Jul22016

Weekend Update – July 3, 2016

Weekend Update

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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Jun182016

Weekend Update – June 19, 2016

Weekend Update

About 25 years ago a character debuted on Saturday Night Live and the recurring joke was to try and guess the character’s gender.

The sketches typically had  red herrings and lots of mis-direction and the question of Pat’s gender was never answered.

Never a terribly popular character, someone had the fiscally irresponsible idea of making a feature film and Pat was never heard from again.

The guessing stopped.

Fast forward to 2016 and think of Pat as an FOMC member.

Over the past 2 months or so there has probably been lots of mis-direction coming from Federal Reserve Governors, perhaps as they floated trial balloons to see how interest rate action or inaction would be received by the stock market.

The health of the stock market is not really part of their mandate, but since so much of the nation’s wealth is very closely aligned with those markets, it may only be logical that the FOMC should at least have some passing interest in its health.

Who would have guessed 6 months ago when the first interest rate hike occurred that we would be at a point where that has thus far been the only one?

Who would have thought that in the transpiring 6 months nothing would have validated the December 2015 interest rate increase and that nothing but conflicting economic data would be forthcoming?

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Mar142015

Weekend Update – March 15, 2015

Weekend Update

Anyone who has seen the classic movie “Casablanca” will recall the cynicism of the scene in which Captain Renault says “I’m shocked, shocked to find that gambling is going on in here!” seconds before the croupier hands him his winnings from earlier.

This week, the Chief Global Investment Strategist of Blackrock (NYSE:BLK) in attempting to explain a sell-off earlier in the week said “You’ve got the dollar up about 23 percent from the summer lows, and people are realizing this is starting to bite into earnings.”

No doubt that a stronger US Dollar can have unwanted adverse consequences, but exactly what people was Russ Koesterich referring to that had only that morning come to that realization?

How in the world could people such as Koesterich and others responsible for managing huge funds and portfolios possibly have been caught off guard?

Was he perhaps instead suggesting that somehow small investors around the nation suddenly all had the same epiphany and logged into their workplace 401(k) accounts in order to massively dump their mutual fund shares in unison and sufficient volume prior to the previous day’s closing bell?

Somehow that doesn’t sound very likely.

I can vaguely understand how a some-what dull witted middle school aged child might not be familiar with the consequences of a strengthening dollar, especially in an economy that runs a trade deficit, but Koesterich could only have been referring to those who were capable of moving markets in such magnitude and in such short time order. There shouldn’t be too much doubt that those people incapable of seeing the downstream impacts of a strengthening US Dollar aren’t the ones likely to be influencing market direction upon their sudden realization.

Maybe it just doesn’t really matter when it’s “other people’s money” and it is really just a game and a question of pushing a sell button.

This past week was another in which news took a back seat to fears and the fear of an imminent interest rate increase seems to be increasingly taking hold just at the same time as the currency exchange issue is getting its long overdue attention.

While there are still a handful of companies of importance to report earnings this quarter, the next earnings season begins in just 3 weeks. If Intel (NASDAQ:INTC) is any reflection, there may be any number of companies getting in line to broadcast earnings warnings to take some of the considerable pressure off the actual earnings release.

The grammatically incorrect, but burning question that I would have asked Russ Koesterich during his interview would have been “And this comes to you as a surprise, why?”

In the meantime, however, those interest rate concerns seem to have been holding the stock market hostage as the previous week’s Employment Situation report is still strengthening the belief that interest rate increases are on the near horizon, despite any lack of indication from Janet Yellen. In addition, the past week saw rates on the 10 Year Treasury Note decrease considerably and Retail Sales fell for yet another month, even while gasoline prices were increasing.

The coming week’s FOMC meeting may provide some clarity by virtue of just occurring. With so many focusing on the word “patience” in the FOMC Statement, whether it remains or is removed will offer reason to move forward as either way the answer to the “sooner or later” question will be answered.

Still, it surprises me, having grown up believing the axiom that the stock market discounts events 6 months into the future, that it has come to the point that fairly well established economic cycles, such as the impact of changing currency exchange rates on earnings, isn’t something that had long been taken into account. Even without a crystal ball, the fact that early in this current earnings season companies were already beginning to factor in currency headwinds and tempering earnings and guidance, should at least served as a clue.

