiums Enhanced by Earnings: Bed Bath and Beyond (9/24 PM)

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

Sep112015

Weekend Update – September 13, 2015

Weekend Update Comment

For those of a certain age, you may or may not recall that Marvin Gaye’s popular song “What’s Going On?” was fairly controversial and raised many questions about the behavior of American society both inside and outside of our borders during a time that great upheaval was underway.

The Groucho Marx character Rufus T. Firefly said “Why a four-year-old child could understand this report. Run out and find me a four-year-old child, I can’t make head or tail of it.”

While I could never answer that seminal question seeking an explanation for everything going on, I do know that the more outlandish Groucho’s film name, the funnier the film. However, that kind of knowledge has proven itself to be of little meaningful value, despite its incredibly high predictive value.

That may be the same situation when considering the market’s performance following the initiation of interest rate hikes. Despite knowing that the market eventually responds to that in a very positive manner by moving higher, traders haven’t been rushing to position themselves to take advantage of what’s widely expected to be an upcoming interest rate increase.

In hindsight it may be easy to understand some of the confusion experienced 40 years ago as the feeling that we were moving away from some of our ideals and fundamental guiding principles was becoming increasingly pervasive.

I don’t think Groucho’s pretense of understanding would have fooled anyone equally befuddled in that era and no 4 year old child, devoid of bias or subjectivity, could have really understood the nature of the societal transformation that was at hand.

Following the past week’s stealth rally it’s certainly no more clear as to what’s going on and while many are eager to explain what is going on, even a 4 year old knows that it’s best to not even make the attempt, lest you look, sound or read like a babbling idiot.

It’s becoming difficult to recall what our investing ideals and fundamentals used to be. Other than “buy low and sell high,” it’s not clear what we believe in anymore, nor who or what is really in charge of market momentum.

Just as Marvin Gaye’s song recognized change inside and outside of our borders, our own markets have increasingly been influenced by what’s going on outside of those borders.

If you have any idea of what is really going on outside of our borders, especially in China, you may be that 4 year old child that can explain it all to the rest of us.

The shock of the decline in Shanghai has certainly had an influence on us, but once the FOMC finally raises rates, which may come early as this week, we may all come to a very important realization.

That realization may be that what’s really going on is that the United States economy is the best in the world in relative terms and is continuing to improve in absolute terms.

That will be something to sing about.

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

With relatively little interest in wanting to dip too deeply into cash reserves, which themselves are stretched thinner than I would like, I’m more inclined to give some consideration to positions going ex-dividend in the very near future.

Recent past weeks have provided lots of those opportunities, but for me, this week isn’t as welcoming.

The two that have my attention, General Electric (NYSE:GE) and Las Vegas Sands (NYSE:LVS) couldn’t be more different, other than perhaps in the length of tenure of their Chairmen/CEOs.

I currently own shares in both companies and had shares of General Electric assigned this past week.

While most of the week’s attention directed toward General Electric is related to the European Union’s approval of its bid to buy Alstom SA (EPA:ALO), General Electric has rekindled my interest in its shares solely because of its decline along with the rest of the market.

While it has mirrored the performance of the S&P 500 since its high point in July, I would be happy to see it do nothing more than to continue to mirror that performance, as the combination of its dividend and recently volatility enhanced option premium makes it a better than usual candidate for reward relative to risk.

While I also don’t particularly like to repurchase recently assigned shares at a higher price, that most recent purchase may very well have been at an unrealistically low price relative to the potential to accumulate dividends, premiums and still see capital appreciation of shares.

Las Vegas Sands, on the other hand, is caught in all of the uncertainty surrounding China and the ability of Chinese citizens to part with their dwindling discretionary cash. With highly significant exposure to Macau, Las Vegas Sands has seen its share price bounce fairly violently over the past few months and has certainly reflected the fact that we have no real clue as to what’s going on in China.

As expected, along with that risk, especially in a market with its own increasing uncertainty is an attractive option premium. Since Las Vegas Sands ex-dividend date is on a Friday and it does offer expanded weekly options, there are a number of potential buy/write combinations that can seek to take advantage of the option premium, with or without also capturing the dividend.

The least risk adverse investor might consider the sale of a deep in the money weekly call option with the objective of simply generating an option premium in exchange for 4 days of stock ownership. At Friday’s closing prices that would have been buying shares at $46.88 and selling a weekly $45.50 call option for $1.82. With a $0.65 dividend, shares would very likely be assigned early if Thursday’s closing price was higher than $46.15.

If assigned early, that 4 day venture would yield a return of 0.9%.

However, if shares are not assigned early, the return is 2.3%, if shares are assigned at closing.

Alternatively, a $45.50 September 25, 2015 contract could be sold with the hope that shares are assigned early. In that case the return would be 1.3% for the 4 days of risk.

In keeping with Las Vegas Sand’s main product line, it’s a gamble, no matter which path you may elect to take, but even a 4 year old child knows that some risks are better than others.

Coca Cola (NYSE:KO) was ex-dividend this past week and it’s not sold in Whole Foods (NASDAQ:WFM), which is expected to go ex-dividend at the end of the month.

There’s nothing terribly exciting about an investment in Coca Cola, but if looking for some relative safety during a period of market turmoil, Coca Cola has been just that, paralleling the behavior of General Electric since that market top.

As also with General Electric, its dividend yield is more than 50% higher than for the S&P 500 and its option premium is also reflecting greater market volatility.

Following an 8% decline I would consider looking at longer term options to try and lock in the greater premium, as well as having an opportunity to wait out some chance for a price rebound.

Whole Foods, on the other hand, has just been an unmitigated disaster. As bad as the S&P 500 has performed in the past 2 months, you can triple that loss if looking to describe Whole Foods’ plight.

What makes their performance even more disappointing is that after two years of blaming winter weather and assuming the costs of significant national expansion, it had looked as if Whole Foods had turned the corner and was about to reap the benefits of that expansion.

What wasn’t anticipated was that it would have to start sharing the market that it created and having to sacrifice its rich margins in an industry characterized by razor thin margins.

However, I think that Whole Foods will now be in for another extended period of seeing its share price going nowhere fast. While that might be a reason to avoid the shares for most, that can be just the ideal situation for accumulating income as option premiums very often reflect the volatility that such companies show upon earnings, rather than the treading water they do in the interim.

That was precisely the kind of share price character describing eBay (NASDAQ:EBAY) for years. Even when stuck in a trading range the premiums still reflected its proclivity to surprise investors a few times each year. Unless purchasing shares at a near term top, adding them anywhere near or below the mid-point of the trading range was a very good way to enhance reward while minimizing risk specific to that stock.

While 2015 hasn’t been very kind to Seagate Technology (NASDAQ:STX), compared to so many others since mid-July, it has been a veritable super-star, having gained 3%, including its dividend.

Over the past week, however, Seagate lagged the market during a week when the performance of the technology sector was mixed.

Seagate is a stock that I like to consider for its ability to generate option related income through the sale of puts as it approaches a support level. Having just recovered from testing the $46.50 level, I would consider the sale of puts and would try to roll those over and over if necessary, until that point that shares are ready to go ex-dividend.

That won’t be for another 2 months, so in the event of an adverse price move there should be sufficient time for some chance of recovery and the ability to close out the position.

In the event that it does become necessary to keep rolling over the put premiums heading into earnings, I would select an expiration a week before the ex-dividend date, taking advantage of either an increased premium that will be available due to earnings or trading down to a lower strike price.

Then, if necessary, assignment can be taken before the ex-dividend date and consideration given to selling calls on the new long position.

Adobe (NASDAQ:ADBE) reports earnings this week and while it offers only monthly option contracts, with earnings coming during the final week of that monthly contract, there is a chance to consider the sale of put options that are effectively the equivalent of a weekly.

Adobe option contracts don’t offer the wide range of strike levels as do many other stocks, so there are some limitations if considering an earnings related trade. The option market is implying a move of approximately 6.7%.

However, a nearly 1% ROI may be achieved if shares fall less than 8.4% next week. Having just fallen that amount in the past 3 weeks I often like that kind of prelude to the sale of puts. More weakness in advance of earnings would be even better.

Finally, good times caught up with LuLuLemon Athletica (NASDAQ:LULU) as it reported earnings. Having gone virtually unchallenged in its price ascent that began near the end of 2014, it took a really large step in returning to those price levels.

While its earnings were in line with expectations, its guidance stretched those expectations for coming quarters thin. If LuLuLemon has learned anything over the past two years is that no one likes things to be stretched too thin.

The last time such a thing happened it took a long time for shares to recover and there was lots of internal turmoil, as well. While its founder is no longer there to discourage investors, the lack of near term growth may be an apt replacement for his poorly chosen words, thoughts and opinions.

However, one thing that LuLuLemon has been good for in the past, when faced with a quantum leap sharply declining stock price is serving as an income production vehicle through the sale of puts options.

I think that opportunity has returned as shares do tend to go through a period of some relative stability after such sharp declines. During those periods, however, the option premiums, befitting the decline and continued uncertainty remain fairly high.

Even though earnings are now behind LuLuLemon, the option market is still implying a price move of % next week. At the same time, the sale of a weekly put option % below Friday’s closing price could still yield a % ROI and offer opportunity to roll over the position in the event that assignment may become likely.

Traditional Stock: Coca Cola, Whole Foods

Momentum Stock: LuLuLemon Athletica, Seagate Technology

Double-Dip Dividend: General Electric (9/17 $0.23), Las Vegas Sands (9/18 $0.65)

Premiums Enhanced by Earnings: Adobe (9/17 PM)

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

Aug292015

Weekend Update – August 30, 2015

Weekend Update Comment

Good luck to you if you have staked very much on being able to prove that you can make sense of what we’ve been seeing in the US stock market.

While it’s always impossible to predict what the coming week will bring, an even more meaningful tip of the hat would go to anyone that has a reasonable explanation of what awaits in the coming week, especially since past weeks haven’t necessarily been simple to understand, even in hindsight.

Sure, you can say that it’s all about the confusion over in China and the series of actions taken to try and control the natural laws of physics that describe the behavior of bubbles. You can simply say that confusion and lack of clear policy in the world’s second largest economy has spilled over to our shores at a time when there is little compelling reason for our own markets to make any kind of meaningful move.

That appears to be a reasonable explanation, in a case of the tail wagging the dog, but the correlation over the past week is imperfect and not much better over the past 2 weeks when some real gyrations began occurring in China.

The recovery last week was very impressive both in the US and in China, but in the span of less than 2 months, ever since China began restrictions on stock trading activity, we can point to three separate impressive recoveries in Shanghai. During that time the correlation between distant markets gets even weaker.

Good luck, then, guessing what comes next and whether the tail will still keep wagging the dog, now that the dog realizes that a better than expected GDP may be finally evidencing the long expected energy dividend to help boost consumer participation in economic growth.

