Weekend Update – October 23, 2016

This past week was the first full week of earnings for this most recent earnings season and you could be excused for wondering just how to interpret the data coming in.

The financial sector had fared well, but if you were looking for a pattern of revenue and earnings beats, or even looking for a shared sense of optimism going forward from a more diverse group of companies, you’ve been disappointed to date.

For the most part, this past week was one of mixed messages and the market really rewarded the messages that it wanted to hear and really punished when the messages didn’t hit the right notes.

With so much attention being placed on the expectation that the FOMC would have sufficient data to warrant an interest rate increase in December, you might have thought that companies would start painting a slightly more optimistic image of what awaited their businesses, perhaps based upon a building trend from the past quarter.

That optimistic guidance has yet to prevail even as some have been reporting better than expected revenues.

But no one should be surprised with the mixed messages that the market hasn’t been able to interpret and then use as a foothold to move in a sustained direction.

The mixed messages coming from those reporting just follows the wonderful example of streaming mixed messages that have been coming at us all year long from members of the Federal Reserve.

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Weekend Update – September 25, 2016

The Talking Heads were really something.

I saw them and The Ramones in Cambridge.

Not at a concert, but at an album signing.

I picked up an album just to be able to get a close look at the members of both bands, mostly because one of the Ramones had a safety pin through his cheek and I thought that was pretty weirdly cool.

Then I promptly put the signed albums back into the rack.

Maybe it’s strange that so many years later one of the Ramones, maybe the one with the safety pin, would sing an homage to American capitalism and maybe a bit of an homage to one of its media symbols, “The Money Honey.”

But that was all almost 40 years ago and I never dreamed that those two groups would have been so influential. I never would have returned the signed albums back to the rack had I any clue that they would have been worth something some day.

In time, I came to especially like the Talking Heads, but never got as close as I did that one afternoon, instead having to settle on repeatedly melting the cassette tapes holding their songs.

“Burning Down the House,” “Once in a Lifetime” and so many more.

This coming week, right on the heels of the FOMC’s most recent statement release that kept investors in a celebratory mood, is going to be something of a Talking Feds festival.

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Weekend Update – February 14, 2016

It’s not only campaigns that are going negative.

After having watched the latest in political debates on both sides of the aisle, the negative finally coming to the surface should no longer come as a surprise.

Maybe the real surprise should have been just how long the professional politicians on both sides were able to keep that negativity mostly bottled up.

There’s certainly nothing illegal about engaging in a negative political campaign and we have heard time and time again that politicians pursue that unsavory strategy because it works.

It’s also a strategy that’s not unique to the United States. The last unicorn was apparently spotted in Canada and ex-Prime Minister of Great Britain, Tony Blair, was frequently called “Tony Bliar.”

Maybe the fact that such an approach works is why central banks around the world are increasingly giving some thought to going negative.

Negative interest rates are now all the rage after the Bank of Japan had already gone in that direction a few weeks ago.

This week there was at least some suggestion that particular strategy wasn’t entirely off the table in the United States as some are beginning to question just what arrows the Federal Reserve has left in its quiver in the event of an economic slowdown.

Janet Yellen, during her two day mandated session in front of Congressional committees this week said that she didn’t even know whether the Federal Reserve had the legal authority to implement negative interest rates in the United States, but that didn’t stop the worries over what such a scenario would mean with regard to the economy that drove it there.

While oil continued to be the major stock market mover for 2016, this week had some diversification as precious metals began to soar and interest rates continued to plunge.

Who would have predicted this just a couple of months ago when the FOMC saw it fit to begin a slow increase in interest rates?

But just as the week was looking as if it would create a February 2016 that would have us pining for the good old days of January 2016, oil rebounded and Jamie Dimon came to the rescue with a $26 million expression of confidence in the banking system.

Even in the economy of Djibouti, $26 million isn’t that big of a deal, but when Dimon elected to purchase shares in the open market for only the 3rd time in his tenure at JP Morgan Chase, it may have been the first vote of confidence in anything in 2016.

Fortunately, we have a holiday shortened trading week ahead to help us digest the gains seen on Friday that left the S&P 500 only 0.9% lower on the week.

While we’ve had a recent run of strong week ending trading sessions, there hasn’t been much in the way of staying power. Maybe a long weekend will help.

