Jul252014

Weekend Update – July 27, 2014

Weekend Update

It seems that almost every week over the past few months have both begun and ended with a quandary of which path to take.

Talk about indecision, for the previous seven weeks the market closed in the an alternating direction to the previous week. This past week was the equivalent of landing on the “green” as the S&P 500 was 0.12 higher for the week, but ending the streak.

Like the biology experiment that shows how a frog immersed in water that is slowly brought to a boil never perceives the impending danger to its life, the market has continued to set new closing record high after record high in a slow and methodical fashion.

With all the talk continuing about how money remains on the sidelines from 2008-9, you do have to wonder how getting into the market now is any different from that frog thinking about climbing into that pot as it nears its boiling point.

Unless there’s new money coming in what fuels growth?

That’s not to say that danger awaits or that the slow climb higher will lead to a change in state or a frenzied outburst of energy leading to some calamitous event, but the thought could cross some minds.

Perhaps Friday’s sell off will prompt some to select one path over another, although a single bubble doesn’t mean that as you’re immersed in a bath that it is coming to a boil. It may entirely be due to other reasons, such as your most recent meal, so it’s not always appropriate to jump to conclusions.

While the frog probably doesn’t really comprehend the slowly growing number of bubbles that seem to be arising from the water, investors may begin to notice the rising number of IPO offerings entering the market and particularly their difficulty in achieving pricing objectives.

I wonder what that might signify? The fact that suddenly my discount brokerage seems to be inundating me with IPO offers makes me realize that it does seem to be getting hotter and hotter around me.

This coming week I’ve had cash reserves replenished with a number of assignments, somehow surviving the week ending plunge and I see many prices having come down, even if just a little. That combination often puts me into a spending mood, that would be especially enhanced if Monday begins either on the downside or just tepidly higher.

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

The big news in the markets this week was Facebook (FB) as its earnings report continued to make clear that it has mastered the means to monetize a mobile strategy. While it produces nothing it’s market capitalization is stunning and working its way closer to the top spot. For those in the same or reasonably close sector, the trickle down was appreciated. One of those, Twitter (TWTR) reports earnings this week and the jury is still very much out on whether it has a viable product, a viable management team and even a viable life as an independent entity.

For all of those questions Twitter can be an exciting holding, if you like that sort of thing. I currently hold shares that were assigned to me after having fallen so much that I couldn’t continue the process of rolling over puts any longer. The process to recover has been slow, but speeded a bit by selling calls on the way higher. However, while that has been emotionally rewarding, but as may be the case when puts are sold and potential ownership is something that is shunned, has required lots of maintenance and maneuvering.

With earnings this week the opportunity arises again to consider the sale of new Twitter puts, either before earnings are released or if shares plunge, afterward.

The option market is implying an 11.7% move in shares upon earnings. a 1% weekly ROI may possibly be obtained at a strike price that’s 14.8% below Friday’s close.

While Twitter is filled with uncertainty, Starbucks (SBUX) has some history behind it that gives good reason to have continuing confidence. With the market having looked adversely at Starbucks’ earnings report, Howard Schultz gave an impassioned and wholly rational defense of the company, its operations and prospects.

In the past few years each time Starbucks shares have been pummeled after earnings and Schultz has done as he did on Friday, it has proven itself an excellent entry point for shares. Schultz has repeatedly shown himself to be among the most credible and knowledgeable of CEOs with regard to his own business and business strategy. He has been as bankable as anyone that can be found.

With an upcoming dividend, always competitive option premiums and Schultz standing behind it, the pullback on Friday may be a good time to re-consider adding shares, despite still trading near highs.

While I suppose Yelp (YELP) could tell me all about the nearest Starbucks and the experience that I might expect there, it’s not a site that gets my attention, particularly after seeing some reviews of restaurants that pilloried the businesses of places that my wife and I frequent repeatedly.

Still, there’s clearly something to be had of value through using the site for someone. What does have me interested is the potential opportunity that may exist at earnings. Yelp is no stranger to large moves at earnings and for those who like risk there can be reward in return. However, for those who like smaller dosages of each a 1% ROI for the week can potentially be achieved at a strike price of $58 based on Friday’s $68.68 closing priced and an implied move of 12%. Back in April 2014 I received an almost 3% ROI for the risk taken, but don’t believe that I’m willing to be so daring now that I’m older.

