Mar142014
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Daily Market Update – March 14, 2014 (9:00 AM) The Week in Review will be posted by 6 PM and the Weekend Update will be posted by noon on Sunday. Today’s possible outcomes include:
Assignments: SBUX Rollovers: CHK, COH, KSS, MSFT Expirations: AIG, APC, C, FDO, IP, MOS, VZ, WFM
Trades, if any will be attempted to be made before 3:30 PM EDT, where possible.
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Mar132014
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Daily Market Update – March 13, 2014 (Close) This was already shaping up like another shapeless day before the distasteful afternoon occured, but at least the morning brought us closer to the end of what has not been a terribly good week, principally due to some poorly timed new positions. They not only faltered with a teetering market, but like General Motors, brought their own problems to the table. As the afternoon unfolded the week only got worse as it was really anyone’s guess as to what caused the sell-off, although Crimean rumors caught some blame, as did more moaning about the Chinese economy being worse than thought. For the first time that I can recall, this has been a week that I’ve made more personal trades than recommended trades. While that includes a trade in Cypress Semiconductor, the other trades were all put sales, none of which were included as Trading Alerts. That adds to my characterization of this week. The Cypress Semiconductor trade was was never sent as an alert because it appeared as if I had gotten the last person willing to buy contracts at $0.20, the price I thought necessary to make it a worthwhile trade. For those that occasionally check “market depth” to see what the outstanding offers are at various prices, at the time my trade was executed there was no shortage of bids at $0.20, but literally as my trade was filled and right before sending that alert I watched the market depth indicate that all of those $0.20 bids were gone and instead replaced by $0.10 bids or nothing at all, despite the fact that the share price was unchanged or even $0.01 higher. A couple of days later that $0.20 still hasn’t come back even though shares have gotten more expensive. Back to the puts. One of my reasons for being more reluctant to recommend the sale of puts is that I know that not all brokerage firms, including Scottrade, allows the sale of cash covered puts. I know that some subscribers use that brokerage and while I don’t understand the basis for not allowing that kind of trade, as the alternative, buying shares and selling calls isn’t always an equal alternative. A cash covered put is no more of a risky trade, neither to the investor nor to the brokerage than a similar buy/write trade. The money is simply held in escrow by the brokerage until it’s absolutely certain that it won’t be needed to purchase the underlying security because of assignment. There must be a reason and it must be for someone’s protection, but I still don’t understand, particularly since that need to protect someone doesn’t appear to be very universally appreciated by other brokerages. Additionally, I tend to sell puts following some bad news and a precipitous drop in share price. That immediately is a more risky situation as for many stocks that first big move is the beginning of a new momentum that may carry it further in the same direction. Selling the puts is a statement of bullish sentiment in the belief that the move won’t be continued to the level of the selected option strike. What often makes that kind of trade appealing is that the premium is enhanced because of the initial large move and emotion takes over as the supply/demand curve is shifted because people believe that momentum will continue. While adherents of the belief that big moves beget more big moves in the same direction or even continued and sustained movement in the same direction, there are plenty of examples where that’s just not the case. Although many refer to dead cat bounces and dismiss them as being meaningless in the big picture in terms of changing direction, the reality is that what really matters is the time frame with which one looks to create a specific outcome. While a dead cat bounce may not mean much for the prospects of a stock or even an entire market looking months forward it may certainly buy some time until expiration a few days later. My own use of puts has evolved over the years. To some degree it does require a modification of the thought process as the concept isn’t always intuitive. After all, most of us think in terms of good happening when shares go higher. With puts the good can occur with both lower and higher moves, with the latter being simply a question of degree. Additionally, the common belief is that if you sell a put and shares fall below the strike price you will be assigned shares. The reality is that if the market exists and at prices that are attractive enough you can roll over the puts in an effort to continue to generate option premium and buy time for your hoped for rebound in price. However, the further reluctance in recommending put sales very often is that often the rollover, if necessary, involves some wide bid and ask spreads and really works best when the trader executes the trade as a spread, rather than individually executing the BTC and STO legs of the trade. Deciding on the appropriate NC (Net Credit) may appear daunting when the spreads are wide, but is actually fairly simple and uses the following formula: STO bid price minus BTC ask price plus average of BTC bid – ask difference plus STO bid – ask difference. Or you could just follow the NC that I provide, to make it even more simple. The reason that I put all of this down is that I am probably going to make more put sale Trading Alerts, where it appears appropriate in the future as market conditions may warrant that additional strategy to not be overlooked. For those that can’t sell put contracts, contact me to see if there is an equivalent buy/write alternative. Today, however, did point out how momentum can build on itself as the market just kept going lower once it made it to a triple digit less. The next 150 points lower were far easier than the first 100. Having chosen to start testing the market when it was down 100 may often make sense, whether doing so via buy/writes or the sale of puts. But not today.