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

Years ago, before spinning off its European operations, Altria (NYSE:MO) was one of my favorite companies. While I have to qualify that, lest anyone believed that their core business was the reason for my favor, it was simply a company whose shares I always wanted to trade.

In academic medicine we used to refer to the vaunted “triple threats.” That was someone who was an esteemed researcher, clinician and teacher. There really aren’t very many of those kind of people. While Altria may represent the antithesis to what a triple threat in medicine is dedicated toward, it used to be a triple threat in its own right. It had a great dividend, great option premiums and the ability to have share appreciation, as well.

That changed once Phillip Morris (NYSE:PM) went on its own and the option premiums on the remainder of Altria became less and less appealing, even as the dividend stayed the course. I found less and less reason to own shares after the split.

However, lately there has been some life appearing in those premiums at a time that shares have fallen nearly 10% in just 2 weeks. With the company re-affirming its FY 2015 guidance just a week ago, unless it too has a sudden realization that its now much smaller foreign operations and businesses will result in currency exchange losses, it may be relatively immune from what may ail many others as currency parity becomes more and more of a reality.

Lately, American Express (NYSE:AXP) can’t seem to do anything right. I say that, as both my wife and I registered our first complaints with them after more than 30 years of membership. Fascinatingly, the events were unrelated and neither of us consulted
with the other, or shared information about the issues at hand, before contacting the company.

My wife, who tends to be very low maintenance, was nearly apoplectic after being passed to 11 different people, some of whom acted very “Un-American Express- like.”

The preceding is anecdotal and meaningless information, for sure, but makes me wonder about a company that received a premium for its use by virtue of its service.

With the loss of its largest co-branding partner to take effect in 2016, American Express has already sent out notices to some customers of its intent to increase interest rates on those accounts that are truly credit cards, but my guess is that revenue enhancements won’t be sufficient to offset the revenue loss from the partnership dissolution.

To that end the investing world will laud American Express for its workforce cutbacks that will certainly occur at some point, and service will as certainly decline until that point that the consumers go elsewhere for their credit needs.

That is known as a cycle. The sort of cycle that perhaps highly paid money managers are unable to recognize, until like currency headwinds, it hits them on the head.

Still, the newly introduced uncertainty into its near term and longer term prospects has again made American Express a potentially attractive covered option candidate, as it has just announced a dividend increase and a nearly $7 billion share buyback.

Based on its falling stock price, you would think that Las Vegas Sands (NYSE:LVS) hasn’t been able to do anything right of late, either.

Sometimes your fortunes are defined on the basis of either being at the right place at the right time or the wrong place at the wrong time. For the moment, Macao is the wrong place and this is the wrong time. However, despite the downturn of fortunes for those companies that placed their bets on Macao, somehow Las Vegas Sands has found the wherewithal to increase its quarterly dividend and is now at 5%, yet with a payout ratio that is sustainable.

The company also has operating and profit margins that would make others, with or without exposure to Macao envious, yet its shares continue to follow the experiences of the much smaller and poorer performing Wynn Resorts (NASDAQ:WYNN). That probably bothers Sheldon Adelson to no end, while it likely delights Steve Wynn, who would rather suffer with friends.

With shares going ex-dividend this week and trading near its yearly low, it’s hard to imagine news from Macao getting much worse, particularly as China is beginning to play the interest rate game in efforts to stimulate the economy. The risk, however, is still there and is reflected in the option premium.

Given the risk – benefit proposition, I ask myself “WWSD?”

What would Sheldon Do?

My guess is that he would be betting on his company to do more than just tread water at these levels.

The Gap (NYSE:GPS) fascinates me.

I don’t think I’ve ever been in one of their stores, but I know their brand names and occasionally make mental notes about the parking conditions in front of their stores. Those activities are absolutely meaningless, as are The Gap’s monthly sales reports.

I don’t think that I can recall any other company that so regularly alternates between being out of touch with what the consumer wants and being in complete synchrony. At least that’s how those monthly sales statistics are routinely interpreted and share prices goes predictably back and forth.

