Aug162014

Weekend Update – August 17, 2014

Daily Market Update

It’s hard to know whether the caption seen with this screen capture this past Friday morning was just an unfortunate mistake or an overly infatuated producer trying to send a not so subtle message to an on air personality who may not be that exciting when the teleprompter isn’t present.

There’s also the possibility that it was simply a reflection of the reality for the week. Coming to the mid-point of August and people every where grasping for the last bits of summer, it was an extraordinarily slow week for scheduled economic news and a slow week for trading. The most prevalent stories for the week were regarding the death of a beloved comic genius and that of a national figures and unknowns injecting a little icy cold fun into supporting research into the mysteries of a horrible disease.

In that vacuum the stock market was on its way to having its best week in nearly two months.

In that context, there was no doubt that boring was indeed, sexy.

For me, not so much. Boring was more like a full length burlap sack that was far too tight around the neck. Just a few short weeks ago after a deluge of market moving news I found myself wishing for quietude, only to learn that you do have to be careful what you wish for.

As a covered option trader I much prefer weeks that the market is struggling or flat. Even mild to moderate declines are better than strong moves forward, if my covered positions cause me to be left behind. I can usually do without those “best weeks ever” kind of hyperbole.

Luckily, lately Fridays have had a way of shaking things up a little bit, particularly when it comes to reversing course.

Although its probably a coincidence but seemingly market moving news from Russia seems to prefer Fridays, something noted a few months ago and not having slowed down too much.

That was certainly the case to end out the week where I was getting left behind. News, however, of a possible military action cast a pall on the markets and quickly reversed a decent gain earlier in the day.

In the perverse world of hedging your bets, sometimes those surprises are the antidote to getting left behind, so what is likely bad news for many may be more happily received by others. In some cases it’s really that bad news that’s sexy.

By the same token I wasn’t overly pleased when the market regained much of what it had lost. For me, in addition to renewing the gap between personal performance and the market, it also pointed to a market unclear as to its direction.

Even though it’s volatility that drives the premiums that can make the sale of options enticing, I really like clarity. After Friday’s events there was no clarity, other than the validation of the belief that the market is clearly on edge. At best, the market demonstrated ambivalence and that is far from being sexy.

What may be sexy is a recognition of the market’s unwillingness to give into the jitteriness and its continuing to pursue a climb higher. But then again, that wouldn’t be the first time something stupid was done in pursuit of something alluring.

I wouldn’t mind it being on the edge or deigning to walk on the wild side. That’s understandable, maybe even sexy. What is much less understandable is how forgiving the market has been, especially as it entered yet another weekend of uncertainty, yet pulled back from its retreat in a show of confidence.

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

When the market first caught word of the possible military action in Ukraine the response was fairly swift and saw nearly a 200 point market reversal.

While that move may reflect investor jitteriness and a disdain for the uncertainty that may be in store, the broad brush was fairly indiscriminate and not only took stocks with significant international exposure lower, but also took those relatively immune for a ride, even if they were already well off of their previous highs.

While I understand why MasterCard (MA) and its shareholders may have particular angst about events in Russia, I’m not certain that the same should have extended to those with interests in Best Buy (BBY) or Fastenal (FAST).

They all fell sharply and didn’t share in the subsequent recovery later in the day.

I already own Best Buy and anticipated it being assigned this past week, only to have to roll the option contracts over. While it does report earnings next week and is frequently a candidate for large moves, I think that at its Ukraine depressed price there is some spring back to supplement the always healthy option premium.

Fastenal is a very unsexy kind of stock and it does seem quite boring. I suppose that for some people its stores and catalogue of thousands of handy items may actually be very exciting. It is, however, a very exciting stock if you learn to look beyond the superficial. As a buy and hold position it has had a few instances of opportune buying over the past year. However, as a vehicle for a covered option strategy it has had many of those opportunities and I regret not having taken more advantage.

During a trading period of 14 months, while the S&P 500 has gone 18% higher, while Fastenal had gone nearly 14% lower. Not exactly the kind of stock you would find very appealing, even in very low light and deprived of oxygen. However, being opportunistic and using a covered option strategy it has delivered a 43% ROI in that period.

While Best Buy and Fastenal may have been innocent victims of Friday’s decline, MasterCard has been battling with Russian related problems for the
past few months, as there had been some suggestion that the Russian banking system would create its own network of credit cards. That notion has since been dismissed, but there may be little emanating from Russia at the moment that could be taken at face value.