Sure, anyone can say that a 10% correction has been long overdue and leave it at that, and be able to hold their head up high in any argument now that we’ve been there and done that.

There has definitely not been a shortage of people coming out of the woodwork claiming to have gone to high cash positions before this recent correction. If they did, that’s really admirable, but it’s hard to find many trumpeting that fact before the correction hit.

What would have given those willing to disengage from the market and go to cash following unsuccessful attempts to break below support levels a signal to do so? Those lower highs and higher lows over the past month may have been the indication, but even those who wholeheartedly believe in technical formations will tell you that acting on the basis of that particular phenomenon has a 50-50 chance of landing you on the right side.

And why did it finally happen now?

The time has been ripe for about 3 years. I’ve been continually wrong in that regard for that long and I certainly can’t hold my head up very high, even if I had gotten it right this time.

Which I didn’t. But being right once doesn’t necessarily atone for all of the previous wrong calls.

No sooner had the chorus of voices come together to say that the character and depth of the decline seen were increasingly arguing against a V-shaped recovery that the market now seems to be attempting that V-shaped recovery.

What tends to make the most sense is simply considering taking a point of view that’s in distinct contrast to what people clamoring for attention attempt to build their reputations upon and are equally prepared to disavow or conveniently forget.

Of course, if you want to add to the confusion, consider how even credible individuals see things very differently when also utilizing a different viewing angle of events.

Tom Lee, former chief US equity strategist for JP Morgan Chase (NYSE:JPM) and founder of Fundstrat Global, who is generally considered bullish, notes that history shows that the vast majority of 10% declines do not become bear markets.

Michael Batnick, who is the director of research at Ritholtz Wealth Management, looked at things not from the perspective of the declines, but rather from the perspective of the advances seen.

His observation is that the vast majority of those declines generally occurred in “not the healthiest markets.”

Not that such data has application to events being seen in China, but it may be worthwhile to make note of the fact that the tremendous upside moves having recently been seen in China have occurred in the context of that market still having dropped 20%.

Perhaps not having quite the same validity as laws of physics, it may make some sense to be wary of the kind of moves higher that bring big smiles to many. If China’s stock market can still wag the United States, even with less than perfect correlation, there’s reason to be circumspect not only of their continued attempts to defy natural market forces, but also of that market’s behavior.

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

While I’m among those happy to have seen the market put 2 consecutive impressive gains together, particularly after the failed attempt to bounce back from a 600+ point loss to begin the week, I don’t think that I’ll be less cautious heading into this week.

I did open 2 new positions last week near the market lows, and despite their performance am still ambivalent about those purchase decisions. For each, I sold longer term contracts than would be my typical choice, in an attempt to lock in some volatility induced premiums and to have sufficient time for price recovery in the event of a short term downturn.

With an unusually large number of personal holdings that are ex-dividend this week, I may be willing to forgo some of the reluctance to commit additional capital in an effort to capture more dividend, especially as option premiums are being enhanced by volatility.

Both Coach (NYSE:COH) and Mosaic (NYSE:MOS) are ex-dividend this week.

For me, both also represent long suffering existing positions that I’ve traded many times over the years, and have been accustomed to their proclivity toward sharp moves higher and lower.

However, what used to be relatively short time frames for those declines have been anything but that for some existing lots, even as having traded other lots at lower prices.

Since their previous ex-dividend dates both have under-performed the S&P 500, although the gap has narrowed in the past month, even as both are within reach of their yearly lows.

On a relative basis I believe that both will out-perform the S&P 500 in the event of the latter’s weakness, but may not be able to keep pace if the market continues to head higher. However, for these trades and unlike having used longer term contracts with trades last week, my eyes would be focused on a weekly option and would even be pleased if shares were assigned early in an effort to capture the dividend.

That’s one of the advantages of having higher volatility. Even early assignment can be as or more profitable than in a low volatility environment and being able to capture both the premium and dividend, when the days of the position being open are considered.

Despite having spent some quality time with Meg Whitman’s husband a few months ago, I had the good sense not to ask him anything a few days before Hewlett Packard (NYSE:HPQ) was scheduled to report earnings.

That would have been wrong and no one with an Ivy League legacy, that I’ve ever heard about, has ever crossed that line between right and wrong.

While most everyone is now focusing on the upcoming split of Hewlett Packard, my focus is dividend centric. As with Coach and Mosaic, the option premium is reflecting greater volatility and is made increasingly attractive, even during an ex-divided event.

However, since Hewlett Packard’s ex-dividend date is on Friday, there is less advantage in the event of an early assignment. That, though, points out another advantage of a higher volatility environment.

That advantage is that it is often better to rollover in the money positions, with or without a dividend in mind, than it is to accept assignment and to seek a new investment opportunity.

In this case, if faced with likely early assignment, I would probably consider rolling over to the next week and at least if still assigned early, then would be able to pocket that additional week’s option premium, which could become the equivalent of having received the dividend.

For those who are exceptionally daring, Joy Global (NYSE:JOY) is also ex-dividend this week and it is another of my long suffering positions.

These days, anything stocks associated with China have additional risk. For years Joy Global was one of a very small number of stocks that I considered owning that had large exposure to the Chinese economy. I gave considerably more credibility to Joy Global’s forecasting of its business in China than to official government reports of economic growth.

The daring part of a position in Joy Global has more to do with just having significant interests in China, but also because it reports earnings the day after going ex-dividend. I generally do stay away from those situations and much prefer to have earnings be release first and then have the stock go ex-dividend the following day.

In this case, one can consider the purchase of shares and the sale of a deep in the money weekly call option in the hopes that someone might consider trying to capture the dividend and then perhaps selling their shares before exposure to earnings risk.

In such an event, the potential ROI can be 1.1% if selling a weekly $22 call option, based upon Friday’s $24.01 close.

However, if not assigned early, the ROI becomes 1.8% and allows for an 8% price cushion in the event of the share’s decline, which is in line with the option market’s expectations.

For those willing to cede the dividend, there is also the possibility of considering a put sale in advance of earnings.

The option market is implying only an 8.1% move next week. However, it may be possible to achieve a 1% return for the sale of a weekly put that is at a strike price 12.5% below Friday’s closing price.

Going from daring to less so, I purchased shares of $24.06 shares General Electric (NYSE:GE) last week and sold longer dated $25 calls in an effort to combine premium, capital gains on shares and an upcoming ex-dividend date.

Despite the shares having climbed during the course of the week and now beyond that strike level, I may be considering adding even more shares, again trying to take advantage of that combination, especially the higher than usual option premium that’s available.

General Electric hasn’t yet announced that ex-dividend date, but it’s reasonable to expect it sometime near September 18th. While my current short call position is for October 2, 2015, for this additional proposed lot, I may consider the sale of a September 18 slightly out of the money option contracts.

In the event that once the ex-dividend date is announced and those shares are in jeopardy of being assigned early, I might consider rolling over the position if volatility allows that to be a logical alternative to assignment.

Finally, as long as Meg Whitman is on my mind, I’m not certain how much longer I can go without owning shares of eBay (NASDAQ:EBAY). While it has traded in a very consistent range and very much paralleling the performance of the S&P 500 over the past month, it is offering an extremely attractive option premium in addition to some opportunity for capital gains on shares.

The real test, of course, begins as it releases its next earnings report which will no longer include PayPal’s (NASDAQ:PYPL) contributions to its bottom line. That is still 6 weeks away and I would consider the purchase of shares and the sale of intermediate term option contracts in order to take advantage of that higher market volatility induced premium.

At least that much makes sense to me.

Traditional Stock: eBay, General Electric

Momentum Stock: none

Double-Dip Dividend: Coach (9/3 $0.34), Hewlett Packard (9/4 $0.18), Joy Global (9/2 $0.20), Mosaic (9/1 $0.28)

Premiums Enhanced by Earnings: Joy Global (9/3 AM)

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

Aug212015

Weekend Update – August 23, 2015

Weekend Update Comment

It wasn’t too long ago that China did what it continues to believe that it does best.

It dictated and restricted behavior.

You really can’t blame them, as for the past 67 years the government has done a very good job of controlling everything within its borders and rarely had to give up much in return.

This time it believed that it could control natural market forces with edicts and with the imposition of a very market un-natural prohibition against selling shares in a large number of stocks.

In the immediate aftermath of that decision nearly 2 months ago, the Shanghai Index had actually fared quite well, especially when you consider that in the month prior that index had taken a free fall and dropped 30% over the course of 27 days.

A subsequent 21% rebound over 15 days after the introduction of new “rules” to inactivate gravitational pull, likely re-inforced the belief that the government was omnipotent and emboldened it as it went forth with a series of rapid and significant currency devaluations, even while sending confusing signals when it moved in to support its currency.

I’ve often wondered about people who engage in risky behaviors, such as free fall jumping. What goes on in their mind, besides the obvious thrill, that tells them they can battle nature and natural laws and be on the winning side?

As with lots of things in life, we have the tendency to project in a very optimistic way. A single victory against all odds suddenly becomes the expected outcome in the future, as if nature and its forces had never heard of the expression “fool me once, shame on me….”

Given China’s track record in getting what it wants they can’t be blamed for believing that they are bigger than the laws that govern markets.

When you believe that you are right or invincible, you don’t really think about such pesky matters as consistency and the likelihood that things will eventually catch up with you.

While it may not be unusual to place some restrictions on trading when things are looking dire, the breadth of the Chinese stock trading restrictions was really broad. The suggestion that those responsible for rampant speculation and “malicious” short selling might suffer anirreversible form of punishment simply sought to ensure that any remaining miscreants severed their alliance with their normal behavior.

But when you’re on a streak and no one questions you, what reason is there to not continue in the same path that got you there? It’s just like not selling your stock positions and pocketing the gains.

Since those restrictions were imposed the Shanghai Index has actually gone 1% higher, which is considerably better than our own S&P 500 which has declined 5% after today’s free fall.

So clearly erecting a dam, even if on the wrong side of the natural flow, has helped and the score is Chinese Government 1, Natural Forces 0.

Except of course if you drill down to the past few days and see a drop of about 13%, while the S&P 500 has gone down 6%.

When the dam breaks, it’s not just the baby in the bath water that’s going to get wet, but more on that, later. That downdraft that we felt on our shores blew in from China as we got sucked in by the vacuum created from their free fall.

As with other instances of trying to do battle with nature there may be the appearance of a victory if you have a very, very short timeframe, but at some point the dam is going to burst and only time can really get things back under control enough to allow an opportunity to rebuild.

This past week was the worst in over 4 years as the S&P 500 fell 5.8%. At this point people are looking at individual stocks and are no longer marveling about how many are in correction territory, but rather how many are approaching or are in bear territory.

I haven’t kept track, but 2015 has been a year in which it seems that the most uttered phrase has been “and the markets have now given up all of their gains for the year.”

While I don’t spend too much time staring at charts and thinking about technical factors, you would have had a very difficult time escaping the barrage of comments about the market having dipped below its 200 Day Moving Average.

