Daily Market Update – August 25, 2014

 

  

 

Daily Market Update – August 25, 2014 (8:30 AM)

Looking back, last week was an odd one.

I don’t really recall the last time that not a single new position was from the Weekend Update playlist, but last Monday’s strong weekly opening saw immediate jumps in the playlist components and made them less desirable.

Couple that with another week of just a few scant new position purchases and there was little opportunity to follow the script.

This week appears to be ready to get off to a moderately positive start as there was no substantive geo-political news over the weekend, no blockbuster comments coming from Jackson Hole and little on the scheduled economic news front to act as a potential challenge.

That all sounds good, especially if your sights are set on a very short term horizon.

With a lot of assignments last week there is cash to take advantage of any opportunities that may appear, but as the week gets ready to open I find myself not particularly interested in too much risk and may be focused more on blue chips, with the possible exception of some earnings related trades, that as usual have elevated risk.

However, because there are so few rollover opportunities as we enter this week and also so few opportunities for assignment to help offset some of the funding necessary for next week, there is reason to try and establish some new weekly positions, as it is true that it takes money to make money.

But as with most of those weekly scripts there has to be room for re-writes that take a measure of what appears before you. At the week’s outset I would love the idea of accumulating more dividends and focusing on blue chips, but that could easily change.

With relatively few positions already in place that are set to expire this Friday, I will probably not spend too much time looking at expanded weekly contracts, whose premiums are severely challenged by the continuing low volatility environment. By the same token, with a number of positions already having contracts expiring at the cycle’s end, I’m not anxious to add to those with four weeks still left to go. However, some of the potential trades for this week, such as McDonalds, which is also ex-dividend, may be better as a monthly trade, to also attempt to capitalize on the possibility for capital appreciation as well.

That’s part of the theme of this week’s playlist, as the majority of the positions have under-performed the S&P 500 over the past two months and may have some capability of making up for those losses, at least in relative terms.

Since it really is a fool’s game to try and time markets or even individual stocks, some of those depressed positions may still need some time to acquit themselves and the monthly contracts may be better suited, despite the low premiums.

It’s always nice to have a plan, it’s just too bad that there is no shortage of factors to alter the plan and no shortage of conflicting considerations in its implementation.

 

P.S. On a bookkeeping note, if you have shares of Holly Frontier and had sold calls on that position, your contracts have been adjusted by $0.50 to reflect the special $0.50 dividend, that is made on a quarterly regular basis, yet is somehow still “special.” Because of that nature the strike levels are all adjusted to reflect the distribution of that additional dividend, as long as it’s more than $0.125/share..

Holly Frontier will also go ex-dividend on August 28th for its regular $0.32 quarterly dividend, so the threshold price target is $50.82, before any rational person would consider making an early exercise in order to capture the dividend. However, the use of the September 20 option means that a truly rational person would likely want to see a price somewhat greater than $50.82, due to the additional time value remaining in the option, that may make its trading more valuable than capturing a dividend.

 

 

 

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Dashboard – August 25 – 29, 2014

 

 

 

 

 

Selections

MONDAY:  Another relatively quiet week on the economic news front and coming off a quiet week on the geo-political front, both would seem to make for a positive beginning to the week’s trading.

TUESDAY:     Yesterday lived up to its potential and today has no apparent roadblocks to a continuing climb higher, as a technician might agree, as the pattern of higher highs and higher lows continues uninterrupted.

WEDNESDAY:  S&P 500 hits 2000 and starts to get people’s interest, as talk increases of money coming off sidelines. Who made that observation? No one other than chairman of S&P 500 Index, himself. Markets look to be quiet to start the day as these round numbers always make people circumspect or ebullient.

THURSDAY:    With yesterday’s market in suspended animation it was still enough to set another new record on the S&P 500 as the market awaits GDP and Jpbless Claims to end the summer.