What the day off will also do is to give us a chance to actually try to understand the significance of negative interest rates even as the market seemed concerned just a couple of days earlier that a March 2016 interest rate hike wasn’t off the table.

Last week’s reactions by the market to interest rates was akin to being both afraid of the dark and the light as the market understandably went back and forth in spasms of fear and relief.

Going negative usually reflects some sort of fear and a concern that more conventional approaches aren’t going to deliver the hoped for results.

It may also reflect some desperation as there comes a perception that there is nothing really to lose.

I can understand a Presidential candidate using a profanity during a public appearance and I can even understand one Presidential candidate referring to another as “a jerk.”

That kind of negativity I get, but I’m having a really hard time understanding the concept of negative interest rates.

While I understand relative negative rates during periods of high inflation, the very idea that paying to keep your money in the bank would become similar to paying someone to store your cache of gold bars is confusing to me.

Why would you do that? Why would I want to pay money to a bank just so they could make even more money by putting my money to use?

I know that it’s not quite that simple, but I would be happy if I could get a bank to lend money to me at a negative interest rate, but somehow I don’t envision the APR on credit cards reflecting that kind of environment anytime soon.

Now, if you really wanted to spur consumer spending, that may be just the way to do it. Why not apply a monthly negative interest rate to a credit card balance and the longer you keep the balance open the more likely it will disappear as the negative interest accumulates and works down your debt.

The money you don’t spend on your monthly payments could easily then be used to spur even more consumer spending.

If that isn’t a win – win, then I just don’t know what would be.

I suppose I understand the theory behind how negative interest rates may prompt banks, such as Dimon’s JP Morgan Chase (JPM) to put deposits to work by increasing their lending activity, but I wonder how the lending risk is managed as thoughts of recession are coming to the surface.

As I recall, it wasn’t that long ago that poor management of lending risk put us all at risk.

The coming week will have the release of some FOMC meeting minutes and we may get to see whether there was even the slightest consideration given to going negative.

It’s not too likely that will have come up, but as we may now be witnessing, it is possible that the FOMC’s crystal ball is no better than those owned by the least informed of us.

What was clear, however, as the market began to sink back to a “bad news is good news” kind of mentality is that negative rates weren’t the kind of bad news that anyone could embrace.

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

Among many stocks that fared well on Friday as the market found a reason to mount some rebound from the onslaught earlier in the week was Best Buy (BBY).

Best Buy’s performance was especially impressive as it opened the d
ay 6% lower following a downgrade, they ended the day more than 1% higher.

I generally don’t want to add positions after a sharp climb higher, but as Best Buy is set to report earnings during the first week of the March 2016 option cycle, I am willing to consider the sale of puts in the week prior to those earnings, as the recent volatility has its rewards reflected in the available premiums.

If faced with assignment the premiums are enhanced due to earnings and there may be good opportunity to roll the short put position over, although if doing so, some thought has to be given to the upcoming ex-dividend date likely sometime before the beginning of the April 2016 option cycle.

If faced with assignment of shares just prior to that ex-dividend date, I’d be inclined to accept that assignment in order to have both the chance to sell calls and to possibly collect the dividend, as well.

While its options are less liquid than those of Best Buy, I would consider doing the same with Weyerhauser (WY), although earnings don’t have to be contended with until the May 2016 option cycle.

With an upcoming merger expected to close sometime in the first or second quarters of 2016, Weyerhauser has badly trailed the S&P 500 since the announcement was made 3 months ago.

That is despite the belief by many that the proposed merger with Plum Creek Timber (PCL) represents a good strategic fit and offers immediate financial synergy.

At this point, I just like the low price, the relatively high option premium and the potential to take ownership of shares in order to also try and collect the generous dividend just a few weeks away.

Due to the lesser liquidity of the options, there can also be some consideration to simply doing a buy/write and perhaps selecting an out of the money strike price with an expiration after the ex-dividend date.

Sinclair Broadcasting (SBGI) is another that hasn’t fared terribly well in the past few months and has also under-performed the S&P 500 of late.

It is a stock that I often purchase right before an ex-dividend date, as long as its price is reasonable by its historical standards.

For me, that reasonable price is around $29. It failed to break through resistance at $33 and has fallen about 18% in February, bringing the price to where I like to consider entry.

Share price hasn’t been helped by a recent downgrade on earnings warnings and the announced buyout of The Tennis Channel.