The level that I had been keeping my eye on as support was the 2045 level on the S&P 500 and that was breached in the final hour of trading on Thursday, leaving the 2000 level the next likely stop.

That too was left behind in the dust, as is the usual case when in free fall.

As mentioned earlier in the month, those technicals were showing a series of lower highs and higher lows, which is often interpreted as meaning that a break-out is looming, but gives no clue as to the direction.

Now we know the direction, not that it helps any after the fact.

While the DJIA ended the week down a bit more than 10% off from its all time highs, allowing this to now be called a “correction,” the broader S&p 500 is only 7.8% lower. While many elected to sell on their way out in the final hour of the week, I wasn’t, but don’t expect to be very actively buying next week, without some sign of a functioning parachute or at least some very soft land at the bottom.

Buying is something that I will probably leave to those people who are more daring than I tend to be.

However, even they seem to have been a little more careful as this most recent sell-off hasn’t shown much in the way of enticing dare devils to buy on the substantial dips.

Even people prone to enjoying the thrill of a nice free fall are exercising some abundance of caution. While I prefer not to join them on the way down, I don’t mind keeping their company for now.

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

I succumbed a little to the sell off late in the week on Thursday and purchased some shares of Bank of America (NYSE:BAC) in the final hour, right before another leg downward in a market that at that point was already down nearly 300 points.

That simply was a lesson in the issue that faces us all when prices seem to be so irrationally low. Distinguishing between a value priced stock and one that is there to simply suck money out of your pocket isn’t terribly easy to do.

As the sell off continued the following day to bring the August 2015 option cycle to its end the financial sector continued to be hit very hard as interest rates continued their decline.

It wasn’t very long ago that the 10 Year Treasury was ready to hit 2.5% and many were looking at that as being the proverbial “hand writing on the wall,” but in the past month those rates have fallen more than 40% and suddenly that wall is as clean as that baby that is continually mentioned as having been thrown out with the bath water, which coincidentally may be the second most uttered phrase of late.

After committing some money to Bank of America, I’m actually considering adding more financial sector positions in the expectation that the decline in interest rates will be coming to an end very soon as there’s some reason to believe that the FOMC’s dependence on data may be lip service.

Generally, the association between interest rates and the performance of stocks in the financial sector is reasonably straight forward. With some limitations, an increasing interest rate environment increases the margins that such companies can achieve when they put their own money to work.

MetLife (NYSE:MET) is a good example of that relationship and its share price has certainly followed interest rates lower in the past few weeks, just as it dutifully followed those rates higher.

The decline in its shares has been swift and has finally brought them back to the mid-point of the range of the past dozen purchases. While that decline has been swift, the range has been fairly consistent and as the lower end of that range is approached there’s reason to consider braving some of the prevailing winds.

With the swiftness of the decline and with the broader market exhibiting volatility, the option premiums now associated with MetLife are recapturing some of the life that they had earlier in this year and all throughout 2014.

I often like to consider adding shares of MetLife right before an ex-dividend date, but I find the current stock price level to be compelling reason enough to consider a position and perhaps consider a longer term option contract to ride out any storm that may continue to be ahead.

Blackstone (NYSE:BX) hasn’t exactly followed that general rule, but lately it has fallen back in line with that very general rule, as it has plunged in share price since its earnings report and news of some insider selling.

As an example of how easy it has been to be too early in expressing optimism, I thought that Blackstone might be ready for a purchase just 2 weeks ago, but since then it has fallen 12%, although having had nothing but positive analyst comments directed toward it during those weeks. It, too, seems to have been caught in a significant downdraft and continued uncertainty in its near term fortunes are reflected in the very rich option premiums it’s now offering.

My major concern with Blackstone at the moment is whether its dividend, now at an 8.4% yield, can be sustained.

At a time when uncertainty is the prevailing mood, there’s some comfort that could come from having dividends accrue, as long as those dividends are safe.

While it’s dividend isn’t huge, at 2.5% and very safe, Sinclair Broadcasting (NASDAQ:SBGI) again looks inviting as it followed other media companies lower this week and is now at a very appealing part of its trading range.

They have no worries about exchange rates, the Chinese economy or any of those “stories du jour” that have everyone’s attention.

Having reached an agreement with DISH Network earlier in the week to allow retransmission of its signal it saw shares plummet the following day.

Sinclair Broadcasting is ubiquitous around the nation but not exactly a household name, even in its home turf in the Mid-Atlantic. It offers only monthly options and has generally been a longer holding for me, having owned shares on six occasions in the past 15 months.

Lexmark (NYSE:LXK) was one of the early and very pronounced casualties of this most recent earnings season and it has shown no sign of recovery. The market didn’t even cheer as Lexmark announced workforce reductions.

What Lexmark has done since earnings hasn’t been encouraging as its total decline has been in excess of 30%, with a substantial portion of that coming after the initial wave of selling upon earnings being released.

Lexmark also only offers monthly options and it has a dividend yield that’s both enticing and unnerving. The good news is that expected earnings for the next quarter are sufficient to cover the dividend, but there has to be some concern going forward, as Lexmark has found itself in the same situation as its one time parent IBM (NYSE:IBM) having pivoted from its core business and perhaps needing to do so again.

With virtually no exposure to China you might have thought that Deere (NYSE:DE) would have had somewhat of an easier time of things as reporting its earnings for the past quarter.

If so, you would have been wrong, but getting it right hasn’t been the norm of late, regardless of what company is being considered.

The drop seen in Deere shares definitely came as a surprise to the options markets and to most everyone else as they became yet another to beat on earnings, but to miss on revenues.

As is the general theme, as volatility is climbing, at nearly its highest level in 3 years, the premiums are welcoming greater risk taking, even as they provide some cushion to risk.

Following its loss on Friday, even Starbucks (NASDAQ:SBUX) is now among those in correction, having sustained that decline over the past 2 weeks. With some significant exposure in China it may be understandable why Starbucks was a full participant in the market’s weakness.

Like many other stocks, the sudden decline in the context of a market decline that has led to a surge in volatility, option premiums are beginning to look better and better.

As volatility increases, which itself is a reflection of increasing risk, there is the seeming paradox of more of that risk being mollified through the sale of in the money options. The cushion provided by those in the money options increases as the volatility increases, so that the relative risk is reduced more than an upward moving market.

Starbucks, after a prolonged period of very mediocre option premiums is now beginning to show some of the reason why option sellers prefer high volatility. It’s not only for the increased premium, but also for the premium on that premium which allows greater reward even when willing to see shares assigned at a loss.

As an example, at Starbuck’s closing price of $52.84, the weekly $52 option sale would have delivered a premium of $1.64, which would net $0.80, a 1.5% yield, if shares were assigned, even if those shares fell 1.6%.

Those kind of risk and reward end points on otherwise low risk stocks haven’t been seen in a few years and is very exciting for those who do sell options on a regular basis.

Finally, not many companies have had their obituaries prepared for release as frequently as GameStop (NYSE:GME) has had to endure for many years.

Somehow, though, even as we think that the model for gaming distribution is changing there exists a strong core of those still yearning for physicality, even if in a virtual world.

GameStop reports earnings this week and it is no stranger to strong moves. The option market, however is implying only an 8.8% move, which seems substantial, but as this most recent earnings season will attest, may be under-stated.

For those bold enough to consider the sale of puts before earnings, a 1% ROI can be achieved if shares fall less than 12.1%.

As with a number of other earnings related trades over the past few months, I’m not so bold as to consider the trade in advance of earnings, but might consider selling puts after earnings in the event of a large move downward.

Lately, that has been a better formula for balancing reward and risk, although it may result in some lost opportunities in the event that shares don’t plummet beyond the strike prices implied by the option market. That, however, can be a small price to pay when the moves have so frequently been out-sized in their magnitude and offering a reward that ends up being dwarfed by the risk.

Considering that GameStop has fallen only 4.6% from its highs, it may be under additional pressure in the event of even a mild disappointment or less than optimistic guidance.

While it may be premature to begin the flow of tears and recount the good memories of GameStop and a youth wasted, I would be cautious about discounting the concerns entirely as far as the market’s reaction may be concerned.

Traditional Stock: Blackstone, Deere, General Electric, MetLife, Starbucks

Momentum Stock: none

Double-Dip Dividend: Lexmark (8/26 $0.36), Sinclair Broadcasting (8/28 $0.16)

Premiums Enhanced by Earnings: GameStop (8/27 PM)

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

Aug152015

Weekend Update – August 16, 2015

Weekend Update Comment

Most everyone understands the meaning of “a bull in a China shop.”

Even I, who always had problems with idiomatic expressions, could understand that the combination of bull and china wasn’t very good. You simply did not want a bull any where near fragile china, especially if it was precariously placed so that everyone could enjoy its sight.

At the very least you had to keep a close eye on the bull in an effort to avoid or minimize damage. Even better would be to keep it on a tight leash.

Now, it’s China that you have to keep an eye upon lest your bull gets damaged as China continues to tighten its leashes.

Lately China has become a threat to the bull that everyone’s been enjoying. The bull market itself has already been precariously positioned for a while and its tentativeness has been accentuated by some of the recent unpredicted and unpredictable actions by the Chinese government and the Peoples Bank of China (“PBOC”), which are essentially the same thing.

Just to confuse things a bit, in the midst of a series of 3 moves to devalue the Chinese Yuan, came an interruption by the PBOC in the currency markets to support the currency.

That sort of thing, trying to fight the tide of the currency market doesn’t typically work out as planned, but you can’t blame the PBOC for trying, given how the government’s actions in the stock markets have seemed to stop the hemorrhaging these past few weeks.

The theory at play may be that the tighter the leash the easier it is to control things when oxygen is no longer fueling natural existence.

While many suspect that China is looking to jump start its economy with a 10% currency devaluation, that is being denied, at least in terms of the size of the devaluation. What isn’t being denied is that the Chinese economy isn’t growing by the same leaps and bounds as it had been, if those leaps and bounds were real in the first place.

It should come as no surprise that China is using bully measures to try and bring things under control, because while they may be new at this game we call “capitalism,” the rulers understand the consequences of failure.

In the United States and Europe, we’re accustomed to cycles and the kinds of depths to which we get taken while awaiting the inevitable upward return.

Plus, we can “vote the bums out.”

In China, where personal and societal freedom has been traded for growing prosperity, what does the population have left if the prosperity disappears?

They can’t necessarily exercise their constitutional right to change their government representatives every two, four or 6 years as is often the cry after currency devaluation is felt by citizens as a their standard of living is reduced.

Of course the rulers remember the lesson of popular dissent and how their forefathers came to be in power, so this may be a government especially willing to pull out the stops, including a currency war.

While currency wars aren’t terribly common, when the bull is cornered it typically lashes out.

That’s usually not good for the bull, but now I’m left confused as to which side of the metaphor I’m working.

