Weekend Update – August 9, 2015

In an age of rapidly advancing technology, where even Moore’s Law seems inadequate to keep up with the pace of advances, I wonder how many kids are using the same technology that I used when younger.

It went by many names, but the paper “fortune teller” was as good a tool to predict what was going to happen as anything else way back then.

Or now.

It told your fortune, but for the most part the fortunes were binary in nature. It was either good news that awaited you later in life or it was bad news.

I’m not certain that anything has actually improved on that technology in the succeeding years. While you may be justified in questioning the validity of the “fortune teller,” no one really got paid to get it right, so you could excuse its occasional bad forecasting or imperfect vision. You were certainly the only one to blame if you took the results too seriously and was faced with a reality differing from the prediction.

The last I checked, however, opinions relating to the future movements of the stock market are usually compensated. Those compensations tend to be very generous as befitting the rewards that may ensue to those who predicate their actions on the correct foretelling of the fortunes of stocks. However, since it’s other people’s money that’s being put at risk, the compensations don’t really reflect the potential liability of getting it all wrong.

Who would have predicted the concurrent declines in Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) that so suddenly placed them into correction status? My guess is that with a standard paper fortune teller the likelihood of predicting the coincident declines in Disney and Apple placing them into correction status would have been 12.5% or higher.

Who among the paid professionals could have boasted of that kind of predictive capability even with the most awesome computing power behind them?

If you look at the market, there really is nothing other than bad news. 200 Day Moving Averages violated; just shy of half of the DJIA components in correction; 7 consecutive losing sessions and numerous internal metrics pointing at declining confidence in the market’s ability to move forward.

While this past Friday’s Employment Situation Report provided data that was in line with expectations, wages are stagnant If you look at the economy, it doesn’t really seem as if there’s the sort of news that would drive an interest rate decision that is emphatically said to be a data driven process.

Yet, who would have predicted any of those as the S&P 500 was only 3% away from its all time highs?

I mean besides the paper fortune teller?

Seemingly paradoxical, even while so many stocks are in personal correction, the Volatility Index, which many look at as a reflection of uncertainty, is down 40% from its 2015 high.

As a result option premiums have been extraordinarily low, which in turn has made them very poor predictors of price movements of late, as the implied move is based upon option premium levels.

Nowhere is that more obvious than looking at how poorly the options market has been able to predict the range of price movements during this past earnings season.

Just about the only thing that could have reasonably been predicted is that this earnings season who be characterized by the acronym “BEMR.”

“Beat on earnings, missed on revenues.”

While a tepid economy and currency exchange have made even conservative revenue projections difficult to meet, the spending of other people’s money to repurchase company shares has done exactly what every CEO expected to be the case. Reductions in outstanding shares have boosted EPS and made those CEOs look great.

Even a highly p[aid stock analyst good have predicted that one.

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

Not too surprisingly after so many price declines over the past few weeks, so many different stocks look like bargains. Unfortunately, there’s probably no one who has been putting money at risk for a while who hasn’t been lured in by what seemed to be hard to resist prices.

It’s much easier to learn the meaning of “value trap” by reading about it, rather than getting caught in one.

One thing that is apparent is that there hasn’t been a recent rush by those brave enough to “buy on the dip.” They may sim
ply be trading off bravery for intelligence in order to be able to see yet another day.

With my cash reserves at their lowest point in years, I would very much like to see some positions get assigned, but that wish would only be of value if I could exercise some restraint with the cash in hand.

One stock suffering and now officially in correction is Blackstone (NYSE:BX). It’s descent began with its most recent earnings report. The reality of those earnings and the predictions for those earnings were far apart and not in a good way.

CEO Schwarzman’s spin on performance didn’t seem to appease investors, although it did set the tone for such reports as “despite quarterly revenues and EPS that were each 20% below consensus. That consensus revenue projection was already one that was anticipating significantly reduced levels.

News of the Blackstone CFO selling approximately 9% of his shares was characterized as “unloading” and may have added to the nervousness surrounding the future path of shares.

But what makes Blackstone appealing is that it has no debt on its own balance sheet and its assets under management continue to grow. Even as the real estate market may present some challenges for existing Blackstone properties, the company is opportunistic and in a position to take advantage of other’s misery.

Shares command an attractive option premium and the dividend yield is spectacular. However, I wouldn’t necessarily count on it being maintained at that level, as a look at Blackstone’s dividend payment history shows that it is a moving target and generally is reduced as share price moves significantly lower. The good news, however, is that shares generally perform well following a dividend decrease.

Joining Blackstone in its recent misery is Bed Bath and Beyond (NASDAQ:BBBY). While it has been in decline through 2015, its most recent leg of that decline began with its earnings report in June.

That report, however, if delivered along with the most recent reports beginning a month ago, may have been met very differently. Bed Bath and Beyond missed its EPS by 1% and met consensus expectations for revenue.

Given, however, that Bed Bath and Beyond has been an active participant in share buybacks, there may have been some disappointment that EPS wasn’t better.

However, with more of its authorized cash to use on share buy backs, Bed Bath and Beyond has been fairly respectful in the way it uses other people’s money and has been more prone to buying shares when the stock price is depressed, in contrast to some others who are less discriminating. As shares are now right near a support level and with an option premium recognizing some of the uncertainty, these shares may represent the kind of value that one of its ubiquitous 20% of coupons offers.

The plummet is Disney shares this week following earnings is still somewhat mind boggling, although short term memory lapses may account for that, as shares have had some substantial percentage declines over the past few years.

Disney’s decline came amidst pervasive weakness among cable and content providers as there is a sudden realization that their world is changing. Words such as “skinny” and “unbundling” threaten revenues for Disney and others, even as revenues at theme parks and movie studios may be bright spots, just as for Comcast (NASDAQ:CMCSA).

