Weekend Update – March 29, 2015

Fresh off of his estate’s victory in a copyright infringement suit, Marvin Gaye comes to my mind this week as I can’t help but wonder what’s going on.

With the Passover holiday approaching this week, I’m also reminded that much of the basis of re-telling the story of the exodus from Egypt is in response to the questions asked by children.

Among the classes of children traditionally described are the wise child, the evil child, the simple one and the one who doesn’t even know how to ask a question.

When it comes to trying to understand the past week I’m feeling a bit more like one of the latter two of those categories, although I still retain the option of holding onto my evil persona.

The week started with the Vice-Chair of the Federal Reserve, who coincidentally had been the Governor of the Bank of Israel many years after the exodus, getting some laughs with jokes that maybe only economists would appreciate. However, to his credit he was able to tone down his hawkish sentiments while still staying true to his tenets, but without frightening markets. That was nice to see, as it was his comments just 2 days after Janet Yellen’s congressional testimony that brought an end to the February rally and, perhaps coincidentally, set us on the path for March.

That hasn’t been a very good path for most investors and with only 2 days of trading remaining in the quarter has it threatening to be the first losing quarter in quite a while as we learned that the most recent quarterly corporate profits over the same time period fell for the first time since 2008.

Yet that news didn’t seem to bother markets this morning as they had a rare session ending with a higher close.

With Stanley Fischer putting everyone into a good mood from a dose of Federal Reserve humor all went pretty well to start the week, with Monday looking like it would mark the first time of having two consecutive days higher in over a month. That was the case until the final 15 minutes of trading and then the market just continued in that downward path throughout most of the rest of the week.

But why? Someone, somewhere had to be asking the obvious question that 3 out of 4 categories of children are capable of asking.

What’s going on?

Friday’s GDP data for the 4th Quarter of 2014 showed no change with the economy growing at an annual 2.2% rate. That’s considerably less than projections based upon lower energy prices fueling a resurgence of consumer activity in the coming year, even recognizing that those perceived benefits were theoretically in only their very nascent stages in late 2014.

While the GDP data is certainly backward looking there’s been nothing happening to support that consumer led growth that we’ve all believed was coming.

Corporate profits are falling, retail sales are flat and home sales aren’t exactly setting the economy on fire, all as energy prices are well off their earlier eye popping lows.

So you might think that would all add an arrow to the quiver of interest rate doves, but the market hasn’t been embracing the idea of continuing low interest rates as much as it’s been fearing the prospects of increasing interest rates.

But this week had nothing to fear. Even the most influential of the hawks seemed and sounded accommodating, but the market wasn’t buying it.

This past week, like recent weeks, has made little sense no matter how much you try to explain it. Just like it’s hard to explain how the defendant’s weren’t aware of the existence of Marvin Gaye’s “Got to Give It Up” or that somehow pestilence, boils and locusts rained down upon the Pharoahs.

No matter how you look at it reason is not reigning.

Even a child who doesn’t know how to ask knows when something is going on.

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

I purchased some American Express (NYSE:AXP) shares a few weeks ago shortly after the news of their loss of Costco (NASDAQ:COST) as a co-branding partner. Coincidentally that decision came at the same time as both my wife and I had individual issues with American Express customer service.

With a combined history of more than 65 years of using American Express as our primary personal and business cards, we’ve done so largely for their customer service. My wife, after speaking to almost 15 representatives is ready to give her card the boot and she reminded me that she’s had that card longer than she’s had me, so I should be on notice.

Coming as no surprise, American Express just announced workforce cutbacks that will only serve to weaken what really distinguished them from the rest, but that may be what it takes to start making shares look attractive again as the company substitutes cost savings for revenues.

Fortunately, my shares from a few weeks ago were quickly assigned and now it looks as if another opportunity may be at hand as it has re-traced its bounce from the sizable drop it took when the Costco news was made known. It’s upcoming ex-dividend date this week adds to the attraction as the company is wasting no time in taking steps to offset what are now expected to be significant revenue losses beginning in 2016.

Who knew to ever ask just how important Costco was to American Express?

I purchased shares of Dow Chemical last week in order to capture the dividend. What I wasn’t expecting was the announcement coming Friday morning of their plans to merge a portion of the company with Olin Corporation (NYSE:OLN) while becoming a majority owner of Olin.

Fortunately that announcement waited until Friday morning so that I was able to retain the dividend. Had it come after Thursday’s close and based on the initial price reaction, those shares would have been assigned early.

While Dow Chemical has been somewhat phlegmatic lately as it tracks energy prices, the sale to Olin appears to be responsive to activist Dan Loeb’s desire to shed low margin businesses. This deal looks to be a great one for Dow Chemical and may also demonstrate that it is serious about improving margins.