That may sum up where the new week is set to begin.

With markets successfully steering clear of violating support levels and having done so in a dramatic way mid-week and actually managing to not fritter away the effort, you would believe that there is reason for optimism.

However, despite revisions to previous month’s government Retail Sales Reports, the actual earnings reports coming from national retailers isn’t necessarily painting a picture of a spending consumer. That’s even as the JOLTS report indicates increasing job turnover, presumably leading to higher wages for more workers and more job openings for incoming workforce members.

The coming week has more retail sales reports and hopefully will give the market a fundamental reason to begin a test of resistance levels, while we await the next stutter step from China.

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

With all of the concern about what happens next in China, it seems odd to begin the week thinking about adding another position in Las Vegas Sands (NYSE:LVS).

I have 2 much more expensively priced share lots and have been awaiting an opportunity to add another. With all of the bad news focusing around gaming prospects in Macau, one of only two special administrative areas within China, Las Vegas Sands has seen its share price plummet and then go into regular paroxysms of pronounced movements higher and lower, as the news runs sweet and sour.

However, its current price now represents the downward paroxysm that has taken shares below the mid-point of a reasonably stable price channel over the past 8 months. That seems like a reasonable entry point.

While the trading range has been fairly well defined, which would seem to limit uncertainty, the option premium seems to respect the continuing uncertainty of doing business in Macau, during a period of time that market volatility is otherwise so low. Whereas uncertainty has been very much under-estimated for many stocks, especially as they were in the throes of earnings releases, Las Vegas Sands seems to be getting its fair due in terms of option pricing.

While i still own those more expensive shares and while the dividend has made it minimally more palatable, my hope for a new position, if added, would be to have it assigned before its next ex-dividend date at the end of the September option cycle.

On a positive note, Microsoft (NASDAQ:MSFT) may not have the same worries about China as do some other companies. I suppose that having so much of your intellectual property getting pirated within China makes you a little more resistant to the effects of currency devaluation.

So there’s always that.

Microsoft hopefully has some other good things going for it, as reviews for its new operating system, Windows 10, have been generally favorable. However, one has to remember that we often tend to be less picky about things when they’re free.

Microsoft is ex-dividend this week and one thing that isn’t free is a dividend. You know that when you look at your stock’s share price on its ex-dividend date. Although studies show long term out-performance by stocks offering dividends, that’s not very different from saying people who run marathons live longer.

Both may be true, but the underlying reason a company can afford to pay a dividend or the underlying reason that someone can run a marathon may be related to pre-existing financial health or physical health, respectively.

However, when the option premium tends to subsidize some of that decline in a stock’s share price, part of that dividend really may be free, thanks to the buyer of the option premium.

In this case, Microsoft is offering a relatively large option premium for a weekly at the money option helping to offset some of the obligatory price decline as shares go ex-dividend.

Also going ex-dividend this week are Cablevision (NYSE:CVC) and Dunkin Donuts (NASDAQ:DNKN). While watching television and eating donuts may not be the formula necessary to be able to run those marathons, there’s more to life than just good health.

A broad selection of television offerings, fast internet speed, hot coffee and a jelly donut can be its own kind of health.

You have to enjoy yourself, as well, and a combination of price appreciation, a satisfactory dividend and an option premium can create an enjoyable atmosphere.

Both companies offer only monthly option contracts, but this being the final week of the August 2015 cycle, there is a potential opportunity for them to effectively offer a weekly option during their ex-dividend week.

Cablevision is a company firmly in the grip of a single family and one that is perennially rumored to be for sale. Back in May, the last time I owned shares, not coincidentally just prior to its ex-dividend date, shares surged upon news of a foreign buyer for a privately owned cable company. That rumor took Cablevision along for a ride as well, especially since Cablevision indicated that it was now willing to sell itself.

While recent activity in the sector is focused on the changing landscape for product distribution and introducing the phrase “skinny bundle” into common parlance, Cablevision has fared better than the rest during recent sector weakness. In fact, after years of lagging behind, it has finally been an out-performer, at least as long as rumors and deep pockets or willing lenders are available.

When thinking about stocks that should have relatively little to be concerned about when China is considered, Dunkin Donuts comes to mind, but perhaps not for long. Earlier this year it announced plans for a major expansion in China, but it will hopefully shelve any thoughts of emulating its New England model.

I still am amazed after years of living and working in and around Boston how so many locations could exist so close to one another.

I don’t know whether it was Dunkin Donuts or its more upscale competitor that discovered that cannibalization doesn’t seem to extend to coffee purveyors, but there is still plenty of room around the rest of the nation for more and more of their outlets and maybe reason to slow down some overseas expansion.

While I would prefer a single week’s holding in order to capture the dividend, I would also consider the use of a longer term call option sale to try for capital appreciation of shares while other companies may have significant currency exchange concerns.

On that same day that it was revealed that activist Nelson Peltz took a large position in a food services company, DuPont (NYSE:DD) received an analyst upgrade and shares did something that they haven’t really done ever since Peltz was rebuffed when seeking a seat on the Board.

DuPont isn’t alone in seeming to be bargain priced, but it has actually accounted for 17% of the DJIA decline since coming off of its highs in the aftermath of Peltz being sent packing. So it has had more than its fair share of angst of late.

The option market doesn’t appear to expect any continued unduly large moves in share price and this is also a position that I would consider purchasing and using a longer term option in order to capitalize on share gains and a competitive dividend.

Finally salesforce.com (NYSE:CRM) reports earnings this week. Its share price has been the beneficiary of two successively well received earnings reports and rumors about a buyout from Microsoft.

In the nearly 4 months that have passed since those rumors the stock has given up very little of what was gained when the speculation began.

The option market is predicting up to 9.2% price movement, but as has been the case on a number of occasions this earnings season, the option market has been under-estimating some of the risk associated with earnings, particularly when they are disappointing.

While selling puts prior to earnings can be rewarding when shares either move higher or fall less than the implied move, I generally like to consider doing so when the stock is already showing some weakness heading into earnings.

salesforce.com hasn’t been doing that, although it is about 3% below its closing high for the year. What makes a put sale tempting is that a 1% ROI for the week may be obtained even if the shares fall 11%.

However, considering just how often the option market has missed the risk associated with earnings this quarter, salesforce.com is another in a series of earnings related put sales that I would only seriously consider after earnings and in the event of a precipitous fall in the market’s response.

While salesforce.com may have the expertise to know how to most efficiently utilize a herd of bulls to exact the greatest amount of damage its own recent rise carries significant risk in this market if there is the slightest disappointment in its earnings report and guidance. If that report does disappoint, there may still be reward to be found in selling put contracts as sellers pile on to depress the price, while helping to maintain a relatively high option premium even after the carnage.

Traditional Stocks: DuPont

Momentum Stocks: Las Vegas Sands

Double-Dip Dividend: Microsoft (8/18 $0.31), Cablevision (8/19 $0.15), DNKN (8/20 $0.26)

Premiums Enhanced by Earnings: salesforce.com (8/20 PM)

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

Aug82015

Weekend Update – August 9, 2015

Weekend Update Comment

In an age of rapidly advancing technology, where even Moore’s Law seems inadequate to keep up with the pace of advances, I wonder how many kids are using the same technology that I used when younger.

It went by many names, but the paper “fortune teller” was as good a tool to predict what was going to happen as anything else way back then.

Or now.

It told your fortune, but for the most part the fortunes were binary in nature. It was either good news that awaited you later in life or it was bad news.

I’m not certain that anything has actually improved on that technology in the succeeding years. While you may be justified in questioning the validity of the “fortune teller,” no one really got paid to get it right, so you could excuse its occasional bad forecasting or imperfect vision. You were certainly the only one to blame if you took the results too seriously and was faced with a reality differing from the prediction.

The last I checked, however, opinions relating to the future movements of the stock market are usually compensated. Those compensations tend to be very generous as befitting the rewards that may ensue to those who predicate their actions on the correct foretelling of the fortunes of stocks. However, since it’s other people’s money that’s being put at risk, the compensations don’t really reflect the potential liability of getting it all wrong.

Who would have predicted the concurrent declines in Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) that so suddenly placed them into correction status? My guess is that with a standard paper fortune teller the likelihood of predicting the coincident declines in Disney and Apple placing them into correction status would have been 12.5% or higher.

Who among the paid professionals could have boasted of that kind of predictive capability even with the most awesome computing power behind them?

If you look at the market, there really is nothing other than bad news. 200 Day Moving Averages violated; just shy of half of the DJIA components in correction; 7 consecutive losing sessions and numerous internal metrics pointing at declining confidence in the market’s ability to move forward.

While this past Friday’s Employment Situation Report provided data that was in line with expectations, wages are stagnant If you look at the economy, it doesn’t really seem as if there’s the sort of news that would drive an interest rate decision that is emphatically said to be a data driven process.

Yet, who would have predicted any of those as the S&P 500 was only 3% away from its all time highs?

I mean besides the paper fortune teller?

Seemingly paradoxical, even while so many stocks are in personal correction, the Volatility Index, which many look at as a reflection of uncertainty, is down 40% from its 2015 high.

As a result option premiums have been extraordinarily low, which in turn has made them very poor predictors of price movements of late, as the implied move is based upon option premium levels.

Nowhere is that more obvious than looking at how poorly the options market has been able to predict the range of price movements during this past earnings season.

Just about the only thing that could have reasonably been predicted is that this earnings season who be characterized by the acronym “BEMR.”

“Beat on earnings, missed on revenues.”

While a tepid economy and currency exchange have made even conservative revenue projections difficult to meet, the spending of other people’s money to repurchase company shares has done exactly what every CEO expected to be the case. Reductions in outstanding shares have boosted EPS and made those CEOs look great.

Even a highly p[aid stock analyst good have predicted that one.

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

Not too surprisingly after so many price declines over the past few weeks, so many different stocks look like bargains. Unfortunately, there’s probably no one who has been putting money at risk for a while who hasn’t been lured in by what seemed to be hard to resist prices.

It’s much easier to learn the meaning of “value trap” by reading about it, rather than getting caught in one.

One thing that is apparent is that there hasn’t been a recent rush by those brave enough to “buy on the dip.” They may simply be trading off bravery for intelligence in order to be able to see yet another day.

With my cash reserves at their lowest point in years, I would very much like to see some positions get assigned, but that wish would only be of value if I could exercise some restraint with the cash in hand.

One stock suffering and now officially in correction is Blackstone (NYSE:BX). It’s descent began with its most recent earnings report. The reality of those earnings and the predictions for those earnings were far apart and not in a good way.

CEO Schwarzman’s spin on performance didn’t seem to appease investors, although it did set the tone for such reports as “despite quarterly revenues and EPS that were each 20% below consensus. That consensus revenue projection was already one that was anticipating significantly reduced levels.

News of the Blackstone CFO selling approximately 9% of his shares was characterized as “unloading” and may have added to the nervousness surrounding the future path of shares.