The good thing about all of the non-sense is that the opportunities to benefit from enhanced option premiums actually occurs up to 5 times in a 3 month period extending from one earnings report to the next, as the monthly same store sales reports also have enhanced premiums. With an upcoming dividend during the same week as the next same store sales report in early April 2015, this is a potential position that I’d consider selling a longer term option, in order to take advantage of the upcoming volatility, collect the dividend and perhaps have some additional time for the price to recoup if it reacts adversely.

MetLife (NYSE:MET) has been trading in a range lately that has simply been following interest rates for the most part. As it awaits a decision on its challenge to being designated as “systemically important” it probably is wishing for rate increases to come as quickly as possible so that it can put as much of its assets to productive use as quickly as possible before the inevitable constraints on its assets become a reality.

With interest rate jitters and uncertainty over the eventual judicial decision, MetLife’s option premiums are higher than is typically the case. However, in the world of my ideal youth, the stock market would have already discounted the probabilities of future interest rate increases and the upheld designation of the company as being systemically important.

With Intel’s announcement, this wasn’t a particularly good week for “old technology.” For Seagate Technolgy (NASDAQ:STX) the difficulties this week were just a continuation since its disappointing earnings in January. After its earnings plunge and an attempted bounce back, it is now nearly 9% lower than at the depth of its initial January drop.

That continued drop in share price is finally returning shares to a level that is getting my attention. With its dividend, which is very generous and appears to be safe, still two months away, Seagate Technology may be a good candidate for the sale of put contracts and if opening such a position and faced with assignment, I would consider trying to rollover as long as possible, either resulting in an eventual expiration of the position or being assigned and then in a position to collect the dividend.

Finally, for an unprecedented fourth consecutive week, I’m going to consider adding shares of United Continental (NYSE:UAL) as energy prices have recaptured its earlier lows. Those lows are good for UAL and other airlines and by and large the share prices of UAL and representative oil companies have moved in opposite directions.

I had shares of UAL assigned again this past Friday, as part of a pairs kind of trade established a few weeks ago. I still hold the energy shares, which have slumped in the past few weeks, but would be eager to once again add UAL shares at any pullback that might occur with a bounce back in energy prices.

The volatility and uncertainty inherent in shares of UAL has made it possible to buy shares and sell deep in the money calls and still make a respectable return for the week, if assigned.

That’s a risk – reward proposition that’s relatively easy to embrace, even as the risk is considerable.

 

Traditional Stocks: Altria, American Express, MetLife, The Gap

Momentum Stocks: Seagate Technology, United Continental

Double Dip Dividend: Las Vegas Sands (3/19)

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.

Mar72015

Weekend Update – March 8, 2015

Daily Market Update

It seems as if it has been a long time since we were at that stage where good economic news was interpreted negatively and bad news was celebrated.

Lately, on the economic front there really hasn’t been any bad news, although depending on your perspective perhaps the good news just hasn’t been good enough. That might include unrequited expectations for a consumer buying frenzy that hasn’t yet materialized as a result of energy savings.

On the other hand the good news has been steady. Not terribly spectacular, but a steady climb toward an improved economic landscape for more and more people. Again, to put a little cynical spin on things, for some the climb has been far too slow and the 5.5% unemployment rate a bit illusory as so many may have simply dropped out of the employment seeking pool.

After a week in which the market moved in alternating directions on no news at all during the first 3 days of trading, it finally reverted to a paradoxical form when the Employment Situation Report was released on Friday morning.

A much better than expected number and with no revisions to previous months was great if you were among those looking for and finding a new job. What it wasn’t great for were the prospects of interest rates staying low and the Federal Reserve continuing with its “patience.”

At least that’s how the impact of the data was perceived. The good news was cast in a very negative way and the immediate reaction was not much different from the panic that might beset a grocery store when in August the Farmer’s Almanac may call for unusually brutal winter and people clear the shelves of milk in anticipation.

While there are still far too many people in need of jobs and newly created jobs aren’t necessarily of the same caliber of pay as those lost since 2008, for some the burden of the good news was too much to bear and the selling accelerated to a level not seen in quite a while, although never really to the point of toilet paper frenzy.

At the very least for those who practice a paradoxical approach to the interpretation of news, they were able to contain some of their emotions even as their irrational selling ruled the day. It was like still finding a carton of milk after the hordes had beaten you to the store, indicating that not everyone believed that Armageddon was the next stop.

