Weekend Update – May 24, 2015

There was a time, a long time ago, that people actually made telephone calls and the ones on the receiving end didn’t have Caller ID to screen those calls.

Back in those days, without any screening device, there were lots of wrong numbers. Sometimes, if it got to the point that you actually began to recognize the voice on the other end, those wrong numbers could become annoying. Of course, the time of the day also played a role in just how annoying those wrong numbers could be and they always seemed to come at the worst of times.

For example, just imagine how bad the timing might be if you discovered that the wrong GDP numbers had played a role, maybe a major role, in helping stock markets move higher in the belief that interest rate increases weren’t going to be imminent.

Somehow, that’s not as funny as the intentionally wrong number prank phone calls made by Bart Simpson.

Although anyone could make the honest mistake of dialing a wrong number, in the back of your mind you always wondered what kind of an idiot doesn’t know how to dial? After all, it was just a simple question of transposing numbers into action.

Otherwise, numbers were a thing of beauty and simply reflected the genius of mankind in their recognition and manipulations.

For many years I loved arithmetic and then I learned to really enjoy mathematics. The concept that “numbers don’t lie” had lots of meaning to me until I learned about interpretative statistics and came to realize that numbers may not lie, but people can coerce them into compromising themselves to the point that the numbers themselves are blamed.

As we’ve all been on an FOMC watch trying to predict when a data driven Federal Reserve would begin the process of increasing rates it’s a little disconcerting to learn that one of the key input numbers, the GDP, may not have been terribly accurate.

In other words, the numbers themselves may have lied.

As those GDP reports had been coming in over the past few months and had been consistently disappointing to our expectations, many wondered how they could possibly be reflecting a reality that seemed to be so opposite to what logic had suggested would be the case.

But faced with the sanctity of numbers it seemed a worthless exercise to question the illogical.

While many of us are wary of economic statistics that we see coming from overseas, particularly what may be self-serving numbers from China, there’s basically been a sense that official US government reports, while subject to revision, are at least consistent in their accuracy or inaccuracy, as the methodology is non-discriminatory and applied equally.

It really comes as a blow to confidence when the discovery is made that the methodology itself may be flawed and that it may not be a consistently applied flaw.

The word for that, one that we heard all week long, was “seasonality.”

The realization that the first quarter GDP was inaccurate puts last month’s FOMC minutes released this past week in a completely different light. While the FOMC Governors may not have been inclined to increase rates as early as this upcoming June’s meeting, that inclination may at least have been partially based upon erroneous data. That erroneous data, although perhaps isolated to a particular time of the year, therefore, may also impact the rate of change observed in subsequent periods. Those projected trends are the logical extension of discrete data points and may also contribute to policy decisions.

But not so readily once you find that you may have been living a lie.

Next week, a holiday shortened trading week, ends with the release of the GDP and may leave us with the question of just what to do with that data.

This past Friday, Federal Reserve Chairman Janet Yellen gave an address and didn’t offer any new insights into the thoughts of the FOMC, particularly as the issue of the integrity of data was concerned.

With the S&P 500 resting for the week at what may either be a resistance level or a support level, what she also didn’t do was to offer stock market bulls a reason to believe that a dovish FOMC would take a June interest rate increase off the table to offer a launching pad.

As the market sits right below its record closing highs and with earnings season begin to wind down, taking those always questionable numbers away with them until the next earnings season begins in less than 2 months, all we have left is the trust in the consistency and accuracy of economic reports. However, taking a look at both the Shanghai and Hang Seng Indexes, maybe questionable numbers isn’t such a bad thing, after all.

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

Coach (NYSE:COH) and Michael Kors (NYSE:KORS) have been very much linked in people’s minds ever since Coach’s very disappointing sales and earnings report in July 2013. At that time the storyline was that Coach was staid and uninteresting and had been supplanted in all ways by Kors.

