Weekend Update – April 27, 2014

“The Bear” is waking up.

Whether you interpret that to mean that Russia is seeking to return to some of its faded and faux glory left behind as its empire crumbled, or that the stock market is preparing for a sustained downward journey, neither one likes to feel threatened.

As we prepare for the coming week the two bears may be very much related, at least if you believe in such things as “cause and effect.”

It now seems like almost an eternity when the first murmurings of something perhaps going on in Crimea evoked a reaction from the markets.

On that Friday, 2 months ago, when news first broke, the DJIA went from a gain of 120 points to a loss of 20 in the final hour of trading, but somehow managed to recapture half of that drop to cap off a strong week.

Whatever happened to not going home long on the brink of a weekend of uncertainty?

Since that time the increased tensions always seemed to come along on Fridays and this past was no different, except that on this particular Friday it seems that many finally went home with lighter portfolios in hopes of not having lighter account balances on Monday morning.

As often is the case these kind of back and forth weeks can be very kind to option sellers who can thrive when wandering aimlessly. However, while we await to see what if any unwanted surprises may come this weekend, the coming week packs its own potential challenges as there will be an FOMC announcement on Wednesday and the Employment Situation Report is released on Friday. Although neither should be holding much in the way of surprise, it is often very surprising to see how the market reacts to what is often the lack of news even when that is the expectation.

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

With the prospects of some kind of uncomfortable beginning to the coming week there may be reason to stay away from those companies or sectors that might have enhanced risk related to any kind of escalating “tit for tat” that may occur if events in and around Ukraine and Russia deteriorate.

Bed Bath and Beyond (BBBY), which as far as I know has little exposure east of Bangor and west of Los Angeles, is one of those companies that suffered the wrath of a disappointed market. Like many that stumble, but whose underlying business, execution or strategies aren’t inherently flawed, there comes a point that price stability and even growth returns. While it has only been 2 weeks since earnings, Bed Bath and Beyond has withstood any further stresses from a wounded market and has thus far settled into some stability. While some may question the legitimacy of using this past winter’s weather as an excuse for slumping sales, I’m not willing to paint with a broad brush. In fact, I would believe that retailers like Bed Bath and Beyond, typically not located in indoor malls would be more subject to weather related issues than mall based, one stop shopping centers.

Having been to a number of other countries and having seen the high regard in which coffee is held, it’s not very likely that Keuring Green Mountain (GMCR) would feel any serious loss if exports to Russia were blocked as part of sanctions. At the current high levels, I’m surprised to be considering shares again, but I have had a long and happy history with this very volatile stock that has taken on significantly greater credibility with its new CEO.

Because of its volatility its option premiums are always attractive, but risk will be further enhanced as earnings are scheduled to be reported the following week. Shares are approaching that level they stood before its explosive rise after the most recent earnings report.

Aetna (AET) for a brief moment looked to be one of those reporting earnings that was going to capitalize on good news. Following a nice advance on the day of earnings it started on this past fateful Friday with another 1.5% advance on top of a nearly 6% advance the day before. Within 10 minutes and well before the market started its own decline, that early gain was completely gone.

As pro-Russian militias may say if they believed that any expatriate nationals might be threatened in France, “C’est la vie.” While that is certainly the case, such unexpected moves re-offer opportunity as the health care insurers are in a position to bounce back from some recent weakness. With earnings now out of the way and little bad news yet to be reported regarding the Affordable Healthcare Act transition, Aetna can get back to what health insurance companies have always been good at doing, besides lobbying. Although it’s dividend is on the low side, Aetna is a company that I could envision as a long term core holding.

Dow Chemical (DOW) also reported earnings this past week and beat projections the old fashioned way. They cut costs in the face of falling revenues. While that says nothing good about an economy that is supposed to be growing, Dow Chemical’s value may be enhanced as it has activists eyeing it for possible break-up. On the other end, defending the status quo is a hardened CEO who is likely to let little fall through the cracks as he pursues his own vision. While shares are trading near their highs the activist presence is potentially helpful in keeping shares trading within a range which entices me to consider shares now, after a small drop, rather than waiting for a larger one on order to re-open a position. With its option premiums, generous dividend and opportunity for share appreciation, Dow Chemical is one stock that I would also consider for longer term holding.

I’m on the fence over Cypress Semiconductor (CY). I currently own shares and always like the idea of having some just as it trades near it strike price. It has a good recent habit of calling $10 its home and works hard to get back to that level, whether well above or well below. However, befitting its high beta it fell about 5% on Friday and has placed itself quite a distance from its nearest strike. While I generally like paying less for shares, in the case of Cypress I may be more enticed by some price migration higher in order to secure a better premium and putting shares closer to a strike that may make it easier to roll over option contracts to June 2014, if necessary. Holding shares until June may offer me enough time after all of these years to learn what Cypress Semiconductor actually does, although I’m familiar with its increasingly vocal CEO.

This is another week replete with earnings. For those paying attention last week a number of companies were brutalized last week when delivering earnings or guidance, as the market was not very forgiving.

