Daily Market Update – July 29, 2014





Daily Market Update – July 29, 2014 (9:30 AM)

While today will be another busy earnings day, having already gotten underway with Pfizer and others, it’s likely to be relatively quiet as it usually is once the FOMC meeting gets underway.

The real surprise would be if at 2 PM tomorrow there is some surprise coming from the statement released after the two day meeting. However, increasingly the words are being parsed for the slightest hit of nuance or the appearance of a new word or deletion of an old one, in order to ascertain what is really going on in the minds of those in control of the economy. That could mean some reaction beyond the usual knee-jerk response, which itself was actually missing at least month’s release.

Following a nice recovery from yesterday’s early sell-off there’s reason to believe that records could easily be assaulted again, especially if some of the bigger names come out with earnings. It doesn’t take too much to move the DJIA and this morning both Merck and Pfizer seem to be contributing to the pre-open advance, as they have released their earnings. Verizon and AT&T are also both up strongly, helping to give the DJIA an early lead over the broader S&P 500.

With the early assignment of Texas Instruments in order to capture the dividend that pesky problem of having cash is even greater now. I would still like the opportunity to spend some down and would like to see another day of some downward moves or at least some flatness while awaiting something that looks appealing.

As with other times that problem of having cash has been the case, I’m not too likely to want to compound that problem by spending it down just for the sake of spending it down. Last Friday seemed to bring some relative bargains, but the key word is “relative.” Many stocks still look and feel expensive so there has to be a nagging voice somewhere questioning every potential new purchase as being without value.

By the same token everything that looks like a bargain may get the same scrutiny as a 45 year old bachelor. People want validation for their biases. Why in the world hasn’t he never been married? Why would it be so “cheap” when everything else is going higher?

While one may certainly be a lifestyle choice, it would be hard to find anyone other than a short seller who wouldn’t want to see shares higher, so wondering why something hasn’t been participating may be a justified question.

Whereas yesterday I felt willing to jump in without waiting for much validation, in the hopes of picking up some of those seeming bargains, I don’t have that same confidence this morning. With the very strong early moves in some of the DJIA components there may be some early skew to the perception of how the market will actually trade. Those gains just seem to be illusory, very much based on some financia
l engineering ideas put forth by a tiny player in the communications sector that may have big implications for the likes of the behemoths, Verizon and AT&T.

So I think that I want to revert back to recent style and watch and see how the market’s trend, if any, will develop this morning, as they may come to the realization that what matters for Verizon may have little to no relevance for anyone else and still may have some regualtory and IRS hurdles ahead.





Daily Market Update – July 28, 2014




Daily Market Update – July 28, 2014 (Close)

This has the potential to be a busy week.

For the first time in a little while there’s some market moving news that may be at hand as both the FOMC statement is released and the Employment Situation Report ends the week.

In-between are about 140 of the S&P 500 companies reporting earnings.

So far, though, as far as the morning that is set to begin the week’s trading goes, it appears to be a relatively quiet start to the week and that’s exactly what today ended up being.

Unless you owned shares of Family Dollar Stores.

I recently spoke about “serendipity” as a factor in outcomes. The Family Dollar Story is a perfect example, as it received an unexpected buyout offer this morning.

For those that remember, just about two months ago a DOH trade was made on a lot of FDO and a regular call sale made on another lot. At the time I felt good about making those trades on that Friday, but at the close of trading came word that Carl Icahn had taken a position and shares shot up higher in the after hours.

Then, just as suddenly, I didn’t feel very good about those trades.

After some manipulation that took advantage of some enhanced premiums associated with earnings, we were able to prevent those positions from being assigned at such a low price, only to watch shares subsequently fall and then see their most recent calls expire this Friday, without being rolled over.

I usually am not terribly happy when I can’t get a rollover trade, but in the case of FDO the premiums were just so low that the costs of closing out the option positions in order to open new ones on Friday were really just too high to have made it worthwhile.


This morning came word of a buyout from a different suitor.

