Weekend Update – May 25, 2014

This was a good week, every bit as much as it was an odd one. 

You almost can’t spell “good” without “odd.”

We tend to be creatures that spend a lot of time in hindsight and attempting to dissect out what we believe to be the important components of everything that surrounds us or impacts upon us.

Sometimes what’s really important is beyond our ability to  see or understand or is just so counter-intuitive to what we believe to be true. I’m always reminded of the great Ralph Ellison book, “The Invisible Man,” in which it’s revealed that the secret to obtaining the most pure of white paints is the addition of a drop of black paint.

That makes no sense on any level unless you suspend rational thought and simply believe. Rational thought has little role when it calls for the suspension of belief.

This past week there was no reason to believe that anything good would transpire.

Coming on the heels of the previous week, which saw a perfectly good advance evaporate by week’s end there wasn’t a rational case to be made for expecting anything better the following week. That was especially true after the strong sell-off this past Tuesday.

Rational thought would never have taken the antecedent events to signal that the market would alter its typical pattern of behavior on the day of an FOMC statement release. That behavior was to generally trade in a reserved and cautious fashion prior to the 2 PM embargo release and then shift into chaotic knee-jerks and equally chaotic post-kneejerk course corrections.

Instead, the market advanced strongly from the opening bell on that day, erasing the previous day’s losses and had no immediate reaction to the FOMC release and then in an orderly fashion moved mildly higher after the words were parsed and interpreted.

The trading on that day and its timing were entirely irrational. It was odd, but it was good.

Ordinarily it would have also been irrational to expect a rational response to the minutes that offered no new news, as in the past real news was not a necessary factor for irrational buying or selling behavior.

The ensuing rational behavior was also odd, but it, too, was good.

As another new high was set to end the week there should be concern about approaching a tipping point, especially as the number of new highs is on the down trend. However, the market’s odd behavior the past week gives me reason to be optimistic in the short term, despite a belief that the upside reward is now considerably less than the downside risk in the longer term. 

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

This was a week in which those paid to observe such things finally commented on the disappointing results coming from retailers, despite the fact that the past two or three quarters have been similar and certainly not reflective of the kind of increased discretionary spending you might expect with increasing employment statistics.

With some notable exceptions, such as LuLuLemon (LULU) and Family Dollar Store (FDO) I’ve enjoyed being in and out of retailers, although I think I’d rather be maimed than actually be in and out of anyone’s actual store.

This week a number of retailers have appeal, either on their merits or because there may be some earnings related trades seeking to capitalize on their movements. Included for their merits are in the list are Bed Bath and Beyond (BBBY), eBay (EBAY), Nike (NKE) and The Gap (GPS), while Abercrombie and Fitch (ANF) and Kors (KORS) report earnings this week.

After a disappointing earnings report Bed Bath and Beyond has settled into a trading range and gas seemed to establish some support at the $60 level. Along with so many others that have seen their shares punished after earnings the recovery of share price seems delayed as compared to previous markets. For the option seller that kind of listless trading can be precisely the scenario that returns the best results.

eBay has also stagnated. With Carl Icahn still in the picture, but uncharacteristically quiet, especially after the announcement of a repatriation of some $6 billion in cash back to the United States and, therefore, subject to taxes, there doesn’t seem to be a catalyst for a return to its recent highs. That suits me just fine, as I’ve liked eBay at the $52 level for quite a while and it has been one of my more frequent in and out kind of trades. At present, I do own two other lots of shares and three lots is my self imposed limit, but for those considering an initial entry, eBay has been seen as a mediocre performer in the eyes of those expecting upward price movement, but a superstar from those seeking premium income through the serial sale of option contracts week in and out. If you’re the latter kind, eBay can be as rewarding as the very best of the rest.