FRIDAY:  Likely to be one of the slowest trading days of the year, but despite a seemingly flat open, any news can end up being big news, especially if geo-political and facing a long holiday weekend ahead

 



 

                                                                                                                                           

Today's TradesCash-o-Meter

 

 

 





 “SNEAK PEEK AT NEXT WEEK” APPEARS ON FRIDAYS

Sneak PeekPie Chart Distribution

 

 

 

 

 

 

 

Weekly Summary

  

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Weekend Update – August 24, 2014

For two consecutive summers back in 1981 and 1982 I found myself in Jackson Hole.

Although both times were in August, I don’t recall having run across any Federal Reserve types at the time. However, if they were there, they certainly weren’t staying in the same campground, but I’m guessing that their table was set much the same as mine, when big decisions in an era of 15% Fed Funds rates and the burgeoning money supply were being made.

Or maybe they were simply unwinding after a long day of exchanging white papers.

And not the type that are rolled, as good old fashioned Jackson Hole cowboys were reported to do. Too much exchanging of those rolled papers could definitely lead you into some kind of complacency. I know that I really didn’t care too much about what was going to happen next and was content to just let it all keep happening without my input.

This past week was one when neither decisions nor inputs were really required from investors as the market had its best week in about four months. With the exception of a totally inconsequential FOMC statement release, there was absolutely no economic news, or really no news of any kind at all. In fact, awaiting the scheduled remarks from Mario Draghi was elevated to the status of “breaking news” as most people were tiring of seeing celebrities getting doused with a bucket of ice, under the guise of being news.

In an environment like that how could you not exercise complacency? Going along for the ride has been a good strategy, just ask most hedge fund managers. While they, and I, were elated with the sudden spike in volatility just two weeks ago, talk of a 30% surge in volatility have been replaced by silence and sulking for them and justifiable complacency for most other investors.

Even though it was another in a series of Fridays with potentially unsettling news coming from Ukraine, this time regarding violation of their border by a Russian convoy, the market completely ignored the news, as it did the encounter of a US military jet with a Chinese fighter plane at a distance reported to be 20 feet.

That seemed odd.

Instead, all eyes were focused on the Kansas City Federal Reserve’s annual soiree in Jackson Hole, awaiting the keynote speech by Janet Yellen and then some words from her European counterpart, Mario Draghi.

For her part, Janet Yellen’s prepared remarks had no impact on markets, which were largely unchanged for the day.

The speculation that the real market propelling catalyst would come from Draghi, who was said to be ready to announce a large round of European quantitative easing turned out to be unfounded and so the week ended on a whimper, with many traders exercising their complacency by having embarked on an early start to the last of summer’s weekends.

While not going out in a blaze of glory markets again thrived on the lack of any news. In that kind of environment you can easily get used to the good times. With many believing that the Federal Reserve’s policies were responsible for those good times and having a “dove” at its helm, even with telegraphed interest rate hikes and an end to quantitative easing, auto-pilot seems so right.

Until it doesn’t.

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

This week I’m drawn to summer under-performers and there appear to be quite a few among companies that can have a place even in very traditional portfolios.

^SPX ChartIn a world that increasingly seems dominated by technology and bio-technology, my initial thoughts this week are focused on heavy metal, although that may be a consequence of some neuron debilitating nights in Jackson Hole.

Deere (DE) announced further layoffs this past week and has been mired at $85 level. Despite record crop yields Deere has gone fallow of late. While I may still like to see it trading a little lower, it is definitely in the range that I like to own shares, not having done so since August 2013, despite it being a portfolio mainstay, at one point. While its premiums are somewhat depressed along with most everything else, at the moment stocks that have under-performed the S&P 500 for the summer have some enhanced appeal at the market’s current dizzying heights.

Although the question “how much further could it possibly fall?” is not one whose answer most people would want to hear, I like considering high quality companies that have under-performed, as the market adds to its own risk for reversal.