GameStop (NYSE:GME) reported earnings this past Friday and recovered significantly from its preliminary decline. I was amazed that it did so after watching what appeared to be a very wooden and canned performance by its CFO during an interview before trading began that didn’t seem very convincing. However, shortly after trading did begin shares climbed significantly.

I like considering adding shares of GameStop after a decline, as there is a long history of people predicting its coming demise and offering very rational and compelling reasons of why they are correct, only to see shares have a mind of their own.

I had shares assigned just a week earlier and was happy to see that assignment come right after its ex-dividend date but before earnings. Now at a lower price it looks tempting again, although I would probably hold out for a little bit more of a decline, perhaps approaching Friday morning’s opening lows.

While GameStop has a reasonably low beta you wouldn’t know it if you owned shares, but fortunately the options market knows it and typically offers premiums that reflect the sudden moves shares are very capable of taking.

Up until about 30 minutes before Friday’s close it hadn’t been a very good week to be in the semiconductor business. That may have changed, at least for a moment or two, as it was announced that Intel (NASDAQ:INTC) was in talks to purchase Altera (NASDAQ:ALTR).

Among those stocks benefiting from that late news was Micron Technology (NASDAQ:MU), which has fallen even more than Intel in 2015.

Micron Technology reports earnings this week and is no stranger to large earnings related moves. The options market, however is implying only a 5.5% price move next week. While I normally look for a strike level that’s outside of the range defined by the implied move that offers at least a 1% ROI for the week, this coming week is a bit odd.

That’s because Micron Technology reports earnings after the market’s close on Thursday, yet the market will be closed for trading on Good Friday.

For that reason I would consider looking at the possibility of selling puts for the following week, but would like to see shares give up some of the gains made in response to the Intel news.

While Intel’s late news helped to rescue it from having sunk below $30 for the first time in 9 months, it did nothing for Oracle (NYSE:ORCL) nor Cisco (NASDAQ:CSCO). They, along with Intel had been significantly under-performing the S&P 500 this week and for the year to date.

Both Cisco and Oracle are ex-dividend this week and following their drops this past week both are beginning to have appeal once again.

With a holiday shortened week and also going ex-dividend the expectation is that option premiums would be noticeably lower, However, both Cisco and Oracle are offering a compelling combination of option premiums and dividends along with some chance of recovering some of their recent losses.

The real challenge for each may be related to currency exchange and how it will impact earnings. However, barring early earnings warnings, Cisco won’t report earnings for another 7 weeks and Oracle not for another 12 weeks, so hopefully that would allow plenty of time to extricate from a position before the added risk of earnings comes into play.

Finally, I came close to buying shares of SanDisk (NASDAQ:SNDK) just a couple of days ago, looking to replace shares that were assigned just 2 weeks earlier.

It’s not often that you see a company give earnings warnings twice within the space of about 2 months, but SanDisk now has that distinction and has plunged on both of those occasions.

What SanDisk may have discovered is what so many others have, in that being an Apple (NASDAQ:AAPL) supplier may be very much a mixed blessing or curse, depending on your perspective at the moment.

While its revenues are certainly being squeezed I’m reminded of a period about 10 years ago when SanDisk was essentially written off by just about everyone as flash memory was becoming to be considered as nothing more than a commodity.

In that time anyone with a little daring would have done very well in that time period with shares nearly doubling the S&P 500 performance.

With a nearly 25% drop over the past few days, even as a commodity or a revenue stressed company, SanDisk may have some opportunity as it approaches its 18 month lows.

As with many other stocks that have taken large falls, I would consider entering a new position through the sale of put options and if faced with the possibility of assignment would try to roll the position over to a forward week in an attempt to delay or preclude assignment while still collecting a premium.

Traditional Stocks: Dow Chemical

Momentum Stocks: GameStop, SanDisk

Double Dip Dividend: American Express (3/31), Cisco (3/31), Oracle (4/2)

Premiums Enhanced by Earnings: Micron Technology (4/2 PM)

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

Weekend Update – March 22, 2015

The past week has to be one to make most people pause and try to understand the basis for what we just experienced.

In a week otherwise devoid of any meaningful news there was a singular event in the middle of the week and then a little bit of follow-up to help clarify that event.

That event was the release of this month’s FOMC Statement and the subsequent clarifying event was the press conference held by its Chair, Janet Yellen.

In its aftermath, I am more confused than ever.

Not so much about where interest rates are headed, nor when, but more about the thought processes that propel markets when expectations are so clearly defined and what our continuing expectations should be.

