Weekend Update – January 27, 2013

By Thursday evening I had already lost track of how many records and new highs had been set as trading was getting ready to enter the final week of January. Depending on the parameters and definitions it seems as if every minute someone was referring to one new market high of one sort or another.

Sometimes I think that the Wilshire 5000 doesn’t get its due recognition, but if the trend continues it will join the party, even if only to have set a record for intra-day trading level on a Tuesday following inauguration.

If they weren’t calling new records they were hyper-focused on just how far we were from a new record. By the way, just for the record, the WIlshire 5000 is 1.3% away from its all time record high.

After a while the meaning of a record becomes less and less. I certainly didn’t feel the special nature of whatever was being watched so closely. S&P 500 at 1500? For me, the only record that counts is 14,164 for the Dow and 1565 on the S&P 500, both more than 5 years ago.

But even those records are meaningless, because all that really matters is where your own assets are residing.

I’d also lost track of how many consecutive gaining days we had other than to remember that last January seemed to be the very same. Like through a million cuts we went higher each and every day, simply setting a record for the number of slices.

You don’t have to be a short seller to bemoan a relentless upward path, but it’s a little more excruciating when there’s no apparent reason for what has caused such despair. At least Ackman knows where Loeb lies.

Alright, it hasn’t really been excruciating and it hasn’t really been a period of despair to live and die by covered option sales. That may be a bit of an exaggeration, as you do share in the market’s gains, but maybe not as much. Of course, that assumes that the next guy is actually taking their profits rather than falling prey to human nature and letting it all ride. I like taking profits on a very regular basis and moving on before the welcome is outstayed.

Records don’t mean very much. Just ask the performance enhanced athletes that are being denied recognition for their accomplishments. I don’t really know what exactly is juicing the markets right now, but I do know that there’s little reason to believe that the recent heights are deserved.

Ultimately, looking back at the record highs of October 2007, I realize that the best performance enhancer since then has been ignoring the occasional mindless melt ups and doing the conservative thing. Collecting penny by penny selling those options until the sum of the parts is greater than the whole. I continually maintain that you don’t have to be a great stock picker or market timer to have your records beat theirs.

And get there sooner.

As volatility keeps setting its own record lows it does become more challenging to get more pennies for your efforts in selling options. Although I’ve never been much of a fan of earnings season, at the very least it does its part to enhance premiums, if you don’t mind the enhanced risk, as well. As a covered call seller risk is not high on the list of favorite things, but there has no be some solace in knowing that a uni-directional move sooner or later has to come to an end. Hopefully, when it does, it won’t be quite as bruising as has been the descent of Apple (AAPL) after its one way journey higher.

As always, the week’s selections are categorized as either being Traditional, Momentum, Double Dip Dividend, or “PEE” (see details).

What strikes me this week is how I had a very difficult time identifying a “Traditional” candidate. Over the past month the least well performing sector, Utilities, has nonetheless delivered growth. The makes it difficult to spot potential targets that are also fairly priced.

That brings me to the elephant in the room. For the second week in a row Apple is back on the list. Last week it was a possible earnings related trade. Up until an hour before the close of Wednesday’s trading I thought of selling weekly $480 puts, but decided that having done the same with Mellanox (MLNX) and F5 Networks (FFIV) enough was enough. What exactly does that say when either Mellanox or F5 Networks is thought to be less risky than Apple? It probably says something about my delusional diagnostic methodology rather than the respective companies. But as Apple is now near the last price at which I owned it and closer to a $425 support level, it just seems harder to ignore. I think that once Tim Cook replaces the “WWJD” bracelet on his wrist and gets a new one from which to draw inspiration and guidance, things will get back to normal. The new bracelet would simply be inscribed “WWJD.” The difference? What Would Jobs Do?

With the “Traditional” category so quickly dispatched, it’s another week and another reason to think about adding shares of AIG (AIG). Of course, I wouldn’t have to consider doing that if my one and two week old lots hadn’t been assigned. But the reality is that the shares are always welcome back home. I look at the option premiums as being something like the rent you might collect from your adult child living in the basement.

