Daily Market Update – February 18, 2014 (Close)

Starting this shortened trading week less than 1% below the recent S&P 500 high there’s not much reason to believe that recent history won’t repeat itself.

That history has been about 10 occasions of a 3% or more decline followed by climbing to new highs in the past 20 months.

In the past year there have now been 4 attempts to reach a 5% decline and the result has been the same. The market just keeps wanting to climb higher and higher and has now been doing so almost interrupted for any substantive period of time for about 16 months.

With cash back up to the 40% level that I’ve been very comfortable starting each week with, I’m willing to get down to about 25% again, but also recognize that the option premiums this week will be  a little on the low side due to the decreased volatility, but especially due to the loss of a trading day’s worth of time value.

With lots of positions having contracts expiring this Friday I’m not overly anxious to add to that list but the low volatility makes it a little harder to justify longer term time frames, other than to diversify in time. At the moment I don’t anticipate going too far out in time, although some of this week’s potential dividend trades offer only monthly options, so there is a chance of going the March 2014 route on those, but most likely others will be contained to either the February 22 or 28 expirations.

This morning’s flat pre-open is the kind of market that is preferable to a sharp climb higher to start the week when you have cash in hand. I don’t think that the market is simply sending a message that it wants to wait for the release of tomorrow’s FOMC minutes, as it’s unlikely that there will be any great surprise.

That lack of surprise, however, doesn’t mean a lack of reaction, as we saw at the last FOMC minutes release when it really wasn’t clear why there was any noticeable change in direction at all.

Given that kind of unpredictability you really can’t predicate your actions on a market that has shown that kind of behavior. While any one day may see an unexpected reaction in one direction, it’s equally likely that on the occasion of the next event that reaction can be in completely the opposite direction. So why fight or why put all of your faith in any given event or the reaction to that event?

Instead, I’m apt to believe that the over-riding sentiment is that the market tried for a correction and just like all of the previous times in the past year has gotten it out of its system. That will be a more likely theme going forward until the next challenge.

Of course, with that said, I’m not crazy and will still exercise some caution.

However, for those that do have a bullish feeling that would be the time to consider using the AC/DC strategy, selling calls on only a portion of holdings in a particular stock or using different strikes on portions of the holding.

Last week I was content to simply watch prices move higher, especially insofar as it helped some depressed prices. This week, while I do have more to invest, I’m not adverse to the same possibility and would especially like to see existing positions continue to go higher and hopefully create opportunities to gain cover and some additional income. That would certainly go along with the goal of wanting to reduce the total number of holdings, which has been difficult to accomplish while simultaneously adding new positions in a market that was headed lower.

With the turnaround of the past 7 trading sessions there is opportunity to make progress in all aspects of that short term playlist. Hopefully this week will end on the same strong note as have each of the past two weeks and provide good opportuni
ty to approach the March 2014 cycle.

What I wasn’t expecting was to have seen the two dividend purchases this morning abruptly change direction and take themselves out of contention for collecting the dividend.

With Walgreen last week and for most people, Microsoft being assigned early, I’m getting greedy and want more dividends, despite the fact that this option cycle is winding up to be the best month for dividend collection that I can recall. Right now it’s running at about a 3.2% annual rate and helps a little to offset some of the lower premiums and uncovered positions.

But that desire explains why I eventually decided to try and rollover the very trades made this morning. Doing so added some earnings enhanced premiums to the dividend that is now fairly certain to remain where it belongs, for two stocks that are already down enough before their earnings next week. However, the nice thing was that even in the event of an earnings drop, there will be a month to recover and maybe do it all over again.

It was, otherwise, an entirely forgettable and boring day with almost no trading range. Despite that, this was one of the busiest days I think I’ve ever had as far as text messages and emails.

One of the reasons was related to tomorrow’s special dividend for L Brands. Lots of questions regarding how that works.

As far as being an option trader goes there is no relevance to special dividends in excess of $0.125/share.

Anything greater than that requires the strike prices to be adjusted to reflect the special dividend distribution. If, for example there is a $1 special dividend and you sold a $55 option it becomes a $54 option to reflect the fact that you just got a $1 in special dividends.

In the event of early assignment you would have gotten the full $55, but no one in their right mind will exercise early to capture a special dividend. Personally, I don’t understand why anyone likes them, other than as a matter of principle, for those that believe they should share in a stock’s good fortune. You really receive nothing other than an early tax liability, potentially.

Then, there are always those who are not in their right mind. For anyone that did the rollovers and you do get assigned, you should send them a nice “Thank You” card.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

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