When to Take Tax Losses

(A version of this article appeared in TheStreet.com).

Each year the ritual begins just days before New Years. Even in the best of years there are bound to be some losers. Fortunately, whatever faults there may be in the tax code, the ability to attenuate investment mistakes isn’t one of them.

Since I actively sell covered options and generate taxable premiums the thought of offsetting gains is appealing, but before jumping at the opportunity a grasp of history may be helpful.
In this case looking at the strategic tax losses taken in 2012 I’m struck by one thing. Four out of the five such sales saw shares appreciate more than the S&P 500′s gain for 2013. Not only did they gain more than 29% from their sales price, but they also gained more than 29 % from their purchase prices.
Proponents of the “Dogs of the Dow Theory” would readily understand the phenomenon, as perhaps should serial covered option writers who repeatedly write options on the same stocks as their prices regularly go up and down, sometimes even to extremes, yet so often recover.
Given the choice between taking a tax credit or a stock loss or paying more taxes because of greater gains, I would take the latter every time. However, there is a preponderance of thought that losses should be taken if they reach the 10% level. For those believing in rules, this is a useful rule, if consistently practiced.

Unfortunately, there is no guarantee that proceeds from the sale of losers will be recycled into the shares of winners. Sometimes losers simply give way to other losers, as even well devised ideas don’t alwaysbear fruit. While hindsight often has me wishing I had cut my losses, the real battle is deciding whether to follow your humble or arrogant side.

The arrogant side believes it can re-invest loser proceeds and recover losses. The humble side wonders how someone so ill-advised and having made the original investment, then sat frozenly while shares plunged, could now suddenly be deft enough to select a winner, instead of inviting ruination once again.
It’s difficult to not take the humble side’s argument. Logic trumps hope.
The decision process as to whether to take tax losses begins with understanding your tax liability, which is related to your marginal tax rate. If in the highest Federal tax bracket, the short term rate on capital gains is 39.6%, although the rate varies from 10 to 39.6%.

Next comes a look at the probabilities of various outcomes and their respective benefits.
There is a 100% probability that the loss will decrease your tax liability, if you didn’t violate the Wash Sales Rules. It’s hard to beat those odds, but if you do buy and sell the same stock repeatedly, as I often do, the 30 day window on either side of your proposed trade can scuttle your strategy.
The next step takes some calculation.

As an example, I’m going to look at Petrobras (PBR) shares that I bought on January 7, 2013 at $20.05 and currently trading at $13.48. An advanced degree is mathematics is unnecessary to recognize that represents more than a 10% decline and would violate investing rules sometimes attributed to famed financier Bernard Baruch.
The potential tax benefit is based upon your tax rate and whether the holding is a short term or long term. As a short term holding the Petrobras position is entitled up to a 39.6% credit against capital gains, meaning that credit can be worth up to $2.60 per share.

While that is an objective calculation, the next step is entirely subjective and focuses on your assessment of the probability that Petrobras shares will add $2.60 to its current share price. How likely is it that shares will gain 19.3%?  While there may be be company specific challenges, as well as broader economic challenges to consider, one may be justified in wondering whether Petrobras will be this year’s Hewlett Packard (HPQ), which was a strategic tax loss that I mistakenly took last year and is up 99% YTD.

If you believe that such lightning may strike twice in a lifetime you may decide to roll the dice and surrender the certainty of a short term tax credit.

if your educated gamble is right, even at the new higher price yomay still qualify for a tax loss, however, you’ll find yourself looking at a much ower credit, if the short term loss becomes a long term loss. As a movie character once asked, “are you feeling lucky?” If you can generate some option premiums along the way you can make your own luck, but whatever the outcome, it is deferred to 2015, which may entail further opportunity costs.

Then again, just look at your losers from last year. Unlikely as it may have seemed, recovery wasn’t outside the realm of possibility.

Bottom line? Ask your tax advisor, but do so soon.

Weekend Update – November 24, 2013

Sometimes the strategy is self-defense. Sometimes it’s just doing what you need to do to keep beta at bay.

I don’t know about other people, but I’m getting a little more nervous than usual watching stocks break the 16000 level on the Dow Jones and the 1800 level on the S&P 500.

What’s next 5000 NASDAQ? Well that’s not so ludicrous. All it would take is 4 years of 6% gains and we would could set the time machine back to a different era.

In hindsight I know what I would do at the 5000 level.

For those old enough to remember the predictions of Dow 35000 all we need is a repeat of the past 56 months and we’re finally there and beyond.

