Daily Market Update – February 24, 2014

  

 

Daily Market Update – February 24, 2014 (9:00 AM)

There doesn’t seem to be much lurking around the corner that may either serve to spook or excite the markets this week and maybe even less so today.

While I prefer a market that has little net movement, I like the kind of market that has lots of intermediate swings in both directions that help to create a large trading range. If I can’t have both, then I’d go for the former, because even with lower premiums the opportunity to repeatedly sell calls on the same positions that are essentially moving nowhere is a pretty stress free way to go about a profitable existence.

The sources of excitement this week appear to be limited. While there are still some earnings reports to come and some merger stories are heating up, it looks to be a quiet week unless something is injected into the system to shake things up.

I continue to have a short term optimistic view, solely related to past history when coming back from attempts at a correction. Given that each of those have seen an overshooting of the previous high there’s not too much reason to suspect that this will be otherwise. At the very least, even a flat market, comprised of lots of flat stocks, can be a great victory.

Although maybe the fact that there’s not too much reason to suspect otherwise is, itself, reason enough to suspect otherwise.

This contrarian thing can get carried away.

The market appears to be ready to open the week mildly on the upside, but for the past month or so the first hour hasn’t been very reliable in setting overall tone. While the first hour is often called “amateur hour,” I don’t think that’s really consistently the case, although lately it hasn‘t been the most opportune time to open new positions.

Once again, this week, I’d like to see some additional positions picking up their own cover and contributing to the income streams that most of us want to see and seeing either rollovers or assignments of the 10 positions set to expire this week.

For the first time in a few months I don’t have a distribution of expirations over the weeks intermediate between the current week and the end of the monthly cycle, as the lowered volatility has made that a less desirable strategy. As long as the market continues either treading water or going higher there’s no particular advantage, perhaps even a detriment to that kind of  staggering, but I still may be looking for some opportunities to populate some intermediate weeks.

With cash back up to levels that I’m comfortable pursuing a buying spree and still having enough left over for a rainy day, I don’t mind spending the money this week and have a little less hesitancy than just a few weeks ago.

With cash at about 42% I’m not resistant to getting down to the 25% range, which would equate to about 7 new positions, if they are there to be had.

Still, as the market has again moved higher comes the challenge of locating what may be relative bargains and looking for downside protection at the same time. As with so many opportunities in the past that may simply mean looking to familiar names, either down on their luck or not having shared as much in the recent good fortune the market has exhibited.

With the consideration of more familiar names also comes the consideration of once again looking to rollover in the money positions, as opposed to allowing assignment. That was a strategy opportune during the latter part of 2012 and early 2013. In a rising market it continues to capitalize on strength and minimizes the need to discover an increasing number of new opportunities for the coming week. Additionally, as volatility is low, the cost to repurchase those in the money contracts is relatively lower than when volatility is high, as the added “premium” of being in the money quickly erodes when the clock is ticking away and expiration rapidly approaching.

 

 

 

 

 

 

 

 

 

 

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Dashboard – February 24 – 28, 2014

 

 

 

 

 

MONDAY:   Looking to be another quiet start to the week and possibly another week with little to no foreseeable catalysts

TUESDAY:     While there were no identifiable catalysts yesterday, it was anything but quiet. Today appears to be a repeat of yesterday’s early indications of a quiet day, with little reason to expect a repeat of the surprise move higher once the bell rang.

WEDNESDAY:  These days, when it comes to retail, the expectations are so low, that “not horrible” is great. They say if you live long enough you’ll see everything. Patience and genes help

THURSDAY:    Durable Goods, Jobless Claims and Janet Yellen testimony yt start the morning, as even JC Penney enjoys a retail rally during an otherwise quiet week

FRIDAY:  The expectation is for more quietude today as news and earnings are taking a break

                                                                                                                                           





 “SNEAK PEEK AT NEXT WEEK” APPEARS ON FRIDAYS

Sneak Peek

 

 

 

 

 

 

 

 

  

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Weekend Update – February 23, 2014

When this past week was all said and done, it was hard to discern that anything had actually happened.