I wanted so much to pick up shares of Baidu (BIDU) once again last week but it just didn’t get to a good price point. By that I mean that as opposed to barely a month or two ago the extraordinarily low volatility is taking its toll on intrinsic value and making the sale of in the money calls somewhat less of a slam dunk, particularly when the intrinsic value is more than half of the difference between two strike prices. I’m hoping to see Baidu trade within $2 or less of a lower strike price early in the week.

YUM Brands (YUM) should probably have the ticker symbol “YOYO.” It responds more to the conflicting daily rumors regarding the vitality of the Chinese economy than do traditional metrics of growth, such as copper and iron ore. Today’s drop was just another in the recent series of rumors regarding safety of the chicken offerings. It’s hard to imagine that YUM Brands is delivering a lower quality or unsafe product than is generally available to the growing consumer base in China.

There was a time, before Apple, that Texas Instruments (TXN) reporting earnings set the tone for the market. Those days are long gone. In fact, no one really sets that tone anymore, not even IBM (IBM), whose own great earnings and share performance did nothing more than be the sole reason for the Dow’s positive performance on Tuesday, while the S&P fell flat. In the meantime, Texas Instruments has survived its own earnings report and has a decent dividend this week in addition to income streams from its weekly option offerings.

Fastenal (FAST) is just a remarkably stable company whose products are ubiquitous yet out of view. Somehow, the fact that they have about 2600 company owned stores has escaped my view, but somehow they haven’t escaped the end user. More important than the company’s stability is the stability of shares over time. The dividend is fairly meager, but added to its option premium a reasonably safe place to leave money for a little while.

US Steel (X) is a recent and current holding. It is among a large group of high profile companies that are reporting earnings this week and may satisfy being plugged in to the equation that evaluates premiums of put sales relative to potential earnings related stock dives. For US Steel accepting the possibility of a 5% decline can still result in a 1% gain.

Lexmark (LXK) was also a recent holding. I still don’t fully understand where their earnings come from now that they are getting out of the printer business. However. it has shown resilience after the revelation that people on wireless devices just aren’t printing as much as the next guy tethered to a desk and computer. It too may offer an appealing award for accepting the possibility of a sharp earnings related decline.

VMWare (VMW), a one time high flier has settled into a good place. Although it is capable of making large moves after earnings, those moves on a percentage basis are fairly modest. Yet it does regularly offer premiums that are attractive. It’s one time parent EMC Corp (EMC) reports earnings in the morning and may offer some insights for the later reporting VMWare.

And finally, there’s Facebook. I still get a little smirk thinking about the vitriol directed toward me when making the case for buying shares following expiration of the first lock-up period. Just as with Apple, your portfolio isn’t a very good place to park your emotions. Whatever your opinion may be on Facebook the shares, Facebook the IPO, Facebook the company or Facebook the hoodie, it is an appealing trade based upon its earnings release this week.

Traditional Stocks: Apple

Momentum Stocks: AIG, Baidu, YUM Brands

Double Dip Dividend: Fastenal (ex-div 1/30), Texas Instruments (ex-div 1/29)

Premiums Enhanced by Earnings: Lexmark (1/29 AM), Facebook (1/30 PM), US Steel (1/29 AM), VMWare (1/28 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

 

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Weekend Update – January 20, 2013

Stocks should never be boring.

People do stupid things when they’re bored.

Trust me, I know. If I were a betting person I would bet that you know that to be true, as well.

After starting with a more than 4% gain in the S&P 500 in the first week of 2013, the subsequent two weeks have been incredibly boring.

When over the course of five trading days the S&P closes at 1472 on four of those days, there’s something missing. In my case, it was trading.

As someone who sells covered options, I love that the concept “reversion to the mean” seems to be realized with great regularity. But if there wasn’t lots of intervening noise from Point A right back to Point A, there wouldn’t be much of a market for buying the options that I was so intent upon selling. Boring markets are an anathema and together its accompanying low volatility conspire to reduce the joy of selling options by increasing risk taking in order to meet income targets from having sold option contracts.

This past week was one of those weeks when the intra-day action was in a state of deep hibernation for much of the time. For me the pinnacle came on Wednesday, but as it would turn out that was wholly appropriate, as Jane Wells, of CNBC pointed out that was “National Do Nothing Day.” She explained the “holiday” in her blog and if you look at the associated video, you can even catch a glimpse of me (want even more?). Somehow, everyone got back to work on Thursday and the market showed some vestiges of past life and excitement, just in time to plan for an upcoming week highlighted by high profile earnings reports.

