Weekend Update – November 24, 2013

Sometimes the strategy is self-defense. Sometimes it’s just doing what you need to do to keep beta at bay.

I don’t know about other people, but I’m getting a little more nervous than usual watching stocks break the 16000 level on the Dow Jones and the 1800 level on the S&P 500.

What’s next 5000 NASDAQ? Well that’s not so ludicrous. All it would take is 4 years of 6% gains and we would could set the time machine back to a different era.

In hindsight I know what I would do at the 5000 level.

For those old enough to remember the predictions of Dow 35000 all we need is a repeat of the past 56 months and we’re finally there and beyond.

This being a holiday shortened trading week adds a little bit to the stress level, because of the many axioms you hear about the markets. The one that I believe has as much validity as the best of them is that low volume can create artificially large market moves. When so many are instead focusing on the historical strength of markets during the coming week, I prefer to steer clear of any easy guide to riches.

When faced with a higher and higher moving market you could be equally justified in believing that momentum is hard to stop as you could believe that an inflection point is being approached. The one pattern that appears clear of late is that a number of momentum stocks are quickly decelerating when faced with challenges.

When I find myself a little ill at ease with the market’s height, I focus increasingly on “beta,” the measure of a stock’s systemic risk compared to the overall market. I want to steer clear of stock’s that may reasonably be expected to be more volatile during a down market or expectations of a declining market.

As a tool to characterize short term risk beta can be helpful, if only various sources would calculate the value in a consistent fashion. For example, Tesla (TSLA), which many would agree is a “momentum” stock, can be found to have a beta ranging from 0.33 to 1.5. In other words, depending upon your reference source you can walk away believing that either Tesla is 50% more volatile than the market or 67% less volatile.

Your pick.

While “momentum” and “beta” don’t necessarily have correlation, common sense is helpful. Tesla or any other hot stock du jour, despite a reported beta of 0.33, just doesn’t seem to be 67% less volatile than the overall market, regardless of what kind of spin Elon Musk might put on the risk.

During the Thanksgiving holiday week I don’t anticipate opening too many new positions and am focusing on those with low beta and meeting my common sense criteria with regard to risk. Having had many assignments to close out the November 2013 option cycle I decided to spread out my new purchases over successive weeks rather than plow everything back in at one time and risk inadvertently discovering the market’s peak.

Additionally, I’m more likely to look at either expanded option possibilities or monthly options, rather than the weekly variety this week. In part that’s due to the low premiums for the week, but also to concerns about having positions with options expiring this week caught in a possible low volume related downdraft and then being unable to find suitable new option opportunities in future weeks. If my positions aren’t generating revenue they’re not very helpful to me.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

While eschewing risk may be in order when you think a market top is at hand, sometimes risky behavior can be just the thing when it comes to assembling a potentially profitable mix of stocks. In this case the risky behavior comes from the customers of Lorillard (LO), Philip Morris (PM) and Molson-Coors (TAP).

With word that Europeans may finally be understanding the risks associated with tobacco and may be decreasing use of their ubiquitously held cigarettes, Philip Morris shares had a rough week. The 6% drop accompanying what should be good news from a public health perspective brings shares back to a much more inviting level. Shares did successfully test an $85 support level and subsequently bounced back a bit too much for my immediate interest, but I would welcome another move toward that level, particularly as I would prefer an entry cost right near a monthly strike level.

Lorillard, on the other hand, has essentially no European exposure, but perhaps in sympathy gave up just a little bit from its 52 week high after a sustained run higher over the past 6 weeks. While there is certainly downside risk in the event of a lower moving market, shares do go ex-dividend this week and think of all of those people lighting up after a hearty Thanksgiving meal. The near term risk factors identified for Europe aren’t likely to have much of an impact in the United States market, where the only real risk factors may be use of the products.

That Thanksgiving meal may very well be complemented with a product from Molson Coors. I imagine there will also be those using a Molson Coors product while using a Lorillard product, perhaps even dousing one in the other. Shares, which are down nearly 5% from its recent highs go ex-dividend this week. Because of the strike prices available, Molson Coors is one position that I may consider using a November 29, 2013 option contract, as many more strike levels are available, something that is useful when attempting to capture both a decent option premium and the dividend, while also enticing assignment of shares.