The Gap reported earnings on Friday and exhibited little movement. It’s currently trading at the high end of where I like to initiate positions, but it, too, has been a very reliable covered option trade. An acceptable dividend and a fair option premium makes it an appealing recurrent trade. The only maddening aspect of The Gap is that it is one of the few remaining retailers that oddly provides monthly same store sales and as a result it is prone to wild price swings on a regular basis. Those price swings, however, tend to be alternating and do help to keep those option premiums elevated.

You simply take the good with the odd in the case of The Gap and shrug your shoulders when the market response is adverse and just await the next opportunity when suddenly all is good again.

Despite all of the past criticism and predictions of its irrelevance in the marketplace Abercrombie and Fitch continues to be a survivor.  This past Friday was the second anniversary of the initial recommendation of taking a position for Option to Profit subscribers, although I haven’t owned shares in nearly 5 months. Since that in
itial purchase there have been 18 such recommendations, with a cumulative 71.5% return, despite shares having barely moved during that time frame.

Always volatile, especially when earnings are due, the options market is currently implying a 10.2% move in price. For me, the availability of a 1% ROI from selling put contracts at a strike level outside of the lower boundary of that implied range gets my interest. In this case shares could fall up to 13.9% before assignment is likely and still deliver that return.

Kors, also known as “Coach (COH) Killer” also reports earnings this week. It has stood out recently because it hasn’t been subject to the same kind of selling pressure as some other “momentum” stocks. The option market is implying a price movement of 7.4%, while a 1% ROI from put sales may be obtained at a strike level currently 8.8% below Friday’s closing price. However, while Abercrombie and Fitch has plenty of experience with disappointing earnings and has experienced drastic price drops, Kors has yet to really face those kinds of challenges. In the current market environment earnings disappointments are being magnified and the risk – reward proposition with an earnings related trade in Kors may not be as favorable as for that with Abercrombie.

In the case of Kors I may be more inclined to consider a trade after earnings, particularly considering the sale of puts if earnings are disappointing and shares plummet.

After last week’s brief ownership of Under Armour (UA) this week it may be time to consider a purchase of Nike, which under-performed Under Armour for the week. Shares also go ex-dividend this week and have been reasonably range-bound of late. It isn’t a terribly exciting trade, but at this stage of life, who really needs excitement? I also don’t need a pair of running shoes and could care less about making a fashion statement, but I do like the idea of its consistency and relatively low risk necessary in order to achieve a modest reward.

Transocean (RIG) is off of its recent lows, but still has quite a way to go to return to its highs of earlier in the year. Going ex-dividend this week, the 5.7% yield has made the waiting on a more expensive lot of shares to recover a bit easier. As with eBay, I already have two lots of shares, but believe that at the current level this is a good time for initial entry, perhaps considering a longer term option contract and seeking capital gains on shares, as well. As with most everything in business and economy, the current oversupply or rigs will soon become an under supply and Transocean will reap the benefits of cyclicality.

Sinclair Broadcasting (SBGI) also goes ex-dividend this week. It is an important player in my area and has become the largest operator of local television stations in the nation, while most people have never heard the name. It is an infrequent purchase for me, but I always consider doing so as it goes ex-dividend, particularly if trading at the mid-point of its recent range. CUrrently shares a little higher than I might prefer, but with only monthly options available and an always healthy premium, I think that even at the current level there is good opportunity, even if shares do migrate to the low end of its current range.

Finally, Joy Global (JOY), one of those companies whose fortunes are closely tied to Chinese economic reports, has seen a recent 5% price drop from its April 2014 highs. While it is still above the price that I usually like to consider for an entry, I may be interested in participating this week with either a put sale of a buy/write.

Among the considerations are events coming the following week, as shares go ex-dividend early in the week and then the company reports earnings later in the week.

While my preference would be for a quick one week period of involvement, there always has to be the expectation of well laid out plans not being realized. In this case the sale of puts that may need to be rolled over would benefit from enhanced earnings related premiums, but would suffer a bit as the price decrease from the dividend may not be entirely reflected in the option premium. That’s similar to what is occasionally seen on the call side, when option premiums may be higher than they rightfully should be, as the dividend is not fully accounted.

