Sep 18, 202111 min
Hey Everyone!
Whew! We are in a middle of a broad-base sell-off where many stocks have dropped in price over the past several days. Let's take a look at some of the ETFs we're holding:
Here's SPY:
Here's QQQ:
Here's DIA:
Trade of the Week:
Spinning your wheels: 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 your shares were called away last week, you can consider restarting your wheel. For beginners, you can consider starting again by selling a cash-secured put, around 1-3 strikes OTM (or for a lower price).
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.
Keep It Balanced: Just as a friendly reminder, we recommend to not go overboard with growth stocks, like AMD and PINS, for your Wheels. Yes, they do have high premiums and they are relatively less expensive compared to AAPL, NKE, SBUX, and MSFT. However, just keep in mind that stocks that don't pay a dividend and have high premiums/IV typically drop the fastest when there is uncertainty in the markets. If you are brand new to starting the Wheel, we recommend starting off with AAPL, NKE, SBUX, or MSFT.
Upcoming Earnings: Please be mindful of company earnings coming up in the next couple of weeks. We have NKE reporting next week and the rest towards the end of October.
Here are some trade recommendations and see what fits your personal risk-tolerance:
MSFT
Monday Open: $297.55
Friday Close: $299.87
5-day change: 0.77%
Starting a New Wheel: Selling a Cash-Secured Put on MSFT
- MSFT's Current Price: $299.87
- Capital Needed: $29500.00
- Sell at the Expiration Date: 2021-10-08
- Select the Strike: $295
- Premium you'll receive: $393.00
- Cost Basis: $295.00 - $3.93 = $291.07
Starting a New Wheel: Selling a Covered Call on MSFT
- MSFT's Current Price: $299.87
- Capital Needed: $29987.00
- Sell at the Expiration Date: 2021-10-08
- Select the Strike: $300
- Premium you'll receive: $573.00
- Cost Basis: $299.87 - $5.73 = $294.14
AAPL
Monday Open: $150.63
Friday Close: $146.06
5-day change: -3.03%
Starting a New Wheel: Selling a Cash-Secured Put on AAPL
- AAPL's Current Price: $146.06
- Capital Needed: $14600.00
- Sell at the Expiration Date: 2021-10-08
- Select the Strike: $146
- Premium you'll receive: $315.00
- Cost Basis: $146.00 - $3.15 = $142.85
Starting a New Wheel: Selling a Covered Call on AAPL
- AAPL's Current Price: $146.06
- Capital Needed: $14606.00
- Sell at the Expiration Date: 2021-10-08
- Select the Strike: $147
- Premium you'll receive: $365.00
- Cost Basis: $146.06 - $3.65 = $142.41
AMD
Monday Open: $105.26
Friday Close: $103.88
5-day change: -1.31%
Starting a New Wheel: Selling a Cash-Secured Put on AMD
- AMD's Current Price: $103.88
- Capital Needed: $10300.00
- Sell at the Expiration Date: 2021-10-08
- Select the Strike: $103
- Premium you'll receive: $313.00
- Cost Basis: $103.00 - $3.13 = $99.87
Starting a New Wheel: Selling a Covered Call on AMD
- AMD's Current Price: $103.88
- Capital Needed: $10388.00
- Sell at the Expiration Date: 2021-10-08
- Select the Strike: $104
- Premium you'll receive: $360.00
- Cost Basis: $103.88 - $3.60 = $100.28
NKE
Monday Open: $161.56
Friday Close: $156.42
5-day change: -3.18%
Starting a New Wheel: Selling a Cash-Secured Put on NKE
- NKE's Current Price: $156.42
- Capital Needed: $15500.00
- Sell at the Expiration Date: 2021-10-08
- Select the Strike: $155
- Premium you'll receive: $465.00
- Cost Basis: $155.00 - $4.65 = $150.35
Starting a New Wheel: Selling a Covered Call on NKE
- NKE's Current Price: $156.42
- Capital Needed: $15642.00
- Sell at the Expiration Date: 2021-10-08
- Select the Strike: $160
- Premium you'll receive: $730.00
- Cost Basis: $156.42 - $7.30 = $149.12
PINS
Monday Open: $54.25
Friday Close: $54.77
5-day change: 0.95%
Starting a New Wheel: Selling a Cash-Secured Put on PINS
- PINS's Current Price: $54.77
- Capital Needed: $5400.00
- Sell at the Expiration Date: 2021-10-08
- Select the Strike: $54
- Premium you'll receive: $154.00
- Cost Basis: $54.00 - $1.54 = $52.46
Starting a New Wheel: Selling a Covered Call on PINS
- PINS's Current Price: $54.77
- Capital Needed: $5477.00
- Sell at the Expiration Date: 2021-10-08
- Select the Strike: $55
- Premium you'll receive: $197.00