Most everyone who follows markets knows that the great debate of late has not been whether the FOMC was going to begin the process of raising interest rates, but when they were going to begin that process. Somehow, we believed that the answer to that question was going to come when we learned whether the word “patience” would continue to characterize the FOMC’s timetable with regard to its effort to “normalize the stance of monetary policy.”

Most had taken positions that the first rate increase would come either as early as this June or perhaps as late as September. The continuing use of the word “patience” was perceived as a sign that interest rate increases wouldn’t occur until sometime after June 2015.

So you have to excuse some confusion when the market reversed course by more than 300 points as it learned that the word “patience” was eliminated, but also received news that the FOMC didn’t foresee an interest rate increase before their next meeting in April 2015.

April?

That could mean that an increase by the May meeting was still on the table and the last time I looked, May came before June, especially if you believe a more hawkish approach is warranted.

Presumably, it was the fear of interest rate increases coming as early as June that was a source for recent market weakness.

As I parsed the words I couldn’t understand the way in which the news was initially embraced. While I expected that regardless of the wording outcome the market would find reason to move forward, I certainly didn’t expect the reaction that ensued, especially since the signal was so mixed and really offered nothing to get excited about, nor to fear.

No rate increase likely in April? That’s the best the FOMC could do?

But in a world where even the slightest of interest rate increases is feared, despite the past evidence suggesting that it should be embraced, the very thought of an increase possibly coming before June should have sent buyers heading for the exits.

Yet it was more than good enough, at least for a couple of hours, and actually represented the first in 7 trading sessions where the market reversed course intra-day, having had triple digit moves in opposite directions each and every one of those days.

Now clearly that has to inspire confidence for whatever is to come next.

It’s a good thing that I don’t believe very much in chart analysis, because it would otherwise be very tempting to notice that the previous 7 trading sessions shows a clear pattern of lower highs and higher lows when looking at the net change and an even more compelling series of higher highs and higher lows when looking at the DJIA closing levels.

Yet, at the same time, it has been nearly 4 weeks ever since the DJIA has been able to string together as little as 2 consecutive days of gains.

Perhaps not to coincidentally the last time the market was able to do that was on the occasion of Janet Yellen’s two day mandated congressional testimony during which time she re-iterated a dovish position regarding the initiation of interest rate increases. But barely 2 days later suspicion of her intentions set in as the Vice-Chairman of the FOMC, Stanley Fischer struck a more hawkish tone that just a week later seemed to be validated by the Employment Situation Report.

Despite the fact that there has been no other corroborating evidence to drive the data that the FOMC insists that it values, the market lost its forward momentum from February until Janet Yellen once again took center stage.

Why people just didn’t believe her all along is a mystery, just as it is a mystery that they again chose to believe her.

How long will the trust in her comforting words last this time?

Perhaps Friday’s GDP release, coming on the same day as a scheduled speech by Stanley Fischer will give us some idea of the staying power of the dove when faced with a circling hawk.

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

It was neither a good week to be DuPont (NYSE:DD) nor eBay (NASDAQ:EBAY) as both received analyst downgrades and saw their shares fall significantly when compared to the S&P 500 over the previous 7 sessions.

DuPont’s downgrade came amid worries of problems in its agricultural and chemical segments, along with concerns about the kind of currency headwinds that we’re likely to be hearing much more about in the coming weeks as the next earnings season gets ready to begin.

While those are all important issues, certainly important enough to see DuPont’s shares fall nearly 9% relative to the S&P 500 in the past week, there was lots of activist related news that may be setting the stage for a more contentious kind of fight than Nelson Peltz usually gets himself into. However, it is that activist position that the analyst recognized as a risk to his overall negative outlook as Peltz took to the media last week to be both more accommodating in his requests to DuPont, but also to voice his frustrations.

In the meantime the recent drop in share price is similar to other such drops seen in the past year that have been at levels representing higher lows and that have set the stage for climbs to higher highs.

While Dow Chemical (NYSE:DOW) may be suffering from some of the same issues as DuPont and has the added liability of oil interests in Kuwait, it is at least seemingly at peace with its own activist investors, or at the very least the relations are not overtly adverse at the moment.

Dow Chemical has been very much tied to energy prices these past few months even as its CEO Andrew Liveris has clearly stated that on a net basis the decrease in energy prices is beneficial to Dow Chemical, as it pays more for energy input than it depends on revenue from energy outputs.

Shares are ex-dividend this week and are attractively priced, although as long as energy is under pressure and as long as Liveris’ contention goes ignored, the shares will be under pressure. I currently own shares and Dow Chemical was for a long time a staple in my portfolio, both as a long term holding and as a frequent trading vehicle. At the current price I think a new position could be used as either a longer term holding or a serial trade.

eBay has been absent from my portfolio for a couple of months as I’ve grown too uneasy with it flirting near the $60 level to consider re-purchasing shares. Even the $57.50 level puts me at unease, but a recent downgrade calling into question the value of its PayPal unit in light of increasing competition, most recently from Facebook (NASDAQ:FB) was welcome and did bring shares closer to the upper level at which I had some comfort.