That should be exciting. Apple (AAPL), Google (GOOG), IBM (IBM) and much more.

For as long as I’ve been selling options, I did find the timing of Google’s earnings release interesting. Of course, nothing could be as interesting as Google’s last quarter, when it blamed RR Donnelly (RRD) for having released earnings 3 hours earlier than anyone expected or wanted. This time, however, instead of reporting earnings at the close of trading on the Thursday prior to the last day of the monthly option cycle, Google is actually releasing earnings on the first day of the new monthly option cycle.

I’ve always liked the former timing. Now, selling deep out of the money weekly puts on Google shares in anticipation of 5-10% moves in either direction will have too much time to trade on such things as merits and other non-emotional and highly charged issues. Although it’s not on my list this week there still may be good reason to make it happen.

Although this week the potential selections are still categorized as being either Traditional, Momentum, Double Dip Dividend and Premiums Enhanced by earnings, at the moment, in my mind I’m categorizing them as either being Exciting or Boring (see details).

Capital One Finance (COF) has been on my radar screen for a couple of months, but got too expensive on the week that I had initially thought of making the purchase. After getting hit badly on Friday on disappointing earnings, it is right at the price target that had appeal for me in November. The very recent weakness in credit card titans Visa (V) and MasterCard (MA) are felt even more by those that incur credit risk, but Capital One is here to stay.

Starbucks (SBUX) although also reporting earnings this coming week and having a premium enhanced by the prospects of a significant reaction to earnings, has been a good and steady position to own and sell options upon for the past 6 months. I especially look forward to Howard Schultz’s post-earnings interviews. No one knows the marketplace better than he does. Even when the shares are punished after earnings he has credibility and clarity that restores confidence.

Not that I would condone doing so, but for many a cup of coffee and a cigarette go hand in hand. Lorillard (LO) has just concluded its share split and offers an attractive option premium with relatively little undue risk, besides to one’s health and well-being.

Anadarko (APC) is one of those positions that pains me a bit, having happily owned it several times in the past few months. Despite in now trading $5 above my last purchase price and having lost it to assignment, it continues to look attractive, both on the basis of the potential for price appreciation and its option premium. If you never knew joy you would never know pain.

Freeport McMoRan (FCX) continues to be my favorite pick for 2013. The materials sector was a bad under-performer this past week, but I continue to labor under the thesis that China will be forced to expand its GDP more than may be healthy in order to maintain domestic peace during political transfer. We can worry about the effect of over-expansion some other time. In the meantime, Freeport also reports earnings next week, but will do so before the first trade of the week is made.

AIG (AIG) is probably my single most mentioned stock and the one that I most often regret for not having purchased. Over the past month or so I’ve been heeding my own advice and keeping shares on a revolving door basis. As long as they trade in a tight range, even if assigned, it has been worthwhile to repurchase shares.

Baidu (BIDU) is another stock that I’ve owned several times over the past few months. Despite it’s torrid run to $110, I think that there are still opportunities, particularly in selling deep in the money call options. After all, if you can still achieve a 0.5% or higher gain for a week of holding those shares before losing them to assignment at a lower price, is that not better than the S&P 500 is able to do on most weeks?

I haven’t owned shares of Citibank (C) since before the 10:1 reverse split. There’s something unsettling about a bank that trades with a beta of nearly 2, but I think the future is bright as far as price support goes, as there is increasing discussion about the value of Citibank’s component parts. That is very much the same kind of talk that has spurred price appreciation of Bank if America (BAC). While rediscovering price stability, Citibank continues to offer an attractive call premium and makes the risk-reward equation skew toward reward.

What can anyone say about Apple ? I certainly haven’t been shy about expressing my bearish opinion on shares and to the increasingly adverse external environment to which the company was subject. Apple reports earnings after Wednesday’s market close. Although I don’t believe that it will test a support at $425, I do believe that there are opportunities to either sell deep in the money calls or sell deep out of the money puts. If I’m wrong, I will be left owning shares for the first time since $450. It would be as if almost nothing had happened in-between. With so many people now piling on and blasting Apple, it’s beginning to look better and better.