In the meantime, Sinclair Broadcasting remains the most potent play in local television in the nation and is increasingly diversifying its assets.

With earnings and an ex-dividend date both due early in the March 2016 option cycle and with only monthly options available, this is a position that I would consider selling longer term and out of the money contracts upon, such as the $30 June 2016 contract.

Sinclair Broadcasting’s stock price history suggests that it tends not to stay depressed for more than a couple of months after having approached a near term low. Hopefully, it’s current level is that near term low, but by using a June 2016 option expiration there may be sufficient time to ride out any further decline.

Following an even stronger gain than the S&P 500’s 1.9% advance to close the week, General Electric (GE) is now almost even with the S&P 500 for 2016.

That’s not a great selling point.

General Electric seems to have just successfully tested an important support level, but that risk does remain, particularly if the overall market takes another leg down.

In that case, there may be some significant risk, as there could be another 15% downside in an effort to find some support.

Thus far, the moves in 2016 have been fairly violent, both lower and higher, with an overall net downward bias. There isn’t too much reason to believe that pattern will soon reverse itself and for that reason option premiums, such as for General Electric are higher than they have been for quite some time.

While numerous stocks can make a case that their current prices represent an attractive entry level, General Electric can certainly pick up the pieces even if there is further downside.

The worst case scenario in the event of further price declines is that the General Electric position becomes a longer term one while you collect a nice dividend and maybe some additional option premiums along the way.

T-Mobile (TMUS) reports earnings this week.

I’m struck by two things as that event approaches.

The first is what seems to be an even increasing number of T-Mobile television ads and the increasing financial burden that must be accruing as it continues to seek and woo subscribers away from its competitors.

The second comes from the option market.

I generally look at the “implied move” predicted by the option market when a company is about to report earnings. For most companies, the option premiums near the strike price are very similar for both puts and calls, particularly if the current price is very close to the strike price. However, in the case of T-Mobile, there is considerable bias on the call side.

The implied move is about 8.1%, but about 5.4% of that is from the very high call premium. The clear message is that the option market expects T-Mobile to move higher next week. It’s unusual to see that much of a declaration of faith as is being demonstrated at the moment.

When I see something like that, the oppositional side of me even thinks about buying puts if I didn’t mind the almost all or none proposition involved with that kind of a trade.

However, rational though pushes that oppositional piece of me to the side and while I generally like the idea of selling puts ahead of earnings, in this case, there may be good reason to consider the purchase of shares and the sale of calls, perhaps even deep in the money calls, depending upon the balance of risk and reward that one can tolerate.

Finally, if you’ve been following the news, you know that it wasn’t a particularly good week to have been a cruise line or perhaps to have been a cruise line passenger. While there may be lots of great things about being a passenger, it seems that we hear more and more about how either a virus or the rough seas will take its toll.

With an upcoming ex-dividend date this week and a severe price descent, Carnival (CCL) is finally looking attractive to me again after nearly 18 months of not having owned shares.

With earnings early in the April 2016 cycle th
ere are a number of different approaches in the coming week to the shares.

One approach may simply be the purchase of shares and the concomitant sale of in the money February 2016 call options, which are the equivalent of a weekly option, as expiration is this Friday. In such as case, whether using the at the money or in the money strike, the intent is to at least generate option premium and perhaps the dividend, as well, while having the position exercised.

Alternatively, a larger premium can be exacted by selling a March 2016 out of the money option and more predictably ensuring the capture of the premium. With earnings coming early in the April 2016 option cycle, the more daring investor can also consider the use of even longer dated out of the money options in the hopes of getting an more substantive share gains in addition to the dividend and an earnings enhanced option premium.

I’m more inclined to go for the full journey on this one and extend my stay even if there may be some bumpiness ahead. 

Traditional Stocks: General Electric, Sinclair Broadcasting, Weyerhauser

Momentum Stocks: Best Buy

Double-Dip Dividend: Carnival (2/17 $0.30)

Premiums Enhanced by Earnings: T-Mobile (2/17 AM)

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

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Weekend Update – October 4, 2015

If you’re a parent, even if 50 years have passed since the last episode, you can probably still remember those wonderful situations when your child was having a complete meltdown, even as the kid really didn’t know what it is that they wanted.