This being a holiday shortened trading week adds a little bit to the stress level, because of the many axioms you hear about the markets. The one that I believe has as much validity as the best of them is that low volume can create artificially large market moves. When so many are instead focusing on the historical strength of markets during the coming week, I prefer to steer clear of any easy guide to riches.

When faced with a higher and higher moving market you could be equally justified in believing that momentum is hard to stop as you could believe that an inflection point is being approached. The one pattern that appears clear of late is that a number of momentum stocks are quickly decelerating when faced with challenges.

When I find myself a little ill at ease with the market’s height, I focus increasingly on “beta,” the measure of a stock’s systemic risk compared to the overall market. I want to steer clear of stock’s that may reasonably be expected to be more volatile during a down market or expectations of a declining market.

As a tool to characterize short term risk beta can be helpful, if only various sources would calculate the value in a consistent fashion. For example, Tesla (TSLA), which many would agree is a “momentum” stock, can be found to have a beta ranging from 0.33 to 1.5. In other words, depending upon your reference source you can walk away believing that either Tesla is 50% more volatile than the market or 67% less volatile.

Your pick.

While “momentum” and “beta” don’t necessarily have correlation, common sense is helpful. Tesla or any other hot stock du jour, despite a reported beta of 0.33, just doesn’t seem to be 67% less volatile than the overall market, regardless of what kind of spin Elon Musk might put on the risk.

During the Thanksgiving holiday week I don’t anticipate opening too many new positions and am focusing on those with low beta and meeting my common sense criteria with regard to risk. Having had many assignments to close out the November 2013 option cycle I decided to spread out my new purchases over successive weeks rather than plow everything back in at one time and risk inadvertently discovering the market’s peak.

Additionally, I’m more likely to look at either expanded option possibilities or monthly options, rather than the weekly variety this week. In part that’s due to the low premiums for the week, but also to concerns about having positions with options expiring this week caught in a possible low volume related downdraft and then being unable to find suitable new option opportunities in future weeks. If my positions aren’t generating revenue they’re not very helpful to me.

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).

While eschewing risk may be in order when you think a market top is at hand, sometimes risky behavior can be just the thing when it comes to assembling a potentially profitable mix of stocks. In this case the risky behavior comes from the customers of Lorillard (LO), Philip Morris (PM) and Molson-Coors (TAP).

With word that Europeans may finally be understanding the risks associated with tobacco and may be decreasing use of their ubiquitously held cigarettes, Philip Morris shares had a rough week. The 6% drop accompanying what should be good news from a public health perspective brings shares back to a much more inviting level. Shares did successfully test an $85 support level and subsequently bounced back a bit too much for my immediate interest, but I would welcome another move toward that level, particularly as I would prefer an entry cost right near a monthly strike level.

Lorillard, on the other hand, has essentially no European exposure, but perhaps in sympathy gave up just a little bit from its 52 week high after a sustained run higher over the past 6 weeks. While there is certainly downside risk in the event of a lower moving market, shares do go ex-dividend this week and think of all of those people lighting up after a hearty Thanksgiving meal. The near term risk factors identified for Europe aren’t likely to have much of an impact in the United States market, where the only real risk factors may be use of the products.

That Thanksgiving meal may very well be complemented with a product from Molson Coors. I imagine there will also be those using a Molson Coors product while using a Lorillard product, perhaps even dousing one in the other. Shares, which are down nearly 5% from its recent highs go ex-dividend this week. Because of the strike prices available, Molson Coors is one position that I may consider using a November 29, 2013 option contract, as many more strike levels are available, something that is useful when attempting to capture both a decent option premium and the dividend, while also enticing assignment of shares.

Speaking of risky behavior, the one exception to the central theme of staying away from high beta names is the consideration of adding shares of Walter Energy (WLT). While the last 9 months have seen its shares plummet, the last three months have been particularly exciting as shares had gone up by as much as 75%. For those with some need for excitement this is certainly a candidate, with a beta value 170% greater than the average of all other recommended positions this week, the stock is no stranger to movement. But speaking of movement, although I don’t look at charts in any depth, there appears to be a collision in the making as the 50 dma is approaching the 200 dma from below. Technicians believe that is a bullish indicator. Who knows. What I do know is that the coal, steel and iron complex, despite a downgrade this past Friday of the steel sector, has been building a higher base and I believe that the recent pullback in Walter Energy is just a good opportunity for a quick trade, perhaps using the sale of puts rather than covered calls.