But what makes Blackstone appealing is that it has no debt on its own balance sheet and its assets under management continue to grow. Even as the real estate market may present some challenges for existing Blackstone properties, the company is opportunistic and in a position to take advantage of other’s misery.

Shares command an attractive option premium and the dividend yield is spectacular. However, I wouldn’t necessarily count on it being maintained at that level, as a look at Blackstone’s dividend payment history shows that it is a moving target and generally is reduced as share price moves significantly lower. The good news, however, is that shares generally perform well following a dividend decrease.

Joining Blackstone in its recent misery is Bed Bath and Beyond (NASDAQ:BBBY). While it has been in decline through 2015, its most recent leg of that decline began with its earnings report in June.

That report, however, if delivered along with the most recent reports beginning a month ago, may have been met very differently. Bed Bath and Beyond missed its EPS by 1% and met consensus expectations for revenue.

Given, however, that Bed Bath and Beyond has been an active participant in share buybacks, there may have been some disappointment that EPS wasn’t better.

However, with more of its authorized cash to use on share buy backs, Bed Bath and Beyond has been fairly respectful in the way it uses other people’s money and has been more prone to buying shares when the stock price is depressed, in contrast to some others who are less discriminating. As shares are now right near a support level and with an option premium recognizing some of the uncertainty, these shares may represent the kind of value that one of its ubiquitous 20% of coupons offers.

The plummet is Disney shares this week following earnings is still somewhat mind boggling, although short term memory lapses may account for that, as shares have had some substantial percentage declines over the past few years.

Disney’s decline came amidst pervasive weakness among cable and content providers as there is a sudden realization that their world is changing. Words such as “skinny” and “unbundling” threaten revenues for Disney and others, even as revenues at theme parks and movie studios may be bright spots, just as for Comcast (NASDAQ:CMCSA).

As with so many other stocks as the bell gets set to ring on Monday morning, the prevailing question will focus on value and relative value. Disney’s ascent beyond the $100 level was fairly precipitous, so there isn’t a very strong level of support below its current price, despite this week’s sharp decline. That may provide reason to consider the sale of puts rather than a buy/write, if interested in establishing a position. Additionally, a longer term time frame than the one week that I generally prefer may give an opportunity to generate some income with relatively low risk while awaiting a more attractive stock price.

While much of the attention has lately been going to PayPal (NASDAQ:PYPL) and while I am now following that company, it’s still eBay (NASDAQ:EBAY) that has my focus, after a prolonged period of not having owned shares. Once a mainstay of my holdings and a wonderful covered option trade it has become an afterthought, as PayPal is considered to offer better growth prospects. While that may be true, I generally like to see at least 6 months of price history before considering a trade in a new company.

However, as a covered option trader, growth isn’t terribly important to me. What is important is discovering a stock that can have some significant event driven price movements in either direction, but with a tendency to predictably revert to its mean. That creates a situation of attractive option premiums and relatively defined risk.

eBay is now again trading in a narrow range after some of the frenzy associated with its PayPal spin-off, albeit the time frame for that assessment is limited. However, as it has traded in a relatively narrow range following the spin-off, the option premium has been very attractive and I would like to consider shares prior to what may be an unwanted earnings surprise in October.

Sinclair Broadcasting (NASDAQ:SBGI) reported earnings last week beating both EPS and revenue expectations quite handily. However, the market’s initial response was anything but positive, although shares did recover about half of what they lost.

Perhaps shares were caught in the maelstrom that was directed toward cable and content providers as one thing that you can predict is that a very broad brush is commonly used when news is at hand. But as a plebian provider of terrestrial television access, Sinclair Broadcasting isn’t subject to the same kind of pressures and certainly not to the same extent as their higher technology counterparts.

I often like to consider the purchase of shares just before Sinclair Broadcasting goes ex-dividend, which it will do on August 28th. However, with the recent decline, I would consider a purchase now and selling the September 18, 2015 option contract at a strike level that could generate acceptable capital gains in addition to the dividend and option premium, while letting the cable and content providers continue to take the heat.

It seems only appropriate on a week that is focused on an old time paper fortune teller that some consideration be given to International Paper (NYSE:IP) as it goes ex-dividend this week. With its shares down nearly 17% from their 2015 high, the combination of perceived value, very fair option premium and generous dividend may be difficult to pass up at this time, while having passed it up on previous occasions during the past month.

International Paper’s earnings late last month fell in line with others that “BEMR,” but it shares remained largely unchanged since that report and shares appear to have some price support at its current level.

You may have to take my word for it, but Astra Zeneca (NYSE:AZN) is going ex-dividend this week. That information didn’t appear in any of the 3 sources that I typically use and my query to its investor relations department received only an automated out of office response. The company’s site stated that a dividend announcement was going to be made when earnings were announced on July 30th, but a week after earnings the site didn’t reflect any new information. Fortunately,someone at NASDAQ knew what I wanted to know.

Astra Zeneca pays its dividends twice each year, the second of which will be ex-dividend this week and is the smaller of the two distributions, yet still represents a respectable 1.3% payment.

I already own shares and haven’t been disappointed by shares lagging its peers. What I have been disappointed in, however, has been it’s inability to mount any kind of sustained move higher and the inability to sell calls on those shares, particularly as there had been some liquidity issues.

The recent stock split, however, has ameliorated some of those issues and there appears to be some increased options trading volume and smaller bid-ask discrepancies. Until that became the case, I had no interest in adding shares, but am now more willing to do so, also in anticipation of some performance catch-up to its other sector mates.

The promise that seemed to reside with shares of Ali Baba (NYSE:BABA) not so long ago has long since withered along with many other companies whose fortunes are closely tied to the Chinese economy.

Ali Baba reports earnings this week and the option market is predicting only a 6.7% price move. That seems to be a fairly conservative assessment of the potential for exhilaration or the potential for despair. However, a 1% ROI through the sale of a weekly put option is not available at a strike that’s below the bottom of the implied range.

For that reason, I would approach Ali Baba upon earnings in the same manner as with Green Mountain Keurig’s (NASDAQ:GMCR) earnings report. That is to only consider action after earnings are released and if shares drop below the implied lower end of the range. There is something nice about letting others exercise a torrent of emotion and fear and then cautiously wading into the aftermath.

Finally, during an earnings season that has seen some incredible moves, especially to the downside, Cree (NASDAQ:CREE) should feel right at home. It has had a great habit of surprising the options market, which is supposed to be able to predict the range of a stock’s likely price move, on a fairly regular basis.

With its products just about every where that you look you would either expect its revenues and earnings to be booming or you might think that it was in the throes of becoming commoditized.

What Cree used to be able to do was to trade in a very stable manner for prolonged periods after an earnings related plunge and then recover much of what it lost as subsequent earnings were released. That hasn’t been so much the case in the past year and its share price has been in continued decline in 2015, despite a momentary bump when it announced plans to spin-off a division to “unlock its full value.”

The option market is implying a 9.4% move when earnings are announced this coming week. By historical standards that is a low estimation of what Cree shares are capable of doing. While one could potentially achieve a 1% weekly ROI at a strike price nearly 14% below Friday’s closing price, as with Ali Baba, I would wait for the lights to go out on the share’s price before considering the sale of short term put options.

Traditional Stocks: Bed Bath and Beyond, Blackstone, Disney, eBay, Sinclair Broadcasting

Momentum Stocks: none

Double-Dip Dividend: Astra Zeneca (8/12 $0.45), International Paper (8/12 $0.40)

Premiums Enhanced by Earnings: Ali Baba (8/12 AM), Cree (8/11 PM)

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

Aug12015

Weekend Update – August 2, 2015

Weekend Update Comment

Like many people I know who have seen the coming attractions for “Vacation,” I’m anxious to see the film having laughed out loud on the two occasions that I saw the coming attractions.

That’s one of the benefits of diminishing short term memory and ever lower standards for what I find entertaining.

My wife and I usually rotate over who gets to select the next movie we see, although it usually works out to a 3 to 1 ratio in her favor. We tend to like different genres. But on this one, we’re both in agreement.

I’m under no illusions that the upcoming “vacation” being taken by the Federal Reserve and its members will have anywhere near the hijinks that the scripted “Vacation” will likely have.

For a short while the usually very visible and very eager to share their opinion members of that august institution will not garner too much attention and the stock market will be left to its own devices to try and interpret the meaning of incoming economic data in a vacuum.

The greatest likelihood is that the Federal Reserve Governors and the members of the FOMC will also be busily evaluating the economic data that will continue to accrue during the remainder of the summer, even as they have a much abridged speaking schedule in August.

I count only 3 scheduled appearances for August, which means less opportunity to go off script or less opportunity to speak one’s own mind, regardless of how that mind may lack influence where it really matters.

That then translates into less opportunity to move markets through casual comments, observations or expressions of personal opinion, even when that opinion may carry little to no weight.

While FOMC members may be taking a vacation from their public appearances for a short while, they’ll be able to give some thought to the most recent economic data which isn’t painting a picture of an economy that is expanding to the point of worry or perhaps not even to the point of justifying action.

The GDP data reported this week came in below estimates and further there was no indication of wage growth. For an FOMC that continually stresses that it will be “data driven” one has to wonder where the justification would arise to consider an interest rate increase even as early as September.

This coming week’s Employment Situation Report could alter the landscape as could the upcoming earnings reports from retailers that will begin in about 2 weeks.

With less attention being paid to when an interest rate hike may or may not occur, perhaps more attention will be paid to the details that would trigger such an increase and interpret those details on their surface, such that good news is greeted as good news and bad news as bad. That would mean a greater consideration of fundamental criteria rather than interpretation of the first or second order changes that those fundamentals might trigger.

Meanwhile, the market continues to be very deceiving.

While the S&P 500 is only about 1.5% below its all time high and the DJIA is about 3.5% below its high, it’s hard to overlook the fact that 40% of the latter’s component companies are in bear market correction.

That seems to be such an incongruous condition and the failure to break out beyond resistance levels after successfully testing support could be pointing to a developing dynamic of higher lows, but lower highs. That’s something that technicians believe may be a precursor to a breakout, but of indeterminate direction.

A lot of good that is.

The fact remains that the market has been extremely unpredictable from week to week, exhibiting something resembling a 5 steps forward and almost 5 steps backward kind of pattern throughout 2015.

With this past week being one that moved higher and bringing markets closer to its resistance level, the coming week could be an interesting one if China remains under control and fundamentals coming from earnings and economic data paint a picture of good news.

Given my low volume of trading over the past few weeks I feel that I’ve been on an extended, but unplanned vacation. Unfortunately, there are no funny tales to recount and the weeks past feel like weeks lost.

Although I’ve never really understood those who complained about having “too much quality family time” and welcomed heading back to work, I think I now have a greater appreciation for their misery.

