Week in Review – October 27 – 31, 2014

 

Option to Profit Week in Review
October 27 – 31,  2014
 
NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
2 / 2 4 4 1  / 0 2  / 0 0

    

Weekly Up to Date Performance

October 27 – 31, 2014

After two consecutive weeks of no new purchases it was nice to finally do something, but following two consecutive days of gains totaling nearly 400 points it was hard to keep up.

The two new purchases, both dividend plays, were ahead 2.2% for the week, but still lagged the S&P 500 which was 2.7% higher for the week and 2.6% higher on an adjusted basis, following a nearly 2% move higher in those same 2 days.

Unlike previous weeks that characterized the sharp upward climb coming after a ne
arly 9% drop, this time around there was news to account for the market’s movement, especially to end the week, with some very unexpected news coming from the Bank of Japan.

For the first time in 3 weeks there was an assignment, albeit just one. Closed positions finished 3.5% higher, as compared to 1.8% for the S&P 500 for the comparable holding periods. That 1.7% advantage represents a 93% difference in return.

 

It’s hard to know how to characterize this week.

It ended on a real surprise, although it was the good kind of surprise.

No one expected the Bank of Japan to do what everyone has been saying was need to be done by the European Central Bank.

Everyone agreed that the unexpected action is what sent markets soaring from the outset on Friday and as opposed to the market’s sharp climb on Thursday, the week ending surge was broad and not confined to a very small segment of the market and not so wholly reliant on the performance of a single stock.

As has been the case with the majority of hedge funds in 2014, when you have a week that climbs so strongly, hedgers are left in the dust. That happened this week, especially if you have some significant energy holdings which continue to lag the market and may also be responsible for some of the broad advances as low energy prices are good for most everyone other than those owning energy stocks.

This week, though, was one where there was at least some more trading activity in the past few weeks, in addition to the 2 new purchases to get the flow of income moving once again, especially after a very fallow week last week.

This week there was a decent combination of rollovers and sales of calls on uncovered positions, in addition to the single assignment.

Of course, I still want more of each of those categories.

Next week already has 6 positions set to expire and with a little bit of cash replenishment I may be interested in adding some additional positions, but would still be far more interested in making what already exists become more productive portfolio members.

With volatility back to its very low levels, with very little mention by the very people that were shouting from the rooftops about its climb, the option premiums, especially for out of the money strikes, such as are used in the DOH Trades aren’t very attractive and just don’t offer much in the way of enticement.

For those that look at the daily updated spreadsheet, you may have noticed an additional column to the far left. coded in “Red” and “Green.”  That column represents the break even price on positions that includes all realized premiums and dividends and can act as a guide as to what strike price, if assigned, can be sold without incurring a net loss on a position. The guide may be helpful in identifying opportunities to capitalize on achieving premiums even at strikes below the original purchase price and that would still result in a gain for the position.

I may come to rely on those more frequently in order to accomplish 3 things:

     a. generate more premium income

     b. generate more cash reserves through increased assignments

     c. reduce the total number of holdings and lots

As is usually the case, the ideal time to try to do such trades is during upward moves in shares, despite the declining premiums that ensue.

As opposed to DOH Trades, in which you generally would prefer not to have your shares assigned, as it would represent a net loss, the decision to rollover positions that have a “Green” strike price may be done on an individual basis, depending on needs, such as “do I want to generate cash reserves?”

I don’t usually speak about individual stocks in the week end wrap up, but Intel warrants some comment.

 

Next week, for those that own Intel, which goes ex-dividend on Wednesday, you’ve probably noticed its wild swings on Thursday and Friday. With its generous dividend and shares being currently deep in the money, I may look to roll the position in one of two ways. Either roll the November 7, 2014 $33 contract to a $34 November 14, 2014 contract or roll the existing contract to a November 7, 2014 $33.50.

With Intel currently being deep in the money, either of those trades, even if assigned early and very likely to be assigned early, would add, at the current prices for options, an additional
$0.12 in premiums, to offset the likely loss of the $0.22 in dividend, while allowing the funds to be re-invested in some other income producing position.

