Weekend Update – June 1, 2014

I read an excellent article by Doug Kass yesterday. Most of all it explained the origin and definition of the expression “Minsky Moment” that had suddenly come into vogue and received frequent mention late this past week.

I enjoy Kass’ perspectives and opinions and especially admire his wide range of interests and willingness to state his positions without spinning reality to conform to a fantasy.

Perhaps it was no coincidence that the expression was finding its way back to use as Paul McCulley, late of PIMCO, who had coined the phrase, was being re-introduced to the world as the newest PIMCO employee, by a beaming Bill Gross.

The basic tenet in the Kass article was that growing complacency among investors could lead to a Minsky Moment. By definition that is a sudden collapse of asset values which had been buoyed by speculation and the use of borrowed money, although that didn’t appear to be the basis for the assertion that investors should prepare for a Minsky Moment.

Kass, however, based his belief in the possibility of an impending Minsky Moment on the historically low level of market volatility, which he used as a proxy for complacency. In turn, Kass simply stated that a Minsky Moment “sometimes occurs when complacency sets in.”

You can argue the relative foundations of those suppositions that form the basis for the belief that it may be opportune to prepare for a Minsky Moment. Insofar as it is accurate to say that sometimes complacency precedes a Minsky Moment and that volatility is a measure of complacency, then perhaps volatility is an occasional predictor of a sudden and adverse market movement.

Volatility is a complex concept that has its basis in a purely statistical and completely unemotional measure of dispersion of returns for an investment or an index. However, it has also been used as a reflection of investor calm or anxiety, which as far as I know has an emotional component. Yet volatility is also used by some as a measure the expectation of a large movement in one direction or another.

Right now, the low volatility indicates that there has been little dispersion of price, or put another way there has been very little variation in price in the recent past. Having gone nearly 2 years without a 10% correction most would agree, without the need for statistical analysis, that the variation in stock price has been largely in a single direction.

However, few will argue that volatility is a forward looking measure.

Kass noted that “fueled by new highs and easy money, market observers are now growing more optimistic.”

Coincidentally enough, on the day before the Kass article appeared, I wrote in my Daily Market Update about complacency and compared it to the 1980s and 2007.

Of course, that was done through the lens of an individual investor with money on the line and not a “market observer.”

While I’m very mindful of volatility, especially as low volatility drives down option premiums, it doesn’t feel as if the historic low volatility is reflective of individual investor complacency. In fact, even among those finding the limelight, there is very little jumping up and down about the market achieving new daily highs. The feeling of invincibility is certainly not present.

Anyone who remembers 1987 will recall that there was a 5 year period when we didn’t know the meaning of a down market. Complacency is when you have a certain smugness and believe that things will only go your way and risk is perceived to be without risk.

Anyone who remembers 2007 will also recall how bored we became by new daily record highs, almost as if they were entitlements and we just expected that to keep being the new norm.

I don’t know of many that feel the same way now. What you do hear is that this is the least liked and respected rally of all time and the continuing expectation for some kind of reversal.

That doesn’t sound like complacency.

While the Volatility Index may be accurately portraying market prices that have demonstrated little variation over a finite time frame, I don’t believe that it remotely reflects individual investor sentiment.

As opposed to earlier times when new market highs were seen as preludes to even greater rewards you may be hard pressed to find those who believe that the incremental reward actually exceeds the risk of pursuing that reward.

Put me in that latter camp.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.

One stock that I really haven’t liked very much has been Whole Foods (WFM). I say that only because it has consistently been a disappointment for me and has reflected my bad market timing. WHile I often like to add shares in positions that are showing losses and using a “Having a Child to Save a Life” strategy, I’ve resisted doing so with Whole Foods.

However, it finally seems as if the polar vortex is a thing of the past and the market has digested Whole Foods’ expansion and increased cap-ex and its strain on profits. But that’s a more long term perspective that I rarely care about. Instead, it appears as if shares have finally found a floor or at least some stability. At least enough so to consider trying to generate some income from option sales and perhaps some capital gains on the underlying shares, as well, as I believe there will be some progress toward correcting some of its recent price plunge.

Mosaic (MOS) which goes ex-dividend th
is week is one stock that I’ve been able to attenuate some of the pain related to its price drop upon news of the break-up of the potash cartel, through the use of the “Having a Child to Save a Life” strategy. Shares have slowly and methodically worked their way higher since that unexpected news, although have seen great resistance at the $50 level, where it currently trades.

While I don’t spend too much time looking at charts, Mosaic, if able to push past that resistance may be able to have a small gap upward and for that reason, if purchasing shares, I’m not likely to write calls on the entire position, in anticipation of some capital gain on shares, in addition to the dividend and option premiums.