I think that if I could choose, I’d much rather be trading stocks when there is an identifiable and consistent reaction to events, even if it may be less than rational. The early part of the week, moving up and down daily in individual vacuums could do little to create any kind of confidence regarding market direction. In essence, it’s easier to plan survival tactics when maniacs are in charge than it is when no one is in charge.

Those that were in charge on Friday based their actions on fear and dragged the rest of us down with them.

They were fearful that putting more people to work would accelerate the timetable for raising interest rates. That in turn would lead to greater costs of doing business and would be coming at a time that the rest of the world is lowering rates.

That would probably lead to even greater strength in the US Dollar, perhaps even USD and Euro parity, which only serves to accentuate those currency headwinds that have already been highlighted as reducing corporate earnings and would only further create competitive threats.

Cycles. You can’t live with them and you can’t live without them.

The reaction by traders on Friday would have you believe that none of this was previously known or suspected to be in our future.

The reality is that we all know that rates are going to go higher. It’s just a question of whether we follow Janet Yellen’s perceived path or Stanley Fisher’s accelerated path.

Personally, my fear is how we could be trading in a market that in the space of a single week, when both Yellen and Fischer expressed their opinions, could go from the comforting assurances from Janet Yellen to completely tossing out those assurances. That leads to the question of whether we believe she is simply wrong or just lying.

Neither of those is very comforting.

It’s actually even worse than that, as last week the market, following a positive response to Yellen’s comments turned on her barely 2 days later upon Fischer’s suggestion that interest rate increases would be coming sooner, rather than later.

On the other hand a more rational consideration of Friday’s reaction would suggest that maybe the reaction itself was irrational and unwarranted because Janet Yellen is in a better position to know about the timing or rate increases than a nervous portfolio manager and is probably much less likely to lie or mis-represent her intentions.

There’s always that.

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

Following Friday’s sell-off a number of positions appear to be more appropriately priced, however, the accelerating nature of the sell-off should leave some residual precaution as approaching the coming week, as even stock innocents were taken along for the plunge on Friday and could just as easily still be at risk.

Another large climb in 10 Year Treasury interest rates makes interest related investment strategies more appealing to some and the impending start of the European version of Quantitative Easing may also serve to siphon investment funds from US equity markets.

While I do have some room in my mind and heart for some more exciting kind of positions this week, my primary focus is likely to be on more mundane positions, especially if there’s a dividend at hand. This week’s selection is also more limited, than usual, as I expect my week to be ruled by some of that heightened caution, at least at the outset of trading.

Huntsman (NYSE:HUN), Coca Cola (NYSE:KO) and Merck (NYSE:MRK) seem to be appropriate choices for the coming week and all under-performed the S&P 500 during the past week, with the latter perhaps having more currency related considerations in their futures.

Trading right near its one year low is Huntsman Corp . It’s not a terribly exciting company, but at the moment, who really needs excitement?

Trading only monthly options I might consider the use of a longer term option sale, perhaps a May 2015, to further reduce the excitement, while bypassing earnings in late April and adding a decent sized premium to the potential return, in addition to the upcoming dividend and, hopefully, some capital gains from shares, as well.

There probably isn’t very much that can be said about Coca Cola that would offer any great new insights. With a number of potential support levels beneath its current price and a recently enhanced option premium, particularly in a week that it is ex-dividend, a position seems to offer a good balance of reward with risk.

While the company may still be floundering in its efforts to better diversify its portfolio of offerings and while it may continue to be under attack for its management, those may be of little concern for a very short term strategy seeking to capitalize on option premiums and the upcoming dividend. At its current price level, however, it is below its mid-point level range for the past 6 months and may offer some near term upside in the underlying shares in addition to the income related opportunities.

You really know that it’s no longer your “grandfather’s stock market” when big pharma is no longer the keystone in everyone’s portfolio and is no longer making front page new on a daily basis. Instead, increasingly big pharma is playing second fiddle to smaller pharmaceutical companies, at least in garnering attention, unless it is involved in a proposed buy-out or merger, as is increasingly the case.

On a steady price decline since the end of January 2015, when the market started its own party mode, Merck shares are also ex-dividend this week and offer a better premium proposition than is normally the case when doing so.

Dow Chemical (NYSE:DOW) has for the past few months been held hostage by energy prices and will likely continue so while the supply – demand situation for oil evolves for better or worse.

