Feb92014

Weekend Update – February 9, 2014

Weekend Update

Everything is crystal clear now.

After three straight weeks of losses to end the trading week, including deep losses the past two weeks everyone was scratching their heads to recall the last time a single month had fared so poorly.

What those mounting losses accomplished was to create a clear vision of what awaited investors as the past week was to begin.

Instead, it was nice to finish on an up note to everyone’s confusion.

When you think you are seeing things most clearly is when you should begin having doubts.

Who saw a two day 350 point gain coming, unless they had bothered to realize that this week was featuring an Employment Situation Report? The one saving grace we have is that for the past 18 months you could count on a market rally to greet the employment news, regardless of whether the news met, exceeded or fell short of expectations.

That’s clarity. It’s confusing, but it’s a rare sense of clarity that comes from being so successful in its ability to predict an outcome that itself is based upon human behavior.

As the week began with a 325 point loss in the DJIA voices started bypassing talk of a 10% correction and starting uttering thoughts of a 15-20% correction. 10% was a bygone conclusion. At that point most everyone agreed that it was very clear that we were finally being faced with the “healthy” correction that had been so long overdue.

When in the middle of that correction nothing really feels very healthy about it, but when people have such certainty about things it’s hard to imagine that they might be wrong. With further downside seen by the best and brightest we were about to get healthier than our portfolios might be able to withstand.

It was absolutely amazing how clearly everyone was able to see the future. What made things even more ominous and sustaining their view was the impending Employment Situation Report due at the end of the week. Following last month’s abysmal numbers, ostensibly related to horrid weather across the country, there wasn’t too much reason to expect much in the way of an improvement this time around. Besides, the Nikkei and Russian stock markets had just dipped below the 10% threshold that many define as a market correction and as we’re continually reminded, it’s an inter-connected world these days. It wasn’t really a question of “whether,” it was a matter of “when?”

Then there was all that talk of how high the volatility was getting, even though it had a hard time even getting to October 2013 levels, much less matching historical heights. As everyone knows, volatility comes along with declining markets so the cycle was being put in place for the only outcome possible.

After Monday’s close the future was clear. Crystal clear.

Instead, the week ended with an 0.8% gain in the S&P 500 despite that plunge on Monday and a highly significant drop in volatility. The market responded to a disappointing Employment Situation Report with what logically or even using the “good news is bad news” kind of logic should not have been the case.

Now, with a week that started by confirming the road to correction we were left with a week that supported the idea that the market is resistant to a classic correction. Instead of the near term future of the markets being crystal clear we are left beginning this coming week with more confusion than is normally the case.

If it’s true that the market needs clarity in order to propel forward this shouldn’t be the week to commit yourself. However, the only thing that’s really clear about our notions is that they’re often without basis so the only reasonable advice is to do as in all weeks – look for situational opportunities that can be exploited without regard to what is going on in the rest of the world.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

If you’re looking for certainty, or at least a company that has taken steps to diminish uncertainty, Microsoft (MSFT) is the one. With the announcement of the appointment of Satya Nadella, an insider, to be its new CEO, shares did exactly what the experts said it wouldn’t do. Not too long ago the overwhelming consensus was that the appointment of an outsider, such as Alan Mullaly would drive shares forward, while an insider would send shares tumbling into the 20s.

Microsoft simply stayed on its path with the news of an inside candidate taking the reigns. Regardless of its critics, Microsoft’s strategy is more coherent than it gets credit for and this leadership decision was a quantum leap forward, certainly far more important than discussions of screen size. With this level of certainty also comes the certainty of a dividend and attractive option premiums, making Microsoft a perennial favorite in a covered option strategy.

The antithesis of certainty may be found in the smallest of the sectors. With the tumult in pricing and contracts being promulgated by T-Mobile (TMUS) and its rebel CEO John Legere, there’s no doubt that the margins of all wireless providers is being threatened. Verizon (VZ) has already seen its share price make an initial response to those threats and has shown resilience even in the face of a declining market, as well. Although the next ex-dividend date is still relatively far away, there is a reason this is a favorite among buy and hold investors. As long as it continues to trade in a defined range, this is a position that I wouldn’t mind holding for a while and collecting option premiums and the occasional dividend.

