Weekend Update – August 14, 2016

When the news came that Thursday’s close brought concurrent record closing highs in the three major stock indexes for the first time since 1999, it seemed pretty clear what the theme of the week’s article should be.

But as I thought about the idea of partying like it was 1999, what became clear to me was I had no idea of why anyone was in a partying kind of mood on Thursday as those records finally fell.

Ostensibly, the market was helped out by the 16% or so climbs experienced by the first of the major national retailers to report their most recent quarterly earnings.

Both Macy’s (M) and Kohls (KSS) surged higher, but there really wasn’t a shred of truly good news.

At least not the kind of news that would make anyone believe that a consumer led economy was beginning to finally wake up.

The market seemed to like the news that Macy’s was going to close 100 of its stores, while overlooking the 3.9% revenue decline in the comparable quarter of 2015.

In the case of Kohls the market completely ignored lowered full year guidance and focused on a better than expected quarter, also overlooking a 2% decline in comparable quarter revenue.

For those looking to some good retail news as validating the belief that the FOMC would have some basis to institute an interest rate increase in 2016, there should have been some disappointment.

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Weekend Update – July 31, 2016

Let me get this straight.

The people sequestered in their nearly meeting for 2 days in Washington and who only have to consider monetary policy in the context of a dual mandate are the smartest guys in the room?

We often hear the phrase “the smartest guys in the room.”

Sometimes it’s meant as a compliment and sometimes there may be a bit of sarcasm attached to its use.

I don’t know if anyone can sincerely have any doubt about the quality of the intellect around the table at which members of the FOMC convene to make and implement policy.

While there may be some subjective baggage that each carries to the table, the frequent reference to its decisions being “data drive” would have you believe that the best and brightest minds would be objectively assessing the stream of data and projecting their meaning in concert with one another.

One of the hallmarks of being among the smartest in the room is that you can see, or at least are expected to see what the future is more likely to hold than can the person in the next room. After all, whether you’re the smartest in the room and happen to be at Goldman Sachs (GS) or at the Federal Reserve, no one is paying you to predict the past.

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Weekend Update – July 3, 2016

We often have an odd way of accepting someone’s decision to change their mind.

A change of mind is frequently thought to be a sign of a poorly conceived conviction or a poorly conceived initial position.

Few politicians change their minds because they know that they will be assailed for weakness or for having caved in, as opposed to having given careful and objective thought to a complex topic.

Of course, then there’s also the issue of a politician changing their mind simply for political expediency or political advantage.

That kind of distasteful behavior, although perhaps pragmatic, just stokes our cynicism.

We sometimes get upset at a child’s frequent changes of mind and want to instill some consistency that ultimately stifles ongoing thought and assessment.

At the same time, as parents, we are often faced with alternating opinions as to whether we need to be consistent in application and formulation of the rules we set or whether there should be some ability to make the rules a living entity that is responsive to events and circumstances.

When I was a child, I attended a “Yeshiva,” which is a Jewish version of a parochial school. We were taught to abide by Biblical laws, include the law regarding Kosher foods.

One day, when I was about 10 years old, I found a package of ham in our refrigerator and confronted my mother about the blatant violation of a sacred rule.

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Weekend Update – June 5, 2016

While so many people are still confused over the “Transgender Bathroom” issue, the real confusion came from this week’s Employment Situation Report.

With the odds of an interest rate hike by the FOMC’s June meeting seemingly increasing every day, you would really have to believe that the FOMC knew what was going to be in the economic news cards.

The increasing hawkish talk all seemed to be preparing us for a rate hike in just 2 weeks. Judging by the previous week’s market performance you would certainly have been of the belief that traders were finally at personal peace with the certainty of that increase.

The concept of being at personal peace is confusing to some.

I’m personally confused as to how it could have taken so long to see the obvious, unless we’re talking about stocks, interest rates and investor’s reactions.

What I find ironic is that the proposal for all inclusive bathrooms is really age old, at least at the NYSE, when there was a recent time that there was only a need for a single sex bathroom, anyway.

Just like many of us know, what a great degree of certainty, which camp we belong to when nature beckons, the lines seemed to be increasingly drawn with regard to interest rates.

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Weekend Update – March 6, 2016

Depending upon what kind of outlook you have in life, the word “limbo” can conjure up two very different pictures.

For some it can represent a theologically defined place of temporary internment for those sinners for whom redemption was still possible. 

In simple terms it may be thought of as a place between the punishing heat and torment of hell below and the divineness and comfort of heaven above.

Others may just see an image reminding them of a fun filled Caribbean night watching a limber individual dancing underneath and maybe dangerously close to a flaming bar that just keeps getting set lower and lower.

Both definitions of “limbo” require some significant balancing to get it just right.

For example, you don’t get entrance into the theologically defined “Limbo” if the preponderance of your sins are so grievous that you can’t find yourself having died in “the friendship of God.” Instead of hanging around and waiting for redemption, you get a one way ticket straight to the bottom floor.

It may take a certain balance of the quantity and quality of both the good and the bad acts that one has committed during their mortal period to determine whether they can ever have a chance to move forward and upward to approach the pearly gates of heaven.

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Weekend Update – January 31, 2016

 

 Whether you’re an addict of some sort, an avid collector or someone who seeks thrills, most recognize that it begins to take more and more to get the same exhilarating jolt.

At some point the stimulation you used to crave starts to become less and less efficient at delivering the thrill.

And then it’s gone.

Sometimes you find yourself pining for what used to be simpler times, when excess wasn’t staring you in the face and you still knew how to enjoy a good thing.

We may have forgotten how to do that.

It’s a sad day when we can no longer derive pleasure from excess.

It seems that we’ve forgotten how to enjoy the idea of an expanding and growing economy, historically low interest rates, low unemployment and low prices.

How else can you explain the way the market has behaved for the past 6 months?

Yet something stimulated the stock market this past Thursday and Friday, just as had been the case the previous Thursday and Friday.

For most of 2016 and for a good part of 2015, the stimulus had been the price of oil. but more than often the case was that the price of oil didn’t stimulate the market, but rather sucked the life out of it.

We should have all been celebrating the wonders of cheap oil and the inability of OPEC to function as an evil cartel, but as the excess oil has just kept piling higher and higher the thrill of declining end user prices has vanished.

Good stimulus or bad stimulus, oil has taken center stage, although every now and then the debacles in China diverted our attention, as well.

Every now and then, as has especially been occurring in the past 2 weeks, there have been instances of oil coming to life and paradoxically re-animating the stock market. It was a 20% jump in the price of oil that fueled the late week rally in the final week of the January 2016 option cycle. The oil price rise has no basis in the usual supply and demand equation and given the recent dynamic among suppliers is only likely to lead to even more production.