Among those reporting earnings this week are Herbalife (HLF), Twitter (TWTR) and Yelp (YELP).

There’s not much you can say about Herbalife, other than it may be the decade’s most unpredictable stock. Not so much in terms of revenues, but rather in terms of “is it felonious or isn’t it felonious?” With legal and regulatory issues looming ahead the next bit of truly bad news may come at any moment, so it may be a good thing that earnings are reported on Monday. At least that news will be out of the way. Unlike many other volatile names, Herbalife actually move marginally higher to end the week, rather than plunging along with the rest. My preference, if trading on the basis of earnings, would be to sell puts, particularly if there is a substantive price drop preceding earnings.

Twitter lost much of the steam it had picked up in the early part of the week and finished at its lows. I already have puts on shares having sold them about a month ago and rolled them forward a few times in the hopes of having the position expire before earnings.

However, with its marked weakness in the latter part of the week I’m interested in the possibility of selling even more puts in advance of earnings on Tuesday. However, if there is price strength on Monday, I would be more inclined to wait for earnings and would then consider the sale of puts if shares drop after earnings are released.

Yelp is among those also having suffered a large drop as the week’s trading came to its close. as with Twitter, the option market is implying a large earnings related move in price, with an implied volatility of nearly 15%. However, a drop of less than 21% may still be able to deliver a 1.1% return.

For those that just can’t get enough of earnings related trades when bad news can be the best news of all, a more expanded list of potential trades can be seen.

Finally, Intel (INTC) and Microsoft (MSFT) are part of what now everyone is affectionately referring to as “old tech.” A few months ago the same people were somewhat more derisive, but now “old tech” is everyone’s darling. Intel’s ex-dividend date is May 5, 2014, meaning that shares would need to be owned this week if hoping to capture the dividend. Microsoft goes ex-dividend during the final week of the May 2014 cycle.

Both stocks have been frequent holdings of mine, but both have recently been assigned. Although they are both trading near the top of their price ranges, the basic appeal still holds, which includes generous dividends and satisfactory premiums. Additionally, bit also have in common a new kind of leadership. Intel is much more focused on operational issues, befitting the strength of its new CEO, while Microsoft may finally simply be ready to “get it” and leverage its great assets, recognizing that there may be some real gems beyond Windows.

Traditional Stocks: Momentum Stocks: Aetna, Bed Bath and Beyond, Dow Chemical, Microsoft

Momentum: Cypress Semiconductor, Keurig Green Mountain

Double Dip Dividend: Intel (ex-div 5/5)

Premiums Enhanced by Earnings: Herbalife (4/8 PM), Twitter (4/27 PM), Yelp (4/30 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.

Weekend Update – December 8, 2013

Sometimes good things can go good.

Anyone who remembers the abysmal state of television during the turn of this century recalls the spate of shows that sought to shock our natural order and expectations by illustrating good things gone bad. There were dogs, girls, police officers and others. They appealed to viewers because human nature had expectations and somehow enjoyed having those expectations upended.

That aspect of human nature can be summed up as “it’s fun when it happens to other people.”

For those that loved that genre of television show, they would have loved the stock markets of the last few years, particularly since the introduction of Quantitative Easing. That’s when good news became bad and bad news became good. Our ways of looking at the world around us and all of our expectations became upended.

Like everyone else, I blame or credit Quantitative Easing for everything that has happened in the past few years, maybe even the continued death of Disco. Who knew that pumping so much money into anything could possibly be looked at in a negative way despite having possibly saved the free world’s economies? While many decried the policy, they loved the result, in a reflection of the purest of all human qualities – the ability to hate the sinner, but love the sin.

Then again, I suppose that stopping such a thing could only subsequently be considered to be good, but rational thought isn’t a hallmark of event and data driven investing.

With so many believing that all of the most recent gains in the market could only have occurred with Federal Reserve intervention, anything that threatens to reduce that intervention has been considered as adverse to the market’s short term performance. That means good news, such as job growth, has been interpreted as having negative consequences for markets, because it would slow the flow. Bad news simply meant that the punch bowl would continue to be replenished.

For the very briefest of periods, basically lasting during the time that it wasn’t clear who would be the successor to Ben Bernanke, the market treated news on its face value, perhaps believing that in a state of leadership limbo nothing would change to upset the party.

It had been a long time since good news resulted in a market responding appropriately and celebrating the good fortune by creating more fortunes. This past week started with that annoying habit of taking news and believing that only a child’s version of reverse psychology was appropriate in interpreting information, but the week ended with a more adult-like response, perhaps a signal that the market has come to peace with idea that tapering is going to occur and is ready to move forward on the merits of news rather than conjecture of mass behavior.

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).

Coming off a nearly 200 point advance on Friday what had initially looked like relative bargains were now pricey in comparison and at risk to retrace their advances.