So if that Trading Alert comes your way, don’t scratch your head, too much. Given the extremely heavy put option activity on Thursday, some of which expired today, anything can still happen with those shares, as someone made a very, very big bet that Intel shares would be heading lower.

Quickly.

So far, they are wrong and the large block of $33.50 in the money puts that expired today lost about $0.90/share in the 2 day transaction, as there wasn’t any evidence of them being rolled forward. It was simply a very big bet that was allowed to die, although the bet is still on for the week of November 14th.

But that’s just a single stock.

So as hard as it is to characterize this past week, it’s even harder to understand what next week may bring. It’s never easy, but if anyone has any clue as to what next week may bring, let me know, because I’m not a big believer that Quantitative Easing in other countries is necessarily good for the US markets, as it would do what our QE did.

That is, siphon money from foreign markets into our own, except this time we’re the foreign market.

 

 

   

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:   F, INTC

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycle:  F, LVS

Calls Rolled over, taking profits, into extended weekly cycle:  DOW (11/14), EMC (11/14)

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

Calls Rolled Over, taking profits, into a future monthly cyclenone

Calls Rolled Up, taking net profits into same cyclenone

New STO:  ANF (11/7), K (12/20), LO (11/7), TMUS (11/14)

Put contracts expired: none

Put contracts rolled over: none

Long term call contracts sold:  none

Calls AssignedWFM

Calls Expired:  BX, GM

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 PositionsF (10/29 $0.12)

Ex-dividend Positions Next Week:  INTC (11/5 $0.22), WLT (11/6 $0.01)

 

 

For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, BX, CHK, CLF, COH, EBAY, FAST, FCX, GDX, GM, GPS, HAL, HFC, .JCP, JOY  LULU, LVS, MCP, MOS,  NEM, 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 – October 31, 2014

 

  

 

Daily Market Update – October 31, 2014 (8:30 AM)

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

Today’s possible trading outcomes include:

Assignments:  none

Rollovers:  DOW, EMC,  WFM

Expirations:   BX, GM

 

The following stocks were ex-dividend this week: Ford (10/29 $0.12)

The following stocks are ex-dividend next week: INTC (11/5 $0.22), WLT (11/6 $0.01)

 

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

 

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Daily Market Update – October 31, 2014 (Close)

 

  

 

Daily Market Update – October 30, 2014 (Closed)

I really did expect some kind of a big move yesterday to come in the aftermath of the FOMC meeting. Sometimes that big move is simply a knee-jerk, sometimes it is a sustained move to finish the day.

Sometimes it is the next day, but frequently that next day is in the opposite direction.

Thanks to Visa, which contributed about 150 points to the DJIA gain of 221 points. The rest of the market eventually turned positive, but looked like it had to be pulled kicking and screaming. Then, it looked like it enjoyed what Visa was having.

For the past year, every FOMC Statement release has been met in a positive manner, especially those alternate months when Janet Yellen held her post-FOMC press conference.

This time around the reaction was pretty muted, but it was negative and in the early morning the indication was of some continuing negative tone. Excluding Visa that tone continued for the first two hours of trading.

The surprise of not having seen a large movement yesterday came because for the first time in about a year or more, there was reason to believe that there’s a movement to the hawkish side on the Federal Reserve, which now may mean that interest rate hikes will come sooner rather than later.

Even though every one knows that hikes are coming sooner or later the stock market doesn’t like that sort of thing and at the first whiff of it occurring the market will react with shock, as if it was the first time anyone had heard of such a  thing.

Just days ago there were those saying that the original thought that those increases would come somewhere around the middle of 2015, would now be moved to early 2016. That was bullish for stocks.

Suddenly, however, there is talk that it will be early 2015.

The fact that the two previous dissenters, both hawks, were now in support of the statement and a dove was now a dissenter says something that should have caused market bulls to question how much longer the party would continue..

The FOMC Statement also clearly was not in alignment with the comments made by James Bullard, which many attributed to the sudden market recovery from a 9% drop.

So, putting it all together, the anticipated reaction should have been strongly negative.

But it wasn’t. Far from it, in
fact, even without Visa in the mix.

For now, I just want to end the week with some assignments. Those haven’t been very frequent lately and they could come in handy to either re-invest or store for some time in the future.