Lowes (LOW) is always considered an also ran in the home improvement business and some recent disappointing home sales news has trickled down to Lowes’ shares. While it does report earnings during the first week of the March 2014 option cycle, I think there is some near term opportunity at it’s current lower price to see some share appreciation in addition to collecting premiums. However, I wouldn’t mind being out of my current shares prior to its scheduled earnings report.

Among those going ex-dividend this week are Conoco Phillips (COP), International Paper (IP) and Eli Lilly (LLY). In the past month I’ve owned all three concurrently and would be willing to do so again. While International Paper has outperformed the S&P 500 since the most recent market decline two weeks ago, it has also traded fairly rangebound over the past year and is now at the mid-point of that range. That makes it at a reasonable entry point.

Conoco Phillips appears to be at a good entry point simply by virtue of a nearly 12% decline from its recent high point which includes a 5% drop since the market’s own decline. With earnings out of the way, particularly as they have been somewhat disappointing for big oil and with an end in sight for the weather that has interfered with operations, shares are poised for recovery. The premiums and dividend make it easier to wait.

Eli Lilly is down about 5% from its recent high and I believe is the next due for its turn at a little run higher as the major pharmaceutical companies often alternate with one another. With Pfizer (PFE) and Merck (MRK) having recently taken those honors, it’s time for Eli Lilly to get back in the short term lead, as it is for recent also ran Bristol Myers Squibb (BMY) that was lost to assignment this past week and needs a replacement, preferably one offering a dividend.

Zillow (Z) reports earnings this week. In its short history as a publicly traded company it has had the ability to consistently beat analyst’s estimates and then usually see shares fall as earnings were released. That kind of doubled barrel consistency warrants some consideration this week as the option market is implying an 11% move this week. While that is possible, there is still an opportunity to generate a 1% ROI for the week if the share price falls by anything less than 16%.

While I’m not entirely comfortable looking for volatility among potential new positions two that do have some appeal are Coach (COH) and Morgan Stanley (MS).

Coach is a frequent candidate for consideration and I generally like it more when it’s being maligned. After last week’s blow-out earnings report by Michael Kors (KORS) the obvious next thought becomes how their earnings are coming at the expense of Coach. While there may be truth to that and has been the conventional wisdom for nearly 2 years, Coach has been able to find a very comfortable trading range and has been able to significantly increase its dividend in each of the past 4 years in time for the second quarter distribution. It’s combination of premiums, dividends and price stability, despite occasional swings, makes it worthy of consistent consideration.

I’ve been waiting for a while for another opportunity to add shares of Morgan Stanley. Down nearly 12% in the past 3 weeks may be the right opportunity, particularly as some European stability may be at hand following the European Central Bank’s decision to continue accommodation and provide some stimulus to the continent, where Morgan Stanley has interests, particularly being subject to “net counterparty exposure.” It’s ride higher has been sustained and for those looking at such things, it’s lows have been consistently higher and higher, making it a technician’s delight. I don’t really know about such things and charts certainly aren’t known for their clarity being validated, but its option premiums do compel me as do thoughts of a dividend increase that it i increasingly in position to institute.

Finally, if you’re looking for certainty you don’t have to look any further than at Chesapeake Energy (CHK) which announced a significant decrease in upcoming capital expenditures, which sent shares tumbling on the announcement. Presumably, it takes money to make money in the gas drilling business so the news wasn’t taken very well by investors. A very significant increase in option premiums early in the week suggested that some significant news was expected and it certainly came, with some residual uncertainty remaining in this week’s premiums. For those with some daring this may represent the first challenge since the days of Aubrey McClendon and may also represent an opportunity for shareholder Carl Icahn to enter the equation in a more activist manner.

Traditional Stocks: Lowes, Microsoft, Verizon

Momentum Stocks: Chesapeake Energy, Coach, Morgan Stanley,

Double Dip Dividend: Conoco Phillips (ex-div 2/13), International Paper (ex-div 2/12), Eli Lilly (ex-div 2/12)

Premiums Enhanced by Earnings: Zillow (2/12 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.

Jan202014

Taking Solace in an Earnings Challenged Coach

Articles

(A version of this article appeared in TheStreet)

It has been very easy to be disparaging of Coach (COH) these days.

In 2013, including dividends, an investment in Coach shares witnessed a 3.1% ROI, as compared to 29.6% for the S&P 500, exclusive of dividends.