While last week was one in which dividends were a primary source of my happiness, unfortunately this week is not likely to be the same. As in life where I just have to get by on my looks, this week I’ll have to get by on new purchases that hopefully don’t do anything stupid and have a reasonable likelihood of being assigned or having their calls rolled over to another point in the near future. The principle reason for that is that most of the stocks going ex-dividend this week that have some appeal for me only have monthly options available. Since I’m already overloaded on options expiring at the end of the this monthly cycle my interests are limited to those that have weekly options. With volatility and subsequently premiums so low, as much as I’d like to diversify by using expanded options, they don’t offer much solace in their forward week premiums.

While the energy sector may be a little bit of a mine field these days, particularly with Iran coming back on line, Williams Companies (WMB) fits the profile that I’ve been looking for and is especially appealing this week as it goes ex-dividend. Williams has been able to trade in a range, but takes regular visits to the limits of the range and often enough to keep its option premium respectable. With no real interest in longer term or macro-economic issues, I see Williams for what it has reliably been over the course of the past 16 months and 9 trades. Despite its current price being barely 6% higher than my average cost of shares, it has generated about 35% in premiums, dividends and share appreciation.

Another ex-dividend stock this week is Macys (M). Retail is another minefield of late, but Macys has not only been faring better than most of the rest, it has also just hit its year’s high this past week. Ordinarily that would send me in the opposite direction, particularly given the recent rise. With the critical holiday shopping season in full gear, some will have their hopes crushed, but someone has to be a winner. Macys has the generic appeal and non-descript vibe to welcome all comers. While I wouldn’t mind a quick dividend and option premium and then exit, it is a stock that I could live with for a longer time, if necessary.

Citibank (C) is no longer quite the minefield that it had been. It may be an example of a good stock, gone bad, now gone good again. When I look at its $50 price it reminds me of well known banking analysts Dick Bove, who called for Citibank to hold onto the $50 price as the financial meltdown was just heating up. Fast forward five years and Bove was absolutely correct, give or take a 1 to 10 reverse split.

But these days Citibank is back, albeit trading with more volatility than back in the old days. I’m under-invested in the financial sector, which didn’t fare well last week. If the contention that this is a market that corrects itself through its sector rotation, then this may be a time to consider loading up on financials, particularly as there are hints of interest rate rises. Citibank’s beta inserts some more excitement into the proposition, however.

Like many others, Dow Chemical (DOW) took its knocks last week before recovering much of its loss. Also like many that I am attracted toward, it has been trading in a price range and has been thwarted by attempts to break out of that range. Mindful of a market that is pushing against its highs, this is a stock that I don’t mind owning for longer than most other holdings, if necessary. The generous dividend helps the patient investor wait on the event of a price reversal. For those a little longer term oriented, Dow Chemical may also be a good addition for a portfolio that sells LEAPs.

Like all but one of this week’s selections, I have owned shares of International Paper (IP) on a number of occasions in the past year. While shares are now well off of their undeserved recent lows there is still ample upside opportunity and shares seemed to have created support at the $45 level. My preference, as with some other stocks on this week’s list is that a little of the past week’s late gains be retraced, but that’s not a necessary condition for re-purchasing International Paper.

Baxter International (BAX) has been also in a trading range of late having been boxed in by worries related to competition in its hemophilia product lines to concerns over the impact of the Affordable Care Act’s tax on medical devices. Also having recovered some of its past week’s losses it, too, is trading at the mid-point of its recent range and doesn’t appear to have any near term catalysts to see it break below its trading range. The availability of expanded options provide some greater flexibility when holding shares.

Joy Global (JOY) had been on an upswing of late but has subsequently given back about 5% from its recent high. It reports earnings this week and its implied price move is nearly 6%. However, its option pricing doesn’t offer premiums enhanced by earnings for any strike levels beyond that are beyond the implied move. While a frequent position, including having had shares assigned this past week, the risk/reward is not sufficient to purchase shares or sell puts prior to the earnings release. However, in the event hat shares do drop, I would consider purchasing shares if it trades below $52.50, as that has been a very comfortable place to initiate positions and sell calls.

LuLuLemon Athletica (LULU) on the other hand, has an implied move of about 8% and can potentially return 1.1% even if the stock falls nearly 9%. In this jittery market a 9% drop isn’t even attention getting, but a 20% drop , such as LuLuLemon experienced in June 2013 does get noticed. Its shares are certainly able to have out-sized moves, but it has already weathered quite a few challenges, ranging from product recalls, the announced resignation of its CEO and comments from its founder that may have insulted current and potential customers. I don’t expect a drop similar to that seen in December 2012, but can justify owning shares in the event of an earnings related drop.

Riverbed Technology (RVBD), long a favorite of mine, is generally a fairly staid company, as far as staying out of the news for items not related to its core business. It can often trade with some volatility, especially as it has a habit of providing less than sanguine guidance and the street hasn’t yet learned to ignore the pessimistic outlook, as RIverbed tends to report very much in line with expectations. Recently the world of activist investors knocked on Riverbed’s doors and they responded by enacting a “poison pill.” While I wouldn’t suggest considering adding shares solely on the basis of the prompting from activist investors, Riverbed has long offered a very enticing risk/reward proposition when selling covered calls or puts. It is one of the few positions that I sometimes consider a longer term option sale when purchasing shares or rolling over option contracts.