Speaking of risky behavior, the one exception to the central theme of staying away from high beta names is the consideration of adding shares of Walter Energy (WLT). While the last 9 months have seen its shares plummet, the last three months have been particularly exciting as shares had gone up by as much as 75%. For those with some need for excitement this is certainly a candidate, with a beta value 170% greater than the average of all other recommended positions this week, the stock is no stranger to movement. But speaking of movement, although I don’t look at charts in any depth, there appears to be a collision in the making as the 50 dma is approaching the 200 dma from below. Technicians believe that is a bullish indicator. Who knows. What I do know is that the coal, steel and iron complex, despite a downgrade this past Friday of the steel sector, has been building a higher base and I believe that the recent pullback in Walter Energy is just a good opportunity for a quick trade, perhaps using the sale of puts rather than covered calls.

While not falling into the category of risky behavior, Intel’s (INTC) price movement this week certainly represents odd behavior. Not being prone to exceptionally large moves of late on Thursday it soared 3%, which by Intel’s standards really is soaring. It then fell nearly 6% the following day. While the fall was really not so odd given that Intel forecast flat revenues and flat operating profits, it was odd that the price had gone up so much the previous day. Buying on Thursday, in what may have been a frenzied battle for shares was a nice example of how to turn a relatively low risk investment into one that has added risk.

But with all of the drama out of the way Intel is now back to a more reasonable price and allows the ability to repurchase shares assigned the previous week at $24 or to just start a new position.

While I would have preferred that Joy Global (JOY) had retreated even further from its recent high, its one year chart is a nearly perfect image of shares that had spent the first 6 months of the year above the current price and the next 6 months below the current price, other than for a brief period in each half year when the relationship was reversed. Joy GLobal is an example of stock have a wide range of beta reported, as well, going from 1.14 to 2.17. However, it has also traded in a relatively narrow range for the past 6 months, albeit currently near the high end of that range.

With earnings scheduled later in the December 2013 option cycle there is an opportunity to attempt to thread a needle and capture the dividend the week before earnings and avoid the added risk. However, I think that Joy Global’s business, which is more heavily reliant on the Chinese economy may return to its recent highs as earnings are delivered.

Lowes (LOW) reported earnings this past week, and like every previous quarter since the dawn of time the Home Depot (HD) versus Lowes debate was in full force and for yet another quarter Lowes demonstrated itself to be somewhat less capable in the profit department. However, after its quick return to pricing reality, Lowes is once again an appealing portfolio addition. I generally prefer considering adding shares prior to the ex-dividend date, but the share price slide is equally compelling.

Hewlett Packard (HPQ) is one of those stragglers that has yet to report earnings, but does so this week. Had I known 35 years ago that a classmate would end up marrying its future CEO, I would likely not have joined in on the jokes. It is also one of those companies that I swore that I would never own again as it was one of my 2012 tax loss positions. I tend to hold grudges, but may be willing to consider selling puts prior to earnings, although the strike price delivering a 1% ROI, which is my typical threshold, is barely outside of the implied price move range of 8%. It’s not entirely clear to me where Hewlett Packard’s future path may lead, but with a time perspective of just a week, I’m not overly concerned about the future of the personal computer, even if Intel’s forecasts have ramifications for the entire industry.

Lexmark (LXK) is a company that I like to consider owning when there is also an opportunity to capture a dividend. That happens to be the case this week. When it announced that it was getting out of the printer business investors reacted much as you would have imagined. They dumped shares, which for most people are electronically maintained and not in printed form. After all, why own a printer company that says that printers are a dead end business? Who knew that Lexmark had other things in mind, as it has done quite nicely focusing on business process and content management solutions. While it has been prone to large earnings related moves or when shocking the investment community with such news as it was abandoning its most recognizable line of business, it has also been a rewarding position, owing to dividends and option premiums. However, always attendant is the possibility of a large news related move that may require some patience in awaiting recovery.

Finally, I find myself thinking about adding shares of eBay (EBAY) again this week, just as last week and 10 other times this past year. Perhaps I’m just obsessed with another CEO related missed opportunity. Shares didn’t fare too well based upon an analyst’s report that downgraded the company saying that shares were “range bound at $49-$54.” While that may have been the equivalent of a death siren, for me that was just validation of what had been behind the decision to purchase and repurchase shares of eBay on a regular basis. While being range bound is an anathema to most stock investors, it is a dream come true to a covered option writer.

Happy Thanksgiving.