Holly Frontier (HFC) also goes ex-dividend this week. Like so many stocks that I like to consider, it has been recently trading in a range and has occasional paroxysms of price movement. Those quick and unpredictable moves keep option premiums enticing and its tendency to restrict its range have made it an increasingly frequent target for purchase. It is currently trading near the high of my comfort level, but that can be said about so many stocks at the moment, as they rotate in and out of favor with one another, as the market reaches its own new highs.

Lowes (LOW) us one of those companies that must have a strong sense of self-worth, as it is always an also-ran to Home Depot (HD) in the eyes of analysts, although not always in the eyes of investors. It, too, seems to now be trading in a comfortable range, although that range has been recently punctuated by some strong and diverse price moves which have helped to maintain the option premiums, despite overall low market volatility.

MasterCard (MA) was one of the early casualties I experienced when initially beginning to implement a covered call strategy. I never thought that it would soar to the heights that it did and my expectations for it to drop a few hundred points just never happened, unless you don’t understand stock splits.

For some reason, while Apple (AAPL) shares never seemed too expensive for purchase, MasterCard did feel that way to me although at its peak it wasn’t very much higher than Apple at its own peak. Also, unlike Apple which will start trading its post-split shares this week, that split isn’t likely to induce me to purchase shares, while the split in MasterCard was a welcome event and re-introduced me to ownership.

With a theme of trading in a range and having its price punctuated by significant moves, MasterCard has been a nice covered option trade and I would be welcome to the possibility of re-purchasing shares after a recent assignment. With some of the uncertainty regarding its franchise in Russia now resolved and with the hopes that consumer discretionary spending will increase, MasterCard is a proverbial means to print money and generate option income.

I was considering the purchase of shares of Joy Global (JOY) on Friday and the sale of deep in the money weekly calls in the hope that the shares would be assigned early in order to capture its dividend, as Friday would have been the last day to have done so. That would have prevented exposure to the coming week’s earnings release.

Instead, following a nearly 2% price drop I decided to wait until Monday, foregoing the modest dividend in the hope that a further price drop would occur before Thursday’s scheduled earnings.

With its reliance on Chinese economic activity Joy Global may sometimes offer a better glimpse into the reality of that nation that official data. With its share price down approximately 6% in the past month and with my threshold 1% ROI currently attainable at a strike level that is outside of the lower boundary defined by the implied move, the sale of put contracts may have some appeal.

If there may be a poster child for the excesses of a market that may perhaps be a sign of an impending Minsky Moment, salesforce.com (CRM) should receive some consideration. Although there are certainly other stocks that have maintained a high profile and have seen their fortunes wax and wane, salesforce.com seems to go out of its way to attract attention.

Following a precipitous recent decline in price over the past few days shares seemed to be on the rebound. This past Friday morning came word of an alliance with Microsoft (MSFT), a company that salesforce.com’s CEO, Marc Benioff, has disparaged in the past.

While that alliance still shouldn’t be surprising, after all, it is all about business and personal conflict should take a back seat to profits, what was surprising was that the strong advance in the pre-open trading was fairly quickly reversed once the morning bell was rung.

With a sky high beta, salesforce.com isn’t a prime candidate for consideration at a time when the market itself may be at a precipice. However, for those with some room in the speculative portion of their portfolio, the sale of puts may be a reasonable way to participate in the drama that surrounds this stock. However, I would be inclined to consider rolling over put options in the event that assignment looks likely, rather than accepting assignment.

Finally, everyone seems to have an opinion about Abercrombie and Fitch (ANF). Whether its the actual clothing, the marketing, the abhorrent behavior of its CEO or the stock, itself, there’s no shortage of material for casual conversation. Over the past two years it has been one of my most frequent trades and has sometimes provided some anxious moments, as it tends to have price swings on a regular basis.

Abercrombie reported earnings last week and I had sold puts in anticipation. Unlike most times when I sell puts my interest is not in potentially owning shares at a lower price, but rather to simply generate an option premium and then hopefully move on without shares nor obligation. However, in the case of Abercrombie, if those put contracts were to have fallen below their strike levels, I was prepared to take delivery of shares.

While rolling over such puts would have been a choice, Abercrombie does go ex-dividend this week and its ability to demonstrate price recovery and essentially arise from ashes it fairly well demonstrated.

My preference would have been that Abercrombie had a mild post-earnings
loss, as it is near the higher end of where i would consider a purchase, but it’s an always intriguing and historically profitable position, despite all of the rational reasons to run fro ownership of shares.

