Most of us can recall a time when we were embarrassed, unless you need for denial is a stronger than your memory.
It’s probably much worse when there are a lot of people around as witnesses.
It may be even worse if your antics are under embargo, finally being released at 2 PM, say on a Wednesday, and then really called into question the following day with the planned release of the GDP.
There’s nothing like being under the spotlight, especially when purposefully bringing attention to yourself and then somehow messing up.
I imagine, that even as poised and calm as she appears as the Chairman of the Federal Reserve, a young Janet Yellen may have been as easily subject to embarrassment as a child as any of us.
Obviously, I also imagine that the hairdo hasn’t changed over the years.
Of course, it could be really helpful to know what the actual GDP statistic will be and having your performance altered to meet the demands of reality.
This coming week has an FOMC Statement release which is followed barely 20 hours later by news of the GDP for the first quarter of 2016.
As the FOMC meeting gets underway on Tuesday, there is no doubt awareness of the consensus calling for lackluster GDP growth and the Atlanta Federal Reserve’s own decreased estimate just a few weeks ago.
One would think that with some strong sense of what the data really happens to be, the chances of embarrassing one’s self by taking the opportunity to announce an interest rate increase at this coming week’s FOMC meeting would be very small.
You can avoid embarrassment by never taking chances, although that carries its own cost.
Looking back just a few months to when the FOMC did announce its first interest rate increase in about a decade, there wasn’t much doubt that their intention was to institute a series of rate increases to match the anticipated strength in the economy.
Some 5 months later, imagine the potential for embarrassment when the expected growth had failed to materialize.
But before you come to the belief that a once chastened FOMC would be reluctant to put itself out again, comes the knowledge that Janet Yellen has “never been allergic to uncertainty.”
It’s refreshing to hear from the leader of the single most important central bank in the history of mankind that there are plenty of things about the economy that the Federal Reserve doesn’t grasp right now.
Refreshing, but maybe also a little bit frightening.
As a federal employee, Janet Yellen doesn’t really get the big bucks, but we generally expect a high degree of certainty from those in charge of large organizations.
While no one seriously expects the announcement of an interest rate increase this coming week, particularly with the belief that the GDP will be weak, some of the revelations about Janet Yellen’s ability to co-exist in a world marked by uncertainty, suggest that she may not be concerned about sacrificing action in the name of avoiding embarrassment.
While the FOMC has been stressing their “data dependence” we may be interpreting that in the wrong way.
We may all think that “data dependence” means that the FOMC will act in a reactive manner, only moving policy when the hand writing is on the wall.
That’s certainly one way to avoid embarrassment, but even a monkey can react to the obvious.
The FOMC needs to be, and likely will be, proactive.
We may not see the handwriting on the wall. because it may just not be there yet other than in the mind’s eye of Janet Yellen.
In hindsight, it may be embarrassing not to have been aware of the signs. However, that may be far less embarrassing than being wrong about trying to be out ahead of the handwriting becoming so obvious.
As much of a shock as an interest rate announcement this week may be, when put into perspective, it won’t rise to the level of asking where were you on that day, as may be asked about JFK, the O.J. Bronco Chase and Prince.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
If you’ve been paying attention to the market’s response to the first week of earnings reports, it has been clear that companies meeting or exceeding the lowered expectations that had been set the previous quarter were rewarded.
Those that failed to meet lowered expectations or that continued to guide lower for the next quarter were brutally punished.
Microsoft (MSFT) was punished as it failed to meet expectations, but there may have been a literal silver lining in its cloud. That is, while so much focus was placed on some deterioration in certain aspects of its business, sometimes without full consideration of the implications of currency fluctuations, its transition to a cloud based company continues unabated.
Sometimes transition is painful.
In the meantime, Microsoft is, for now, available at a discount. At the same time it offers a reasonable option premium and an upcoming dividend.
With the chance that the discount may disappear when people come to their senses, put together with the premium and opportunity to capture the dividend, I’m looking at a purchase of shares and the sale of a longer dated call option that encompasses the May 17, 2016 ex-dividend date.
While I generally don’t like chasing after stocks that have moved significantly higher, I may re-think that this week as Morgan Stanley (MS) goes ex-dividend.
It’s among stocks that the market hasn’t punished for poor results, as they were at least able to meet expectations. With the financial sector having had a prolonged period of under-performance in 2016 as the realization of increased interest rates hasn’t materialized, it undoubtedly will.
I’m ready to believe that day will be much sooner, even if the upcoming GDP may say otherwise. In addition to interest rates, the financial sector stands to greatly benefit if oil prices continue to stabilize and those loans take on a less risky character.
Rather than seeking a true “Double Dip Dividend” trade and selling an in the money call option, I may look at an out of the money strike. However, if looking at an in the money strike and faced with likely early assignment, I would strongly consider trying to roll the short call position over by an additional week or more.