As with so many other stocks as the bell gets set to ring on Monday morning, the prevailing question will focus on value and relative value. Disney’s ascent beyond the $100 level was fairly precipitous, so there isn’t a very strong level of support below its current price, despite this week’s sharp decline. That may provide reason to consider the sale of puts rather than a buy/write, if interested in establishing a position. Additionally, a longer term time frame than the one week that I generally prefer may give an opportunity to generate some income with relatively low risk while awaiting a more attractive stock price.

While much of the attention has lately been going to PayPal (NASDAQ:PYPL) and while I am now following that company, it’s still eBay (NASDAQ:EBAY) that has my focus, after a prolonged period of not having owned shares. Once a mainstay of my holdings and a wonderful covered option trade it has become an afterthought, as PayPal is considered to offer better growth prospects. While that may be true, I generally like to see at least 6 months of price history before considering a trade in a new company.

However, as a covered option trader, growth isn’t terribly important to me. What is important is discovering a stock that can have some significant event driven price movements in either direction, but with a tendency to predictably revert to its mean. That creates a situation of attractive option premiums and rel
atively defined risk.

eBay is now again trading in a narrow range after some of the frenzy associated with its PayPal spin-off, albeit the time frame for that assessment is limited. However, as it has traded in a relatively narrow range following the spin-off, the option premium has been very attractive and I would like to consider shares prior to what may be an unwanted earnings surprise in October.

Sinclair Broadcasting (NASDAQ:SBGI) reported earnings last week beating both EPS and revenue expectations quite handily. However, the market’s initial response was anything but positive, although shares did recover about half of what they lost.

Perhaps shares were caught in the maelstrom that was directed toward cable and content providers as one thing that you can predict is that a very broad brush is commonly used when news is at hand. But as a plebian provider of terrestrial television access, Sinclair Broadcasting isn’t subject to the same kind of pressures and certainly not to the same extent as their higher technology counterparts.

I often like to consider the purchase of shares just before Sinclair Broadcasting goes ex-dividend, which it will do on August 28th. However, with the recent decline, I would consider a purchase now and selling the September 18, 2015 option contract at a strike level that could generate acceptable capital gains in addition to the dividend and option premium, while letting the cable and content providers continue to take the heat.

It seems only appropriate on a week that is focused on an old time paper fortune teller that some consideration be given to International Paper (NYSE:IP) as it goes ex-dividend this week. With its shares down nearly 17% from their 2015 high, the combination of perceived value, very fair option premium and generous dividend may be difficult to pass up at this time, while having passed it up on previous occasions during the past month.

International Paper’s earnings late last month fell in line with others that “BEMR,” but it shares remained largely unchanged since that report and shares appear to have some price support at its current level.

You may have to take my word for it, but Astra Zeneca (NYSE:AZN) is going ex-dividend this week. That information didn’t appear in any of the 3 sources that I typically use and my query to its investor relations department received only an automated out of office response. The company’s site stated that a dividend announcement was going to be made when earnings were announced on July 30th, but a week after earnings the site didn’t reflect any new information. Fortunately,someone at NASDAQ knew what I wanted to know.

Astra Zeneca pays its dividends twice each year, the second of which will be ex-dividend this week and is the smaller of the two distributions, yet still represents a respectable 1.3% payment.

I already own shares and haven’t been disappointed by shares lagging its peers. What I have been disappointed in, however, has been it’s inability to mount any kind of sustained move higher and the inability to sell calls on those shares, particularly as there had been some liquidity issues.

The recent stock split, however, has ameliorated some of those issues and there appears to be some increased options trading volume and smaller bid-ask discrepancies. Until that became the case, I had no interest in adding shares, but am now more willing to do so, also in anticipation of some performance catch-up to its other sector mates.

The promise that seemed to reside with shares of Ali Baba (NYSE:BABA) not so long ago has long since withered along with many other companies whose fortunes are closely tied to the Chinese economy.

Ali Baba reports earnings this week and the option market is predicting only a 6.7% price move. That seems to be a fairly conservative assessment of the potential for exhilaration or the potential for despair. However, a 1% ROI through the sale of a weekly put option is not available at a strike that’s below the bottom of the implied range.

For that reason, I would approach Ali Baba upon earnings in the same manner as with Green Mountain Keurig’s (NASDAQ:GMCR) earnings report. That is to only consider action after earnings are released and if shares drop below the implied lower end of the range. There is something nice about letting others exercise a torrent of emotion and fear and then cautiously wading into the aftermath.

Finally, during an earnings season that has seen some incredible moves, especially to the downside, Cree (NASDAQ:CREE) should feel right at home. It has had a great habit of surprising the options market, which is supposed to be able to predict the range of a stock’s likely price move, on a fairly regular basis.

With its products just about every where that you look you would either expect its revenues and earnings to be booming or you might think that it was in the throes of becoming commoditized.

What Cree used to be able to do was to trade in a very stable manner for prolonged periods after an earnings related plunge and then recover much of what it lost as subsequent earnings were released. That hasn’t been so much the case in the past year and its share price has been in continued decline in 2015, despite a momentary bump when it announced plans to spin-off a division to “unlock its full value.”

The option market is implying a 9.4% move when earnings are announced this coming week. By historical standards that is a low estimation of what Cree shares are capable of doing. While one could potentially achieve a 1% weekly ROI at a strike price nearly 14% below Friday’s closing price, as with Ali Baba, I would wait for the lights to go out on the share’s price before considering the sale of short term put options.