Sometimes a child can get so out of control over something that they wanted so badly that even when finally getting it, they just couldn’t regain control. We’ve all seen kids carry on as if there was some horrible void being perceived in their lives that was still gaping and eating away at their very core even when their immediate issue had already been resolved.

I think that’s the only way to explain the market ups and downs that we’ve been seeing, starting from the week of the most recent FOMC Statement release and all the way through to the last trading day of the past week.

The market has gone from a condition of apoplexy over the very thought of an interest rate hike to a melt down when that very same interest rate hike didn’t materialize.

Whether the moves have been up or down the rational basis has become more elusive and knowing what to do in response has been difficult. It’s been a little bit easier to simply accept the fact that there is such a phenomenon as “the terrible twos” and just ride out the storm.

Trying to understand that kind of behavior is tantamount to trying to use rational thought processes when dealing with a child in the midst of an uncontrollable outburst.

Sometimes it’s just best to ignore what you see unfolding before your eyes and let events run their course. That may not be a call for total passivity, though, and completely giving up on things, but the belief that you can outsmart or out-think a rampaging child or a rampaging market is destined for failure.

Followings Friday’s 1.4% gain in the S&P 500 that index was down only about 8.7% from its summer time highs, after having been down as much as 11.9% after the first day of trading this past week.

In doing so, the market has continued its dance around that 10% correction line while having a regular series of irrational outbursts that have alternated between plunges and surges.

Like most parents, there is some pride that comes into play when a child finally is able to come to a stage in life when those uncontrollable and irrational outbursts have run their course. For most kids once they’ve gotten through that phase it never returns, although for some adults it may manifest itself in different ways.

I don’t know if this week is going to be that week when some pride is warranted, but at the very least the market took some time in-between its outbursts this week to collect itself. In doing so, it either continued to hover around that 10% correction line and avoided spiraling out of control or took some positive steps toward finally recovering from that correction.

It started with a 300+ point drop on Monday with almost nothing happening on Tuesday as it geared up for a 200+ point gain on Wednesday.

Then, it did virtually nothing again on Thursday, only to see the bottom drop out after some very disappointing Employment Situation Report numbers on Friday morning.

This time, “disappointing” meant employment numbers that were far lower than expected and lower revisions to the previous month.

Had the same numbers been put forward a few months ago they would have engendered elation, but now that market thinks it knows what it wants and as always, when it doesn’t get it there’s a tantrum at hand.

Then, suddenly, something just seemed to click, just a it occasionally does with a child. Sometimes it may simply be exhaustion or a realization of the futileness of demonstrable outbursts, but at other times a spark may get lit that creates a path to a greater understanding of things.

The morning turnaround on Friday occurred at that point at which the S&P 500 was approaching its lowest level since the correction began and had chartists scurrying to their charts to see where the next stop below awaited.

Instead, however, the S&P 500 climbed 3% from those depths having turned positive for the day by noontime and then continuing so soar even more.

Of course, while there may be some pride in what can be interpreted as a sudden realization of the unwarranted behavior in the morning, I always get wary of such large moves, even when they’re to my benefit. When seeing those kinds of intra-day reversals, my thoughts go from recognizing them as reasonably normal tantrums, to the less normal exhibition of a bipolar disorder.

With earnings season beginning at the end of this coming week, we may soon find out whether the market is capable of exhibiting some rational responses to real news.

I’m optimistic that those responses will be more appropriate than has been the case over the last 2 earnings seasons when the o
ption market had repeatedly under-estimated the magnitude of those responses.

Any sign that top line and bottom line numbers are both heading in the right direction may paint those disappointing Employment Situation Report numbers as an aberration. That could be just the spark we all need to get over the hump of interest rate worries and escape the developmental binds that throw us into fits of rage.

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

I never get tired of doing the same thing over and over again. There may be a psychiatric diagnostic code for that sort of thing, but when it comes to stocks it can be a very rational way of behaving especially when those stocks start falling into a pattern of trading in a narrow price range.

However, if all those stocks did was to trade in that narrow range and didn’t have a moment of explosive behavior or two before returning to a more normal path, there would be no reason to consider owning them for any reason other than perhaps for the relative safety of their dividend income.

But those occasional moves higher and lower make the sale of calls worthwhile even when the shares are seemingly moribund. Both General Electric (NYSE:GE) and Bank of America (NYSE:BAC) are recently exhibiting the kind of behavior that can generate a very respectable return, both in relative and absolute terms, especially if the opportunity presents to buy shares on a serial basis following share assignment.