MasterCard shares are still a little higher than I find attractive, but it’s always in the eye of the beholder. Ever since its stock split it has traded in a nicely defined range and has moved back and forth with regularity within that range. If you like covered options, that is a really sexy characteristic.

I also understand why MetLife (MET) fell precipitously on Friday. Already owning shares and having expected its assignment, I rolled it over prematurely as it started to quickly lose altitude as the 10 year Treasury rate started plummeting. The thesis with MetLife, that has been consistently borne out is that it prospers with a rising rate environment.

Shares did recover by the close of the session and despite it being near the top of the range that I would consider a share purchase, I may be ready to add to my existing position.

I also understand why Starbucks (SBUX) may be at risk with any escalation of events in Europe. It is also a potential victim to an Italian recession and declining German GDP. However, despite those potential concerns, it actually withstood the torrents of Friday’s trading and I think is poised to trade near its current levels, which s ideal for use in a covered option trade.

I have been sitting on shares of both Freeport McMoRan (FCX) and Mosaic (MOS) for quite a while. Although the former shares are in profit they are still greatly lagging the S&P 500 for the same period. The latter is still at a loss, not having recovered from the dissolution of the potash cartel, but I’ve traded numerous intermediate positions, as is frequently done to support a paper loss.

Both, however, I believe are ready to move higher and at the very least offer appealing dividends if forced to wait. That has been a saving grace for my existing shares and could easily be so with future shares, that also provide attractive premiums. If finding entry at just the right price that combination can truly be sexy.

I’m not really certain why GameStop (GME) is still in business, but that’s been the conventional wisdom for years. The last time I was involved in shares was through the sale of puts after a plunge when Wal-Mart (WMT) announced that it would intrude of GameStop’s business and offer Wal-Mart store credits for used games. Based upon their own earnings report last week, looks like that strategy didn’t move the needle very much, however.

Still, GameStop keeps on going. It reports earnings this coming week and it was 5% lower in Friday’s trading. If considering the sale of puts before earnings, I especially find those kinds of plunges before earnings to be very sexy. With an implied move of about 7.8%, a 1% ROI may be able to be achieved by selling a put contract at a strike level 9.2% below Friday’s closing price.

In the event of an impending assignment, however, I would look for any opportunity to roll over the put contracts, but would also be mindful of an upcoming dividend payment sometime in September, which could be a good reason to take possession of shares if unable to get extricated from the short put position.

Finally, after a week of retailers reporting their sales and earnings figures, it’s not really clear whether the increased employment numbers are creating a return to discretionary spending. It’s equally not clear that Sears Holdings (SHLD), which reports earnings this week is really a retailer, but it reports earnings this week, as well. 

For years, and possibly still so, it has been extolled for its real estate strategies as it spins off or plans to spin off the only portions of its retail operations that seem to work.

However, in the world of trading for option income none of that really matters, although it may be an entertaining side bar. 

The option market is currently assigning an implied price move of approximately 9.4%, while a 1% ROI for the week may potentially be made by selling a put contract 11.8% below Friday’s closing price.

As I knew deep down in high school, even losers can be sexy in the right light. Sears Holdings could be one of those losers you can learn to love.

 

Traditional Stocks: Fastenal, MasterCard, MetLife, Starbucks

Momentum: Best Buy, Freeport McMoRan, Mosaic

Double Dip Dividend: none

Premiums Enhanced by Earnings: GameStop (8/21 PM), Sears Holdings (8/21 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.

Jul112014

Weekend Update – July 13, 2014

Weekend Update

In the past month Janet Yellen has reaffirmed the commitment to keeping stocks the preferred investment vehicle yet after the initial euphoria, skepticism and askance looks greeted any attempts to set even more new record highs.

For stock investors the greatest gift of all was there, delivered on a platter, just waiting to be taken advantage of this past week. But we didn’t do so, maybe having learned a lesson from Greek mythology and avoiding obvious and superficial temptation.

Unfortunately, the application of that lesson may have been misguided as the temptations offered by the Federal Reserve had already run fairly deep, having already been acknowledged to have fueled much of the years long rally in stocks.

Instead of focusing on accepting and making good use of the gifts this past week it didn’t take long to re-ignite talk of the beginning of the long overdue correction after a failed start to the week’s trading.

