Monthly Archives: March 2014

Daily Market Update – March 12, 2014 (9:30 AM)

This is getting to the point of becoming more than just simply a dreary week.

Dreary I can take, but when it’s accompanied by portfolio losses I have a harder time accepting the lack of anything of substance.

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 continues 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 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 for markets to reverse direction.

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 al
so 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 may likely be a day of watching to see where the market decides to go at the mid-way mark for the week and planning for dispositions for thi and next week monthly cycle expiration.

Daily Market Update – March 11, 2014 (Close)

It has been about a year, perhaps more, since we had to wake up and actually care how European markets were trading, because they were setting the cue for our own markets.

It’s nice when you’re in control of your own destiny, but that can’t always be the case. Sometimes it’s the weather and sometimes it’s the tanks in Crimea

For the past week that has been the case as markets have very much been reacting to the only story that mattered as it was slowly unfolding in all of its confusion in Ukraine and Crimea. We pretty much followed the European markets in whatever reaction they were having to overnight events that have been more muddled the past few days.

While those markets have set the tone for our own trading that noose is also released once the overseas markets close for trading, which now because of daylight savings time is 12:30 PM. Often that marks a change in our tone and direction.

Yesterday was one of those examples.

Yesterday was also one of those very rare days that we didn’t hit a new closing record, but you couldn’t help notice how nicely the market had acquitted itself in having rallied to nearly create another new record. For those final few minutes of trading it looked as if there may have actually been another new record in hand.

For many that will be a bullish sign and provide renewed confidence. I don’t really see any particular significance to yesterday’s late afternoon rally as long as the market is tied to a singular event and especially when we have no control over that event or its outcome. As NATO may find itself to be directly or indirectly involved in events that control may come a bit over to us. Whether that will benefit markets or not is another issue.

This morning appears to be very much like yesterday as the pre-open is indicating only a mild movement, albeit in the opposite direction this time around.

As it turned out the final 90 minutes of trading turned a mediocre day into a truly terrible one. While the net loss wasn’t really that big by any standard the behavior of companies was reminiscent of profit taking, which makes me think that those are actions that serve as a prelude.

I always get concerned when I see a big discrepancy between the Dow Jones and the S&P 500. Today was one of those days, although a big piece of that discrepancy was related to McDonalds’ performance, which really stood out.

With a few new positions opened yesterday there appeared to still be room for more to bring cash down to last week’s levels, but I’m not certain that there’s enough clarity to dig into the cash reserves beyond simply spending what was recovered through last week’s assignments, although the pre-opening trading is often no indication of how individual stocks will perform once the real trading begins.

While there are often notable movers in the pre-open based on some event driven news, such as earnings or analyst ratings, most others quietly go about their way never really waving a flag to get your attention.

This morning looked to be one of those likely mornings that the upgrades had already created the clear winners, at least for the day and the others are just taken along for whatever ride the market is taking as it awaits direction from overseas.

In hindsight there wasn’t even enough clarity to add a single new position today as the market went into its selling mode with absolutely no reason.

Of course, there will be those blaming rising 10 Year Treasury rates and those talking about international uncertainty. There will be others pointing to some technical factors and others who will blame earnings, but objectively speaking, there was nothing to blame.In a way it makes me look forward to just a few weeks from now when the next earnings season is about to begin. At least then there may be reason for the market to  respond to what its component pieces are experiencing especially once the excuse of weather has been discounted and exhausted.

For this morning, as for the past month or so, I waited for the early morning shake out to see what direction the market would takes, as there have been many reversals of late and false indications of forward momentum, in particular. It would have been better to have waited for the closing bell to make any decisions.

In the meantime, I can at least count the day’s dividends that came in. I almost forgot about them and I do like surprises, but not like today’s.

PS: If you didn’t see yesterday’s “Close” edition of the Daily Market Update, here’s a re-print of the addendum:

For those surprised, or even shocked that your Kohls shares weren’t assigned early (and you were in the vast majority), it’s all a question of pennies and time.

Had these shares gone ex-dividend last Friday on a March 7, 2014 option or perhaps this Thursday with a March 14, 2014 option, those shares closing at $55.45 and offering a $0.39 dividend, would have been well above the threshold price of $54.89. That price represents the minimal price at which a break-even could be obtained if the option holder chose to exercise early. That break-even analysis, however covers neither the original cost to buy the option nor the commissions. In such a case, with very little time value left on the option it would have been better for the option holder to exercise early and then immediately sell shares the following morning, collecting any profit on shares and the dividend.

