Daily Market Update – October 26, 2015

 

 

 

Daily Market Update – October 26,  2015  (7:00 AM)

 

The final 2 days of last week put a real nail in Volatility’s coffin for now, as it got to see daylight for only a very short time.

I had enjoyed its brief return and wouldn’t mind seeing an encore, especially after having had some assignments last week and cash in hand for re-investment, if the prices are right.

With still lots more earnings reports to come, it’s hard to imagine that this week will provide the same kind of fertile ground for the market as was the case last week.

Last week we had gifts from the ECB and the People’s Bank of China, in addition to really great earnings from a trio of companies that could conceivably reflect what’s going on in a big portion of the economy.

But other than those three, albeit very important companies, there hasn’t been too much to get excited about.

If you’re the kind that looks at bad earnings news as being the sort of thing that delays an interest rate hike you would be happy, so the news from that trio may put a damper on things a thought now turns to what the FOMC will do this week as it meets and releases its Statement on Wednesday.

More likely than the FOMC actually doing anything, though, is it saying something. It may take note of improving conditions in China and more likely, signs of a recovering consumer led economy in the United States.

Until then, though, we still have half of the trading week to figure out where things were going.

The rally of last week on Thursday and Friday have altered my position that we would see a rally heading into the FOMC Statement release, in anticipation of no real policy change coming from the FOMC.

This morning’s futures point to a much more tentative investing environment.

With a nice amount of cash raised from last week’s assignments, I wouldn’t mind opening some new positions, especially since there are none expiring this week and only 2 ex-dividend positions to generate income flow.

As in past weeks I’m mostly inclined to do so in the face of some declining prices. Lately the market has been good about doing that as the week has opened.

In the past few weeks even a flat opening may have seemed a little bit of an invitation, but following the rapid surges of last week, I think I want to see some more being given back before committing much in the way of new funds.

The S&P 500 is now barely 3% lower from its all time highs after having dropped almost 12 %.

That’s a pretty sizeable gain in less than a single month, so I may want to sit on cash a little bit more than has been the case the past few weeks.

With the market pointing toward a flat open to begin the week I’ll probably be more tentative than I usually like being, but I do like having some more cash in hand than has been the case for quite a while and don’t want to get deep in the hole again so quickly, particularly as a single word change in an otherwise dry tome put out by the FOMC can dash the entire party very quickly.

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Dashboard – October 26, 2015

 

 

 

 

 

SELECTIONS

MONDAY:   Lots more earnings this week, but most attention will be focused on the wording of the FOMC Statement this week, in the assumption that no action is taken on interest rates

TUESDAY:   .A very quiet day yesterday and if this morning’s futures are going to be any indication, the same is in store for today, as the FOMC begins its meeting

WEDNESDAY:  Another quiet morning appears to be ahead, as this afternoon’s FOMC Statement release could be the market’s excuse for a release, as well.

THURSDAY: Yesterday’s surprising move higher on some hawkish tone from the FOMC is being given back in this morning’s pre-opening trading. This morning’s GDP may give some reason to suspect that December may now be the new target date for FOMC action

FRIDAY:. Another quiet day looks to be in the works to end the week, while we await retail earnings that are still another week away

 

 

 

 

 



 

                                                                                                                                           

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 “SNEAK PEEK AT NEXT WEEK” APPEARS ON FRIDAYS

Sneak PeekPie Chart Distribution

 

 

 

 

 

 

 

Weekly Summary

  

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Weekend Update – October 25, 2015

There’s an old traditional Irish song “Johnny, We Hardly Knew Ye,” that has had various interpretations over the years.

The same title was used for a book about President John F. Kennedy, but in that case, it was fairly clear that the title was referring to the short time in which we had a chance to get to know the 35th President of the United States, whose life was cut down in its prime.

But in either case, both song and book are generally a combination of sadness over hopes dashed, although the song somehow finds a way to reflect the expression of some positive human traits even in the face of betrayal and tragedy.

While hardly on the same level as the tragedies expressed by song and written word, I hold a certain sadness for the short lived period of volatility that was taken from us far too soon.