Finally, and this is certainly getting to be a broken record, but eBay (EBAY) has once again fulfilled prophecy by trading within the range that was used as an indictment of owning shares. For yet another week I had two differently priced lots of eBay shares assigned and am anxious to have the opportunity to re-purchase if they approach $52, or don’t get higher than $52.50. While there may be many reasons to not have much confidence in eBay to lead the market or to believe that its long term strategy is destined to crumble, sometimes it’s worthwhile having your vision restricted to the tip of your nose.

Traditional Stocks: Baxter International, Dow Chemical, eBay, International Paper

Momentum Stocks: Citibank, Riverbed Technology

Double Dip Dividend: Macys (ex-div 12/11), Williams Co (ex-div 12/11)

Premiums Enhanced by Earnings: Joy Global (12/11 AM), LuLuLemon Athletica (12/12 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.

Weekend Update – December 1, 2013

We may be on the verge of the Eve of Inflection.

Thanksgiving is that time of year when many sit back and think about all of their bounty and good fortune in the past year.

Sometimes the processes of reflection and introspection bring about inflection. Sometimes reviewing where you’ve been and where you appear to be heading are sufficient causes to consider a change in path or direction.

Nowhere is that more true than among many hedge fund managers now faced with the end of the year in sight and a stock market that has been out-performing their own trading and expertise. Many have already made the decision to increase risk taking behavior and eschew hedging in a last ditch effort to catch up to the averages and to secure their bonuses or save their jobs.

That may be more an example of desperation rather than introspection, but that kind of behavior may also herald an inflection point, not only in personal behavior but also in the very nature of the markets, especially if you take a contrarian view. When others change their behavior and begin to chase it may be time to take cover.

Sometimes that change in path is neither wanted nor welcome, but perhaps unavoidable. With the market hitting new highs on a nearly daily basis, what hasn’t escaped notice is that the rate of increase is itself decreasing. Most will tell you that in the case of a momentum stock a sign that its heady days are about to become a memory is when the rate of growth begins decreasing. In this case, it seems that it is the market as a whole whose rate of increase has recently been on the decline.

Depending on your perspective, if you are eternally bullish that decline is just a chance to digest some gains and prepare for the next leg higher. For the bears that slowing is the approach to the point of inflection.

Every roller coaster has them. Every stock market has them. On roller coasters, even when your eyes are closed you know when a change in slope direction is about to occur. It’s not quite as intuitive or simple in the stock market because human nature often believes that simple laws governing events can be suspended. No one thinks in a cautionary manner when the prevailing spirit is “laissez les bon temps rouler.”

While the overall market would likely find that a point of inflection would take it lower, there may be opportunity in stocks whose points of inflection may have been reached and are now bound to go higher or are already on their way.

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).

Stanley Black and Decker (SWK) reported its earnings early in the most recent earnings season. It was the first to blame the government shutdown on its poorer than anticipated results and shares plummeted about 15%. Having recovered nearly half of that loss, with about another 6 weeks to go until the next earnings report, shares go ex-dividend this week. It has been a bit more than a year since the last time I owned shares, then too purchased in part because of its upcoming dividend. I think Stanley Black and Decker still has some room to move higher relative to the overall market and now offers good opportunity in advance of its next report.

To a degree Stanley Black and Decker and Fastenal (FAST) are related and dependent upon residential and commercial growth. This past week’s durable goods orders report didn’t necessarily send news of a robust economy, but Fastenal has been trading in a range of late which is always a reason to consider as part of a covered option strategy. I already own two lots of Fastenal, but continue to like it at its current price in anticipation that it will remain near that price.

The Gap (GPS) is one of those clothing retailers that still insists on releasing monthly comparison statistics. The past two monthly reports have sent shares moving in opposite directions as the report itself is the source of exceptionally high option premiums. With conflicting interpretations in two successive monthly reports there is little reason to believe that any volatility surrounding the monthly reports are indicative of systemic or irreparable issues at the retailer. Even with the prospect of another negative report this coming week, I don’t believe that the market will react as rashly as had occurred in October and from which point shares have now fully recovered.

While both AIG (AIG) and Halliburton (HAL) do go ex-dividend this week, their dividends alone aren’t appealing enough to focus attention on their purchase. Both, however, are sufficiently off from their recent high levels to warrant consideration. Both also represent stocks that appear to have set new baseline price levels as they have been slowly and methodically moved higher until very recently. Those are opportunities that get enhanced by the prospects of an inflection and their option premiums complemented by the possibility of also capturing dividends, albeit modest ones.

Dow Chemical (DOW) may also appear to be in the category of having fallen some from its recent high point and perhaps ready for a turnaround, with its current levels serving as that point of inflection taking the stock to a modestly higher level. While it may also be subject to some of the larger macro-economic issues such as those faced by Stanley Black and Decker and Fastenal, Dow Chemical’s dividend offers some protection during a market decline and its option premiums help to provide a cushion during either bigger picture declines or stock specific missteps.

While the previously mentioned positions are all fairly sedate choices that may be expected to do better if there is an inflection in the market, there may also be room for consideration of some more volatile additions to the portfolio, particularly as part of short term trading strategies.

