Coming To An Agreement

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Includes: COH, HPQ, MRO
by: George Acs

Summary

OPEC's agreement on production reductions came as a surprise to anyone who had been paying attention to their recent past history.

The stock market reacted in a more appropriate fashion to a supply related increase in oil prices than it has done for most of the past 2 years.

The economy seems ready to warrant the FOMC's decision to raise interest rates and investors seem to be rational actors in that regard, as well.

It's hard to say what really came as more of a surprise.

The fact that we have a President-elect Trump or the fact that OPEC actually came to something of an agreement this past week.

When it has come to the latter, we'd seen any number of stock market run-ups in anticipation of an OPEC agreement to limit production of crude oil in an effort to force the supply-demand curve to their nefarious favor.

Had you read the previous paragraph during any other phase of your lifetime, you would have basically found it nonsensical.

But in the past 18 months or so, we've been in an environment where the stock market looked favorably on a supply driven increase in the price of oil.

So when it seemed as if OPEC was going to come to an agreement to reduce production earlier in the year, stocks soared and then soured when the agreement fell apart.

Unable to learn from the past, the very next time there was rumor of an OPEC agreement stocks soared and then again soured when the predictable happened.

This week, however, everything was different.

Maybe better, too.

Or maybe, not.

What was not better was that OPEC actually came to an agreement, although you can't be blamed if you withhold judgment in the belief that someone will cheat or that U.S. producers might be enticed to increase production as prices rise.

What may have been good, though, was that markets didn't react with their usual state of irrational unbridled enthusiasm as the price of oil sharply increased this week.

Nor did rational behavior kick in, as a supply driven increase in the price of oil should induce concerns about corporate profits and diversion of discretionary consumer cash.

But there was some kind of rational behavior this week as was when the Employment Situation Report was released.

In that case there was basically no reaction, which is probably a good thing, as we are prepared to accept the inevitable in less than 2 weeks. The FOMC seemingly has no choice but to announce an increase in interest rates.

Then we'll see whether the rational behavior has longer lasting power than it did a year ago when we were in the same situation.

But, with a little bit of hindsight at hand, you do have to be impressed with what may have been a very rational response by stock markets in the aftermath of the Trump election victory, as it did a complete about face from what most everyone in the world believed that it would do.

In addition to the rational behavior displayed by the market, you may have to give some credit to the non-traditional timeframe in which the President-elect has decided to hit the ground running when it comes to economic matters.

That timeframe is before he is empowered to really do anything other than to decide not to go to security briefings.

Can we all agree that those briefings are less relevant than the economy?

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

For those who haven't tired of hearing about Marathon Oil (NYSE:MRO), I feel that I might be negligent to not bring it up again this week.

In a week when oil stocks really prospered, Marathon Oil really, really prospered.

On the one hand I felt really good about that, having sold 2 separate lots of put options, one of which was at what would turn out to be at about its lows for the week.

On the other hand, I sold calls on a far more expensive lot of shares at a strike well below my break-even and I had to scurry to roll those short calls over in the hopes that shares might find their own rational place to go, maybe just a bit south of $17.50.

But that brings me back to still be interested in Marathon Oil.

The issue, though, as it always is, is what comes next?

I'm of the belief that those higher oil prices may not be long lasting, but perhaps long enough to bring some share price stability.

Even at this new level, I might be interested in selling puts again with an $18 or $17.50 strike level, but I would certainly not do so in the same quantity as I did this week with $15 puts.

I was aggressive with those and happily so, but I would not consider doing the same this week.

Where I might consider being aggressive is with the purchase of shares of Coach (NYSE:COH).

Considering the purchase of any retailer in the final month of the year is something that shouldn't be taken too lightly, as surprises abound when you would least prefer.

What appeals to me about Coach right now is the fact that I find it fairly priced at a time when it will be ex-dividend.

For me, even as I'm still saddled with an expensive lot of Coach shares, the most appealing and profitable time to have bought shares was on the cusp of an ex-dividend date.

My history, with the exception of the current lot of shares that i own has been that dividends and earnings have been great times to do something. The problem with Coach's earnings, however, is that they have been far lass predictable than its commitment to the dividend.

Finally, I have shares of Hewlett Packard (NYSE:HPQ) and am short $15 calls that expire along with the end of the monthly option cycle.

Hewlett Packard is also ex-dividend on the Monday following this coming week, so I will be closely watching its closing price next Friday.

But before that Friday comes by, I will seriously consider adding shares and selling calls that also expire with the monthly options.

That would be to have the possibility of collecting somewhat more than a typical week's worth of premium, by virtue of the longer time value, following adjustment for its dividend, in the event of an early assignment.

Generally, Monday ex-dividend positions provide an opportunity to consider those scenarios where either an early assignment or the alternative of collecting both the premium and the dividend can be appealing.

It helps when the purchase price is close to the strike price and when the purchase price is close to what you would ordinarily accept as a fair price for shares.

I like Hewlett Packard at $15, although I don't see too much prospect for capital appreciation of shares. What i like about it is as a repository for premiums and dividends and that could start as early as Monday morning.

Traditional Stocks: none

Momentum Stocks: Marathon Oil

Double-Dip Dividend: Hewlett Packard (12/12 $0.13), Coach (12/7 $0.33)

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.

Disclosure: I am/we are long COH, HPQ, MRO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may buy/add shares or sell puts in COH, HPQ or MRO

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