🔒Membership Positions - July 31, 2022

Hey Wealth Builders!

Wow! We had another wonderful rally this week, despite the US economy entering a technical recession and the Federal Reserve raising interest rates by 75 basis points to 2.25% to 2.5%, as their main objective is to do whatever they can do lower inflation.

Remember, a recession is often defined as a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. However, it still seems that the economy is still moving forward with what we heard in this week's major corporate earnings and with the US jobless claims still relatively low.

Treasury Secretary Janet Yellen believes the U.S. economy is in a state of transition, not recession, despite two consecutive quarters of negative growth.

Recession, Yellen insisted, is a “broad-based weakening of our economy” that includes substantial layoffs, business closures, strains in household finances and a slowdown in private sector activity.

“That is not what we are seeing right now,” she said during the Thursday afternoon news conference at the Treasury. “When you look at the economy, job creation is continuing, household finances remain strong, consumers are spending and businesses are growing.”

Technical Analysis 📈

SPY

SPY has broken out from some of its downward trending resistance lines. We are, however, getting close to the next area of resistance of $415.

It seems like large institutions are comfortable putting their money back into the markets. Hopefully over the past half year, you have been diligently increasing your cash reserves from (1) covered call premiums, (2) bear call spreads, (3) dividends, and (4) monthly deposits. We can now consider SLOWLY putting some of the saved capital to use by buying SOME shares. You can also leave some capital on the side, just in case S&P500 rejects the resistance line. If we break through, you can also SLOWLY buy more shares into strength.

Remember the goal is to SLOWLY scale into your positions because we don't know what can happen in the markets. Make sure that you are comfortable with the capital that you put into the markets and that your intentions for investing is for the long term.

QQQ

The same goes for QQQ as we are nearing the $317 resistance line. You can comfortably buy some shares now and buy some later if we break above the resistance line.

Buying ETFs

If you want to take a more conservative approach, you can consider purchasing SPY shares more than QQQ shares. SPY shares mimic the S&P500, while QQQ shares mimic the NASDAQ100, which are comprised of many tech stocks. Though tech shares typically rise the fastest during a bullish market, they also drop the fastest when there is uncertainty.

Something you can consider is splitting out your investments and buy these ETFs in a 1 to 1 ratio. For every 1 share of SPY you purchase, you can buy 1 shares of QQQ. Or, for every $100 you put into SPY, you can put in $100 into QQQ.

All in all, see what your risk tolerance is. Heck, if you don't want to invest right now, that's fine. You can wait a little longer until you feel more comfortable with market sentiment.

However, I recommend that you see investing from a long-term lens. Where do you think these shares are going to be in the next 5-10 years? Most likely, the value of these shares will be much higher from where they are now.

SPY:

QQQ:

Earnings

As we look at some of the companies that delivered earnings this week and their financial statements, remember that we are looking for overall top-line revenue growth. At the end of the day, Wall Street investors want to see if companies are able to make increasing revenue compared to the same prior time period, and if they are projected to make more in the future.

Investing is like dating. You want to make sure the person you date is financially stable and getting an increase in salary each year. Likewise, we want to make sure the companies we "date" are making more and more money each year.

Lastly, remember that the numbers in the financial statements below are typically represented in the thousands. You can stick on another three zeros at the end of each revenue figure.

MSFT:

Microsoft's top line revenue increased to $51.87 billion from $46.15 billion in the year-ago quarter. Looking at the company's financial statements, revenue from all three segments rose from quarter-over-quarter and year-over-year basis.

Guidance:

Chief Financial Officer Amy Hood guided for fiscal first-quarter revenue of $49.25 billion to $50.25 billion, while analysts on average had been expecting $51.44 billion.

Hood projected revenue of $20.3 billion to $20.6 billion for Microsoft’s cloud segment.

Hood projected $13 billion to $13.4 billion for the PC segment and $15.95 billion to $16.25 billion for Microsoft’s software business.

For the full fiscal year, Hood maintained expectations for double-digit percentage growth in revenue and operating margins for Microsoft.

