Daily Market Update – October 20, 2014 (Close)

There was a time when earnings reports like this morning’s delivered by IBM would have cast a pall on the market, especially coming before the opening bell on a Monday.

Luckily, it’s not your father’s IBM, anymore and it doesn’t have the same impact as it once did.

But still, we’re probably lucky these disappointing earnings weren’t unveiled last week, because they could easily have caused some harm, especially if in the earlier part of the week. At least by coming today we had the continuing good feelings left over from Friday, instead of coming on the heels of a few hundred points loss. 

You do have to wonder how the  company has seemed to lose its way and there certainly can be a new and better era ahead of it, but more importantly you have to wonder in this day and age how any company can ever maintain its predominance for very long.

With the DJIA being price weighted, IBM plays a big role in its calculation, although no quite as much at the moment. Still a lot, though, as it accounts for the entirety of the pre-open futures decline that at least temporarily puts a damper on Friday’s strong rally.

As a rule, each point of a DJIA component stock has a weighting of 7 times on the index, so when IBM was $15 lower, that was about 105 points. That fully explains the huge dichotomy between today’s closes on the DJIA and S&P 500 of about 0.8%.

Hopefully the week will see some kind of price stability in net terms, although I would love to see lots of intra-day movements. In an ideal market there’s minimal net movement but lots of activity. That inefficiency in net movement is great for premiums.

If you would have taken IBM out of today’s DJIA it would have closed the day with a gain of nearly 110 points.

Coming off last week and having finally gone a week without any new purchases, it may be easier to resist spending any money this week again. Certainly easier than the first time, as there’s still no reason to believe that any given day’s strength is the antidote to the past 4 weeks of declines.

I did the resisting today, but there really wasn’t anything that compelling today anyway, so the resisting was pretty easy.

As tempting as so many stock prices look right now there have been so many reasons to avoid those temptations, but like most everything in life, it takes a good degree of hindsight to have some certainty about  that conclusion. Without a doubt, at some point in the future, hindsight will also question why those purchases weren’t made sooner, forgetting all that transpired before.

Last week, other than a f
ew new sales of option contracts on existing positions, was so devoid of activity. I don’t really want to repeat it, but at least there was an overall out-performance in a market that is still trending downward.

Imagine where that market would be if those explosively higher moves hadn’t occurred?

While those higher moves may have sucked people back into the market chasing new positions, even if they represent false promises, at least they have tempered the decline. Without those 200 and 300 point like moves higher we would have been looking at a 10% correction level from the wrong side of 10%.

So this week is another in which I don’t anticipate much in the way of new position additions.

Unlike last week, which was also the monthly cycle ending with the smallest number of expiring positions that I can recall in years, this week already has double the number of last week. I would just love to see some assignments from among that group, but would really be content if at least the opportunity to execute rollovers and make those new call contract sales came to being.

While volatility took a little decline on Friday’s straight climb higher, there may still be reasons to consider some longer term option sales if the forward week premiums show some evidence of that volatility. The two solitary trades for the day both looked to the November 2014 cycle, although Campbell Soup only offered a monthly option, anyway, but I did consider the December cycle.

The diversification by time that was re-initiated a few weeks ago as those premiums started to climb has already had some benefit by being able to lock in some of those premiums and to not be entirely at risk on any single day.

Given the kind of price movements that we’ve seen in the past month, any single day could fall on just the wrong day as it comes to risk of a contract going unassigned, so it is nice not to have all of those contracts subject to the whims of an irrationally adverse price decline.

For the week there may also continue to be opportunity and reason to pursue DOH Trades and attempt to squeeze whatever income is possible out of beaten down stocks, especially if receiving what may be a temporary bump higher.

Any little bit helps.