Otherwise, if beginning a position with a buy/write and not seeing shares assigned at the end of the week, I might consider a rollover to a deep in the money call, thereby taking advantage of the enhanced premiums and offering a potential exit in the event that shares fall with the guidelines predicted by the implied volatility. Additionally, it might offer the chance of early assignment prior to earnings due to the Monday ex-dividend date, thereby providing a quick exit and the full premium without putting in the additional time and risk.

 

Traditional Stocks: Bed Bath and Beyond, eBay, The Gap

Momentum: Joy Global

Double Dip Dividend: Nike (5/29 $0.24), Sinclair Broadcasting (5/28 $0.15), Transocean (5/28 $0.75)

Premiums Enhanced by Earnings: Abercrombie and Fitch (5/29 AM), Kors (5/28 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 19 – 23, 2014

 

Option to Profit Week in Review
May 19 – 23,  2014
 
NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
4 / 4 9 6 6  / 0 2  / 0 0

    

Weekly Up to Date Performance

May 19 – 23, 2014 

New purchases for the week trailed the S&P 500 for the week that saw a 1.2% gain, while  those new purchases matched the performance of the time adjusted S&P 500, which were both 1.0% higher for the week.

The market finished higher for the first time in 3 weeks and did so with a bit of confidence as it even moved nicely higher prior to the FOMC report and then lost none of the steam it had built up after a large loss the prior day.

Performance of positions closed in 2014 continue to out-perform the S&P 500 performance by 1.6%. They were up 3.3% out-performing the market by 101.5%.

This week was a little more like it after a couple of weeks of very little trading and dashed expectations as the market reversed course, and not in a good way for the latter parts of the past couple of weeks.

The combination of very few assignments and very few rollovers, especially like last week is one that I don’t particularly like to see, but it appears as if the decision to defer rollovers in the hope that this week would be somewhat better did work out. It’s just not the kind of decision I want to be in a position to make more than once or twice every five years.

This time around the week reversed course in the good kind of way.

WIth all of the concerns we had this time last week it was another week of talking about new records as the week came to a close. Unlike some previous weeks we didn’t see a collapse in the latter part of the week and instead saw unexpected strength, despite the lack of any catalyst.

As a result this week you could count those chickens before they were hatched and not end up overly disappointed.

This week had a nice combination of assignments, rollovers, newly covered positions and new purchases. It seems as if it has been a while since those all came together. I was especially happy to find some new cover and get some laggards to start earning their keep.

As a result of that combination of assignments and rollovers the cash reserve is restored somewhat and available for new purchases. With only 5 positions set to expire next week and with volatility so low the greatest likelihood is that next week’s new purchases will look at a preponderance of weekly option contracts, rather than expanded weekly contracts. However, with the coming week being a shortened one due to the Memorial Day holiday, I may look at some expanded option poossibilities, if only to make up a little for the lost day of premium for the coming week.

With another new record high set to end the week despite having money to burn, you still have to be mindful of how precarious it can be at the top and how far that fall can be. Most everything is a balance between consideration of risk and reward. However, as we climb so hgh it seems reasonable to believe that the continued upside reward is decreasing relative to the downside risk.

For that reason, although the money is there and there are now six fewer positions to stock the portfolio, I’m not terribly interested in replacing all six during the coming week. With so many rollovers and newly covered positions some of the upcoming week’s income has already been realized and that removes some of the need to find new sources of revenue.

Of course, as with every week, the plan may be great, but it can all change with the first opening bell of the week.

WIth the portfolio having lost some positions I wouldn’t mind a little bit of a decline to start the week on Tuesday and the potential opportunity to repurchase some of the recently assigned positions.

The longer you do this the less boring it gets to keep doing the same thing over and over again.

Have a safe and fun Memorial Day.