Also in the heavy metal business, General Motors (GM) has been subject to more scrutiny than most companies could ever withstand and I think its CEO, Mary Barra, has reacted and performed admirably, trying to get ahead of the news. In that process General Motors has also found itself mired, but trading in a fairly predictable range, having a nice option premium and an upcoming dividend offer reasons for consideration. However, in order to capture the dividend I may consider the use of a monthly contract, although expanded weekly options are available. With a Monday ex-dividend date, one can even consider the sale of a September 12, 2014 contract and trade off an extra week of option premium for the dividend, if assigned early.

International Paper (IP) may not be the stuff of heavy metal, but there is a chance that some of those white papers controlling our economic and banking policies were presented on their products. It’s also possible that some of those erstwhile cowboys passed an International Paper product along to their friends around the campfire, years ago.

At its current trading level, International Paper has my attention, although I do already own some more expensive and uncovered shares. Management has sequentially created value for investors through strategic spin-offs, which may continue and a healthy dividend. It, too, has under-performed the S&P 500 of late and should have limited geo-political risk, although it does have manufacturing facilities in Russia and “International” in its name.

It’s not too often that I think about adding shares of a Dow component or a really staid “blue chip.” However, despite some low option premiums that usually accompany such names, this week it just feels right, perhaps as somewhat of an antidote to geo-political risk.

Both McDonalds (MCD) and Kellogg (K) also happen to be ex-dividend this week and are generous in their distributions. Both have also taken their lumps recently, badly trailing the already mediocre S&P 500 through the first two months of summer.

While McDonalds isn’t entirely immune to geo-political risk, witness the sudden closure of its flagship Russian restaurant and others throughout the country, following the pattern initially seen in Crimea months ago, the risk seems to be limited, as the real issues are with declining American tastes for its products.

Kellogg quietly manufactures its products in 18 countries and markets them nearly everywhere in the world, yet it’s not too likely that anyone or any government will make Kellogg the scapegoat for its geo-political shenanigans. Although I’ve never purchased shares, it’s a company that I consistently look at in order to capture its dividend, but have always gone elsewhere to be requited.

This time may be different, though. The combination of under-performance, option premium and dividend, coupled with a little bit of a time buffer through the use of a monthly option contract provides some comfort at a time when the world may be a tinderbox.

Halliburton (HAL) also goes ex-dividend this week, but its puny dividend isn’t the sort of thing that beckons anyone to begin a chase. However, shares have recently been under attack. Although only mildly trailing the S&P 500 for the summer its decline in the past month has been 8%. That’s enough to get my attention in return for receiving an option premium and perhaps a dividend payment, as well.

Pfizer (PFE) is somewhat of a mystery to me. It is thought to have a relatively shallow pipeline of new drugs, has been rebuffed in its attempt to swallow up some competition and perhaps gain a tax inversion opportunity. The mystery, though, is why shares had fallen as they have done over the summer. Whatever disappointment existed due to the failed buyout was in excess of any premium that the market attached to that buyout and the favorable tax situation.

As with International Paper, I already own uncovered shares, but am willing to now add shares as it has shown the ability to bounce back from its recent lows. While its premium isn’t necessarily the most provocative, in the past it has been the ability to repeatedly rollover shares that has been the real reward.

You can add Blackstone (BX) to the list of uncovered positions that I hold, with the most recent contract expiring this past Friday. Undoubtedly, Blackstone’s prospects are tied to a healthy stock market and an overall healthy economy, as its varied business interests and investments are the real product and they live and die through the whims of both masters.

That’s the kind of risk that’s represented in its high beta and reflected in its option premiums. However, in this period of extraordinarily low volatility, even Blackstone is having a hard time generating premiums of old. Still, its recent decline, in the absence of any real news and during a market rise makes me believe that despite the warning signs, it may offer some safety, particularly if there is further strength in the financial sector, as in the past week.