Traditional Stocks: eBay, Intel, Lowes, Philip Morris

Momentum Stocks: Joy Global, Walter Energy

Double Dip Dividend: Lexmark (ex-div 11/26), Lorillard (ex-div 11/26), Molson-Coors (ex-div 11/26)

Premiums Enhanced by Earnings: Hewlett Packard (11/26 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.

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Copyright 2013 TheAcsMan

Weekend Update – November 17, 2013

Things aren’t always as they seem.

As I listened to Janet Yellen face her Senate inquisitors as the hearing process began for her nomination as our next Federal Reserve Chairman, the inquisitors themselves were reserved. In fact they were completely unrecognizable as they demonstrated behavior that could be described as courteous, demur and respectful. They didn’t act like the partisan megalomaniacs they usually are when the cameras are rolling and sound bites are beckoning.

That can’t last. Genteel or not, we all know that the reality is very different. At some point the true colors bleed through and reality has to take precedence.

Closing my eyes I thought it was Woody Allen’s sister answering softball economic questions. Opening my eyes I thought I was having a flashback to a curiously popular situational comedy from the 1990s, “Suddenly Susan,” co-starring a Janet Yellen look-alike, known as “Nana.” No one could possibly sling arrows at Nana.

These days we seem to go back and forth between trying to decide whether good news is bad news and bad news is good news. Little seems to be interpreted in a consistent fashion or as it really is and as a result reactions aren’t very predictable.

Without much in the way of meaningful news during the course of the week it was easy to draw a conclusion that the genteel hearings and their content was associated with the market’s move to the upside. In this case the news was that the economy wasn’t yet ready to stand on its own without Treasury infusions and that was good for the markets. Bad news, or what would normally be considered bad news was still being considered as good news until some arbitrary point that it is decided that things should return to being as they really seem, or perhaps the other way around..

While there’s no reason to believe that Janet Yellen will do anything other than to follow the accommodative actions of the Federal Reserve led by Ben Bernanke, political appointments and nominations have a long history of holding surprises and didn’t always result in the kind of comfortable predictability envisioned. As it would turn out even Woody Allen wasn’t always what he had seemed to be.

Certainly investing is like that and very little can be taken for granted. With two days left to go until the end of the just ended monthly option cycle and having a very large number of positions poised for assignment or rollover, I had learned the hard way in recent months that you can’t count on anything. In those recent cases it was the release of FOMC minutes two days before monthly expiration that precipitated market slides that snatched assignments away. Everything seemed to be just fine and then it wasn’t suddenly so.

As the markets continue to make new closing highs there is division over whether what we are seeing is real or can be sustained. I’m tired of having been wrong for so long and wonder where I would be had I not grown cash reserves over the past 6 months in the belief that the rising market wasn’t what it really seemed to be.

What gives me comfort is knowing that I would rather be wondering that than wondering why I didn’t have cash in hand to grab the goodies when reality finally came along.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

Sometimes the most appealing purchases are the very stocks that you already own or recently owned. Since I almost exclusively employ a covered option strategy I see lots of rotation of stocks in and out of my portfolio. That’s especially true at the end of a monthly option cycle, particularly if ending in a flourish of rising prices, as was the case this week.

Among shares assigned this past week were Dow Chemical (DOW), International Paper (IP), eBay (EBAY) and Seagate Technology (STX).

eBay just continues to be a model of price mediocrity. It seems stuck in a range but seems to hold out enough of a promise of breaking out of that range that its option premiums continue to be healthy. At a time when good premiums are increasingly difficult to attain because of historically low volatility, eBay has consistently been able to deliver a 1% ROI for its near the money weekly options. I don’t mind wallowing in its mediocrity, I just wonder why Carl Icahn hasn’t placed this one on his radar screen.

International Paper is well down from its recent highs and I’ve now owned and lost it to assignment three times in the past month. While that may seem an inefficient way to own a stock, it has also been a good example of how the sum of the parts can be greater than the whole when tallying the profits that can arise from punctuated ownership versus buy and hold. Having comfortably under-performed the broad market in 2013 it doesn’t appear to have froth built into its current price

Although Dow Chemical is getting near the high end of the range that I would like to own shares it continues to solidify its base at these levels. What gives me some comfort in considering adding shares at this level is that Dow Chemical has still under-performed the S&P 500 YTD and may be more likely to withstand any market downturn, especially when buoyed by dividends, option premiums and some patience, if required.