Traditional Stocks: Bed Bath and Beyond, Blackstone, Disney, eBay, Sinclair Broadcasting

Momentum Stocks: none

Double-Dip Dividend: Astra Zeneca (8/12 $0.45), International Paper (8/12 $0.40)

Premiums Enhanced by Earnings: Ali Baba (8/12 AM), Cree (8/11 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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Copyright 2015 TheAcsMan

Weekend Update – January 18, 2015

This was really a wild week and somehow, with all of the negative movement, and despite futures that were again down triple digits in the previous evening’s futures trading, the stock market somehow managed to move to higher ground to bring a tumultuous week to its end.

Actually, the reason it did so is probably no mystery as the market seems to have re-coupled with oil prices, for good or for bad.

Still it was a week when stocks, interest rates, precious and non-precious metals, oil and currencies were all bouncing around wildly, as thus far, is befitting for 2015.

The tonic, one would have thought could have come from the initiation of another earnings season, traditionally led by the major banks. However “the big boys” suffered on top and bottom lines, citing disappointing results in fixed income and currency trading, as well as simply being held hostage by a low interest rate environment for their more mundane activities, like pumping money into the economy through loans.

Even worse, the unofficial spokesperson for the interest of those “too big to fail,” Jamie Dimon, seemed passively resigned to the reality that the Federal government was in charge and could do with systemically important institutions whatever it deemed appropriate, such as breaking them up.

The first sign of troubles came weeks ago as trader bonus cuts were announced. While declines in trader revenue were expected, the bonus cuts suggested that the declines were steeper than expected, particularly when the bonus cuts were greater than had only recently been announced.

Of course, that leads to the question: “If a banker can’t make money, then who can?”

That’s a reasonable question and has some basis in earnings seasons past and may provide some insight into the future.

For those who follow such things, the past few years have seen a large number of such earnings seasons start off with good news from the financial sector, only to have lackluster or disappointing results from the rest of the S&P 500, propped up by rampant buybacks.

What is rare, however, is to have the financials disappoint , yet then seeing the remainder of the market report good or better than expected earnings, particularly as the rate of increase of buybacks may be decreasing.

That is now where we stand with the second week of earnings season ready to begin when the market re-opens on Tuesday.

While there was already some clue that the major money center banks were not doing as well as perhaps expected, as bonuses were cut for many, the expectation has been that the broader economy, especially that reflecting consumer spending, would do well in an environment created by sharply falling energy prices.

Among gyrations this week were interest rates which only went lower on the week, much to the chagrin of those whose fortunes are tied to the certainty of higher rates and in face of expectations for increases, given growing employment, wage growth and the anticipated increase in consumer demand.

Funny thing about those expectations, though, as we got off to a bad start on the surprising news that retail sales for December 2014 didn’t seem to reflect any increased consumer spending, as most of us had expected, as the first dividend to come from falling energy prices.

While faith in the integrity and well being of our banking system is a cardinal tenet of our economy, it is just another representation of the certainty that investors need. That certainty was missing all of this past week as events, such as the action by the Swiss National Bank were unexpected, oil prices bounced by large leaps and falls without ob
vious provocation, copper prices plunged and gold seemed to be heating up.

How many of those did anyone expect to all be happening in a single week? Yet, on Friday, in a reversal of the futures, markets surged adding yet another of those large gains that are typically seen in bearish cycles.

Still, the coming week has its possible antidotes to what has been ailing us all through 2015. There are more earnings reports, including some more from the oil services sector, which could put some pessimism to rest with anything resembling better than expected news, such as was offered by Schlumberger (SLB) this past Friday, which also included a very unexpected dividend increase.

Also, this may finally be the week that Mario Draghi belatedly brings the European Central Bank into the previous decade and begins a much anticipated version of “quantitative easing.”

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. Additional earnings related trades may be seen in an accompanying article.

Among those big boys with disappointing stories to tell was JP Morgan Chase (JPM). In a very uncharacteristic manner, CEO and Chairman Jamie Dimon didn’t exude optimism and confidence, instead seemingly accepting whatever fate would be assigned by regulators. Of course, some of that resignation comes in the face of likely new assaults on Dodd-Frank, which could only be expected to benefit Dimon and others.

Whether banks and large financial institutions are under assault or not may be subject to debate, but the assault on JP Morgan’s share price is not, as it has fallen about 11% over the past two weeks, despite a nice gain on Friday.

While still above its 52 week low, unless interest rates continue their surprising descent and go lower than 1.8% for a while, this appears to be a long sought after entry point for shares. The volatility in the financial sector is so high that even with an upcoming 4 day trading week the option premium is very rich, reflecting the continuing uncertainty.

More importantly, may be the distinction that Dimon made between good and bad volatility, with JP Morgan having been subject to the bad kind of late.

The bad kind is when you have sustained moves higher or lower and the good kind is when you see a back and forth, often with little net change. The latter is a trader’s dream and it are the traders that make it rain at JP Morgan and others. That good kind of volatility is also what option writers hope will be coming their way.

So far, 2015 is sending a signal that it may be time to take the umbrellas out of storage.

MetLife (MET), with its 30 day period to challenge its designation as a “systemically important” financial institution, decided to make that challenge. As interest rates went even lower this week, momentarily breaching the 1.8% level, MetLife’s shares continued its decline.

If Dimon is correct in his resignation that nothing can really be done when regulators want to express their whims, then we should have already factored that certainty into MetLife’s share price. It too, like JP Morgan, had a nice advance on Friday, but is still about 11% lower in the past 2 weeks and has an upcoming dividend to consider, in addition to earnings a week afterward.

Intel (INTC), a stellar performer in 2014, joined the financials in reporting disappointing earnings this past week. While it did get swept along with just about everything else higher in the final hour of trading, it had already begun its share recovery after hitting its day’s low in the first 30 minutes of trading.