To a large degree that mindset still continues, despite Kors steep descent from its highs of 2014. What has gone unnoticed, however, is that other than for the 6 month period after that disastrous earnings report in 2013, Coach shares have actually out-performed Kors through most of the time thereafter.

Coach didn’t fare terribly well after its most recent earnings report and its price has since returned back to where it had built a comfortable base. With an ex-dividend date upcoming the following week I think that I’m ready to add shares to a more expensive pre-existing lot that has been waiting for more than a year to be assigned and the past 8 months to be joined by another lot to help alleviate its misery.

With that upcoming dividend and with this week being a shortened trading week and offering lessened option premiums, I would likely consider a purchase of Coach shares and the sale of an extended weekly option, probably also seeking some capital gains on shares by using an out of the money strike price.

Kors on the other hand is reporting earnings this week and the option market is implying a 7.5% price movement. While not a very big differential, a 1% ROI may be achieved with the sale of a weekly put option if the shares fall less than 8.3% next week. If willing to add an additional week to the put contract expiration that would allow a fall of almost 10% before being at risk of assignment of shares.

Normally I don’t like to go more than a week at a time on a put sale unless needing to rollover a put that is deep in the money in order to prevent or delay assignment. However, the premiums this week are somewhat lower because of the holiday and that means that risk is a little bit higher if selling puts with a particular ROI as a goal in mind.

While Coach has been resistant to being buried and cast away, it’s hard to find a company that has had more requiems written for it than GameStop (NYSE:GME).

With game makers having done well of late there may be reason to delay a public performance of any requiem for yet another quarter as GameStop continues to confound investors who have long made it a very popular short position.

Unlike Kors, which pays no dividend, I do factor a dividend into the equation if selling puts in advance or after earnings are reported. GameStop reports earnings this week and will be ex-dividend sometime during the June 2015 option cycle.

With the option market having an implied price move of 6.2% as earnings are released, a 1% ROI can be achieved with the sale of a weekly put if shares don’t fall more than 6.8%. However, if faced with assignment, I would try to rollover the put options unless the ex-dividend date is announced and it is in the coming week. In that event, I would take assignment and consider the sale of calls with the added goal of also capturing the dividend.

I’ve been waiting a long time to re-purchase shares of Baxter International (NYSE:BAX) and always seem drawn to it as it is about to go ex-dividend. This week’s ex-dividend date arrives at a time when shares are approaching their yearly low point. I tend to like that combination particularly when occurring in a company that is otherwise not terribly volatile nor prone to surprises.

As with some other trades this week I might consider bypassing the weekly option and looking at an extended weekly option to try to offset some of the relatively higher transaction costs occurring in a holiday shortened week.

Qualcomm (NASDAQ:QCOM) is also ex-dividend this week and seems to have found stability after some tumultuous trading after its January 2015 earnings report. With some upcoming technology and telecom conferences over the next 2 weeks there may be some comments or observations to shake up that stability between now and its next earnings report. However, if open to that risk, shares do offer both an attractive option premium and dividend.

With shares currently situated closer to its yearly low than its high it is another position that I would consider selling an extended weekly option and seeking to also get some capital gains on shares by using an out of the money strike price.

Finally, retail hasn’t necessarily been a shining beacon of light and whatever suspicions may surround the GDP, there’s not too much question that retailers haven’t posted the kind of revenues that would support a consumer led expansion of the economy, although strangely shoes may be exception.

One of the more volatile of the shoe companies has been Deckers Outdoor (NYSE:DECK) and if the option market is any judge, it is again expected to be volatile as it rep
orts earnings this week.

The option market is implying a 10.5% price move in one direction or another this coming week as earnings are released and guidance provided.

Meanwhile, a 1% ROI could potentially be achieved from the sale of a put option if the shares don’t fall more than 15.4%. That’s quite a differential and may be enough to mitigate the risk in the shares of a company that are very prone to significant ups and downs.