Traditional Stocks: Lowes, MasterCard, Whole Foods

Momentum: salesforce.com

Double Dip Dividend: Abercrombie and Fitch (6/3), Holly Frontier (6/4), Mosaic (6/3),

Premiums Enhanced by Earnings: Joy Global (6/5 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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Week in Review – May 26 – 30, 2014

 

Option to Profit Week in Review
May 26 – 30,  2014
 
NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
3 / 4 4 6 1  / 1 1  / 0 0

    

Weekly Up to Date Performance

May 26 – 30, 2014 

New purchases for the week beat the unadjusted S&P 500 by 0.7% and surpassed the adjusted index by 1.2%

The market finished higher for the second consecutive week and set new closing records for three of the four trading days, but doid so without any real euphoria. New positions were 1.9% higher whole the overall market was up 1.2% on an unadjusted basis. 

Performance of positions closed in 2014 continue to out-perform the S&P 500 performance by 1.6%. They were up 3.2% out-performing the market by 99.2%. 

More records this week, yet with little excitement or buzz.

Earlier this week I showed a graphic that looked at the S&P 500 march higher contrasted with the number of new stock highs. Most everyone who follows that latter metric tells you that when it is going higher it is reflective of a broadly advancing market and a very bullish sign. They also look at the drop in new highs as a bearish signal.

No wonder that people aren’t jumping up and down while the market moves higher. The number of new highs is declining when it should be moving higher, reflecting the very selective and fleeting nature of the advance in individual stocks.

I was among those not terribly thrilled with the performance this week, despite being happy with the new positions opened and the ability to rollover positions and sell new cover on existing positions.

I was also happy with the dividends coming in this week and the way in which positions are set up to receive dividends next week, as well, but would have liked to have seen more assignments.

There were actually relatively few positions expiring this week and happily none expired worthless, all either being rolled over or assigned.

However, the overall performance of the portfolio was lacking this week, predominantly as a result of continued weakness in the commodities sector. It remains hard for me to understand how an economy can be perceived as improving if the very basic building blocks necessary for the growth or maintenance of infrastructure isn’t participating.

Of course the downward revision of GDP earlier this week sent a message that growth wasn’t all its been cracked up to be, but the polar vortex is catching that blame, in the assumption that lost opportunities will be re-captured in coming quarters.

I don’t know, but the kind of thoight that it takes to parse all of that information is well above my pay grade.

Next week has some potential hurdles including lots of attention being focused on European interest rates and our own Employment Situation report. In addition to those is also Monday’s ISM, which recently has recently been weak and has caused the market to hiccough a bit.

While this past week wasn’t as busy trading as was the previous week, I think it would qualify as a busy week at this time next Friday. I’m not expecting to be overly active next week although I certainly wouldn’t want to be left out if the party, even if somewhat muted, continues.

With some replenishment of cash reserves, although not too much, and with a number of rollovers having generated the coming week’s income, there is a buffer that allows the resistance to spending down cash in the coming week.

I continue to want to see uncovered positions earn their keep and have that as a priority over adding new positions for the purposes of creating weekly income streams. The past few weeks have been good in getting some laggards contribute, but there’s much more to be done in that regard.

Coming off all of these highs I’m now increasingly reminded of 2007 when the market setttled in and just went higher every day to the point that people actually seemed to believe that new closing records on a daily basis was an entitlement.

The big difference is that there wasn’t really any sense of nervousness back then. Fortunately, we have that sense of nervousness now and it acts as a sort of Freudian “ego” that may prevent us from doing anything really stupid or that might have long term adverse consequences.

 







 

     

This week’s details may be seen in the Weekly Performance spreadsheet * or in the PDF file, as well as as in the summary.below

(Note: Duplicate mention of positions reflects different priced lots):



New Positions Opened:  EBAY, GME, GPS, SBGI

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycle: EBAY, JPM, LOW, MET

Calls Rolled over, taking profits, into extended weekly cyclePFE (6/13)

Calls Rolled over, taking profits, into the monthly cycle:  none

Calls Rolled Over, taking profits, into a future monthly cycle: RIG

Calls Rolled Up, taking net profits into same cyclenone

New STO:  BMY (6/6), FDO (6/6), JPM (5/30), WY (6/21)

Put contracts expiredANF

Put contract rolled over: none

Long term call contracts sold:  none

Calls Assigned:   LLY

Calls Expired:   none

Puts Assigned:  none

Stock positions Closed to take profits:  none

Stock positions Closed to take losses: none

Calls Closed to Take Profits: none

Ex-dividend Positions:  RIG (5/28 $0.75), SBGI (5/28 $0.15), HFC (5/28 $0.50 Special Dividend)

Ex-dividend Positions Next Week:  GME (6/2 $0.33), MOS (6/3 $0.25), COH (6/4 $0.34), GM (6/6 $0.30), HFC (6/4 $0.32)

 

 

For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, BX, C, CLF, COH, DRIFCX, GM, JCP, LULU, MCP, MOS,  NEM, PBR ,RIG, TGT, WFM, WLT (See “Weekly Performance” spreadsheet or PDF file)



* If you don’t have a program to read or modify spreadsheets, you can download the OpenOffice Suite at no cost.