“We see real opportunity to help every customer in every industry use digital technology to overcome today’s challenges and emerge stronger,” said Satya Nadella, chairman and chief executive officer of Microsoft. “No company is better positioned than Microsoft to help organizations deliver on their digital imperative – so they can do more with less.”

“In a dynamic environment we saw strong demand, took share, and increased customer commitment to our cloud platform. Commercial bookings grew 25% and Microsoft Cloud revenue was $25 billion, up 28% year over year,” said Amy Hood, executive vice president and chief financial officer of Microsoft. “As we begin a new fiscal year, we remain committed to balancing operational discipline with continued investments in key strategic areas to drive future growth.”

MSFT 5-Year Chart:

AAPL:

Apple posted a June quarter revenue record of $83.0 billion, up 2 percent year over year. Looking at the company's financial statements, revenue from products and services have risen from a quarter-over-quarter and year-over-year basis.

Looking closely, sales from Macs, iPads, and Wearables, Home and Accessories have declined. However, iPhone sales and revenue from services have risen, which has given Apple an overall net profit.

Looking at years before, I expect the revenue from these segments to rise as we progress towards Q4 since this is when Apple likes to release their new products and consumer spending (holiday shopping) increases.

“This quarter’s record results speak to Apple’s constant efforts to innovate, to advance new possibilities, and to enrich the lives of our customers,” said Tim Cook, Apple’s CEO. “As always, we are leading with our values, and expressing them in everything we build, from new features that are designed to protect user privacy and security, to tools that will enhance accessibility, part of our longstanding commitment to create products for everyone.”

“Our June quarter results continued to demonstrate our ability to manage our business effectively despite the challenging operating environment. We set a June quarter revenue record and our installed base of active devices reached an all-time high in every geographic segment and product category,” said Luca Maestri, Apple’s CFO.

AAPL 5-Year Chart:

AMZN:

Amazon reported top-line revenue that increased 7% to $121.2 billion in the second quarter, compared with $113.1 billion in second quarter 2021. Revenue from their products and services have both gone up from the same quarter and year ago.

“Despite continued inflationary pressures in fuel, energy, and transportation costs, we’re making progress on the more controllable costs we referenced last quarter, particularly improving the productivity of our fulfillment network,” said Andy Jassy, Amazon CEO. “We’re also seeing revenue accelerate as we continue to make Prime even better for members, both investing in faster shipping speeds, and adding unique benefits such as free delivery from Grubhub for a year, exclusive access to NFL Thursday Night Football games starting September 15, and releasing the highly anticipated series The Lord of the Rings: The Rings of Power on September 2.”

AMZN 5-Year Chart:

V:

Visa reported top-line revenue of $7.3 billion, which is an increase of 19% from the same quarter a year ago.

Payment volume, cross-border volume, and processed transactions have all increased with double-digit numbers.

CEO Alfred F. Kelly, Jr. stated, "Against the backdrop of macroeconomic uncertainty, significant exchange rate headwinds and the suspension of our business in Russia, Visa had a very strong quarter, with net revenues up 19%, GAAP EPS up 36% and non-GAAP EPS up 33%. Sustained levels of growth in overall payments volume, cross-border volume and processed transactions demonstrated the resiliency of our business model. Consumers are back on the road, visiting various corners of the world, resulting in cross-border travel volume surpassing 2019 levels for the first time since the pandemic began in early 2020. While the economic outlook is unclear, we remain confident in our ability to execute with discipline and expand Visa’s role at the center of money movement."

V 5-Year Chart:

GOOGL

Alphabet Google reported $70 billion of top-line revenue, compared to the same quarter a year ago of $62 billion.

All of Alphabet Google's main segments, such as Google Search & other, YouTube ads, Google Network, Google Services, and Google Cloud, have increased in revenue.

Sundar Pichai, CEO of Alphabet and Google, said: “In the second quarter our performance was driven by Search and Cloud. The investments we’ve made over the years in AI and computing are helping to make our services particularly valuable for consumers, and highly effective for businesses of all sizes. As we sharpen our focus, we’ll continue to invest responsibly in deep computer science for the long-term.”

Ruth Porat, CFO of Alphabet and Google, said: “Our consistent investments to support long-term growth are reflected in our solid performance in the second quarter, with revenues of $69.7 billion in the quarter, up 13% versus last year or 16% on a constant currency basis. We are focused on responsible capital allocation in support of our growth opportunities.”