The pain is far greater when realizing just how long volatility had been away and just how short a chance some of us had to rejoice in its return.

Even though rising volatility usually means a falling market and increasing uncertainty over future market prospects, it drives option premiums higher.

I live on option premiums and don’t spend very much time focusing on day to day price movements of underlying shares, even while fully cognizant of them.

When those premiums go higher I’m a happy person, just as someone might be when receiving an unexpected bonus, like finding a $20 bill in the pockets of an old pair of pants.

Falling prices leads to volatility which then tends to bring out risk takers and usually brings out all sorts of hedging strategies. In classic supply and demand mode those buyers are met by sellers who are more than happy to feed into the uncertainty and speculative leanings of those looking to leverage their money.

Good times.

But when those premiums dry up, it’s like so many things in life and you realize that you didn’t fully appreciate the gift offered while it was there right in front of you.

I miss volatility already and it was taken away from us so insidiously beginning on that Friday morning when the bad news contained in the most recent Employment Situation Report was suddenly re-interpreted as being good news.

The final two days of the past week, however, have sealed volatility’s fate as a combination of bad economic news around the world and some surprising good earnings had the market interpreting bad news as good news and good news as good news, in a perfect example of having both your cake and the ability to eat that cake.

With volatility already weakened from a very impressive rebound that began on that fateful Friday morning, there then came a quick 1-2-3 punch to completely bring an end to volatility’s short, yet productive reign.

The first death blow came on Thursday when the ECB’s Mario Draghi suggested that European Quantitative easing had more time to run. While that should actually pose some competitive threat to US markets, our reaction to that kind of European news has always been a big embrace and it was no different this time around.

Then came the second punch striking a hard blow to volatility. It was the unexpectedly strong earnings from some highly significant companies that represent a wide swath of economic activity in the United States.

Microsoft (NASDAQ:MSFT) painted a healthy picture of spending in the technology sector. After all, what prolonged market rally these days can there be without a strong and vibrant technology sector leading the way, especially when its a resurgent “old tech” that’s doing the heavy lifting?

In addition, Alphabet (NASDAQ:GOOG) painted a healthy picture among advertisers, whose budgets very much reflect their business and perceived prospects for future business. Finally, Amazon (NASDAQ:AMZN) reflected that key ingredient in economic growth. That is the role of the consumer and those numbers were far better than expected.

As if that wasn’t enough, the real death blow came from the People’s Bank of China as it announced an interest rate cut in an effort to jump start an economy that was growing at only 7%.

Only 7%.

Undoubtedly, the FOMC, which meets next week is watching, but I don’t expect that watching will lead to any direct action.

Earlier this past week my expectation had been that the market would exhibit some exhilaration in the days leading up to the FOMC Statement release in the anticipation that rates would continue unchanged.

That expectation is a little tempered now following the strong 2 day run which saw a 2.8% rise in the S&P 500 and which now has that index just 2.9% below its all time high.

While I don’t expect the same unbridled enthusiasm next week, what may greet traders is a change in wording in the FOMC Statement that may have taken note of some of the optimism contained in the combined earnings experience of Microsoft, Alphabet and Amazon as they added about $80 billion in market capitalization on Friday.

If traders stay true to form, that kind of recognition of an economy that may be in the early stages of heating up may herald the kind of fear and loathing of rising interest rates that has irrationally sent markets lower.

In that case, hello volatility, my old friend.

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

As is typically the case when the market closes on some real strength for the week, it’s hard to want to part with cash on Monday when bargains may have disappeared.

Like volatility, those bargains are only appreciated when they’re gone. Even though you may have a strong sense that they’ll be back, the waiting is just so difficult sometimes and it’s so easy to go against your better judgment.

Although the market has gone higher in each of the past 4 weeks, the predominant character of those weeks had been weakness early on and strength to close the week. That’s made a nice environment for adding new positions on some relative weakness and having a better chance of seeing those positions get assigned or have their option contracts rolled and assigned in a subsequent week.

Any weakness to begin the coming week will be a signal to part with some of that cash, but I do expect to be a little tighter fisted than I have in the past month.