Perhaps the root cause of the quantitative disappointment has been the near universal acknowledgement that Coach was no longer a very interesting place to shop, as Michael Kors (KORS) had displaced it in the hearts and more importantly, the literal and figurative pocketbooks of shoppers.

The first hint of trouble presented itself in August 2011 when shares plunged 6.5% after announcing earnings, following years of running higher, that took only a short rest in June 2010. While shares went bacl to their old ways of climbing higher under CEO and Chairman Lew Frankfort that climb came to a decided halt shortly after the Michael Kors IPO.

COH ChartIn 2013 Coach knew only large price moves following earnings reports, following the pattern that began in 2012. The difference, however, was that in 2013 all but one of those large price moves was higher, with -16.1%, +9.8%, -7.8% and -7.5% earnings related responses greeting increasingly wary and frustrated shareholders.

Coach reports its second quarter earnings on January 22, 2014 prior to the market’s open. The option market is implying a nearly 10% move upon that event, which comes on the heels of a 6.3% decline in shares in the past week.

For most, that may mean that this would be a good time to steer clear of Coach shares or even consider exiting existing psoitions, especially as the retail sector has been struggling to get consumers to part with their discretionary cash.

In the past year, while Coach has been a non-entity, I have owned it and sold calls on shares, or sold puts on eight occasions. Included in those trades were three sales of put options on the day prior to earnings and one purchase of shares and sale of calls on the day following disappointing earnings.

COH data by YCharts

During that time Coach has fulfilled two of my cardinal requirements in that it has been a model of mediocrity, but still has something to offer and will do more than simply make a pretense of maintaing a business model.

My goal with Coach, as with all positions upon which I use a covered option strategy is to make a small rate of return and in a short time frame. My ideal trade is one that returns a 1% profit in a week’s time and surpasses the performance of the S&P 500 during the time period of the trade.

During 2013, the cumulative return from the eight Coach trades was 25.4% and the average holding period was 28 days. The average trade had an ROI of 3.2%, which when adjusted for the average holding period was less than the 1% goal, consistent with the lower premiums obtained in a low volatiity period. However, during the same time periods for each trade, the results surpassed the S&P 500 performance for the same time periods by 18.5%.

Coach 2013 Performance - Option to Profit

While I don’t place too much credibility on annualizing performance, the annualized performace of Coach, utilizing the serial covered option strategy, with some trades timed to coincide with earnings was 41.5%, while the annualized S&P 500 return was 34.7%. A longer period of observation also yielded similar favorable results

In the case of potential trades seeking to reach those objectives when earnings are to be released, my preference is to see whether there is an option premium available for the sale of puts that is at the extreme end of the implied volatility range or beyond. For Coach, the implied volatility suggests expectations of a price move in the $47.50 to $57.50 range, based on Friday’s closing price of $52.56.

The $47 January 24, 2014 put premium satisfies the quest for a 1% return and is at a strike price slightly outside of the implied volatility range. Essentially, the risk-reward proposition is a 1% return in the event of anything less than a 10% drop in share price. Anything more than a 10% price drop creates additional possibilities to generate returns, but extends the period of the trade.

As always, the sale of puts should only be undertaken if you’re prepared to take ownsership of shares at the strike price specified. While I wouldn’t shy away from share ownership in the event of a larger than anticipated price drop, I would be inclined to consider rolling over the put sale into a new expiration date and ideally at a lower strike price, if possible, repeating that process until expiration finally arrives.

While not everyone appreciates leather, everyone can appreciate investment profits, even if they come at the expense of corporate losses and a fall from grace.

Jan192014

Weekend Update – January 19, 2014

Weekend Update

As you get older you realize certain truths and realities and they aren’t always warm and fuzzy.

One of those realities is that often many years of marriage come to an end once the children have left the household. Without the diversion of children always in need comes the realization that there is nothing of substance to hold together a failing foundation. Sometimes the realization is there, but swept under the rug as other events take precedence, but you always know that someday reality can no longer be delayed.

With my youngest child having graduated college that appears to be the story that we’ve heard on multiple occasions from like aged acquaintances and friends. Like most everything else in life there are parallels to the stock market.