Unitedhealth Group (UNH) is in a good position as it’s on both sides of the health care equation. Besides being the single largest health care carrier in the United States, its purchase of Quality Software Services last year now sees the company charged with the responsibility of overhauling and repairing the beleaguered Affordable Care Act’s web site. That’s convenient, because it was also chosen to help set up the web site. It too, is below its recent highs and has been slowly working its way back to that level. Any good news regarding ACA, either programmatically or related to the enrollment process, should translate into good news for Unitedhealth

Seagate Technology simply goes up and down. That’s a perfect recipe for a successful covered option holding. It’s moves, in both directions, can however, be disconcerting and is best suited for the speculative portion of a portfolio. While not too far below its high thanks to a 2% drop on Friday, it does have reasonable support levels and the more conservative approach may be through the sale of out of the money put options.

While I always feel a little glow whenever I’m able to repurchase shares after assignment at a lower price, sometimes it can feel right even at a higher price. That’s the case with Microsoft (MSFT). Unlike many late to the party who had for years disparaged Microsoft, I enjoyed it trading with the same mediocrity as eBay. But even better than eBay, Microsoft offered an increasingly attractive dividend. Shares go ex-dividend this week and I’d like to consider adding shares after a moth’s absence and having missed some of the run higher. With all of the talk of Alan Mullally taking over the reins, there is bound to be some let down in price when the news is finally announced, but I think the near term price future for shares is relatively secure and I look forward to having Microsoft serve as a portfolio annuity drawing on its dividends and option premiums.

I’m always a little reluctant to recommend a possible trade in Cliffs Natural Resources (CLF). Actually, not always, only since the trades that still have me sitting on much more expensive shares purchased just prior to the dividend cut. Although in the interim I’ve made trades to offset those paper losses, thanks to attractive option premiums reflecting the risk, I believe that the recent sustained increase in this sector is for real and will continue. Despite that, I still wavered about considering the trade again this week, but the dividend pushed me over. Although a fraction of what it had been earlier in the year it still has some allure and increasing iron ore prices may be just the boost needed for a dividend boost which would likely result in a significant rise in shares. I’m not counting on it quite yet, but think that may be a possibility in time for the February 2014 dividend.

While earnings season is winding down there are some potentially interesting trades to consider for those with a little bit of a daring aspect to their investing.

Not too long ago Best Buy (BBY) was derided as simply being Amazon’s (AMZN) showroom and was cited as heralding the death of “brick and mortar.” But, things really aren’t always as they seem, as Best Buy has certainly implemented strategic shifts and has seen its share price surge from its lows under previous management. As with most earnings related trades that I consider undertaking, I’m most likely if earnings are preceded by shares declining in price. Selling puts into price weakness adds to the premium while some of the steam of an earnings related decline may be dissipated by the selling before the actual release.

salesforce.com (CRM) has been a consistent money maker for investors and is at new highs. It is also a company that many like to refer to as a house of cards, yet another way of saying that “things aren’t always as they seem.” As earnings are announced this week there is certainly plenty of room for a fall, even in the face of good news. With a nearly 9% implied volatility, a 1.1% ROI can be attained if less than a 10% price drop occurs, based on Friday’s closing prices through the sale of out of the money put contracts.

Then of course, there’s JC Penney (JCP). What can possibly be added to its story, other than the intrigue that accompanies it relating to the smart money names having taken large positions of late. While the presence of “smart money” isn’t a guarantee of success, it does get people’s attention and JC Penney shares have fared well in the past week in advance of earnings. The real caveat is that the presence of smart money may not be what it seems. With an implied move of 11% the sale of put options has the potential to deliver an ROI of 1.3% even if shares fall nearly 17%.

Finally, even as a one time New York City resident, I don’t fully understand the relationship between its residents and the family that controls Cablevision (CVC), never having used their services. As an occasional share holder, however, I do understand the nature of the feelings that many shareholders have against the Dolan family and the feelings that the publicly traded company has served as a personal fiefdom and that share holders have often been thrown onto the moat in an opportunity to suck assets out for personal gain.

I may be understating some of those feelings, but I harbor none of those, personally. In fact, I learned long ago, thanks to the predominantly short term ownership afforded through the use of covered options, that it should never be personal. It should be about making profits. Cablevision goes ex-dividend this week and is well off of its recent highs. Dividends, option premiums and some upside potential are enough to make even the most hardened of investors get over any personal grudges.

