May 21, 20225 min
Hey Wealth Builders!
Once again, we experienced another red week in the markets as large institutions dwell on future interest rate hikes and hope for better inflation data.
Like last week, I gave market updates for Standard and Premium members in a video format, rather than my usual written posts. You can find the video on the Dashboard.
Again, I personally don't recommend starting any new wheels at the time and to hold off with buying anymore long-term holds. It may be a wiser decision to respect the market trend, as we know that we cannot control the direction of the markets. The team and I are still waiting for a trend reversal and positive economic news. Once we observe this, we will let you know how to pivot our strategies.
During this time, news on increasing interest rates and inflation will have more weight on corporate earnings. Even with companies delivering wonderful numbers, Wall Street will not reward them until the uncertainty fades.
Stay calm and continue to deposit money in your accounts, collect dividends, and collect cash from your initial covered call and bear call spread trades. The more cash reserve you have, the more ammo you'll have when the markets retraces back up.
If you are itching to start selling covered calls, you can consider setting up bear call spreads. If your underlying stock rises, you can then convert your bear call spread trade into a covered call. If your underlying stock does not rise, you get to keep the cash premiums. Setting up bear call spreads during this market environment is a wonderful way to build your cash reserves.
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Paige
Q: I was able to obtain stock for $55 through my cash secured put. Sold a covered call 4 weeks out with strike of $56 expiring this Friday the 20th. Underlying stock has dropped quickly to $50.14 as of today. What would be the smartest move be for this beginner? The was my first Covered Call.
A: Great job on collecting premium! As a reminder, we are being cautious and not recommending to start new wheels as we are in extremely volatile conditions. However, what you do with your portfolio is up to you. With that being said, if this is your first covered call, you can consider waiting to see how your option fluctuates with price movements. If you want to lock in your profits however, you can consider buying back your contract.
When we sell a covered call and the underlying stock price drops, our contracts become cheaper to buy back. For example, let's say you sell a covered call and receive $200 in premium when the stock is trading at $100. Now let's say the underlying stock price drops to $90. Your contract may now be worth $100 to buy back. If you sold it for $200 and buy it back for $100, you lock in $100 in profit.
As a beginner, you can consider letting your contract go to expiration. If you are more confident, you can consider locking in profits when you have received the majority of your premium.
Because of the current market volatility, you can consider selling your next round of covered calls around 6-8 weeks out to receive higher premiums due to the higher extrinsic value.
Sven
Q: Hi, I sold 2 CSP in 2 following weeks a couple of weeks ago. For both contacts I had to buy AAPL for 165. For one contract which expired on 6th of may I sold a covered call with strike 165 6 weeks out. The second contract expired last friday and I have not sold a covered call on it because APPL now is 137, so for me it does not make any sense to sell a covered call for almost no premium. Is it the right thing to wait until APPL rises before selling a covered call? What would you do? thanks.
A: Great question, Sven! What you do is completely up to you. You can consider selling covered calls at your cost basis for a little more premium, selling at your assigned strike price for less premium, OR just waiting for AAPL to retrace. An example of selling covered calls at your cost basis, is if you received $500 in premium and were assigned 100 shares at $165, your cost basis for those shares is $160. Due to the recent drop in AAPL, you can consider selling at the $160 strike for more premium instead of your assigned strike of $165 which would give less premium. If you don't feel comfortable selling your shares for less than what you purchased them for, you can always sell a covered call at or above your assigned strike price ($165). However, the premium may be minimal. Hang in there Sven!
Michael
Q1. Hi - I was wondering what CTL's perspective is on retirement accounts such as rollover 401K's and Roth IRAs and if any of these strategies (wheels, etc) are advised for or against for these types of accounts? Obviously we're in a bearish market but I have received a large cash windfall into these types of accounts and I'm thinking more for when the market turns upward again. Is there any type of allocation strategy for retirement accounts versus the 30/30/30/10 outlined in the content?
A: We love Roth IRAs as it allows our money to grow tax-free. We do trade the wheel in our Roth IRAs, but we like to be more conservative and allocate a smaller percentage in the wheel. In our Roth IRAs, we are more heavily invested in ETFs that track the S&P 500 like SPY and VOO. In regards to percentages, there is no "correct" percentage, but you can consider allocating a larger percentage of your portfolio into these conservative ETFs that track the S&P 500.
Tonya
Q1. Hey Steve and team! I hope that things are going well. I've got a quick question about closing a position. I set up some covered calls for about 5 weeks out on AAPL and they've lost about 75% of their value. I'm going to close them to lock in my profit, but does it make a difference if I do it on a Friday or the following Monday (when I would set up new calls)? Thanks!
A: Great job, Tonya! You can sell a covered call whenever you'd like. However, we prefer selling covered calls on Mondays (if you let them expire on the previous Friday), or selling covered calls for a further date right away at the time we buy to close our positions.
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 💬
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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.
Have a great weekend!
-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.