Otherwise, my focus this week is on some high profile and volatile names as they report earnings this week.
Apple (AAPL), Facebook (FB), Twitter (TWTR) and Seagate Technolgy (STX) are just a few among many reporting over the next few days.
The technology sector is one characterized by risk and uncertainty on any given day and especially so when earnings are at hand.
Apple, for all of the uncertainty surrounding the sales of its much awaited watch and the speculation regarding where it may turn to next, is out of the unwanted headlines for the moment, as the immediate need to create a back door into its security system is on hold.
But with the uncertainty, the option market is implying a fairly small move during earnings week, at least by historical standards.
The implied move is only 4.6%, resulting in an anticipated price range of approximately $101 – $111.
There is, however, no chance to derive a 1% ROI for the sale of a weekly put at a strike within that range. For that reason, my only interest in Apple would be in the event of a sharp decline outside of that range following the release of earnings.
In the event that Apple does fall below $101, or approaches that level, I may consider sale of puts. However, there is an upcoming ex-dividend date, perhaps just a week or two later, so I may not want to rollover the short puts if faced with assignment. I may be more inclined to take ownership of shares and then consider strategies to enhance the return by the sale of calls in an effort to also capture the dividend.
Facebook has no dividend. What it does have a greater uncertainty as predicted by the options market. Its implied move is 7.5%, resulting in an anticipated range of approximately $103 – $119.
In the case of Facebook, a 1% ROI for the sale of a weekly out of the money put contract may be obtained at a strike price nearly 8.1% below the mid-way point of the range.
That’s not too much of a cushion, but here too, I might be interested after earnings are released, in the event Facebook takes a rare decline on earnings.
Following a huge run higher after its previous earnings report and a subsequent plunge just a few days later, there are actually numerous support levels down to the lower end of the range predicted by the options market. However, below that lower range there is some room for a further decline and its there that there may be some more reliable price support even as the option market would likely send put premiums sharply higher.
While Apple has no immediate government worries and Facebook has no dividend, Twitter has no soul and no real reason for being, other than for its users.
For investors, that may not be reason enough.
For all of the promise of its overhaul of its management and its Board, not much has happened. As a “logged out user” that Twitter is reportedly targeting for untapped revenue, I don’t think that I’m going to be their answer.
After having enjoyed a very, very busy 2014 selling, rolling over, selling and rolling over Twitter puts repeatedly, I am sitting on a very expensive lot that was assigned to me when I could roll it over no more, other than to an expiration date that was likely beyond my life expectancy.
Talk about being a “logged out user.”
With an implied volatility of 12.2%, Twitter’s anticipated price range this week is $15 – $19. Meanwhile, a 1.2% ROI may possibly be obtained by selling a weekly put option at a strike price 14.7% below the mid-point of that range.
That’s beginning to become a better risk – reward proposition for my temperament. Fortunately, Twitter tends to have some good liquidity in its option trading, in the event that there is an adverse price move and your life expectancy exceeds my own.
Finally, I’m embarrassed to have sold Seagate Technology puts a week ago after it plunged about 18% following a preliminary earnings release. Since then it has plunged almost an additional 10%.
As you might expect, it was that second decline that led to the embarrassment.
I rolled the position over once, but decided to take assignment of shares rather than rolling over again heading into earnings.
If you sell options, you also tend to not be allergic to uncertainty, as it’s the uncertainty that creates the premiums that may be worth pursuing. The accumulation of those premiums can soften the cruelty of being embarrassed and with time it can be possible for everyone to forget the faux pas, especially if your most recent actions reflect redemption.
The option market, however, may be of the belief that you can only make a rock bleed so much, as Seagate Technology’s implied move is only 7.1%. That represents an approximate price range of approximately $24.50 – $27.50.
Here, a 1.2% ROI may potentially be achieved with the sale of a weekly put option 9.5% below the mid-point of that range.
However, with Seagate Technology announcing earnings at the end of the week and with its ex-dividend date likely to be the following week or perhaps the one after, there may be some uncertainty in addition to earnings.
That is, will Seagate Technology be able to continue its very rich dividend as it cut its guidance on weak demand, as it has done periodically over the past decade.
With that in mind, I would probably defer any action until after earnings. If earnings send shares lower, but the dividend is left intact or at least reduced to a still reasonable level, such as 3.5%, I would very much consider the purchase of shares and the sale of calls going into the ex-dividend date.
In doing so, I would still, however, prepare to embarrass myself once again.
Traditional Stocks: Microsoft
Momentum Stocks: none
Double-Dip Dividend: Morgan Stanley (4/27 $0.15)
Premiums Enhanced by Earnings: Apple (4/26 PM), Facebook (4/27 PM), Seagate Technology (4/29 AM), Twitter (4/26 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.