It used to be, that unless the economy was clearly heading for a slowdown, a decreasing price of oil was seen as a boost for most everyone other than the oil companies themselves. But now, no one seems to be benefiting.

As the price of oil was going lower and lower through 2015, what should have been a good stimulus was otherwise.

However, what last Thursday and Friday may have marked was a pivot away from oil as the driver of the market, just as we had pivoted away from China’s excesses and then its economic and market woes.

At some point there has to be a realization that increasing oil prices isn’t a good thing and that may leave us with the worst of all worlds. A sliding market with oil prices sliding and then a sliding market with oil prices rising.

It seems like an eternity ago that the market was being handcuffed over worries that the FOMC was going to increase interest rates and another eternity ago that the market seemed to finally be exercising some rational judgment by embracing the rate rise, if only for a few days, just 2 months ago.

This week saw a return to those interest rate fears as the FOMC, despite a paucity of data to suggest inflation was at hand, didn’t do much to dispel the idea that “one and done” wasn’t their plan. The market didn’t like that and saw the prospects of an interest rate increase as a bad thing, even if reflecting improving economic conditions.

But more importantly, what this week also saw was the market returning to what had driven it for a few years and something that it never seemed to tire of celebrating.

That was bad news.

This week brought no good news, at all and the market liked that.

Negative interest rates in Japan? That has to be good, right?

A sluggish GDP, oil prices rising and unimpressive corporate earnings should have sent the market into a further downward spiral, but instead the idea that the economy wasn’t expanding was greeted as good news.

Almost as if the Federal Reserve still had some unspent ammunition to throw at the economy that would also serve to bolster stocks, as had been the case for nearly 6 years.

It’s not really clear how much more stimulus the Federal Reserve can provide and if investors are counting on a new and better high, they may in for a big disappointment.

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

I’m a little surprised that my brokerage firm didn’t call me last week, to see if I was still alive,  because it was the second consecutive week of not having made a single trade.

Despite what seem to be bargain prices, I haven’t been able to get very excited about very many of the ones that have seemed alluring. Although this coming Monday may be the day to mark a real and meaningful bounce higher, the lesson of the past 2 months has been that any move higher has simply been an opportunity to get disappointed and wonder how you ever could have been so fooled.

I’m not overly keen on parting with any cash this week unless there some reason to believe that the back to back gains of last week are actually the start of something, even if that something is only stability and treading water.

Building a base is probably far more healthy than trying to quickly recover all that has been quickly lost.

With weakness still abounding I’m a little more interested in looking for dividends if putting cash to work.

This week, I’m considering purchases of Intel (INTC), MetLife (MET) and Pfizer (PFE), all ex-dividend this coming week.

With the latter two, however, there’s also that pesky issue of earnings, as MetLife reports earnings after the close of trading on its ex-dividend date and Pfizer reports earnings the day before its ex-dividend date.

MetLife has joined with the rest of the financial sector in having been left stunned by the path taken by interest rates in the past 2 months, as the 10 Year Treasury Note is now at its lowest rate in about 8 months.

It wasn’t supposed to be that way.

But if you believe that it can’t keep going that way, it’s best to ignore the same argument used in the cases of the price of
oil, coal and gold.

With MetLife near a 30 month low and going ex-dividend early in the week before its earnings are reported in the same day, there may be an opportunity to sell a deep in the money call and hope for early assignment, thereby losing the dividend, but also escaping the risk of earnings. In return, you may still be able to obtain a decent option premium for just a day or two of exposure.

The story of Pfizer’s proposed inversion is off the front pages and its stock price no longer reflects any ebullience. It reports earnings the morning of the day before going ex-dividend. That gives plenty of time to consider establishing a position in the event that shares either go lower or have relatively little move higher.

The option premium, however, is not very high and with the dividend considered the option market is expecting a fairly small move, perhaps in the 3-4% range. Because of that I might consider taking on the earnings risk and establishing a position in advance of earnings, perhaps utilizing an at the money strike price.

In that case, if assigned early, there is still a decent 2 day return. If not assigned early, then there is the dividend to help cushion the blow and possibly the opportunity to either be assigned as the week comes to its end or to rollover the position, if a price decline isn’t unduly large.

Intel had a nice gain on Friday and actually has a nice at the money premium. That premium is somewhat higher than usual, particularly during an ex-dividend week. As with Pfizer, even if assigned early, the return for a very short holding could be acceptable for some, particularly as earnings are not in the picture any longer.

As with a number of other positions considered this week, the liquidity of the options positions should be  sufficient to allow some management in the event rollovers are necessary.

2015 has been nothing but bad news for American Express (AXP) and its divorce from Costco (COST) in now just a bit more than a month away.

The bad news for American Express shareholders continued last week after reporting more disappointing earnings the prior week. It continued lower even as its credit card rivals overcame some weakness with their own earnings reports during the week.

At this point it’s very hard to imagine any company specific news for American Express that hasn’t already been factored into its 3 1/2 year lows.

The weekly option premium reflects continued uncertainty, but I think that this is a good place to establish a position, either through a buy/write or the sale of puts. Since the next ex-dividend date is more than 2 months away, I might favor the sale of puts, however.

Yahoo (YHOO) reports earnings this week and as important as the numbers are, there has probably been no company over the past 2 years where far more concern has focused on just what it is that Yahoo is and just what Yahoo will become.

Whatever honeymoon period its CEO had upon her arrival, it has been long gone and there is little evidence of any coherent vision.

In the 16 months since spinning off a portion of its most valuable asset, Ali Baba (BABA), it has been nothing more than a tracking stock of the latter. Ali Baba has gone 28.6% lower during that period and Yahoo 28% lower, with their charts moving in tandem every step of the way.

With Ali Baba’s earnings now out of the way and not overly likely to weigh on shares any further, the options market is implying a price move of 7.6%.

While I usually like to look for opportunities where I could possibly receive a 1% premium for the sale of puts at a strike price that’s outside of the lower boundary dictated by the option market, I very much like the premium at the at the money put strike and will be considering that sale.

The at the money weekly put sale is offering about a 4% premium. With a reasonably liquid option market, I’m not overly concerned about difficulty in being able to rollover the short puts in the event of an adverse move and might possibly consider doing so with a longer term horizon, if necessary.

Finally, there was a time that it looked as if consumers just couldn’t get enough of Michael Kors (KORS).

Nearly 2 years ago the stock hit its peak, while many were writing the epitaph of its competitor Coach (COH), at least Coach’s 23% decline in that time isn’t the 60% that Kors has plunged.

I haven’t had a position in Kors for nearly 3 years, but do still have an open position in Coach, which for years had been a favorite “go to” kind of stock with a nice dividend and a nice option premium.

Unfortunately, Coach, which had long been prone to sharp moves when earnings were announced, had lost its ability to recover reasonably quickly when the sharp moves were lower.