We now find ourselves in a market faced with certain realities but without the diversions offered by European monetary crises, sequestration, fiscal cliffs, government shutdowns, quantitative easing, credit downgrades and budgetary deadlines. Those diversions conveniently removed focus from the very foundation upon which stocks find their fair price and to which markets have traditionally responded.

All that is now left behind is earnings and it’s not a pretty prospect.

Perhaps in a manner similar to those in long standing unions who suddenly suffer from improved judgment following a youth blinded by the superficial, the market went through a period of not being terribly discerning and always finding reason to go higher. Interpreting economic news to be something other than what it is has its counterpart in idealizing the idea more than the hard facts.

The reality that is being faced is that of earnings and the failing of earnings to support an ongoing rise in the stock market.

Early suggestions that this earnings season would result in a 6% increase could only be the result of optics as publicly held shares have diminished through massive stock buybacks. However, it doesn’t take much insight to realize that the abysmal state of retail earnings has to have some meaning with regard to the ability of individuals to find discretionary spending within their reality.

As with the past two quarters with the big money financial centers reporting positive earnings, there is little reason to believe that will extend to the other members of the S&P 500 as they begin their reporting in earnest this week.

I’m prepared for the reality, but I still like the fantasy, so I expect to continue playing along this week, just a little more mindful of the obstacles that have a lot of catching up to do.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

Among those reporting earnings this week is Coach (COH) which had fallen 6.2% last week, in preparation for what has become a near regular occurrence in the past 18 months upon earnings. While its most recent past has been to shed significant value when all is bared the option market is expecting an implied move of nearly 10%, in addition to the recent weakness. While Coach has had its competitive challenges it has somehow been able to find a fairly well defined trading range, punctuated with some significant moves and periods of recovery or occasionally, decline. In 2013, I traded Coach for all earnings reports, three of which were through the sale of puts. Despite the dramatic moves following all of last year’s earnings reports, predominantly lower, Coach has been and may continue to be an erratic position that offers acceptable reward for defined risk.

Cypress Semiconductor (CY) also reports earnings this week. Just a few months ago, prior to its last report, it did what many have been doing of late and offered some earnings warnings and saw shares plummet more than 20%, leaving virtually nothing more to fall. Like Coach, Cypress Semiconductor has a habit of seeing its share price gravitate back toward a set level with some regularity. Having already fallen approximately 4% in the past two weeks. While the option market is implying a 9% move this week as earnings are announced, I think that it will be much less pronounced and more likely to have some upside potential. After having shares assigned this past Friday, rather than selling puts,as I often do when earnings are at hand, I am considering the purchase of shares and sale of calls on only a portion of shares or at both the $10 and $11 levels to potentially capitalize on share appreciation.

Anadarko (APC) had a brief spike in price this past week, nearly three weeks after plummeting upon news that it might be facing a $14 billion judgment in a case involving a company that it had purchased several years ago. The spike came as Anadarko stated that it believed the judge in the case set damages that were punitive, rather than remedial and believed that the appropriate amount was more in the $2 billion range. It will likely take a long time to come to some resolution, but even at $14 billion there is certainty and the ability to move forward. As shares seem to be creating a new base I think this is a good entry point, as well as a good point to add shares to start the process of offsetting the paper losses from older shares.

Chesapeake Energy (CHK), while trading in a range of late, has also been trading with relatively large daily and intra-day moves. As a result shares enjoy generous option premiums that reflect the volatility, despite having traded in a very stable range for the past 5 months. Offering expanded weekly options I would consider selecting an expiration prior to the scheduled February 20, 2014 earnings report date.

Having already announced earnings Unitedhealth Group (UNH) added to its recent losses and is now down approximately 5% since its recent high. It appears to have some price support a dollar lower than its current price, which may be a good thing considering the unknowns that await as more news trickles in regarding registration demographics and utilization among newly enrolled health care policy holders. While I never move into a position with the idea that it will be a long term holding, I don’t hold too much concern for that unwanted possibility as it’s as likely to recover from any price drops as most anything else and could easily be justified as being a core holding.

The potential dividend choices this week share a “household theme” covering aspects of the kitchen, laundry room and bathroom, but represent different ends of the consumer spectrum when defensive investing is foremost.

