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

The reaction to Twitter’s earnings released yesterday afternoon was pretty implausible and makes you wonder who exactly runs in to purchase shares after hours when a buying frenzy is going on. You have to have lots and lots of confidence to commit to a stock when its shares jump about 30% in the blink of an eye, especially when they’ve shown that they can also do the same in the opposite direction.

I have enough trouble running in and doing so after a 1% climb, but there’s something unnerving about buying into something when there’s a big price gap, just as there’s something unnerving about being on the wrong side of a gap lower.

For me, the good news is that if the price holds until Friday I will finally be out of shares that started as a put sale at $47, then an assignment at $43.50 and a large number of rollovers of both puts and calls in an effort to stay ahead of assignment, including the sale of even more puts at lower prices to generate offsetting revenues. 

First the fear was that of assignment of puts and then the fear was that of assignment of calls when executing DOH trades.

Fear can be a good motivator, but it’s a lot easier to take than stress, because somewhere along the line I believed that somehow everything would work out, or at least not be as bad as things may appear.

What the process, now that it’s coming to an end demonstrates is that it is possible to make proverbial lemonade even when things aren’t looking very good. Unfortunately, there are plenty of lemons to deal with sometimes.

In the case of Twitter it was easier because the shares have some volatility. That’s the secret sauce that makes some things more likely.It is what enhances premiums, even when they’re deep in the money. It is what is lacking in most other positions and that makes it difficult to maneuver in the event of an adverse price movement.

That adverse price movement can be higher, just as easily as it can be lower.

I mention that because of one subscriber who had sold August 16, 2014 calls on his Family Dollar Store holdings. With shares being now deep in the money after the buyout bid the likelihood of being able to roll those shares over into the future at a higher strike price in order to gain some benefit from the buyout isn’t very high as long as the volatility is low.

When the original stake by Icahn was announced we were able to rollover shares to a higher strike and participate in the share’s appreciation due to  having selected an option expiration that coincided with earnings. Tha
t alone caused the enhanced volatility that allowed a trade to be made, and to live to see another day.

In the current case the next earnings date is in October. While that may give some opportunity, there is another difference between the Family Dollar of old and the Family Dollar of today.

Back then there was still an unlimited potential for the share price to climb, as Icahn had just entered the picture. Now, there is a defined offer that prices shares at about $74.50. While that can change if some other player comes in, the volatility won’t appear again unless that  happens. That immediately limits potential trade opportunities.

But, like today’s FOMC statement release, you just never know if a surprise is just around the corner. You really can’t take anything for granted.

As long as a company still has some breath in it there’s always the chance, in fact, the probability that it will show some recovery. The key is whether that recovery is enough to start instituting some measures, such as DOH trades, to start resurrecting the position’s ability to support itself and justify its existence in a portfolio.

That requires a lot of patience sometimes, but that patience, as it grows, also comes with a remarkable reduction in stress.

Of course, nothing reduces that stress more than profits.