Weekend Update – November 22, 2015

We’ve all seen a child who is in the midst of a tantrum or some hysterical outburst.

So often that tantrum takes on a life of its own and the perpetrator has completely forgotten what set off the outburst in the first place and just can’t get things under control even when there’s no reason for its continuation.

Most tantrums are related to an item that is wanted, but either not available to the child or has been taken away from the child.

There is a reason, but there is usually no reasoning.

When faced with the odious behavior, particularly in a public place, the instinct is often to just give in, hoping that will return calm.

The outburst is often irrational and while a parent’s response in a public place may seem to be rational, in seeking to avoid further disturbances, there may be a component of irrationality, in that acceding simply reinforces unwanted behavior.

Most will tell you that nothing is better at helping to develop appropriately self-sustaining behavior than instituting fair, clear and consistent rules that are then consistently applied.

Of course, that’s not easy when you have parents who may not agree on the rules or the consistency of their application.

But as is so often the case, once that tantrum starts, it’s easy for the child to lose sight of what the initial objective was and even if that objective is achieved, the tantrum continues. Sometimes the child can become so oppositional and caught up in the moment they may not even realize that their objective has been attained and their demands acceded to.

Eventually, all tantrums run out of steam and eventually, most children grow up and leave tantrums behind, although they may find other behavioral replacements to vex those around them, even as they enter the adult world.

As a parent, it’s easier to be a grandparent.

Unfortunately, for all of its intended or unintended paternal caring for what goes on in the stock market, there is no grandparent stage for the FOMC.

They may not see themselves in a parental role, but they have certainly been at the center of creating and rewarding some inappropriate behaviors, and perhaps acceding to them, as well.

With the release of the FOMC minutes this week and with a clear shift to a more hawkish tone regarding an interest rate increase, investors finally left their tantrum behavior behind.

That is meant as giving credit to investors.

Until the FOMC finally follows through with some clear action to complement their more clear words, there’s no reason for accolades.

Besides, clarity and consistency should be the minimally accepted behaviors from the more mature and rational FOMC, after all, how could you ever expect any kind of rational behavior down below, if those above are unable to get on the same page?

That stock market’s earlier tantrum like behavior was manifested by multiple instances of indiscriminate selling whenever the very thought of low interest rates being taken away from them presented itself.

The FOMC didn’t help things by airing individual member conflicts in opinion and sending conflicting messages. It’s easy to look at investors as an irrational bunch that is very often guided by emotion over analysis and is prone to outbursts, but as a parent, the FOMC did little to create an environment to limit that kind of behavior.

Unlike parents who do have some mandates, guiding the behavior of the stock market isn’t one of the Federal Reserve’s mandates, although as long as they’re having admitted to watching economic events in China and allowing them to become part of their decision tree, you would think that they would also watch over some fairly important events here, as investors can’t necessarily be counted upon to control their own infantile behavior.

Unfortunately, the market hasn’t really shown what it wants, as it has gone back and forth between being disappointed about the prospects of a rise in interest rates to greeting those prospects as the good news it should be reflecting.

Sometimes parents can’t quite figure their child out, but dispensing with consistent and unified messages can only create more confusion for all.

Hopefully the market will get over its penchant for tantrums and irrational behavior, including the exuberance that Alan Greenspan once warned about, and the FOMC will be more mindful of the power it holds in creating adult like behavior in others

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

Over the past year there have been may false starts by the bond market in expectation of rising interest rates.

Theoretically, rising interest rates on bonds begins to make them more competitive of an alternative to stocks, but with those expectations for increasing rates, companies that stand to benefit from an interest rate environment are also expected to benefit from that kind of an environment.

MetLife (MET) and Morgan Stanley (MS) are two companies that I’m considering in the coming week, even as there has been somewhat of a breakdown in the association between rising interest rates and their share prices over the past month.

I’ve now owned shares of Morgan Stanley 4 times over the past 5 weeks, after having had shares assigned again this past week. It has tracked the 10 Year Treasury Note’s performance better than has MetLife over the past month, but it has dragged in its magnitude of change during that time.

Following a precipitous earnings related decline last month shares have been working their way higher, but I would consider buying shares again on any kind of weakness that may bring it closer to $33.50, although I may still be interested in shares if they remain flat as the coming week begins. Even with a trading shortened week, due to the Thanksgiving holiday, the call option premiums are reflecting some greater volatility in these shares and perhaps expectations for shares to continue tracking the 10 Year Treasury note higher.