I had 2 lots of General Electric assigned this past week and would be very willing to own them for the sixth time in 6 weeks. However, following its late day turnaround on Friday, along with the rest of the market, I would probably only do so if its price came closer to $25.

With a remaining lot of shares and options set to expire this week, I would still have an eye on selling new weekly calls, but if requiring rollover at the end of the week, I would consider bypassing the cycle ending week of October 16th, and perhaps selling extended weekly calls, as General Electric will report earnings that morning.

I now own 2 lots of Bank of America and three lots at any one time is my self imposed limit, but trading at the $15.50 level has a relative feeling of safety for me. As with General Electric, however, if purchasing or adding shares, there is that little matter of upcoming earnings. While most likely beginning the process with a weekly call, if requiring a rollover as being faced with expiration rather than assignment, I would probably opt to bypass the October 16 expirations in the event of some poorly received news on earnings.

Poorly received news is an apt way to describe anything emanating from China these days. While there are lots of potential “poster child” examples of the risks associated with any stock that has exposure in China, among the more respected names has to be caterpillar (NYSE:CAT).

For many rational reasons, well known short seller Jim Chanos laid out his short thesis on caterpillar nearly 30 months ago and following a substantial move higher, the virtue of patience has begun to start its rewards.

With shares now down about 40% from a year ago, there’s still no telling if this is the bottom, but a constellation of events has me considering a position.

With its ex-dividend date the next week and then earnings the following week and a weekly option premium that reflects the near term risk, I’m ready to consider that risk.

If selling a weekly option doesn’t look as if it will result in an assignment, I would probably consider trying to roll over those options to the ex-dividend week, but with a mind toward giving up that dividend by selling a deep in the money call option in an effort to collect some additional premium, but to be out of shares prior to earnings.

Failing that, however, the next step would be to attempt to roll over those shares and again selecting an expiration date that bypasses the immediate threat of earnings and then holding on tightly as one of the least respected CEOs over the past few years may again be in people’s cross-hairs.

YUM Brands (NYSE:YUM) reports earnings this week and as ubiquitous as their locations may be in the United States, it’s almost always their Chinese holdings that get the attention of investors.

Following a strong move higher on Friday, I would be reluctant to start the week by selling puts on YUM shares, as it reports earnings Tuesday afternoon, unless there is some significant giveback of those weekending gains. At the moment, the option market is implying a price move of about 5.7%.

A 1% ROI could potentially be obtained through the sale of a weekly put at a strike level 6.7% below Friday’s close, but that may be an insufficient cushion, given YUM’s earnings history, even when the CHinese economy has not been so highly questionable. However, in the event of some price pullback prior to earnings or a large price drop after earnings, I would consider a posit
ion.

In the event of a large pullback after earnings, however, rather than selling puts, as I might usually want to do, YUM is expected to have its ex-dividend date the following week, so I might consider the purchase of shares and the sale of calls. But even then, depending on the prevailing option premiums, I could possibly consider sacrificing the dividend for the premiums that could come from selling deep in the money calls and possibly using an extended option expiration date.

Equally ubiquitous, at least in some portions of the United States is Dunkin Brands (NASDAQ:DNKN). Following a disastrous reception on Thursday to their forward guidance and the barely perceptible rebound the following day, this is a stock that I’ve wanted to repurchase for nearly a year.

With only monthly options available and without a wide assortment of strike levels, this may be a good position to consider a longer term option sale, as it reports earnings at the beginning of the November 2015 cycle and will likely have its ex-dividend date in the November or December cycle.

During this latest downturn, I’ve had a more profound respect for trying to accumulate dividends, especially as the increased volatility has created option premiums that subsidize more of the dividend related price drop in shares. In doing so, sometimes there may be just as good opportunity in trying to induce early assignment of shares by selling deeper in the money calls that you usually might do in a lower volatility environment and using an extended option timeframe.

Both Verizon (NYSE:VZ) and Oracle (NYSE:ORCL) may benefit from those approaches, although when the size of the dividend is larger than the strike price unit, such as in the case of Verizon, the advantage is a bit muted.

However, with Verizon reporting earnings on October 20th, some consideration might be given toward selling an in the money option expiring on that date, in an effort to get the larger, earnings enhanced premium, even while potentially sacrificing the dividend.