The week itself was a bizarre one with some fairly odd stories diverting attention from what really mattered.

There was the frivolous news of a wildly successful potato salad Kickstarter campaign, the inconsequential news of the demise of Crumbs (CRMB), the laughably sad news of the sudden appearance of a seemingly phony social media company in Belize with a $5 billion market capitalization while the SEC slept and feel good news of LeBron James taking his talents back to the fine people of Cleveland.

Somewhere in-between was also the news that a Portuguese bank was having some difficulty paying back short term debt obligations.

Talk of an impending correction came before this week’s FOMC statement release, which did much to erase the previous two days of weakness, but it was short lived, as fears related to the European banking system swept through the European markets and made their ways to our shores on Thursday.

This was yet another week when the market wasn’t willing to accept the assurance of continuing gifts from the Federal Reserve after the initial giddiness upon the delivery of its news. While we all know that sooner or later the gifts from the Federal Reserve will slow down and then stop altogether in advance of that time when it actually begins to impede our over-fed avarice, there isn’t too much reason to refuse the gifts that are still there to be given. While perhaps those gifts could be viewed as an entitlement perhaps the additional lesson learned is that we are resilient enough to not allow a natural sense of cautionary behavior to be disarmed.

Somehow, I doubt that’s the case, just as I doubt that Greek mythology has taught very many or lasting lessons to many of us lately.

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

Puts I sold on Bed Bath and Beyond (BBBY) that I sold a few weeks ago expired this past week, as they were within easy range of assignment or in need of rollover on Friday until murmurings of a leveraged buyout started to lift shares.

Had those murmurings waited until sometime on Monday I might have considered them as a gift, as I wanted to now add shares to my portfolio. However, coming as they did, although securing the ability to see the puts sold expire worthless, may have snatched a gift away, as I rarely want to chase a stock once it has started moving higher. However, on any weakness that see shares trading lower to begin the week, I would be anxious to add shares as I believe Bed Bath and Beyond was already in recovery mode from the strong selling pressure after it reported earnings a few weeks ago.

The Gap (GPS) continues to be one of the dwindling few that report monthly sales statistics. As it does, it regularly has paroxysms of movement when those statistics are released. Rarely does it string together more than two successive months of consistent data, such that its share price bounces quite a bit, despite shares themselves not being terribly volatile in the longer run. Those movements often provide nice option premiums and makes The Gap an attractive buy, although it can also be a frustrating position, as a result. However, it is one that I frequently like as part of my portfolio and currently do own shares. This most recent report on Friday don’t send shares moving as much as in the recent past, however, it did create an opportunity to consider the addition of more shares.

With earnings season beginning to high gear this week there is no shortage of potential candidates. However, unless most weeks when considering earnings related trades I only think in terms of put sales and would prefer not to own shares.

That is certainly the case with SanDisk (SNDK).

The option market believes that there may be a 6.6% movement in either direction next week upon earnings being released. However, a 1.1% ROI can potentially be achieved at a strike level that is outside of the range implied by the option market, making it an appealing trade, if willing to also manage the position in the event that assignment may be likely by attempting to roll over the put sale to a new time period.

On the other hand both Blackstone (BX) and Cypress Semiconductor (CY) are shares that I would want to own
at a lower price and would consider accepting assignment rather than rolling over and trying to stay one step ahead of assignment.

In the case of Cypress Semiconductor, whose products are quietly ubiquitous, since it has only monthly options available, there aren’t good opportunies to try such evasive techniques, so being prepared for ownership is a requisite if selling puts. Shares have traded in an identifiable range, so if assigned and patient there’s liukely to be an escape path while collecting option premiums and perhaps dividends, as well.

Blackstone is off from its recent highs and has been a beneficiary of the rash of IPO offerings of late. While I wouldn’t mind owning shares again at this level, the fact that it offers many expanded weekly options does allow for the possibility of managing the position through rollovers in the event that assignment may be imminent. However, with a generous dividend upcoming there may also be reason to consider ownership if assignment may be likely.

Finally, A stock that I love to own is Fastenal (FAST). To me it represents a snapshot of the US economy. Depending on your perspective when the economy does well, Fastenal does well or when Fastenal is doing well the economy is doing well. While that’s fairly simple and easy to understand, even if not entirely validated, what is always less easy to understand is how a stock responds to its earnings reports. In this case shares of Fastenal tumbled as top line numbers were very good, but margins were decreasing.