After 2 very well received earnings reports the past quarters, it may have been too much to expect a third successive upside surprise. However, the giant that slid into somnolence as the world was changing around it has clearly reawakened and could make a very good covered option trade once again if it repeatedly faces upside resistance a
t $37.50.

I’m not quite certain how to characterize The Gap (GPS). I don’t know whether it’s fashionable, just offers value or is a default shopping location for families.

What I do know is that among my frequent holdings it has a longer average holding period than most others, despite having the availability of weekly options. That’s because it consistently jumps up and down in price, partially due to its habit of still reporting same store sales each month and partially for reasons that escape my ability to grasp.

Yet, it still trades in a fairly narrow range and for that reason it is a stock that I always like to consider on a decline. Because of its same store sales reports it offers an enhanced option premium on a monthly basis in addition to its otherwise average premium returns, but it also has an acceptable dividend for your troubles of holding it for any extended period of time.

As a Pediatric Dentist, you would think that I would own Colgate-Palmolive (CL) on a regular basis. However, I tend to put option premium above any sense of professional obligation. In that regard, during a sustained period of low volatility, Colgate-Palmolive hasn’t been a very appealing alternative investment. However, with volatility creeping higher, and with shares going ex-dividend this week, the premium is getting my attention.

Together with its recent 6% price decline and its relative immunity from oil prices, the time may have arrived to align professional and premium interests. However, if shares go unassigned, consideration has to be given to selecting an option expiration for a rollover trade that offers some protection in the event of an adverse price move after earnings, which are scheduled for the following week.

Among those reporting earnings this week are Cree (CREE), eBay (EBAY) and SanDisk (SNDK).

Cree is an example of a company that regularly has an explosive move at earnings and may present some opportunity if considering the sale of puts before, or even after earnings, in the event of a large decline.

I have experience with both in the past year and the process, as well as the result can be taxing. My most recent exploit having sold puts after a large decline and eventually closing that position at a loss, and both the process and the result were less than enjoyable.

That’s not something that I’d like to do again, but seeing the ubiquity of its products and the successive earnings disappointments in the past year, I’m encouraged by the fact that Cree hasn’t altered its guidance, as it has in the past in advance of earnings.

I generally prefer selling puts into a price decline, however Cree advanced by nearly 4% on Friday and reports earnings following Tuesday’s close. In the event of a meaningful decline in price before that announcement I would consider the sale of puts. The option market believes that there can be a move of 10.1% upon earnings release, however a 1% ROI can potentially be achieved even when selling a put contract at a strike that is 14.2% below Friday’s close.

Alternatively, in the event of a large drop after earnings, consideration can be given toward selling calls in the aftermath, although if past history is a guide, when it comes to Cree, what has plunged can plunge further.

SanDisk recently altered its guidance and saw its share price plunge nearly 20%. For some reason, so often after such profit warnings are provided before earnings, the market still seems surprised after earnings are released and send shares even lower.

While I’m interested in establishing a position in SanDisk, I’m not likely to do so before earnings are announced, as the option market is implying a price move of 7% and in order to achieve a 1% ROI the strike level required is only 7.5% below Friday’s closing price. That offers inadequate cushion between risk and reward. Because I expect a further decline, I would want a greater cushion, so would prefer to wait until earnings are released.

While Cree and SanDisk are volatile and, perhaps speculative, eBay is a very different breed. However, it is still prone to decisive moves at earnings and it has recently diffused disappointing earnings reports with announcements, such as the existence of an Icahn position or comments regarding a PayPal spin-off.

As opposed to most put sale, where I usually have no interest in taking ownership of shares, eBay is one that, if I sell puts and see an adverse move, would consider taking assignments, as it has been a very reliable covered call stock for the past few years, as its shares have traded in a very narrow range.

Despite a gain on Friday that trailed the market’s advance, it is about 6% below where I last had shares assigned and would be interested in initiating another new position before it becomes a less interesting and less predictable company upon its planned PayPal spin-off.

I tend to like Best Buy (BBY) when it is down or has had a large decline in shares. It has done so on a regular basis since January 2014 and did so again this past week, almost a year to the day of its nearly 33% drop.

This time it was a pin being forced into the bubble that its shares had recently been experiencing as the reality behind its sales figures indicated that margins weren’t really in the equation. Undertaking a “sales without profits” strategy like its brickless and mortarless counterpart isn’t a formula for long term success unless you have very, very deep pockets or a surprisingly disarming and infectious laugh, such as Jeff Bezos possesses.

While possibly selling all of those GoPro (GPRO) devices and other items over the holidays at little to no profit may not have been in Best Buy’s best interests, it may have helped others, for at least as long as that strategy can be maintained.

However, Best Buy has repeatedly been an acceptable buy after gaps down in its share price, although consideration can also be given to the sale of put contracts, as its price is still a bit higher than I would like to see for a re-entry.

Finally, there are probably a large number of reasons to dislike GoPro. For me, it may begin with the fact that I’m neither young, photogenic nor athletic. For others it may have to do with secondary offerings or the bent rules around its lock-up expiration. Certainly there will be those that aren’t happy about a 50% drop from its high just 3 months ago, which includes the 31% decline occurring in the days after the lock-up expiration.

While it has been on a downtrend after the most recent lock-up expiration, despite having traded higher in the days before and immediately afterward, the impetus for this week’s large decline appears to be the filing of a number of patents by Apple (AAPL) which many have construed as potentially offering competition to GoPro in the hardware space, all while GoPro is already seeking to re-invent itself or at least shift from a hardware company to a media company.

I don’t know too much about Apple and I know even less about GoPro, but Apple’s long history has shown that it doesn’t necessarily pounce into markets where there already seems to be a product that is being well received by consumers.

It prefers to pick on the weak and defenseless, albeit the ones with good ideas.