The only good news is that while it may be unduly castigated for its joint energy holdings the impact has been relatively muted. During the past few months as shares have become more volatile its option premiums have understandably been increasing and making it again worthy of some consideration.

Although it doesn’t go ex-dividend for another 3 weeks I would already place my sights on trying to capture that dividend and would consider a longer term option contract in order to attempt to lock in several weeks of premiums in addition to the dividend as oil is likely to go up and down man
y times during that time frame.

Sometimes, the best approach during periods of advanced volatility is to try and ride things out by placing some time distance between your short option positions and events.

I was considering adding more shares of Mosaic (NYSE:MOS) a few weeks ago, as it passed the $52.50 level, thinking that it might be ready for a breakout, perhaps bringing it back to levels last seen before the breakdown of the potash cartel. I can’t really recall why I ultimately decided to look elsewhere, but instead shares went into another break-down.

That breakdown last week will hopefully be much smaller, since I already own shares and will take nowhere near as long to recoup the losses.

The nearly 8% decline in shares last week for no discernible reason has now brought them back to the upper range of where I had most recently been comfortable adding shares. While the broader macro-economic picture may suggest less acreage being put to use to add to the supply of already low priced crops there isn’t such a clean association between commodity prices and fertilizer prices.

With its ex-dividend date having just passed and with the recent trend still pointing downward, Mosaic may be a good candidate to consider the sale of put options as a means of potential entry into a long position, but at an even lower price.

Finally, for the third consecutive week I would consider establishing a position in shares of United Continental (NYSE:UAL) as part of a paired trade with an energy holding, especially if you crave the kind of excitement that Huntsman may not be able to provide.

I’ve been using Marathon Oil (NYSE:MRO) as the matching energy position and had my UAL shares assigned this past Friday, despite a large price drop for the second consecutive week just before expiration.

With the energy holding still in my portfolio I would consider another purchase of UAL, particularly if there is weakness in its shares to open the week. As has been the case previously, because of the volatility in shares the option premiums have been very generous. However, rather than directly taking advantage of those premiums, my preference has been to balance risk with reward and instead have opted for lower premiums by selecting deep in the money strike prices. Doing so allows shares to drop in price while still being able to deliver an acceptable ROI for the week.

Traditional Stocks: Dow Chemical

Momentum Stocks: Mosaic, United Continental

Double Dip Dividend: Huntsman (3/12), Coca Cola (3/12), Merck (3/12)

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.

Feb282015

Weekend Update – March 1, 2015

Weekend Update

It was interesting listening to the questioning of FOMC Chairman Janet Yellen this week during her mandated two day congressional appearance.

The market went nicely higher on the first day when she was hosted by the more genteel of the two legislative bodies. The apparent re-embrace of her more dovish side was well received by the stock market, even as bond traders had their readings of the tea leaves called into question.

While the good will imparted by suggesting that interest rate increases weren’t around the corner was undone by the Vice-Chair on Friday those bond traders didn’t get vindicated, but the stock market reacted negatively to end a week that reacted only to interest rate concerns.

His candor, or maybe it was his opinion or even interpretation of what really goes on behind the closed doors of the FOMC may be best kept under covers, especially when I’m awaiting the likelihood of assignment of my shares and the clock is ticking toward the end of the trading week in the hope that nothing will get in the way of their appointed rounds.

Candor got in the way.

But that’s just one of the problems with too much openness, particularly when markets aren’t always prepared to rationally deal with unexpected information or even informed opinion. Sometimes the information or the added data is just noise that clutters the pathways to clear thinking.

Yet some people want even more information.

On the second day of Yellen’s testimony she was subjected to the questioning of those who are perennially in re-election mode. Yellen was chided for not being more transparent or open in detailing her private meetings. It seemed odd that such non-subtle accusations or suggestions of undue influence being exerted upon her during such meetings would be hurled at an appointed official by a publicly elected one. That’s particularly true if you believe that an elected official has great responsibility for exercising transparency to their electorate.

Good luck, however, getting one to detail meetings, much less conversations, with lobbyists, PAC representatives and donors. You can bet that every opacifier possible is used to make the obvious less obvious.

But on second thought, do we really need even more information?