Sure, there was an Olympics being staged and fomenting revolution in Ukraine, but it was a week when even the release of FOMC minutes failed to be news. Earnings season was winding down, the weather was in abeyance and the legislative docket was reasonably non-partisan.

I could have spent last week watching the grass grow if it hadn’t been covered in a foot of snow.

In its own way, despite the intermediate and alternating moves approaching triple digits, the past week was a perfect example of reversion to the mean. For those that remember 2011, it was that year in a microcosm.

The coming week promises to be no different, although eight members of the Federal Reserve are scheduled to speak. While they can move markets with intemperate or unfiltered remarks, which may become more meaningful as “hawks” assume more voting positions, most people will likely get their excitement from simply reading the just released 2008 transcripts of the Federal Reserve’s meetings as the crisis was beginning to unfold. While you can learn a lot about people in times of crisis, other than potential entertainment value the transcripts will do nothing to add air to the vacuum of the past week. What they may contain about our new Chairman, Janet Yellen, will only confirm her prescience and humor, and should be a calming influence on investors.

As a covered option investor last week was the way I would always script things if anyone would bother opening the envelope to read what was inside. While I have no complaints about 2012 or 2013, as most everyone loves a rising market, 2011 was an ideal market as the year ended with no change. Plenty of intermediate movement, but in the end, signifying nothing other than the opportunity to seemingly and endlessly milk stocks for their option premiums that were nicely enhanced by volatility.

Although I’ve spent much of the past year expecting, sometimes even waiting at the doorstep for the correction to come, the past few weeks have been potentially dangerous ones as I’ve had optimism and money to spend. That can be a bad combination, but the past 18 months have demonstrated a pattern of failed corrections, at least by the standard definition, and rebounds to new and higher highs.

While there may be nothing to see here, there may be something to see there as the market may again be headed to new neighborhoods.

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). A companion article this week explores some additional earnings related trades.

In a week that Wal-Mart (WMT) again disappointed with its earnings report, once again the market failed to follow its lead. In the past year Wal-Mart has repeatedly disappointed, yet the market has disconnected form its leadership, other than for a brief two hours of panic a few months ago when Wal-Mart announced some increasing inventory levels. That panic quickly resolved once Wal-Mart explained their interpretation of inventory levels.

However, one does have to wonder under what economic circumstances does Wal-Mart not meet expectations? Is the economy thriving and people are moving to other retailers, such as Target (TGT) or even Sears (SHLD) or are they moving to Family Dollar Store (FDO)? WHile it is possible that Wal-Mart may simply be suffering from its own bad economic and internal forecasting, there isn’t much reason to be sanguine about retailing. My money is on Family Dollar.

One source that I use for information lists Family Dollar as going ex-dividend this week, however, I haven’t found that to be corroborated anywhere else and historically the first quarter ex-dividend date is in the second week of March. If shares do go ex-dividend this week I would have significant enthusiasm for adding shares, but even in the absence of that event I’m inclined to make that purchase.

Coming off two successive weeks of garnering more than the usual number of dividends, this week is relatively slim pickings. Weyerhauser (WY) and Molson Coors (TAP) both go ex-dividend this week, but both are near the bottom of my list for new purchases this week.

While I like Molson Coors, at the moment the product holds some more appeal than the stock, which is trading near its yearly high point. However, with earnings now out of the way and Canadians around the world celebrating Olympic victories, what better way to show solidarity than to own shares, even if just for a week? Other than potential technical indicators which may suggest an overbought condition, there isn’t too much reason to suspect that in a flat or higher moving market during the coming week, Molson Coors shares will decline mightily. With shares as the body and a head composed of a nice premium and dividend, it just may be time to indulge.

