May 8, 202110 min
Updated: May 28, 2021
Hey Everyone!
Wow! What another week of great earnings! However, it looks like we did trend a little neutrally for some of the stocks we're investing and trading in.
Here's a snapshot of how the overall markets did this week:
My thoughts on PINS: It looks like Wall Street doesn't favor PINS at the moment. I personally still love this company because of their explosive growth in increasing revenue. However, some boys and girls at Wall Street don't like the idea that their monthly active users (MAU) may decline with more people getting out of their houses with the reopening going on.
Here is a chart of PINS:
This week, we saw a dramatic drop in price in PINS and we didn't see much retracement to the upside with Friday's rally. Right now, PINS seems pretty oversold with a RSI of around 30 on the daily chart, which means that the stock could potentially rally up in the short term. There is also a gap between $70 and $75, meaning that algorithms and traders may want to fill it (or at least half of it). Even with this said, I don't think PINS is going to go back to it's all time highs of $88 anytime soon. There might be a horizontal support line at around $55 and it may be trending down/neutrally in the next couple of weeks.
I'm predicting that the stock is going to bounce between $55 and $75 from now until the next earnings date. On top of that, there are talks about rising interest rates going around which can go against high growth stocks like PINS. With higher interest rates, companies will not be able to leverage their capital as well compared to a low interest rate environment. In a nutshell, it's going to cost more money for companies to borrow money. Lastly, with PINS quick 230% gain within a year's timeframe and that they don't pay a dividend, many large institutions may be okay with dropping the stock and taking profits. Again, anything can happen in the markets, but this is just my prediction and reasoning.
So what now? For me, I am considering exiting my PINS Wheels by setting my strikes at the lower end of my cost basis.
Here is my first Wheel:
My cost basis for these shares are $78.00 - $4.89 - $1.46 - $3.10 - $0.53 = $68.02 per share. This means that I'm going to sell my next strike at $68. The $68 strike for the June 4, 2021 expiration date also has a delta 0.20, meaning there is a 20% probability that the stock will go beyond the strike on expiration.
Here is my second Wheel:
My cost basis for these shares are $80.00 - $3.95 - $1.06 - $4.00 - $0.60 = $70.39 per share. This means that I'm going to sell my next strike at $70. The $70 strike for the June 4, 2021 expiration date also has a delta 0.13, meaning there is a 13% probability that the stock will go beyond the strike on expiration.
The reason why I'm not selling at my originally sold strikes is because the strikes are way OTM and the premiums are too little. I am willing to sell my shares at a lower price/strike price, so I can get a higher premium. If I don't get my shares called away, that's great for me because I still get to keep all the premiums and lower the cost basis of my shares even more. Then, I can wash, rinse, and repeat. If my shares are called away, that's no problem too. I am okay with selling my shares for a lower price because I can use the capital for another stock that is better suited for the Wheel.
If you want to exit PINS by not just selling your shares at your cost basis, you can even consider selling them for a lower strike, like the $65 strike, or whatever strike you are comfortable with. Yes, you will incur a loss on your shares if your shares are called away, but remember that you can strategically get a tax loss for up to $3000 per year.
You can read more about it here:
✅ https://www.irs.gov/taxtopics/tc409
(Since we are not tax specialists, we recommend consulting with one to see how you can apply this for your tax bill next year.)
If you do sell your shares for a loss, remember that you cannot re-enter the stock for 61 days so you do not violate the wash-sale rule.
You can read more about it here:
All in all, it's up to you to see what you want to do if you have a Wheel with PINS. You can either have the goal of keeping the shares to patiently let the price rise back up or you can leave the stock now and consider re-entering the stock at a later time.
Trade of the Week:
If your covered calls expired worthless this Friday, we recommend selling more calls at around the same strike price as before to collect more premium. If you were assigned your 100 shares from your cash-secured put, you can sell a call against your shares and convert your trade into a covered call trade.
Pay attention to the delta: You can always look at the delta of the call you are selling since the delta roughly approximates the probability of the price of the stock reaching the strike by expiration. If you see that the delta is 0.10, you know that there is roughly a 10% chance that the price of the stock will reach that strike price by expiration. Likewise, if you see that the delta is 0.20, you know that there is roughly a 20% chance that the price of the stock will reach that strike price by expiration.