 

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:  HFC, IP, KSS, UA

Puts Closed in order to take profits:  none

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

Calls Rolled over, taking profits, into extended weekly cycle:  EBAY (6/6), HFC (6/13)

CallsRolled over, taking profits, into the monthly cycle:  none

Calls Rolled Over, taking profits, into a future monthly cycle: none

Calls Rolled Up, taking net profits into same cyclenone

New STO:  CY, EBAY, FAST, GM, LLY, MET, RIG, SBUX, TXN

Put contracts sold and still open: none

Put contracts expired: none

Put contract rolled over: none

Long term call contracts sold:  none

Calls Assigned:   CMCSA, IP, MA, SBUX, TXN, UA

Calls Expired:   GM, JPM

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:  TGT (5/19 $0.43), CLF (5/21 $0.15), IP (5/21 $0.35)

Ex-dividend Positions Next Week:  RIG (5/28 $0.75), HFC special dividend (5/28 $0.50)

 

For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, BMY, BX, C, CLF, COH, CY, DRI, FCX, FDO, GM, JCP, LULU, MCP, MOS,  NEM, PBR, RIG, TGT, WFM, WLT, WY (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 23, 2014

 

 

Daily Market Update – May 23, 2014 (9:00 AM)

The Week in Review will be posted by 6 PM today and the Weekend Update will be posted by noon on Sunday.

Today’s possible outcomes include:

AssignmentCMCSA, UA

Rollover:  EBAY, IP, MA, MET, SBUX, TXN

Expiration:  EBAY, GM, JPM

 

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

 

 

 

 

 

 

 

 

 

 

 

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Daily Market Update – May 22, 2014 (Close)

 

 

Daily Market Update – May 22, 2014 (Close)

It still seems very odd to me that the market came off of its large drop on Tuesday and recovered the loss on a Wednesday, but did so ahead of the FOMC statement release and subsequently did little afterward.

While yesterday marked about the 6th consecutive month with no expected surprises in the statement and none delivered, that hasn’t changed the pattern of trading. Hesitancy prior to the release and then incoherent reactions afterward was a fairly predictable pattern.

Yesterday was completely against long established script.

Given the uncertainty that has been permeating the market and the final realization that earnings really haven’t been that great, especially on the retail level, it’s surprising that investors would have gone counter to Tuesday’s large downward move, which itself was already counter to a Tuesday trend.

With the FOMC now out of the way and earnings season slowing down I’m not certain what the next catalyst will be, particularly as the situation in Ukraine also seems to be mitigated, although there is the little matter of a planned election on Sunday, which may bring out some emotions.

There was certainly no catalyst today, but sometimes that’s a good thing.

Depending on your perspective having a market vacation on Memorial Day may either be a good thing or bad thing for investors as the uncertainty that may attend Sunday’s elections makes itself known. Either we will be behind the eight ball having to wait an additional day to react or that additional day would allow some time to calm and digest.

Some may even use tomorrow as an opportunity to lighten up a little bit in advance of a long weekend, but that hasn’t been the case for the past couple of years. Uncertainty going into a weekend alone hasn’t been enough to derail bullish sentiment and the fear of missing out on a Monday rally.

Another day like yesterday will have us at another new record and anything is entirely plausible.

Today we did get just a little bit closer to those records. Not too much closer, but we didn’t move any further away.

The pre-open appeared to be pointing to a flat open, but just as yesterday’s pre-open provided absolutely no indication for what was to transpire when the bell rang, today turned out to be no different.

The late Mark Haines always used to say that the pre-open was meaningful of nothing, except when there was a very large move based on some unexpected news. We haven’t really had any of those for a long while. Instead, we’ve gotten fairly accustomed to early gains in the pre-open fading within about an hour or so and moderate losses in the pre-open foretelling nothing.

So this morning is another kind of sit back and watch, with the hope that there wouldn’t be a repeat of the past two weeks when many positions that were rollover candidates saw their prices deteriorate as the markets went much lower.

This week has a large number of rollover candidates as the low volatility continues to make it unappealing to diversify by time of expiration. Hopefully a fair share of those will be assigned or rolled over, as currently appears to be the case.