GOOGL 5-Year Chart:

Meta:

Meta reported their top-line revenue of $28.8 billion, compared to $29 billion from the same quarter a year ago. Top-line revenue increased by a little over $1 billion from a year-over-year basis.

Family daily active people (DAP) – DAP was 2.88 billion on average for June 2022, an increase of 4% year-over-year.

Family monthly active people (MAP) – MAP was 3.65 billion as of June 30, 2022, an increase of 4% year-over-year.

Facebook daily active users (DAUs) – DAUs were 1.97 billion on average for June 2022, an increase of 3% year-over-year.

Facebook monthly active users (MAUs) – MAUs were 2.93 billion as of June 30, 2022, an increase of 1% year-over-year.

Ad impressions and price per ad – In the second quarter of 2022, ad impressions delivered across our Family of Apps increased by 15% year-over-year and the average price per ad decreased by 14% year-over-year.

The CFO stated, "We expect third quarter 2022 total revenue to be in the range of $26-28.5 billion. This outlook reflects a continuation of the weak advertising demand environment we experienced throughout the second quarter, which we believe is being driven by broader macroeconomic uncertainty. We also anticipate third quarter Reality Labs revenue to be lower than second quarter revenue."

Meta 5-Year Chart:

Steve's Overall Thoughts:

I believe MSFT, AAPL, and V are still great stocks to continue to invest in , especially in your retirement accounts. These three stocks are part of the DOW30 and S&P500, and all pay a dividend. I also believe AAPL, AMZN, and GOOGL are great candidates to sell covered calls on. However, I have concerns about META and their slower growth and uncertain outlook. Even though the markets rallied this week, META was the only one institutions did not feel comfortable putting their capital into. If the company continues to give weak numbers, I may start to slowly sell away my shares and reallocate them into a more steady stock like MSFT or AAPL.

Trade Of The Week:

Now that we have some earnings released and a look at the technical charts, we can start to see what trades to put on.

Bear Call Spreads (Premium Members)

If you're a Premium Member and have been setting up bear call spreads, you most likely have your buy-stop-orders triggered into purchasing your shares to cover yourself. If that's the case, you would have made money from the premiums and capital gains, and converted your bear call spreads into covered call trades. I would let your covered calls reach until expiration, and hopefully have your shares get called away. When this happens, you will have free capital to start new wheels.

Cash-Secured Puts

If you want to start new wheels, I recommend SLOWLY selling cash-secured puts first. Don't get too greedy because the markets can have a reversal at any time. Stocks that I favor right now include AAPL, AMZN, and GOOGL. If you have more capital, you can also consider MSFT.

However, because I'm still a little wary with where the markets are going and if this is a potential bull trap or if we'll have another pullback, you can consider being more conservative with choosing your underlying stock and strike prices. I personally favor AAPL and MSFT more since it pays a dividend compared to AMZN and GOOGL.

You may want to sell a cash-secured put around 30-days out, or the August 26 expiration date. I would also choose a strike around $5-10 OTM, or below the price of the current market price. Or, to be more specific, I would choose a delta that ranges from -0.30 to -0.16.

Here is a chart of AAPL and an example of the AAPL option chain for August 26:

In this example, you can consider selling your cash-secured put at the $155 strike for $200 or $150 strike for $114.

Make sure that if you are going to do this, you are comfortable with being assigned 100 shares of AAPL at the strike price you choose in case the stock drops. If this happens, you can then convert the trade into a covered call to generate more premium.

All-in-all, see what you're most comfortable doing and your level of risk tolerance. 👍

Ask Steve 💭

Let's see what some of our members asked this week. Here are the top questions we received:

Q1: Is the idea to lower your cost basis (from your first premium gains) allows you to sell covered calls at an even higher premium on your next cycle? Assuming the stock is continually to trend upward.