As with Kors, there is no dividend to factor into any decision if faced with the need to either embrace or avoid assignment. In that event, I would likely try to roll the put options over to a forward week in an attempt to outlast any decline in share price and wait out price recovery, while still generating premium income.

That sounds good on paper and when it does work out that way, adding up all of those premiums on a piece of paper reminds you how beautiful simple numbers can still be.

Traditional Stocks: none

Momentum Stocks: Coach

Double Dip Dividend: Baxter International (5/28), Qualcomm (6/1)

Premiums Enhanced by Earnings: Deckers (5/28), GameStop (5/28 PM), Kors (5/27 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 – May 18 – 22, 2015

 

Option to Profit

Week in Review

 

May 18 – 22,  2015

 

NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
1 / 0 0 7 0  /  0 0  / 0 1

    

Weekly Up to Date Performance

May 18 – 22, 2015

This was a very forgettable week.

The single new position for the week beat the adjusted and unadjusted S&P 500 by 1.9%.

That position gained 2.1% for the week. The unadjusted and adjusted S&P 500 ended the week having gone just 0.2% higher.

That high ROI was made possible by being able to pocket a full month’s worth of premium and a portion of the dividend while then closing out the position after just 4 days.

Existing positions broke their streak of out-performance this week as energy and materials, which had been primarily responsible for the previous out-performance faltered and were `1% lower for the week.

Lots closed in 2015 continue to out-perform the market. They are an average of 5.2% higher, while the comparable time adjusted S&P 500 average performance has been 1.5% higher. That 3.7% difference represents a 256.6% performance differential.  That’s too large to be sustained, but I’ve been saying that for a while, including much of 2014.

This was as about a quiet of a week in the market as you could expect. Virtually nothing happened to get anyone’s attention and there were virtually no intra-day moves, either.

The pre-opening futures all pointed toward quiet days and that’s exactly how it all worked out.

Neither the release of FOMC minutes nor Janet Yellen’s Friday afternoon speech did anything to move or excite markets. Next week doesn’t look much different, except that next Friday’s GDP release will be more critically looked at and maybe not act as much to shake markets if it holds a surprise.

Somehow, though, with a little bit of luck, there was an opportunity to get some rollovers done and to be able to close out the single new position opened for the week.

Doing that restored the cash pile to where it had begun the week and the rollovers at least helped to generate some cash for the week.

Equally lucky is that it was another week not adding to that list of uncovered positions, but by the same token, there were no opportunities to sell calls on uncovered positions this week.

That would have made it an especially nice and complete week, particularly as dividends were back in the mix thois week

Otherwise, there was absolutely nothing memorable about the week or really setting the tone for the coming week, which is a holiday shortened one.

While it was a very boring and staid week we are left in an unusual position, having only a single option set to expire next week. It’s not totally unexpected, as I mentioned that it might be a possibility sometime last week, but it almost became a reality, except for one position..

That’s almost like starting with a fresh slate.

The only position currently set to expire next week is the Market Vectors Gold Miners ETF, which I think has the distinction of being the single most rolled over position of the past 3 years. One of the 3 currently open lots It has now been rolled over 19 times in 6 months. During that time its price is up just 1%, but the premiums make it a 20% advance.

It’s too bad that they can’t all be like that.

With a little bit of cash reserves in hand, although I’d like to have more ammunition, I’m not adverse to spending any next week. The question may be whether to look at expirations for that week or for the following weeks, as the combination of low volatility and only 4 days worth of time will make for some paltry premiums if looking only at a weekly option.

With earnings now pretty much out of the way, the focus will intensify on interest rates, especially as some doubt has been raised about the validity of some of the data that may have played into the FOMC’s decisions to leave interest rates unchanged.

But for now, I just look forward to a nice relaxing Memorial Day weekend and hope that everyone is able to have one of those.

 

 

 

Note: For those who purchased Cablevision this week, the hope, by selling a deep in the money call in advance of the ex-dividend date was that the shares would be assigned early. That would have sacrificed the dividend in exchange for an entire month’s option premium.