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Daily Market Update – May 30, 2014

 

 

Daily Market Update – May 30, 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:

 

Assignment:

RolloverJPM, LLY, PFE

ExpirationANF (puts), EBAY

 

Trades, if any, will be attempted to be made prior to 3:30 PM EDT

 

 

 

 

 

 

 

 





  

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Daily Market Update – May 29, 2014 (Close)

 

 

Daily Market Update – May 29, 2014 (Close)

Hard to believe that the morning wasn’t faced with the challenge of having to add to another previous day’s closing high.

With volatility so low and now even precious metals testing some resistance levels the thought that comes to mind is the inescapable reality that cycles rule everything in economics. It’s just the onset, length and magnitude of those cycles that are hard to divine.

With some occasional brief and shallow interruptions this has been a 5 year cycle that appears to have a slowing acceleration as it continues to move higher.

But don’t tell that to the market which decided to take a mediocre day trading and turn it around in the final minutes.

If you can’t stand the suspense, there was another new high set in the S&P 500 when it was all over for the day.

At the same time all of the fears surrounding the impact of the 10 Year Treasury rates on equities have been unfounded as even the direction of rates has been missed. First the fears focused on the rate approaching 3%, barely a couple of months ago and now the fears have followed the rate from 2.75% to 2.5% and still, nothing. The market just goes higher despite the well reasoned theories on why it should not do so.

For the rest of the week there is plenty of economic news scheduled to be released but none of it likely to move the needle very much as we’re on target to have a second consecutive week of gains.

Even the large revision in the GDP really did little to unsettle the market, whereas in a past era it would have sent it tumbling.

The big difference between setting record after record today versus 5 years ago or in the 1980s is that there isn’t the same kind of complacency. Back then there was often a belief that regardless of the investment it was bound to go higher, if only because it would be carried along with the rest of the market.

By and large that was true for certain times over the past 25 years and the complacency was justified until it wasn’t.

Sometimes the loss of justification came suddenly and caught most everyone by surprise, while at other times that lack of justification came with fair warning that was frequently ignored.

This time around the complacency isn’t there because the market has been very selective. Even while it moves higher and higher not all are taken for the ride and there appears to be much more sector rotation than ever, perhaps accounting for a divergence between the new market highs and the number of stocks in the new daily highs list.

Common sense would tell you that if the market, which is nothing more than the sum of its component parts keeps going higher its component pa
rts must, as well. The fact that the number of stocks on new highs list is decreasing is telling of  the fleeting strength of individual positions, which may in part explain why the vast majority of hedge funds are trailing the market index.

I suppose that those may be concerns for next week.

For this week there aren’t too many positions set to expire, but I’m hoping that there is again a nice mix of assignments and rollovers, much as was the case last week.

The early market indication was for a flat open and if that is sustained through tomorrow’s close that would be just fine and create the right frame of mind to deal with all of those future concerns, even though it paradoxically must bring us closer to an inevitable top.

 

 

 

 

 





  

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Daily Market Update – May 29, 2014

 

 

Daily Market Update – May 29, 2014 (8:30 AM)

Hard to believe that the morning isn’t faced with the challenge of having to add to another previous day’s closing high.

With volatility so low and now even precious metals testing some resistance levels the thought that comes to mind is the inescapable reality that cycles rule everything in economics. It’s just the onset, length and magnitude of those cycles that are hard to divine.

With some occasional brief and shallow interruptions this has been a 5 year cycle that appears to have a slowing acceleration as it continues to move higher.

At the same time all of the fears surrounding the impact of the 10 Year Treasury rates on equities have been unfounded as even the direction of rates has been missed. First the fears focused on the rate approaching 3%, barely a couple of months ago and now the fears have followed the rate from 2.75% to 2.5% and still, nothing. The market just goes higher despite the well reasoned theories on why it should not do so.

For the rest of the week there is plenty of economic news scheduled to be released but none of it likely to move the needle very much as we’re on target to have a second consecutive week of gains.

The big difference between setting record after record today versus 5 years ago or in the 1980s is that there isn’t the same kind of complacency. Back then there was often a belief that regardless of the investment it was bound to go higher, if only because it would be carried along with the rest of the market.