Oracle doesn’t offer the same generous dividend as does Verizon, nor does it have earnings immediately at hand.

It can be approached in a much more simplistic fashion in an attempt to capture both the dividend and the option premium by considering a sale of a call hovering near the current price. because it is ex-dividend on a Friday, there may be some opportunity to enhance the yield by selling an extended weekly option, again, possibly risking early assignment, but atoning for some of that with some additional premium

Finally, how can there be anything good to say about Abercrombie and Fitch (NYSE:ANF)? I’ve been practicing Chanos like patience on a much more expensive lot of shares, but in the meantime have found some opportunity by buying shares and selling calls in the $20-22 range.

Having now done so on 4 occasions in 2015 it nay be time to do so again as it closed in at the lower end of that range. With its earnings due relatively late in the current cycle this position can be considered either through the sale of puts or as a buy/write.

Traditional Stocks: Caterpillar, Dunkin Donuts, General Electric

Momentum Stocks: Abercrombie and Fitch, Bank of America

Double-Dip Dividend: Oracle (10/9 $0.15), Verizon (10/7 $0.565)

Premiums Enhanced by Earnings: YUM Brands (10/6 PM)

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

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Weekend Update – September 20, 2015

This past Monday, prior to the market’s opening, I posted the following for Option to Profit subscribers:

“In all likelihood, at this point there are only two things that would make the market take any news badly.

The first is if no interest rate increase is announced.

Markets seem to have finally matured enough to understand that a rate hike is only a reflection of all of the good and future good things that are developing in our economy and are ready to move on instead of being paralyzed with fear that a rate hike would choke off anemic growth.

The second thing, though, is the very unlikely event of a rate hike larger than has been widely expected. That means a 0.5% hike, or even worse, a full 1% hike.

That would likely be met with crazed selling.”

Based on the way the market was trading this week as we were awaiting the FOMC Statement which was very widely expected to announce an interest rate increase, you would have been proud.

The proudness would have arisen as it seemed that the market was finally at peace with the idea that a small interest rate increase, the first in 9 years, wouldn’t be bad news, at all.

Finally, it seemed as if the market was developing some kind of a more mature outlook on things, coming to the realization that an interest rate hike was a reflection of a growing and healthy economy and was something that should be celebrated.

It always seemed somewhat ironic to me that the investing class, perhaps those most likely to endorse the concept of teaching a man how to fish rather than simply giving a handout, would be so aghast at the possibility of a cessation of a zero interest rate policy (“ZIRP”), which may have been tantamount to a handout.

The realization that ours was likely the best and most fundamentally sound economy in the world may have also been at the root of our recent disassociation from adverse market events in China.

So while the week opened with more significant weakness in China, our own markets began to trade as if they were now ready to welcome an interest rate increase and seeing it for what it really reflected.

All was well and in celebration mode as we awaited the news on Thursday.

As the news was being awaited, I saw the following Tweet. 

I don’t follow many people on Twitter, but Todd Harrison, the founder of Minyanville is one of those rare combinations of humility, great personal and professional successes, who should be followed.

I have an autographed copy of his book “The Other Side of Wall Street,” whose full title really says it all and is a very worthwhile read.

Like the beer pitchman, Todd Harrison doesn’t Tweet much, but when he does, it’s worth reading, considering and placing somewhere in your memory banks.

Many people in their Twitter profiles have a disclaimer that when they re-Tweet something it isn’t necessarily an endorsement.

When I re-Tweet something, it is always a reflection of agreement. There’s no passive – aggressiveness involved in the re-Tweet by saying “I endorse the re-Tweeting of this, but I don’t necessarily endorse its content.”

I believed, as Todd Harrison did, some 4 minutes before the FOMC statement release, that the knee jerk reaction to the FOMC decision wasn’t the one to follow.

But a funny thing happened, but not in a funny sort of way.

For a short while that knee jerk reaction would have been the right response to what should have been correctly viewed as disappointment.

What was wrong was a reversion back to a market wanting and believing that it was given another extension of the ZIRP handout. That took a market that had given up all of its substantial gains and made another reversal, this time going beyond the day’s previous gains.

With past history as a guide, going back to Janet Yellen’s predecessor, who introduced the phenomenon of the Federal Reserve Chairman’s Press Conference, the market kept going higher during the prepared statement portion of the conference and continued even higher as some clarification was sought on what was meant by “global concerns.”