Traditional Stocks: Dow Chemical, eBay, International Paper, Unitedhealth Group

Momentum Stocks: Seagate Technology

Double Dip Dividend: Cablevision (ex-div 11/20), Cliffs Natural (ex-div 11/20), Microsoft (ex-div 11/19)

Premiums Enhanced by Earnings: Best Buy (11/19 AM), salesforce.com (11/18 PM), JC Penney (11/20 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.

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Copyright 2013 TheAcsMan

Cisco was a Friend of Mine

You have to be of a certain age to recognize the Cisco Kid character, but somewhat younger to be familiar with the song that paid homage to the fictional character.

After terrible earnings and poorly received guidance that stunned most everyone, Cisco (CSCO) hasn’t made many friends, but it’s still a friend of mine.

Maybe the problem is all in the name. No, not Cisco, there are worse things in the world than being confused for a food services company. Maybe the problem is in the name John Chambers.

Barely two years ago it was a John Chambers, as head of Standard and Poors’ Sovereign Debt Committee who lowered the debt rating of US Treasury debt. He wasn’t very popular at the time, as many people are put off when they can connect the dots and point fingers at the catalyst for a market wide plunge.

But the John Chambers who is the CEO of Cisco has seen his popularity mirror that of many stocks, in general, as it has gone up and down and up again.

Now it’s down.

Not too long ago John Chambers was said to be on the short list to be the Treasury Secretary in the Bush administration. He was regarded as a model CEO of the new economy and his slow drawl and transparency were welcome alternatives to the obfuscation spun by so many others. His candor during interviews in the immediate moments of earnings being released were always respected.

Then the bottom fell out from Cisco and there were calls for his ouster. Seeing share price in 2011 challenge the lows of 2009 wasn’t the sort of thing that engendered confidence and the calls went out for his head. At that point Treasury Secretary may have been looking pretty good, but that ship had long sailed.

But Chambers was eventually rehabilitated. Rising stock prices, perhaps buoyed by aggressive buybacks, will do that for you. In fact, if you conveniently have data points extend only from the lows in August 2011 to yesterday, Cisco actually out-performed the broader index.

Ironically, John Chambers is somewhat like fictional The Cisco Kid, who actually started his life as a cruel outlaw, but became regarded as being a heroic character. It’s just that Chambers can stay a hero.

Chambers has been there and done that, but now he’s back in that dark place, where people are even poking fun at his drawl and once again saying that his ship has sailed. Perhaps plunges on two successive earnings releases will create that kind of feeling. He certainly may have cut back a bit on his candor, as even his appearance yesterday offered little insight into the disappointment that awaited.

In fact, many asked, given how substantive the alterations in forward guidance were, why Cisco didn’t pre-announce or issue revised guidance weeks ago.

Personally, I don’t see the difference between getting hit with an earnings related surprise earlier, rather than when scheduled. I actually prefer knowing the date and time that i may see my shares subject to evisceration.

I owned Cisco shares and have done so on 5 different occasions this year. My shares had calls written upon them and were due to expire November 22, 2013. Barely a few hours ago they seemed certain to be assigned. Now they are more likely to be seeking rollover opportunity to a future date.

As most everyone has piled on the sell wagon, much as had occurred with Oracle (ORCL), which also had two successive share plunges after disappointing earnings, I believe that for the short term trader and particularly for the covered option trader, this most recent fall in share price is just an entry opportunity.

Yesterday, I did something that I very rarely do. I purchased shares in the after hours. Usually when I do so, in the anticipation that by morning calmer heads will prevail, I’m typically wrong. That was the case with Cisco this morning.

In addition to buying shares in the after hours, another thing that I rarely do is to purchase shares without immediately or very shortly after selling calls on those shares. In essence, both actions were counter to my overall desire to limit risk.

While I’m usually on the wrong side of momentum when entering, I look at these positions as ones to generate both capital gains from shares and option premium income, whereas for the majority of my positions I emphasize premium and dividend income.

In the case with Oracle, opportunity existed after bad news and exaggerated downward price movements. SInce I tend to be short term oriented, I only care about the opportunity and not about structural issues that may have longer term impact.