By and large that was true for certain times over the past 25 years and the complacency was justified until it wasn’t.

Sometimes the loss of justification came suddenly and caught most everyone by surprise, while at other times that lack of justification came with fair warning that was frequently ignored.

This time around the complacency isn’t there because the market has been very selective. Even while it moves higher and higher not all are taken for the ride and there appears to be much more sector rotation than ever, perhaps accounting for a divergence between the new market highs and the number of stocks in the new daily highs list.

Common sense would tell you that if the market, which is nothing more than the sum of its component parts keeps going higher its component parts must, as well. The fact that the number of stocks on new highs list is decreasing is telling of  the fleeting strength of individual positions, which may in part explain why the vast majority of hedge funds are trailing the market index.

I suppose that those may be concerns for next week.

For this week there aren’t too many positions set to expire, but I’m hoping that there is again a nice mix of assignments and rollovers, much as was the case last week.

The early market indication is for a flat open and even if that is sustained through tomorrow’s close that would be just fine and create the right frame of mind to deal with all of those future concerns.

 

 

 

 

 





  

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Daily Market Update – May 28, 2014 (Close)

 

 

Daily Market Update – May 28, 2014 (Close)

Another new high.

Of course, that was in reference to yesterday. Today it was almost more of the same, but for the bulls out there, you can add the qualifier “barely missed.”

It’s said that the title to the movie “Annie Hall” was derived from “anhedonia,” which refers to the inability to experience pleasure.

While I don’t mind seeing all of these new highs as long as it translates into something equally good at home the amount of exhiliration is nothing close to what you would expect.

I’m not jumping up and down and certainly the market isn’t expressing any great optimism. The fact that you don’t see people pounding their chests and  raving about their successes is telling. Most people aren’t shy about letting the world know how great they’re doing.

This week, in addition to being a shortened trading week, also has almost no economic news of great importance.

That makes it one of those weeks with the potential to act as if in a vacuum. You could just as easily see large moves higher as you could see them go lower. You could also just as easily see very little happening as people will keep re-evaluating the old “Sell in May and go away” aphorism.

Today turned out to be a day of antipathy and give and take with neither bulls nor bears really wanting to take charge of things.

This morning saw a little reversal of the mildly positive pre-open trading by the time the morning bell rang but that means very little. In today’s case, though, that mild reversal of a mild gain was an encapulation of the trading day to come.

As with many days in the past couple of months the morning’s pre-open action warranted just sitting and watching during the first 30-60 minutes just to see how things would unfold, but there really was no over-riding theme in the markets at the moment trading started and none throughout the rest of the day, either.

While I continue to believe that there just has to be some kind of market retreat and an end to this historically low volatility, it just doesn’t happen. It continues to fascinate me that the market is able to continually go higher and higher. If not going higher and higher, at least it seems to stay in the same neighborhood.

While on the one hand you don’t want to miss out on the party, you also don’t necessarily be the last one to leave or come to a late realization that the party is over.

Sitting mid-week with plenty of cash to party it’s hard to resist joining in, but despite recent h
istory indicating a really resilient market, the  simple question becomes one of a consideration of “the margins.”

“The margins” means looking at each incremental unit of change. At the market’s current level what is the likelihood of continued upside movement as compared to the potential for downside? Not only the likelihood, but in terms of the number of units of movement in both directions. Does the market have as much realistic potential to move to the upside by an amount that is greater than the potential to move to the downside?

I think that the downside risk and the amount of risk is now greater than the upside reward, even though the theoretical upside reward is much greater than the theoretical downside risk.

Most people have their own notion of what constitutes an acceptable risk to reward ratio. While there may continue to be upside reward, after all the market hasn’t exactly been rational in moving higher, it’s hard to discount the gap between the current level and where support exists below that level.

For some the small semi-corrections seen over the past two years means that there are ia number of intermediate support levels that could take the market down just a little at a time or if you’re really an optimist serve as a springboard to go even higher.

To the cynic those aren’t really support levels, rather just resting spots to get the market to finally have a meaningful correction.

The reality is that we just don’t know, because the historical precedence isn’t very strong and that is it’s own vacuum.

Like so many other times over the past few years sometimes it helps to sit back and wait for some indication of a macro move, whether based on market dynamics, external world events or anything else, before making too large of an additional commitment.

Hopefully the rest of this week will offer some additional opportunities to sell new cover and maybe a new purchase here or there, but for the moment, I want some sign before digging too deeply into my pockets for the entry fee to get into this party.