Following the market’s sharp drop on Friday it was difficult to not jump the gun a little bit as some prices looked to be either “too good” or just ready. One of those was General Motors (GM). Having survived earnings last week,
albeit with a sizeable share drop over the course of a few days and wading its way through so much litigation, it is quietly doing what it is supposed to be doing and selling its products. An energized consumer will eventually trade in those cars that have long passed their primes, as for many people what they drive is perceived as the best insight into their true standing in society. General Motors has traded nicely as it has approached $33 and offers a nice premium and attractive dividend, making it fit in nicely with a portfolio that tries to accentuate income streams even while shares my gyrate in price.

I never get tired of thinking about adding shares of eBay (EBAY). With some of my shares assigned this past Friday despite some recent price strength after earnings, I think it is now in that mid-point of its trading range from where it has been relatively easy to manage the position even with some moves lower.

Carl Icahn has remained incredibly quiet on his position in eBay and my guess, based on nothing at all, is that there is some kind of behind the scenes convergence of thought between Icahn and eBay’s CEO, John Donahoe, regarding the PayPal jewel.

With all of the recent talk about “old tech,” there’s reason to consider one of the oldest, Texas Instruments (TXN) which goes ex-dividend this coming week. Having recently traded near its year’s high, shares have come down considerably following earnings, over the course of a few days. While still a little on the high side, it has lots of company in that regard, but at least has the goods to back up its price better than many others. It, too, offers an attractive combination of dividend, premiums and still possibility of share appreciation.

Reporting earnings this week are both MasterCard (MA) and MetLife (MET). Neither are potential trades whose premiums are greatly enhanced by the prospects of earnings related surprises. Both, however, are companies that I would like to once again own, possibly through the sale of put options prior to earnings being announced.

MasterCard suffered on Friday as collateral damage to Visa’s (V) earnings, which helped drag the DJIA down far more than the S&P 500, despite the outsized contribution by Amazon (AMZN) which suffered a % decline after earnings. On top of that are worries again from the Russian market, which earlier in the year had floated the idea of their own credit system. Now new rules impacting payment processors in Russia is of concern.

MasterCard has been able to generate satisfactory option premiums during an otherwise low volatility environment and despite trading in a $72 – $78 range, as it has regular bounces, such as seen this past week.

I have been waiting for MetLife to trade down to about the $52 range for the past two months and perhaps earnings will be the impetus. For that reason I might be more inclined to consider opening a position through the sale of puts rather than an outright buy/write. However, also incorporated into that decision process is that shares will be going ex-dividend the following week and there is some downside to the sale of puts in the face of such an event, much as their may be advantage to selling calls into an ex-dividend date.

Finally, there hasn’t been much that has been more entertaining of late than the Herbalife (HLF) saga. After this past week’s tremendous alternating plunge and surge and the absolute debacle of a presentation by Bill Ackman that didn’t quite live up to its billing.

While there may certainly be lots of validity to Ackman’s claims, which are increasingly not being nuanced, the opportunity may exist on both sides of the controversy, as earnings are announced next week. Unless some significant news arises in addition to earnings, such as from the SEC or FTC, it is like any other high beta stock about to report earnings.

The availability of expanded weekly options makes the trade more appealing in the event of an adverse move bringing shares below the $61.50 level suggested by the implied volatility, allows some greater flexibility. However, because of the possibility of other events, my preference would be to have this be as short term of a holding as possible, such that if selling puts and seeing a rise in shares after earnings, I would likely sacrifice remaining value on the options and close the position, being happy with whatever quick profits were achieved.

Traditional Stocks: eBay, General Motors, MasterCard, MetLife, Starbucks

Momentum: none

Double Dip Dividend: Texas Instruments (7/29)

Premiums Enhanced by Earnings: Herbalife (7/28 PM), Twitter (7/29 PM), Yelp (7/30 PM)

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

Oct272013

Weekend Update – October 27, 2013

Weekend Update

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

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

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

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

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

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

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

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

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

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

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

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

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories this week (see details).