While not falling into the category of risky behavior, Intel’s (INTC) price movement this week certainly represents odd behavior. Not being prone to exceptionally large moves of late on Thursday it soared 3%, which by Intel’s standards really is soaring. It then fell nearly 6% the following day. While the fall was really not so odd given that Intel forecast flat revenues and flat operating profits, it was odd that the price had gone up so much the previous day. Buying on Thursday, in what may have been a frenzied battle for shares was a nice example of how to turn a relatively low risk investment into one that has added risk.

But with all of the drama out of the way Intel is now back to a more reasonable price and allows the ability to repurchase shares assigned the previous week at $24 or to just start a new position.

While I would have preferred that Joy Global (JOY) had retreated even further from its recent high, its one year chart is a nearly perfect image of shares that had spent the first 6 months of the year above the current price and the next 6 months below the current price, other than for a brief period in each half year when the relationship was reversed. Joy GLobal is an example of stock have a wide range of beta reported, as well, going from 1.14 to 2.17. However, it has also traded in a relatively narrow range for the past 6 months, albeit currently near the high end of that range.

With earnings scheduled later in the December 2013 option cycle there is an opportunity to attempt to thread a needle and capture the dividend the week before earnings and avoid the added risk. However, I think that Joy Global’s business, which is more heavily reliant on the Chinese economy may return to its recent highs as earnings are delivered.

Lowes (LOW) reported earnings this past week, and like every previous quarter since the dawn of time the Home Depot (HD) versus Lowes debate was in full force and for yet another quarter Lowes demonstrated itself to be somewhat less capable in the profit department. However, after its quick return to pricing reality, Lowes is once again an appealing portfolio addition. I generally prefer considering adding shares prior to the ex-dividend date, but the share price slide is equally compelling.

Hewlett Packard (HPQ) is one of those stragglers that has yet to report earnings, but does so this week. Had I known 35 years ago that a classmate would end up marrying its future CEO, I would likely not have joined in on the jokes. It is also one of those companies that I swore that I would never own again as it was one of my 2012 tax loss positions. I tend to hold grudges, but may be willing to consider selling puts prior to earnings, although the strike price delivering a 1% ROI, which is my typical threshold, is barely outside of the implied price move range of 8%. It’s not entirely clear to me where Hewlett Packard’s future path may lead, but with a time perspective of just a week, I’m not overly concerned about the future of the personal computer, even if Intel’s forecasts have ramifications for the entire industry.

Lexmark (LXK) is a company that I like to consider owning when there is also an opportunity to capture a dividend. That happens to be the case this week. When it announced that it was getting out of the printer business investors reacted much as you would have imagined. They dumped shares, which for most people are electronically maintained and not in printed form. After all, why own a printer company that says that printers are a dead end business? Who knew that Lexmark had other things in mind, as it has done quite nicely focusing on business process and content management solutions. While it has been prone to large earnings related moves or when shocking the investment community with such news as it was abandoning its most recognizable line of business, it has also been a rewarding position, owing to dividends and option premiums. However, always attendant is the possibility of a large news related move that may require some patience in awaiting recovery.

Finally, I find myself thinking about adding shares of eBay (EBAY) again this week, just as last week and 10 other times this past year. Perhaps I’m just obsessed with another CEO related missed opportunity. Shares didn’t fare too well based upon an analyst’s report that downgraded the company saying that shares were “range bound at $49-$54.” While that may have been the equivalent of a death siren, for me that was just validation of what had been behind the decision to purchase and repurchase shares of eBay on a regular basis. While being range bound is an anathema to most stock investors, it is a dream come true to a covered option writer.

Happy Thanksgiving.

Traditional Stocks: eBay, Intel, Lowes, Philip Morris

Momentum Stocks: Joy Global, Walter Energy

Double Dip Dividend: Lexmark (ex-div 11/26), Lorillard (ex-div 11/26), Molson-Coors (ex-div 11/26)

Premiums Enhanced by Earnings: Hewlett Packard (11/26 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.

Weekend Update – July 21, 2013

This week may have marked the last time Ben Bernanke sits in front of far less accomplished inquisitors in fulfilling his part of the obligation to provide congressional testimony in accordance with law.

The Senate, which in general is a far more genteel and learned place was absolutely fawning over the Federal Reserve Chairman who is as good at playing close to the vest as anyone, whether its regarding divulging a time table for the feared “tapering” or an indication of whether he will be leaving his position.