Of course, everyone knew that meant China, although one has to wonder whether those global concerns also included the opinions held and expressed by Christine Legarde of the International Monetary Fund and others, who believe that it would be wrong for the FOMC to introduce an interest rate increase in 2015.

While some then began to wonder whether “global concerns” meant that the Federal Reserve was taking on a third mandate, it all turned suddenly downward.

With the exception of a very early Yellen press conference when she mischaracterized the FOMC’s time frame on rate increases and the market took a subsequent tumble, normally, Yellen’s dovish and dulcet tones are like a tonic for whatever may have been ailing the market/ This week, however, the juxtaposition of dovish and hawkish sentiments from the FOMC Statement, the subsequent press conference prepared statement and questions and answers may have been confusing enough to send traders back to their new found friend.

Logic.

Perhaps it was Yellen’s response that she couldn’t give a recipe to define what would cause the FOMC to act or perhaps it was the suggestion that the FOMC needn’t wait until their next meeting to act that sent markets sharply lower as they craved some certainty.

Or maybe it was a sudden realization that if markets had gone higher on the anticipation of a rate increase, logic would dictate that it go lower if no increase was forthcoming.

And so the initial response to the FOMC decision was the right response as the market may have shown earlier in the week that it was finally beginning to act in a mature fashion and was still capable of doing so as the winds shifted.

Perhaps the best question of that afternoon was one that pointed out an apparen
t inconsistency between expectations for full employment in the coming years, yet also expectations for inflation remaining below the Federal Reserve’s 2% target.

Good question.

Her answer “If our understanding of the inflation process is correct……we will see further upward pressure on inflation, may have represented a very big “if” to some and may have deflated confidence at the same time as a re-awakening was taking place that suggested that perhaps the economy wasn’t growing as strongly as had been hoped to support continued upward movement in the market.

That’s the downside to focusing on fundamentals.

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

As the market continues its uncertainty, even as it may be returning more to consideration of fundamentals, I continue to like the idea of going with some of the relative safety that may be found with dividends.

Last week I purchased more shares of General Electric (GE), hoping to capture both the dividend and the volatility enhanced premium. Those shares, however were assigned early, but having sold a 2 week option the ROI for the 3 days of holding reflected that additional time value and was a respectable 1.1%.

Even though I still hold some shares with an October 2, 2015 $25 expiration hanging over them, this week I find myself wanting to add shares of General Electric, once again, as was the case in each of the last two weeks.

Although there is no dividend in sight for another 3 months, the $25 neighborhood has been looking like a comfortable one in which to add shares as volatility has made the premiums more and more attractive and there may also be some short term upside to shares to help enhance the return.

A covered option strategy is at its best when the same stock can be used over and over again as a vehicle to generate premiums and dividends. For now, General Electric may be that stock.

Verizon (VZ) doesn’t have an upcoming dividend this week, but it will be offering one within the next 3 weeks. In addition to its recently increased dividend, the yield was especially enhanced by its sharp decline in share price at the end of the week as it gave some dour guidance for 2016.

There’s not too much doubt that the telecommunications landscape is changing rapidly, but if I had to put my confidence in any company within that smallest of sectors to survive the turmoil, it’s Verizon, as long as their debt load isn’t going to grow by a very unneeded and unwanted purchase of a pesky competitor that has been squeezing everyone’s margins.

I see Verizon’s pessimism as setting up an “under promise and over deliver” kind of scenario, as utilities typically find a way to thrive, but rarely want to shout up and down the streets about how great things are, lest people begin taking notice of how much they’re paying for someone else’s obscene profits.

Among those being considered that are going to be ex-dividend this week are Cypress Semiconductor (CY) and Green Mountain Keurig (GMCR).

I already own shares of Cypress Semiconductor and have a way to go to reach a breakeven on those shares which I purchased after its proposed buyout of another company fell through. I’ve held shares many times over the years and have become very accustomed to its significant and sizable moves, while somehow finding a way to return back to more normative pricing.

Following this past Friday’s decline its well below the $10 level that I’ve long liked for adding shares. With an ex-dividend date on Tuesday, if the trade is to be made, it will be likely done early in the week.