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

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

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

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

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

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

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

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

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

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

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

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

Traditional Stocks: Baxter International, Dow Chemical, MetLife

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

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

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

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

Jun292013

Weekend Update – June 30, 2013

Weekend Update

The hard part about looking for new positions this week is that memories are still fresh of barely a week ago when we got a glimpse of where prices could be.

When it comes to short term memory the part that specializes in stock prices is still functioning and it doesn’t allow me to forget that the concept of lower does still exist.

The salivating that I recall doing a week ago was not related to the maladies that accompany my short term memory deficits. Instead it was due to the significantly lower share prices.

For the briefest of moments the market was down about 6% from its May 2013 high, but just as quickly those bargains disappeared.

I continue to beat a dead horse, that is that the behavior of our current market is eerily reminiscent of 2012. Certainly we saw the same kind of quick recovery from a quick, but relatively small drop last year.

What would be much more eerie is if following the recovery the market replicated the one meaningful correction for that year which came fresh off the hooves of the recovery.

I promise to make no more horse references.

Although, there is always that possibility that we are seeing a market reminiscent of 1982, except that a similar stimulus as seen in 1982 is either lacking or has neigh been identified yet. In that case the market just keeps going higher.

I listened to a trader today or was foaming at the mouth stating how our markets can only go higher from here. He based his opinion on “multiples” saying that our current market multiple is well below the 25 times we saw back when Soviet missiles were being pointed at us.

I’ll bet you that he misses “The Gipper,” but I’ll also bet that he didn’t consider the possibility that perhaps the 25 multiple was the irrational one and that perhaps our current market multiple is appropriate, maybe even over-valued.

But even if I continue to harbor thoughts of a lower moving market, there’s always got to be some life to be found. Maybe it’s just an involuntary twitch, but it doesn’t take much to raise hope.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or Momentum categories. With earnings season set to begin July 8, 0213, there are only a handful of laggards reporting this coming week, none of which appear risk worthy (see details).

I wrote an article last week, Wintel for the Win, focusing on Intel (INTC) and Microsoft (MSFT). This week I’m again in a position to add more shares of Intel, as my most recent lots were assigned last week. Despite its price having gone up during the past week, I think that there is still more upside potential and even in a declining market it will continue to out-perform. While I rarely like to repurchase at higher prices, this is one position that warrants a little bit of chasing.

While Intel is finally positioning itself to make a move into mobile and tablets and ready to vanquish an entire new list of competitors, Texas Instruments (TXN) is a consistent performer. My only hesitancy would be related to earnings, which are scheduled to be announced on the first day of the August 2013 cycle. Texas Instruments has a habit of making large downward moves on earnings, as the market always seems to be disappointed. With the return of the availability of weekly options I may be more inclined to consider that route, although I may also consider the August options in order to capitalize somewhat on premiums enhanced by earnings anticipation.

Already owning shares of Pfizer (PFE) and Merck (MRK), I don’t often own more than one pharmaceutical company at a time. However, this week both Eli Lilly (LLY) and Abbott Labs (ABT) may join the portfolio. Their recent charts are similar, having shown some weakness, particularly in the case of Lilly. While Abbott carries some additional risk during the July 2013 option cycle because it will report earnings, it also will go ex-dividend during the cycle. However, Lilly’s larger share drop makes it more appealing to me if only considering a single purchase, although I might also consider selling an August 2013 option even though weekly contracts are available.

I always seem to find myself somewhat apologetic when considering a purchase of shares like Phillip Morris (PM). I learned to segregate business from personal considerations a long time ago, but I still have occasional qualms. But it is the continued ability of people to disregard that which is harmful that allows companies like Phillip Morris and Lorillard (LO), which I also currently own, to be the cockroaches of the market. They will survive any kind of calamity. It’s recent under-performance makes it an attractive addition to a portfolio, particularly if the market loses some ground, thereby encouraging all of those nervous smokers to sadly rekindle their habits.