Western DIgital (WDC) is just another of those exciting stocks. I’m not really certain why that’s the case, as the product isn’t terribly exciting and is hard to differentiate from a commodity. It too, reports earnings on Wednesday if you have the stomach for even more excitement.

I don’t look at charts very often or in great depth, but Mellanox Technologies (MLNX) will definitely get your attention if you like charts with slopes approaching infinity. Mellanox makes some very sudden and pronounced moves. With earnings coming up on January 23, 2013 another vertical move may be awaiting anyone with incredible risk tolerance. Since even 20% moves aren’t unheard recently for this semiconductor design and sales company, the option premiums are priced accordingly. Among the caveats is that only month long option contracts are offered and that may be a very long time to sit on a roller coaster. I’m currently looking at selling puts as being more appealing and in the event that Mellanox surprises with an upside move after earnings, I would vacate the position as fast as humanely possible.

Finally, Williams-Sonoma (WSM) is the sole dividend play this week. It too has been bruised by the market’s reaction to its earnings. Somehow Williams Sonoma has the ability to withstand the economy and even when things look grim for the consumer it just keeps on going. It’s a place where you can escape the cares of the real world and pamper yourself before returning to reality. It’s not a terribly exciting stock, but after a week of potentially lots of excitement a little serenity may be a good thing.

Traditional Stocks: Anadarko, Capital One Finance, Lorillard

Momentum Stocks: AIG, Baidu, Citibank, Freeport McMoRan

Double Dip Dividend: Williams Sonoma (ex-div 1/23)

Premiums Enhanced by Earnings: Apple (1/23 PM), Mellanox (1/23 PM), Starbucks (1/24 PM), Western Digital (1/23 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

 

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Weekend Update – January 13, 2013

Your portfolio is your Preidential Cabinet.

In a week when the biggest story was the signature of the man selected by President Obama to succeed Timothy Geithner as Treasury Secretary it’s not too surprising that not much happened in the markets.

After more than a 4% gain the prior week a breather was welcome., as shares assigned from my portfolio must have felt as if they had outstayed their welcome.

They hadn’t, but sometimes it’s just time to leave.

The week was a busy one in Executive Office politics as it was the time honored tradition of appointed cabinet officials knowing that it was time to leave . The week demonstrated a strategy to fill cabinet positions that many are finding to be uncomfortable. Some people like the security that comes with known names and entities, while others relish in the unknown and “out of the box” thinkers..

Professional sports is like the former. How else can you explain the consistent recycling of proven losers, while promising new leaders go languishing as they await an opportunity to strut their stuff and lead their teams to victory?

As opposed to the process of assembling a Presidential cabinet under George W. Bush when every face was a very hackneyed and familiar one, this week’s events were quite the opposite, as the choices ranged from the unknown to the disliked. Norv Turner may have qualified for an appointment in the Bush Administration, but not here and not now.

What could confidently be said about Jack Lew, the Treasury Secretary designee, is that his signature suggests that he would be comfortable working together with Federal Reserve Chairman Bernanke and add a few extra “zeroes” to the money supply. After all, why stop at just a Trillion Dollar Coin? It’s like 5 minute Abs.

President Obama’s cabinet during his first term was noted for its infrequent turnover and familiar names. That’s how my portfolios used to be and I can’t necessarily complain about its performance. The portfolio was always comprised of well known names, never any speculative issues and they all stayed a long time, through good and bad performance, then good performance and then bad performance, again and again.

As Secretary of Labor Hilda Solis announced her departure, ostensibly lured by an irresistible Herbalife (HLF) ethnocentric marketing campaign, Raymond LaHood is one of the few leftovers and he should stay just for the humorous name.

That’s not a good enough criterion for stocks, though. These days, I like rapid turnover, but still only have comfort with familiar names. I too may have chosen Donald Rumsfeld, but likely would have been a little distressed if he had not departed within 40 days, or so. I like a portfolio that is more of a sleep-over than a relationship.

After veering significantly from last week’s script in an effort to find lots of replacements for assigned shares, I’m again faced with needing lots of replacements, but at least this past week the overall market wasn’t terribly difficult to top. Think of it as having to find a replacement for Treasury Secretary John Snow. Henry Paulson was pretty good in his own right, but by comparison he really shined.