Freeport McMoRan (FCX) has reversed course from its nearly 15% climb in October, simply an example of successive points of inflection in a short period of time. I think that the selling is now overdone, not only in Freeport McMoRan, but in the metals complex and that shares of Freeport are once again getting ready for another period of inflection. While I have held some positions in Freeport McMoRan much longer than my typical holding, its dividend has made the holding period more tolerable. That dividend appears to be secure, even while there is some talk of gold miners being at risk of cutting dividends if ore prices continue to decline.

For the ones really enjoying roller coaster rides, Walter Energy (WLT) may be just the thing. Its recent drop for its near term high seems to be developing a new price floor that can serve as the point of inflection taking the price higher, although I would expect that based on its recent behavior such a move might be short lived. However, that rapid alternation in direction has made Walter Energy a very good recent covered call trade, although for some the sale of puts may be a more appropriate manner to take advantage of the share’s volatility.

Finally, it’s yet another week to consider eBay (EBAY). Despite a 2.5% gain on Friday, eBay is simply proving the analysts correct, in that it continues to be a moribund stock trading in a tight range. It was decried just two weeks ago for being unable to escape from that range while the rest of the market seemed to be thriving. In the meantime, those practicing a covered call strategy and owning shares of eBay, over and over again, have fared well. Responding to the analyst’s cry, eBay did test that lower range and has now bounced back nicely to the point that it is once again in the middle of that range. That’s an ideal position to consider opening a new position or adding to an existing position.

Traditional Stocks: Dow Chemical, eBay, Fastenal, The Gap

Momentum Stocks: Freeport McMoRan, Walter Energy

Double Dip Dividend: AIG (ex-div 12/3 ), Halliburton (ex-div 12/4), Stanley Black and Decker (ex-div 12/4)

Premiums Enhanced by Earnings: none

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.

Weekend Update – November 17, 2013

Things aren’t always as they seem.

As I listened to Janet Yellen face her Senate inquisitors as the hearing process began for her nomination as our next Federal Reserve Chairman, the inquisitors themselves were reserved. In fact they were completely unrecognizable as they demonstrated behavior that could be described as courteous, demur and respectful. They didn’t act like the partisan megalomaniacs they usually are when the cameras are rolling and sound bites are beckoning.

That can’t last. Genteel or not, we all know that the reality is very different. At some point the true colors bleed through and reality has to take precedence.

Closing my eyes I thought it was Woody Allen’s sister answering softball economic questions. Opening my eyes I thought I was having a flashback to a curiously popular situational comedy from the 1990s, “Suddenly Susan,” co-starring a Janet Yellen look-alike, known as “Nana.” No one could possibly sling arrows at Nana.

These days we seem to go back and forth between trying to decide whether good news is bad news and bad news is good news. Little seems to be interpreted in a consistent fashion or as it really is and as a result reactions aren’t very predictable.

Without much in the way of meaningful news during the course of the week it was easy to draw a conclusion that the genteel hearings and their content was associated with the market’s move to the upside. In this case the news was that the economy wasn’t yet ready to stand on its own without Treasury infusions and that was good for the markets. Bad news, or what would normally be considered bad news was still being considered as good news until some arbitrary point that it is decided that things should return to being as they really seem, or perhaps the other way around..

While there’s no reason to believe that Janet Yellen will do anything other than to follow the accommodative actions of the Federal Reserve led by Ben Bernanke, political appointments and nominations have a long history of holding surprises and didn’t always result in the kind of comfortable predictability envisioned. As it would turn out even Woody Allen wasn’t always what he had seemed to be.

Certainly investing is like that and very little can be taken for granted. With two days left to go until the end of the just ended monthly option cycle and having a very large number of positions poised for assignment or rollover, I had learned the hard way in recent months that you can’t count on anything. In those recent cases it was the release of FOMC minutes two days before monthly expiration that precipitated market slides that snatched assignments away. Everything seemed to be just fine and then it wasn’t suddenly so.

As the markets continue to make new closing highs there is division over whether what we are seeing is real or can be sustained. I’m tired of having been wrong for so long and wonder where I would be had I not grown cash reserves over the past 6 months in the belief that the rising market wasn’t what it really seemed to be.

What gives me comfort is knowing that I would rather be wondering that than wondering why I didn’t have cash in hand to grab the goodies when reality finally came along.

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).

Sometimes the most appealing purchases are the very stocks that you already own or recently owned. Since I almost exclusively employ a covered option strategy I see lots of rotation of stocks in and out of my portfolio. That’s especially true at the end of a monthly option cycle, particularly if ending in a flourish of rising prices, as was the case this week.

Among shares assigned this past week were Dow Chemical (DOW), International Paper (IP), eBay (EBAY) and Seagate Technology (STX).

eBay just continues to be a model of price mediocrity. It seems stuck in a range but seems to hold out enough of a promise of breaking out of that range that its option premiums continue to be healthy. At a time when good premiums are increasingly difficult to attain because of historically low volatility, eBay has consistently been able to deliver a 1% ROI for its near the money weekly options. I don’t mind wallowing in its mediocrity, I just wonder why Carl Icahn hasn’t placed this one on his radar screen.