While Coach is one of those rare gainers in 2016, nearly 13% higher, Kors is flat on the year, although still far better than the S&P 500.

While I don’t believe that Coach has turned the tables on Kors and is now “eating their lunch” as was so frequently said when Kors was said to be responsible for Coach’s reversal of fortune, I think that there is plenty of consumer to go around for both.

Kors reports earnings this week and like COach, is prone to large earnings related moves.

With no dividend to factor into the equation, Kors may represent a good  opportunity for those willing to take some risk and consider the sale of out of the money puts.

WIth an implied move of 8.5% next week, it may be possible to get a 1.1% ROI even if shares fall by as much as 11.3% during the week.

A $4.50 move in either direction is very possible with Kors after having dropped nearly $60 over the past 2 years. However, if faced with the possibility of assignment of shares, particularly since there is no dividend, I would just look for any opportunity to continue rolling the short puts over and over.

If not wanting to take the take the risk of a potential large drop, some consideration can also be given to selling puts after earnings, in the event of a large drop in shares. If that does occur, the premiums should still be attractive enough to consider making the sale of puts after the event.

 

Traditional Stocks: American Express

Momentum Stocks:  none

Double-Dip Dividend: Intel (2/3 $0.26), MetLife (2/3 $0.38), Pfizer (2/3 $0.30)

Premiums Enhanced by Earnings: Michael Kors (2/2 AM), Yahoo (2/2 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.

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Weekend Update – January 3, 3016

The "What If" game is about as fruitless as it gets, but is also as much a part of human nature as just about anything else.

How else could I explain having played that game at a high school reunion?

That may explain the consistent popularity of that simple question as a genre on so many people’s must read lists as the New Year begins.

Historical events lead themselves so beautifully to the "What If" question because the cascading of events can be so far reaching, especially in an interconnected world.

Even before that interconnection became so established it didn’t take too much imagination to envision far reaching outcomes that would have been so wildly different around the world even a century or more later.

Imagine if the Union had decided to cede Fort Sumpter and simply allowed the South to go its merry way. Would an abridged United States have been any where near the force it has been for the past 100 years? What would that have meant for Europe, the Soviet Union, Israel and every other corner of the world?

Second guessing things can never change the past, but it may provide some clues for how to approach the future, if only the future could be as predictable as the past.

Looking back at 2015 there are lots of "what if" questions that could be asked as we digest the fact that it was the market’s worst performance since 2008.

In that year the S&P 500 was down about 37%, while in 2015 it was only down 0.7%. That gives some sense of what kind of a ride we’ve been on for the past 7 years, if the worst of those years was only 0.7% lower.

But most everyone knows that the 0.7% figure is fairly illusory.

For me the "what if" game starts with what if Amazon (AMZN), Alphabet (GOOG), Microsoft (MSFT) and a handful of others had only performed as well as the averages.

Of course, even that "what if" exercise would continue to perpetuate some of the skew seen in 2015, as the averages were only as high as they were due to the significant out-performance of a handful of key constituent components of the index. Imagining what if those large winners had only gone down 0.7% for the year would still result in an index that wouldn’t really reflect just how bad the underlying market was in 2015.

While some motivated individual could do those calculations for the S&P 500, which is a bit more complex, due to its market capitalization calculation, it’s a much easier exercise for the DJIA.

Just imagine multiplying the 10 points gained by Microsoft , the 30 pre-split points gained by Nike (NKE), the 17 points by UnitedHealth Group (UNH), the 26 points by McDonalds (MCD) or the 29 points by Home Depot (HD) and suddenly the DJIA which had been down 2.2% for 2015, would have been another 761 points lower or an additional 4.5% decline.

Add another 15 points from Boeing (BA) and another 10 from Disney (DIS) and we’re starting to inch closer and closer to what could have really been a year long correction.

Beyond those names the pickings were fairly slim from among the 30 comprising that index. The S&P 500 wasn’t much better and the NASDAQ 100, up for the year, was certainly able to boast only due to the performances of Amazon, Netflix (NFLX), Alphabet and Facebook (FB).

Now, also imagine what if historically high levels of corporate stock buybacks hadn’t artificially painted a better picture of per share earnings.

That’s not to say that the past year could have only been much worse, but it could also have been much better.

Of course you could also begin to imagine what if the market had actually accepted lower energy and commodity prices as a good thing?

What if investors had actually viewed the prospects of a gradual increase in interest rates as also being a good thing, as it would be reflective of an improving, yet non-frothy, economy?

And finally, for me at least, What if the FOMC hadn’t toyed with our fragile emotions and labile intellect all through the year?

Flat line years such as 2015 and 2011 don’t come very often, but when they do, most dispense with the "what if" questions and instead focus on past history which suggests a good year to follow.

But the "what if" game can also be prospective in nature, though in the coming year we should most likely ask similar questions, just with a slight variation.

What if energy prices move higher and sooner than expected?

What if the economy expands faster than we expected?

What if money is running dry to keep the buyback frenzy alive?

Or, what if corporate earnings actually reflect greater consumer participation?

You may as well simply ask what if rational thought were to return to markets?

But it’s probably best not to ask questions when you may not be prepared to hear the answer.

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

For those, myself included, who have been expecting some kind of a resurgence in energy prices and were disbelieving when some were calling for even further drops only to see those calls come true, it’s not really clear what the market’s reaction might be if that rebound did occur.

While the market frequently followed oil lower and then occasionally rebounded when oil did so, it’s hard to envision the market responding favorably in the face of sustained oil price stability or strength.

I’ve given up the idea that the resurgence would begin any day now and instead am more willing to put that misguided faith into the health of financial sector stocks.

Unless the FOMC is going to toy with us further or the economy isn’t going to show the kind of strength that warranted an interest rate increase or warrants future increases, financials should fare well going forward.

This week I’m considering MetLife (MET), Morgan Stanley and American Express (AXP), all well off from their 2015 highs.

MetLife, down 12% during 2015 is actually the best performer of that small group. As with Morgan Stanley, almost the entirety of the year’s loss has come in the latter half of the year when the S&P 500 was performing no worse than it had during the first 6 months of the year.

Both Morgan Stanley and MetLife have large enough option premiums to consider the sale of the nearest out of the money call contracts in an attempt to secure some share appreciation in exchange for a somewhat lo0wer option premium.

In both cases, I think the timing is good for trying to get the best of both worlds, although Morgan Stanley will be among the relatively early earnings reports in just a few weeks and still hasn’t recovered from its last quarter’s poorly received results, so it would help to be prepared to manage the position if still held going into earnings in 3 weeks.