- Cost Basis: $54.77 - $1.97 = $52.80
SBUX
Monday Open: $119.89
Friday Close: $113.41
5-day change: -5.4%
Starting a New Wheel: Selling a Cash-Secured Put on SBUX
- SBUX's Current Price: $113.41
- Capital Needed: $11300.00
- Sell at the Expiration Date: 2021-10-08
- Select the Strike: $113
- Premium you'll receive: $209.00
- Cost Basis: $113.00 - $2.09 = $110.91
Starting a New Wheel: Selling a Covered Call on SBUX
- SBUX's Current Price: $113.41
- Capital Needed: $11341.00
- Sell at the Expiration Date: 2021-10-08
- Select the Strike: $114
- Premium you'll receive: $191.00
- Cost Basis: $113.41 - $1.91 = $111.50
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Aaron
Q1: Hi Call to Leap team, I have a small account($5k). Should I just buy 1-5 shares of 3-5 companies if they go up 5%-10%? Also I was looking to buy shares specifically of MSFT, AAPL, NKE, SBUX, MA, and V. Are these good candidates to eventually do CSP’s and CC’s in the future?
A1: Yes, you can consider slowly investing in those companies mentioned for the long term. We currently like selling CCs and CSPs on SBUX, MSFT, NKE and AAPL.
Q2: I emailed earlier. Is it alright to accumulate 100+ shares of fundamentally strong stocks so I could do multiple contracts (staggered)?
A2: Yes you can own 100+ shares to sell multiple staggered contracts. This is actually the goal! To have multiple contracts going will give us more consistent passive monthly income :)
Yoon
Q1: Do u recommend using any trading apps that tells u you what and when to trade ? Will you have more success?
A1: We don't use any apps to tell us what and when to trade. We have fundamental knowledge of the stock market and tools such as covered calls, cash-secured puts, BCSs and LEAPs that we use to take advantage of certain market conditions. With experience, you can learn how to utilize these tools and take control of your own finances. This builds confidence in trading. Your success depends on the market conditions and how you trade. Always do your own due diligence too!
John
Q3: On July 19, 2021, AAPL was $142.45. Say I had bought 100 shares and sold a covered call at strike price $143 with expiration date Aug 13, 2021 for around $320 dollars.
On Aug 13, 2021, AAPL was $149.10, so my shares got called away. The following Monday, Aug 16, 2021, I decide to do the wheel and sell a cash-secured put. However, AAPL is at $151.12. I now have $14620 to use. What would you do then? What strike price would you use?
A3: As the underlying stock price rises, it becomes more expensive to start wheels. The true power of the wheel can be seen during neutral markets where the price doesn't move up. During bullish markets, we can sell covered calls more OTM in order to capture the gains from the upward movement and decrease the chances of our shares being called away. Because our contract would most likely expire worthless when we sell far OTM, we would most likely still have those 100 shares at expiration to repeat another covered call.
Keep in mind that selling far OTM covered calls does give us less premium. For example, you can buy AAPL at $150 and sell a covered call at $160. You might get $100 premium selling at $160 instead of $300 premium selling at $151. However, if the price ends at $159 at expiration, your shares have appreciated $900 and you still received some premium. As you gain more experience, you can see what strategy works best for you.
The likelihood of the underlying stock price reaching a strike price by expiration can be observed by looking at the delta. For example, a delta 0.30 has a 30% chance of the underlying stock price hitting that strike price at expiration while a delta 0.15 has a 15% chance of the underlying stock price hitting that strike price by expiration. Looking at our previous example, at expiration if the stock hits $159, you keep your shares and you can consider selling another covered call more OTM like $170 to receive more premium. This can combat the rising prices of the wheel during bull markets. During neutral markets you can consider selling covered calls 1 strike OTM for more premium. In addition, we recommend to continue funding your brokerage account each month.