While that may not be great news for Fastenal and it certainly wasn’t for its shareholders today, the growth in sales revenues may be a positive sign for the economy. For me, the negative response provides opportunity to once again own shares and to do so as either a potential short term purchase or with a longer term horizon.

While Fastenal trades only monthly options with this being the final week of the July 2014 cycle it could potentially be purchased with the mindset of a weekly option trader. However, in the event that shares aren’t assigned, they do go ex-dividend the following week, so there may be reason to consider immediately considering an August 2014 option in hedging the share purchase.

Traditional Stocks: Bad Bath and Beyond, Fastenal, The Gap

Momentum: none

Double Dip Dividend: none

Premiums Enhanced by Earnings: Blackstone, Cypress Semiconductor, SanDisk

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.

Jun132014

Weekend Update – June 15, 2014

Weekend Update

It’s hard to believe that there was ever a period of a few hundred years with relative peace and little military expansion.

It’s not too hard to believe that almost 2000 years have passed, but given that the Pax Romana was followed by the Middle Ages we may want to re-think the idyllic and beneficial nature of peace.

The “Pax Romana” sounds so quaint in an era when even a week without new conflict seems like a gift from the heavens, but the markets need some kind of conflict, physical or otherwise, to keep it functioning in a rationale manner. Otherwise it gets left to its own self and that could have consequences.

This past week was one in which there was no real scheduled news and very little was expected to be happening to shake markets. It was a week when I thought the real challenge would be balancing new market highs achieved in very tentative fashion with the vacuum that can generate largely uncatalyzed moves.

In that vacuum too much quietude can lead to lots of introspection, and over-analysis, not to mention those voices that start telling you what you really should be doing. In that vacuum it’s not too unusual to see over-exaggerated responses to otherwise benign factors.

Who knew that the vacuum could be so easily magnify the results of a primary election in a small congressional district?

For some reason that was the conventional wisdom explaining the first of two triple digit losses mid-week, despite little rationale reason to believe that the political landscape could get any less accommodating. Why in the world a roadblock toward achieving immigration reform could jeopardize stock health is a difficult thesis to weave, but that was the story and everyone stuck to it, while ignoring the fact that the World Bank had cut its forecasts for global growth.

However, the following day there really was something to be concerned about and that was the disruption of a week’s worth of world peace as news came of a mostly unknown army beginning to conquer Iraq and marching toward its capital with Patton-like speed.

Its name “ISIS,” an acronym for “The Islamic State in Iraq and Syria” is an unfortunate situation for Isis Pharmaceuticals (ISIS). It reminds me a bit of the early 1980s and the one time popular diet suppressant, AYDS. Hopeful Isis Pharmaceuticals will respond better than the decision to rename a product as “Diet Ayds.”

But with tensions rising as this past week came to its close the market once again did the unexpected, just as it had done through much of 2011, 2012 and 2013.

If the lessons of the Crimean and Ukraine crises have taught us anything it’s that Friday crises tend to be good for whatever it is that’s ailing the markets.

Going into a weekend of uncertainty the market again failed to sell off and abide by the age old wisdom of not staying long going into a weekend of uncertainty.

Lately, it seems that the market thrives most when peace, whether that of political compromise necessary for a budgetary agreement or that of a cease fire, is itself at risk. With all of the recent talk about complacency, while the Volatility Index may reflect the level of past complacent behavior, the decision to ignore the unknown that may come from a marauding army marching into a nation’s capital is a true measure.

While we all want peace in every aspect of our lives there is a sense of “schadenfreude” that may exist when realizing that it is ongoing tension that may serve to keep markets thriving rather than focusing upon itself and realizing that sometimes heights are untenable.

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

In  addition to the certainty of conflict that seems to occur on a very predictable basis, so too is there certainty lately that General Motors (GM) will be in the news and not for a good reason. With even more recalls announced last week there really hasn’t been much good news for quite a while, but as we saw last week, that didn’t seem to have any impact on sales.

To its credit despite all of the adverse news General Motors has defended the $35 level very nicely, as long as you’ve had a little bit of faith and patience while others either took profits or panicked.

Following a little bit of weakness and demonstrating that shares can absorb incredible amounts of bad news, General Motors offers some good opportunities for use in a covered option strategy, as it offers an attractive dividend that results from its frequent price gyrations. With it’s equally attractive dividend it is easier to be patient while watching shares move up and down. The availability of expanded weekly options adds considerable latitude in how shares are managed while awaiting those price movements.