While earnings represented a risk and shares moved quite a bit more than the implied movement, suggesting that investors were surprised and unprepared, I think the risk is now greatly discounted.

I make no judgment regarding the ability of Cisco, whether under Chambers’ leadership or anyone else to compete in the marketplace and to recapture its glory or restore Chambers to a position of honor.

Instead, Cisco is nothing more than a vehicle. The Cisco Kid had his horse, John Chambers had his buybacks and for some the shares of this beleaguered company are the vehicle of the day.

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Weekend Update – November 10, 2013

Is there life after momentum slows?

There was no shortage of stocks taking large price hits last week, as earnings season had already begun its slowdown phase. However, for some of the better known momentum stocks the slightest mis-steps were all the reason necessary to flee with profits.

For those who live long enough, it should never come as a surprise that some things are just destined to slow down.

Momentum fits into that category, although based on the past week it’s more of a question of falling down than slowing down for some.

After the fact, no one seemed to be surprised.

In a week that saw a decrease in the ECB’s main lending rate that was widely described as being a “surprise'” later in the day came reports that most economists expected the cut. The market clearly didn’t, however, as the economists may have neglected to pass on their views.

And then there was a surprisingly large increase in non-farm payroll jobs. Somehow everyone was taken off guard and the market responded by interpreting good news as good news and finished the week with a flourish.

What surprised me, however, was that there was such a disconnect between the anticipated numbers and the actual report, which covered the period of the government shutdown. The disconnect had to do with methodology, as forecasts didn’t take into account that government statistics considered furloughed employees to be employed, since they were to receive back, through legislative action.


In effect, Friday’s rally was based on a misunderstanding of methodology. It will also certainly be interesting to see what impact Ben Bernanke’s statement after the market’s close may have on Monday’s trading.

I think the unemployment rate probably understates the degree of slack in the labor market. I think the employment-population ratio overstates it somewhat, because there are important downward trends in participation

Unfortunately, Friday’s gains complicate the goal of finding bargain priced stocks in the coming week, but with a little water having been thrown on the fire there may be opportunity yet.

Everyone, including me, likes to look for clues and cues that have predictive value. Parallels are drawn at every opportunity to what we know from the past in the expectation that it can foretell the future.

For some the sudden increase in IPOs coming to market and the sudden fall of many momentum stocks heralds a market top. In hindsight, if it does occur, it will be regarded as “no surprise.” If it doesn’t occur within the attention span of most paying attention it will simply be conveniently ignored.

For others the reversal of fortune may represent values and not value traps.

But no matter what the case there is life after momentum slows. It’s just a question of accommodation to new circumstances.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

eBay (EBAY) like so many stocks that I consider tends to trade in a range. While eBay is often criticized for being “range bound” there is some comfort in knowing that it is less likely to offer an unwanted surprise than many other stocks. My shares were assigned this past week and are now trading at the upper range of where I may normally initiate a position. However, having owned shares on ten separate occasions this year I would be anxious to do so again on the slightest of pullbacks.

Although hardly a momentum stock, Mondelez (MDLZ) had some earnings woes this past week, although it did recover a bit, perhaps simply being carried along by a rallying market. Shares are still a little higher than I would like for an entry point, but I expect that as a short term selection it will match market performance, while in a market turn-down it will exceed performance.

Fastenal (FAST) is another fairly sedate company, yet its stock often has some large moves. I see Fastenal as a leading indicator of economic activity, but also very sensitive to the economy. I think its most recent price weakness will be reversed as the impact of a resolution of the government’s shutdown trickles down to the economy. I currently own shares with a contract set to expire this week, but at this price am considering doubling down on what in essence can be a weekly option contract during the final week of the November 2013 cycle.

Deere (DE) is another range bound stock, that in hindsight I should have bought on numerous occasions over the past few months. Good option premiums, a good dividend and not facing some of the same external pressures as another favorite, Caterpillar (CAT), makes Deere a perennially good selection within its sector.

I currently own shares of both Eli Lilly (LLY) and International Paper (IP), both of which go ex-dividend this week. Unlike many other stocks that I discuss, I have not owned either on multiple occasions this year and my current shares are now below their cost. Both emerged unscathed after recent earnings reports, although both are down considerably from their recent highs and both have considerably under-performed the S&P 500 from the time for its first in a series of market highs on May 21, 2013. That latter criterion is one that I have been using with some regularity as the market has continued to reach new highs in an effort to identify potential late comers to the party.