Rachel
Q: So I made my first mistake- I did not pay attention to the quarterly reports and I ended up doing a cash put for chewy for $89 and welllllll I learned my lesson as the quarterly report was negative. Anyways, I know the put will be exercised as the price keeps declining. Should I just keep it and wait for it to go up and then do a call when it has gone back up or should I do a call that is about $20 bucks? Same thing with AMD (not so tragic as chewy but still). Thanks in advance!
A: If you sold CSPs on CHWY and AMD and the price dropped, you can consider getting assigned and then selling a covered call at the price you were assigned at or one strike higher than what you were assigned at. I'm not sure how much time you have left until expiration. Anything can happen. In this scenario we just have to be patient and consider selling covered calls at the price we were assigned/one strike above what we were assigned at until they are called away. Consider doing CSPs on a more stable stock like AAPL, NKE and MSFT for less volatility. Hang in there Rachel!
Jharana
Q: What if you don't have a lot of money to start with? Where do I begin?
A: If you want to start investing, you can start with as little as $500. You can consider buying some stocks and ETFs like MSFT, QQQ, VTI, V, AAPL, V, & MA to name a few. Consider adding more shares to your portfolio each month. As your portfolio grows and you have enough for a wheel, you can then consider starting one.
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 Level 1 page. You might find what you're looking for. 😊
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Technical Analysis 📈📉
QQQ:
QQQ is still trading between its major support and resistance lines. Though there are some companies in the index that have dropped over the past couple of weeks, such as AAPL and FB, companies like MSFT and ADBE are still propping the averages up as you can see that these stocks are still hovering near their ATHs.
SPY:
SPY broke its orange support line this week. If you take a look at the 1-year chart, you can see that we've been on a consistent upward trend, which is not a typical thing to see. The sell-off that we're observing right now is most likely due to large institutional traders taking profit from the bull run. And yes, I do think that this is a healthy pullback because many stocks that run up quickly without taking an occasional break means that they will usually fall much harder when there is a correction.
You don't need to worry at all since we are seeing a broad-base sell-off, meaning that the majority of stocks are dropping together. Nothing has fundamentally changed to these stocks, so we just have to be patient.
DIA:
DIA broke its green trendline weeks ago. However, I'm predicting that the new orange line is a possible support line.
SQ:
SQ broke its support line.
WM:
WM also broke its support line.
COST:
And COST broke it's support line.
V:
Visa is still in a downward trend and there is a clear support and resistance line. I would patiently wait until the selling stops and to see when the trend reverses back. When it does, I will then add a couple more shares to my long-term holds.
MA:
Similarly, MA is still on a downward trend. Let's wait patiently until the trend breaks and we see a reversal before adding more shares.
EL:
EL is a strange one since it did somewhat break its support line too. I've been investing in this company little by little, but I am going to take a brief pause to see where it goes in the next couple of weeks.
NKE:
NKE is also still selling off. However, looking at the RSI, it looks a bit oversold and a little tempting to jump in. I have a small hunch that it might pop back up once they deliver their earnings report next week.
What's the Game Plan? 💡
I know some of you are asking when to add more shares to your long-term holds. Well, there are a couple of ways to go about this.
Patiently Wait and Pounce Like a Lion
Since many stocks have shown a clear downward trend, you can wait until the selling stops. How will you know? Well, one way to tell is if the downward trend breaks and we see a reversal. We will want to see higher highs and higher lows. If we see this pattern and perhaps a 5-10% increase in the stock price from the lows, it may signal to us that institutions are putting their money back into the markets again. Like always, we would not jump in on a stock and put all our money in. We would slowly scale in and buy 1-5 shares at a time, or whatever we are comfortable with. This is why it's important to have that extra 10% cash on reserve in your portfolio, so you can purchase some shares when they go on "discount."
Stay With the 5-10% Increase Guideline
Another way to go about this is just adhering to the 5-10% increase guideline. For example, if you last purchased WM at $155, you can wait for the stock to go up around 5-10%, or when it hits around $163 or $170, before buying more shares. This strategy will have you buying shares whenever stocks are in a constant upward trend and making higher highs.
Just Let Your Premiums Sit In Cash
If you decide to not do anything, you can just keep spinning your previous wheels and keep your premiums and dividends as cash. Once you feel comfortable, you can start deploying some of that money into long-term holds.
Conclusion
In the end, all of this is short-term and you'll most likely won't even remember this pullback in a couple of years. Remember to always have a long-term outlook.
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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 wonderful 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.