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Mar132014
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Daily Market Update – March 13, 2014 (9:30 AM) This is already shaping up like another shapeless day, but at least that brings us closer to the end of what has not been a terribly good week, principally due to some poorly timed new positions. They not only faltered with a teetering market, but like General Motors, brought their own problems to the table. For the first time that I can recall, this has been a week that I’ve made more personal trades than recommended trades. While that includes a trade in Cypress Semiconductor, the other trades were all put sales, none of which were included as Trading Alerts. That adds to my characterization of this week. The Cypress Semiconductor trade was was never sent as an alert because it appeared as if I had gotten the last person willing to buy contracts at $0.20, the price I thought necessary to make it a worthwhile trade. For those that occasionally check “market depth” to see what the outstanding offers are at various prices, at the time my trade was executed there was no shortage of bids at $0.20, but literally as my trade was filled and right before sending that alert I watched the market depth indicate that all of those $0.20 bids were gone and instead replaced by $0.10 bids or nothing at all, despite the fact that the share price was unchanged or even $0.01 higher. A couple of days later that $0.20 still hasn’t come back even though shares have gotten more expensive. Back to the puts. One of my reasons for being more reluctant to recommend the sale of puts is that I know that not all brokerage firms, including Scottrade, allows the sale of cash covered puts. I know that some subscribers use that brokerage and while I don’t understand the basis for not allowing that kind of trade, as the alternative, buying shares and selling calls isn’t always an equal alternative. Additionally, I tend to sell puts following some bad news and a precipitous drop in share price. That immediately is a more risky situation as for many stocks that first big move is the beginning of a new momentum that may carry it further in the same direction. Selling the puts is a statement of bullish sentiment in the belief that the move won’t be continued to the level of the selected option strike. What often makes that kind of trade appealing is that the premium is enhanced because of the initial large move and emotion takes over as the supply/demand curve is shifted because people believe that momentum will continue. While adherents of the belief that big moves beget more big moves in the same direction or even continued and sustained movement in the same direction, there are plenty of examples where that’s just not the case. Although many refer to dead cat bounces and dismiss them as being meaningless in the big picture in terms of changing direction, the reality is that what really matters is the time frame with which one looks to create a specific outcome. While a dead cat bounce may not mean much for the prospects of a stock or even an entire market looking months forward it may certainly buy some time until expiration a few days later. My own use of puts has evolved over the years. To some degree it does require a modification of the thought process as the concept isn’t always intuitive. After all, most of us think in terms of good happening when shares go higher. With puts the good can occur with both lower and higher moves, with the latter being simply a question of degree. Additionally, the common belief is that if you sell a put and shares fall below the strike price you will be assigned shares. The reality is that if the market exists and at prices that are attractive enough you can roll over the puts in an effort to continue to generate option premium and buy time for your hoped for rebound in price. However, the further reluctance in recommending put sales very often is that often the rollover, if necessary, involves some wide bid and ask spreads and really works best when the trader executes the trade as a spread, rather than individually executing the BTC and STO legs of the trade. Deciding on the appropriate NC (Net Credit) may appear daunting when the spreads are wide, but is actually fairly simple and uses the following formula: STO bid price minus BTC ask price plus average of BTC bid – ask difference plus STO bid – ask difference. Or you could just follow the NC that I provide, to make it even more simple. The reason that I put all of this down is that I am probably going to make more put sale Trading Alerts, where it appears appropriate in the future as market conditions may warrant that additional strategy to not be overlooked. For those that can’t sell put contracts, contact me to see if there is an equivalent buy/write alternative.
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Mar132014
(A version of this article appeared in TheStreet)
Crowds can certainly be a means for achieving good ends. Ask people in Tahrir Square or those in Kiev, although some may disagree and see only the dark side of crowds.
The power of crowds has made Wikipedia an increasingly legitimate asset as the crowd has been tamed and made to adhere to standards. The burden of creating a useful utility is borne by so many people that no one individual is critical and no one individual can harm the foundation.