The last time I purchased Walgreens (WAG) was one of the very few times in the past year or two that I didn’t immediately sell a call to cover the shares. Then, as now, shares took, what I believed to be an unwarranted large drop following the release of earnings, which I believed offered an opportunity to capture both capital gains and option premiums during a short course of share ownership. It looks as if that kind of opportunity has replicated itself after the most recent earnings release.

Among the sectors that took a little bit of a beating last week were the financials. The opportunity that I had been looking for to re-purchase shares of JP Morgan Chase (JPM) disappeared quickly and did so before I was ready to commit additional cash reserves stored up just for the occasion. While shares have recovered they are still below their recent highs. If JP Morgan was not going ex-dividend this trade shortened week, I don’t believe that I would be considering purchasing shares. However, it may offer an excellent opportunity to take advantage of some option pricing discrepancies.

I rarely use anecdotal experience as a reason to consider purchasing shares, but an upcoming ex-dividend date on Darden Restaurants (DRI) has me taking another look. I was recently in a “Seasons 52” restaurant, which was packed on a Saturday evening. I was surprised when I learned that it was owned by Darden. It was no Red Lobster. It was subsequently packed again on a Sunday evening. WHile clearly a small portion of Darden’s chains the volume of cars in their parking lots near my home is always impressive. While my channel check isn’t terribly scientific it’s recent share drop following earnings gives me reason to believe that much of the excess has already been removed from shares and that the downside risk is minimized enough for an entry at this level.

While I did consider purchasing shares of Conoco Phillips (COP) last week, I didn’t make that purchase. Instead, this week I’ve turned my attention back to its more volatile namesake, Phillips 66 (PSX) which it had spun off just a bit more than a year ago. It has been a stellar performer in that time, despite having fallen nearly 15% since its March high and 10% since the market’s own high. It fulfills my need to find those companies that have fared more poorly than the overall market but that have a demonstrated ability to withstand some short term adverse price movements.

Finally, I haven’t recommended the highly volatile silver ETN products for quite a while, even though I continue to trade them for my personal accounts. However, with the sustained movement of silver downward, I think it is time for the cycle to reverse, much as it had done earlier this year. The divergence between the performance of the two leveraged funds, ProShares UltraShort Silver ETN (ZSL) and the ProShares Ultra Silver ETN (AGQ) are as great as I have seen in recent years. I don’t think that divergence is sustainable an would consider either the sale of puts on AGQ or outright purchase of the shares and the sale of calls, but only for the very adventurous.

Traditional Stocks: Abbott Labs, Eli Lilly, Intel, Mosaic, Phillip Morris, Texas Instruments, Walgreens

Momentum Stocks: Phillips 66, ProShares UltraSilver ETN

Double Dip Dividend: Darden Restaurants (ex-div 7/8), JP Morgan (ex-div 7/2)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

 

Apr212013

Weekend Update – April 21, 2013

Weekend Update

I’m finally feeling bullish. Sort of.

Two months ago I started getting a very uneasy feeling.

Normally, money burns a hole in my pocket. Sadly for the economy, that’s not the case when it comes to consumer goods, but it’s definitely the case when it comes to stocks.

Selling options, and predominantly of the weekly variety, I often have had the pleasure of awaking Monday morning to see freshly deposited cash in my account as shares upon which I had written weekly call contracts were assigned.

But that has changed recently, ever since that uneasy feeling hit.

The principal change was not immediately going out on shopping sprees on Monday mornings and instead building up cash caches. Among the changes were also the use of longer option contract periods because of the realization that so often market downturns happen suddenly and I would prefer not to be caught flat-footed or in-between contracts when and if it does occur.

But now, after what is the worst week of 2013, it may be time for yet another transition, of sorts.

As the April 2013 cycle has come to an end and many of those contracts have been assigned or rolled over to May 2013, being flush with cash at a time that some stocks have had some meaningful declines introduces temptation.

Jim Cramer used to say “there’s always a bull market somewhere.” I may still harbor the belief that the market is poised to mime the same period of 2012, but within that bearish sentiment I do see some glimmers of hope and opportunity as there is a universe of beaten down stocks that may have deserved better.