Shares recovered nicely from the initial reaction to the downgrade, but still trailed the S&P 500 by 5% over the past 7 trading sessions.

In the past I have very much liked owning eBay when it was mired in a tight range, yet still delivered appealing option premiums due to the occasional earnings related surprises. The story changed once activism entered the picture and shares started moving beyond the 2 year price range in the belief that PayPal had great value beyond what was already reflected in eBay’s price.

With each passing day, however, the luster of PayPal may be diminishing, even as it still remains an extremely valuable brand and service.

As it sits at the upper end of where I would consider taking a position, I would be very interested in either adding shares and selling calls or selling puts on any further drop in price. If selling puts this is one position that I wouldn’t mind taking assignment on in the event of an adverse price move, but would still look at the possibility of simply rolling over those puts to forward weeks.

AbbVie (NYSE:ABBV) is increasingly becoming an interesting company. While it certainly has some challenges as it’s chief revenue generating drug goes off patent next year, it has certainly been actively pursuing other lucrative areas, including management of Hepatitis C and cancer therapy, with its planned purchase of Pharmacyclics (NASDAQ:PCYC).

While shares have recovered somewhat from its recent low following an analyst downgrade, they are still nearly 8% lower YTD, but the company is certainly not standing still. In addition to upside potential, the shares offer attractive option premiums and an upcoming dividend that’s well ahead of that offered by its one time parent.

I’m not much of a video gamer even though I can get easily get sucked in by useless activities of a repetitive nature. My guess is that a combination of lack of skill, lack of attention span and allegiance to pinball have kept me indifferent to much of the last 25 years of home entertainment.

This week, however, GameStop (NYSE:GME) and Activision (NASDAQ:ATVI) have my attention.

I was actually happy to see my shares of GameStop get assigned this past week ahead of earnings this week. The timing was good as its generous dividend was captured without having to think about the risk of its upcoming earnings.

GameStop is a company that many have written off for years, pointing toward its paleolithic business model, the challenges of brick and mortar as well as streaming competition and the always large short interest looming over shares.

But somehow it continues to confound everyone.

With shares about 10% higher in March the option market is implying a price move of 7.8% upon earnings release. Meanwhile a 1% ROI may be able to be obtained even if shares fall almost 10% following the news. As with eBay, GameStop is a company that I wouldn’t mind owning if puts were at risk of being assigned. However, I’d be much more willing to sell puts if there was some price weakness heading into earnings. Otherwise, I would wait until after earnings and again consider the sale of puts in the event of a large price drop.

The last time I purchased Activision was after its own large price drop following earnings this past February when the company announced record earnings but provided weak forward guidance.

Shares, however, recovered quickly as Activision announced a large share buyback and increased dividend. Since then the shares have been trading in a fairly tight range and they are ex-dividend this week.

That dividend, however, is an annual one and on that basis is paltry. However, if shares end up being a short term holding the dividend yield can be very attractive, especially taken together with the option premiums available when selling calls.

Finally, LuLuLemon (NASDAQ:LULU) reports earnings this week and appears to be back in favor with shoppers as the company appears to be sufficiently distanced from its founder. Time may have been the best of all remedies to their particular problem as shares have shown great recovery.

The option market is implying an earnings related move of 8% and a 1% ROI may be able to be obtained when selling puts at a strike level 10.1% below Friday’s closing price. In the past, LuLuLemon has had some very significant earnings moves, with 15-20% moves not being out of the norm.

However, unlike a number of other stocks mentioned this week, LuLuLemon had nicely out-performed the S&P 500 over the past 7 trading sessions. For that reason I would be inclined to wait until after earnings are released and would consider either a sale of puts or a buy/write in the event of a large price drop.

Traditional Stocks: AbbVie, DuPont, eBay

Momentum Stocks: none

Double Dip Dividend: Activision (3/26), Dow Chemical (3/27)

Premiums Enhanced by Earnings: GameStop (3/26 PM), LuLuLemon (3/26 AM)

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

Weekend Update – November 23, 2014

About a month ago we got a much needed gift from Federal Reserve Governor James Bullard, who at the depths of a nearly 10% market decline gave some reason to believe that the Federal Reserve may not have been done with its tapering policy.

Since then, he’s back-peddled just a bit, appropriately, in light of the fact that tapering has now come to its planned end.

The market, however, never looked back and took full advantage of that market propelling gift.