I started this morning still hopeful that the last two days of this week would offer some opportunity to generate income, but those opportunities have been somewhat more difficult lately, but for an unexpected reason.

There have been just too few call options buyers to be found with so many positions not even having a single bid. In such cases you can’t really close a bid – ask gap through compromising on price. You need to have an able body on the other end to compromise with to make the sale. Fortunately, there were some of those able bodies around for Las Vegas Sands and T-Mobile today, but they weren’t there for those, either, earlier in the week.

That seems like an odd situation as the market is recovering from that 9% drop and did so in very convincing and rapid fashion. Past history would have suggested plenty of people betting on further market moves through their options market activity. Options buyers usually go on hunches or follow momentum. Either they have no hunches or don’t believe the momentum.

Overall, the Put/Call ratio over the past 2 weeks is higher than in the last 8 years, so it looks as if the the skew may be toward expecting declines, but that skew is probably enhanced by the increased used in portfolio protection, especially at low pricing.

If you really want to see the imbalance of put action, look no further than Intel, which had absolutely incredible put volume today both for this week’s expiring option and November 14th. In this case the complete absence of news pointed solely to speculative action in markets with great expectations for even more abrupt drops ahead, although the weekly put trade today was an in the money variety at $33.50. The week of November 14th expiry puts, however, were focused on the $31.50 and $32 strike and came at various times during the trading session, but also in very large quantity.

Since the option market usually gets it wrong, my hope is that the paucity in call activity and the skew toward puts is a sign of some further market advance.

Again, I don’t mind going along for the ride right now and will take gains in any way they may come.

 

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Daily Market Update – October 30, 2014

 

  

 

Daily Market Update – October 30, 2014 (9:00 AM)

I really did expect some kind of a big move yesterday to come in the aftermath of the FOMC meeting. Sometimes that big move is simply a knee-jerk, sometimes it is a sustained move to finish the day.

Sometimes it is the next day, but frequently that next day is in the opposite direction.

For the past year, every FOMC Statement release has been met in a positive manner, especially those alternate months when Janet Yellen held her post-FOMC press conference.

This time around the reaction was pretty muted, but it was negative and so far this morning the early indication is of some continuing negative tone.

The surprise of not having seen a large movement comes in because for the first time in about a year or more, there is reason to believe that there’s a movement to the hawkish side on the Federal Reserve, which now may mean that interest rate hikes will come sooner rather than later.

Even though every one knows that hikes are coming sooner or later the stock market doesn’t like that sort of thing and at the first whiff of it occurring the market will react with shock, as if it was the first time anyone had heard of such a  thing.

Just days ago there were those saying that the original thought that those increases would come somewhere around the middle of 2015, would now be moved to early 2016. That was bullish for stocks.

Suddenly, however, there is talk that it will be early 2015.

The fact that the two previous dissenters, both hawks, were now in support of the statement and a dove was now a dissenter says something that should have caused market bulls to question how much longer the party would continue..

The FOMC Statement also clearly was not in alignment with the comments made by James Bullard, which many attributed to the sudden market recovery from a 9% drop.

So, putting it all together, the anticipated reaction should have been strongly negative.

But it wasn’t.

FOr now, I just want to end the week with some assignments. Those haven’t been very frequent lately and they could come in handy to either re-invest or store for some time in the future.

I’m still hopeful that the last two days of this week will offer some opportunity to generate some income, but those opportunities have been somewhat more difficult lately, but for an unexpected reason.

There have been just too few call options buyers to be found with so many positions not even having a single bid. In such cases you can’t really close a bid – ask gap through compromising on price. You need to have an able body on the other end to compromise with to make the sale.

That seems like an odd situation as the market is recovering from that 9% drop and did so in very convincing and rapid fashion. Past history would have suggested plenty of people betting on further market moves through their options market activity. Options buyers usually go on hunches or follow momentum. Either they have no hunches or don’t believe the momentum.

Overall, the Put/Call ratio over the past 2 weeks is higher than in the last 8 years, so it looks as if the the skew may be toward expecting declines, but that skew is probably enhanced by the increased used in portfolio protection, especially at low pricing.

Since the option market usually gets it wrong, my hope is that the paucity in call activity and the skew toward puts is a sign of some further market advance.