While Clorox (CLX) and Colgate Palmolive (CL) may be best known for consumer staples and nothing terribly ostentatious, Williams Sonoma (WSM) offers products that are every bit as critical to some. Those who would sacrifice anything to ensure that they can purchase an oversized block of Mediterranean pink salt have money every bit as valuable as those that like bright white shirt collars and bright white teeth.

More importantly, at least for me, they have all recently under-performed the S&P 500 and all trade with a low beta at a time that I want to balance risk and still generate a reasonable income stream from premiums and dividends. While both Clorox and Colgate Palmolive have earnings reports due in the February option cycle, WIlliams Sonoma, which tends to trade with more volatility upon earnings, does not report until the end of the March 2014 cycle.

Finally, for those who really seek reckless adventure, perhaps only frolicking in a landfill brimming with its products offers more excitement than considering shares of LED light bulb maker Cree (CREE) in advance of earnings. The last time I considered an earnings related trade in Cree I didn’t recommend the purchase or sale of puts to my subscribers, but did make the put sale for my personal account. However, I did so only after earnings, believing that the 16% drop offered sufficient protection to make an out of the money put sale with relative impunity.

Like some other stocks this past week that continued to fall even days after earnings plunges, that’s what Cree did. Rolling over the puts on a few occasions, eventually taking assignment and then selling calls until its final assignment at a strike level 5% higher than the original put strike price made it worthwhile, but more thrilling than necessary.

So unnecessary that I may be ready to do so again.

Traditional Stocks: Anadarko, Unitedhealth Group

Momentum Stocks: Chesapeake Energy

Double Dip Dividend: Colgate Palmolive (ex div 1/22), Clorox (ex-div 1/27), Williams Sonoma (ex-div 1/22)

Premiums Enhanced by Earnings: Cree (1/21 PM), Coach (1/22 AM), Cypress Semiconductor (1/22 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.

Dec152013

Weekend Update – December 15, 2013

Weekend Update

People tend to have very strong feelings about entitlements.

Prior to this week there were so many people waiting for the so-called “Santa Claus Rally” that you would have thought that it was considered to be an entitlement.

After the week we’ve just had you can probably add it to the other market axioms that haven’t really worked out this year. If anything, so far it appears that you should have taken your vacation right now along with Santa Claus, who must have not realized that his vacation conflicted with the scheduled rally. You also should probably not taken the wizened advice to vacation months ago when the traditional prevailing attitude implored you to “sell in May and go away.”

The past week saw the S&P 500 drop 1.7% to a closing level not seen in a 22 trading sessions. This week’s drop places us a full 1.8% below the recent record high. Yet, like during a number of other smallish declines in 2013, this one is also being warily eyed as being the precursor to the long overdue, but healthy, 10% decline. We have simply become so accustomed to advances that even what would ordinarily be viewed as downward blips are hard to accept.

For those that have a hard time dealing with conflict, these are not good times, as the Santa Claus Rally is being threatened by the specter of a correction in the waiting. While there’s still time for the traditional rally it’s hard to know whether Santa Claus factored the thought of an outgoing Federal Reserve Chairman presiding over his final FOMC meeting and holding his final press conference.

Oh, and then there’s also the little matter of possibly announcing the beginning of the taper to Quantitative Easing. Just a week earlier the idea that such an announcement would come in December was considered highly unlikely. Now it seems like a real possibility and not the kind that the markets were altogether comfortable with, even as they expressed comfort with the previous week’s Employment Situation Report.

While I admire Ben Bernanke and believe that he helped to rescue the world’s financial markets, it may not be far fetched to cast him as the “Grinch” who stole the Santa Claus Rally if the markets are taken off guard. Personally, I don’t believe that he will make the decision to begin the tapering, in deference to Janet Yellen, his expected successor, privilege to decide on timing, magnitude and speed.

However, I’m not really willing to commit very much to that belief and will likely exercise the same caution as I did last week.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

Last week was one of my slowest trading weeks in a long time. Even with cash to spend there never seemed to be a signal that price stability would temper downward risk. Moving forward to this week comes the challenge of trying to distinguish between value and value trap, as many of the stocks that I regularly follow are at more appealing prices but may be at at continued risk.

With lots of positions set to expire this week, the greatest likelihood is that whatever new positions I do establish this week will be with the concomitant use of expanded weekly options or even the January 18, 2014 option, rather than options expiring this coming Friday. The options market is certainly expecting some additional fireworks this coming week as option premiums are generally considerably higher than in recent months.