In the world of financing “crowd sourcing,” the mechanism of pooling funds from a large group of people to help achieve an objective is getting increasingly popular for charitable and commercial ventures and received great fanfare this week as legendary musician Neil Young sought funding for his project of creating a high fidelity system to play and listen to digital music that restores all of the sounds and nuances of the original recordings as intended by the artists.
Neil Young has been adamant over the years about his feelings regarding the quality of the most prevalent file format used for digital recordings and many believe that the iTunes franchise of Apple (AAPL) is most at risk for an assault against that format and to introduction of a new audio player. Perhaps the sentiment attributed to Young that the songs on an iPhone “sound like crap,” and that even Steve Jobs wasn’t satisfied with the sound of music on the iPod, add to that feeling of an impending assault on the existing Apple eco-system..
As an artist proud of his art, and together with a growing collection of other well known artists who feel similarly about the preservation of the quality of their art, there is certainly a case to be made for providing a medium that faithfully recreates the experience. Of course, doing so requires capital and investment and is faced with long odds when the competitor is Apple.
While there are different models of crowd sourcing, the most commonly used and the one that Mr. Young is utilizing is that promoted by Kickstarter. It is one that offers rewards for contributions toward reaching a specified financial objective. Rewards are based upon the level of donation, which is referred to as a “pledge,” which is returned if at the end of the campaign the financial objective is not met.
As an example, a $5 pledge to this campaign entitles the donor to “LOVE + THANKS” and a mention on the website. Greater amounts may result in “swag,” including T-shirts, signed posters and even a discounted price on the music player. At the highest level, $5,000, donors receive a “VIP Dinner and Listening Party with Neil Young.”
No doubt that all of these reward have some value, but what they belie is greed.
First, Kickstarter offers a great opportunity for those without ready access to capital and a wonderful means to generate financial support for what may be great projects, products and ideas that would otherwise never see the light of day. Crowd sourcing may be the mechanism by which yet another great American success story is launched without the potential burden of over-bearing and demanding investors worried about their capital investments.
The alternative, the more traditional route is to access capital markets or venture capital and accept the potential liabilities that may come along with those alternatives. Whether that includes the re-payment of business loans or the granting of equity, the price is very tangible, although perhaps necessary and even an indispensable part of the equation.
The novice inventor has little chance to access either of these traditional routes of funding, having neither their own capital nor networks to get a foot in the door. That is where Kickstarter comes in and offers an opportunity to open the doors with very few strings attached other than a token gift of appreciation. That opportunity can make all of the difference for so many, but seems inherently wrong when the ones asking for pledges have infinite avenues available to them and are more likely to find the path to success to be a paved road.
And then there’s Neil Young.
While I’m not privy to his ability to personally finance this laudable project it may be reasonable to believe that through his own resources or through his personal network of contacts he would be able to find the resources necessary to bring this project fully into being. There is, however, scant information on the Kickstarter site as to the earlier backers of this effort.
In the event that there is a gap in funding for additional components of the strategy to bring the enhanced music player to market, there is clearly a downside to going back to original investors. That downside is the need to cede further equity to attract funds. However, the non-traditional route offered by Kickstarter entails none of that need to reduce personal equity. Instead yoou keep it all and pass the costs down to those who get no share in any potential future success.
In this case the objective of the campaign was to raise $800,000 which seems like a small amount, although there’s no indication of just how much has already been invested in the project. That $800,000 threshold was easily surpassed in just the second day of the campaign. In fact, it was more than doubled with more than a month remaining to collect even more.
Like the duo in “The Producers” the campaign can keep collecting as much as it wants because all that needs to be done is to print more T-shirts or sign more posters. As opposed to 100% of the pie the universe of T-shirts is conceivably unlimited and carries no future obligation to any of the donors.
Donors, many of whom, like me, probably already have a large collection of rock and roll T-shirts just love the idea of being associated in perpetuity with one of their favorite rock stars. In that case of the 8300 such items to be given away 5741 potential items still remain with an additional donation value in return of over $2.2 million. Of course, there are also those unlimited donor levels of $5 and $50, because “LOVE AND THANKS” is in eternal supply.