With the recent revision to GDP there may not be much reason to be optimistic about near term economic growth. However with continuing and steady growth in employment and perhaps bolstered by news from one time leader Intel (INTC), of increasing fortunes, I again took to my proxy for economic growth, Fastenal (FAST). 

I already own shares that may be assigned this coming week, but would not be adverse to rolling them over as they approach the purchase price after some recent weakness. I would also consider either replacing those shares, if assigned, or even adding additional shares and would further consider using some longer term options, such as the July or August 2014 contracts. The latter also adds the possibility of capturing a dividend payment.

Nike (NKE) isn’t a company that I’ve owned very often, although it is one that I look at each week when thinking of possible replacements for assigned shares. Unfortunately, this week I didn’t have any assignments and that makes me a little more guarded about adding new positions and eroding my cash position. However, it’s hard to formulate a thesis whereby Nike is disproportionately damaged by any breach of peace in the world. I also look at shares of Nike as currently being on sale after some recent losses. 

Lowes (LOW) on the other hand, is a company that I’ve owned with some frequency, as recently as a week ago. It, too, is on sale after last week’s market movements and without any real reason for its price drop.

Lowes fits the profile of companies that have been especially kind to me, in that it tends to move within a defined range, deals with an easily understandable product and happens to offer reasonable option premiums and a fair dividend.

While there’s nothing terribly exciting about the company that sits in the shadow of a larger competitor and isn’t too likely to gain from future growth nor suffer from growth disappointments, there is something exciting about booking profits at a tolerable level of risk.

With some recent concerns about its future in the Russian marketplace having been put at ease, MasterCard (MA) has rebounded from its recent lows. It is among those stocks that has seen me hoping for a drop in value and did so a bit over the past week. My comfort level with purchasing new shares is in the $76 range and it is currently just below that level, inviting some consideration. However, I may be inclined to sell puts on shares as my preference is a lower entry price. If doing so and the shares dropped below the strike I would assess whether to attempt to rollover the puts in an effort to get an even lower entry price or whether to accept assignment and position myself to sell calls and perhaps collect the trivial dividend early next month.

The week’s two potential dividend plays are very much at extremes of the spectrum. General Electric (GE) is fairly staid, moves in small doses, while Las Vegas Sands (LVS) is quite the opposite.

General Electric is a company that I don’t own often enough and am never quite certain why that is the case. It too tends to trade in a definable range, is not terribly volatile, offers a reasonable option premium and an excellent dividend. All of that sounds compelling to me, with perhaps this being the week, as the dividend serves as a lure.

Las Vegas Sands, which I purchased last week and may lose to early assignment, is still at the lower end of its recent trading range, despite the good showing last week. While I don’t particularly like chasing stocks that have risen, regardless of how much higher they may still need to go to get to recent highs, here too, the dividend may be a potent lure. While the premium is always attractive, I think that the near term lower boundary on the trading range may have been defined at about $72.

Finally, everyone who loves dysfunction would certainly be attracted to Darden Restaurants (DRI).

Not too long ago its CEO, Clarence Otis, was hailed as a genius and in touch with the casual dining needs of the nation. Now, he is castigated as caring only about his own fate and selling Darden’s assets at ridiculously low valuation in an effort to fend off activists.

Whatever.

I rarely want to consider an earnings related trade unless there are weekly and preferably expanded weekly contracts available and then usually consider the sale of puts. Sadly, in Darden’s case there are only monthly contracts, but this happens to be the final week of the monthly cycle, so in a perfectly executed strategy this could be a weekly trade.

However, despite that, I look at a potential share purchase of Darden and looking at a longer term commitment, with consideration of selling July 2014 calls in the hope of also capturing its very healthy dividend.

Dysfunction can sometimes play the same role as conflict. Sure, normalcy is far easier to deal with, but as with peace, where’s the excitement in that?

 

Traditional Stocks: Fastenal, Lowes, MasterCard, Nike

Momentum:  General Motors

Double Dip Dividend:  General Electric (6/19), Las Vegas Sands (6/18)

Premiums Enhanced by Earnings: Darden Restaurants (6/20)

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.

Apr192014

Weekend Update – April 20, 2014

Weekend Update

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.