While there may be some more value to be wrung out of shares, as the original suitor may still be in the mix, I was ready to close the position without concern for whatever more may be on the table and did so in the pre-opening hours.

Little events, such as the sale of calls or the inability to sell calls and such varied outcomes.

Unless you have the ultimate in inside information, you can only ascribe being on the right side of those events as “luck.”

When a gift like this appears and you think about the luck involved to still be in a position to profit from that luck, it seems greedy to want to press for even more luck, or try to engage in some kind of passive arbitrage as third parties may or may not battle it out.

Hopefully there will be more of that luck to go around this week, with or without Family Dollar.

With some assignments last week and the Family Dollar surprise added to it, cash reserves are way up and the market closed on the downside last Friday.

That’s a combination that I tend to like. Better yet, there’s no indication of a bounce higher this morning, so if inclined to pick up shares there may still be some prices in line with Friday’s close.

With some positions set to expire this week, but not too many, there isn’t the same kind of reluctance as last week, to pick up new positions with contracts expiring the same week. Even though that’s what was done last week, it wasn’t really a preference, it was just that forward week premiums were so low.

This week volatility is very slightly elevated so we’ll see how those forward week premiums look once the option markets open for trading.

With cash in hand I don’t mind making some purchases to bring those levels down. The past few weeks have been very quiet on that end, but luckily the combination of new cover, rollovers and the occasional purchase here and there have done reasonably well at a time that the market has been moving higher in a halting fashion.

As opposed to the past couple of months where I’ve waited to see how trading would go during the first 30 minutes or so, this week I may be inspired to pick up any relative bargains on the early side of the day.

Other than FDO, today was a fairly sedate day, just another with little to no movement and little to no insight into where the market may be going or into what may be leading the market to whatever direction it will be heading.

With money still in hand after only two purchases today, I wouldn’t mind some more opportunities presenting themselves tomorrow or later in the week.

With the two large events scheduled to begin at the week’s mid-point, where feasible, as was done just a few weeks ago, again in a serendipitous fashion, I will look for opportunities to execute early rollovers.
















Dashboard – July 28 – August 1, 2014







MONDAY:  A potentially busy week ahead with still lots of earnings, an FOMC release and the Employment Situation Report to close the week. The morning, however, appears to be off to a quiet start

TUESDAY:     More earnings today and FOMC begins their meeting. Market usually doesn’t commit or make big moves prior to meeting, but there’s little reason to believe that there will be anything earth shattering coming tomorrow

WEDNESDAY:  Will Twitter propel the market? Not likely, as most will likely be waiting for FOMC statement release before commiting too much. No surprises are expected this afternoon, but since when does reality get a say in decisions?

THURSDAY:    What a difference a day and the day can make. The market appears to be ready to open on a large down note. How much better that generally is on a Monday rather than a Thursday becomes pretty clear as assessing rollover and assignment probabilities.

FRIDAY:  Some follow-up to yesterday’s plunge looks likely, at least before the looming Employment Situation Report which is more likely to exacerbate than to help things, if there is any reaction in store




Today's TradesCash-o-Meter





Sneak PeekPie Chart Distribution








Weekly Summary


More and More Earnings

After last week’s deluge of 150 of the S&P 500 companies reporting their earnings this week is a relatively calm one.

For all of its gyrations last week, including the sell-off on Friday, if you simply looked at the market’s net change you would have thought that it was a quiet week as well.

The initial week of earnings season did see seem promise coming from the financial sector. Last week was a mixed one, as names such as Facebook (FB) and Amazon (AMZN) went in very different directions and the initial responses to earnings didn’t necessarily match the final result, such as in the case of NetFlix (NFLX).

While some of the sell-off on Friday may be attributed to the announcement of additional European Council sanctions against Russia and perhaps even the late in the session downgrade of stocks and bonds by Goldman Sachs (GS), earnings had gotten most of the week’s attention.