MetLife, on the other hand, hasn’t tracked the 10 Year Treasury note very well, at all, in the past month, neither in magnitude, nor in direction. Not unexpectedly, its option premium doesn’t reflect quite the same expectation for it to track interest rates as reliably as Morgan Stanley, but may still be sufficient of an ROI for
a 4 day trading week that brings us that much closer to a potential FOMC decision to raise those rates.

The days when Pfizer (PFE) was among the first and foremost on everyone’s list of pharmaceutical companies ended when Genentech came on the scene. Since then, Genentech has been rolled back into its parent and many others have come on the scene, as Pfizer has seemed to fade from the conversation.

But with what may be an impending inversion deal with Ireland’s Allergan (AGN), it is most definitely back in the headlines.

Having fallen about 9% in the past 3 weeks and with an option premium that’s reflecting some of the excitement that may be awaiting, I look at this as a good opportunity to establish a new position and would be willing to keep this one for a while, as long as the dividend is still part of the equation.

After a couple of downgrades and a lowering of price targets, Darden Restaurants (DRI) seems to have fallen out of favor with analysts, after the significant management changes following a successful proxy fight earlier in the year.

Darden reports earnings prior to the end of the December 2015 option cycle and having fallen about 10% in the past 10 days, unless there is some shocking news ahead, much of the disappointment may have already played out.

Darden Restaurants offers only monthly options and it will be ex-dividend shortly after the New Year.  As a result,  I would consider a January 2016 option sale and also using an out of the money strike price, in an effort to capture the premium, dividend and some capital gain on shares, while still having about a month for shares to recover in the event of further price declines after earnings.

Lexmark (LXK) also offers only monthly options and will be ex-dividend this week.

A few years ago Lexmark plunged when it announced it was getting out of the hardware business, just as its one time parent, International Business Machines (IBM) had also shed its hardware assets.

Both companies saw their fortunes fare well as they were re-invented, but more recently both have come under significant pressure, to the point that Lexmark recently announced that it was seeking “alternatives” to enhance shareholder value, including a sale of itself.

The initial negative reaction to that, which came on top of the more than 30% drop after disastrous earnings in July 2015 were released, has seen some reversal and cooler heads may be now prevailing.

With the next earnings release scheduled for early in the February 2016 option cycle, I would consider selling either December 2015 or January 2016 options and may actually consider doing both.

In the case of the December options, I would consider the sale of in the money options, with the intent of seeing an early assignment of the position.

For example, based upon Friday’s closing price of $35.43, the option premium for a December $34 call option was $2.30. If assigned early, that would mean a net gain of 2.5% for a single day of holding. However, if not assigned early, the monthly return would then include the dividend, resulting in a 3.5% ROI, even if shares fell as much as an additional 4%.

Hewlett Packard (HPQ) reports earnings this week and it the part of the pre-split company that’s still in the business that Lexmark abandoned and that IBM spun off.

I already own shares that have calls written against them that will be called away if the combined price of Hewlett Packard and the new Hewlett Packard Enterprises (HPE) exceeds $29.

I’d like to see that happen, but at the same time I see some appeal in considering some kind of position in Hewlett Packard, with an upcoming ex-dividend date on a Monday, two weeks away from this coming Monday.

The option market is implying a 5.6% price move this coming week as earnings are reported.

Normally, I would look for the possibility of selling puts at a strike price that was outside of the range implied by the option market, if that strike price could deliver an ROI of 1%. 

However, in this case, I am currently considering the sale of a put within the range implied by the option market and would be willing to take assignment in order to then plot a strategy to then capture the dividend and some call premiums, if possible.

With the split between Hewlett Packard and Hewlett Packard Enterprises only recently having occurred, the upcoming earnings report will very likely be a very complicated one and will include lots of adjustments and expenses related to the split, so there may be a bigger move than the option market is currently predicting. However, this earnings report will close the book and will likely be quickly forgotten, just as are most reasons behind tantrums.

Finally, Best Buy (BBY) just reported earnings and it did what so many other companies have done over the past few years as stock re-purchase programs have created havoc with the metric that has been the common language of analysts and investors alike.

What they did was to beat expectations for earnings per share, while missing on revenue estimates.