Weyerhauser is a perfectly boring stock. Often, i mean that in a positive sense, but in this case I’m not so certain. I’ve owned shares since May 2013 and would be happy to see them assigned. Despite Weyerhauser offering a dividend this week, my interests are more aligned with re-establishing a position in International Paper (IP). In addition to offering a weekly option, which Weyerhauser does not, its options liquidity and pricing is superior. While it is trading near its yearly high, it has repeatedly met resistance at that level. As a result, while eager to once again own shares, I would be much more willing to do so even with just a slight drop in price.

While offering only a monthly option is a detriment as far as Weyerhauser is concerned, it may be a selling point as far as Cypress Semiconductor (CY) goes. I like to consider adding shares when it is near a strike price as it was after Friday’s close. Shares can be volatile, but it tends to find its way back, especially when home is $10. WHile earnings aren’t due until April 17, 2014, that is just one day before the end of the monthly cycle. Therefore, if purchasing shares of Cypress at this time, I would be prepared to set up for ownership through the May 2014 cycle in the event that shares aren’t assigned when the March cycle comes to an end, in order to avoid being caught in a vortex if a disappointment is at hand. The dividend and the premiums will provide some solace, however.

Although I had shares of Fastenal (FAST) assigned this past week and still own some more expensive shares, this company, which I believe is a proxy for economic activity, has been a spectacular covered call trade and has lent itself to serial ownership as it has reliably traded in a defined range. It doesn’t report earnings until April 10, 2014, but it does have a habit of announcing altered guidance a few weeks earlier. That can be annoying if it comes at the end of an option cycle and potentially removes the chance of assignment or even anticipated rollover, but it’s an annoyance I can live with. After two successive quarters of reduced guidance my expectation is for an improved outlook.

I haven’t owned shares of Deere (DE) for a few months as it had gone on a ride higher, just as Caterpillar (CAT), another frequent holding, is now doing. Deere is now trading at the upper range of where I typically am interested in establishing a position, but after a 7% decline, it may be time to add shares once again. It consistently offers an option premium that has appeal and in the event of longer than anticipated ownership its dividend eases the wait for assignment.

While I would certainly be more interested in Starbucks (SBUX) if its shares were trading at a lower level, sometimes you have to accept what may be a new normal. I had nearly a year elapse before coming to that realization and missed many opportunities in that time with these shares. It does, however, appear that the unbridled move higher has come to an end and perhaps shares are now more likely to be range bound. As with the market in general it’s that range that others may view as mediocrity of performance that instead may be alternatively viewed as the basis for creating an annuity through the collection of option premiums and dividends.

I’ve never been accused of having fashion sense, so it’s unlikely that I would ever own any Deckers (DECK) products at the right time. One minute they sell cool stuff, the next minute they don’t and then back again. Just like the story of most stocks themselves.

What is clear is that they have become cool retailers again and impressively, shares have recovered from a recent large decline. With earnings due to be announced this week the option market is implying a 12.3% potential movement in shares. In the meantime, if you can set your sights on a lowly 1% ROI for the week’s worth of risk a 16.3% drop can still leave you without the obligation to purchase the shares if having sold puts.

Less exciting, at least in terms of implied moves, is T-Mobile (TMUS). It also reports earnings this week and there has to be some thought to what price T-Mobile is paying and will be paying for its very aggressive competitive stance. While its CEO John Legere, may be a hero to some for taking on the competition, that may very quickly fade with some disappointing earnings and cautionary guidance. the option market is pricing a relatively small move of 8.7%, while current option pricing can return a 1% ROI on a strike level 9.5% lower than Friday’s close. Although that’s not much of a margin of difference, I may be more inclined to consider the sale of puts if shares drop substantively on Monday in advance of Tuesday morning’s announcement. Alternatively, if not selling puts in advance of earnings and shares do significantly fall following earnings, there may be potential to do the put sale at that time.

Finally, Abercrombie and Fitch (ANF) reports earnings this week. It is one of the most frustrating and exhilirating of stocks and I currently own two lots. My personal rule is to never own more than three, so I still have some room to add shares, or more likely sell puts in advance of its earnings. Abercrombie and FItch is a nice example of how dysfunction and lowered expectations can create a stock that is so perfectly suited for a covered option strategy. Its constant gyrations create enhanced option premiums that are also significantly impacted by its history of very large earnings related price changes.