 

 

 

Reprinted from yesterday’s Close 

 

PS: For those with the Feb 18, 2014 Transocean lot, sorry about the late rollover trade. I was really on the fence with this one because I wasn’t certain that the June 21, 2014 $42 calls would be assigned early to capture tomorrow’s $0.75 dividend, despite closing at $43.35.

Despite being $1.35 in the money, I’m still not certain that shares have a high probability of early assignment to capture the dividend, but I really wanted to keep this dividend and believe that Transocean has more room to climb.

Ultimately, doing the “what-if” scenarios convinced me that taking a net debit on the rollover, which actually is still a net credit thanks to the premium received for the $42 sale last week, was worthwhile.

If shares were to have been assigned early at the $42 strike the ROI would have been 8% compared to 4% for the S&P 500 over the same period.

If shares wouldn’t be assigned early and the dividend was received the ROI, if assigned at the end of the June 2014 cycle would have been 9.7%. However, given that shares closed about $0.60 over the threshold level of $42.75 there was some chance of early assignment, even though nearly 4 weeks remain on the contract.

With the rollover up to a $43 strike in exchange for going to a July 2014 expiration the likelihood of early assignment is virtually non-existent and if eventually assigned the ROI would be 11.5%

The final part of the equation was the question of what else could have been done with the money if assigned early. Given the recent low volatility the monthly ROI is at the low end of the range that I’ve been accustomed to achieving. In essence the question became could I achieve a 3.5% ROI over the 8 week period? While I like to believe that the answer is “yes” the belief that Transocean doesn’t have much in the way of near term downside ultimately made the decision relatively straightforward. I looked at the rollover as providing a relatively low maintenance return with greater safety than alternatives.



  

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Daily Market Update – May 28, 2014

 

 

Daily Market Update – May 28, 2014 (9:45 AM)

Another new high.

It’s said that the title to the movie “Annie Hall” was derived from “anhedonia,” which refers to the inability to experience pleasure.

While I don’t mind seeing all of these new highs as long as it translates into something equally good at home the amount of exhiliration is nothing close to what you would expect.

I’m not jumping up and down and certainly the market isn’t expressing any great optimism. The fact that you don’t see people pounding their chests and  raving about their successes is telling. Most people aren’t shy about letting the world know how great they’re doing.

This week, in addition to being a shortened trading week, also has almost no economic news of great importance.

That makes it one of those weeks with the potential to act as if in a vacuum. You could just as easily see large moves higher as you could see them go lower. You could also just as easily see very little happening as people will keep re-evaluating the old “Sell in May and go away” aphorism.

This morning saw a little reversal of the mildly positive pre-open trading by the time the morning bell rang but that means very little.

As with many days in the past couple of months it warrants just sitting and watching during the first 30-60 minutes just to see how things unfold, but there really is no over-riding theme in the markets at the moment.

While I continue to believe that there just has to be some kind of market retreat and an end to this historically low volatility, it just doesn’t happen. It continues to fascinate me that the market is able to continually go higher and higher.

While on the one hand you don’t want to miss out on the party, you also don’t necessarily be the last one to leave or come to a late realization that the party is over.

Sitting mid-week with plenty of cash to party it’s hard to resist joining in, but despite recent history indicating a really resilient market, the  simple question becomes one of a consideration of “the margins.”

“The margins” means looking at each incremental unit of change. At the market’s current level what is the likelihood of continued upside movement as compared to the potential for downside? Not only the likelihood, but in terms of the number of units of movement in both directions. Does the market have as much realistic potential to move to the upside by an amount that is greater than the potential to move to the downside?

I think that the downside risk and the amount of risk is now greater than the upside reward.

Most people have their own notion of what constitutes an acceptable risk to reward ratio. While there may continue to be upside reward, after all the market hasn’t exactly been rational in moving higher, it’s hard to discount the gap between the current level and where support exists below that level.

For some the small semi-corrections means that there are intermediate support levels that could take the market down just a little at a time.

To the cynic those aren’t really support levels, rather just resting spots to get the market to finally have a meaningful correction.

The reality is that we just don’t know, because the historical precedence isn’t very strong and that is it’s own vacuum.

Like so many other times over the past few years sometimes it helps to sit back and wait for some indication of a macro move, whether based on market dynamics, external world events or anything else, before making too large of an additional commitment.

Hopefully the rest of this week will offer some additional opportunities to sell new cover and maybe a new purchase here or there, but for the moment, I want some sign before digging too deeply

 

 

 

 

 

PS: For those with the Feb 18, 2014 Transocean lot, sorry about the late rollover trade. I was really on the fence with this one because I wasn’t certain that the June 21, 2014 $42 calls would be assigned early to capture tomorrow’s $0.75 dividend, despite closing at $43.35.