The week’s selections are categorized as either Traditional, Momentum, or “PEE” (see details). Although my preference, during this period of pessimism is to continue seeking high quality, dividend paying stocks as a defensive position, there aren’t many of those to consider this week. Instead, earnings and injured shares predominate.

Anadarko (APC) is one of those stocks that has seen a relatively large drop recently, but has been showing some strength at $79. It does report earnings on May 6, 2013, but the weekly option premium is unusually high for the period two weeks before earnings. While the monthly premiums are also attractive, this may be one of the situations where I would still consider the use of a weekly contract.

eBay (EBAY) also had a rough week. it is among those stocks that have had some significant drops that may have been overdone. Down about 7% following earnings its share price is approaching the $52.50 level where it has had some reasonable strength. It too may warrant a look at the weekly option contracts, especially if it appears as if there may be some market stability early next week.

In a similar situation, General Electric (GE) suffered a 4% earnings related loss on Friday and is down about 8% over the past 2 months. It too is approaching a price level where it has been pretty comfortable and when GE is comfortable, so am I. Flush with cash itself, GE may continue its own spending spree which is sometimes a short term share price depressant. If its current share price is maintained or goes a bit lower on Monday, it may be one of those few positions that I do not immediately cover by selling call options, but rather await some price rebound and then sell options.

I was disappointed when it was decided that Texas Instruments (TXN) would no longer have weekly options offered. However, the concern is now on hold as the monthly contracts look better and better every day, especially as volatility and premiums are increasing. Texas Instruments goes ex-dividend this week and that is a significant repository of its appeal to me. However, before it does so, it reports earnings. I don’t particularly see a compelling trade based on that event on Monday afternoon, so I would likely wait until after that occurs to decide whether the premium offered is still appealing enough to purchase shares.

Although I’m overweight in the Technology Sector, and despite the fact that its performance hasn’t been spectacular, sometimes I do find it hard to resist after price pullbacks. That was certainly the case after re-purchasing shares of Cypress Semiconductor (CY) after its deep fall upon earnings and disappointing guidance. Although IBM’s (IBM) earnings report on Friday cast a little bit of a pall over the sector some values appear to available. For the coming week, both Cisco (CSCO) and Oracle (ORCL), which I owned just a week ago prior to its assignment are again in a price range that works for me, Even as I hold uncovered shares of sector mate Riverbed Technology (RVBD) which reports earnings this week and often follows Oracle’s pattern, I believe that there are opportunities at these levels even in a weak overall market.

I always like MetLife (MET). So often, however, it seems just as I want to purchase shares the rest of the world has had the same idea and I’m reluctant to chase the stock. This past week, it along with the market settled down a bit. It always offers a fair option premium and it is a resilient performer even in the face of overall market adversity.

Although I also always like YUM Brands (YUM) that, unfortunately, doesn’t give me freedom to extend that to its products, as I’m now sworn to keeping my cholesterol within survivable levels. However, perhaps increasing my use of MetLife products might offset the use of YUM’s goods. After a fairly significant price fall, YUM Brands is back to the range that offers me as much comfort as their foods. I think that it is immune from near term Chinese economic concerns, the market having digested that along with its drumsticks.

With Apple (AAPL) sinking below $400/share and earnings set to be announced this week it’s not a far stretch of the imagination to believe that there may be significant price movement upon their release. Always a volatile holding upon earnings and guidance, there isn’t much pent up frustration any longer. Following more than a 40% drop in share price most shareholders and long time advocates have had ample opportunity to vent. Although Steve Jobs was notorious for his strategy of under-promising and over-delivering, it’s hard to imagine that expectations could get any lower. I think Apple is a good earnings play, factoring in a 10% price drop in return for nearly a 1% ROI. Relative to the market, i expect Apple to trade higher in the aftermath of its eagerly awaited news, which makes the sale of out of the money put options particularly appealing.

Netflix (NFLX) certainly would qualify as a finalist in any “comeback stock of the year” competition. I haven’t owned shares in almost 90 points. Like the other earnings related selections this week, it is certainly capable of a dramatic move when earnings and guidance are released. In this case, there may be opportunity to still derive a 1% ROI even if share price falls by as much as 25%. Risky? Yes, but Green Mountain (GMCR) has shown that momentum stocks can come back more than once. Even a significant price drop can no longer be counted upon as being a conclusion to the Netflix story. What was once considered the end of its run, Netflix has successfully gone on to its second life and could easily have a third.