Apple has done incredibly well for itself in recognizing new technologies that might be in much greater demand if the existing products didn’t suffer from horrid design and engineering. Having a fractured manufacturer base with no predominant player has also been an open invitation to Apple to meld its design and marketing prowess and capture markets.

Whatever GoPro may suffer from, I don’t think that anyone has accused the GoPro product line of either of those shortcomings. so this most recent and pronounced decline may be unwarranted. However, GoPro does report earnings in the following week, so I would consider the potential risk associated with a position unlikely to be assigned this week. For that reason I would consider either the purchase of shares and the sale of deep in the money calls or the sale of deep out of the money puts, utilizing a weekly contract and keeping fingers crossed and strapping on for the action ahead.

Traditional Stocks: Intel, JP Morgan Chase, MetLife, The Gap

Momentum Stocks: Best Buy, GoPro

Double Dip Dividend: Colgate-Palmolive (1/21)

Premiums Enhanced by Earnings: Cree (1/20 PM), eBay (1/21 PM), SanDisk (1/21 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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Copyright 2015 TheAcsMan

Beware of Earnings Unless You Dare

Although the first week of this most recent earnings season has been less than spectacular, as the financial sector has suffered under a low interest rate environment, I continue to look at the more speculative portion of my portfolio as being available to generate quick income from stocks before or after earnings are announced.

During a week that stocks, interest rates, oil, precious metals and currencies have all gyrated wildly, what’s a little added speculation with earnings?

The process of trading in anticipation or after earnings news is one that seeks to balance risk with reward, accepting a relatively small reward in exchange for taking on a level of risk that appears to be less than the market is expecting.

The basic concepts and considerations in the approach are related to:

  • personal ROI goal;
  • individual temperament for risk, and
  • time and ability to trade in or out of risk in response to events.

The concepts are covered in previous articles, but in summary, the objective is to find a stock that can deliver an acceptable ROI when selling a weekly put option at a strike level that is lower than the bottom of the range defined by the option market’s implied volatility for that stock.

For my tolerances I seek a 1% ROI for a weekly position at a strike price that is outside the boundaries implied by the option market.

While achieving the desired ROI is an objective metric, and should be done within the context of acceptable risk, the decision process to initiate a trade is frequently based upon share behavior.

My preference, when it appears that both the risk and the reward measures are satisfactory, is to sell puts into share weakness in advance of earnings. If that condition isn’t met, I may also consider the sale of puts after earnings if there is significant price weakness after the report.

After Friday’s strong close, which may have come as a surprise to most everyone after a week of declines, many stocks reporting earnings next week may now be coming off of Friday’s advances. Insofar as Friday’s performance may have represented a reflexive bounce higher, I would be initially reluctant to jump into any put sale related trades for concern about an equally reflexive drop lower.

However, a number of the positions covered in this article have already suffered large losses in advance of their earnings report, some perhaps due to altered guidance and many are already well off from their highs, even as the S&P 500 is barely 4% lower after a quick triple bottom.

I tend to be more interested in those stocks that have already fallen than I am in those whose shares are moving higher prior to earnings, as that moves the strike level that I would have to use to achieve my desired 1% ROI for the week higher, and may also shift premium enhancement on the call side of the equation, rather than to the put side, which also contributes to a lower ROI.

While the traditional opinion and belief is that put sellers must be willing to own the shares in which they have sold puts, I often do not want to take ownership unless an ex-dividend date is approaching. While many sell puts in order to gain an entry into share ownership at a lower and more attractive price, I do so generally in order to capture the income stream from the option sales.

For that reason, it is important to have liquidity in the options market in order to be able to concurrently close the position and open a new one for a forward week if assignment is unwanted. Ideally, that would also be done at a lower strike price, however, in an otherwise low volatility environment, as we currently have, despite some recent increase, that is a difficult objective unless there is additional stock specific volatility, as may be seen in the energy sector currently.

Whether able to rollover to a lower strike level or not, the primary goals are to delay or prevent assignment and to collect additional net premiums in an attempt to ultimately see the position expire or be closed.

Among the stocks for consideration this week are many that can be readily recognized for inherent risk, which may also influence price behavior on a regular basis regardless of upcoming earnings or guidance.

This week I’m considering the sale of puts of shares of Cree (NASDAQ:CREE), Freeport McMoRan (NYSE:FCX), F5 Networks (NASDAQ:FFIV), General Electric (NYSE:GE), International Business Machines (NYSE:IBM), Intuitive Surgical (NASDAQ:ISRG), Netflix
(NASDAQ:NFLX), Starbucks (NASDAQ:SBUX), SanDisk (NASDAQ:SNDK) and United Continental Holdings (NYSE:UAL).

 

 

Generally I don’t spend too much time considering the relative merits of the stocks being considered for earnings related trades, preferring to remain agnostic to those issues and simply following guidelines outlined above.

Looking at this week’s list, there is no shortage of stories in advance to scheduled earnings, such as SanDisk releasing altered guidance or Freeport McMoRan feeling the sudden weight of collapsing copper prices, in addition to its growing exposure to gold and energy prices.

While I don’t use margin to add stock positions, it is often perfectly suited for this kind of trading activity. I generally use these trades in an account hat has margin privileges. While selling cash secured puts decreases the amount of margin that is available to you, it does not draw on margin funds and, therefore, doesn’t incur interest expenses. Those expenses will only be incurred if the shares are assigned to you and are subsequently purchased through the use of the credit extended.

One thing noticed among the positions cited above is that fewer are meeting my criteria and being assigned a “YES” designation. That may reflect an increasing sense of pessimism among option market traders as compared to previous quarterly earnings periods. Normally I would only consider those with a “YES” rating, but may now also consider those that are “MARGINAL.”