The coming week offers another opportunity to consider potential trades that can profit regardless of the direction of share price movements, as long as they stay reasonably close to the option market’s predictions of their trading range in response to those reports.

In line with my own tolerance for risk and my own definition of what constitutes a suitable reward for the risk, I prefer the consideration of trades that can return at least 1% for the sale of a weekly put option at a strike level that is below the lower boundary defined by the option market’s assessment. Obviously, everyone’s risk-reward profile differs, but I believe that consistent application or standardizing criteria by individual investors is part of a discipline that can make such trades less anxiety provoking and less tied to emotional factors.

Occasionally, I will consider the outright purchase of shares and the sale of calls, rather than the sale of puts for such trades, but that is usually the case if there is also the consideration of an upcoming ex-dividend date, such as will be the case with Phillips 66 (PSX). Additionally, doing so would most likely be done if I had no hesitancy regarding the ownership of shares. In contrast, often when I sell puts I have no real interest in owning the shares and would much prefer expiration or the ability to roll over those contracts if assignment appeared likely.

This coming week there again appear to be a number of stocks deserving attention as the reward may be well suited to the level of risk, thanks to the option premiums that are enhanced before earnings are released.

As often is the case the stocks that are most likely to be able to deliver a 1% or greater premium at a strike level outside of the implied move range are already volatile stocks, whose volatility is even greater in response to earnings. While at first glance an implied move of 12%, as is the case for Yelp (YELP) may seem unusually large, past history shows that concerns for moves of that magnitude are warranted.

Among the companies that I am considering this coming week are Anadarko (APC), Herbalife (HLF), MasterCard (MA), Mosaic (MOS), Merck (MRK), Outerwall (OUTR), Phillips 66, T-Mobile (TMUS), Twitter (TWTR) and Yelp.

These potential trades are entirely based upon what may be a discrepancies between the implied price movement and option premiums that will return the desired premium. Generally, I don’t think very much about those issues that may have relevance prior to considering a purchase of shares. The focus is entirely on numbers and whether the risk-reward proposition is appealing. Issues such as whether people are tweeting enough or whether a company is based upon a pyramid strategy can wait until the following week. Hopefully, by that time I would be freed from the position and would be less interested in those issues.

Deciding to pull the trigger is often a function of the prevailing price dynamic. My preference when selling put contracts is to do so if shares are falling in price in advance of earnings. For example, last week I did not sell puts on Facebook (FB), as its shares rose sharply prior to earnings. In that case, that represented a missed opportunity, however.

Compared to the previous week’s close of trading when the market had a sizable gain, this past Friday there were widespread losses, perhaps resulting in a different dynamic as the coming week begins its trading.

While I would rather not take ownership of shares, there must be a realization that doing so may be inevitable or may require additional actions in order to prevent that unwanted outcome, such as rolling the put option forward, if possible.

If there is a large decline in share price well beyond that lower boundary, the investor should be prepared for an extended period of needing to juggle that position in order to avoid assignment while awaiting some price recovery. I have some positions, that I’ve done so for months. The end result may be satisfactory, but the process can be draining.

The table may be used as a guide for determining which of this week’s stocks meet risk-reward parameters. Re-assessments should be made as share prices  option premiums and strike levels may change. 

While the list can be used in executing trades before the release of earnings, there may also be opportunity to consider trades following earnings. I typically like to consider those trades if a stock moved higher before earnings and then plunged afterward, if in the belief that the response was an over-reaction to the news. In such cases there may be an opportunity to sell put options whose premiums will still see some enhancement as a reflection of the strong negative sentiment taking shares lower.

Ultimately, if large price movements are either anticipated or have already occurred there is usually some additional opportunity that arises with the perceived risk at hand. If the risk isn’t realized, or if the risk is managed appropriately, the reward can be very addictive.

Weekend Update – July 27, 2014

It seems that almost every week over the past few months have both begun and ended with a quandary of which path to take.

Talk about indecision, for the previous seven weeks the market closed in the an alternating direction to the previous week. This past week was the equivalent of landing on the “green” as the S&P 500 was 0.12 higher for the week, but ending the streak.