Still, the challenge of finding potential candidates that aren’t at or near 52 week highs is difficult. Normally, my list is comprised of the same old and reliable names, but this week there are some newcomers that hopefully will get a chance to strut their stuff and then be gone before outwearing their welcome. That’s especially on my mind this week as a number offer only monthly option contracts. I tend to be more willing to consider those stocks in the final week of a monthly cycle, but if they’re not assigned that starts preparing the way to push the 40 day envelope.

As usual, stocks are categorized as either being Traditional, Momentum, Double, Dip Dividend or PEE (see details). As earnings season goes into full gear this week there were actually a large number of candidates to consider for earnings related trades, but often the best opportunities come with some of the lesser known or higher flying names than with the button down early reporters.

I’m not certain that I know anyone that would admit to having, much less using a Discover credit card. I still spend a good portion of my time trying to find a place that will allow me to decide between my Diners Club or Discover. Yet Discover FInancial (DFS) is a reasonable alternative to Visa (V) and MasterCard (MA). Although Discover has outperformed its more respected cousins in the past year, it has greatly under-performed in the past month.

DuPont (DD) used to be one of my favorites. That was back in the days when there were no weekly options, it had an artificially high dividend and great option premiums. These days, I’m not quite as enthused, as the years have taken their toll. But during the last week of an option cycle? Why not? Besides, with all of the portfolio new comers, it’s good to have a familiar face or two to keep things grounded.

Speaking of grounds, Starbucks (SBUX), although higher than the last time I owned it, just a few months ago, appears to be running on all cylinders. I’m not certain that anyone knows and understands his company as well as Howard Schultz understands Starbucks. Even in the face of a negative earnings report two quarters ago, Schultz effused so much confidence in responding to the market’s reflexive response to “bad” news, that you had to be inspired about the company’s prospects.

These days, I’m not certain that I should still categorize AIG (AIG) along with my other “Momentum” stocks. Its option premiums are less and less like those of others in that category. AIG is a stock that I often wish I had read my own weekly words and bought much more frequently than I had done. Along the lines of inspiration, every time I see its CEO, Robert BenMosche on air, I think that he is truly a hero of American business and finance. Instead of remembering the villains, we should laud the heroes.

US Steel (X) could be one of my newcomer stocks this week. I don’t have any particular thesis. I simply like the premium, but am respectful of the risk. US Steel does report earnings on January 29, 201 and am not certain that I would want to be holding shares going into earnings. Since it does trade a weekly option, there would be at least two escape opportunities prior to earnings.

Yahoo! (YHOO) is another stock that I haven’t owned in a while, having waited for its return to $16. Following its drop this past week I feel a bit more comfortable considering a purchase after its resurrection.

Footlocker (FL) is another one of the new comers that doesn’t necessarily inspire me on the basis of any underlying theme. Like Us Steel it has a nice option premium, but only trades a monthly option. The upcoming dividend may tip the scales for me as the stock hasn’t had the same kind of run-up that its products should equip the owner for.

Lowes (LOW), for all of its commendable performance, is a stock that I only look toward as it approaches its ex-dividend date. It too offers only a monthly option, but like Foot Locker, going ex-dividend in the final week of the monthly option cycle makes ownership more palatable.

eBay (EBAY) is another stock that I own too infrequently. That may change as it’s come over to the weekly options family. It reports earnings this week and will likely be as good as its PayPal division allows it to be. It’s no longer the highly volatile stock of yesterday, but still offers a reasonable risk-reward ratio in the same 5% range on strike price.

Having missed the entire move in the entire housing sector doesn’t preclude entry, it just includes risk. Lennar (LEN) will report earnings this coming week and I expect a break in its upward trajectory. In the past its shares have not over-responded to earnings news, so the risk reward may be present at the 5% level, rather than the 10% level that I often find comfort in. If prices hold up prior to earnings release and I can obtain a 1% premium for selling a put at a strike 5% below the current price or selling an in the money call at a similar strike, this may be a good candidate for a short term dalliance.

Traditional Stocks: Discover Financial, DuPont, Starbucks

Momentum Stocks: AIG, US Steel, Yahoo!

Double Dip Dividend: Foot Locker (ex-div 1/16), Lowes (ex-div 1/18)

Premiums Enhanced by Earnings: eBay (1/16 PM), Lennar (1/15 AM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

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Copyright 2013 TheAcsMan