If you're a beginner, we recommend you starting off with selling cash-secured puts around 1-3 strikes OTM. This is typically a conservative starting point when starting the Wheel Strategy. If you have been using the Wheel Strategy for a while and have a more bullish outlook, we recommend starting your new Wheel by selling a covered call around 1-3 strikes OTM to not only receive the premium, but also make capital gains if you are called away at expiration.
If you want to still trade the Wheel on PINS, please keep in mind of the associated risks since this is a volatile stock and that institutions may be a little iffy with the company in the near-term. We may recommend selling further OTM strikes, around 3-6 strikes away to play it more conservatively. Of if you just want to play it safe, you can just sit this one out for now.
Here are some trade recommendations and see what fits your personal risk-tolerance:
MSFT:
Monday Open:$253.40
Friday Close:$252.46
Change: -0.37%
Starting a New Wheel: Selling a Cash-Secured Put on MSFT
- MSFT's Current Price: $252.46
- Capital needed: $25,000.00
- Sell at the Expiration Date: 2021-06-04
- Select the Strike: $250.00
- Premium you'll receive: $447.50
- Cost basis: $250.00 - $4.47 = $245.53
Starting a New Wheel: Selling a Covered Call on MSFT
- MSFT's Current Price: $252.46
- Capital needed: $25,246.00
- Sell at the Expiration Date: 2021-06-04
- Select the Strike: $252.50
- Premium you'll receive: $510.00
- Cost basis: $252.46 - $5.10 = $247.36
AAPL:
Monday Open:$132.04
Friday Close:$130.21
Change: -1.39%
Starting a New Wheel: Selling a Cash-Secured Put on AAPL
- AAPL's Current Price: $130.21
- Capital needed: $13,000.00
- Sell at the Expiration Date: 2021-06-04
- Select the Strike: $130.00
- Premium you'll receive: $315.00
- Cost basis: $130.00 - $3.15 = $126.85
Starting a New Wheel: Selling a Covered Call on AAPL
- AAPL's Current Price: $130.21
- Capital needed: $13,021.00
- Sell at the Expiration Date: 2021-06-04
- Select the Strike: $131.00
- Premium you'll receive: $289.50
- Cost basis: $130.21 - $2.90 = $127.32
AMD:
Monday Open:$81.97
Friday Close:$78.81
Change: -3.86%
Starting a New Wheel: Selling a Cash-Secured Put on AMD
- AMD's Current Price: $78.81
- Capital needed: $7,850.00
- Sell at the Expiration Date: 2021-06-04
- Select the Strike: $78.50
- Premium you'll receive: $275.00
- Cost basis: $78.50 - $2.75 = $75.75
Starting a New Wheel: Selling a Covered Call on AMD
- AMD's Current Price: $78.81
- Capital needed: $7,881.00
- Sell at the Expiration Date: 2021-06-04
- Select the Strike: $79.00
- Premium you'll receive: $277.00
- Cost basis: $78.81 - $2.77 = $76.04
NKE:
Monday Open:$133.37
Friday Close:$137.81
Change: 3.33%
Starting a New Wheel: Selling a Cash-Secured Put on NKE
- NKE's Current Price: $137.81
- Capital needed: $13,700.00
- Sell at the Expiration Date: 2021-06-04
- Select the Strike: $137.00
- Premium you'll receive: $283.50
- Cost basis: $137.00 - $2.83 = $134.16
Starting a New Wheel: Selling a Covered Call on NKE
- NKE's Current Price: $137.81
- Capital needed: $13,781.00
- Sell at the Expiration Date: 2021-06-04
- Select the Strike: $138.00
- Premium you'll receive: $299.50
- Cost basis: $137.81 - $3.00 = $134.81
PINS:
Monday Open:$66.71
Friday Close:$59.86
Change: -10.27%
Starting a New Wheel: Selling a Cash-Secured Put on PINS
- PINS's Current Price: $59.86
- Capital needed: $5,900.00
- Sell at the Expiration Date: 2021-06-04
- Select the Strike: $59.00
- Premium you'll receive: $266.50
- Cost basis: $59.00 - $2.67 = $56.34
Starting a New Wheel: Selling a Covered Call on PINS
- PINS's Current Price: $59.86
- Capital needed: $5,986.00
- Sell at the Expiration Date: 2021-06-04
- Select the Strike: $60.00
- Premium you'll receive: $307.50
- Cost basis: $59.86 - $3.08 = $56.78
Earnings
Whoa! Let's take a look at some report cards that came out this week!