I still have a certain fondness for the old days when only an elite few had timely information and you had to go to the library to seek out an updated copy of Value Line in the hopes that someone else hadn’t already torn out the pages you were seeking.

Back then the closest thing to transparency was the thinness of those library copy pages, but back then markets weren’t gyrating wildly on news that was quickly forgotten and supplanted the next day. That kind of news just didn’t exist.

You didn’t have to worry about taking the dog out for a walk and returning to a market that had morphed into something unrecognizable simply because a Federal Reserve Governor had offered an opinion in a speech to businessmen in Fort Worth.

Too much information and too easy access and the rapid flow of information may be a culprit in all of the shifting sands that seem to form at the base of markets and creating instability.

I liked the opaqueness of Greenspan during his tenure at the Federal Reserve. During that time we morphed from investors largely in the dark to investors with unbelievable access to information and rapidly diminishing attention spans. Although to be fair, that opaqueness created its own uncertainty as investors wouldn’t panic over what was said but did panic over what was meant.

If I had ever had a daughter I would probably apply parental logic and suggest that it might be best to “leave something to the imagination.” I may be getting old fashioned, but whether it’s visually transparent or otherwise, I want some things to be hidden so that I need to do some work to uncover what others may not.

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

It’s difficult to find much reason to consider a purchase of shares of Chesapeake Energy (NYSE:CHK), but exactly the same could have been said about many companies in the energy sector over the past few months. There’s no doubt that a mixture of good timing, luck and bravery has worked out for some willing to take the considerable risk.

What distinguishes Chesapeake Energy from so many others, however, is that it has long been enveloped in some kind of dysfunction and melodrama, even after severing ties with its founder. Like a ghost coming back to haunt his old house the legacy of Aubrey McClendon continues with accusations that he stole confidential data and used it for the benefit of his new company.

Add that to weak earnings, pessimistic guidance, decreasing capital expenditures and a couple of downgrades and it wasn’t a good week to be Chesapeake Energy or a shareholder.

While it’s hard to say that Chesapeake Energy has now hit rock bottom, it’s certainly closer than it was at the beginning of this past week. As a shareholder of much more expensive shares I often like to add additional lower cost lots with the intent of trying to sell calls on those new shares and quickly close out the position to help underwrite paper losses in the older shares. However, I’ve waited a long time before considering doing so with Chesapeake.

Now feels like the right time.

Its elevated option premiums indicate continuing uncertainty over the direction its shares will take, but I believe the risk-reward relationship has now begun to become more favorable as so much bad news has been digested at once.

It also wasn’t a very good week to be Bank of America (NYSE:BAC) as it well under-performed other large money center banks in the wake of concerns regarding its capital models and ability to withstand upcoming stress tests. It’s also never a good sign when your CEO takes a substantial pay cut.

If course, if you were a shareholder, as I am, you didn’t have a very good week, either, but at least you had the company of all of those analysts that had recently upgraded Bank of America, including adding it to the renowned “conviction buy” list.

While I wouldn’t chase Bank of America for its dividend, it does go ex-dividend this week and is offering an atypically high option premium, befitting the perceived risk that continues until the conclusion of periodic stress testing, which will hopefully see the bank perform its calculations more carefully than it did in the previous year’s submission to the Federal Reserve.

After recently testing its 2 year lows Caterpillar (NYSE:CAT) has bounced back a bit, no doubt removing a little of the grin that may have appeared for those having spent the past 20 months with a substantial short position and only recently seeing the thesis play out, although from a price far higher than when the thesis was originally presented.

While it’s difficult to find any aspect of Caterpillar’s business that looks encouraging as mining and energy face ongoing challenges, the ability to come face to face with those lows and withstand them offers some encouragement if looking to enter into a new position. Although I rarely enter into a position with an idea of an uninterrupted long term relationship, Caterpillar’s dividend and option premiums can make it an attractive candidate for longer term holding, as well.

Baxter International (NYSE:BAX) is a fairly unexciting stock that I’ve been excited about re-purchasing for more than a year. I generally like to consider adding shares as it’s about to go ex-dividend, as it is this week, however, I had been also waiting for its share price to become a bit more reasonable.

Those criteria are in place this week while also offering an attractive option premium. Having worked in hospitals for years Baxter International products are ubiquitous and as long as human health can remain precarious the market will continue to exist for it to dominate.