Like the biology experiment that shows how a frog immersed in water that is slowly brought to a boil never perceives the impending danger to its life, the market has continued to set new closing record high after record high in a slow and methodical fashion.

With all the talk continuing about how money remains on the sidelines from 2008-9, you do have to wonder how getting into the market now is any different from that frog thinking about climbing into that pot as it nears its boiling point.

Unless there’s new money coming in what fuels growth?

That’s not to say that danger awaits or that the slow climb higher will lead to a change in state or a frenzied outburst of energy leading to some calamitous event, but the thought could cross some minds.

Perhaps Friday’s sell off will prompt some to select one path over another, although a single bubble doesn’t mean that as you’re immersed in a bath that it is coming to a boil. It may entirely be due to other reasons, such as your most recent meal, so it’s not always appropriate to jump to conclusions.

While the frog probably doesn’t really comprehend the slowly growing number of bubbles that seem to be arising from the water, investors may begin to notice the rising number of IPO offerings entering the market and particularly their difficulty in achieving pricing objectives.

I wonder what that might signify? The fact that suddenly my discount brokerage seems to be inundating me with IPO offers makes me realize that it does seem to be getting hotter and hotter around me.

This coming week I’ve had cash reserves replenished with a number of assignments, somehow surviving the week ending plunge and I see many prices having come down, even if just a little. That combination often puts me into a spending mood, that would be especially enhanced if Monday begins either on the downside or just tepidly higher.

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

The big news in the markets this week was Facebook (FB) as its earnings report continued to make clear that it has mastered the means to monetize a mobile strategy. While it produces nothing it’s market capitalization is stunning and working its way closer to the top spot. For those in the same or reasonably close sector, the trickle down was appreciated. One of those, Twitter (TWTR) reports earnings this week and the jury is still very much out on whether it has a viable product, a viable management team and even a viable life as an independent entity.

For all of those questions Twitter can be an exciting holding, if you like that sort of thing. I currently hold shares that were assigned to me after having fallen so much that I couldn’t continue the process of rolling over puts any longer. The process to recover has been slow, but speeded a bit by selling calls on the way higher. However, while that has been emotionally rewarding, but as may be the case when puts are sold and potential ownership is something that is shunned, has required lots of maintenance and maneuvering.

With earnings this week the opportunity arises again to consider the sale of new Twitter puts, either before earnings are released or if shares plunge, afterward.

The option market is implying an 11.7% move in shares upon earnings. a 1% weekly ROI may possibly be obtained at a strike price that’s 14.8% below Friday’s close.

While Twitter is filled with uncertainty, Starbucks (SBUX) has some history behind it that gives good reason to have continuing confidence. With the market having looked adversely at Starbucks’ earnings report, Howard Schultz gave an impassioned and wholly rational defense of the company, its operations and prospects.

In the past few years each time Starbucks shares have been pummeled after earnings and Schultz has done as he did on Friday, it has proven itself an excellent entry point for shares. Schultz has repeatedly shown himself to be among the most credible and knowledgeable of CEOs with regard to his own business and business strategy. He has been as bankable as anyone that can be found.

With an upcoming dividend, always competitive option premiums and Schultz standing behind it, the pullback on Friday may be a good time to re-consider adding shares, despite still trading near highs.

While I suppose Yelp (YELP) could tell me all about the nearest Starbucks and the experience that I might expect there, it’s not a site that gets my attention, particularly after seeing some reviews of restaurants that pilloried the businesses of places that my wife and I frequent repeatedly.

Still, there’s clearly something to be had of value through using the site for someone. What does have me interested is the potential opportunity that may exist at earnings. Yelp is no stranger to large moves at earnings and for those who like risk there can be reward in return. However, for those who like smaller dosages of each a 1% ROI for the week can potentially be achieved at a strike price of $58 based on Friday’s $68.68 closing priced and an implied move of 12%. Back in April 2014 I received an almost 3% ROI for the risk taken, but don’t believe that I’m willing to be so daring now that I’m older.