Unfortunately, despite knowing better, and the past two weeks should have reinforced that knowledge, I continue to count those chickens before their hatched. However, there does seem to be a slightly optimistic tone after yesterday’s trading and thus far, nothing seems to be on the horizon that is likely to upset things.

With Monday being a market holiday, there is a chance that some new purchases may still be made this week in an attempt to get a full week’s premium from call sales, as opposed to just 4 days that would be reflected in the prices. Not what I usually do on Thursdays or Fridays, but it’s my small way of celebrating.

Otherwise, I’d have been perfectly content to see the market keep share prices where they are or a bit higher and execute those rollovers today or tomorrow and simply enjoy a nice three day weekend.

That played out nicely for today as more of those trades were made than is usually the case on a Thursday. Hopefully, tomorrow will bring even more, as a number of positions are uin good shape for either assignment or rollover, as long as those chickens do their job.

 

 

 

 

 

 

 

 

 

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Daily Market Update – May 22, 2014

 

 

Daily Market Update – May 22, 2014 (8:45 AM)

It still seems very odd to me that the market came off of its large drop on Tuesday and recovered the loss on a Wednesday, but did so ahead of the FOMC statement release and subsequently did little afterward.

While yesterday marked about the 6th consecutive month with no expected surprises in the statement and none delivered, that hasn’t changed the pattern of trading. Hesitancy prior to the release and then incoherent reactions afterward was a fairly predictable pattern.

Yesterday was completely against long established script.

Given the uncertainty that has been permeating the market and the final realization that earnings really haven’t been that great, especially on the retail level, it’s surprising that investors would have gone counter to Tuesday’s large downward move, which itself was already counter to a Tuesday trend.

With the FOMC now out of the way and earnings season slowing down I’m not certain what the next catalyst will be, particularly as the situation in Ukraine also seems to be mitigated, although there is the little matter of a planned election on Sunday, which may bring out some emotions.

Depending on your perspective having a market vacation on Memorial Day may either be a good thing or bad thing for investors as the uncertainty that may attend Sunday’s elections makes itself known. Either we will be behind the eight ball having to wait an additional day to react or that additional day would allow some time to calm and digest.

Some may even use tomorrow as an opportunity to lighten up a little bit in advance of a long weekend, but that hasn’t been the case for the past couple of years. Uncertainty going into a weekend alone hasn’t been enough to derail bullish sentiment and the fear of missing out on a Monday rally.

Another day like yesterday will have us at another new record and anything is entirely plausible.

The pre-open appears to be pointing to a flat open, but just as yesterday’s pre-open provided absolutely no indication for what was to transpire when the bell rang, today could be no different.

The late Mark Haines always used to say that the pre-open was meaningful of nothing, except when there was a very large move based on some unexpected news. We haven’t really had any of those for a long while. Instead, we’ve gotten fairly accustomed to early gains in the pre-open fading within about an hour or so and moderate losses in the pre-open foretelling nothing.

So this morning is another kind of sit back and watch, with the hope that there woun’t be a repeat of the past two weeks when many positions that were rollover candidates saw their prices deteriorate as the markets went much lower.

This week has a large number of rollover candidates as the low volatility continues to make it unappealing to diversify by time of expiration. Hopefully a fair share of those will be assigned or rolled over, as currently appears to be the case.

Unfortunately, despite knowing better, and the past two weeks should have reinforced that knowledge, I continue to count those chickens before their hatched. However, there does seem to be a slightly optimistic tone after yesterday’s trading and thus far, nothing seems to be on the horizon that is likely to upset things.

With Monday being a market holiday, there is a chance that some new purchases may still be made this week in an attempt to get a full week’s premium from call sales, as opposed to just 4 days that would be reflected in the prices. Not what I usually do on Thursdays or Fridays, but it’s my small way of celebrating.

Otherwise, I’d be perfectly content to see the market keep share prices where they are or a bit higher and execute those rollovers today or tomorrow and simply enjoy a nice three day weekend.

 

 

 

 

 

 

 

 

 

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