A1: When you sell a covered call, you receive premium which lowers your cost basis for your shares. However, if your shares get called away because it is at/above your strike price at expiration, you will no longer have the shares. If the stock has significantly risen, your next covered call will be more expensive to start. For example:

You bought stock XYZ for $100 and you sold a covered call at $101 and received $200 in premium. Your cost basis for those shares are now $98. If the underlying stock rises to $110 at expiration, your covered call will get called away at $101, giving you $100 in capital gains as well. You will no longer have the shares. If you want to sell a covered call the following Monday, it will now cost you $11,000 to start a new wheel because the stock is now worth $110. However, because you received $200 in premium for your last covered call those shares will technically cost you $108. Assuming you sell another covered call on those shares and receive another $200 dollars, your cost basis will be $106 for those shares. So on and so forth.

Q2: Assuming the answer is yes to the above question, then, is there some sort of strategy between 1) continuing to lower your cost basis even more, vs, 2) try to get your stocks called away to get capital gains. Not sure if there is any statistically better option or even a balance of the two?

A2: It is impossible to predict the direction of the market as you've seen recently. Here is a rule of thumb: the further OTM you sell your covered calls, the less likely your shares will get called away. Therefore, if you want to lower the chances of your covered call being called away, you can consider selling your covered call further OTM. However, keep in mind that the further you sell your call OTM, the less premium you will receive. To look at the approximate percent chance of your shares being called away at expiration, you can look at the delta. The delta tells us the approximate percent chance that the underlying stock price will reach our strike price by expiration. For example, a delta 0.30 has an approximate 30% chance while a delta 0.10 has an approximate 10% chance.

Q3: For tax reporting purposes, I assume the premium you receive on selling any covered call is not actually realized until you ultimately sell the underlying shares?

A3: As soon as you sell a covered call, you receive the premium upfront. You will be required to pay short-term capital gains on your premium, regardless of what happens at expiration. However, if you sell covered calls in your Roth IRA, you will not be taxed.

Q4:. For example) stock XYZ is trading at $100.

Step 1) We sell a covered call for 4 weeks out, at the $110 stock price.

Step 2) Since we don't want the shares called away, we set a buy-stop order for $109.

Scenario 1) few days before the expiration, the stock gaps up massively to about $115.

Scenario 2) The stock swings back and forth between 109-115.

What Can we do in these 2 scenarios to both Avoid losses, as well as not have the stock called away from us?

A4: When we sell covered calls we sell them at a strike we are okay with letting our shares get called away for. In this scenario, if the stock is at or above $110 by expiration, you've made $1,000 plus premium. We don't set up buy-stop orders when selling covered calls. There is always risk in any trade you do and unfortunately, nobody can predict the stock market.

In scenario 1, we recommend letting your shares get called away at $110. In scenario 2, the stock is going back and forth and if you've already purchased an additional 100 shares at $109, you can consider selling a covered call on those shares at $110 for additional premium. The whole point of the wheel is to make passive income and not time the market. Therefore, we are okay with letting our shares go/being assigned at a selected strike price.

📌Submit Your Questions 🙋‍♂️🙋‍♀️

Have any other questions? Before asking me and my team, feel free to check out our Level 1 FAQ. This FAQ is located on the Dashboard. You might find what you're looking for. 😊

If you do have questions, make sure to ask them on our Dashboard, rather than asking us via email. We also encourage you to watch all of the core video content and some of the past archived videos, read past Membership Positions, and take all the quizzes before sending us your questions.

📌Join Our Discord 💬

Investing, trading, and building wealth was a lonely journey for me. This is why my team and I created a Discord group for you and the other members to shares ideas and support one another. You don't have to go through it alone as we're all here to help. 😉

Make sure to check it out on the bottom of your "Dashboard" and follow the instructions on how to sign up. Coming from a teacher's perspective, I believe it's important to engage in conversations with people who are also seeking to reach financial freedom.

Remember that we are a community of wealth builders at all different levels, so be positive, kind, and helpful to others, so we can help each other get to financial freedom much faster.

Stay patient and disciplined! Great things are coming your way.🙂

-Steve and the Call to Leap Team

The following article is strictly the opinion of the author and is to not be considered financial/investment advice. Call to Leap LLC and the author of this article does not claim to be a registered financial advisor (RIA) or financial advisor. Please visit our terms of service and privacy policy before reading this article.