Finally, Amazon (AMZN) is actually my least compelling earnings related trade in that the price drop cushion in order to achieve a 1% ROI is only about 8%. With a universal chorus deriding the razor thin margins and the P/E one has to wonder when that point will arrive that the market decides to treat Amazon as it does many other companies that spend time in rarefied environments. Still, if the cash in my pocket gets too hot this may be its final resting place.

Traditional Stocks: Anadarko, Cisco, eBay, General Electric, MetLife, Oracle

Momentum Stocks: YUM Brands

Double Dip Dividend: Texas Instruments (4/26)

Premiums Enhanced by Earnings: Amazon (4/25 PM), Apple (4/23 PM), Netflix (4/22 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.

 

Jan272013

Weekend Update – January 27, 2013

Weekend Update

By Thursday evening I had already lost track of how many records and new highs had been set as trading was getting ready to enter the final week of January. Depending on the parameters and definitions it seems as if every minute someone was referring to one new market high of one sort or another.

Sometimes I think that the Wilshire 5000 doesn’t get its due recognition, but if the trend continues it will join the party, even if only to have set a record for intra-day trading level on a Tuesday following inauguration.

If they weren’t calling new records they were hyper-focused on just how far we were from a new record. By the way, just for the record, the WIlshire 5000 is 1.3% away from its all time record high.

After a while the meaning of a record becomes less and less. I certainly didn’t feel the special nature of whatever was being watched so closely. S&P 500 at 1500? For me, the only record that counts is 14,164 for the Dow and 1565 on the S&P 500, both more than 5 years ago.

But even those records are meaningless, because all that really matters is where your own assets are residing.

I’d also lost track of how many consecutive gaining days we had other than to remember that last January seemed to be the very same. Like through a million cuts we went higher each and every day, simply setting a record for the number of slices.

You don’t have to be a short seller to bemoan a relentless upward path, but it’s a little more excruciating when there’s no apparent reason for what has caused such despair. At least Ackman knows where Loeb lies.

Alright, it hasn’t really been excruciating and it hasn’t really been a period of despair to live and die by covered option sales. That may be a bit of an exaggeration, as you do share in the market’s gains, but maybe not as much. Of course, that assumes that the next guy is actually taking their profits rather than falling prey to human nature and letting it all ride. I like taking profits on a very regular basis and moving on before the welcome is outstayed.

Records don’t mean very much. Just ask the performance enhanced athletes that are being denied recognition for their accomplishments. I don’t really know what exactly is juicing the markets right now, but I do know that there’s little reason to believe that the recent heights are deserved.

Ultimately, looking back at the record highs of October 2007, I realize that the best performance enhancer since then has been ignoring the occasional mindless melt ups and doing the conservative thing. Collecting penny by penny selling those options until the sum of the parts is greater than the whole. I continually maintain that you don’t have to be a great stock picker or market timer to have your records beat theirs.

And get there sooner.

As volatility keeps setting its own record lows it does become more challenging to get more pennies for your efforts in selling options. Although I’ve never been much of a fan of earnings season, at the very least it does its part to enhance premiums, if you don’t mind the enhanced risk, as well. As a covered call seller risk is not high on the list of favorite things, but there has no be some solace in knowing that a uni-directional move sooner or later has to come to an end. Hopefully, when it does, it won’t be quite as bruising as has been the descent of Apple (AAPL) after its one way journey higher.

As always, the week’s selections are categorized as either being Traditional, Momentum, Double Dip Dividend, or “PEE” (see details).

What strikes me this week is how I had a very difficult time identifying a “Traditional” candidate. Over the past month the least well performing sector, Utilities, has nonetheless delivered growth. The makes it difficult to spot potential targets that are also fairly priced.