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

Last week I purchased shares of Texas Instruments (NASDAQ:TXN) with dividend capture in mind. However, on the day before the ex-dividend date shares surged beyond my strike price and I decided to roll those options over in a hope that I could either retain the dividend and get some additional premium, or, in the event of early assignment, simply retain the additional premium.

This week, despite semi-conductors still being embattled, I’m interested in adding shares of Intel (NASDAQ:INTC), also going ex-dividend during the week.

While patiently awaiting the opportunity to sell new calls on a much more expensive existing position, I’m very aware that Intel is one of those DJIA components in correction mode. However, I don’t believe Intel will be additionally price challenged unless caught in a downward spiraling market. While I’d love to see some rebound in price for my existing shares, I’d be more than satisfied with a quick turnaround of a new lot of shares and capture of dividend and option premium.

MetLife (NYSE:MET) is also ex-dividend this week. It, too, may be in the process of developing higher lows and lower highs, which may serve as an alert.

With interest rates under pressure in the latter half of the week, MetLife followed suit lower, with both peaking mid-week. Any consideration of adding shares of MetLife for a short term holding should probably be done in the context of the expectation for interest rates climbing. If you believe that interest rates are still headed lower, the prospect of dividend capture and option premium may not offset the risk associated with the share price being pulled toward its support level.

MetLife shares are currently a little higher priced than I would like, but with a couple of days of trading prior to the ex-dividend date, I would be more enticed to consider a dividend capture trade and the use of an extended weekly option if there is price weakness early in the week.

I haven’t owned shares of Capital One Financial (NYSE:COF) in a number of years, although it’s always on my watch list. I almost included it in last week’s selection list following it’s impressive earnings related plunge of about 13%, but decided to wait to see if it could show any attempt to stem the tide.

In a sector that has generally had positive earnings this past quarter the news that Capital One was setting aside 60% more for credit losses came as a stunner, as its profitability ratio also fell.

Some price stability came creeping back last week, however, although still leaving shares well off their highs from less than 2 weeks ago. Even after some price recovery, Capital One Financial joins along with those DJIA stocks that are in correction mode and may offer some opportunity after being oversold.

Despite still owning a much too expensive lot of shares of Abercrombie and Fitch (NYSE:ANF), I’m always attracted to its shares, even when I know that they are likely not to be good for me.

There’s something perverse about that facet of human nature that finds attraction with what most know is bound to be a train wreck, but it can be so hard to resist the obvious warning signals.

While having that expensive lot of shares the recent weakness in Abercrombie and Fitch shares that have taken it below the tight range within which it had been trading makes me want to consider adding shares for the fourth time in 2015.

The option premiums are generally attractive, befitting its penchant for large moves and there is nearly 4 weeks to go until it reports earnings, so there may be some time to manage a position in the event of an adverse price movement.

I might consider the sale of puts with Abercrombie, rather than a buy/write. The one caveat about doing so and it also pertains to being short calls, is that if the ensuing share price is sharply deviating from the strike price when looking to execute a rollover, the liquidity may be problematic and the bid-ask spreads may be overly large and detrimental to someone who feels pressure to make a trade.

Finally, for those that have real intestinal fortitude, both Green Mountain Keurig (NASDAQ:GMCR) and Herbalife (NYSE:HLF) have been in the cross hairs of well known activists and both report earnings this week.

The Green Mountain Keurig saga is a long one and began some years ago when questions arose regarding its accounting practices and issues of inventory. Thrown later into the equation were questions regarding the sale of stock by its founder who had also served as CEO and Chairman until he was fired.

What Green Mountain has shown is that second acts are possible, as it has, very possibly through a lifeline offered by Coca Cola (NYSE:KO), emerged from a seeming spiral into oblivion.

Somewhat ominously, at its recent earnings report and conference, Coca Cola made no mention of its investment in Green Mountain, which has seen its share price fall by more than 50% in the past 9 months. It has been down that path before, having fallen by about 65% just 4 years ago in 2 month period.

Are there third and fourth acts?

The options market is implying a price move of about 10.7%. Meanwhile, one can potentially obtain a 1% ROI for the week if selling a put contract at a strike as much as 14% below this past Friday’s close.

In light of how this current earnings season has punished those disappointing with their earnings, even that fairly large cushion between the implied move and the strike that could deliver a 1% ROI still leads to some discomfort. However, I would very much consider the sale of puts after the earnings report if shares do plunge.

Herbalife has had its own ongoing and long saga, as well, that may be coming toward some sort of a resolution as the FTC probe is nearly 18 months old and follows allegations of illegality made nearly 3 years ago.

Following a fall to below $30 just 6 months ago, a series of court victories by Herbalife have helped to see it realize its own second act, as shares have jumped by 65% since that time.

The options market is implying a share price move of about 16%.

Considering that any day could bring great peril to Herbalife shareholders in the event of an adverse FTC decision, that implied move isn’t unduly exaggerated, as more than business results are in play at any given moment.

However, if that intestinal fortitude does exist, especially if also venturing a trade on Green Mountain, a 1% ROI may possibly be obtained by selling puts at a strike nearly 29% below Friday’s closing price.

Now that’s a cushion, but it may be a necessary one.

If the news is doubly bad, combining disappointing earnings and the coincidental release of an FTC ruling the same week that Bill Ackman would immensely enjoy, I might recommend a vacation, if you can still afford one.

Traditional Stocks: Capital One Finance

Momentum Stocks: Abercrombie and Fitch

Double-Dip Dividend: Intel (8/5), MetLife (8/5)

Premiums Enhanced by Earnings: Green Mountain Keurig (8/5 PM), Herbalife (8/5 PM)

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

Jul252015

Weekend Update – July 26, 2015

Weekend Update Comment

At first blush it may be hard to comprehend how the following opening line from Charles Dickens classic “A Tale of Two Cities” could be possible.

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…”

If your existence knows only the best of times it’s hard to see how it could also be the worst of times. Ask anyone on the right side of the 1% divide about the other side of that line and you’ll likely get a very quixotic look in response.

Recognizing that the polar opposites can concurrently exist in plain sight, yet be so hidden, was part of the genius of Dickens’ tale, but it was more than just the telling of a story. He was also sending a message of warning much closer to home.

If you have been following the stock market lately, you’ll know that even as new highs were approached once again just a week ago, there wasn’t really a pervasive sense of feeling more wealthy.

At least not for me.

The signs that perhaps not all was well and equitable were all around, but they barely received any notice. There were increasing dichotomies among the performances of the DJIA, S&P 500 and NASDAQ 100 over the past few weeks. Outrageously strong moves higher by Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and others distorted market capitalization indexes, just as sharp moves lower by IBM (NYSE:IBM) and other high priced DJIA components served to magnify declines in that price weighted index.

It has certainly been the best of times for those owning a small sub-set of the universe of stocks that had the ability to move the indexes in which they resided. But like the Parisian aristocracy of centuries ago, the impression that all is well may be blind to reality as so many were being left behind.

The past few weeks have perhaps not really been the worst of times, as that would be an exaggeration of major proportion, but it certainly hasn’t been the best of times for the vast majority of that same universe of stocks.

So as the major indexes were once again approaching or exceeding previous highs, they were doing so having been unduly influenced by a small number of very large market capitalization stocks that have gotten all of the attention.

Last week’s abysmal performance of the S&P 500 came a week after an equally wonderful performance. However, that wonderful was very much a product of a narrow mix of stocks, while this week’s retreat was more broad in scope.

In the past few weeks the market has successfully tested support as it bounced back decisively from a 5% decline. What it has failed to do is successfully test resistance after having come within a hair of breaking through to new highs. The shoulders of a few high performers hasn’t been sufficient to do the really heavy lifting necessary to break through resistance.

With the S&P 500 now sitting about 3% below its all time highs some stocks have had their share prices ravaged by earnings in a manner that seems disproportionate to the news. However, some of those stocks looking like bargains after earnings became even greater bargains a day or two later.

With earnings season having taken a decided shift this week after some initial optimism, the focus remains on earnings this week as international events have quieted and even this week’s upcoming FOMC Announcement and GDP release aren’t likely to shake things up very much.

While some of the stocks mentioned this week may appear to be bargain priced, I’m continuing a relatively tight fisted approach to new positions as “buying on the dip” strategy may still work, but may need to be much more selective than at any time over the past 3 years.

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

Lexmark (NYSE:LXK) reported earnings last week and was among those suffering tremendous declines, well beyond what the options market had been predicting.

Like its one time parent company, IBM, Lexmark has re-invented itself from a hardware company to a services one and for the past 3 years as that transition had been made, it’s not entirely clear that investors understand what Lexmark has become. As with IBM, it may be time for yet another re-invention or risk falling into irrelevancy.

Still, sitting at a nearly 2 year low, but with some technical support, Lexmark offers an attractive option premium and a very attractive dividend which is due early in the September 2015 cycle.

For that reason I would consider the sale of September options and would likely choose an out of the money strike in the belief that there may be some bounce in price possible over the course of the next two months as the company and investors think about what comes next.

Apple (NASDAQ:AAPL) doesn’t need re-invention, although it may need to find a success in its recently introduced Apple Watch, whose sales statistics weren’t broken out in the recent earnings report.

On a YTD basis Apple shares are among those that have lifted the 3 major indexes, in part giving the impression that all is well.

It’s decline for the week following what was interpreted as a miss on earnings, came even as the company reported a nearly 33% revenue increase on a year over year basis. Some may also have interpreted the announcement of a $1 billion reduction is spending as reflecting a slowdown, forgetting that Apple has periodically done the same even as it moved forward with significant upgrade cycles.

With an upcoming ex-dividend date the following week, I would consider the purchase of shares and the use of an extended weekly option seeking to get some capital gains on shares in addition to an attempt to capture the dividend.

Dow Chemical (NYSE:DOW) is another that suffered a large loss for the week after announcing earnings. While revenue was lower, it beat analyst’s estimates on EPS handily and proved CEO Andrew Liveris’ contention that low oil prices were good for Dow Chemical, despite some oil interests, at a time that it’s shares were trading in sympathy with declining oil prices.

Declining material costs were significant in helping Dow Chemical overcome decreased revenues and with oil’s recent renewed decline, there may be more advantage for the company.

As is often the case after a large price decline there is an increase in uncertainty that becomes reflected in the option premiums buyers are willing to pay and as shares dropped 10% last week the premiums are reflecting belief that some recovery is likely.

Unlike some more volatile positions that may be used in a covered option strategy and that are best when held for short periods, Dow Chemical is a very suitable long term holding thanks to its option premiums and dividends.

Texas Instruments (NASDAQ:TXN) reported earnings last week and in the minefield that the semiconductors currently represent, it did reasonably well after having fallen short of most analyst’s estimates.

Texas Instruments is ex-dividend this week and its option premiums reflect the perception that there is continued volatility ahead, as shares have fallen about 15% in the past 3 months. That combination may be a compelling one to consider a buy/write on shares prior to its ex-dividend date.