Subsequently, a few weeks ago we got another little gift, this time from far away, as the Bank of Japan announced its own version of Quantitative Easing just in time to battle a 20 year period of economic stagnation.

Since then there haven’t been too many others coming to our shores bearing market moving gifts, as for now, it appears as if our own Federal Reserve won’t be acting as a primary catalyst for the stock market’s expansion. Once you get a taste for gifts it can be hard to go on without them continuing to stream in on a regular basis.

What Bullard and the Bank of Japan offered was probably what was in mind when the concept of “a little help from my friends” found its way to a sheet of music.

But what has anyone done for us lately?

This week was one of an almost comatose nature where not even an FOMC Statement release could jar the market. Having already matched a 45 year record of 5 consecutive days without a greater than 0.1% move, it seemed as if we were poised for some kind of an over the top reaction, but none was to be found.

That is, until our friends from China and the European Union decided to show their friendship and gave indications that central bank money was not a problem and would be there to support lagging economies, although the trickle down benefit of supporting equity markets seems like a welcome idea on this side of a couple of oceans.

The Bank of China’s announcement of a reduction in interest rates came as quite a surprise and at some point will get cynics wondering what is really going on in China that might require that kind of a boost from the central bank.

But that’s next week’s problem.

For today, that was a wonderful gift from the country that invented the term “capitalist roader,” perhaps as a sign of affection for what the United States represented. Amazingly, the manipulation of interest rates has seemingly replaced re-education as a means of effecting change.

While economic data from China has long been suspect, what should really be suspect is when Mario Draghi, President of the European Central Bank starts making comments about the lengths to which the ECB will go in order to achieve its mandate.

He has had a great record of hyperbole and has had an equally great ability for being able to move markets on the basis of what was consistently interpreted as a pledge to introduce a form of Quantitative Easing.

He has also been great at not following through with the unbridled support that he has consistently offered.

Was he being serious this time around? After a number of false starts and promises Draghi should have given some overt sign that this time was going to be different. I know that I can trust a man dressed for casual Friday more than I do one in a beautifully tailored Armani suit, so that could have been a good place to begin demonstrating how this time will be different.

For the U.S. stock market, it probably doesn’t really matter, as long as we can keep coming up with gifts from our other friends on a very regular basis. If not the EU, perhaps Russia will be next to grease our market climb through its central banking policies.

After that it gets a little fuzzy, but that’s a problem for 2015.

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

The most recent earnings season has had mixed news for retailers. The upper end continues to do well and there are signs of life in the middle range as well, however specialty retailers continue to struggle.

The Gap (NYSE:GPS) is one of those struggling as it awaits its new CEO after having released earnings this past week. However, in the past 2 years the Gap has been very much of a yo-yo, as it alternates regularly between disappointing sales news and optimistic forecasts. It does so monthly, so those ups and downs come more often than for many other retailers that have abandoned the practice of reporting monthly same store sales.

After this most recent decline, having just recently recovered from the loss encountered upon the announcement of the departure of its current CEO, along with some weak monthly sales reports, it looks as if is ready for yet another cycle of ups and downs. Because of its continuing to offer monthly reports, the Gap offers enhanced option premiums on a monthly basis, as well, in addition to respectable premiums the remainder of the time.

Companies that are part of the DJIA don’t usually offering a very compelling reason to try and capture an upcoming dividend along with the concurrent sale of a call option. Most often the option is appropriately priced and there is very little opportunity to try to exploit some inefficiency in that pricing, particularly when using an in the money strike.

This week, however, there may be some opportunity in both Coca-Cola (NYSE:KO) and McDonald’s (NYSE:MCD), which appropriately enough, tend to already go together.

While McDonald’s is recovering a bit from a recent share drop after some news of activist involvement in the company, it may finally make the run for the $100 level and stay there for more than just a couple of months. It’s dividend is attractive and as long as there is continuing activist interest its option premiums may continue to also be attractive, even in weeks when the dividend is offered.

Coca-Cola, on the other hand, is trading just slightly below its one year high, which isn’t generally a place that I like to enter a position. That however, can be said for many stocks as the market continually makes its own new highs.

With Warren Buffett lending his support, it’s not terribly easy for any activist activity to try and move this behemoth, which along with McDonald’s may be on the wrong side of food trends. Still those businesses are not going to unravel from one minute to the next. With a short term time frame in mind, Coca-Cola, even at these levels may offer a respectable award for the risk, particularly with the dividend in mind this week.

While Baker Hughes (NYSE:BHI) doesn’t go ex-dividend this week, it has quite a bit in common with Lorillard (NYSE:LO), which does.

Both are subjects of takeover bids and both are trading substantially lower than the current value of those bids, which are both comprised of cash and stock offers. It’s a little difficult to fully understand the relatively large gaps between their closing prices and the offer values, although regulatory and anti-trust obstacles may be playing roles.