If considering the sale of put options, there is always a possibility of early assignment, especially if shares go far below the strike price and when using a weekly contract. If that occurs, the seller of the put contracts should be prepared to either own shares or attempt to rollover the put option to a forward date.

The lower the volatility environment the less benefit there is to the put holder to delay assignment for deep in the money positions. In the event of early assignment the opportunity is then created to begin managing shares and enhancing return through the sale of call options. However, where possible, it may be best to consider pre-emptive action in order to prevent or delay assignment.

Finally, in the current market environment, moves, especially downward, seem to be sudden and magnified. If pursuing any of these earnings related trades it helps to have exit strategies planned in advance and to limit falling prey to surprise, as that may be the one thing that can be counted upon.

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Weekend Update – August 10, 2014

Back in 2007 there was a sign that most mere mortals failed to recognize or understand as they stood in the path of peril.

A messenger delivered such a sign some seven years earlier, as well, and did so again last month.

The messenger was old, perhaps as old as the universe itself and his words and actions did foretell of the dangers that awaited, yet they were not appreciated as such, not even by the messenger, who may also have served as the executioner.

The proposed acquisitions of Chris-Craft and Dow Jones, in 2000 and 2007, respectively, were among the signs of market tops preceding terrible plunges that each saw the sacrifice of a generation of investors, some of whom are still said to be hiding as they await some sign of safety to begin investing once again.

The re-appearance of the messenger should give them some pause before considering a return to the action.

However, in a strange kind of way the “all safe” sign may have been delivered this week, as Rupert Murdoch, whose timing with his large previous acquisitions has been exquisite in its accuracy for coinciding with market tops has now sent a counter sign.

Barely a month ago, for those believing in the power of Murdoch, it was ominous that he would have proposed a buy out of Time Warner (TWX), but this week that offer was revoked, perhaps offering a respite to investors fearing another plunge from what may be destined to be a market top.

While many are speculating as to the reason for Murdoch’s change of heart, could it be that he has come to the realization that his offering price was just too high and that history, which has a habit of repeating itself, was poised to do so again?

Probably not, as once you get the taste, it’s all about the hunt and it shouldn’t come as a surprise if Murdoch either regroups, as the world appreciates that Time Warner’s share value is far less without Murdoch’s pursuit or as he seeks a new target.

As far as the revocation of the offer being a counter sign, this past week didn’t seem to receive it as such, as market weakness from last week continued amidst a barrage of international events.

But Murdoch wasn’t alone this week in perhaps having some remorse. Sprint (S), which never really made an overt bid for T-Mobile (TMUS), did however, overtly withdraw itself from that fray, just as T-Mobile was thumbing its nose at the French telecommunications company, Illiad’s (ILD) bid.

Walgreen (WAG) may have had a double dose of remorse this week as it announced that it would buy the remainder of a British drug store chain but would not be considering doing a tax inversion. They may have first regretted the speculation that they would be doing so as they undoubtedly received considerable political pressure to not move its headquarters. Seeing its shares plunge on that news may have been additional cause for remorse.

While Murdoch may have significant personal wealth tied to the fortunes of his company and may have a very vested interest in those shares prospering, that may not always be the case, as for some, it may be very easy to spend “other people’s money” in pursuit of the target and be immune to feelings of remorse.

But it’s a different story when it’s your own money in question. “Investor’s Remorse” can have applicability in both the micro and macro sense. We have all made a stock purchase that we’ve come to regret. However, in the larger sense, the remorse that may have been felt in 2000 and 2007 as Murdoch flexed his muscles was related to the agony of having remained fully invested in the belief that the market could only go higher.

When we see the potential signs of an apocalypse, such as increasing buyout offers and increasing numbers of initial public offerings while the market is hitting new highs, one has to wonder whether remorse will be the inevitable outcome. An Italian recession and the German stock exchange in correction may add to concerns.

Philosophically, my preference has long been to miss an upward climb to some degree by virtue of not being fully invested, rather than to be fully engaged during a market decline.

A drop of 10% seems like a lot, but it will seem even more when you realize that you must gain 11% just to once again reach your baseline. Having been that route I believe it’s much easier to drop 10% than it is to gain 11%. Just ask anyone who now own stocks that may have suddenly found themselves officially in “correction territory.”

As I get older I have less and less time and less appetite for remorse. I would assume that Rupert Murdoch feels the same, but he may also have a sense of immunity coupled with the secret for immortality, neither of which I enjoy.

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

This week’s selections include a number of recent targets and perhaps sources of remorse that may now find themselves better suited for those spending their own money, rather than that of other people.

Time Warner shareholders have been on a rollercoaster ride over the past three weeks as they saw a plunge on the same order as an initial surge in that time span. They may be experiencing some remorse for their leadership not being willing to consider Murdoch’s overture. The revocation of the offer, beautifully timed to dampen the good news of Time Warner’s earnings perhaps helped to limit any upside gains from earnings and adding to the feeling that Murdoch was the key to attaining “fair value,” even if that fair value may now no longer represent a premium to the initial bid.

However, with shares now back to their pre-offer level, which admittedly was at the then high for the year, the option premiums are quite high, reflecting the potential for more action. The challenge is knowing in which direction.

In the case of T-Mobile, it was a whirlwind week seeing an offer from abroad which wasn’t taken very seriously by anyone and then seeing the presumptive acquirer drop out of the game.

It’s hard to say who if anyone would have had any remorse, certainly not its out front CEO, John Legere, but no doubt shareholders experienced some, as shares plummeted in the belief that suitors were dropping like flies.

While Legere talks a boisterous game and did all he could to close the door to any future with Sprint, the reality is that T-Mobile needs both spectrum and cash and Legere needs a “sugar daddy” and one with lots of patience and tolerance.