By contrast, American Express reports on that same day, but all of 2015 was an abysmal one for the company once the world learned that its relationship with Costco (COST) was far more important than anyone had believed. The impending loss of Costco as a branded partner in the coming 3 months has weighed heavily on American Express, which is ex-dividend this week.

I would believe that most of that loss in share has already been discounted and that disappointments aren’t going to be too likely, particularly if the consumer is truly making something of a comeback.

There has actually been far less press given to retail results this past holiday season than for any that I can remember in the recent and not so recent past.

Most national retailers tend to pull rabbits out of their hats after preparing us for a disappointing holiday season, with the exception of Best Buy (BBY), which traditionally falls during the final week of the year on perpetually disappointing numbers.

Best Buy has already fallen significantly in th e past 3 months, but over the years it has generally been fairly predictable in its ability to bounce back after sharp declines, whether precipitous or death by a thousand cuts.

To my untrained eye it appears that Best Buy is building some support at the $30 level and doesn’t report full earnings for another 2 months. Perhaps it’s its reputation preceding it at this time of the year, but Best Buy’s current option premium is larger than is generally found and I might consider purchasing shares and selling out of the money calls in the anticipation of some price appreciation.

Under Armour (UA) is in a strange place, as it is currently in one of its most sustained downward trends in at least 5 years.

While Nike, its arch competitor, had a stellar year in 2015, up until a fateful downtrend that began in early October, Under Armour was significantly out-performing Nike, even while the latter was some 35% above the S&P 500’s performance.

That same untrained eye sees some leveling off in the past few weeks and despite still having a fairly low beta reflecting a longer period of observation than the past 2 months, the option premium is continuing to reflect uncertainty.

With perhaps some possibility that cold weather may finally be coming to areas where it belongs this time of the year, it may not be too late for Under Armour to play a game of catch up, which is just about the only athletic pursuit that I still consider.

Finally, Pfizer (PFE) has been somewhat mired since announcing a planned merger, buyout, inversion or whatever you like to have it considered. The initially buoyed price has fallen back, but as with Dow Chemical (DOW) which has also fallen back after a similar merger announcement move higher, it has returned to the pre-announcement level.

I view that as indicating that there’s limited downside in the event of some bad news related to the proposed merger, but as with Dow Chemical, Best Buy and Under Armour, the near term option premium continues to reflect perceived near term risk.

Whatever Pfizer;’s merger related risk may be, I don’t believe it will be a near term risk. From the perspective of a call option seller that kind of perception in the face of no tangible news can be a great gift that keeps giving.

Traditional Stocks: MetLife. Morgan Stanley, Pfizer

Momentum Stocks: Best Buy, Under Armour

Double-Dip Dividend: American Express (1/6 $0.29)

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.

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Weekend Update – November 1, 2015

The recently deceased Hall of Fame catcher, Yogi Berra, had many quotes attributed to him, some of which he admitted were uttered by him.

One of those allegedly genuine quotes had Yogi Berra giving directions to his home, ending with the words “when you get to the fork in the road, take it.”

People have likely written PhD dissertations on the many levels of meaning that could be contained in that expression in the belief that there was something more deep to it when it was originally uttered.

We’ll probably never know whether the original expression had an underlying depth to it or was simply an incomplete thought that took on a life of its own.

Nearly each month during the Janet Yellen reign as Chairman of the Federal Reserve we’ve been wondering what path the FOMC would take when faced with a potential decision.

Each month it seems that investors felt that they were being faced with a fork in the road and there was neither much in the way of data to decide which way to go, just as the FOMC was itself looking for the data that justifies taking action.

While that decision process hasn’t really taken on a life of its own, the various and inconsistent market responses to the decisions all resulting in a lack of action have taken on a life of their own.

Over much of Yellen’s tenure the market has rallied in the day or days leading up to the FOMC Statement release and I had been expecting the same this past week, until having seen that surge in the final days of the week prior.

Once that week ending surge took place it was hard to imagine that there would still be such unbridled enthusiasm prior to the release of the FOMC’s decision. It was just too much to believe that the market would risk even more on what could only be a roll of the dice.

Last week the market stood at the fork in the road on Monday and Tuesday and finally made a decision prior to the FOMC release, only to reverse that decision and then reverse it again.

I don’t think that’s what Yogi Berra had in mind.

With the FOMC’s non-decision now out of the way and in all likelihood no further decision until at least December, the market is now really standing at that fork in the road.

With retail earnings beginning the week after next we could begin seeing the first real clues of the long awaited increase in consumer spending that could be just the data that the FOMC has been craving to justify what it increasingly wants to do.

The real issue is what road will the market take if those retail earnings do show anything striking at all. Will the market take the “good news is bad news” road or the “good news is good news” path?

Trying to figure that out is probably about as fruitless as trying to understand what Yogi Berra really meant.

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

When it comes to stocks, I’m often at my happiest when I can go in and out of the same stocks on a serial basis.

While it may be more exciting to discover a new stock or two every week to trust with your money, when it comes to making a choice, I’d much rather take the boring path at the fork.

For those inclined to believe that Yogi Berra meant to tell his prospective guests that they shouldn’t worry when they got to the fork in the road, because both paths could lead to his home, I’m inclined to believe that the boring path will have fewer bumps in its road.

After 2 successive weeks of being in and out of Morgan Stanley (NYSE:MS) and Seagate Technology (NASDAQ:STX), I’m ready to do each or both again in the coming week.

Morgan Stanley, which was ex-dividend last week, has now recovered about half of what it lost when it reported earnings earlier in the month. Its decline this past Friday and hopefully a little more as the new week gets set to begin, would again make it an attractive stock to (“re”)-consider.

While volatility has been declining, Morgan Stanley’s premium still continues elevated, even though there’s little reason to believe that there will be any near term reason for downward price pressure. In fact, a somewhat hawkish FOMC statement might give reason to suspect that the financial sector’s prospects may be brighter in the coming quarter than they were in this quarter past.

Seagate Technology, w
hich reported earnings last week is ex-dividend this week and I would like to take advantage of either the very generous dividend, the call option premium or both.

For the past 2 weeks I had sold puts, but was prepared to take assignment rather than rolling over the short put option position in the event of an adverse price movement.

That was due to the upcoming ex-dividend date and an unwillingness as a put seller to receive a lower premium than would ordinarily be the case if no dividend was in the equation. Just as call buyers often pay a greater premium than they should when a stock is going ex-dividend, put sellers frequently receive a lower premium when selling in advance of an ex-dividend date.

I would rather be on the long end of a pricing inefficiency.

But as Seagate Technology does go ex-dividend and while its volatility remains elevated there are a number of potential combinations, all of which could give satisfactory returns if Seagate spends another week trading in a defined range.

Based upon its Friday closing price a decision to sell a near the money $38 weekly contract, $37.50 or $37 contract can be made depending on the balance between return and certainty of assignment that one desires.