If you hold shares in EMC Corporation (NYSE:EMC), as I do, you have to wonder what’s going on, as a buyout offer from privately held Dell is far higher than EMC’s current price.

The drag seems to be coming from VMWare (NYSE:VMW), which still has EMC as its majority owner. The confusion had been related to the implied value of VMWare, with regard to its contribution to the package offered by Dell.

Many believed that the value of VMWare was being over-stated. Of course, that belief was even further solidified when VMWare reported earnings that stunned the options market by plunging to depths for which there were no weekly strikes. That’s what happens when Microsoft and Amazon, both with growing cloud based web storage services, start offering meaningful competition.

With VMWare’s decline, EMC shares followed.

EMC isn’t an inherently volatile stock, however, the recent spike higher upon news of a Dell offer and the sharp drop lower on VMWare’s woes have created an option premium that’s more attractive than usual. With EMC now back down to about $26, much of the Dell induced stock price premium has now evaporated, but the story may be far from over.

Ford Motors (NYSE:F) reports earnings on Tuesday morning and is ex-dividend the following day.

Those situations when earnings and dividends are in the same week can be difficult to assess, but despite Ford’s rapid ascent in the past month, I believe that it will continue to follow the same trajectory has General Motors (NYSE:GM).

There are a number of different approaches to this trade.

For those not interested in the risk associated with earnings, waiting until after earnings can still give an opportunity to capture the dividend. Of course, that trade would probably make more sense if Ford shares either decline or remain relatively flat after earnings. If so, the consideration can be given to seeking an in the money strike price as would ordinarily be done in an attempt to optimize premium while still trying to capture the dividend.

For those willing to take the earnings risk, rather than selling an in the money option in advance of the ex-dividend date, I would sell an out of the money option in hopes of capturing capital gains, the option premium and the dividend.

I sold Seagate Technolgy (NASDAQ:STX) puts last week and true to its natur
e, even when the sector isn’t in play, it tends to move up and down in quantum like bounces. However, with its competition on the prowl for acquisitions, Seagate Technolgy may have been a little more volatile than normal in an already volatile neighborhood.

I would again be interested in selling puts this week, but only if shares show any kind of weakness, following Friday’s strong move higher. If doing so and the faced with possible assignment, I would likely accept assignment, rather than rolling over the put option, in order to be in a position to collect the following week’s dividend.

I had waited a long time to again establish a Seagate Technology position and as long as it can stay in the $38-$42 range, I would like to continue looking for opportunities to either buy shares and sell calls or to sell put contracts once the ex-dividend date has passed.

So with the company reporting earnings at the end of this week and then going ex-dividend in the following week, I would like to capitalize on the position in each of those two weeks.

Following its strong rise on Friday, I would sell calls on any sign of weakness prior to earnings. With an implied price move of 6.6% there is not that much of a cushion of looking for a weekly 1% ROI, in that the strike price required for that return is only 7.4% below Friday’s closing price.

However, in the event of opening weakness that cushion is likely to increase. If selling puts and then being faced with assignment at the end of the week, I would accept that assignment and look for any opportunity to sell call contracts the following week and also collect the very generous dividend.

AbbVie (NYSE:ABBV) reports earnings this week and health care and pharmaceuticals are coming off of a bad week after having had a reasonably good year, up until 2 months ago.

AbbVie, though, had its own unique issues this year and for such a young company, having only been spun off 3 years, it has had more than its share of news related to its products, product pricing and corporate tax strategy.

This week, though, came news calling into question the safety of AbbVie’s Hepatitis C drug, after an FDA warning that highlighted an increased incidence of liver failure in those patients that already had very advanced liver disease before initiating therapy.

I had some shares of AbbVie assigned the previous week and was happy to have had that be the case, as I would have preferred not being around for earnings, which are to be released this week.

As it turns out, serendipity can be helpful, as no investor would have expected the FDA news nor its timing. However, with that news now digested and the knee jerk reaction now also digested, comes the realization that it was the very sickest people, those in advanced stages of cirrhosis were the ones most likely to require a transplant or succumbed to either their disease or its treatment.