Which finally brings me to the momentum stocks that have my attention this week, some of which may be best approached through the sale of put options and may be best avoided in a weakening market.

Much has been said of the “ATM effect” on Facebook (FB), as speculation that investors were selling Facebook shares to raise money to buy Twitter (TWTR) shares. Following an abrupt reversal during its conference call when there was a suggestion that adolescents were reducing their Facebook use shares have just not regained their traction. Sometimes it’s just profit taking and not driven by the allure of a newer stock in town. But assuming that the “ATM effect” has some validity and with a large gap between the Twitter IPO price and its 7% lower price on its first full day of trading, I can’t imagine now taking the opportunity to sell Facebook in order to purchase Twitter shares. On its own merits Facebook may be a momentum stock that has a cushion of protection until its next earnings report, unless an errant comment gets in the way, again.

Chesapeake Energy (CHK) is much higher than the level at which I last owned shares at $21. Waiting for a return has been fruitless and as a result, rather than having owned shares on 15 occasions, as in 2012, thus far, I’ve only had five bouts of ownership. With the melodrama surrounding its founder and ex-CEO in its past, Chesapeake may begin trading a bit more on fundamentals rather than hopes for a return to its glory days. at such, its price action may be less unidirectional than it has been over the past four months. After last week’s earnings report related drop, while still higher than I would like, I think there may be reason to consider a new entry, perhaps through the sale of put options.

Freeport McMoRan (FCX) is a stock that has been testing my patience through the year. More precisely, however, I’ve had no real issue with Freeport McMoRan’s leadership, in fact, given metal prices, it has done quite well. What I don’t understand is how it has been taking so long for markets to appreciate its strategic initiatives and long term strategies. For much of the year my shares have been non-performing, other than for dividend payments, but with a recent run higher some are generating option premium income streams. Despite the run higher, I am considering adding more shares as the entire metals complex has been showing strength and some stability, as well.

Finally, while I’ve said before that I don’t spend too much time looking at charts, a recent experience with Tesla (TSLA) was perhaps a good reason to at least acknowledge that charts can allow you to look at the past.

While it’s probably always a good week to be Elon Musk, relatively speaking last week wasn’t so good, as both Tesla and Solar City (SCTY) were treated harshly after earnings were released. The spin put around another reported car fire that its resultant heat could be garnered to power several mud huts didn’t give shares much of a boost, perhaps because that might have cannibalized SolarCity sales, with the two companies likely having much overlap in ownership.

Tesla reported earnings last week and took a drubbing through successive days.

A reader of last week’s article asked:

“George, what are your thoughts on a sale of Puts on TSLA which reports Tuesday?”

My response was:

“TSLA isn’t one that I follow, other than watching in awe.

But purely on a glance at this week’s option pricing the implied volatility is about 12% and you can get a 1% ROI on a strike that’s about 17% lower, currently $135

It looks as if it may have price support in the $134-$139 range, but it’s hard to know, because its ascent has been so steep that there may not be much of a real resting point.

In a very speculative portion of my portfolio I might be able to find some money to justify that trade.”

As it turned out Tesla closed the week at $137.95 and now has my attention. You do have to give some credit to its chart on that one. WIth disappointment over its sales, supply chain issues and reports of car fires and even Elan Musk suggesting that “Tesla’s stock price is more than we have any right to deserve,” it has fallen by nearly 21% from the time of that comment, barely 2 weeks prior to earnings. Although to be entirely fair shares did fully recover from a 7.5% decline in the aftermath of the statement in advance of earnings.

While still not knowing where the next resting point may be in the $119-$122 range, representing as much as another 13% price drop. With earnings out of the way to enhance option premiums the risk-reward proposition isn’t as skewed toward reward. However, for those looking to recapture of bit of their own momentum, despite the realization that the end may be near, a put sale can return an ROI of approximately 1.4% at a strike price nearly 6% below Friday’s close is not breached.

The nice thing about momentum slowing is that if you fall the floor isn’t as far away as it used to be.

Traditional Stocks: Deere, eBay, Fastenal, Mondelez

Momentum Stocks: Chesapeake Energy, Facebook, Freeport McMoRan, Tesla

Double Dip Dividend: Eli Lilly (ex-div 11/13), International Paper (ex-div 11/13)

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.

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

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Copyright 2013 TheAcsMan