Ford (NYSE:F) reports earnings on Tuesday morning and is ex-dividend the following day. General Motors (NYSE:GM) reported much better than expected EPS last week, despite lower revenues and its shares were rewarded after some weakness the previous month.

While Ford hasn’t fallen as much as GM over the past month it may also be due for a some relief after it reports earnings.

There are a number of different potential approaches that could be taken with Ford as both earnings and a dividend are part of the options pricing equation this week.

One possibility is a buy/write selling an in the money call option. While the options market is predicting a 4.5% price move, the premium provides about 3.5% downside protection based upon Friday’s closing prices. If selling the $14 weekly call, shares would have to close at above $14.15 to have a likelihood of being assigned 3 days early.

However, if assigned early, the 2 day ROI of approximately 0.8% and the ability to recycle the funds into another income generating vehicle may have some appeal.

If, however, of the belief that Ford may also move higher as did General Motors, the use of a weekly out of the money strike price could offer a very nice return, especially if the dividend is also able to be captured. In the case of a $14.50 strike, that would mean that shares would likely have to exceed $14.65 for early assignment in order for the option buyer to capture the dividend.

Facebook (NASDAQ:FB) is one of those whose gains have been a boon for the S&P 500 and NASDAQ 100 as its market capitalization well exceeds that of IBM and is beginning to rival Microsoft (NASDAQ:MSFT) and other much longer established companies.

As everyone was getting on the bandwagon for Facebook shares to breach the $100 level the shares did exactly what you might expect them to do. The louder and more universal the calls came for that price ascent the more quickly it did just the opposite, although shares still ended the week on an up note and again out-performing the NASDAQ 100 for the week.

Facebook reports earnings this week and in its brief history as a public company has almost always pleased investors with their numbers and ability to both formulate strategies and execute them.

In the last 3 months Facebook shares are up nearly 19% while the NASDAQ 100 is absolutely flat. The options market is implying a 9.8% price move next week. Meanwhile, a price decline of less than 13.3% could still deliver a 1% ROI for the sale of a weekly put contract. However, in this instance, particularly in light of the 13% share price increase in July, I’d be more inclined to consider put sales after earnings are released, if shares fall in any meaningful way.

Finally, Twitter (NYSE:TWTR) is both a company and a stock that can generate concurrent polar opposites of reaction from users and investors, respectively. With its co-founder and interim CEO concurrently serving as CEO at start-up payment processor, Square, comes word that it has reportedly filed a confidential IPO.

In Dorsey’s case it may be the best of times and the best of times, but the jury is still out on Twitter, which reports earnings this week.

Twitter was my single most profitable position last year, not because of its stellar performance, but because it was so predictably volatile and offered wonderful option premiums along the way, as I sold puts repeatedly through the year and occasionally took assignment of shares and then sold calls.

I currently am short Twitter puts and am considering adding to that position as the premium itself is enticing, but knowing that in the event of a poorly received earnings report there will be heated up talks about Twitter’s viability as an independent company and whether it fits perfectly into Google’s need to own up to the minute information for its search engine behemoth.

The option market is implying a significant 13.8% price movement next week as earnings are released. However, a 1% ROI may be able to be achieved by selling put options a full 21% below Friday’s closing price. That represents one of the biggest dichotomies that I’ve seen in a while, particularly at a time when option premiums have been extraordinarily low, even for positions that hold more volatility than is usually the case.

While I usually don’t want to take ownership of shares when I’ve sold puts, Twitter has been one instance of a stock that I haven’t minded taking shares when assigned, rather than trying to evade that possibility by rolling over put options.

In Twitter’s case, if taking ownership, patience comes in handy, while awaiting either good news on performance, change in strategic direction or continued rumors of an inevitable buyout.

Traditional Stocks: Apple, Dow Chemical

Momentum Stocks: Lexmark

Double-Dip Dividend: Ford (7/29), Texas Instruments (7/29)

Premiums Enhanced by Earnings: Facebook (7/29 PM), Ford (7/28 AM), Twitter (7/28 PM)

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

Jul182015

Weekend Update – July 19, 2015

Weekend Update Comment

There’s a lot of confusion over who was responsible for the idea that time is merely an illusion and that it is “nature’s way of preventing everything from happening all at once.”

The first part of the idea is certainly thought provoking and is beyond my ability to understand. The second part may be some attempt at a higher plane of humor in an attempt to explain the significance of what is beyond the capability of most people.

In essence, if you thought that the time frame described during the first seven days of creation was compressed, some physicists would suggest that it all actually happened all at once and if you had the appropriate vehicle traveling at sufficient speed you would know that first hand.

The humorous quip has been attributed to Albert Einstein, Woody Allen and others. It has also been attributed to theoretical physicist John Archibald Wheeler, who was one of Einstein’s last collaborators, which itself indicates a relative time in Einstein’s career, so it may be unlikely that Wheeler would have described himself in those terms, if he was a real believer.

You might believe that Wheeler’s single degree of separation from Einstein would suggest hat perhaps the true source of the concept would then be Einstein himself. However, Wheeler maintained that he actually saw it scrawled on a men’s room wall in an Austin, Texas cafe, that in theory would have occurred at the same time that Einstein saw the famous Theory of Relativity equation scrawled on the men’s room wall of a Dusseldorf beer garden.

The idea, though, flows from Einstein’s earlier works on time, space and travel and may have been an inspiration to some well read patron while making room for the next idea inducing purchase of a large quantity of beer, wine or spirits.

This past week may have been an example of time forgetting its role, as we saw an avalanche of important news and events that came upon us in quick succession to begin the week. The news of an apparent agreement to the resolution of the Greek debt crisis and the announcement of a deal on Iran’s march toward developing a nuclear weapon came in tandem with the non-event of a melt down of the Chinese stock market.

The majority of the 2.4% weekly gain seen in the S&P 500 was over by the time we could blink, as the rest of the week offered little of anything, but saw a continuing successful test of support in the S&P 500, nearly 5% lower, as it moved to be in a position to now test resistance.

With the near simultaneous occurrence of those important events, the real question may be whether or not they themselves are illusory or at least short-lived.

Time may be the key to tell whether the events of this week were justifiable in creating a market embrace of a rosy future.

We’ve lived through past Greek debt crises before, so there is probably little reason to suspect that this will be the last of them for Greece or even the last we’ll see in the Eurozone. When and where the next flash point occurs is anyone’s guess, but German Finance Minister Wolfgang Schäuble’s comments regarding Greece’s place in the EU continues to leave some uncertainty over the sanctity of that union and their currency.

With an Iranian deal now comes the effort to block it, which itself has a 60 day time limit for Congressional opponents to do their best to defeat the proposal and then overcome a Presidential veto. While it’s not too likely that the latter will become reality, there will be no shortage of attempts to undermine the agreement that probably contributed to continuing weakness in the energy sector in fears that Iranian oil would begin flooding markets sooner than is plausible.

The Chinese attempts at manipulating their stock markets have actually worked far longer than I would have predicted. Here too, time is in play, as there is a 6 month moratorium on the sale of some stocks and by some key individuals. That’s a long time to try and hold off real market dynamics and those forces could very well yet undermine the Chinese government’s “patriotic fight” to save its stock market.

The role that those three may have played in moving the market higher last week may now become potential liabilities until they have stood the test of time.

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

The coming week is very short on scheduled economic news, but will be a very busy one as we focus on fundamentals and earnings.

While there are lots of earnings reports coming this week the incredibly low volatility, after flirting with higher levels just 2 weeks ago, has resulted in few opportunities to try and exploit those earnings reports.

As again approaching all time highs and being very reluctant to chase new positions, I would normally focus on relatively safe choices, perhaps offering a dividend to accompany a premium from having sold call options.

This week, the only new position that may fulfill those requirements is Fastenal (NASDAQ:FAST) which offers only monthly options and reported earnings last week.

It has been mired in a narrow price range since its January 2015 earnings report and is currently trading at the low end of that range. Having just reported earnings in line with estimates is actually quite an achievement when considering that Fastenal has been on a hiring spree in 2015 and has significantly added costs, while revenues have held steady, being only minimally impacted by currency exchange rates.

Their business is a very good reflector of the state of the economy and encompasses both professional construction and weekend warrior customers. They clearly believe that their fortunes are poised to follow an upswing in economic activity and have prepared for its arrival in a tangible way.

At the current price, I think this may be a good time to add shares, capture a dividend and an option premium. I may even consider going out a bit further in time, perhaps to the November 2014 option that will take in the next earnings report and an additional dividend payment, while seeking to use a strike price that might also provide some capital gains on shares, such as the $45 strike.

DuPont (NYSE:DD) isn’t offering a dividend this week, although it will do so later in the August 2015 option cycle. However, before getting to that point, earnings are scheduled to be announced on July 28th.

Following what many shareholders may derisively refer to as the “successful” effort to defeat Nelson Peltz’s bid for a board seat, shares have plummeted. The lesson is that sometimes victories can be pyrrhic in nature.

Since that shareholder vote, which was quite close by most proxy fight standards, shares have fallen about 15%, after correcting for a spin-off, as compared to a virtually unchanged S&P 500.

However, if not a shareholder at the time, the current price may just be too great to pass up, particularly as Peltz has recently indicated that he has no intention of selling his position. While DuPont does offer weekly and expanded weekly option contracts, I may consider the sale of the August monthly contract in an attempt to capture the dividend and perhaps some capital gains on the shares, in addition to the premium that will be a little enhanced by the risk associated with earnings.

The remainder of this week’s limited selection is a bit more speculative and hopefully offers quick opportunities to capitalize by seeing assignment of weekly call options or expiration of weekly puts sold and the ability to recycle that cash into new positions for the following week.

eBay (NASDAQ:EBAY), of course, will be in everyone’s sights as it begins trading without PayPal (Pending:PYPL) as an integral part. Much has been made of the fact that the market capitalization of the now independent PayPal will be greater than that of eBay and that the former is where the growth potential will exist.

The argument of following growth in the event of a spin-off is the commonly made one, but isn’t necessarily one that is ordained to be the correct path.

I’ve been looking forward to owning shares of eBay, as it was a very regular holding when it was an absolutely mediocre performer that happened to offer very good option premiums while it tended to trade in a narrow and predictable range.

What I won’t do is to rush in and purchase shares in the newly trimmed down company as there may be some selling pressure from those who added shares just to get the PayPal spin-off. For them, Monday and Tuesday may be the time to extricate themselves from eBay, the parent, as they either embrace PayPal the one time child, if they haven’t already sold their “when issued” shares.

However, on any weakness, I would be happy to see the prospects of an eBay again trading as a mediocre performer if it can continue to have an attractive premium. Historically, that premium had been attractive even long before murmurings or demands for a PayPal spin-off became part of the daily discussion.

Following a downgrade of Best Buy (NYSE:BBY), which is no stranger to falling in and out of favor with analysts, the opportunity looks timely to consider either the sale of slightly in the money puts or the purchase of shares and sale of slightly out of the money calls.