The market’s initial response to the news was to take shares down by 8.4%, but more reasonable minds pared those losses very quickly.

In the latter half of last week I wrote for subscribers that I would be looking at opportunities in retail this coming week, but the strength in some of those names this past Friday, has dampened that expectation.

While many retailer stocks do well in the period between Thanksgiving and Christmas, Best Buy is a frequent outlier in that regard.

However, having just sustained a 15.6% decline during November, I think that those shares are in a position to join the usually party and follow the typical script that has  some initial disappointment in sales figures heading into Christmas and then reports of a better than expected holiday sales season when the dust has finally settled.

I know that I’ll be giving Best Buy gift certificates this year as holiday gifts and expect some of that dust to be of my doing, so I’d be happy to get some of the trickle down benefit, especially as those call and put premiums still reflect some continued anticipation for activity.

If selling puts, however, just as with Hewlett Packard, the upcoming ex-dividend date is just 2 weeks away, so if faced with assignment, rather than rolling over, there may be reason to accept assignment and then seek to collect additional premium and the dividend.

 

Traditional Stocks:    Darden Restaurants, MetLife, Morgan Stanley, Pfizer

Momentum Stocks:   Best Buy

Double-Dip Dividend:  Lexmark (11/24)

Premiums Enhanced by Earnings: Hewlett Packard (11/24 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 – November 16 – 20, 2015

 

Option to Profit

Week in Review

 

NOVEMBER 16 – 20, 2015

 

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

 

Weekly Up to Date Performance

November 16 – 20, 2015


< strong>After a terrible week last week, this week could just as easily have been that way, but instead was strong throughout the week.

It could easily have sold off upon the release of the FOMC minutes, but now seems ready to accept what we all knew had to be coming sooner, rather than later.

There was only one new position for the week, but despite rising 1.7%, it could keep up with the market that nearly erased the entire loss from the previous week.

The adjusted and unadjusted S&P 500 rose a very impressive 3.3% on the week, after having fallen an equally impressive 3.6% the pror week.

But it was still one of those weeks where surpassing was only in relative tems as those positions were 1.5% lower for the week while the unadjusted S&P 500 was 3.6% lower and the adjusted S&P 500 was 2.9% lower.

Energy and commodirties continued to be weak, but retail wasn’t as bad as had been the case the prior week.

For the year the 71 closed lots in 2015 continue to outperform the market. They are an average of 4.6% higher, while the comparable time adjusted S&P 500 average performance has been  1.1% higher. That difference represents a 313.8% performance differential. 

This was yet another week where there really wasn’t too much in the way of real economic news, but the market didn’t really seem to need much in the way of real economic news.

After getting off to a really good start on Monday, it looked as if it would do the same on Tuesday, but then backed away from the gains it had hoped to add on.

What made the week really impressive, beyond the 3.3% gain, was how it came back after having given up on that Tuesday rally.

Also, with release of the FOMC minutes and the clearly hawkish tone of the members, the market didn’t shrink away and head into a deep sell-off, as it had some other times.

That’s different.

Even though it may be hard to see the justiication for a rate increase at this time, the market is now ready for it.

It had been ready for it back in September, as well and then changed its mind and took us into our first real correction in years. 

What’s fascinating is that the market correction didn’t last long, but if you still look at the components of that market, the individual corrections in so many of those stocks continues, as the breadth is very, very narrow.

Who knows where the wind will blow next, but I was happy with the week, especially in being able to at least get an assignment of the single poisition opened and being able to roll all of the expiring positions over.

Next week is a holiday shortened week and so premiums will be a little bit lower, in addition to being dragged down by the low volatility.

With a little bit of cash receycled, I wouldn’t mind spending some money, although as is usually the case after a quick run higher, I would much rather see some of the gains given back before spending too much.

With only 2 positions set to expire next week, the likelihood is that if I can identify a purchase on Monday, i would try to look for a weekly expiration, otherwise, it may make more sense to look at extended weekly expirations and to spend more time thinking about enjoying the upcoming holiday

 

 

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

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:  CSCO (1/15/16), F 912/18/15)

Calls Rolled Up, taking net profits into same cyclenone

New STO:  WY

Put contracts expired: none

Put contracts rolled over: STX

Long term call contracts sold:  none

Calls Assigned: 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: MRO (11/16 $0.05)

Ex-dividend Positions Next Week:   MAT (11/23 $0.38), KO (11/27 $0.33)

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, JCP, JOY, KM
I, 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 – November 20, 2015

 

 

 

Daily Market Update – November 20,  2015  (7:30 AM)

 

The Week in Review will be posted by 10 PM and the Weekend Update will be posted by Noon on Sunday.