With the large decline prior to earnings I’m again interested in the stock. Unlike most recent earnings related trades where I’ve wanted to wait until after earnings to decide whether to sell puts or not, this may be a situation in which it makes some sense to be more proactive, even with some price rebound having occurred to close the week.

The option market is implying only a 5.1% price move next week. Although a 1% ROI may be able to be obtained at a strike level just outside the bounds defined by the option market, I would be more inclined to purchase shares in advance of earnings and sell calls, perhaps using an extended option expiration date, taking advantage of some of its recent volatility and possibly using a higher strike price.

Ali Baba (NYSE:BABA) also reports earnings this week and like much of what is reported from China, Ali Baba may be as much of a mystery as anything else.

The initial excitement over its IPO has long been gone and its founder, Jack Ma, isn’t seen or heard quite as much as when its shares were trading at a significant premium to its IPO price.

Having just climbed 32% in the past month I’d be reluctant to establish any kind of position prior to the release of earnings, especially following a 6.6% climb to close out this week.

Even if a sharp decline occurs in the day prior to earnings, I would still not sell put options prior to the report, as the option market is currently implying only an 8.5% move at a time when it has been increasingly under-estimating the size of some earnings related price moves.

However, in the event of a significant price decline after earnings some consideration can be given to selling puts at that time.

Finally, Twitter (NYSE:TWTR) was my most frequent trade of 2014 and very happily so.

2015, however, has been a very different situation. I currently have a single lot of puts at a far higher price that I’ve rolled over to January 2016 in an attempt to avoid assignment of shares and to wait out any potential stock recovery.

That wait has been far longer than I had expected and January 2016 is even further off into the future than I ever would have envisioned.

With the announcement that Jack Dorsey was becoming the CEO, there’s been no shortage of activity that is seeking to give the appearance of some kind of coherent strategy to give investors some reason to be optimistic about what comes next.

What may come next is something out of so many new CEO playbooks. That is to dump all of the bad news into the first full quarter’s earnings report during their tenure and create the optics that enables them to look better by comparison at some future date.

With Twitter having had a long history of founders and insiders pointing fingers at one another, it would seem a natural for the upcoming earnings report to have a very negative tone. The difference, however, is that Dorsey may be creating some good will that may limit any downside ahead in the very near term.

The option market is implying a move of 12.1%. However, a 1% ROI could be potentially delivered through the sale of put contracts at a strike price that’s nearly 16% below Friday’s close.

That kind of cushion is one that is generally seen during periods of high volatility or with individual stocks that are extremely volatile.

For now, though, I think that Twitter’s volatility will be on hiatus for a while.

While I think that there may be bad news contained in the upcoming earnings release, I also believe that Jack Dorsey will have learned significantly from the most recent earnings experience when share price spiked only to plunge as management put forward horrible guidance.

I don’t expect the same kind of thoughtless presentation this time around and expect investor reception that will reflect newly rediscovered confidence in the team that is being put together and its strategic initiatives.

Ultimately, you can’t have volatility if the movement is always in one direction.

Traditional Stocks: EMC Corp

Momentum Stocks: none

Double-Dip Dividend: Ford (10/28)

Premiums Enhanced by Earnings: AbbVie (10/30 AM), Ali Baba (10/27 AM), Ford (10/27 AM), Seagate Technology (10/30 AM), Twitter (10/27 PM)

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 – October 19 – 23, 2015

 

Option to Profit

Week in Review

 

October 19 – 23, 2015

 

NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED EX-DIVIDEND
2   /   3 1 4 3   /   1 0  /  0 0 1

 

Weekly Up to Date Performance

October 19 – 23, 2015

The latter part of the week was a perfect storm and in a good way for the market and it had its fourth consecutive gaining week, ever since the turnaround on the day the last Employment Situation Report was released.< /strong>

There were 3 new positions opened for the week, but they lagged both the adjusted and unadjusted S&P 500 by 1.0%

Those positions were still 1.1% higher for the week, but just couldn’t keep pace with the S&P 500 which finished 2.1% higher thanks to the tremendous gains on Thursday and Friday.