SQ
Square reported their earnings this week and said that they generated $5.1 billion of revenue in the first quarter, up from $1.38 billion a year ago. This was mostly fueled by the continued growth of the company’s Cash App.
The company saw $960 million in transaction-based revenue, $558 million in subscription and services revenue, $28 million in hardware revenue and $3.5 billion in bitcoin revenue.
Square is seeing traction with its Cash Card, a debit card that lets users spend the funds in their Cash App wallets. The number of monthly Cash Card users surpassed 10 million in March, while weekly active users nearly doubled on a year-over-year basis, hitting 7 million on average.
On top of that, Square’s seller gross payment volume rose to $29.8 billion, which is from $24.7 billion a year earlier.
As disclosed in its shareholder letter, Square said their Cash App continues to benefit from growing inflows into the mobile wallet and that customers added about 55% more funds to the Cash App in March than they did in February.
PYPL
PayPal reported their earnings this week, beat expectations, and even raised its full-year outlook.
The company generated first-quarter net income of $1.1 billion, which is up from $84 million in the year-earlier quarter.
PayPal’s revenue for the quarter totaled $6.03 billion, which is up from $4.62 billion a year earlier.
The company saw a record $285 billion in total payments volume, or the value of activity occurring on its platform. Analysts surveyed by FactSet were modeling TPV of $264.7 billion. With the first-quarter performance, PayPal’s TPV on a trailing-12-month basis topped $1 trillion for the first time.
The company added 14.5 million net new active accounts overall. PayPal saw 4.4 billion transactions in the quarter and 42.2 transactions per active account on a trailing-12-month basis. The number of daily active accounts for the core PayPal product rose 33%.
Chief Executive Dan Schulman said, “The really interesting thing is that we not only saw the strongest quarter in our history, but as we look forward, we’re continuing to see elevated levels of digital spend."
He also stated that newer services are helping to drive increased engagement. About half of customers who’ve tried PayPal’s buy-now-pay-later service used the feature again within three months, with that number rising to 70% over six months.
PayPal expects revenue of $6.25 billion, up 19% from a year earlier, for the second quarter.
PayPal also increased its full-year forecast. The company now expects $25.75 billion in revenue, which is approximately a 20% increase from a year earlier. Their prior outlook was a 19% growth.
The company expects 52 million to 55 million net new active accounts for the full year, up from its prior forecast calling for about 50 million.
Conclusion
We believe that SQ and PYPL are great long-term investments. These stocks are more on the volatile side, so if you're going to invest in these companies, we recommend scaling into your positions slowly.
As always, remember to keep a balanced portfolio with the 30/30/30/10 ratio. If you don't know what that is, please read the Level 1 FAQ. Going overboard with these high growth stocks may give you a bit of a heart-attack in the short term.
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My Final Thoughts
To wrap it up, I'm a little torn on which way the markets may be going. On one hand, you have talks about rising interest rates and inflation and how the technicals may show that the some of the major indices are a bit overbought. On the other hand, corporate earnings were spectacular with many companies delivering increasing revenues and future projections.
Of course, I always say to keep your eye on the long-term perspective. I'm still investing, but more cautiously, and of course, making sure that my portfolio is balanced. Just make sure to have around 10% cash on the side and to keep yourselves emotionally prepared, whether the markets drop or even fly "to the moon" from here. Being super emotionally involved and attached to your portfolio is not healthy, so make sure to sometimes just take a break from your phones and computer monitors.
Have a wonderful Mother's Day weekend everyone! Remember to practice gratitude each day, especially with your loved ones.
-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.