I had been hoping to have my shares of Best Buy (BBY) assigned this past week, in order to have a free and clear mind when considering the upcoming earnings report this week. That wish was granted and its again time to consider a trade in shares.

Best Buy frequently offers a good earnings related trade due to its enhanced premiums, that in turn are due to its propensity for explosive earnings related moves. While the option market is currently assigning an implied move of 8% next week, an ROI of 1% can currently be achieved by selling puts at a strike level 8.7% below Friday’s closing price.

I generally like to see a larger gap between the implied volatility and the strike price returning the threshold premium before considering the sale of puts in advance of earnings. In this case, I may be more inclined to wait after earnings and willing to pile on if shares disappoint. However, with an ex-dividend date just two weeks later, rather than selling puts in the aftermath of a large share drop I might consider the purchase of shares and sale of call options.

Finally, what a roller coaster Abercrombie and Fitch (ANF) has found itself riding. After garnering the honor being named the “Worst CEO of 2013” shares have made an impressive turnaround.

I have no clue how suddenly its products could have become “cool” again, or why teens may now be flocking to its stores or what aggressive strategic changes CEO Jeffries may have implemented, but the sudden favor it has found among investors is undeniable, as shares have left the S&P 500 behind in the dust over the past month.

For me, that kind of share acceleration is a perfect message to consider the sale of puts as earnings are to be released.

The option market is implying a price move of 8.6%, however, a 1% ROI may be achieved at a strike level 13.8% below Friday’s close. That’s the kind of gap that I like seeing. However, as with Best Buy, there is the matter of an ex-dividend date, which happens to be on the same date as earnings are released.

If wanting to take part in this trade, that essentially leaves three different scenarios, including the commonly executed sale of puts before or after earnings. In the case of doing so before earnings the sal
e of puts in the face of an impending ex-dividend date frequently works to the disadvantage of the seller, much in the same way as selling calls into an ex-dividend date serves as a seller’s advantage.

That disadvantage is eliminated in selling puts after earnings, in the event of the share’s decline. However, another possibility, and one that would very likely include retention of the dividend, is the sale of deep in the money calls, particularly if using a monthly expiration. Additionally, if shares move higher after earnings, once the added volatility is removed the deeper in the money position may likely be closed at a small net price following concurrent share sales, allowing funds to be re-deployed.

Take that, complacency.

Traditional Stocks: Blackstone, Deere, General Motors, International Paper, Pfizer

Momentum:

Double Dip Dividend: Halliburton (8/29), Kellog (8/28), McDonalds (8/28)

Premiums Enhanced by Earnings: Abercrombie and Fitch (8/28 AM), Best Buy (8/26 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 – August 18 -22, 2014

August 18 – 22, 2014 

Option to Profit Week in Review
August 18 – 22,  2014
 
NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
3 / 3 5 0 0  / 0 2  / 0 0

    

Weekly Up to Date Performance

August 18 – 22, 2014

New purchases for the week trailed the unadjusted S&P 500 by 0.1%, but beat the adjusted index by 0.2% during a week that the market had its best performance in about 4 months.

New positions opened this week went 1.6%% higher, however the overall market was 1.7% higher on unadjusted basis and 1.4% higher on an adjusted basis.

Performance of closed positions continued to out-perform the S&P 500 performance by 1.8%. They were up 3.7% out-performing the market by 93.2%. 

With really almost nothing having happened this week it turned out to be the 3rd best performing week of the year and the best in the past 4 months.

That’s generally not good news when you’re hedging your bets and most hedge funds are again looking at how to play significant catch up with the indexes, just as it had to do in 2013, although the overall climb this year has been much more subdued.

Last week was definitely one of those “left behind” kind of weeks that don’t happen very often. Given, however, how strongly the market climbed this week I was expecting to once again be left in the dust, but happily it didn’t work out that way.

What did happen was a fair number of assignments, which isn’t unusual when the market has a sharp climb higher. Fortunately, the week also saw the opportunity to develop cover on a number of positions, as well as being able to execute some rollover trades.