For me, the sweet spot is the $37.50 contract, which if assigned early could still offer a net 1.2% ROI for a 2 day holding period.

I would trade away the dividend for that kind of return. However, if the dividend is captured, there is still sufficient time left on a weekly contract for some recovery in price to either have the position assigned or perhaps have the option rolled over to add to the return.

MetLife (NYSE:MET) is ex-dividend this week and then reports earnings after the closing bell on that same day.

Like Morgan Stanley, it stands to benefit in the event that an interest rate increase comes sooner rather than later.

Since the decision to exercise early has to be made on the day prior to earnings being announced this may also be a situation in which a number of different strike prices may be considered for the sale of calls, depending on the certainty with which one wants to enter and exit the position, relative top what one considers an acceptable ROI for what could be as little as a 2 day position.

Since MetLife has moved about 5% higher in the past 2 weeks, I’d be much more interested in opening a position in advance of the ex-dividend date and subsequent earnings announcement if shares fell a bit more to open the week.

If you have a portfolio that’s heavy in energy positions, as I do, it’s hard to think about adding another energy position.

Even as I sit on a lot of British Petroleum (NYSE:BP) that is not hedged with calls written against those shares, I am considering adding more shares this week as British Petroleum will be ex-dividend.

Unlike Seagate Technology and perhaps even MetLife, the British Petroleum position is one that I would consider because I want to retain the dividend and would also hope to be in a position to participate in some upside potential in shares.

That latter hope is one that has been dashed many times over the past year if you’ve owned many energy positions, but there have certainly been times to add new positions over that same past year. If anything has been clear, though, is that the decision to add new energy positions shouldn’t have been with a buy and hold mentality as any gains have been regularly erased.

With much of its litigation and civil suit woes behind it, British Petroleum may once again be like any other energy company these days, except for the fact that it pays a 6.7% dividend.

If not too greedy over the selection of a strike price in the hopes of participating in any upside potential, it may be possible to accumulate some premiums and dividends, before someone in a position to change their mind, decides to do so regarding offering that 6.7% dividend.

Finally, if there’s any company that has reached a fork in the road, it’s Lexmark (NYSE:LXK).

A few years ago Lexmark re-invented itself, just as its one time parent, International Business Machines (NYSE:IBM), did some years earlier.

The days about being all about hardware are long gone for both, but now there’s reason to be circumspect about being all about services, as well, as Lexmark is considering strategic alternatives to its continued existence.

I have often liked owning shares of Lexmark following a sharp drop and in advance of its ex-dividend date. It
won’t be ex-dividend until early in the December 2015 cycle and there may be some question as to whether it can afford to continue that dividend.

However, in this case, there may be some advantage to dropping or even eliminating the dividend. It’s not too likely that Lexmark’s remaining investor base is there for the dividend nor would flee if the dividend was sacrificed, but that move to hold on to its cash could make Lexmark more appealing to a potential suitor.

With an eye toward Lexmark being re-invented yet again, I may consider the purchase of shares following this week’s downgrade to a “Strong Sell” and looking at a December 2015 contract with an out of the money strike price and with a hope of getting out of the position before the time for re-invention has passed.

In Lexmark’s case, waiting too long may be an issue of sticking a fork in it to see if its finally done.

Traditional Stocks: Morgan Stanley

Momentum Stocks: Lexmark

Double-Dip Dividend: British Petroleum (11/4 $0.60), MetLife (11/4 $0.38), Seagate Technology (11/4 $0.63)

Premiums Enhanced by Earnings: MetLife (11/4 PM)

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

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Copyright 2015 TheAcsMan

Weekend Update – September 27, 2015

Subscribers to Option to Profit received preliminary notification of this week’s stock selections on Friday, September 25th, 8:00 AM EDT and updated at 10:20 AM. The full article was distributed on Saturday, at 11:25 AM)

I doubt that Johnny Cash was thinking about that thin line that distinguishes a market in correction from one that is not.

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For him, walking the line” was probably a reference to maintaining the correct behavior so that he could ensure holding onto something of great personal value.

Sometimes that line is as clear as the difference between black and white and other times the difference can be fairly arbitrary.

Lately our markets have been walking a line, not necessarily borne out of a clear distinction between right and wrong, but rather dancing around the definition of exactly what constitutes a market correction, going in and out without much regard.

The back and forth dance has, to some degree, been in response to mixed messages coming from the FOMC that have left the impression of a divergence between words and actions.

Regardless, what is at stake can hold some real tangible value, despite a stock portfolio not being known for its ability to keep you warm at night. Indirectly, however, the more healthy that portfolio the less you have to think about cranking up the thermostat on those cold and lonely nights.

It had been a long, long time since being challenged by that arbitrary 10% definition, but ever since having crossed that line a month ago there’s been lots of indecision about which direction we were heading.

This week was another good example of that, just as the final day of the week was its own good example of the back and forth that has characterized markets.

Depending on your perspective our recent indecision about which side of the line we want to be on is either creating support for a launching pad higher or future resistance to that move higher.

When you think about the quote attributed to Jim Rogers, “I have never met a rich technician,” you can understand, regardless of how ludicrous that may be, just how true it may also be.

While flipping a coin may have predictable odds in the long term, another saying has some real merit when considering the difficulty in trying to interpret charts and chart patterns,

That is “the market can stay irrational far longer than you can stay liquid.” Just a few wrong bets in succession on the direction can have devastating effects.

The single positive from the past 10 days of trading, however, is that the market has started behaving in a rational manner. It finally demonstrated that it understood the true meaning of a potential interest rate hike and then it reacted as a sane person might when their rational expectation was dashed.

Part of the indecision that we’ve been displaying has to be related to what has seemed as a lot of muddled messages coming from the FOMC and from Federal Reserve Governors. One minute there are hawkish sentiments being expressed, yet it’s the doves that seem to be still holding court, leading onlookers to wonder whether the FOMC is capable of making the decision that many believe is increasingly overdue.

In a week where there was little economic news we were all focused on personalities, instead and still stewing over the previous week’s unexpected turn of events.

It was a week when Pope Francis took center stage, then Chinese President Xi trying to cozy up to American business leaders before his less welcoming White House meeting, and then there was finally John Boehner.

The news of John Boehner’s early departure may be the most significant of all news for the week as it probably reduces the chance of another government shutdown and associated headaches for all.

It also marked something rare in Washington politics; a promise kept.

That promise of strict term limits was included in the “Contract with America” and John Boehner was a member of that incoming freshman Congressional Class of 1995 running on that platform, who has now indicated that he will be keeping that promise after only 11 terms in office.

None of that mattered for markets, but what did matter was Janet Yellen’s comments after Thursday’s market close when she said that a rate hike was likely this year and that overseas events were not likely to influence US policy.