The following trade outcomes are possible today:

Assignments:   MS

Rollovers:   CY, STX (puts)

Expirations:  CSCO, F

The following were ex-dividend this week:

The following will be ex-dividend next week:  MAT (11/23 $0.38), KO (11/27 $0.33)

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

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Daily Market Update – November 19, 2015 (Close)

 

 

 

Daily Market Update – November 19,  2015  (Close)

 

Yesterday was a big surprise.

There were 2 things that happened that made it an impressive day.

The first was the manner in which the market reacted to the release of last month’s FOMC minutes, which indicated a much more hawkish tone and one that made it pretty clear that the intent was to raise interest rates soon.

That the market didn’t run away in terror was a good sign.

There was already some word that would be the news in the minutes and that may have been the reason that the market had opened with some strength heading into the official release at 2 PM.

It was, however, at 2:04 PM that the market really took off and moved higher and higher.

While it may have been the official release of the minutes that was the proximal cause of the further rally, perhaps coincidentally, it occurred just as the DJIA had fallen to and successfully tested the 17600 level, which proved to be a resistance point on Tuesday.

Yesterday, after testing that point for just a moment, and again, perhaps coincidentally, the market turned a decent gain into a really nice one.

With some decent earnings for the week and a more mature look at what interest rate increases might mean at such an early stage, there was some hope that the market would be able to maintain this forward momentum as the monthly option cycle was getting ready to come to its end.

At least things didn’t go downhill today and stay there.

The market finished virtually unchanged and didn’t spend too much time traveling about, either.

With earnings reports for this week and for this current cycle now near the end of the ones that really matter for the broader market, we may begin to fall into that more quiet time of the year when most talk starts centering on retailers and their holiday sales.

Using the past as a guide, that typically means considering adding retailers in advance of the official start of the season and holding on through the end of that season, as the script is usually fairly consistent.

Expectations are usually low and results are usually better than expected.

That tends to be a good formula for buying and selling.

But that might be easier to do if the market maintains its strength this week and allows for some assignments of some existing positions and creating some freed up cash to recycle into that sector, where appropriate.

For today it was just a case of sitting back and taking the time to see where the opportunities might arise.

Tomorrow will hopefully bring those opportunities to life.

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Daily Market Update – November 19, 2015

 

 

 

Daily Market Update – November 19,  2015  (7:30 PM)

 

Yesterday was a big surprise.

There were 2 things that happened that made it an impressive day.

The first was the manner in which the market reacted to the release of last month’s FOMC minutes, which indicated a much more hawkish tone and one that made it pretty clear that the intent was to raise interest rates soon.

That the market didn’t run away in terror was a good sign.

There was already some word that would be the news in the minutes and that may have been the reason that the market had opened with some strength heading into the official release at 2 PM.

It was, however, at 2:04 PM that the market really took off and moved higher and higher.

While it may have been the official release of the minutes that was the proximal cause of the further rally, perhaps coincidentally, it occurred just as the DJIA had fallen to and successfully tested the 17600 level, which proved to be a resistance point on Tuesday.

Yesterday, after testing that point for just a moment, and again, perhaps coincidentally, the market turned a decent gain into a really nice one.

With some decent earnings for the week and a more mature look at what interest rate increases might mean at such an early stage, there’s some hope that the market will be able to maintain this forward momentum as the monthly option cycle is getting ready to come to its end.

There are some more earnings reports for this week and for this current cycle, but we are now near the end of the ones that really matter for the broader market and so we may begin to fall into that more quiet time of the year when most talk starts centering on retailers and their holiday sales.

Using the past as a guide, that typically means considering adding retailers in advance of the official start of the season and holding on through the end of that season, as the script is usually fairly consistent.

Expectations are usually low and results are usually better than expected.

That tends to be a good formula for buying and selling.

But that might be easier to do if the market maintains its strength this week and allows for some assignments of some existing positions and creating some freed up cash to recycle into that sector, where appropriate.

For now, it may just be a case of sitting back for these last two days of the cycle and see where the opportunities arise.

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