That brings me to the elephant in the room. For the second week in a row Apple is back on the list. Last week it was a possible earnings related trade. Up until an hour before the close of Wednesday’s trading I thought of selling weekly $480 puts, but decided that having done the same with Mellanox (MLNX) and F5 Networks (FFIV) enough was enough. What exactly does that say when either Mellanox or F5 Networks is thought to be less risky than Apple? It probably says something about my delusional diagnostic methodology rather than the respective companies. But as Apple is now near the last price at which I owned it and closer to a $425 support level, it just seems harder to ignore. I think that once Tim Cook replaces the “WWJD” bracelet on his wrist and gets a new one from which to draw inspiration and guidance, things will get back to normal. The new bracelet would simply be inscribed “WWJD.” The difference? What Would Jobs Do?

With the “Traditional” category so quickly dispatched, it’s another week and another reason to think about adding shares of AIG (AIG). Of course, I wouldn’t have to consider doing that if my one and two week old lots hadn’t been assigned. But the reality is that the shares are always welcome back home. I look at the option premiums as being something like the rent you might collect from your adult child living in the basement.

I wanted so much to pick up shares of Baidu (BIDU) once again last week but it just didn’t get to a good price point. By that I mean that as opposed to barely a month or two ago the extraordinarily low volatility is taking its toll on intrinsic value and making the sale of in the money calls somewhat less of a slam dunk, particularly when the intrinsic value is more than half of the difference between two strike prices. I’m hoping to see Baidu trade within $2 or less of a lower strike price early in the week.

YUM Brands (YUM) should probably have the ticker symbol “YOYO.” It responds more to the conflicting daily rumors regarding the vitality of the Chinese economy than do traditional metrics of growth, such as copper and iron ore. Today’s drop was just another in the recent series of rumors regarding safety of the chicken offerings. It’s hard to imagine that YUM Brands is delivering a lower quality or unsafe product than is generally available to the growing consumer base in China.

There was a time, before Apple, that Texas Instruments (TXN) reporting earnings set the tone for the market. Those days are long gone. In fact, no one really sets that tone anymore, not even IBM (IBM), whose own great earnings and share performance did nothing more than be the sole reason for the Dow’s positive performance on Tuesday, while the S&P fell flat. In the meantime, Texas Instruments has survived its own earnings report and has a decent dividend this week in addition to income streams from its weekly option offerings.

Fastenal (FAST) is just a remarkably stable company whose products are ubiquitous yet out of view. Somehow, the fact that they have about 2600 company owned stores has escaped my view, but somehow they haven’t escaped the end user. More important than the company’s stability is the stability of shares over time. The dividend is fairly meager, but added to its option premium a reasonably safe place to leave money for a little while.

US Steel (X) is a recent and current holding. It is among a large group of high profile companies that are reporting earnings this week and may satisfy being plugged in to the equation that evaluates premiums of put sales relative to potential earnings related stock dives. For US Steel accepting the possibility of a 5% decline can still result in a 1% gain.

Lexmark (LXK) was also a recent holding. I still don’t fully understand where their earnings come from now that they are getting out of the printer business. However. it has shown resilience after the revelation that people on wireless devices just aren’t printing as much as the next guy tethered to a desk and computer. It too may offer an appealing award for accepting the possibility of a sharp earnings related decline.

VMWare (VMW), a one time high flier has settled into a good place. Although it is capable of making large moves after earnings, those moves on a percentage basis are fairly modest. Yet it does regularly offer premiums that are attractive. It’s one time parent EMC Corp (EMC) reports earnings in the morning and may offer some insights for the later reporting VMWare.

And finally, there’s Facebook. I still get a little smirk thinking about the vitriol directed toward me when making the case for buying shares following expiration of the first lock-up period. Just as with Apple, your portfolio isn’t a very good place to park your emotions. Whatever your opinion may be on Facebook the shares, Facebook the IPO, Facebook the company or Facebook the hoodie, it is an appealing trade based upon its earnings release this week.

Traditional Stocks: Apple

Momentum Stocks: AIG, Baidu, YUM Brands

Double Dip Dividend: Fastenal (ex-div 1/30), Texas Instruments (ex-div 1/29)

Premiums Enhanced by Earnings: Lexmark (1/29 AM), Facebook (1/30 PM), US Steel (1/29 AM), VMWare (1/28 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.