However, the other consideration is that Cypress Semiconductor is among the early earnings reporters and it will be reporting  on the day before its next option contract expires. For that reason, if considering a share purchase, I would probably look at a contract expiration beyond October, in the event of further price erosion.

Also going ex-dividend but not until Monday of the following week are Deere (DE) and Dow Chemical (DOW).

Like so many other stocks, they are badly beaten down and as a result are featuring an even more alluring dividend yield. However, their Monday ex-dividend date is something that can add to that allure, as any decision to exercise the option has to be made on the previous Saturday.

That presents opportunity to look at strategies that might seek to encourage early assignment through the sale of in the money call options utilizing expanded weekly options.

While Caterpillar (CAT) and others are feeling the pain of China’s economic slowdown, that’s not the case for Deere, but as is often the case, there are sympathy pains that become all too real.

Dow Chemical, on the other hand has continued to suffer from the belief that its fortunes are closely tied to oil prices. It;s CEO refuted that barely 9 months ago and subsequent earnings reports have borne out his contention, yet Dow Chemical continues to suffer as oil prices move lower.

If looking for a respite from dividends, both Bank of America (BAC) and Bed Bath and Beyond (BBBY) may be worth a look this week.

The financial sector was hard hit the past few days and Bank of America was additionally in the spotlight regarding the issue of whether its CEO should also hold the Chairman’s title.

As with Jamie Dimon before him who successfully faced the same shareholder issue and retained both designations, no one is complaining about the performance of Brian Moynihan.

Even as I sit on some more expensive shares that have options sold on them expiring in two weeks, I have no reason to complain.

Following a second consecutive day of large declines, Bank of America is trading near its support that has seemed to hold up well under previous assault attempts. As with other stocks that have suffered large declines, there is greater ability to attempt to capitalize on price gains without giving up much in the way of option premiums.

Bed Bath and Beyond reports earnings this week and has seen its price in steady decline for the past 4 months. Unlike others that have had a more precipitous decline as they’ve approached the pleasure of a 20% decline, Bed Bath and Beyond has done it in a gradual style.

While those intermediate points along the drop down may represent some resistance on the way back up, that climb higher is made easier when the preceding decline
wasn’t vertical.

When considering an earnings related trade I usually look for a weekly return of 1% or greater by selling put options at a strike price that’s below the bottom range implied by the option market. The preference is that the strike price that provides that return be well below that lower boundary, The lower, the better the safety cushion.

For Bed Bath and Beyond the implied move is about 6.3%, but there is no safety cushion below a $56.50 strike level to yield that 1% return. Therefore, instead of selling puts before earnings, I would consider, as has been the predominant strategy of the past two months, of considering the sale of puts after earnings are announced, but only if there is a significant price decline.

Finally, Green Mountain Keurig is going ex-dividend this coming week, but it hardly qualifies as being among the relatively safe universe of stocks that I would prefer owning right now.

I usually like to think about opening a position in Green Mountain Keurig through the  sale of puts. However, with the ex-dividend date this week that would be like subsidizing someone who was selling those puts for the dividend related price decline.

Other than the dividend, there’s is little that I could say to justify a long term position on Green Mountain and even have a hard time justifying a short term position.

However, Green Mountain’s ex-dividend day is on Friday and expanded weekly options are available.

I would consider the purchase of shares and the concomitant sale of deep in the money expanded weekly calls in an attempt to see those shares assigned early.

As an example, with Green Mountain closing at $56.74 on Friday, the October 2, 2015 $54.50 call option would have delivered a premium of $3.08.

For a rational option buyer to consider early exercise on Thursday, the price of shares would have to be above $54.79 and likely even higher than that, due to the inherent risk associated with owning shares, even if only for minutes on Friday morning after taking their possession.

However, if assigned early, there would be a 1.5% ROI for the 4 days of holding even if the shares fell somewhat less than 3.4%.

Their coffee and their prospects for continued marketplace success may both be insipid, but I do like the tortured logic and odds of the dividend related trade as we look ahead to a week where logic seeks to re-assert itself.

 

Traditional Stock: General Electric, Verizon

Momentum Stock: Bank of America

Double-Dip Dividend: Cypress Semiconductor (9/22), Deere (9/28), Dow Chemical (9/28), Green Mountain Keurig (9/25)

Premiums Enhanced by Earnings: Bed Bath and Beyond (9/24 PM)

Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.

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Copyright 2015 TheAcsMan