It was also nice to grab some more dividends, with even more expected next week.

Among those going ex-dividend next week is Holly Frontier.

It goes ex-dividend for its special dividend of $0.50 on Monday. Although shares closed at $51.26, there’s not much reason to expect that the September 20, 2014 $51 calls will be assigned early.

Those contracts will be adjusted down to $50.50 on Monday as the opening share price will be adjusted to $50.76 and then shares go ex-dividend for their regular quarterly dividend of $0.32 on August 28, 2014.

Complicated? Maybe, but if shares are above $50.50 on Wednesday at the close, because we’re dealing with a September 20 contract the chances of early assignment are reduced.

When putting it all together, the rejuvenation of cash, the option premiums and the dividends that will get deposited into the account, it was a bit of good fortune to be able to keep up with the broad market that would have been well appreciated last week, but at least this week wasn’t a duplicate.

As Friday’s trading session neared its close some of you may have noticed that I did something that I haven’t done in over a year, but may begin to do with more frequency if everything is aligned just right.

What I used to do on a fairly regular basis was to rollover contracts even if they were in the money and unlikely to expire. I did that rather than accepting assignment.

This week, with Whole Foods, came that opportunity.

The reason for rolling those shares over was related to having a fair number of positions already destined for assignment and not having very many positions scheduled for contract expiration next week.

Additionally, in this instance I wanted to grab the additional 0.8% net premium, rather than having to find another stock on Monday to take its place.

In a small way that decreases the need to find at least one replacement position at a time when there is so much uncertainty still in the air and the market is again at or right near new highs.

Given the continuing low volatility that means I’ll have greater leeway in selecting expirations for any new positions opened next week. Since the best premiums are still with the shorter term contracts and those premiums seemingly drop off of a cliff as going out much further, there won’t be the worry of being too heavily reliant on the outcomes of a single week.

Whenever there are too many positions set to expire on a single day I get a little nervous, because it doesn’t take too much to upset the apple cart and ruin some well laid plans.

Next week it’s almost like getting off to a fresh start, but with lots of money to do so and no real compelling requirement to spend, other than the desire to generate some income.

Fortunately, some of the positions going ex-dividend next week will relieve some of the need to look for other income streams and there may be some good reason to look at some very staid companies also going ex-dividend next week in order to supplement the existing dividends with some more and even some option premiums, to boot.

But that’s next week and that’s still so far away.

 

    

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:   CCL, WAG, WFM

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycleWFM

Calls Rolled over, taking profits, into extended weekly cycle:  WAG (9/12)

Calls Rolled 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:  EBAY, FAST, GM, HFC, HFC

Put contracts expired: none

Put contract rolled over: none

Long term call contracts sold:  none

Calls Assigned:  BBY, DD, DG, DOW, EBAY, MET

Calls Expired:   BX, LVS 

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 PositionsCCL (8/20 $0.25), RIG (8/20 $0.75). TGT (8/18 $0.52), WAG (8/19 $0.34)

Ex-dividend Positions Next Week:  HFC (8/25 $0.50 Special dividend), HFC (8/28 $0.32), LO (8/27 $0.62), SBGI (8/26 $0.16)

 

 

For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, BMY, BX, C, CHK, CLF, COH, FCX, IP, JCP, LULU, LVS, MCP, MOS,  NEM, PBR , PFE, 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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Daily Market Update – August 22, 2014

                                                                                                                                   

 

 

Daily Market Update – August 22, 2014 (8:00 AM)

The Week in Review will be posted by 6:00 PM and the Weekend Update will be posted by noon on Sunday.

Today’s possible outcomes include:

 

Assignments: BBY, DD, DG, DOW, EBAY, MET

Rollovers:  WAG, WFM

Expirations:   BX, LVS

 

Trades, if any, will be attempted to be executed by 3:30 PM EDT.

 

 

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