For anyone willing to get in bed with T-Mobile, the good news is that they can have John Legere. The bad news is that they get John Legere.

But for a short term trade, suddenly T-Mobile is in correction territory and as long as there may still be prospects of capital appreciation, the option premiums are very enticing.

Walgreen shares fell nearly 15% on news that it wasn’t going to do a tax inversion, which seems far more than appropriate, as shares had their major ascent about 6 months ago long before most had ever heard of tax inversion.

I’ve been waiting for a while for Walgreen shares to return to the $60 level and the current reason hardly seems like one that would keep shares trading at that low level. Some recovery over the past two days doesn’t dampen the attraction to its shares.

Target (TGT) certainly should have experienced some remorse over the manner in which its data security practices were managed. In Target’s case, they put an additional price tag on that remorse that reversed the recent climb in shares, but was just really part of the obligatory dumping of all bad news into a single quarter to honor the ascension of a new CEO.

I’ve owned Target shares for a while waiting for it to recover from its security breach related price drop. Uncharacteristically, I haven’t added to my holdings as I usually do when prices drop because I haven’t had the level of confidence that I usually want before doing so. Now, however, I’m ready to take that plunge and don’t believe that there will be reason for further personal remorse. WIth an upcoming dividend, I don’t mind waiting for it to share in an anticipated pick up in the retail sector.

I’ve certainly had remorse over my ownership of shares in Whole Foods (WFM). While its co-CEOs are certainly visionaries, they have been facing increasing competition, are engaged in an aggressive national expansion and have one CEO that tends to make inopportune comments reflecting personal beliefs that frequently impact the stock price.

To his credit John Mackey has expressed some regrets over his choice of words in the past, but recently there has been little to inspire confidence. A recent, albeit small, price climb was attributed to a rumor of an activist position. While I have no idea of whether there’s any validity to that, Whole Foods does represent the kind of asset that may be appealing to an activist, in that it has a well regarded product, significantly depressed share price and leadership that may have lost touch with what is really important.

Mondelez (MDLZ) may or may not have any reason to feel remorse over adding activist investor Nelson Peltz onto its Board of Directors and to his decision to stop seeking a merger deal with Pepsi (PEP). Investors, however, may have some remorse as shares suddenly find themselves in correction over the past month.

That price drop brings Mondelez shares back into consideration for rotation into my portfolio, especially if looking for classically “defensive” positions in advance of an anticipated market decline. With an almost competitive dividend, a decent option premium and the possibility of some price bounce back the shares look attractive once again.

DuPont (DD) and Eli Lilly (LLY) are both ex-dividend this week and there’s rarely reason to feel remorse when a dividend can make you feel so much better, especially when well in excess of the average for S&P 500 stocks. Lilly’s recent fall in the past two weeks and DuPont’s two month’s decline offer some incentive to consider adding shares at this time and adding option premiums to the income mix while waiting for the market to return to an upward bias.

Cree (CREE) reports earnings this week and is always an exciting ride for a lucky or unlucky investor. It is a stock that either creates glee or remorse.

My most recent lot of shares came from eventually taking assignment of shares following the sale of puts after the previous earnings report, thinking that they couldn’t possibly go down any further in a significant manner. I don’t have any remorse, as I’ve been able to generate option premium revenue on having rolled the puts over and then having sold calls subsequent to assignment. I may, however, have some remorse after this coming week’s earnings.

The option market is once again looking for a significant earnings related move next week. For the trader willing to risk remorse a 1% weekly ROI may be achieved at a strike level 12% below the current price. For those less tolerant of risk, if shares do drop significantly after earnings, some consideration can be given to selling out of the money puts and being prepared to manage the position, as may become necessary.

Finally, how can you talk about remorse and not mention Halliburton (HAL)? From drilling disasters to adventures in Iraq Halliburton really hasn’t needed to be remorseful, because somehow it always found a way to prosper and move beyond the “disaster du jour.”

In hindsight, it seems so perfectly appropriate that for a period in time its CEO was future Vice President Dick Cheney, who didn’t even express any remorse for having shot a good friend in the face.

That’s the kind of leadership that we need in a company being considered for its worthiness of our personal assets, because we are capable of remorse and are pained by the prospects of engaging in it.

With some recent price weakness, as being experienced in the energy sector, now appears to be a good time to take advantage of Halliburton’s price retreat and save the remorse for others.

Traditional Stocks: Halliburton, Mondelez, Target, Time Warner, Walgreen, Whole Foods

Momentum: T-Mobile

Double Dip Dividend: DuPont (8/13), Eli Lilly (8/13)

Premiums Enhanced by Earnings: Cree (8/12 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.

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Weekend Update – April 20, 2014

I really didn’t see this past week coming at all.

Coming off of an absolutely abysmal week that saw the market refuse to follow up good news with further gains and instead plunging some 400 points in 2 days there were so many reasons to believe that markets were finally headed lower and for more than just a quick dip.

While I strongly believe in not following along with the crowd there has to be some bit of you that tells the rest of you not to completely write off what the crowd is thinking or doing. On horse racing, for example, the favorite does still have its share of wins and the Cinderella long short story just doesn’t happen as often as everyone might wish.

To completely ignore the crowd is courting disaster. At least you can occasionally give the crowd their due.

But this past week wasn’t the week to have done so. This was absolutely the week to have ignored virtually everyone. Unfortunately, this was also the week that I chose not to do so and went along with the crowd. The argument seemed so compelling, but that probably should have been the first clue.

What made this past week so unusual was that hardly anyone tried to offer a reason for the inexplicable advance forward. Not only did the market climb strongly, but it even reversed a late day attempt to erase large gains and ended up closing at its highs for the day. We haven’t seen anything like that lately, as instead we’ve seen so many gains quickly evaporate. For the most part I felt like an outsider because i didn’t open very many new positions last week, but it was rewarding enough to have heard such little pontification, as few wanted to admit that the unexpected had occurred.