Reportedly the Reynolds American (NYSE:RAI) bid for Lorillard is progressing and is expected to be completed sometime in the first half of 2015. Meanwhile, Halliburton (NYSE:HAL) has essentially said “tell us what assets to sell and we’ll do it” to the Department of Justice. Unfortunately, as a current Halliburton shareholder, it also has a large anti-trust termination fee as part of the proposed deal.

As a result of the activity and uncertainty revolving around the proposed buy-out the option premiums in Baker Hughes are higher than they have been in many years, reflecting also some of the risk that a deal will not be completed. However, as with the businesses at Coca-Cola and McDonald’s, that doesn’t appear to be likely in the very near time frame, as there will likely be considerable time before the Department of Justice gets involved in a meaningful and overt fashion.

Lorillard, on the other hand, has not had any enhancements of its option premiums as a result of the planned buy-out by Reynolds American. That would indicate a degree of certainty that the deal will be completed, yet there is still a considerable gap between its current price and the value implied in the offer.

My shares of Lorillard were assigned this week, despite about three days attempting to roll the shares over in order to secure the very generous dividend, which is expected to continue after the takeover. The inability to rollover the shares is further reflection of the frustrations created by the extremely low volatility and larger than normal spreads between bid and ask prices, as option volume continues to be very light.

With still about a $5 gap between those prices, Lorillard has upside potential, but also carries the risk of unexpected regulatory action. If purchasing shares of Lorillard to capture the dividend and I likely try to use near or in the money options, in an attempt to serially collect small weekly premiums, while waiting for something definitive.

Lexmark (NYSE:LXK) also goes ex-dividend this week. The last time I purchased shares was on November 25, 2013, so it seems like it may be a good way to celebrate that anniversary
. Perhaps not to coincidentally, the last purchase was also dividend related.

Lexmark, once the printer division for International Business Machines (NYSE:IBM), took a page out of IBM’s strategy and completely re-invented itself. In a realization that printers were nothing more than a commodity, it has become a service and solutions oriented provider and its stock price hasn’t regretted that decision.

It does trade with some volatility, though, and it offers a good option premium in reflection of that opportunity. While earnings are still two months away, it frequently has large earnings related moves that can be managed through the use of monthly option contracts, sometimes one cycle beyond the earnings date.

If looking for volatility, you may not need to look any further than Market Vectors Gold Miners ETF (NYSEARCA:GDX). While gold has been on an essentially uni-directional downward path for much of the past 6 months and it has been difficult to find any credible proponents of its ownership, it appears as if there may be a battle brewing for where it is headed next. That battle creates significantly improved option premiums, which had been in the doldrums for much of the past 6 months.

As with the underlying metal, the miners can have significant volatility and risk and should be considered for use only as part of the speculative portion of a portfolio and in proportion to the risk it may entail.

As with some fortunate companies in the bio-technology group, sometimes speculative ventures lead to tangible products. That is certainly the case for Gilead Sciences (NASDAQ:GILD).

After a brief uproar about the yearly cost of treatment with its extremely effective Hepatitis C drug, Sovaldi, it has rebounded with ease. Congressional hearings that sought to get some spotlight for protecting the public’s interests resulted in a sharp and quick decline, but the reality has been that the costs of treatment pale in comparison to the costs of traditional treatment. Subsequently, Gilead keeps refining the protocols and adding to the profit margins, while achieving better patient outcomes for an incredibly prevalent chronic disease.

As expected, because of the continuing concerns about price and the manner in which Gilead’s price increase has been so closely associated with its Hepatitis C efforts, it is at risk for being overly reliant on a single drug or class of drugs., However, as with many suggested trades, the outlook tends to be very short term and hopefully avoids some of the risks associated with longer term cycles of ownership.

GameStop (NYSE:GME) did what it so often does after earnings. It made a large move, this time sharply lower this past Friday. With each earnings cycle and frequently in-between, questions arise regarding the business model and how GameStop can continue to survive in the current environment. That question has been asked for about a decade and GameStop has been one of the most heavily shorted stocks throughout that time.

GameStop tends to do well in the final month of the year, although it may simply be carried along for the ride, as the broad market tends to perform well at that time. Following its sharp decline, a reasonable way to consider participation would be through the sale of out of the money puts. If taking that route, this is a stock that I wouldn’t be adverse to owning if faced with possibl
e assignment, although there is usually sufficient activity and volume to be able to roll over those puts in an attempt to avoid assignment and wait out a bounce higher in shares, while continuing to collect premiums.

