Daily Market Update – August 4, 2014 (Close)

Wow. What a nice surprise to start the week.

It was nice that there was essentially no news over the weekend other than what may have been reasonably expected. Maybe a calm weekend was all that was needed, at least for a day or so worth of aftermath.

Maybe that lack of news meant that there was little reason to have more downward pressure to get this week off to its start after the heavy selling on Thursday and the failed comeback on Friday, but the truth is no one can remotely be confident of what created some market confidence.

As the morning and the week looked to get started there were some mild gains showing up that I was hoping would find themselves persisting as trading opened. I would have been happy if they stayed in the mild range, even if they reverted to mild losses. But even better for a little while it nearly looked as if it might be a triple digit gain.

The week began with some available cash and a few positions set for weekly expiration and approximately an equal number set to expire with next week’s conclusion to the August 2014 cycle.

With some stability I wasn’t adverse to adding some new positions, especially after some of the individual stock declines of last week, although it also wasn’t too likely that I’d get carried away, as I would like to maintain adequate cash for any other surprises.

As it turned out I may ahve spent more today than I anticipated, but I’m still willing to do some more this week.

What will be the interesting thing to see this week is whether there is any strength seen in premiums, especially for forward weeks. That’s really the only benefit of having increased volatility, especially since it stems from market weakness. Today’s market strength, though, caused a substantial drop in volatility, so we may have to wait another day to pass some judgment in that regard.

After the decline of late last week the S&P 500 found itself back to levels not seen since June 3, 2014.

That’s wasn’t very long ago, so in context, either the decline was pretty mild or the climb since June has been pretty torrid and the decline was matching in scope.

Torrid isn’t really an apt description of the last two months, although there certainly have been lots and lots of new record highs, only they came a little bit at a time. So again, going back to context, the drop of the past two trading sessions was really very mild by any standard and so far, gives no indication of being the start of some kind of slippery slope.

What I always like to do when we hit one of these near term lows is to check to see where my portfolio stood on that earlier date as compared to where it stands at the moment.

The expectation should be that your personal fortunes withstood the decline better than the overall market,
particularly if your portfolio isn’t highly concentrated in any particular area or stock, although that kind of concentration could also result in significant out-performance if good luck is on your side.

Generally, the more options you sold, particularly near or in the money options, the greater your advantage should have been during a period of market decline.

So as we started this week I was pretty pleased, although I definitely still am displeased about having so many uncovered positions and disappointed that i couldn’t reduce their numbers today.

I don’t mind shares going down in value, but what I do mind is if their not contributing to the accumulation of income or in offsetting their cost basis, however you may prefer.

While I won’t be against adding some more new positions at these levels, my real goal would be to add more covered positions to the list, as has been a goal for quite a while, but has proved to be a very difficult one, especially as the volatility has been so low.

While increasing volatility tends to be seen in a declining market for those that don’t really care too much about paper losses or values that increasing volatility can open up many more opportunities to sell options, especially the out of the money variety.

While most people really don’t want to see a market decline it isn’t necessarily that bad of a prospect as long as it doesn’t become a way of life.

However, since you can never really know what the next day brings, so often the best approach is to straddle all worlds.

For me that means new purchases, perhaps at a lesser level than last week and selling whatever options that can be sold. Even if your stocks can’t appreciate in value during any particular time period there should at least be some incremental income that they can produce while a cold spell is in place.

And if it warms up?

Such a terrible problem to have. At least today can ease our way back into dealing with market gains.