For those that have long invested in shares the prospect of a sharp decline upon earnings can’t come as a surprise. However, with a 10.7% implied price move this coming week, one can still achieve a 1% ROI if shares fall less than 15.3%, based on Friday’s closing price.

Traditional Stocks: Deere, Family Dollar Store, Fastenal, International Paper, Starbucks

Momentum Stocks: Cypress Semiconductor

Double Dip Dividend: Molson Coors (ex-div 2/26)

Premiums Enhanced by Earnings: Abercrombie and Fitch (2/26 AM), Deckers (2/27 PM), T-Mobile (2/25 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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Profiting From Good Fortune Or Bad

While most of the more meaningful companies in the S&P 500 have already reported earnings and new earnings season is barely 7 weeks away, there’s still time to profit from remaining earnings reports coming this week.

Whether a company’s shares respond to earnings by going lower or higher there is often opportunity to profit from either the good or the bad fortunes that they may endure as a result of their past performance and outlook for future fortunes.

As always, whenever I consider whether an earnings related trade is worth consideration I let the option market’s measure of “implied volatility” serve as a threshold in determining whether there is a satisfactory risk-reward proposition. That simple calculation provides an upper and lower price range in which any anticipated price movements will be contained.

Occasionally, for those selling options, whether as part of a covered call strategy or simply through the sale of puts, there may be an opportunity to achieve an acceptable premium even though it represents a share price that is outside of those bounds set by the option market.

This week there appear to be a number of stocks preparing to release their quarterly earnings that may warrant some attention as the reward may be well suited to the risk for some.

A number of the companies that I’ve highlighted are volatile in their own rights, but even more so when event driven, such as before earnings. While the implied volatilities may sometimes appear to be high, they are frequently borne out by past history and it would be injudicious to simply believe that such implied moves are outside the realm of probability.

While individuals can certainly set their own risk-reward parameters, I tend to look at a weekly 1% ROI as meeting my threshold on the reward side of the equation. I measure the degree of risk as whether I need to look above or below the implied volatility to achieve that desired return for what is anticipated to be a week’s investment.

Satisfactory risk exists when the strike price necessary to achieve the ROI is outside of the range predicted by the option market.

The coming week is replete with earnings reports and presents more companies than I usually find that satisfy the above criteria and are in companies that I usually already follow. Among the companies that I am considering this coming week are Abercrombie and Fitch (ANF), Best Buy (BBY), Deckers (DECK), JC Penney (JCP), Macys (M), salesforce.com (CRM), SolarCity (SCTY), Soda Stream (SODA) and T-Mobile (TMUS).

Since the basis of these trades is purely upon what may be considered an inefficiency between the option premiums and the implied volatility, I give no consideration to fundamental nor technical issues. However, my preference, when selling put contracts is to do so when shares have already been falling in price in advance of earnings. As the current week came to its end that included JC Penney, SolarCity, Deckers and Best Buy, although the coming week may define other possibilities.

For those not having sold put contracts in the past, one caveat when considering such trades, is that the investor must be prepared to own the shares if assigned or to manage the options contract, such as rolling it forward, if assignment appears inevitable.

 The table may be used as a guide for determining which of these selected companies meet the risk-reward parameters that an individual sets, understanding that re-assessments need to be made as prices and, therefore, strike prices and their premiums may change.

While the list can be used on a prospective basis in anticipation of an earnings related move there may also be occasion to consider the sale of puts following earnings in those cases where shares have reacted in a decidedly negative fashion to earnings or to guidance.

While some believe in hitting someone when they’re already down, there can be much more satisfaction gained in giving them support in their effort to rise again. Inherently the sale of a put is a statement of bullish sentiment and there may be opportunity to make that expression a profitable one as the response of many when knocked down is to get back up again.

Whether prospective or reactive, there is always opportunity when big movements are anticipated, but not fully realized.

And if they are realized? Think of it as simply more opportunity for opportunity.

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