That was something that had a semblance of a definitive nature to it and was to the market’s liking, particularly as the coming week may supply new economic information to justify the interest rate hawks gaining control.

Friday’s revised GDP data indicating a 3.9% growth rate for the year is a start, as the coming week also bring Jobless Claims, the Employment Situation Report and lots of Federal Reserve officials making speeches, including more from Janet Yellen, who had been reclusive for a while prior to the September meeting and Vice Chair Stanley Fischer.

As a prelude to the next earnings season that begins in just 2 weeks, the stage could be set for an FOMC affirmation that the economy is growing sufficiently to begin thinking about inflation for the first time in a long time.

After being on the other side of the inflation line for a long time and seeing a lost generation in Japan, it will feel good to cross over even as old codgers still dread the notion.

Both sides of the line can be the right side, but not at the same time. Now is the time to get on the right side and let rising interest rates reflect a market poised to move higher, just as low interest rates subsidized the market for the past 6 years. However, as someone who likes to sell options and take advantage of this increased volatility, I welcome continued trading in large bursts of movement up and down, as long as that line is adhered to.

Since the mean can always be re-calculated based on where you want to start your observations, this reversion to the new mean, that just happens to be 10% below the peaks of the summer, can be a great neighborhood to dance around.

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

Last week I was a little busier than has been the usual case of late with regard to opening new positions. Following the sharp sell offs to end the previous week I had a reasonably good feeling about the upcoming week, but now feel fortunate to have emerged without any damage.

I don’t feel the same level of optimism as the new week is set to begin, but there really is no reason to have much conviction one way or another, although there appears to be a more hawkish tone in the air as Janet Yellen is attempting to give the impression that actions will be aligned with words.

With the good fortune of getting some assignments as the week came to its close and having some cash in hand, I would like to build on those cash reserves but still find lots of temptations that seek to separate me from the cash.

The temptations aren’t just the greatly diminished prices, but also the enhanced premiums that accompany the uncertainty that’s characterizing the market.

That uncertainty is still low by most standards other than for the past couple of years, but taking individual stocks that are either hovering around correction or even bear market declines and adding relatively high premiums, especially if a dividend is also involved, is a difficult combination to walk away from.

The stocks going ex-dividend in the upcoming week that may warrant some attention are EMC Corporation (EMC) and Cisco (CSCO).

I own shares of both and both have recently been disappointing, Cisco, after its most recent earnings report looked as if it was surely going to be assigned away from me, but as so many others got caught up in the sudden downdraft and has fallen 14% since earnings, without any particularly bad news. EMC for its part has dropped nearly 13% in that same time period.

As is also so frequently the case as option premiums are rising, those going ex-dividend may become even more attractive as an increasing portion of the share’s price drop due to the dividend gets subsidized by the option premium.

That is the case for both Cisco and EMC. In the case of EMC, when the ex-dividend is early in the week you could even be excused for writing an in the money call with the hope that the newly purchased shares get assigned, as you could still potentially derive a 1% ROI on such a trade, yet for only a single day of holding.

Cisco, which goes ex-dividend later in the week may be a situation where it is warranted to sell an expanded weekly option for the following week that is also in the money by greater than the amount of the dividend, again in an effort to prompt an early assignment.

Doing so trades off the dividend for additional premium and fewer days of holding so that the cash may potentially be recycled into other income generating positions.

On such position is Comcast (CMCSA) which is ex-dividend the following Monday and if assigned early would have to be done so at the conclusion of this week.

While the entire media landscape in undergoing rapid change and while Comcast has positioned itself as best as it can to withstand the quantum changes, a trade this week is nothing more than an attempt to exploit the shares for the income that it may be able to produce and isn’t a vote of confidence in its strategic initiatives and certainly not of its services.

The intention with Comcast is considering the sale of an in the money October 9 or October 16, 2015 call and as with Cisco or EMC, consider forgoing the dividend.

However, for any of those three dividend related trades, I believe that their prices alone are attractive enough and their option premiums enhanced enough, that even if not assigned early, they are in good position to be candidates for serial sale of call options or even repurchases, if assigned.

As long as considering a Comcast purchase, one of my favorites in the sector is Sinclair Broadcasting (SBGI). I currently own shares and most often consider initiating a new position as an ex-dividend date is approaching.

That won’t be for a while, however, the second criteria that I look at is where its price is relative to its historical trading range and it is currently below the average of my seven previous purchases in the past 16 months.

While little known, it is a major player in the ancient area of terrestrial television broadcasting and has significant family ownership. While owners of Cablevision (CVC) can argue the merits or liabilities of a closely held public company, the only real risk is that of a proposal to take the company private as a result of shares having sunk to ridiculously low levels.

I don’t see that on the horizon, although the old set of rabbit ears may be to blame for any fuzzy forecasting. Instead of relying on high technology and still being available the old fashioned way for free viewing, Sinclair Broadcasting has simply been amassing outlets all over the county and making money the old fashioned way.

As I had done with my current lot of shares, I sold some slightly longer term call options, as Sinclair offers only the monthly variety. Since it reports earnings very early in November and will likely go ex-dividend late that month, I would consider selling out of the money calls, perhaps using the December 2015 options in an effort to capture the dividend, the option premium and some capital gains on shares.

While religious and political luminaries were getting most of the attention this past week, it’s hard to overlook what has unfolded before our eyes at Volkswagen (VLKAY). Regulatory agencies and the courts may be of the belief that you can’t spell “FahrvergnĂ¼gen,” Volkswagen’s onetime advertising slogan buzzword, without “Revenge.” Unfortunately, for those owning shares in the major auto manufacturer’s, such as General Motors (GM), last week’s news painted with a very broad brush.

General Motors hasn’t been immune to its own bad news and you do have to wonder if society places greater onus and personal responsibility on the slow deaths that may be promoted by Volkswagen’s falsified diesel emissions testing than by the instantaneous deaths caused by faulty lock mechanisms.

For its part, General Motors appears to really be bargain priced and will likely escape the continued plastering by that broad brush. With an exceptional option premium this week, plumped up by the release of some sales data and a global conference call, GM’s biggest worry after having resolved some significant legal issues will continue to be currency exchange and potential weakness in the Chinese market.

With earnings due to be reported on October 21st, if considering a purchase of General Motors shares, I would think about a weekly or expanded weekly option sale, or simply bypassing the events and going straight to December, in an effort to also collect the generous dividend and possibly some capital gains while having some additional time to recover from any bad news at earnings.

MetLife (MET) is a stock that is beautifully reflective of its dependency on interest rates. As rates were moving higher and the crowd believed that would go even higher, MetLife followed suit.

Of course, the same happened when those interest rate expectations weren’t met.