Finally, this is yet another week in which to consider the sale of Twitter (NYSE:TWTR) put contracts. While it wasn’t really in the news very much this week, other than announcing some less than spectacular enhancements to its messaging options, it has been developing some support in the $39 area and offers an excellent premium in recognition of the risk involved.

The risk is the unwanted assignment and then ownership of its shares. However, what makes Twitter an appealing put option sale trade is that in the event of the prospects of assignment, it may be relatively easy to rollover to a forward week and collect additional premium without taking ownership of shares.

At a time when for many stocks the bid and ask spreads are widening and volume is shrinking, Twitter isn’t really suffering those fates, which makes the possibility of avoiding assignment higher.

For the past 3 weeks I have been rolling over Twitter puts even when not facing assignment, occasionally adjusting the strike prices in an effort to achieve an additional 1% weekly ROI on the position. Doing so may be tempting fate, but in Twitter’s brief history as a publicly traded company it has shown the ability to both come well off its highs as well as to bounce well beyond its lows. All that’s necessary is the ability to put elation or frustration into suspended animation and play the numbers, without regard to the rumors and dysfunction that may be swirling.

Traditional Stocks: The Gap

Momentum: Baker Hughes, GameStop, Gilead, Market Vectors Gold Miners ETF, Twitter

Double Dip Dividend: Coca-Cola (11/26), Lexmark (11/26), Lorillard (11/26), McDonald’s (11/26)

Premiums Enhanced by Earnings: none

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

Weekend Update – November 16, 2014

The past week was one of the quietest ones that could have been imagined.

The biggest stories of the week were the broken scaffolding that left two window washers dangling on the edge of the new “One World Trade Center” and the successful landing of Rosetta on a faraway comet after a 10 year mission.

With the exception of a late in the week rumor of a buyout of one oilfield services company by another, there really was nothing to propel markets as it was an extraordinarily quiet week on the economic news front, only slightly punctuated by a relatively obscure statistic that suddenly may be an important one in the coming months.

Years ago the single most important economic report came on a weekly basis. If anyone remembers all the way back to the 1980s you may recall how everyone waited for Thursdays and the release of the “M2 Money Supply” statistic.

If you do remember that you may also remember the inflation in the 1980s and can understand why M2 was watched so closely. Inflation was “Enemy #1” and the M2 Supply was linked to that evil. At one time M2 was used by the Federal Reserve to steer the economy in attempting to avoid a renewed bout of inflation.

You don’t hear much talk about M2 anymore as it was replaced by a more direct reliance on interest rates, especially the “Fed Funds Rate.” We still care about interest rates, but sometimes a little too much. Right now we seem overly concerned about when the Federal Reserve will begin to finally increase interest rates forgetting how that which helps to bring about inflation is exactly what we’ve been pining for a sign of the economy finally getting some footing.

This week we finally heard about something that wasn’t really new but got lots of comments and focus. Just a few months ago Federal Reserve Chairman Janet Yellen suggested that we should start paying more attention to the “quit rate” that was included in the “Job Openings and Labor Turnover Summary” also known as the “JOLT” Summary.

That acronym may be very unintentionally appropriate, as sometimes a jolt is exactly what’s needed to get things back into gear.

While many fight over whether the monthly Employment Situation Report should be looked at through the lens of the “U-6” measure of employment, Yellen is suggesting that the decision of people to quit their jobs in the belief that they can now land another, presumably better paying job, is telling of an economy that is heading in the right path and that will introduce some wage inflation.

That’s the kind of jolt this economy has needed. Not just more jobs, but better paying jobs that allow consumers to begin consuming again. Instead of fearing inflation, there should be some realization that a degree of inflation is exactly what this economy has needed for a long time.

One of my sons will likely be included in the next “JOLT” Summary, as he quit a job in which he was more of a low priced commodity and started on a new and much better paying job. He also bought a new car that week.

See how it works? It’s all about the discretionary spending. That’s what really fuels everything, as part of a virtuous cycle of jobs and consumerism.

Given the mixed results reported by some major retailers this week there definitely needs to be some enhancements to the top line and the only thing that can bring that about is an energized consumer jolted back to life.

For anyone that has been either on the receiving end or delivery end of paddles that are meant to jolt you back to life you know just how important that kick start is, but you also know that too much of a good thing brings its own problems.

Having been witness to the late 1970s and early 1980s there is certainly a degree of hesitance when inflation enters into the equation, but somewhere there may be a person in a position to steer the economy who understands that the extremes of the continuum aren’t the only possible outcomes.

Janet Yellen gives all indications of being the person who can jolt and withdraw jolt as signs of economic life warrant.

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

Another company bound to benefit from any improvement in employment, especially the kind that results in increased ability to engage in discretionary spending is Fastenal (FAST). This is a company that I’ve come to look at as a reflection of the real economy and while it has traded in a very narrow range it has been an excellent covered call trade.

