Option to Profit Week in Review
June 2 – 6,  2014
 
NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
3 / 3 3 5 5  / 0 4  / 0 0

    

Weekly Up to Date Performance

June 2 – 6, 2014 

New purchases for the week badly trailed both the  unadjusted and adjusted S&P 500 by 2.2% and 2.1%, respectively, as two of the three positions fared very poorly in a week that just set one new high after the next.

The market finished higher for the third consecutive week and set new closing records and did so without any unexpected or unexpectedly good news. New positions were 0.8% lower while the overall market was up 1.4% on an unadjusted basis and 1.3% on an adjusted basis.

Performance of positions closed in 2014 continue to out-perform the S&P 500 performance by 1.5%. They were up 3.3% out-performing the market by 89.6%. 

More records this week as the market received no unwanted surprises and simply ran with it. 

This would have been a good week to have thrown caution out the window and just anticipated that the market doesn’t really seem to need a catalyst to go higher. It just needs the lack of a deterrent.

Despite having a decent number of assignments,  accumulating a fair number of dividend positions this week and being able to rollover some positions and also doing so to secure some dividends, there wasn’t much to be happy about this week.

As usual, it’s bottom line related.

I don’t mind going lower in a given week, as long as it’s not lower than the market. I do mind, however, trailing the market, especially when it goes higher without real reason or without taking a break while doing so.

I’m usually less happy than most when the market simply goes higher and this week was a perfect example of getting left behind as the market advanced another 1.2% for the week.

For those that criticize a covered option strategy this would be the week to point to and say “I told you so.”

With all of those in the money positions the existing positions trailed the market by 0.9% this week. Luckily, I’m not prone to beating my dog.

For perhaps only the second time this year the out-performance of closed positions compared to the market decreased. For much of the year I had been saying that the out-performance was too high to be sustained, at least by my historical standards. Recently that out-performance exceeded 100%. Now it is down to about 90%, as even the 5 assigned positions either didn’t fare as well as the market during their period of holding or just barely exceeded that performance.

Still, not bad, but reflective of a market proceeding without me the past week.

Seeing a fair number of positions now in the money and with still time remaining on their contracts, it’s easy to understand why I wouldn’t mind a little bit of a give back of all of these gains.

Ultimately, that kind of give back would improve the comparative results in the same way that an unchecked advance detracts from it.

Firstly, being in the money means that there’s a cushion to be given back without actually detracting from the bottom line, as long as the decrease still keeps the position in the money.

But more importantly, a broad decline would at least nudge up volatility a little, although at this point t has gotten so low that a little wouldn’t offer too much advantage. What a significant move higher in volatility would accomplish, even if only returning to a VIX of 15, which would have been low by all time historical standards, would be to increase premiums.

But more importantly it would start making longer term options, such as the expanded weeklies and monthlies, more attractive. At the moment, for so many positions there is essentially no additional reward for adding additional time.

Option buyers see little possibility of sudden or drastic moves coming in the future. They are more likely to perceive such a move now, but not tomorrow.

Also, there is essentially no premium for intrinsic value. When volatility is high option buyers pay for intrinsic value. Now they aren’t and subsequently it’s difficult to roll over in the money positions, particularly the deeper in the money they happen to be. Instead of intrinsic value having the added bonus of time value added to it, that time value is almost non-existent.

When volatility is high those kind of rollover trades are easy and much more profitable than they are now.

Additionally, it seems that as the market to profit from buying and selling options decreases for the deep in the money positions, the option buyer is much more likely to exercise early to capture a dividend, since there’s much less likelihood of creating profitable trades on the options contract itself once that time value has been completely discounted, even when substantial time may remain.

The key difference in a high volatility environment is that you do much better by simply rolling over positions, even if they’re in the money. Some long time subscribers will remember that we used to routinely roll over those positions rather than letting them get assigned.

Besides the profit from the roll overs there was less need to find replacement stocks, many of which would also likely be trading at or near highs.

But, at least there’s always next week for some mini-disaster to strike.

Wouldn’t that be nice?

OK, I’m not quite that curmudgeonly yet, but I would like to see some kind of break in this new daily record setting environment.

With some cash from assignments and all of those in the money positions, that would just be exquisite timing and could get me into a buying mood again.



 

     

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:  BMY, HFC, LB

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycle: EBAY ($51), EBAY $51.50), GME

Calls Rolled over, taking profits, into extended weekly cycleKSS (6/27)

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

Calls Rolled Over, taking profits, into a future monthly cycleFDO (7/11)

Calls Rolled Up, taking net profits into same cyclenone

New STO:  BX, C, DRI

Put contracts expired: none

Put contract rolled over: none

Long term call contracts sold:  none

Calls Assigned:   GM ($35), GPS, JPM, LOW, MET

Calls Expired:   BMY, BMY, EBAY, HFC

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 PositionsCOH (6/4 $0.34), GM (6/6 $0.30), GME (6/2 $0.33),  HFC (6/4 $0.32),  LB (6/4 $0.34MOS (6/4 $0.25)

Ex-dividend Positions Next Week:  FDO (6/11 $0.31), KSS (6/9 $0.39), NEM (6/10 $0.25)

 

 

For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, BMY, C, CLF, COH, EBAY, FCX, HFC, 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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