Microsoft (MSFT) is one of those stocks that has come down in the past week, but like so many still has some downside potential. Of its own weight it can easily go down another 3%, but under the burden of a market in correction its next support level is approximately 8% lower. Since the market’s recent high just a few weeks ago, Microsoft has slightly under-performed the market, but it does trade with a low beta, perhaps offering some relative down side protection. As with many other stocks this week its option premium is far more generous than in the recent past making it perhaps more difficult to resist, but with that reward comes the risk.

There’s probably not much reason or value in re-telling the story of Blackberry (BBRY). Most already have an idea of how the story is going to end, but that doesn’t quiet those who dream of a better future. For some, the future is defined by a weekly option contract and Blackberry reports earnings this week. The options market is implying about a 12% move and for the really adventurous the sale of a put with a strike level almost 17% below Friday’s close could yield a weekly ROI of 1.4%. On a note that shouldn’t be construed as being positive, as the market itself appears a bit more tenuous, Blackberry’s own beta has taken a large drop in the past 3 months. The risk, still remains, however.

Although I discussed the possibility of purchasing shares of Joy Global (JOY) in last week’s article after they reported earnings, I didn’t do so, as it fell hostage to my inactivity even after a relatively large price drop. Despite a recovery from the low point of the week, Joy Global, which has been very much a range bound trading stock of late is still in the range that has worked well for covered call sales. The same is a little less so for Caterpillar (CAT) which is approaching the upper end of its range as it has worked its way toward the $87.50 level. However, with even a mild retreat I would consider once again adding shares buoyed a little bit with the knowledge that shares do also go ex-dividend near the end of the January 2014 option cycle.

Citibank (C) was another that I considered purchasing last week and following a small price drop it continues to have some appeal, also having slightly under-performed the S&P 500 in the past three weeks. However, despite its beta having fallen considerably, it is still potentially a stock that could respond far more so than the overall market. Its option premium for an at the money weekly strike is approximately 18% higher than last week, suggesting that the week may be somewhat more risky than of late.

While my shares of Halliburton (HAL) haven’t fared well in the past week, I am looking at reuniting my “evil troika” by considering purchases of both British Petroleum (BP) and Transocean (RIG), which are now also down from their recent highs. Following in a week in which Anadarko (APC) plunged after a bankruptcy court ruling from a nearly decade old case, the “evil troika” is proof that there is life after litigation and after jury awards, fines and clean up costs. While oil and oil services have been volatile of late, both British Petroleum and Transocean share with Microsoft the fact that they have already under-performed the S&P 500 during this latest downturn but have low betas, hopefully offering some relative downside protection in a faltering market. Perhaps even better is that they are beyond the point of significant downward movement emanating from judicial decisions.

Coach (COH) hasn’t been able to garner much respect lately, although there has been some insider buying when others have been disparaging the company. Meanwhile it has been trading in a fairly well defined range of late. It is a stock that I’ve owned eight times during 2013 and regret not having owned more frequently, particularly since it began offering weekly and then expanded options. Like a number of stocks that I’m considering this week, it too is still closer to the upper end of the range than I would normally initiate new positions and wouldn’t mind seeing a little more weakness.

Seagate Technology (STX) may have a higher beta than is warranted to consider at a time that the market may be labile, however it has recently traded well at the $47.50 level and offers an attractive reward for those willing to accept the frequent movements its shares make, even on an intraday basis. My expectation is that If I do consider a trade it would either be the sale of puts before Wednesday’s big events or otherwise waiting for the aftermath and looking at expanded option dates.

Finally, and yet again, it seems as if it may be time to consider a purchase of eBay (EBAY). While I’ll never really lose count of how many times I own a specific stock, going in and out of positions as they are assigned, eBay is just becoming the perfect example of a stock trading within a range. For anyone selling options on eBay, perhaps the best news was its recent downgrade that chided it for trading in a range and further expecting that it would continue range bound. Although you can’t necessarily trade on the basis of the absolute value of price movements of a stock, the next best way to do so is through buying shares and selling covered calls and then repeating the process as often as possible.

Traditional Stocks: British Petroleum, Caterpillar, eBay, Microsoft, Transocean

Momentum Stocks: Citibank, Coach, Joy Global, Seagate Technology

Double Dip Dividend: none

Premiums Enhanced by Earnings: Blackberry (12/20 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.