I was very surprised that shares were not assigned early, but in hindsight the option volume seen on the day prior to the ex-dividend date suggests that some may have had an intuition about the very significant price rise that was to occur the following day.

That rise was fueled by two things.

The first wa the entrance onto the US scene of a European cable company that bought a small US provider and made it clear that it wanted to enter US markets in a bigger way. That lent price support across the spectrum. But beyond that, the Dolan Family, principal owners of Cablevision and who have used it very much as a personal play thing, expressed an interest in selling. That was the real surprise and that really sent the stock much higher than others in the sector.

At that point, with shares so deeply in the money and with volatility still so low, there was actually very little time value in the premium and very little to be gained by holding onto the position.

By closing the position at a NC of $19.89, effectively $0.04 of the dividend was retained and the overall ROI was 2.1% for the 4 days of holding.

I had considered closing the position on the third day of holding, however that may have subjected some to a free-riding violation if they had used unsettled funds to make the original share purchase.

While the ROI was reduced from 2.7% for the monthly contract to 2.1% for the 4 day holding period, presumably the recycled cash over the next 4 weekly periods can more than make up that 0.6% giveback.

 

 

 This week’s details may be seen in the Weekly Performance spreadsheet * or in the PDF file, as well as in the summary below

(Note: Duplicate mention of positions reflects different priced lo
ts):



New Positions Opened:   CVC

Puts Closed in order to take profits:  none

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

Calls Rolled over, taking profits, into extended weekly cycle:  ANF (6/5), DOW (7/2), KMI (6/26), MRO (6/5), TWTR puts (6/5)

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

Calls Rolled Over, taking profits, into a future monthly cycleUAL (Sep 18, 2015)

Calls Rolled Up, taking net profits into same cyclenone

New STO:  none

Put contracts expired: none

Put contracts rolled over: none

Long term call contracts sold:  none

Calls Assigned: none

Calls Expired:  none

Puts Assigned:  none

Stock positions Closed to take profits:  CVC

Stock positions Closed to take losses: none

Calls Closed to Take Profits: none

Ex-dividend PositionsMRO (5/17 $0.21), CVC (5/20 $0.15), MAT (5/20 $0.38)

Ex-dividend Positions Next WeekLXK (5/27 $0.36), RIG (5/27 $0.15)

 

 

For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, ANF, CHK, CLF,  FAST, FCX, HAL, .INTC, JCP, JOY, LVSMCP, MOS, RIG, 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 – May 22, 2015

 

 

 

Daily Market Update – May 22, 2015  (9:30 AM)

 

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

The following trade outcomes are possible today:

Assignments:   none

RolloversGDX, TWTR (puts)

Expirations:   KMI, UAL

 

The following were ex-dividend this week: MRO (5/17 $0.21), CVC (5/20 $0.15), MAT (5/20 $0.38)

The following are ex-dividend next week: LXK (5/27 $0.36), RIG (5/27 $0.15)

 

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

 

 

 

 

 

 

 

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Daily Market Update – May 21, 2015 (Close)

 

 

 

Daily Market Update – May 21, 2015  (Close)

 

The market seems to be reflecting the fact that the biggest story of the week is that it marked the final episode of the David Letterman era on late night television.

This morning is another in a series of quiet early morning starts in a week that doesn’t have very much news, although there may be some spillover as the concept of official government GDP numbers having been wrong begins to really sink in.

The quiet mornings of the past week have also been reflected in this week’s personal trading activity. The market hasn’t done too much to make tomorrow look as if it will be overly active one on a personal level, as the weakness has made those rollovers and assignments look less and less likely.

Yesterday’s release of the FOMC minutes gave the impression that interest rate hikes were not going to be likely in June, as the members of the FOMC repeatedly emphasized their dependence on data.

This week is likely to continue being a quiet one, unless some more news related to the quality of economic data comes in.