Las Vegas Sands (NYSE:LVS) has certainly seen its share of ups and downs over the past few months with very much of the downside being predicated on weakness in Macao. While those stories have developed the company saw fit to increase its dividend by 30%. Given the nature of the business that Las Vegas Sands is engaged in, you would think that Sheldon Adelson saw such an action, even if in the face of revenue pressures, as being a low risk proposition.

Since the house always wins, I like that vote of confidence.

Following a very quick retreat from a recent price recovery I think that there is more upside potential in the near term although if the past few months will be any indication that path will be rocky.

This week’s potential earnings related trades were at various times poster children for “down and out” companies whose stocks reflected the company’s failing fortunes in a competitive world. The difference, however is that while Abercrombie and Fitch (NYSE:ANF) still seems to be mired in a downward spiral even after the departure of its CEO, Best Buy (NYSE:BBY) under its own new CEO seems to have broken the chains that were weighing it down and taking it toward retail oblivion.

As with most earnings related trades I consider the sale of puts at a strike price that is below the lower range dictated by the implied move determined by option premiums. Additionally, my preference would be to sell those puts at a time that shares are already heading noticeably lower. However, if that latter condition isn’t met, I may still consider the sale of puts after earnings in the event that shares do go down significantly.

While the options market is implying a 12.6% move in Abercrombie and Fitch’s share price next week a 1% ROI may be achieved even if selling a put option at a strike 21% below Friday’s close. That sounds like a large drop, but Abercrombie has, over the years, shown that it is capable of such drops.

Best Buy on the other hand isn’t perceived as quite the same earnings risk as Abercrombie and Fitch, although it too has had some significant earnings moves in the recent past.

The options market is implying a 7% move in shares and a 1% ROI could potentially be achieved at a strike 8.1% below Friday’s close. While that’s an acceptable risk-reward proposition, given the share’s recent climb, I would prefer to wait until after earnings before considering a trade.

In this case, if Best Buy shares fall significantly after earnings, approaching the boundary defined by the implied move, I would consider selling puts, rolling over, if necessary to the following week. However, with an upcoming dividend, I would then consider taking assignment prior to the ex-dividend date, if assignment appeared likely.

Finally, I end how I ended the previous week, with the suggestion of the same paired trade that sought to take advantage of the continuing uncertainty and volatility in energy prices.

I put into play the paired trade of United Continental Holdings (NYSE:UAL) and Marathon Oil (NYSE:MRO) last week in the belief that what was good news for one company would be bad news for the other. But more importantly was the additional belief that the news would be frequently shifting due to the premise of continuing volatility and lack of direction in energy prices.

The opening trade of the pair was initiated by first adding shares of Marathon Oil as it opened sharply lower on Monday morning and selling at the money calls.

As expected, UAL itself went sharply higher as it and other airlines have essentially moved opposite
ly to the movements in energy prices over the past few months. However, later that same day, UAL gave up most of its gains, while Marathon Oil moved higher. A UAL share price dropped I bought shares and sold deep in the money calls.

In my ideal scenario the week would have ended with one or both being assigned, which was how it appeared to be going by Thursday’s close, despite United Continental’s price drop unrelated to the price of oil, but rather related to some safety concerns.

Instead, the week ended with both positions being rolled over at premiums in excess of what I usually expect when doing so.

Subsequently, in the final hour of trading, shares of UAL took a precipitous decline and may offer a good entry point for any new positions, again considering the sale of deep in the money calls and then waiting for a decline in Marathon Oil shares before making that purchase and selling near the money calls.

While the Federal Reserve may be data driven it’s hard to say what exactly is driving oil prices back and forth on such a frequent and regular basis. However, as long as those unpredictable ups and downs do occur there is opportunity to exploit the uncertainty and leave the data collection and interpretation to others.

I’m fine with being left in the dark.

 

Traditional Stocks: Caterpillar, Marathon Oil

Momentum Stocks: Chesapeake Energy, Las Vegas Sands, United Continental Holdings

Double Dip Dividend: Bank of America (3/4), Baxter International (3/9)

Premiums Enhanced by Earnings: Abercrombie and Fitch (3/4 AM), Best Buy (3/4 AM)

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