This week energy and commodities continued their weakness, as did healthcare, but everything else was buoyed the last two days of the week.  Existing positions were flat for the week lagging the overall market, just as in the previous as they were compromised by energy and materials.

For the year the 66 closed lots in 2015 continue to outperform the market. They are an average of 4.8% higher, while the comparable time adjusted S&P 500 average performance has been  1.1% higher. That difference represents a 321.9% performance differential. 

Earnings reports started coming this week and they were for the most part pretty uninspiring until the close of trading on Thursday.

On that day the market was already heading toward a 320 point gain as the ECB gave US markets a gift before the open by suggesting that their version of QE was going to continue.

The rally was prolonged with the first real set of good earnings numbers and they came from important players: Google, Microsoft and Amazon, representing 3 very different segments of the consumer discretionary and business worlds.

If they were reporting better revenues and profits how could that not have some meaning for the broader economy?

So stocks surged again, further helped by a rate decrease by the People’s Bank of China in their effort to jump start their economy which was just reported to be struggling along with a GDP growing at just 7%.

Just 7%?

So this was a good week all around.

There were 3 new positions opened and 4 positions were rolled over, in addition to finding some coverage for an uncovered position.

There was also a single ex-dividend position.

Best of all, there was the assignment of 3 positions and the expiration of one short put sale, helping to free up some cash to either sit or be redeployed.

With all of that, however, there are no positions set to expire next week, so the likelihood is that if any new positions are opened with the increased cash position, they will look for either a dividend or a weekly time frame.

My expectation had been that the coming week was likely to show some euphoria as there was little reason to suspect that the FOMC would raise interest rates. Since we are back on a “bad news is good news” mindset, that would likely give reason for more buying.

However, with so much of an advance this week and someone bound to raise the issue of how far off will that rate increase now be once we’ve seen such strong earnings from some key players, I’m not as convinced of next week’s strength, anymore.

With next week still offering so many companies reporting earnings some care has to be taken to not get overly exposed to companies that have that added risk feature. Despite the great earnings reported by Google et al, the earnings season has otherwise not been very encouraging and has offered lots of punishment for those disappointing even by just a little.

With cash available next week, I would again be happy to see some weakness creep back in, at least maybe to start the week.

Friday’s strong close has placed some of the positions that I was eyeing for next week more expensive than I would like, so I may be more passive than  I would prefer to be as the next week gets off to its start.

With volatility suddenly taking a dive and returning close to where it was a month ago some of the easy new position trades and rollovers will likely be on hiatus, but next week may hold some surprises if the FOMC takes note of some evidence of an economy that’s heating up in key sectors and changes the wording of its statement to reflect that observation.

I’ll be tuned in.


 

 

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 lots):



New Positions Opened:  MS, STX, (puts), WMT

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycle: none

Calls Rolled over, taking profits, into extended weekly cycle:  none

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

Calls Rolled Over, taking profits, into a future monthly cycle:  IP (12/18)

Calls Rolled Up, taking net profits into same cyclenone

New STO:  INTC (1/16/16)

Put contracts expired: STX

Put contracts rolled over: none

Long term call contracts sold:  none

Calls Assigned: BBY ($33.50), MET, MS

Calls Expired:  none

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 Positions: FAST (10/23 $0.28)

Ex-dividend Positions Next Week:   KMI (10/29 $0.51), WY (10/28 $0.31)

For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, ANF, AZN, CHK, CLF, COH, CY, FAST, FCX, GDX, GPS, HAL, HPQ, INTC, JCP, JOY, KMI, KSS, LVS,  MCPIQ, MOS, NEM, RIG, WFM, WLTGQ (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 23, 2015

 

 

 

Daily Market Update – October 23,  2015  (8:15 AM)

 

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

The following trade outcomes are possible today:

Assignments:  BBY ($33.50), MET, 

Rollovers:  MS, WMT

Expirations:  BBY ($37), IP, STX (puts)

The following were ex-dividend this week:  FAST (10/23 $0.28)

The following will be ex-dividend next week:  KMI (10/29 $0.51), WY (10/28 $0.31)

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

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