While the reading of those minutes gave stock market bulls some reason to believe that the rally could continue, the reality is that all of those words that were being said were all being said in the context of believing the data that was in front of them.

Any further insight into what the data really is, especially if it does indicate more substantial growth than the disappointing numbers we had been receiving, could easily get the FOMC to take an action that is completely counter to what they had been intending.

You certainly couldn’t blame them for that.

If so, that would certainly put the brakes on any continuing climb beyond 2120 on the S&P 500.

With next week being a holiday shortened week I’m still undecided as to what tactic to take. Much of that indecision is based upon not knowing whether the week’s final 2 days would bring any opportunity to create income or see cash reserves get replenished, as those prospects were seemingly less likely before Thursday’s session got underway.

I would have loved to have seen some nice, albeit totally unexpected advance today to be able to get those expiring positions into better condition for either rollovers or assignments, but it really didn’t require that kind of move to at least get some trades done today.

Although the early pre-open trading wasn’t giving any indication of that being the case, there was at least still some hope for some of the positions to be put into action before Friday’s final bell. Today offered some chance for rolling over a few positions taking some advantage of their price stability today and to close out the single new position opened this week.

That created some income and brought the cash reserves to where the week started. That makes it a little easier to deal with tomorrow’s market, regardless of what direction it takes.

If conventional wisdom holds, there’s not much reason to overl
y commit to the long side ahead of a long weekend, but at least the ability to secure today’s trades makes it less of a hostage situation.

Still, while not committing to long positions over a long weekend is the logical expectation, there hasn’t been too much of that over the past couple of years, as some of the best Friday’s have come either going into long weekends or weekends of great uncertainty.

So I’ll remain hopeful and watchful as the hours tick down to Friday’s closing bell.

 

 

 

 

 

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Daily Market Update – May 21, 2015

 

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Daily Market Update – May 21, 2015  (9:15 AM)

 

The market seems to be reflecting the fact that the biggest story of the week is that it marked the final episode of the David Letterman era on late night television.

This morning is another in a series of quiet early morning starts in a week that doesn’t have very much news, although there may be some spillover as the concept of official government GDP numbers having been wrong begins to really sink in.

The quiet mornings of the past week have also been reflected in this week’s personal trading activity. The market hasn’t done too much to make tomorrow look as if it will be overly active one on a personal level, as the weakness has made those rollovers and assignments look less and less likely.

Yesterday’s release of the FOMC minutes gave the impression that interest rate hikes were not going to be likely in June, as the members of the FOMC repeatedly emphasized their dependence on data.

This week is likely to continue being a quiet one, unless some more news related to the quality of economic data comes in.

While the reading of those minutes gave stock market bulls some reason to believe that the rally could continue, the reality is that all of those words that were being said were all being said in the context of believing the data that was in front of them.

Any further insight into what the data really is, especially if it does indicate more substantial growth than the disappointing numbers we had been receiving, could easily get the FOMC to take an action that is completely counter to what they had been intending.

You certainly couldn’t blame them for that.

If so, that would certainly put the brakes on any continuing climb beyond 2120 on the S&P 500.

With next week being a holiday shortened week I’m still undecided as to what tactic to take. Much of that indecision is based upon not knowing whether the next 2 days will bring any opportunity to create income or see cash reserves get replenished, as those prospects are seemingly less likely.

I would love to see some nice, albeit totally unexpected advance today to be able to get those expiring positions into better condition for either rollovers or assignments.

Although the early pre-open trading isn’t giving any indication of that being the case, there is at least still some hope for some of the positions to be put into action before Friday’s final bell.

But if conventional wisdom holds, there’s not much reason to overly commit to the long side ahead of a long weekend.

That’s the logical expectation, but there hasn’t been too much of that over the past couple of years, as some of the best Friday’s have come either going into long weekends or weekends of great uncertainty.

So I’ll remain hopeful and watchful as the hours tick down to Friday’s closing bell.

 

 

 

 

 

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