Again, I don’t mind going along for the ride right now and will take gains in any way they may come.

 

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Daily Market Update – October 29, 2014 (Close)

 

  

 

Daily Market Update – October 29, 2014 (Close)

Other than the fact that recent months have seen rallies on the day before an FOMC Statement release, there really wasn’t any reason to have expected yesterday’s nearly 200 point climb.

Although there was a gap higher to start the day, a larger move higher started at about 1 PM, with no real news to account for that optimism.

It really is very confusing to understand what is going on, particularly if you believe that the recent abrupt bounce higher of the nearly past two weeks has been due to the suggestion that the Federal Reserve wouldn’t be exiting its Quantitative Easing policies this month, as scheduled.

It would seem then that it is a binary bet that is on the table. Either QE ends or it doesn’t and that was a fairly big bet being made yesterday.

Of course, there were those who believed that yesterday’s market was an expression of confidence that the market could continue to thrive without QE continuing and then there were those who believed that the 200 points tacked on was an expression of the FOMC’s decision to continue some form of QE.

At least we would finally get to have some idea this afternoon, but I don’t think anything was really cleared up, despite the fact that we now know that QE has come to its end.

If the past few months have been any indication, in fact, if Janet Yellen’s tenure as the Federal Reserve Chairman is any indication, the market would interpret whatever is contained in the statement as another reason to move higher. But that wasn’t what happened today as there were some really mixed signals that left you wondering whether the FOMC was beginning to take on a more hawkish posture.

While the recent strength has essentially eroded all of the gains in volatility, at this point I wouldn’t have minded seeing the gains continue, as I would like to see some assignments getting made and the opportunity to replenish my cash reserves, which are at a 5 year or more low point.

Today’s market never really offered that opportunity and got moderately weaker after the FOMC release, before recovering somewhat.

Yesterday’s really unexpected rally was simply a good opportunity to take a break and let the momentum carry you along, but in the right direction. Today did nothing other than to create a need to beware of tomorrow as people have a chance to digest what things mean and to position themselves, accordingly.

I would think that for those that were encouraged by James Bullard there has to be a sense of becoming deflated.

Yesterday,
the trade in Ford, in order to capture the dividend, was one of those that also got taken along for the ride. I really didn’t expect it to breech the $14.12 level, which would have made it susceptible for early assignment. After having gotten to about $14.15 it reversed course and fell to about $14.07 with a bit more than an hour to go in trading. But that final hour carried everything along and Ford shares went back up to $14.16 so it was time to do that rollover, although the one day return wouldn’t have been too bad, particularly if enough shares were held, but the potential 2 week return was even better.

As it would turn out, no one reported having had their unrolled shares assigned early, anyway. Although it was questionable whether those shares would be assigned early, because the closing price was only a few pennies above that $14.12 threshold and there were still 3 days left on the contract, I look at the lack of assignments as a sign of bearishness, at least in shares of Ford, if not in the market in general.

Today was going to be a “wait and see” kind of day anyway. from the onset, but with the exception of a single DOH trade in Abercrombie and Fitch, that’s how it remained. Since Wednesday’s are usually the slowest trading day of my week, even when trading frequently, as has been the case up until the past couple of weeks, there was plenty of reason to sit and wait until the 2 PM release, but as it turned out no reason to do anything otherwise after 2 PM.

While I would have liked the opportunity to take advantage of any pop up in the market before that FOMC release  to sell some options, it never came, just as the futures trading predicted would have been the likely case. I would have  jumped at that opportunity.

Unfortunately, neither yesterday nor today were there many buyers of options and very large bid – ask spreads existed couldn’t really be bridged, as I tried to get option sales made in a number of positions yesterday, but without much luck, other than for Kellogg and Ford. Today I didn’t really even try very much, as there were so many stocks with absolutely no bids to buy at all.

That difficulty indicated to me a less optimistic option market, at least on the call side of the equation. Few are betting on a continued climb.

Another strong move higher today could have changed that and might have brought more call buyers back into the market. For today the FOMC offered nothing to entice people into becoming optimistic ready to drive prices even higher.

But there’s always tomorrow.

 

 

 

 

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