Despite being $1.35 in the money, I’m still not certain that shares have a high probability of early assignment to capture the dividend, but I really wanted to keep this dividend and believe that Transocean has more room to climb.

Ultimately, doing the “what-if” scenarios convinced me that taking a net debit on the rollover, which actually is still a net credit thanks to the premium received for the $42 sale last week, was worthwhile.

If shares were to have been assigned early at the $42 strike the ROI would have been 8% compared to 4% for the S&P 500 over the same period.

If shares wouldn’t be assigned early and the dividend was received the ROI, if assigned at the end of the June 2014 cycle would have been 9.7%. However, given that shares closed about $0.60 over the threshold level of $42.75 there was some chance of early assignment, even though nearly 4 weeks remain on the contract.

With the rollover up to a $43 strike in exchange for going to a July 2014 expiration the likelihood of early assignment is virtually non-existent and if eventually assigned the ROI would be 11.5%

The final part of the equation was the question of what else could have been done with the money if assigned early. Given the recent low volatility the monthly ROI is at the low end of the range that I’ve been accustomed to achieving. In essence the question became could I achieve a 3.5% ROI over the 8 week period? WHile I like to believe that the answer is “yes” the belief that Transocean doesn’t have much in the way of near term downside ultimately made the decision relatively straightforward. I looked at the rollover as providing a relatively low maintenance return with greater safety that alternatiuves.



  

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Daily Market Update – May 27, 2014 (Close)

 

 

Daily Market Update – May 27, 2014 (Close)

While I don’t like the smaller premiums that are generated on these 4 day trading weeks, I no longer dislike Monday holidays.

There was a time that I harbored some resentment for the market being closed on those Mondays. That was back in the days when such a holiday coincided with a day off for me and could have been used to hone some skills back when I couldn’t spend as much time as I wanted glued to the screen and ticker.

These days I can and suddenly, maybe not so surprisingly I like those shortened weeks and actually, on a day like Memorial Day, get a chance to understand and appreciate the reason for the holiday.

So now it’s Tuesday and inexplicably the market starts at another new high. What seems so unusual is that you really don’t see or hear a chorus of people gloating about their returns. The other day it was mentioned that some 70-80% of hedge funds were trailing the S&P 500. While that’s easy to understand if the market is going straight higher, it’s not easy to understand when the market is going lower or bouncing around.

My guess is that lots of hedge funds, after trailing the market in 2013 stopped hedging in anticipation of the need for protection and instead doubled up on the bullish end of things.

Bad timing if that’s the case and it is likely accurate to some degree. It’s not much different from the individual investor who waits until the start of the new year to get into last year’s hottest mutual fund.

While normally there would be some degree of euphoria here’s something that should be cause for concern:

That is that while the S&P 500 is going higher the number of new highs is going lower.

That’s just not the way things are supposed to work.

What that indicates is that the advance is really pretty narrow and there just isn’t a lot of participation.

Normally in a market making new highs over and over again everyone is happy because just about everything is moving higher getting swept by a rising tide.

Now, there’s a tide but it’s not doing too much sweeping and only taking a lucky few along for the ride.

I start this week with replenished cash from a decent number of assignments and having sold more new cover last week than in recent memory. On a personal note that leaves me happy, but I’m not overly anxious to plow even the full amount of the regenerated cash back into the market this week.

One of the reasons is tha
t the reward is reduced as there are only 4 days worth of premiums this week. However, beyond that is that after 2 previous weeks of not seeing much in the way of assignments and some decidedly negative trading, I’m not entirely convinced that least week’s positive trading patterns are here to stay.

My initial sense is that the optimism that may be borne of last week’s trading may be for fools.

Of course, like most everything, I’m not fully willing to base everything on that belief that may end up being wrong. So I anticipate making some trades this week in an effort to open some new positions, but I would still prefer to see uncovered positions find coverage and make my weekly income in that manner rather than having to spend very much to generate that income.

As always, we’ll see.

We’ll see if the pre-open futures have any predictive capability for the rest of the day and whether any bargains may pop up to cause me to rethink the thriftiness I have planned for the week.

But the day did keep all of the pre-open gains and set another new closing record.

Unbelievable.

 

 

PS: For those with the Feb 18, 2014 Transocean lot, sorry about the late rollover trade. I was really on the fence with this one because I wasn’t certain that the June 21, 2014 $42 calls would be assigned early to capture tomorrow’s $0.75 dividend, despite closing at $43.35.

Despite being $1.35 in the money, I’m still not certain that shares have a high probability of early assignment to capture the dividend, but I really wanted to keep this dividend and believe that Transocean has more room to climb.