Following the market’s sharp drop on Friday it was difficult to not jump the gun a little bit as some prices looked to be either “too good” or just ready. One of those was General Motors (GM). Having survived earnings last week,
albeit with a sizeable share drop over the course of a few days and wading its way through so much litigation, it is quietly doing what it is supposed to be doing and selling its products. An energized consumer will eventually trade in those cars that have long passed their primes, as for many people what they drive is perceived as the best insight into their true standing in society. General Motors has traded nicely as it has approached $33 and offers a nice premium and attractive dividend, making it fit in nicely with a portfolio that tries to accentuate income streams even while shares my gyrate in price.

I never get tired of thinking about adding shares of eBay (EBAY). With some of my shares assigned this past Friday despite some recent price strength after earnings, I think it is now in that mid-point of its trading range from where it has been relatively easy to manage the position even with some moves lower.

Carl Icahn has remained incredibly quiet on his position in eBay and my guess, based on nothing at all, is that there is some kind of behind the scenes convergence of thought between Icahn and eBay’s CEO, John Donahoe, regarding the PayPal jewel.

With all of the recent talk about “old tech,” there’s reason to consider one of the oldest, Texas Instruments (TXN) which goes ex-dividend this coming week. Having recently traded near its year’s high, shares have come down considerably following earnings, over the course of a few days. While still a little on the high side, it has lots of company in that regard, but at least has the goods to back up its price better than many others. It, too, offers an attractive combination of dividend, premiums and still possibility of share appreciation.

Reporting earnings this week are both MasterCard (MA) and MetLife (MET). Neither are potential trades whose premiums are greatly enhanced by the prospects of earnings related surprises. Both, however, are companies that I would like to once again own, possibly through the sale of put options prior to earnings being announced.

MasterCard suffered on Friday as collateral damage to Visa’s (V) earnings, which helped drag the DJIA down far more than the S&P 500, despite the outsized contribution by Amazon (AMZN) which suffered a % decline after earnings. On top of that are worries again from the Russian market, which earlier in the year had floated the idea of their own credit system. Now new rules impacting payment processors in Russia is of concern.

MasterCard has been able to generate satisfactory option premiums during an otherwise low volatility environment and despite trading in a $72 – $78 range, as it has regular bounces, such as seen this past week.

I have been waiting for MetLife to trade down to about the $52 range for the past two months and perhaps earnings will be the impetus. For that reason I might be more inclined to consider opening a position through the sale of puts rather than an outright buy/write. However, also incorporated into that decision process is that shares will be going ex-dividend the following week and there is some downside to the sale of puts in the face of such an event, much as their may be advantage to selling calls into an ex-dividend date.

Finally, there hasn’t been much that has been more entertaining of late than the Herbalife (HLF) saga. After this past week’s tremendous alternating plunge and surge and the absolute debacle of a presentation by Bill Ackman that didn’t quite live up to its billing.

While there may certainly be lots of validity to Ackman’s claims, which are increasingly not being nuanced, the opportunity may exist on both sides of the controversy, as earnings are announced next week. Unless some significant news arises in addition to earnings, such as from the SEC or FTC, it is like any other high beta stock about to report earnings.

The availability of expanded weekly options makes the trade more appealing in the event of an adverse move bringing shares below the $61.50 level suggested by the implied volatility, allows some greater flexibility. However, because of the possibility of other events, my preference would be to have this be as short term of a holding as possible, such that if selling puts and seeing a rise in shares after earnings, I would likely sacrifice remaining value on the options and close the position, being happy with whatever quick profits were achieved.

Traditional Stocks: eBay, General Motors, MasterCard, MetLife, Starbucks

Momentum: none

Double Dip Dividend: Texas Instruments (7/29)

Premiums Enhanced by Earnings: Herbalife (7/28 PM), Twitter (7/29 PM), Yelp (7/30 PM)

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.