However, look at the situation of Kohls which went ex-dividend on a Monday and still had 5 days of time value left in the option premium.

Shares opened trading this morning at $54.90. For an option buyer who exercised his contract and took possession of shares he had to lay out $5450 to exercise. If he was able to immediately sell his shares he would have pocketed a $0.40 profit on shares and a $0.39 dividend, for a total of $0.79. Of course, you would then have to subtract the cost of the option he bought to actually calculate his net.

However, if instead he elected to sell his option contract at either Friday’s close or Monday’s open he would have gotten $0.85 for his efforts. Not only is that $0.06 more than if he would have exercised, but it was also without assuming the risk of owning shares, even if only for 10 seconds after the pre-open started trading on Monday. Professionals, or those holding large positions are going to be much more likely to take the certain profit rather than the risk and the large outlay of assets to exercise.

For the rational individual investor option buyer who was otherwise bullish on shares, they would have held onto their option in the belief that there was greater opportunity to trade it during the course of the coming week than to own shares and collect the dividend. Certainly it would require no additional need to tie up cash. For the bearish holder of an option contract the appeal of holding shares isn’t there, so they, too, are less inclined to exercise early. If anything, if they are bearish on shares they will move quickly to close their option position in order to squeeze out and keep any premium that may be left.

Those most likely to consider an early exercise would be those that had bought such option contracts at at a point that shares were well below the $54.50 strike and therefore were very inexpensive to buy. However, there would likely be very few of those original low cost option buyers remaining because the real profits would have come in selling their contracts during the course of Kohls‘ rise, that on a percentage basis would have brought them far greater profits due to leveraging than owning shares and collecting a dividend ever would.

So who then is left to exercise early? Anyone bullish on shares and recognizing that in a low volatility environment their option contract  growth in premium would be limited by its upcoming expiration might consider early exercise, although the majority of those would more likely roll over their optio
n contracts to a future week in the belief that greater share gains are to come.

There are also those that had intended to exercise shares anyway as it came upon its expiration date, because they wanted to own shares at the specified price. Instead of waiting 5 days why not take possession early and also get the dividend?

And finally, there are always an irrational few.

As in a game of blackjack you really don’t want to have an irrational player in the game even though there’s a chance that their actions will be to your benefit. That kind of wild card in the game just isn’t worth it and reduces the impact of your own skill set.

If I were to give homework assignments I would ask you to then explain why some people didn’t have their AIG shares assigned early on Friday morning when shares closed well above the threshold on Thursday.

Daily Market Update – March 11, 2014 (9:30 AM)

It has been about a year, perhaps more, since we had to wake up and actually care how European markets were trading, because they were setting the cue for our own markets.

It’s nice when you’re in control of your own destiny, but that can’t always be the case. Sometimes it’s the weather and sometimes it’s the tanks in Crimea

For the past week that has been the case as markets have very much been reacting to the only story that mattered as it was slowly unfolding in all of its confusion in Ukraine and Crimea. We pretty much followed the European markets in whatever reaction they were having to overnight events that have been more muddled the past few days.

While those markets have set the tone for our own trading that noose is also released once the overseas markets close for trading, which now because of daylight savings time is 12:30 PM. Often that marks a change in our tone and direction.

Yesterday was one of those examples.

Yesterday was also one of those very rare days that we didn’t hit a new closing record, but you couldn’t help notice how nicely the market had acquitted itself in having rallied to nearly create another new record. For those final few minutes of trading it looked as if there may have actually been another new record in hand.

For many that will be a bullish sign and provide renewed confidence. I don’t really see any particular significance to yesterday’s late afternoon rally as long as the market is tied to a singular event and especially when we have no control over that event or its outcome. As NATO may find itself to be directly or indirectly involved in events that control may come a bit over to us. Whether that will benefit markets or not is another issue.

This morning appears to be very much like yesterday as the pre-open is indicating only a mild movement, albeit in the opposite direction this time around.

With a few new positions opened yesterday there’s still room for more to bring cash down to last week’s levels, but I’m not certain that there’s enough clarity to dig into the cash reserves beyond simply spending what was recovered through last week’s assignments, although the pre-opening trading is often no indication of how individual stocks will perform once the real trading begins.