If anything should convince Bernanke to sign up for another round it would be to see how long the two-faced good will last and perhaps give himself the opportunity to remind his detractors just how laudatory they had been. But I can easily understand his taking leave and enjoying the ticker tape, or perhaps the “taper tick” parade that is due him.

But in a week when Treasury Secretary Jack Lew and Bernanke had opportunities to move the markets with their appearances, neither said anything of interest, nor anything that could be mis-interpreted.

Instead, at the annual CNBC sponsored “Delivering Alpha Conference” the ability of individuals such as Jim Chanos and Nelson Peltz to move individual shares was evident. What is also evident is that based upon comparative performance thus far in 2013, there aren’t likely to be many ticker tape parades honoring hedge fund managers and certainly no one is going to honor an index.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. There are many potential earnings related trades this week beyond those listed in this article for those interested in that kind of trade. (see details).

A portion of this week’s selections reflect the recently wounded, but certainly not mortally, from recent disappointing earnings. While there may not be any victory tours coming anytime soon for some of them, it’s far too short sighted to not consider the recent bad news as a stepping stone for short term opportunism.

In terms of absolute dollars lost, it’s hard to imagine the destruction of market capitalization and personal wealth at the hands of Microsoft (MSFT), Intel (INTC) and eBay (EBAY). While no one is writing an epitaph for eBay, there are no shortage of obituary writers for Microsoft and Intel. However, although most all businesses will someday go that path, I don’t think that any of that triumvirate are going to do so anytime soon, although Microsoft’s nearly 11% drop on Friday was more than the option market anticipated. It was also more than an innocent cough and may not be good for Steve Ballmer’s health.

Since my timeframe is usually short, although I do currently have shares of Intel that will soon pass their one year anniversary, I don’t think their demise or even significantly more deterioration in share price will be anytime soon. All offer better value and appealing option premiums for the risk of a purchase. Additionally, both Intel and Microsoft have upcoming dividends during the August cycle that simply adds to the short term appeal. My eBay shares were assigned on Friday, but I have been an active buyer in the $50-52.50 range and welcomed its return to that neighborhood.

I currently own some shares of Apple (AAPL) and sold some $450 August 17, 2013 calls in anticipation of its upcoming earnings. While I normally prefer the weekly options, the particular shares had an entry of $445 and haven’t earned their keep yet from cumulative option premiums. The monthly option instead offered greater time protection from adverse price action, while still getting some premium and perhaps a dividend, as well. However, with earnings this week, the more adventurous may consider the sentiment being expressed in the options market that is implying a move of approximately 5% upon earnings. Even after Friday’s 1% drop following some recent strength, I found it a little surprising at how low the put premiums are compared to call options, indicating that perhaps there is some bullish sentiment in anticipation of earnings. I simply take that as a sign of the opposite and would expect further price deterioration.

I’m always looking to buy or add shares of Caterpillar (CAT). I just had some shares assigned in order to capture the dividend. After Chanos‘ skewering of the company and its rapid descent as a direct result, I was cheering for it to go down a bit further so that perhaps shares wouldn’t be assigned early. No such luck, even after such piercing comments as “they are tied to the wrong products, at the wrong time.” I’m not certain, but he may have borrowed that phrase from last year when applied to Hewlett Packard (HPQ). For me, the various theses surrounding dependence on China or the criticisms of leadership have meant very little, as Caterpillar has steadfastly traded in a well defined range and have consistently offered option premiums upon selling calls, as well as often providing an increasingly healthy dividend. To add a bit to the excitement, however, Caterpillar does report earnings this week, so some consideration may be given to the backdoor path to potential ownership through the sale of put options.

While Chanos approached his investment thesis from the short side, Nelson Peltz made his case for Pepsico’s (PEP) purchase of Mondelez (MDLZ). My shares of Mondelez were assigned today thanks to a price run higher as Peltz spoke. I never speculate on the basis of takeover rumors and am not salivating at the prospect of receiving $35-$38 per share, as Peltz suggested would be an appropriate range for a, thus far, non-receptive Pepsico to pay for Mondelez ownership. Despite the general agreement that margins at Mondelez are low, even by industry standards, it has been trading ideally for call option writers and I would consider repurchasing shares just to take advantage of the option premiums.

Fastenal (FAST) is just one of those companies that goes about its business without much fanfare and it’s shares are still depressed after offering some reduced guidance and then subsequently reporting its earnings. It goes ex-dividend this week and offers a decent monthly option premium during this period of low volatility. Without signs of industrial slowdowns it is a good place to park assets while awaiting for some sanity to be restored to the markets.