Dec122013

A Bullish Case Going Forward

Daily Market Update

(A version of this article appeared on TheStreet.com)

The bullish case? I can’t possibly make one, having been expecting a market correction similar to that seen in April 2012 since April of this year. Besides. I’m an inveterate covered option writer and by nature see the pitfalls of every single trade that I make or suggest.

After all, why would you need protection in the form of options if your stock thesis was sound?

After nearly 30 years of marriage my wife recently told me that only about 40% of what I say turns out to actually be correct. If it was only that good when it came to selecting stocks and getting the timing just right. I’d be in the pantheon of the world’s greatest investors instead of world’s greatest husbands.

Conveniently ignoring my track record of premature pessimism, the coming week holds lots of risk for portfolios.

At a time, albeit only for a day or two, that good news was actually interpreted by the market as being good news, it was a little disconcerting that the idea of a budget deal wasn’t greeted with great enthusiasm. In fact, even the architects of the deal seemed to minimize the achievement. Considering that the current Congress would even have a difficult time agreeing on what day to celebrate New Years if it fell on a Monday, one would be excused for thinking a budget deal, well ahead of a deadline was actually monumental.

Suggesting that the market had simply discounted the deal is also convenient, but clearly without basis. Certainly watching Speaker Boehner and Majority Leader Cantor take the opportunity to rail against the Affordable Care Act, when they addressed the nation, fighting yesterday’s war instead of rallying the markets by celebrating a rare accomplishment, wasn’t helpful.

At this point, however, that’s all yesterday’s news and other than painting a picture of a squeamish market, doesn’t offer any forward looking guidance.

Where the immediate risk enters is from the coming week’s release of the FOMC minutes and perhaps more importantly Chairman Ben Bernanke’s press conference that follows.

Having sold many options with an expiration date just two days after the FOMC release, I’m forced to recall two other occasions this year when I was smugly anticipating assignment of many positions and counting the cash, when the market turned on a dime and not in the right way, either.

Just a few days ago there were very few believing that there was any possibility that the dreaded “taper” to Quantitative Easing could begin or be announced in December. That may be why last week’s good Employment Situation Report was greeted as good news, despite the fact it was good news. Without the fear of the taper beginning much sooner rather than later, the market rallied. But remember, that in the previous days the market sputtered as a synthetic version of tapering, the rising yield on 10 Year Treasury Notes showed us what is in store when the real thing hits.

While the outcome of what awaits next week isn’t pre-ordained, I like to know when obstacles are ahead and what lessons can be learned from the past.

I normally spend Wednesday’s scouting out potential new positions for next week’s purchases in anticipation of weekly option assignments and cash flowing into my account. The question is whether it’s time to preserve the cash or simply look for the bullish case that always exists somewhere, although can disappear in an instant.

Since I never look to hit homeruns, the names that I gravitate to for short term plays are only to achieve small returns and are the names so often dismissed by those with traditional mindsets.

No one thumps their chest pounding about a proposed 1% ROI for the week on their recommeed trades.

COH ChartHowever, eBay (EBAY), Coach (COH) and Caterpillar (CAT) gravitate to the top even when the foundation around them may be weakening. Not because they necessarily have good fundamental stories, after all, they have all had their recent share of derision, but because they have been reliable in their mediocrity and have simply traded in a range for an extended period of time.

 That range is precisely what makes them valuable to an option seller. While exercising a traditional buy and hold approach to these would have been an exercise in futility of the past year, a punctuated form of ownership, essentially a serial buy and hold technique, characterized by repeated purchases, writing of calls and assignments could be an exercise in delight, as seen in these returns in eBay, Caterpillar and Coach. The predictability of that range is more reliable than being able to time a rally or decline. The consistency of trading, particularly over the past nine months or so is the sort of thing that dreams are made of, if you have nothing else to dream about.

They may be boring and they may be out of favor among, but sometimes the bullish case is made out of adding together lots of baby cows.

As I look toward the challenge of the coming week and the message sent by today’s market, I take my seemingly eternal pessimism, but am not inclined to shrink back into my shell. Rather, the time seems exceddingly right for small victories shared with old friends

COH data by YCharts