While there are often notable movers in the pre-open based on some event driven news, such as earnings or analyst ratings, most others quietly go about their way never really waving a flag to get your attention.

This may likely be one of those mornings as the upgrades have already created the clear winners, at least for the day and the others are just taken along for whatever ride the market is taking as it awaits direction from overseas.

In a way it makes me look forward to just a few weeks from now when the next earnings season is about to begin. At least then there may be reason for the market to  respond to what its component pieces are experiencing especially once the excuse of weather has been discounted and exhausted.

For this morning, as for the past month or so, I’ll be waiting for the early morning shake out to see what direction the market takes, as there have been many reversals of late and false indications of forward momentum, in particular.

In the meantime, I can at least count the day’s dividends that came in. I almost forgot about them and I do like surprises.

PS: If you didn’t see yesterday’s “Close” edition of the Daily Market Update, here’s a re-print of the addendum:

For those surprised, or even shocked that your Kohls shares weren’t assigned early (and you were in the vast majority), it’s all a question of pennies and time.

Had these shares gone ex-dividend last Friday on a March 7, 2014 option or perhaps this Thursday with a March 14, 2014 option, those shares closing at $55.45 and offering a $0.39 dividend, would have been well above the threshold price of $54.89. That price represents the minimal price at which a break-even could be obtained if the option holder chose to exercise early. That break-even analysis, however covers neither the original cost to buy the option nor the commissions. In such a case, with very little time value left on the option it would have been better for the option holder to exercise early and then immediately sell shares the following morning, collecting any profit on shares and the dividend.

However, look at the situation of Kohls which went ex-dividend on a Monday and still had 5 days of time value left in the option premium.

Shares opened trading this morning at $54.90. For an option buyer who exercised his contract and took possession of shares he had to lay out $5450 to exercise. If he was able to immediately sell his shares he would have pocketed a $0.40 profit on shares and a $0.39 dividend, for a total of $0.79. Of course, you would then have to subtract the cost of the option he bought to actually calculate his net.

However, if instead he elected to sell his option contract at either Friday’s close or Monday’s open he would have gotten $0.85 for his efforts. Not only is that $0.06 more than if he would have exercised, but it was also without assuming the risk of owning shares, even if only for 10 seconds after the pre-open started trading on Monday. Professionals, or those holding large positions are going to be much more likely to take the certain profit rather than the risk and the large outlay of assets to exercise.

For the rational individual investor option buyer who was otherwise bullish on shares, they would have held onto their option in the belief that there was greater opportunity to trade it during the course of the coming week than to own shares and collect the dividend. Certainly it would require no additional need to tie up cash. For the bearish holder of an option contract the appeal of holding shares isn’t there, so they, too, are less inclined to exercise early. If anything, if they are bearish on shares they will move quickly to close their option position in order to squeeze out and keep any premium that may be left.

Those most likely to consider an early exercise would be those that had bought such option contracts at at a point that shares were well below the $54.50 strike and therefore were very inexpensive to buy. However, there would likely be very few of those original low cost option buyers remaining because the real profits would have come in selling their contracts during the course of Kohls‘ rise, that on a percentage basis would have brought them far greater profits due to leveraging than owning shares and collecting a dividend ever would.

So who then is left to exercise early? Anyone bullish on shares and recognizing that in a low volatility environment their option contract  growth in premium would be limited by its upcoming expiration might consider early exercise, although the majority of those would more likely roll over their option contracts to a future week in the belief that greater share gains are to come.

There are also those that had intended to exercise shares anyway as it came upon its expiration date, because they wanted to own shares at the specified price. Instead of waiting 5 days why not take possession early and also get the dividend?

And finally, there are always an irrational few.

As in a game of blackjack you really don’t want to have an irrational player in the game even though there’s a chance that their actions will be to your benefit. That kind of wild card in the game just isn’t worth it and reduces the impact of your own skill set.

If I were to give homework assignments I would ask you to then explain why some people didn’t have their AIG shares assigned early on Friday morning when shares closed well above the threshold on Thursday.

Daily Market Update – March 10, 2014 (Close)

Even though I know that hoping for something to happen doesn’t have as much power as I might like, that doesn’t stop me from continuing the process.