Although I’ve never been accused of having fashion sense Abercrombie and Fitch (ANF) and Michael Kors (KORS) are frequently alluring positions, although always carrying downside risk even when earnings reports are not part of the equation. I have been waiting for Kors to return to the $60 level and it did show some sporadic weakness during the past week, but doggedly stayed above that price.

Abercrombie and Fitch is always a volatile position, but offers some rewarding premiums, as long as the volatility does strike and lead to a prolonged dip. It reports earnings on August 14, 2013 and may also provide some data from European sales and currency impacts prior to that. Kors also reports earnings during the AUgust cycle and ant potential purchases of either of these shares must be prepared for ownership into earnings if weekly call contracts sold on the positions are not assigned.

Finally, it’s hard to find a stock that has performed more poorly than Cliffs Natural Resources (CLF). Although no one has placed blame on its leadership, in fact, they have been lauded for expense controls during demand downturns, it didn’t go unnoticed that shares rallied when the CEO announced his upcoming retirement. It also didn’t go unnoticed that China, despite being in a relative downturn, purchased a large portion of the nickel, a necessary ingredient for steel, available on the London commodity market. For the adventurous, Cliffs reports earnings this week and seems to have found some more friendly confines at the $16 level. The option market expects a 9% move in either direction. A downward move of that amount or less could result in a 1% ROI for the week, if selling put options. I suspect the move will be higher.

Traditional Stocks: Caterpillar, eBay, Intel. Microsoft, Mondelez

Momentum Stocks: Abercrombie and Fitch, Michael Kors

Double Dip Dividend: Fastenal (ex-div 7/24 $0.25)

Premiums Enhanced by Earnings: Apple (7/23 PM), Cliffs Natural Resources (7/25 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.

Disclosure: I am long AAPL, FAST, CAT, CLF, INTC. 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.

 

Weekend Update – February 24, 2013

We all engage in bouts of wishful thinking.

On an intellectual level I can easily understand why it makes sense to not be fully invested at most moments in time. There are times when just the right opportunity seems to come along, but it stops only for those that have the means to treat that opportunity as it deserves.

I also understand why it is dangerous to extend yourself with the use of margin or leverage and why it’s beneficial to resist the need to pass up that opportunity.

What I don’t understand is why those opportunities always seem to arise at times when the well has gone dry and margin is the only drink of water to be found.

Actually, I do understand. I just wish things would be different.

I rely on the continuing assignment of shares and the re-investment of cash on a weekly basis. My preference is for anywhere from 20-40% of my portfolio to be turned over on a weekly basis.

But this past week was simply terrible on many levels. Whether you want to blame things on a deterioration of the metals complex, hidden messages in the FOMC meeting or the upcoming sequester, the market was far worse than the numbers indicated, as the down volume to up volume was unlike what we have seen for quite a while.

On Wednesday the performances of Boeing (BA), Hewlett Packard (HPQ) and Verizon (VZ), all members of the Dow Jones Industrials Index helped to mask the downside, as the DJIA and S&P 500 diverged for the day. Thursday was more of the same, except Wal-Mart (WMT) joined the very exclusive party. So far, this week is eerily similar to the period immediately following the beginning of 2012 climb and immediately preceding a significant month long decline of nearly 10%,beginning May 2012.

That period was also preceded by the indices sometimes moving in opposite directions or differing magnitudes and those were especially accentuated during the month long decline.

So what I’m trying to say is that with all of the apparent bargains left in the carnage of this trading shortened week, I don’t have anywhere near the money that I would typically have to plow in head first. I wish I did; but I don’t. I also wish I had that cash so that I wouldn’t necessarily be in a position to have it all invested in equities.

Although that margin account is overtly beckoning me to approach, that’s something that I’ve developed enough strength to resist. But at the same time, I’m anxious to increase my cash position, but not necessarily for immediate re-investment.

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

Cisco (CSCO) was one of those stocks that I wanted to purchase last week, but like most in a wholly unsatisfying week, it wasn’t meant to be. With earnings out of the way and some mild losses sustained during the past week, it’s just better priced than before.

Although there have been periods of time that I’ve owned shares of both Caterpillar (CAT) and Deere (DE), up until about $10 ago on each stock there has rarely been a time over the past 5 years that I haven’t owned at least one of them. This past week saw some retreat in their prices and they are getting closer to where I might once again be comfortable establishing ownership.