Now, however, it appears that those rates will be getting a boost sooner, rather than later, as the FOMC seems to be publicly acknowledging its interests in a broad range of matters, including global events and perhaps even stock market events.

With a recently announced share buyback, those shares are now very attractively priced, even after Friday’s nearly 2% gain.

With earnings expected at the end of the month, I would consider the purchase of shares coupled with the sale of some out of the money calls, hoping to capitalize on both capital gains and bigger than usual option premiums. In the event that shares aren’t assigned prior to earnings, I would consider then selling a November 20 call in an effort to bypass earnings risk and perhaps also capture the next dividend.

Finally, I’ve been anxious to once again own eBay (EBAY) and have waited patiently for its price to decline to a more appealing level. While most acknowledge that eBay gave away its growth prospects when it completed the PayPal (PYPL) spin-off, it has actually out-performed the latter since that spin-off, despite being down  nearly 12%.

While eBay isn’t expected to be a very exciting stock performer, it hadn’t been one for years, yet was still a very attractive covered option trading vehicle, as it’s share price was punctuated by large moves, usually earnings related. Those moves gave option buyers a reason to demand and a reason for sellers to acquiesce.

That hasn’t changed and the volatility induced premiums are as healthy as they have been in years. As that volatility rises in the stock and in the overall market, there’s more and more benefit to be gained from selling in the money options both for enhanced premium and for downside protection.

It would be good to welcome eBay back into my portfolio. Even if it won’t keep me warm, I could likely buy someone else’s flea bitten blanket at a great price, using its wonderful services.

 

Traditional Stocks:  eBay, General Motors, MetLife, Sinclair Broadcasting

Momentum Stocks: none

Double-Dip Dividend: Comcast (10/5 $0.25), Cisco (10/1 $0.21), EMC Corp (9/29 $0.12)

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.

Click here for reuse options!
Copyright 2015 TheAcsMan

Weekend Update – August 23, 2015

It wasn’t too long ago that China did what it continues to believe that it does best.

It dictated and restricted behavior.

You really can’t blame them, as for the past 67 years the government has done a very good job of controlling everything within its borders and rarely had to give up much in return.

This time it believed that it could control natural market forces with edicts and with the imposition of a very market un-natural prohibition against selling shares in a large number of stocks.

In the immediate aftermath of that decision nearly 2 months ago, the Shanghai Index had actually fared quite well, especially when you consider that in the month prior that index had taken a free fall and dropped 30% over the course of 27 days.

A subsequent 21% rebound over 15 days after the introduction of new “rules” to inactivate gravitational pull, likely re-inforced the belief that the government was omnipotent and emboldened it as it went forth with a series of rapid and significant currency devaluations, even while sending confusing signals when it moved in to support its currency.

I’ve often wondered about people who engage in risky behaviors, such as free fall jumping. What goes on in their mind, besides the obvious thrill, that tells them they can battle nature and natural laws and be on the winning side?

As with lots of things in life, we have the tendency to project in a very optimistic way. A single victory against all odds suddenly becomes the expected outcome in the future, as if nature and its forces had never heard of the expression “fool me once, shame on me….”

Given China’s track record in getting what it wants they can’t be blamed for believing that they are bigger than the laws that govern markets.

When you believe that you are right or invincible, you don’t really think about such pesky matters as consistency and the likelihood that things will eventually catch up with you.

While it may not be unusual to place some restrictions on trading when things are looking dire, the breadth of the Chinese stock trading restrictions was really broad. The suggestion that those responsible for rampant speculation and “malicious” short selling might suffer anirreversible form of punishment simply sought to ensure that any remaining miscreants severed their alliance with their normal behavior.

But when you’re on a streak and no one questions you, what reason is there to not continue in the same path that got you there? It’s just like not selling your stock positions and pocketing the gains.

Since those restrictions were imposed the Shanghai Index has actually gone 1% higher, which is considerably better than our own S&P 500 which has declined 5% after today’s free fall.

So clearly erecting a dam, even if on the wrong side of the natural flow, has helped and the score is Chinese Government 1, Natural Forces 0.

Except of course if you drill down to the past few days and see a drop of about 13%, while the S&P 500 has gone down 6%.

When the dam breaks, it’s not just the baby in the bath water that’s going to get wet, but more on that, later. That downdraft that we felt on our shores blew in from China as we got sucked in by the vacuum created from their free fall.

As with other instances of trying to do battle with nature there may be the appearance of a victory if you have a very, very short timeframe, but at some point the dam is going to burst and only time can really get things back under control enough to allow an opportunity to rebuild.

This past week was the worst in over 4 years as the S&P 500 fell 5.8%. At this point people are looking at individual stocks and are no longer marveling about how many are in correction territory, but rather how many are approaching or are in bear territory.

I haven’t kept track, but 2015 has been a year in which it seems that the most uttered phrase has been “and the markets have now given up all of their gains for the year.”

While I don’t spend too much time staring at charts and thinking about technical factors, you would have had a very difficult time escaping the barrage of comments about the market having dipped below its 200 Day Moving Average.

The level that I had been keeping my eye on as support was the 2045 level on the S&P 500 and that was breached in the final hour of trading on Thursday, leaving the 2000 level the next likely stop.

That too was left behind in the dust, as is the usual case when in free fall.

As mentioned earlier in the month, those technicals were showing a series of lower highs and higher
lows, which is often interpreted as meaning that a break-out is looming, but gives no clue as to the direction.

Now we know the direction, not that it helps any after the fact.

While the DJIA ended the week down a bit more than 10% off from its all time highs, allowing this to now be called a “correction,” the broader S&p 500 is only 7.8% lower. While many elected to sell on their way out in the final hour of the week, I wasn’t, but don’t expect to be very actively buying next week, without some sign of a functioning parachute or at least some very soft land at the bottom.

Buying is something that I will probably leave to those people who are more daring than I tend to be.

However, even they seem to have been a little more careful as this most recent sell-off hasn’t shown much in the way of enticing dare devils to buy on the substantial dips.

Even people prone to enjoying the thrill of a nice free fall are exercising some abundance of caution. While I prefer not to join them on the way down, I don’t mind keeping their company for now.

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

I succumbed a little to the sell off late in the week on Thursday and purchased some shares of Bank of America (NYSE:BAC) in the final hour, right before another leg downward in a market that at that point was already down nearly 300 points.

That simply was a lesson in the issue that faces us all when prices seem to be so irrationally low. Distinguishing between a value priced stock and one that is there to simply suck money out of your pocket isn’t terribly easy to do.

As the sell off continued the following day to bring the August 2015 option cycle to its end the financial sector continued to be hit very hard as interest rates continued their decline.