Following weeks in which I’ve had a fair number of assignments my hope is usually for a lower open on Monday and maybe finding an opportunity to pick up some replacement positions as they’re (hopefully) on temporary bargain status.

The pre-open trading to begin the week looks as if it’s going to offer one of those opportunities, which haven’t been very frequent, but weighing on the markets is still the situation in Crimea.

As it would turn out the market was down the entire day, but well off of its lows as there really wasn’t any news to confuse things today.

While there’s not likely to be a substantive longer term impact from most likely outcomes from the area, there’s no doubt that a short term impact can easily come and it can come with  no notice. Rarely is there the simple courtesy of being given advanced notice, although after the fact many will point to the signs that predicted the unpredictable.

Looking at the mildly declining prices that appear set to begin the trading week it makes me wonder more than usual whether they represent an opportunity or a trap. Either of those is only possible when you have spare money in hand, so there may be advantages to not being burdened with that state of liquidity.

There’s no doubt that erring on the side of caution has exacted its own price as we celebrate the 5th year of the inflection point as the market turned around from its 2009 lows. Pardon me for mixing Latin and French phraseology, but It has really been as if Mardi Gras’ sine quo non expression “Laissez les bons temps rouler,” has been in force non-stop since then. Having been to New Orleans on multiple occasions no one can keep up that level for more than a few days, but the market has done so for 5 years.

Whatever cautionary note may be struck today could easily have been struck a year ago, which is about the time that I started feeling the need to develop cash reserves and the related need to spend down those cash reserves.

In addition to continuing concern over events there is new news from China that their economy isn’t as strong as we had recently believed it to be, after already having factored in a less robust economy. Japan wasn’t much better, but our expectations there have been low for 20 years.

So with the week starting with expressions of economic weakness and continued international uncertainty, I’m less inclined to spend money this Monday morning as I would have anticipated while tallying the previous week’s results just a few days ago.

This is another week that has a number of positions going ex-dividend and already has a good representation of positions with contracts expiring. Hopefully, some of those positions will be assigned and others rolled over to keep the process going and going.

But because of some concern about the potential for weakness this week there may be reason to look for expirations next week or even further for any new purchases considered. Of course, that is still tempered by the realization that time isn’t as valuable as it used to be back in the good old days when volatility was a reliable partner in creating profits. Sometimes when looking at the paltry marginal premium rece
ived for each additional week of time it’s difficult to justify tying up a position when the past 5 years has shown a market that just proceeds higher.

I’m currently at approximately 42% cash and was willing to get down to 25%. I don’t believe that I’m now willing to get to that level and will again try to focus on lower beta, and where available, dividend paying positions, for the week.

As always, events and sentiments can and do change so quickly.

Hopefully, they will.

PS: For those surprised, or even shocked that your Kohls shares weren’t assigned early (and you were in the vast majority), it’s all a question of pennies and time.

Had these shares gone ex-dividend last Friday on a March 7, 2014 option or perhaps this Thursday with a March 14, 2014 option, those shares closing at $55.45 and offering a $0.39 dividend, would have been well above the threshold price of $54.89. That price represents the minimal price at which a break-even could be obtained if the option holder chose to exercise early. That break-even analysis, however covers neither the original cost to buy the option nor the commissions. In such a case, with very little time value left on the option it would have been better for the option holder to exercise early and then immediately sell shares the following morning, collecting any profit on shares and the dividend.

However, look at the situation of Kohls which went ex-dividend on a Monday and still had 5 days of time value left in the option premium.

Shares opened trading this morning at $54.90. For an option buyer who exercised his contract and took possession of shares he had to lay out $5450 to exercise. If he was able to immediately sell his shares he would have pocketed a $0.40 profit on shares and a $0.39 dividend, for a total of $0.79. Of course, you would then have to subtract the cost of the option he bought to actually calculate his net.

However, if instead he elected to sell his option contract at either Friday’s close or Monday’s open he would have gotten $0.85 for his efforts. Not only is that $0.06 more than if he would have exercised, but it was also without assuming the risk of owning shares, even if only for 10 seconds after the pre-open started trading on Monday. Professionals, or those holding large positions are going to be much more likely to take the certain profit rather than the risk and the large outlay of assets to exercise.