International Paper is well down from its recent highs and I’ve now owned and lost it to assignment three times in the past month. While that may seem an inefficient way to own a stock, it has also been a good example of how the sum of the parts can be greater than the whole when tallying the profits that can arise from punctuated ownership versus buy and hold. Having comfortably under-performed the broad market in 2013 it doesn’t appear to have froth built into its current price

Although Dow Chemical is getting near the high end of the range that I would like to own shares it continues to solidify its base at these levels. What gives me some comfort in considering adding shares at this level is that Dow Chemical has still under-performed the S&P 500 YTD and may be more likely to withstand any market downturn, especially when buoyed by dividends, option premiums and some patience, if required.

Unitedhealth Group (UNH) is in a good position as it’s on both sides of the health care equation. Besides being the single largest health care carrier in the United States, its purchase of Quality Software Services last year now sees the company charged with the responsibility of overhauling and repairing the beleaguered Affordable Care Act’s web site. That’s convenient, because it was also chosen to help set up the web site. It too, is below its recent highs and has been slowly working its way back to that level. Any good news regarding ACA, either programmatically or related to the enrollment process, should translate into good news for Unitedhealth

Seagate Technology simply goes up and down. That’s a perfect recipe for a successful covered option holding. It’s moves, in both directions, can however, be disconcerting and is best suited for the speculative portion of a portfolio. While not too far below its high thanks to a 2% drop on Friday, it does have reasonable support levels and the more conservative approach may be through the sale of out of the money put options.

While I always feel a little glow whenever I’m able to repurchase shares after assignment at a lower price, sometimes it can feel right even at a higher price. That’s the case with Microsoft (MSFT). Unlike many late to the party who had for years disparaged Microsoft, I enjoyed it trading with the same mediocrity as eBay. But even better than eBay, Microsoft offered an increasingly attractive dividend. Shares go ex-dividend this week and I’d like to consider adding shares after a moth’s absence and having missed some of the run higher. With all of the talk of Alan Mullally taking over the reins, there is bound to be some let down in price when the news is finally announced, but I think the near term price future for shares is relatively secure and I look forward to having Microsoft serve as a portfolio annuity drawing on its dividends and option premiums.

I’m always a little reluctant to recommend a possible trade in Cliffs Natural Resources (CLF). Actually, not always, only since the trades that still have me sitting on much more expensive shares purchased just prior to the dividend cut. Although in the interim I’ve made trades to offset those paper losses, thanks to attractive option premiums reflecting the risk, I believe that the recent sustained increase in this sector is for real and will continue. Despite that, I still wavered about considering the trade again this week, but the dividend pushed me over. Although a fraction of what it had been earlier in the year it still has some allure and increasing iron ore prices may be just the boost needed for a dividend boost which would likely result in a significant rise in shares. I’m not counting on it quite yet, but think that may be a possibility in time for the February 2014 dividend.

While earnings season is winding down there are some potentially interesting trades to consider for those with a little bit of a daring aspect to their investing.

Not too long ago Best Buy (BBY) was derided as simply being Amazon’s (AMZN) showroom and was cited as heralding the death of “brick and mortar.” But, things really aren’t always as they seem, as Best Buy has certainly implemented strategic shifts and has seen its share price surge from its lows under previous management. As with most earnings related trades that I consider undertaking, I’m most likely if earnings are preceded by shares declining in price. Selling puts into price weakness adds to the premium while some of the steam of an earnings related decline may be dissipated by the selling before the actual release.

salesforce.com (CRM) has been a consistent money maker for investors and is at new highs. It is also a company that many like to refer to as a house of cards, yet another way of saying that “things aren’t always as they seem.” As earnings are announced this week there is certainly plenty of room for a fall, even in the face of good news. With a nearly 9% implied volatility, a 1.1% ROI can be attained if less than a 10% price drop occurs, based on Friday’s closing prices through the sale of out of the money put contracts.

Then of course, there’s JC Penney (JCP). What can possibly be added to its story, other than the intrigue that accompanies it relating to the smart money names having taken large positions of late. While the presence of “smart money” isn’t a guarantee of success, it does get people’s attention and JC Penney shares have fared well in the past week in advance of earnings. The real caveat is that the presence of smart money may not be what it seems. With an implied move of 11% the sale of put options has the potential to deliver an ROI of 1.3% even if shares fall nearly 17%.

Finally, even as a one time New York City resident, I don’t fully understand the relationship between its residents and the family that controls Cablevision (CVC), never having used their services. As an occasional share holder, however, I do understand the nature of the feelings that many shareholders have against the Dolan family and the feelings that the publicly traded company has served as a personal fiefdom and that share holders have often been thrown onto the moat in an opportunity to suck assets out for personal gain.

I may be understating some of those feelings, but I harbor none of those, personally. In fact, I learned long ago, thanks to the predominantly short term ownership afforded through the use of covered options, that it should never be personal. It should be about making profits. Cablevision goes ex-dividend this week and is well off of its recent highs. Dividends, option premiums and some upside potential are enough to make even the most hardened of investors get over any personal grudges.