The $2 decline on Friday allowed Best Buy shares to test a support level and is now trading near a 9 month low. With earnings still a month away, shares offer reasonable premiums for the interim risk and sufficient liquidity of options if rollovers may be required, particularly in the event of put sales.

The arguments for and against Best Buy’s business model have waxed and waned over the past 2 years and will likely continue for a while longer. As it does so, it offers attractive premiums as the 2 sides of the argument take turns in being correct.

Seagate Technology (NASDAQ:STX) will report earnings on July 31st. In the meantime, that gives some opportunity to consider the sale of out of the money puts.

While I generally prefer not to be in a position to take assignment in the event of an adverse price reaction and would attempt to rollover the puts, in this case with an upcoming ex-dividend date likely to be the week after earnings are released, I might consider taking the assignment if faced with that possibility and then subsequently selling calls, perhaps for the week after the ex-dividend date in an effort to capture that dividend and also attempt to wait out any price recovery.

Like Best Buy, Seagate Technology has been in and out of favor as its legitimacy as a continuing viable company is periodically questioned. Analysts pretend to understand where technology and consumer preferences are headed, but as is the case with most who are in the “futurist” business, hindsight often offers a very punishing report card.

Finally, GoPro (NASDAQ:GPRO) reports earnings this week. During its brief time as a publicly traded company it has seen plenty of ups and downs and some controversy regarding its lock-up provisions for insiders.

It is also a company whose main product may be peaking in sales and it has long made a case for seeking to re-invent itself as a media company, in an effort to diversify itself from dependence on consumer cycles or from its product going the commodity route.

The option market is implying a 9.9% movement in shares next week as earnings are reported. However, a 1% ROI may possibly be achieved if selling a weekly put at a strike that is 13.3% below this past Friday’s closing price.

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

Traditional Stocks: DuPont, eBay

Momentum Stocks: Best Buy, Seagate Technology

Double-Dip Dividend: Fastenal (7/29)

Premiums Enhanced by Earnings: GoPro (7/21 PM)

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

Jul112015

Weekend Update – July 12, 2015

Weekend Update Comment

While mankind has tried and will probably never give up on such attempts, there is a reason many are assigned to the fact that you just can’t fight nature.

In the case of natural disasters, those forces are so powerful and so relentless the best you can hope for is that they will run their course before nature finds its way to you.

Fleeing is probably a better strategy than fighting when faced with the release of unfathomable stores of energy in an effort to buy time until the inevitable reversal of course occurs.

Sure, you can build shelters, fortify dams or enact more stringent building codes in efforts to mollify the impacts of nature, but eventually, we all know who’s in charge.

Economic cycles, stock market cycles, currency cycles and interest rate cycles aren’t very different. They represent incredibly powerful forces that governments attempt to manipulate, but it is really only time that can tame the unwieldy power of an event, regardless of government intervention.

It’s those natural cycles, sometimes a cascade of events coming to a crescendo that are like the worst that Mother Nature has to offer.

Most of us know that trying to best nature is a fairly futile way to expend our own energy, just as is trying to manipulate or change the direction of capital markets. Over the past 50 years there is plenty of evidence to show that heavy handed government attempts to manipulate markets, such as currencies, have exceedingly short impacts.

You can’t really blame the Chinese government for trying to control their stock markets, though, especially in a time of crisis.

They’re pretty new at this capitalism game and it’s only through surviving one of the varied crises that descend upon the cogs of capitalism on occasion that you can continue to reap its many benefits.

Undoubtedly someone in a high position of authority must have seen footage from a 70 year old cartoon and had it mistaken for real news footage of someone successfully battling with a force of nature and then drew the obvious conclusion that the same would be possible as their market was threatening a meltdown.

In a system where it controls everything and has a bully pulpit in more than just figurative terms, it’s only natural to think that it could just as easily exert its will on its stock market and change its behavior.

But what we know is that the forces seen in capital markets is no different from those seen in nature, at least in terms of how unlikely it is that human efforts can suddenly change the course.

Of course, in a nation that executes many for white collar crimes, official condemnation of “malicious short sellers” who being blamed for the bursting bubble and threatened with investigation and arrest can certainly lead to behavioral changes, but not the kind that can stem the inevitable path as gravity takes control of sky high stock prices.

Learning that market forces aren’t as easily controlled as 1.4 billion people isn’t very easy when you actually do have the power to control those 1.4 billion people. That itself is so improbable that everything else must seem like a cakewalk.

When you have the power to tell people that they can only have one child, and they obey the edict, you’ve shown that you’re pretty good at battling nature and what comes naturally. So it’s only natural that when faced with a brewing crisis in their stock markets, the Chinese government would elect to try and alter its natural course.

Good luck with that.

The combination of events in China, the ongoing battle among Greece, the EU, ECB and IMF and the trading halt on the NYSE resulted in a week that saw large moves in both directions, intra-day reversals in both directions and ultimately ended the week unchanged.

There wasn’t too much doubt that events in China determined our own fortunes this past week as the net result of the interventions was to see their markets recover and spill over onto our shores. While I saw reason to establish some new positions last week as the market opened the week on a sharp decline, and was fortunate to have benefited from market strength to close the week, I’m circumspect about the ability of the Chinese government intervention to have anything more than a temporary halting impact. Being mindful of so many past attempts by governments to halt slides in their currency by massive entry into currency markets, makes me want to hold on tightly to any cash that I have as this week is about to begin.

Perhaps some good economic news will be forthcoming this week as earnings season really gets underway in earnest. Maybe some good news can move our attention away from world events, but ignoring those powerful overseas forces would be a mistake, particularly as the Chinese government’s actions may be unpredictable if their initial attempts at controlling their stock markets don’t succeed.

This coming week may offer a wild ride in both stocks and bonds and if so, we’d be very fortunate if the net result was the same as this past week, but you can be lucky only so often in the face of unleashed natural forces.

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

With fewer compelling reasons to spend money this week there aren’t too many stocks that have much in the way of appeal to me at the moment and my selections for this week continue to be limited.

As long as China is front and center, there may be some reason to think about YUM Brands (NYSE:YUM) as it both reports earnings this week and goes ex-dividend.

Over the past few years it seems that there have been an infinite number of disasters that have come YUM’s way, as so much of its fortunes rely on its businesses in China which can so easily fall prey to the weakest links in the chain, as well as to the macro-economic picture.

Following a large move higher on Friday, I wouldn’t rush into any kind of position unless there was some pullback. However, in the event that some of that gain is returned prior to earnings on Tuesday, I would consider a covered call trade, rather than the sale of puts, in order to also be able to capture the dividend the following day.

The option market is implying a 6.4% move next week. At Friday’s closing price of $90.87, the implied lower boundary is about $85. The option premium being offered for the weekly $85 strike would offer a 0.75% ROI if assigned early and a 1.2% ROI if the dividend is captured.

Since earnings are reported on Tuesday after the market’s close and the ex-dividend date is the following day, there is a very short window of opportunity for an option holder to exercise following earnings. The owner of shares would have approximately $6 of downside protection, although YUM shares can certainly be very volatile when earnings or any adverse news is reported.

I have some mixed feelings about considering Caterpillar (NYSE:CAT) this week, as so much focus is placed on its dependence on Chinese economic activity. Overall revenues from the Asia-Pacific region account for about 20% of total revenue and has already been hard hit as it share price is down nearly 25% since November 2014 and 7% in the past 2 weeks. While its CEO tried putting a positive spin on the Chinese economic slowdown a few months ago, he may have to spin extra hard now.

Caterpillar shares go ex-dividend this week and that is certainly a selling point, as its shares are approaching their 52 week low and I have been wanting to add shares for quite a while.

I would be willing to take the risk of their China exposure in the event of any additional price weakness as the week begins in the belief that any disappointing earnings or guidance the following week may have already been discounted.

I have less mixed feelings about Lowes (NYSE:LOW) which goes ex-dividend the following Monday. Lowes shares are down about 10% in the past 3 months and 4% in the past 2 weeks.

What I don’t have mixed feelings about is the quality of the shopping experience at Lowes. I’ve spent lots of time there lately, having become a convert from Home Depot (NYSE:HD) on the advice of a friend who suggested that I try them for a large DIY project I was ready to undertake.

In the past 2 months I have probably made about 20 trips, bypassing that Home Depot store and have noticed that the store always seemed busy and I tended to make more purchases as their sales associates were proactive and helpful.

While I generally like to consider Monday ex-dividend positions, that’s more true when weekly options are available, in an attempt to get 2 weeks of premium instead of the dividend, in the hopes of an early assignment. However, Lowes no longer has weekly options available and while this is the final week of the July 2015 cycle, the ex-dividend date is part of the August 2015 cycle.

With that potential purchase comes the potential liability associated with earnings, which are scheduled to be reported 2 days before the end of the monthly cycle. For that reason I might consider a purchase coupled with the sale of a September or later option, in order to capture the dividend and provide some cushion in the event of a downward price move.

I haven’t owned Baxter International (NYSE:BAX) in almost 2 years and have a very difficult time understanding why that has been the case, as it traded in a very narrow band that entire time while offering a reasonable option premium and attractive dividend.

Having now completed its spin off of Baxalta (NYSE:BXLT), it may join other companies that fell out of favor as they were perceived as less desirable after spinning off their faster growing assets. Whether that’s actually supported by reality may be questionable, but there’s no question that spin-offs, such as Baxalta and the upcoming PayPal (PYPLV) have gotten attention.

For its part, what remains of Baxter is a company that offers an excellent dividend and attractive option premiums in an industry sector that shows little sign of slowing down.

Finally, I purchased shares of Abercrombie and Fitch (NYSE:ANF) last week and happily saw them assigned. I still hold a much more expensive lot of shares and every little bit of premium derived from additional short term lot holdings helps to ease the pain of that non-performing lot.

Last week’s purchase was the third such in the past 10 weeks as Abercrombie and Fitch’s shares have been trading in a very narrow range, but its option premiums still reflect its historical ability to make large moves. Lately, those large moves have been predominantly lower and certainly any time new shares are added the risk remains of continued erosion of value.

While teen retailers haven’t been terribly good stores of stock value of late, and while there’s certainly nothing positive that can be said of Abercrombie and Fitch, it won’t report earnings again until the end of August and continues to present a short term opportunity.

However, following a price reversal during Friday’s session, that saw it’s shares close higher for the day, I would consider an entry this coming week only on weakness, if considering a covered call position. Alternatively, the sale of puts may have some more appeal, especially if there’s price weakness as the week begins and moves the share price closer to $21.

Traditional Stocks: Baxter International

Momentum Stocks: Abercrombie and Fitch

Double-Dip Dividend: Caterpillar (7/16), Lowes (7/20)

Premiums Enhanced by Earnings: YUM Brands (7/14 PM)

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