Ultimately, doing the “what-if” scenarios convinced me that taking a net debit on the rollover, which actually is still a net credit thanks to the premium received for the $42 sale last week, was worthwhile.

If shares were to have been assigned early at the $42 strike the ROI would have been 8% compared to 4% for the S&P 500 over the same period.

If shares wouldn’t be assigned early and the dividend was received the ROI, if assigned at the end of the June 2014 cycle would have been 9.7%. However, given that shares closed about $0.60 over the threshold level of $42.75 there was some chance of early assignment, even though nearly 4 weeks remain on the contract.

With the rollover up to a $43 strike in exchange for going to a July 2014 expiration the likelihood of early assignment is virtually non-existent and if eventually assigned the ROI would be 11.5%

The final part of the equation was the question of what else could have been done with the money if assigned early. Given the recent low volatility the monthly ROI is at the low end of the range that I’ve been accustomed to achieving. In essence the question became could I achieve a 3.5% ROI over the 8 week period? WHile I like to believe that the answer is “yes” the belief that Transocean doesn’t have much in the way of near term downside ultimately made the decision relatively straightforward. I looked at the rollover as providing a relatively low maintenance return with greater safety that alternatiuves.



  

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Daily Market Update – May 27, 2014

 

 

Daily Market Update – May 27, 2014 (9:00 AM)

While I don’t like the smaller premiums that are generated on these 4 day trading weeks, I no longer dislike Monday holidays.

There was a time that I harbored some resentment for the market being closed on those Mondays. That was back in the days when such a holiday coincided wiith a day off for me and could have been used to hone some skills back when I couldn’t spend as much time as I wanted glued to the screen and ticker.

These days I can and suddenly, maybe not so surprisingly I like those shortened weeks and actually, on a day like Memorial Day, get a chance to understand and appreciate the reason for the holiday.

So now it’s Tuesday and inexplicably the market starts at another new high. What seems so unusual is that you really don’t see or hear a chorus of people gloating about their returns. The other day it was mentioned that some 70-80% of hedge funds were trailing the S&P 500. While that’s easy to understand if the market is going straight higher, it’s not easy to understand when the market is going lower or bouncing around.

My guess is that lots of hedge funds, after trailing the market in 2013 stopped hedging in anticipation of the need for protection and instead doubled up on the bullish end of things.

Bad timing if that’s the case and it is likely accuate to some degree. It’s not much different fromt the individual investor who waits until the start of the new year to get into last year’s hottest mutual fund.

While normally there would be some degree of euphoria here’s something that should be cause for concern:

That is that while the S&P 500 is going higher the number of new highs is going lower.

That’s just not the way things are supposed to work.

What that indicates is that the advance is really pretty narrow and there just isn’t a lot of participation.

Normally in a market making new highs over and over again everyone is happy because just about everything is moving higher getting swept by a rising tide.

Now, there’s a tide but it’s not doing too much sweeping and only taking a lucky few along for the ride.

I start this week with replenished cash from a decent number of assignments and having sold more new cover last week than in recent memory. On a personal note that leaves me happy, but I’m not overly anxious to plow even the full amount of the regenerated cash back into the market this week.

Oart of that reqason i
s that the reward is reduced as there are only 4 days worth of premiums this week. However, beyond that is that after 2 previous weeks of not seeing much in the way of assignments and some decidely negative trading, I’m not entirely convinced that least week’s positive trading patterns are here to stay.

My initial sense is that the optimism that may be borne of last week’s trading may be for fools.

Of course, like most everything, I’m not fully willing to base everything on that belief that may end up being wrong. So I anticipate making some trades this week in an effort to open some new positions, but I would still prefer to see uncovered positions find coverage and make my weekly income in that manner rather than having to spend very much to generate that income.

As always, we’ll see.

We’ll see if the pre-open futures have any predictive capability for the rest of the day and whether any barains may pop up to cause me to rethink the thriftiness I have planned for the week.



  

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Dashboard – May 26 – 30, 2014

 

 

 

 

 

Selections

MONDAY:   Happy Memorial Day

TUESDAY:     At another new high and the market looks like it wants to add some more. That would be nice for as long as it can last.

WEDNESDAY:  WWith another new high to start the day or no real news left for the rest of the week it can really be anyone’s guess what the market does in a vacuum. Any of those guesses can be equally valid

THURSDAY:    A quiet day on the news front and the morning set to begin in an unusual place by not having to follow up to another new record close.

FRIDAY:  A quiet close would be fitting for a quiet week that was just your typical new record close day in and out kind of week.

 

 



                                                                                                                                           

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 “SNEAK PEEK AT NEXT WEEK” APPEARS ON FRIDAYS

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Weekly Summary 

  

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