It simply sells those things that are measures of economic development and expansion to both other business, middlemen and do it yourself kind of people. What they sell reflects a wide and varied kind of activity. They sometimes have q habit of providing revised guidance a few weeks before earnings and those occasional surprises help to create a reasonable option premium in advance of earnings, in addition to the enhancement that may come with earnings.

Dow Chemical (DOW) had a few false starts this week, jumping significantly higher and then giving back much of the gains on successive days. Those moves came before and after the announcements of additional share buybacks and an increased dividend. Shares closed up nicely on Friday continuing the hesitant optimism of earlier in the week, after having fallen from its highs of the day, only to rally back in an otherwise mediocre tape.

Add into the mix the presence of an activist investor and a long tenured CEO that is as tough as he can be charming and you have the makings of a company that will continue seeing pressures from both sides in support of shares, even though that may be a by-product of a more personal kind of battle. However, as a shareholder, you don’t necessarily care how you get to your objective, as long as you get there. Having some entertainment accompany the journey can just be an added bonus.

Joy Global (JOY) is another of these companies that trades with quite a bit volatility and is highly levered to activity in China, as well as to the veracity of reports from China. None of those are particularly endearing qualities, but Joy Global has been a company that routinely bounces back from disappointment over prospects of slowdowns in Chinese construction and infrastructure activity. It will report earnings in just a few weeks and will also be ex-dividend prior to that, so there are some events that have to be considered if entering into a new position, particularly if hoping for a quick exit.

While the majority of the systemically important companies have already reported earnings, there are quite a few of the more highly volatile companies reporting earnings this week. Among those that have caught my attention for this week are Best Buy (BBY), GameStop (GME), Green Mountain Keurig (GMCR) and salesforce.com (CRM).

Rather than considering any of them on the basis of their fundamental businesses, strengths or challenges awaiting them, I see them as potential opportunities based only on their recent price behaviors.

One thing that they all have in common is that they’ve all had recent runs higher in price. Another thing that they have in common, befitting the level of risk associated with their upcoming earnings is very high option premiums.

In order to achieve a 1% ROI on the sale of put contracts Best Buy, GameStop, Green Mountain Keurig and salesforce.com could still fall by approximately 9.2%, 21.3%, 10.5%, and 7%, respectively without assignments of puts sold. Meanwhile, their respective implied volatilities are 7.5%, 12%, 8.8% and 6.2%.

However, another thing that they share in common, at least from my perspective is that due to their recent runs higher, they may be prone to even harder falls than those implied moves might indicate. For that reason, I’m more inclined to consider the sale of puts after earnings for any of those companies that may in fact fall hard upon their releases, especially for salesforce.com, which offers the least amount of cushion between the implied move and the strike at which the ROI objective is attained.

On the other hand, GameStop offers the greatest cushion, so may be one to consider the sale of put options prior to earnings. As always, the sale of puts may require some additional attention, especially if hoping to avoid assignment if share price goes below the strike level selected.

Finally, it may be yet another week to think about Twitter (TWTR). Whether using the service or not, there’s no denying that it is a company whose stock is in search of direction, very much as many believe its company is in need of direction.

While no one has been criticizing the company on the basis of its earnings there is certainly lots of confusion about what Twitter plans to be and how it will get there, especially if it can’t decide on how to measure its activities and relate those to revenues.

This past week put the Twitter story into focus. Shares soared at its first analysts day meeting, up about 10% until Standard and Poor’s delivered an unsolicited credit report on the company, placing it at a “junk” level designation.

Granted, that S&P, by virtue of having performed an unsolicited analysis didn’t have access to the same company records as it ordinarily does when assessing a company’s credit worthiness, but the market immediately reversed course and sent shares sharply lower.

As was the case last week, I already had sold Twitter puts. I rolled those over on Thursday as Twitter was falling sharply and mat sell even more puts this week, particularly if there is some opening weakness to begin the week.

For anyone following this trade, it is one that may see lots of ups and downs and may require more maintenance, particularly in deciding whether to roil over puts to a forward week or take assignment in the event of adverse movement, but it can be a serially satisfying trade. Friday’s bounce again higher, perhaps after the realization that the S&P rating may have been based on incomplete information, may simply be one of many bounces ahead.

Traditional Stocks: Dow Chemical, Fastenal

Momentum: Joy Global, Twitter

Double Dip Dividend: none

Premiums Enhanced by Earnings: Best Buy (11/20 AM), GameStop (11/20 AM), Green Mountain Keurig (11/19 PM), salesforce.com (11/19 PM)

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

Weekend Update – August 17, 2014

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.