On the other hand, the cynic in me wonders how $800,000, in a project of this size could possibly have made any difference, particularly when access to real investors shouldn’t be a limiting factor. One has to wonder whether the campaign is simply part of an awareness and publicity campaign, as it has certainly already achieved quite a bit of attention in addition to money and helps to create a potential audience for the planned new hardware, made a bit more enticing with donor discounts.
No matter what your opinion this campaign will be an example of the power of crowd sourcing and will serve as a model for others eager to protect their own interests and perhaps drain from the pool of donations available to others less well connected to capital sources.
Too bad, but at least for the artist, if successful, it means hearing his work in the manner in which it was intended. For the donor who received a discount on the player it’s more likely a situation of wondering when he was going to hear the difference and how many washes that T-shirt can endure.
Mar122014
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Daily Market Update – March 12, 2014 (Close) This is getting to the point of becoming more than just simply a dreary week. Today’s final results did nothing to change my opinion even though the bottom line was better. Dreary I can take, but when it’s accompanied by portfolio losses I have a harder time accepting the lack of anything of substance. Even with a better day today I don’t particularly like it when a market has me selling put contracts, even though that’s an indirect expression of bullish sentiment by most standards. Instead, I look at it as a question of “how much worse can things possibly get?” For some stocks, like Walter Energy, the answer is “worse,” although even death may take an occasional break, as it did today. Despite Monday’s comeback late in the session there was no follow through to Tuesday and that day saw lots of large moves that smelled of profit taking. The kind that doesn’t necessarily lead to re-investment, but rather the kind that’s borne out of caution. That lack of substance can also be a call to put something away for a rainy day. This morning’s pre-open trading continued with that mildly negative tone, but has seen in the past few days that kind of non-committal tone can easily become one of surrender even when there’s no news to create conviction, elation or fear. The rest of the day was no different and the rest of this week is essentially devoid of expected news. Too bad, because that creates a situation similar to someone who is should be racked by guilt but finds diversion from daily events suddenly being cast into a desolate room and forced to be alone with his thoughts. Not a pretty sight. Somehow engineers from centuries ago were able to figure out architectural designs that allowed their works to stand up under their own weight. That may be what’s needed now as the market is at such heights that common sense would suggest that some kind of support would be necessary to sustain the heights. Where is the support coming from? Despite that question being a reasonable one to be asked it has been the same reasonable question for much of the rally that we’ve all come to consider the normal state of affairs. While you can make a case that the Federal Reserve was responsible for much of that rally its impact should only decrease unless events convince the FOMC to turn the flow higher. That can’t be a good thing if it ever got to that point, despite the response having potentially positive impacts. Ultimately support can only come from economic news that reflects a growing economy. Unfortunately, with the interconnected nature of the world that also requires similar news coming from other corners of the world, especially China. Looking backward, however, most would agree that markets climb higher during that part of an economic cycle that is in recovery. During such phases relative measures of growth are exaggerated due to the low baselines that receive comparison. By contrast, when improvement becomes truly tangible markets slow down. Then, of course, comes the invariable slow down of growth which is the signal fo If accepting that simplistic summary of economic and market cycles then the best situation is continued economic mediocrity, never quite getting to its potential, with alternating bits of good and bad economic news. Of course, that’s the same scenario whereby a covered option strategy for any particular stock does its best, as well. As usual, I try to see a positive light out of a weaker market. That positive would be increasing volatility and improved option premiums that would also make it easier to use longer term options instead of the weekly variety. What is sometimes difficult is the period of transition. The premiums don’t immediately go higher, especially in the out weeks. Very often you can see just how the options market is predicting the future course of the market by looking at the premiums in successive weeks. Higher than usual weekly premiums with low premiums in more distant weeks tells you if a market that is bearish acutely, but not extending that outlook very far. Barely a month ago that transition seemed to be occurring as the market headed toward a quick 7% decline and even out weeks were beginning to show some premium expansion. but the volatility quickly declined as the correction was stopped dead in its tracks and even more quickly saw its course fully reversed. Today turned put pretty much as expected and was a day of watching to see where the market decided to go at the mid-way mark for the week and planning for dispositions for this and next week monthly cycle expiration. Although I made some trades for my personal account and know that some of you followed in them, I never feel very good about only making personal trades and not any portfolio Trading Alerts. I may re-think some parameters that I use in weighing risk and reward, especially as the market may be more opportune for the use of put contracts, especially as an alternative to “having a child to save a life.” More on that tomorrow, maybe.
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