Traditional Stocks: Dow Chemical, eBay, International Paper, Unitedhealth Group

Momentum Stocks: Seagate Technology

Double Dip Dividend: Cablevision (ex-div 11/20), Cliffs Natural (ex-div 11/20), Microsoft (ex-div 11/19)

Premiums Enhanced by Earnings: Best Buy (11/19 AM), salesforce.com (11/18 PM), JC Penney (11/20 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.

Weekend Update – October 27, 2013

Watching Congressional testimony being given earlier this week by representatives of the various companies who were charged with the responsibility of assembling a functioning web site to coordinate enrollment in the Affordable Care Act it was clear that no one understood the concept of responsibility.

They did, however, understand the concept of blame and they all looked to the same place to assign that blame.

As a result there are increased calls for the firing or resignation of Kathleen Sebelius, Secretary of Health and Human Services. After all, she, in essence, is the CEO.

On the other hand, it was also a week that saw one billionaire, Bill Gross, the “Bond King” of PIMCO deign to give unsolicited advice to another billionaire, Carl Icahn, in how he should use his talents more responsibly. But then again, the latter made a big splash last week by trying to convince a future billionaire, Tim Cook, of the responsible way to deal with his $150 billion of cash on hand. Going hand in hand with a general desire to impart responsibility is the tendency to wag a finger.

Taking blame and accepting responsibility are essentially the same but both are in rare supply through all aspects of life.

This was an incredibly boring week, almost entirely devoid of news, other than for earnings reports and an outdated Employment Situation Report. The torrent of earnings reports were notable for some big misses, lots of lowered guidance and a range of excuses that made me wonder about the issue of corporate responsibility and how rarely there are cries for firings or resignations by the leaders of companies that fail to deliver as expected.

For me, corporate responsibility isn’t necessarily the touchy-feely kind or the environmentalist kind, but rather the responsibility to know how to grow revenues in a cost-efficient manner and then make business forecasts that reflect operations and the challenges faced externally. It is upon an implied sense of trust that individuals feel a certain degree of comfort or security investing assets in a company abiding by those tenets.

During earnings season it sometimes becomes clear that living up to that responsibility isn’t always the case. For many wishing to escape the blame the recent government shutdown has been a godsend and has already been cited as the reason for lowered guidance even when the business related connection is tenuous. Instead of cleaning up one’s own mess it’s far easier to lay blame.

For my money, the ideal CEO is Jamie Dimon, of JP Morgan Chase (JPM). Burdened with the legacy liabilities of Bear Stearns and others, in addition to rogue trading overseas, he just continues to run operations that generate increasing revenues and profits and still has the time to accept responsibility and blame for things never remotely under his watch. Of course, the feeling of being doubly punished as an investor, first by the losses and then by the fines may overwhelm any feelings of respect.

Even in cases of widely perceived mismanagement or lack of vision, the ultimate price is rarely borne by the one ultimately responsible. Instead, those good earnings in the absence of revenues came at the expense of those who generally shouldered little responsibility but assumed much of the blame. While Carl Icahn may not be able to make such a case with regard to Apple, the coziness of the boardroom is a perfect place to abdicate responsibility and shift blame.

Imagine how convenient it would be if the individual investor could pass blame and its attendant burdens to those wreaking havoc in management rather than having to shoulder that burden of someone else’s doing as they watch share prices fall.

Instead, I aspire to “Be Like Jamie,” and just move on, whether it is a recent plunge by Caterpillar (CAT) or any others endured over the years.

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).

Andrew Liveris, CEO of Dow Chemical (DOW) was everyone’s favorite prior to the banking meltdown and was a perennial guest on financial news shows. His star faded quickly when Dow Chemical fell to its lows during the financial crisis and calls for his ouster were rampant. Coincidentally, you didn’t see his ever-present face for quite a while. Those calls have halted, as Liveris has steadily delivered, having seen shares appreciate over 450% from the market lows, as compared to 157% for the S&P 500. Shares recently fell after earnings and is closing in to the level that I would consider a re-entry point. Now offering weekly option contracts, always appealing premiums and a good dividend, Dow Chemical has been a reliable stock for a covered option strategy portfolio and Andrew Liveris has had a reliable appearance schedule to match.

A company about to change leadership, Coach (COH) has been criticized and just about left for dead by most everyone. Coach reported earnings last week and for a short while I thought that the puts I had sold might get assigned or be poised for rollover. While shares recovered from their large drop, I was a little disappointed at the week ending rally, as I liked the idea of a $48 entry level. However, given its price history and response to the current level, I think that ownership is still warranted, even with that bounce. Like Dow Chemical, the introduction of weekly options and its premiums and dividend make it a very attractive stock in a covered call strategy. Unlike Dow Chemical, I believe its current price is much more attractive.

I’m not certain how to categorize the CEO of Herbalife (HLF). If allegations regarding the products and the business model prove to be true, he has been a pure genius in guiding share price so much higher. Of course, then there’s that nasty fact that the allegations turned out to be true.