Feb232014

Weekend Update – February 23, 2014

Weekend Update

When this past week was all said and done, it was hard to discern that anything had actually happened.

Sure, there was an Olympics being staged and fomenting revolution in Ukraine, but it was a week when even the release of FOMC minutes failed to be news. Earnings season was winding down, the weather was in abeyance and the legislative docket was reasonably non-partisan.

I could have spent last week watching the grass grow if it hadn’t been covered in a foot of snow.

In its own way, despite the intermediate and alternating moves approaching triple digits, the past week was a perfect example of reversion to the mean. For those that remember 2011, it was that year in a microcosm.

The coming week promises to be no different, although eight members of the Federal Reserve are scheduled to speak. While they can move markets with intemperate or unfiltered remarks, which may become more meaningful as “hawks” assume more voting positions, most people will likely get their excitement from simply reading the just released 2008 transcripts of the Federal Reserve’s meetings as the crisis was beginning to unfold. While you can learn a lot about people in times of crisis, other than potential entertainment value the transcripts will do nothing to add air to the vacuum of the past week. What they may contain about our new Chairman, Janet Yellen, will only confirm her prescience and humor, and should be a calming influence on investors.

As a covered option investor last week was the way I would always script things if anyone would bother opening the envelope to read what was inside. While I have no complaints about 2012 or 2013, as most everyone loves a rising market, 2011 was an ideal market as the year ended with no change. Plenty of intermediate movement, but in the end, signifying nothing other than the opportunity to seemingly and endlessly milk stocks for their option premiums that were nicely enhanced by volatility.

Although I’ve spent much of the past year expecting, sometimes even waiting at the doorstep for the correction to come, the past few weeks have been potentially dangerous ones as I’ve had optimism and money to spend. That can be a bad combination, but the past 18 months have demonstrated a pattern of failed corrections, at least by the standard definition, and rebounds to new and higher highs.

While there may be nothing to see here, there may be something to see there as the market may again be headed to new neighborhoods.

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). A companion article this week explores some additional earnings related trades.

In a week that Wal-Mart (WMT) again disappointed with its earnings report, once again the market failed to follow its lead. In the past year Wal-Mart has repeatedly disappointed, yet the market has disconnected form its leadership, other than for a brief two hours of panic a few months ago when Wal-Mart announced some increasing inventory levels. That panic quickly resolved once Wal-Mart explained their interpretation of inventory levels.

However, one does have to wonder under what economic circumstances does Wal-Mart not meet expectations? Is the economy thriving and people are moving to other retailers, such as Target (TGT) or even Sears (SHLD) or are they moving to Family Dollar Store (FDO)? WHile it is possible that Wal-Mart may simply be suffering from its own bad economic and internal forecasting, there isn’t much reason to be sanguine about retailing. My money is on Family Dollar.

One source that I use for information lists Family Dollar as going ex-dividend this week, however, I haven’t found that to be corroborated anywhere else and historically the first quarter ex-dividend date is in the second week of March. If shares do go ex-dividend this week I would have significant enthusiasm for adding shares, but even in the absence of that event I’m inclined to make that purchase.

Coming off two successive weeks of garnering more than the usual number of dividends, this week is relatively slim pickings. Weyerhauser (WY) and Molson Coors (TAP) both go ex-dividend this week, but both are near the bottom of my list for new purchases this week.

While I like Molson Coors, at the moment the product holds some more appeal than the stock, which is trading near its yearly high point. However, with earnings now out of the way and Canadians around the world celebrating Olympic victories, what better way to show solidarity than to own shares, even if just for a week? Other than potential technical indicators which may suggest an overbought condition, there isn’t too much reason to suspect that in a flat or higher moving market during the coming week, Molson Coors shares will decline mightily. With shares as the body and a head composed of a nice premium and dividend, it just may be time to indulge.

Weyerhauser is a perfectly boring stock. Often, i mean that in a positive sense, but in this case I’m not so certain. I’ve owned shares since May 2013 and would be happy to see them assigned. Despite Weyerhauser offering a dividend this week, my interests are more aligned with re-establishing a position in International Paper (IP). In addition to offering a weekly option, which Weyerhauser does not, its options liquidity and pricing is superior. While it is trading near its yearly high, it has repeatedly met resistance at that level. As a result, while eager to once again own shares, I would be much more willing to do so even with just a slight drop in price.