With the S&P 500 now less than 2% from its high, it does make you wonder whether the concept of a correction being defined on the basis of a 10% decline is relevant anymore. Although its much better to think in terms of relative changes, as expressed by percentages, but perhaps our brains are wired to better understand absolute movements. Maybe we interpret a 400 point move as being no different from any other 400 point move, regardless of what the baseline is for either and simply take the move as a signal to reverse.

It’s tempting to think that perhaps we’re simply returning to the recent pattern of small drops on the order of 5% and then returning to unchecked climbs to new records. Of course, that would be in the realm of the "expected."

I have little expectation for what the next week may bring, as trying to figure out what is now driving the markets seems very futile of late. While I don’t think of "going along for the ride" as a very satisfying strategy I may be content to do so if the market continues moving higher for no apparent reason. But without any real indication of a catalyst I’m not terribly excited about wholeheartedly endorsing the move higher in a tangible way.

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

Not all stocks shared in last week’s glory. JP Morgan Chase (JPM) and Unitedhealth Group (UNH) in part accounted for the DJIA lagging the S&P 500 for the week.

JP Morgan and Unitedhealth both felt some backlash after some disappointing earnings reports. For JP Morgan, however, it has been about a year since there’s actually been anything resembling good news and yet its stock price, up until the past week had well out-performed the S&P 500. I’ve been waiting for a return to a less pricey entry point and after the past week it’s arrived following a 9% drop this month. With little reason to believe that there’s any further bad news ahead it seems to offer low enough risk for its reward even with some market weakness ahead.

Unitedhealth Group’s decline was just slightly more modest than that of JP Morgan and it, too, has returned to a price level that I wouldn’t mind owning shares. I haven’t done so with any regularity but the entry price is getting less expensive. As more news emerges regarding the Affordable Care Act there is potential for Unitedhealth Group to go in either direction. While its most recent earnings disappointed, there may be some optimism as news regarding enrollments by younger people.

Fastenal (FAST) is a company that I like very much, but am a little reluctant to purchase shares at this level, if not for the upcoming dividend that I would like to capture. I’ve long thought of Fastenal as a proxy for the economy and lately shares have been trading near the upper end of its range. While that may indicate some downside weakness, Fastenal has had good resilience and has been one of those monthly contracts that I haven’t minded rolling over in the past, having owned shares 5 times in the past 6 months.

You probably can’t get much more dichotomous than Kohls (KSS) and Abercrombie and FItch (ANF). While Kohls has reliably sat its current levels and doesn’t live and die by fads and arrogance, Abercrombie has had its share of ups and downs and always seems to find a way to snatch defeat from victory. Yet they are both very good covered option trades.

With Kohls having recently joined Abercrombie in the list of those stocks offering expanded weekly options it is an increasing attractive position that offers considerable flexibility, good option premiums and a competitive dividend.

Abercrombie, because of its volatility tends to offer a more attractive option premium, but still offers an attractive enough dividend. Following some recent price weakness I may be more inclined to consider the sale of puts of Abercrombie and might be willing to take assignment of shares, if necessary, rather than rolling over put contracts.

This week there are a number of companies reporting earnings that may warrant some consideration. A more complete list of those for the coming week are included in an earlier article that looks at opportunities in selling put contracts in advance of, or after earnings. Of the companies included in that article the ones that I’ll most likely consider this week are Cree (CREE), Facebook (FB) and Deckers (DECK).

All are volatile enough in the own rights, but especially so with earnings to be released. I have repeatedly sold puts on Cree over the past few months with last week having been the first in quite a while not having done so. It can be an explosive mover after earnings, just as it can be a seemingly irrational mover during daily trading. It has, however, already fallen approximately 8% in the past month. My particular preference when considering the sale of puts is to do so following declines and Cree certainly fulfills that preference, even though my target ROI comes only at a strike level that is at the very edge of the range defined by its implied volatility.

Deckers has only fallen 5% in the past month and it, too can be explosive at earnings time. As with Cree, for those that are adventurous, the sale of deep out f the money puts can offer a relatively lower risk way of achieving return on investment objectives. In this case, while the implied volatility is 10.1%, a share drop of less than 13.2% can still return a weekly 1% ROI.

Facebook has generally performed well after earnings announcements. Even the past quarter, when the initial reaction was negative, shares very quickly recovered and surpassed their previous levels. As with all earnings related trades entered through the sale of puts my goal is to not own shares at a lower price, but rather to avoid assignment by the rollover of put contracts, if necessary, in the hope of waiting out any unforeseen price declines and eventually seeing the put contracts expire, while having accumulated premiums.

Finally, it seems as if there’s hardly a week that I don’t think about adding or buying shares of Coach (COH). Having already owned it on 5 occasions in 2014 and having shares assigned again this past week, it’s notable for its stock price having essentially stayed in place. That’s what continually makes it an attractive candidate.

This week, however, there is a little more risk if shares don’t get assigned, as earnings are reported next week and Coach has been volatile at earnings for the past two years.

For that reason, this week, Coach may best be considered as a trade through the sale of puts with the possible need to rollover the puts if assignment seems likely. That rollover, if necessary, would then probably be able to be done at a lower strike price as the implied volatility will be higher in the week of earnings.

Traditional Stocks: Momentum Stocks: JP Morgan, Kohls, United Healthcare

Momentum: Abercrombie and Fitch, Coach

Double Dip Dividend: Fastenal (ex-div 4/23)

Premiums Enhanced by Earnings: Cree (4/22 PM), Deckers (4/24 PM), Facebook (4/23 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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