Herbalife reports earnings this week and if you have the capacity for potential ownership the sale of out of the money puts can provide a 1.2% return even of shares fall 17%. The option market is implying a 10% move. That is the kind of differential that gets my attention and may warrant an investment, even if the jury is still out on some of the societal issues.

In the world of coffee, Dunkin Brands (DNKN) blamed K-Cups and guided toward the lower end of estimates. Investors didn’t care for that news, but they soon got over it. The category leader, Starbucks (SBUX) reports earnings this week. I still consider Howard Schultz’s post-disappointing earnings interview of 2012 one of the very best in addressing the issues at hand. But it’s not Starbucks that interests me this week. It’s Green Mountain Coffee Roasters (GMCR). Itself having had some questionable leadership, it restored some credibility with the appointment of its new CEO and strengthening its relationships with Starbucks. Shares have fallen about 25% in the past 6 weeks and while not reporting its own earnings this week may feel some of the reaction to those from Starbucks, particularly as Howard Schultz may characterize the nature of ongoing alliances. Green Mountain shares have returned to a level that I think the adventurous can begin expressing interest. I will most likely do so through the sale of puts, with a strike almost 5% out of the money being able to provide a 1.2% ROI. The caveat is that CEO Brian Kelley may soon have his own credibility tested as David Einhorn has added to his short position and has again claimed that there are K-cup sales discrepancies. Kelley did little to clear up the issue at a recent investor day meeting.

Baxter International (BAX) has held up reasonably well through all of the drama revolving around the medical device tax and the potential for competition in the hemophilia market by Biogen Idec (BIIB). WIth earnings out of the way and having approached its yearly low point I think that it is ready to resume a return to the $70 range and catching up to the S&P 500, which it began to trail in the past month when the issues of concern to investors began to take root.

MetLife (MET) has settled into a trading range over the past three months. For covered calls that is an ideal condition. It is one of those stocks that I had owned earlier at a much lower price and had assigned. Waiting for a return to what turned out to be irrationally low levels was itself irrational, so I capitulated and purchased shares at the higher level. In fact, four times in the past two months, yielding a far better return than if shares had simply been bought and held. Like a number of the companies covered this week it has that nice combination of weekly option contracts, appealing premiums and good dividends.

Riverbed Technology (RVBD) reports earnings this week, along with Seagate Technology (STX). Riverbed is a long time favorite of mine and has probably generated the greatest amount of premium income of all of my past holdings. However, it does require some excess stomach lining, especially as earnings are being released. I currently own two higher cost lots and uncharacteristically used a longer term call option on those shares locking in premium in the face of an earnings report. However, with recent price weakness I’m re-attracted to shares, particularly when a 3 week 1.7% ROI can be obtained even if shares fall by an additional 13%. In general, I especially like seeing price declines going into earnings, especially when considering the sale of puts just in advance of earnings. Riverbed Technology tends to have a history of large earnings moves, usually due to providing pessimistic guidance, as they typically report results very closely aligned with expectations.

Seagate Technology reports earnings fresh off the Western Digital (WDC) report. In a competitive world you might think that Western Digital’s good fortunes would come at the expense of Seagate, but in the past that hasn’t been the case, as the companies have traveled the same paths. With what may be some of the surprise removed from the equation, you can still derive a 1% ROI if Seagate shares fall less than 10% in the earnings aftermath through the sale of out of the money put contracts.

ConAgra (CAG) and Texas Instruments (TXN) both go ex-dividend this week. I think of them both as boring stocks, although Texas Instruments has performed nicely this year, while ConAgra has recently floundered. On the other hand, Texas Instruments is one of those companies that has fallen into the category of meeting earnings forecasts in the face of declining revenues by slashing worker numbers.

Other than the prospect of capturing their dividends I don’t have deeply rooted interest in their ownership, particularly if looking to limit my new purchases for the week. However, any opportunity to get a position of a dividend payment subsidized by an option buyer is always a situation that I’m willing to consider.

Finally, as this week’s allegation that NQ Mobile (NQ), a Chinese telecommunications company was engaged in “massive fraud” reminds us, there is always reason to still be circumspect of Chinese companies. While the short selling firm Muddy Waters has been both on and off the mark in the past with similar allegations against other companies they still get people’s attention. The risk of investing in companies with reliance on China carries its own risk. YUM Brands (YUM) has navigated that risk as well as any. With concern that avian flu may be an issue this year, that would certainly represent a justifiable shifting of blame in the event of reduced revenues. At its recent lower price levels YUM Brands appears inviting again, but may carry a little more risk than usual.

Traditional Stocks: Baxter International, Dow Chemical, MetLife

Momentum Stocks: Coach, Green Mountain Coffee Roasters, YUM Brands

Double Dip Dividend: ConAgra (ex-div 10/29), Texas Instruments (ex-div 10/29)

Premiums Enhanced by Earnings: Herbalife (10/28 PM), Riverbed Technology (10/28 PM), Seagate Technology (10/28 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.