While offering only a monthly option is a detriment as far as Weyerhauser is concerned, it may be a selling point as far as Cypress Semiconductor (CY) goes. I like to consider adding shares when it is near a strike price as it was after Friday’s close. Shares can be volatile, but it tends to find its way back, especially when home is $10. WHile earnings aren’t due until April 17, 2014, that is just one day before the end of the monthly cycle. Therefore, if purchasing shares of Cypress at this time, I would be prepared to set up for ownership through the May 2014 cycle in the event that shares aren’t assigned when the March cycle comes to an end, in order to avoid being caught in a vortex if a disappointment is at hand. The dividend and the premiums will provide some solace, however.

Although I had shares of Fastenal (FAST) assigned this past week and still own some more expensive shares, this company, which I believe is a proxy for economic activity, has been a spectacular covered call trade and has lent itself to serial ownership as it has reliably traded in a defined range. It doesn’t report earnings until April 10, 2014, but it does have a habit of announcing altered guidance a few weeks earlier. That can be annoying if it comes at the end of an option cycle and potentially removes the chance of assignment or even anticipated rollover, but it’s an annoyance I can live with. After two successive quarters of reduced guidance my expectation is for an improved outlook.

I haven’t owned shares of Deere (DE) for a few months as it had gone on a ride higher, just as Caterpillar (CAT), another frequent holding, is now doing. Deere is now trading at the upper range of where I typically am interested in establishing a position, but after a 7% decline, it may be time to add shares once again. It consistently offers an option premium that has appeal and in the event of longer than anticipated ownership its dividend eases the wait for assignment.

While I would certainly be more interested in Starbucks (SBUX) if its shares were trading at a lower level, sometimes you have to accept what may be a new normal. I had nearly a year elapse before coming to that realization and missed many opportunities in that time with these shares. It does, however, appear that the unbridled move higher has come to an end and perhaps shares are now more likely to be range bound. As with the market in general it’s that range that others may view as mediocrity of performance that instead may be alternatively viewed as the basis for creating an annuity through the collection of option premiums and dividends.

I’ve never been accused of having fashion sense, so it’s unlikely that I would ever own any Deckers (DECK) products at the right time. One minute they sell cool stuff, the next minute they don’t and then back again. Just like the story of most stocks themselves.

What is clear is that they have become cool retailers again and impressively, shares have recovered from a recent large decline. With earnings due to be announced this week the option market is implying a 12.3% potential movement in shares. In the meantime, if you can set your sights on a lowly 1% ROI for the week’s worth of risk a 16.3% drop can still leave you without the obligation to purchase the shares if having sold puts.

Less exciting, at least in terms of implied moves, is T-Mobile (TMUS). It also reports earnings this week and there has to be some thought to what price T-Mobile is paying and will be paying for its very aggressive competitive stance. While its CEO John Legere, may be a hero to some for taking on the competition, that may very quickly fade with some disappointing earnings and cautionary guidance. the option market is pricing a relatively small move of 8.7%, while current option pricing can return a 1% ROI on a strike level 9.5% lower than Friday’s close. Although that’s not much of a margin of difference, I may be more inclined to consider the sale of puts if shares drop substantively on Monday in advance of Tuesday morning’s announcement. Alternatively, if not selling puts in advance of earnings and shares do significantly fall following earnings, there may be potential to do the put sale at that time.

Finally, Abercrombie and Fitch (ANF) reports earnings this week. It is one of the most frustrating and exhilirating of stocks and I currently own two lots. My personal rule is to never own more than three, so I still have some room to add shares, or more likely sell puts in advance of its earnings. Abercrombie and FItch is a nice example of how dysfunction and lowered expectations can create a stock that is so perfectly suited for a covered option strategy. Its constant gyrations create enhanced option premiums that are also significantly impacted by its history of very large earnings related price changes.

For those that have long invested in shares the prospect of a sharp decline upon earnings can’t come as a surprise. However, with a 10.7% implied price move this coming week, one can still achieve a 1% ROI if shares fall less than 15.3%, based on Friday’s closing price.

Traditional Stocks: Deere, Family Dollar Store, Fastenal, International Paper, Starbucks

Momentum Stocks: Cypress Semiconductor

Double Dip Dividend: Molson Coors (ex-div 2/26)

Premiums Enhanced by Earnings: Abercrombie and Fitch (2/26 AM), Deckers (2/27 PM), T-Mobile (2/25 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.