Lockheed Martin (LMT) is one of those stocks that I really wished had offered weekly option premiums. Back in the days when there was no such vehicle this was one of my favorite stocks. This week it goes ex-dividend and that always gets me to give a closer look, especially after some recent price drops. Dividends, premiums and a price discount may be a good combination.

Dow Chemical (DOW) has been in my doghouse of late. That’s not any expression of its quality as a company, nor of its leadership. After all, back when the market last saw 14,000, Dow Chemical was among those companies whose shares, dividends and option premiums helped me to survive those frightening days. But after 2009 had gotten well entrenched and started heading back toward 14000, the rest of the market just left Dow behind. Then came weekly options and Dow Chemical didn’t join that party. More recently, as volatility has been low, it’s premiums have really lagged. But now, at its low point in the past two months for no real reason and badly lagging the broad market, it once again looks inviting.

Lorillard (LO) was on my radar screen about a month ago, but as so often happens when it came time to make a decision there appeared to be a better opportunity. This week Lorillard goes ex-dividend. Unfortunately, it no longer offers a weekly option, but this is one of those companies that if not assigned this month will likely be assigned soon, as tobacco companies have this knack for survival, much more so than their customers.

MetLife (MET) was on last week’s radar screen, but it was a week that very little went according to script. Maybe this week will be better, but like the tobacco companies that are sometimes the bane of insurance companies, even when paying out death benefits, somehow these companies survive well beyond the ability of their customers.

United Healthcare (UNH) simply continues the healthcare related theme. Already owning shares of Aetna (AET), I firmly believe that whatever form national healthcare will take, the insurance companies will thrive. Much as they have done since Medicaid and Medicare appeared on the national landscape and they moaned about how their business models would be destroyed. After 50 years of moaning you would think that we would all stop playing this silly game.

The Gap (GPS) reports earnings this week, along with Home Depot (HD) as opposed to most companies that I consider as potential earnings related trades, there isn’t a need to protect against a 10-20% drop. At least I don’t think there is that kind of need. But whereas the concern of holding shares of some of those very volatile companies is real, that’s not the case with these two. Even with unexpected price movements eventually ownership will be rewarded. The fact that Home Depot gained 2% following Friday’s upgrade by Oppenheimer to “outperform” always leads me to expect a reversal upon earnings release.

On the other hand, when it comes to MolyCorp (MCP) there’s definitely that kind of need to protect against a 20% price decline. Always volatile, MolyCorp got caught in last week’s metal’s meltdown, probably unnecessarily, since it really is a different entity. Yet with an SEC overhang still in its future and some investor unfriendly moves of late, MolyCorp doesn’t have much in the way of good will on its side.

Nike (NKE) goes ex-dividend this week and its option premiums have become somewhat more appealing since the stock split.

Salesforce.com (CRM) is another of those companies that I’m really not certain what it is that they do or provide. I know enough to be aware that there is drama regarding the relationship between its CEO, Mark Benioff and Oracle’s mercurial CEO, Larry Ellison, to get people’s attention and become the basis of speculation. I just love those sort of side stories, they’re so much more bankable that technical analysis. In this case, a xx% drop in share price after earnings could still deliver a 1% ROI.

Finally, two banking pariahs are potential purchases this week. I’ve owned both Citibank (C) and Bank of America (BAC) in the past month and have lost both to assignment a few times. As quickly as their prices became to expensive to repurchase they have now become reasonably priced again.

Although Friday’s trading restored some of the temporarily beaten down stocks a bit, a number still appear to be good short term prospects. I emphasize “short term” because I am mindful of a repeat of the pattern of May 2012 and am looking for opportunities to move more funds to cash.

I don’t know if Friday’s recovery is a continuation of that 2012 pattern, but if it is, that leads to concern over the next leg of that pattern.

For that reason I may be looking at opportunities to increase cash levels as a defensive move. In the event that there are further signals pointing to a strong downside move, I would rather be out of the market and miss a continued upside move than go along for the ride downward and have to work especially hard to get back up.

I’ve done that before and don’t feel like having to do it again.

Traditional Stocks: Caterpillar, Cisco, Deere, Dow Chemical, MetLife, United Healthcare

Momentum Stocks: Citibank

Double Dip Dividend: Bank of America (ex-div 2/27), Lockheed Martin (ex-div 2/27), Lorillard (ex-div 2/27), Nike (ex-div 2/28)

Premiums Enhanced by Earnings: Home Depot (2/26 AM), MolyCorp (2/28 PM), Salesforce.com (2/28 PM), The Gap (2/28 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 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.