It wasn’t very long ago that the 10 Year Treasury was ready to hit 2.5% and many were looking at that as being the proverbial “hand writing on the wall,” but in the past month those rates have fallen more than 40% and suddenly that wall is as clean as that baby that is continually mentioned as having been thrown out with the bath water, which coincidentally may be the second most uttered phrase of late.

After committing some money to Bank of America, I’m actually considering adding more financial sector positions in the expectation that the decline in interest rates will be coming to an end very soon as there’s some reason to believe that the FOMC’s dependence on data may be lip service.

Generally, the association between interest rates and the performance of stocks in the financial sector is reasonably straight forward. With some limitations, an increasing interest rate environment increases the margins that such companies can achieve when they put their own money to work.

MetLife (NYSE:MET) is a good example of that relationship and its share price has certainly followed interest rates lower in the past few weeks, just as it dutifully followed those rates higher.

The decline in its shares has been swift and has finally brought them back to the mid-point of the range of the past dozen purchases. While that decline has been swift, the range has been fairly consistent and as the lower end of that range is approached there’s reason to consider braving some of the prevailing winds.

With the swiftness of the decline and with the broader market exhibiting volatility, the option premiums now associated with MetLife are recapturing some of the life that they had earlier in this year and all throughout 2014.

I often like to consider adding shares of MetLife right before an ex-dividend date, but I find the current stock price level to be compelling reason enough to consider a position and perhaps consider a longer term option contract to ride out any storm that may continue to be ahead.

Blackstone (NYSE:BX) hasn’t exactly followed that general rule, but lately it has fallen back in line with that very general rule, as it has plunged in share price since its earnings report and news of some insider selling.

As an example of how easy it has been to be too early in expressing optimism, I thought that Blackstone might be ready for a purchase just 2 weeks ago, but since then it has fallen 12%, although having had nothing but positive analyst comments directed toward it during those weeks. It, too, seems to have been caught in a significant downdraft and continued uncertainty in its near term fortunes are reflected in the very rich option premiums it’s now offering.

My major concern with Blackstone at the moment is whether its dividend, now at an 8.4% yield, can be sustained.

At a time when uncertainty is the prevailing mood, there’s some comfort that could come from having dividends accrue, as long as those dividends are safe.

While it’s dividend isn’t huge, at 2.5% and very safe, Sinclair Broadcasting (NASDAQ:SBGI) again looks inviting as it followed other media companies lower this week and is now at a very appealing part of its trading range.

They have no worries about exchange rates, the Chinese economy or any of those “stories du jour” that have everyone’s attention.

Having reached an agreement with DISH Network earlier in the week to allow retransmission of its signal it saw shares plummet the following day.

Sinclair Broadcasting is ubiquitous around the nation but not exactly a household name, even in its home turf in the Mid-Atlantic. It offers only monthly options and has generally been a longer holding for me, having owned shares on six occasions in the past 15 months.

Lexmark (NYSE:LXK) was one of the early and very pronounced casualties of this most recent earnings season and it has shown no sign of recovery. The market didn’t even cheer as Lexmark announced workforce reductions.

What Lexmark has done since earnings hasn’t been encouraging as its total decline has been in excess of 30%, with a substantial portion of that coming after the initial wave of selling upon earnings being released.

Lexmark also only offers monthly options and it has a dividend yield that’s both enticing and unnerving. The good news is that expected earnings for the next quarter are sufficient to cover the dividend, but there has to be some concern going forward, as Lexmark has found itself in the same situation as its one time parent IBM (NYSE:IBM) having pivoted from its core business and perhaps needing to do so again.

With virtually no exposure to China you might have thought that Deere (NYSE:DE) would have had somewhat of an easier time of things as reporting its earnings for the past quarter.

If so, you would have been wrong, but getting it right hasn’t been the norm of late, regardless of what company is being considered.

The drop seen in Deere shares definitely came as a surprise to the options markets and to most everyone else as they became yet another to beat on earnings, but to miss on revenues.

As is the general theme, as volatility is climbing, at nearly its highest level in 3 years, the premiums are welcoming greater risk taking, even as they provide some cushion to risk.

Following its loss on Friday, even Starbucks (NASDAQ:SBUX) is now among those in correction, having sustained that decline over the past 2 weeks. With some significant exposure in China it may be understandable why Starbucks was a full participant in the market’s weakness.

Like many other stocks, the sudden decline in the context of a market decline that has led to a surge in volatility, option premiums are beginning to look better and better.

As volatility increases, which itself is a reflection of increasing risk, there is the seeming paradox of more of that risk being mollified through the sale of in the money options. The cushion provided by those in the money options increases as the volatility increases, so that the relative risk is reduced more than an upward moving market.

Starbucks, after a prolonged period of very mediocre option premiums is now beginning to show some of the reason why option sellers prefer high volatility. It’s not only for the increased premium, but also for the premium on that premium which allows greater reward even when willing to see shares assigned at a loss.

As an example, at Starbuck’s closing price of $52.84, the weekly $52 option sale would have delivered a premium of $1.64, which would net $0.80, a 1.5% yield, if shares were assigned, even if those shares fell 1.6%.

Those kind of risk and reward end points on otherwise low risk stocks haven’t been seen in a few years and is very exciting for those who do sell options on a regular basis.

Finally, not many companies have had their obituaries prepared for release as frequently as GameStop (NYSE:GME) has had to endure for many years.

Somehow, though, even as we think that the model for gaming distribution is changing there exists a strong core of those still yearning for physicality, even if in a virtual world.

GameStop reports earnings this week and it is no stranger to strong moves. The option market, however is implying only an 8.8% move, which seems substantial, but as this most recent earnings season will attest, may be under-stated.

For those bold enough to consider the sale of puts before earnings, a 1% ROI can be achieved if shares fall less than 12.1%.

As with a number of other earnings related trades over the past few months, I’m not so bold as to consider the trade in advance of earnings, but might consider selling puts after earnings in the event of a large move downward.

Lately, that has been a better formula for balancing reward and risk, although it may result in some lost opportunities in the event that shares don’t plummet beyond the strike prices implied by the option market. That, however, can be a small price to pay when the moves have so frequently been out-sized in their magnitude and offering a reward that ends up being dwarfed by the risk.

Considering that GameStop has fallen only 4.6% from its highs, it may be under additional pressure in the event of even a mild disappointment or less than optimistic guidance.

While it may be premature to begin the flow of tears and recount the good memories of GameStop and a youth wasted, I would be cautious about discounting the concerns entirely as far as the market’s reaction may be concerned.

Traditional Stock: Blackstone, Deere, General Electric, MetLife, Starbucks

Momentum Stock: none

Double-Dip Dividend: Lexmark (8/26 $0.36), Sinclair Broadcasting (8/28 $0.16)

Premiums Enhanced by Earnings: GameStop (8/27 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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