After tallying up comparative results for the fourth quarter of 2012, my personal assets gained by 7.2% versus a loss of 1.3% for the S&P 500. In fact, the smugness really showed itself when recently publishing the trading results for my "Option to Profit" subscription service.
But those results were so "yesterday."
The numbers were good, but had really nothing to do with stock picking prowess or incredible insights. It was more about an indecisive market. In fact, if I'd bothered to really dwell on things, I'd have just looked at the early part of the first quarter of 2012 when instead of feeling smug, I was probably feeling like an idiot, but for some reason didn't find myself advertising that fact. Back then, the market knew that it wanted to go higher without me.
Take it from me, unless you're on the receiving end, smug is better. Much better. As funny as it may be to ask "But what have you done for me lately?" quite the opposite, it's not that funny when you are on the receiving end.
On Wednesday, the first day of trading in 2013, I was feeling like the proverbial pair of brown shoes with a black tuxedo. There was an incredible party going on, as somehow the House of Representatives pulled one out and actually came up with a real bipartisan vote to at least resolve some of the issues facing it, U.S. taxpayers and investors. While the S&P started the first week of 2013 on track for an incredible 4.6% gain, as long as you allow me to include December 31st to further exaggerate the point, I lagged that by 2.2%. On an annualized basis, that would put the S&P at a 2013 gain of 228% compared to the actual gain of 13.4% in 2012. I'm pretty certain I won't be able to keep up.
The problem was that those covered positions were invited to the party, but they simply thought that they had better plans and blew it off. Even worse, two my recent Double Dip Dividend choices, Bristol Myers Squibb (BMY) and JP Morgan Chase (JPM), were assigned prematurely following the late market surge on Monday (December 31, 2012).
To compound matters, what little self-esteem I still had was lost, as I began selling calls on some laggards that hadn't been covered the prior week or two. Feeling good about seeing their prices climb, what better time to sell covered calls than into strength? That is unless news is leaked that Transocean (RIG) was coming to a resolution with the Federal government and soars moments after selling calls. Or Las Vegas Sands (LVS) soaring for no reason at all after calls were sold.
What I do know is that the portfolio will look very different next week, as I have to replace nearly 40% of inhabitants, including a number of old friends. Although I ideally would love to see turnover in the 20-40% range, when near the end of that range comes the pressure of trying to find reasonably bargain priced stocks and being faced with a market that might be in an over-bought condition. On a positive note, call premiums tend to be enhanced when there's optimism in the air and can offset a little of the over-pricing of shares while biding time for assignment. I still wouldn't mind a bit of deflation of the optimism when the market opens on Monday.
My misanthropic hope for a surprisingly bad employment number didn't materialize this morning and the markets gave up none of the week's earlier strength, as I was hoping for an easy way out.
Of course, the danger of being too cautious is missing out. FOMO (Fear of Missing Out) is a powerful force, maybe even as strong as fear and greed. I remain convinced, however, that the danger of being overly smug and overly optimistic is greater than the danger of being too cautious. Missing part of a rally is generally easier to overcome than having to recover from a large loss, not to mention the fact that a rally is worthless if you don't take your gains because smugness tells you that there's more to come.
The selections this week, as always, are classified as being in either Traditional, Momentum or Double Dip Dividend categories (see details). Despite earnings season beginning this week, I couldn't identify any compelling Premium Enhanced by Earnings selections, although the following week may be a very different story.
Perhaps it's due to their relative recent under-performance, but this week's stocks on the radar screen have an energy and healthcare theme, as well as a need to make up for those lost dividends. As with most stocks, as I was writing this article, they too were moving higher throughout an otherwise lackluster conclusion to the week.
Chevron Texaco (CVX), Schlumberger (SLB) and Petrobras (PBR) are all potential buys this week, as British Petroleum (BP) and Halliburton (HAL) shared first in the collective guilt and now a bit in the optimism related to Transocean's coming to an end in its litigation journey. My shares of Halliburton are among those assigned, and British Petroleum and Transocean are likely to follow this Friday. They simply need to be replaced, and this week's selections are firmly in the middle of the performance pack.
People have a love-hate relationship with Chesapeake Energy (CHK). I'm no different, having traded shares on many occasions in 2012, but also being in a position to sell shares for a strategic tax loss at the end of the year. At current levels, I think that shares may be bargain priced, but in a rare occurrence, if I do end recommending it to subscribers, it is one trade that I won't make for my own accounts due to the Wash Sales Rule. My ideal stock moves around quite a bit, but goes nowhere. Chesapeake is often like that, but occasionally it gets out of the barn. I'm hoping that by January 21, when I can repurchase shares, it will still be in the same neighborhood, as I would like to add to an existing position. For subscribers, it also happens to go ex-dividend this week and with its depressed price, the dividend is just slightly below the S&P 500 average. The fact that it rallied on Friday by nearly 4% may suppress my desire on Monday morning, though.
Speaking of love-hate relationships, United Healthcare (UNH) may fall into that category whether you are a shareholder or they are your carrier. Being added to the Dow Jones Index hasn't been terribly advantageous, but I think that as the healthcare sector may be poised to play a bit of catch-up with the rest of the market, it probably makes sense to go with the highest profile player in the category.
While not quite sharing the same high profile, Aetna (AET) warrants a look, particularly as its option premium is appealing, perhaps more so than that of United Healthcare.
Although Abbott Labs (ABT) offers a far less compelling dividend following its very recent spin-off of AbbVie (ABBV) and only trades monthly options, it too is a relative laggard among its peers and fulfills my desire for an underdog this week.
Among other shares going ex-dividend this week are Verizon (VZ), AT&T (T) and Darden Restaurants (DRI). There's certainly nothing terribly adventurous about buying shares of the communication giants to capture the dividend. What's more adventurous is the specter of selling in the money calls and then having shares assigned early, particularly if the market continues its advance. At that point, opportunity costs do start becoming more tangible, as neither AT&T nor Verizon offer tremendous premiums, although if prematurely assigned, the investment would be only for a single day's holding period and could conceivably be plowed back into some other income generating opportunity. However, it would take a very large share purchase to make this a tenable action, so unless someone really likes these stocks, they may best be ignored or considered for a LEAP covered call, such as January 2014.
Darden, on the other hand has begun showing some stability after its large drop last month and offers a very attractive dividend. Although I normally challenge option buyers to exercise early by selling in the money contracts, this may be one position that may have some additional upside potential in it, perhaps offering some capital appreciation on shares, in addition to a monthly premium and dividend payment by selling an out of the money option.
Finally, as always, earnings season gets started with Alcoa (AA), despite the fact that it's not the first to actually announce. Alcoa is always a tricky stock to play on earnings. The past two reports had seen strong gains in the after hours session, only to be reversed as guidance was put forward. I look very closely at the proximity of Alcoa's price to a strike price in order to maximize premium, before considering purchasing new shares. However, when earnings are part of the equation, i think in terms of at least a 5% move and want adequate protection, given the risk. As much as I wanted to find something to like about the Alcoa opportunity, it just doesn't seem to be there.
Traditional Stocks: Aetna, Chevron, Petrobras, Schlumberger, United Healthcare
Momentum Stocks: Chesapeake Energy
Double Dip Dividend: Abbott Labs (ex-div 1/11), AT&T (ex-div 1/8), Chesapeake Energy (ex-div 1/11), Darden (ex-div 1/8), Verizon (ex-div 1/8)
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.