For the rational individual investor option buyer who was otherwise bullish on shares, they would have held onto their option in the belief that there was greater opportunity to trade it during the course of the coming week than to own shares and collect the dividend. Certainly it would require no additional need to tie up cash. For the bearish holder of an option contract the appeal of holding shares isn’t there, so they, too, are less inclined to exercise early. If anything, if they are bearish on shares they will move quickly to close their option position in order to squeeze out and keep any premium that may be left.

Those most likely to consider an early exercise would be those that had bought such option contracts at at a point that shares were well below the $54.50 strike and therefore were very inexpensive to buy. However, there would likely be very few of those original low cost option buyers remaining because the real profits would have come in selling their contracts during the course of Kohls’ rise, that on a percentage basis would have brought them far greater profits due to leveraging than owning shares and collecting a dividend ever would.

So who then is left to exercise early? Anyone bullish on shares and recognizing that in a low volatility environment their option contract  growth in premium would be limited by its upcoming expiration might consider early exercise, although the majority of those would more likely roll over their option contracts to a future week in the belief that greater share gains are to come.

There are also those that had intended to exercise shares anyway as it came upon its expiration date, because they wanted to own shares at the specified price. Instead of waiting 5 days why not take possession early and also get the dividend?

And finally, there are always an irrational few.

As in a game of blackjack you really don’t want to have an irrational player in the game even though there’s a chance that their actions will be to your benefit. That kind of wild card in the game just isn’t worth it and reduces the impact of your own skill set.

If I were to give homework assignments I would ask you to then explain why some people didn’t have their AIG shares assigned early on Friday morning when shares closed well above the threshold on Thursday.

Daily Market Update – March 10, 2014 (9:30 AM)

Even though I know that hoping for something to happen doesn’t have as much power as I might like, that doesn’t stop me from continuing the process.

Following weeks in which I’ve had a fair number of assignments my hope is usually for a lower open on Monday and maybe finding an opportunity to pick up some replacement positions as they’re (hopefully) on temporary bargain status.

The pre-open trading to begin the week looks as if it’s going to offer one of those opportunities, which haven’t been very frequent, but weighing on the markets is still the situation in Crimea.

While there’s not likely to be a substantive longer term impact from most likely outcomes from the area, there’s no doubt that a short term impact can easily come and it can come with  no notice. Rarely is there the simple courtesy of being given advanced notice, although after the fact many will point to the signs that predicted the unpredictable.

Looking at the mildly declining prices that appear set to begin the trading week it makes me wonder more than usual whether they represent an opportunity or a trap. EIther of those is only possible when you have spare money in hand, so there may be advantages to not being burdened with that state of liquidity.

There’s no doubt that erring on the side of caution has exacted its own price as we celebrate the 5th year of the inflection point as the market turned around from its 2009 lows. Pardon me for mixing Latin and French phraseology, but It has really been as if Mardi Gras’ sine quo non expression “Laissez les bons temps rouler,” has been in force non-stop since then. Having been to New Orleans on multiple occasions no one can keep up that level for more than a few days, but the market has done so for 5 years.

Whatever cautionary note may be struck today could easily have been struck a year ago, which is about the time that I started feeling the need to develop cash reserves and the related need to spend down those cash reserves.

In addition to continuing concern over events there is new news from China that their economy isn’t as strong as we had recently believed it to be, after already having factored in a less robust economy. Japan wasn’t much better, but our expectations there have been low for 20 years.

So with the week starting with expressions of economic weakness and continued international uncertainty, I’m less inclined to spend money this Monday morning as I would have anticipated while tallying the previous week’s results just a few days ago.

This is another week that has a number of positions going ex-dividend and already has a good representation of positions with contracts expiring. Hopefully, some of those positions will be assigned and others rolled over to keep the process going and going.

But because of some concern about the potential for weakness this week there may be reason to look for expirations next week or even further for any new purchases considered. Of course, that is still tempered by the realization that time isn’t as valuable as it used to be back in the good old days when volatility was a reliable partner in creating profits. Sometimes when looking at the paltry marginal premium received for each additional week of time it’s difficult to justify tying up a position when the past 5 years has shown a market that just proceeds higher.

I’m currently at approximately 42% cash and was willing to get down to 25%. I don’t believe that I’m now willing to get to that level and will again try to focus on lower beta, and where available, dividend paying positions, for the week.

As always, events and sentiments can and do change so quickly.

Hopefully, they will.