Apr 16, 20237 min
Hi Wealth Builders! 👋
Hope everyone is having a great week and are in the final stretches of filing your taxes!
Here are the top things that caught my attention this week:
Inflation decreased to 5% in March: this is heartening news as it has been a long and painful process for the Fed to tame the overheated economy from ~9% inflation levels last year. This slowdown (along with the jobs data showing labor market slowdown) finally reflects some impact of the Fed's series of enthusiastic rate hikes over these past 2 years. I don't think this means Powell will step on the breaks just yet. As we can see from history, there's a lag in the macroeconomic cycle so the Fed most likely will wait a bit longer to see if this inflation taming trend will continue. In addition, although it seems crazy now but the Fed has reiterated their target inflation rate of 2% so we have more runway to get from 5% down to 2%. Finally, in addition to the rate of inflation, I personally like to also observe the duration of high inflation. The longer we're in high inflationary conditions, the more likely the Fed will lean towards accepting recessionary damage in hopes of entering a more stabilized condition.
Financial Sector increases as other sectors decreases: as we enter into earnings season, quarterly results posted by big banks were stronger than expected, despite recent banking fears. This strong result contrasts from declines we see in healthcare, consumer staples, and other sectors. Still, it may take time to see the full impact of the recent banking collapse on the overall industry. In addition, counteracting higher rates which allow the banks to lend at more profitable terms is renewed caution on extend of lending overall. That's why I only focus on the long term and invest only in high quality stocks that I believe will be better prepared to weather storms like the recent banking collapse.
US Government Bonds (aka Treasuries) stabilizes as investors are more confident the recent banking crisis will not balloon to a contagion bringing down the entire market. The importance of this new stability is that so many other bonds and assets are priced based Treasury prices and investors always prefer stability over volatility, all else equal. This is a good sign for businesses and investments because they are more likely to start borrowing again (most will hold off on investing in big projects if interest rates may surge or drop tomorrow). As businesses borrow and reinvest into their business, there is more growth, and the hope is that trickles through other parts of the economy and benefits the entire ecosystem.
Heat Map📈
Here's this week's heat map:
What's Been Happening In The Charts?📊
SPY
The S&P500 is traded up by 0.79% this week along with Dow increasing by 1.2% and Nasdaq by 0.29%. I'm encouraged by the trend these recent weeks but am cautious because earnings are coming up which means there is a higher risk of more volatility ahead. In addition, many macroeconomic info (e.g., rate hikes, job numbers) can still jolt our markets in either direction.
Steve's Trades
To emphasize my point earlier, I expect higher volatility as we enter into earnings season so if anyone is uncomfortable, feel free to sit it out and continue selling covered calls against shares already owned. I'm also keeping a lot of my positions as cash right now to see how Wall Street reacts. If the sentiment is good and companies do well, I will buy more shares of those.
1. AAPL Cash Secured Put
Expiration Date: May 26, 2023
Step 1: Have $15,000 of cash as collateral
Step 2: Sell 1 $150 strike put option (delta -0.16) for $143
Credit/premium received: $143
2. AAPL Bear Call Spread
Expiration Date: May 26, 2023
Step 1: Buy 1 $195 strike call option (delta 0.01) for $9
Step 2: Sell 1 $180 strike call option (delta 0.14) for $79
Step 3: Set a buy-stop order of 100 shares at $179
Credit/premium received: $79 - $9 = $70
3. SBUX Cash-Secured Puts:
Expiration Date: May 26, 2023
Step 1: Have $10,100 of cash as collateral
Step 2: Sell 1 $101 strike put option (delta -0.24) for $162
Credit/premium received: $162
By placing this trade, we are willing to buy 100 shares at the strike price of $101 by expiration. If the shares are assigned to us, we can start earning premium from selling covered calls on this new position.
4. SBUX Bear Call Spread:
Expiration Date: May 26, 2023
Step 1: Buy 1 $125 strike call option (delta 0.01) for $20
Step 2: Sell 1 $114 strike call option (delta 0.26) for $130
Step 3: Set a buy-stop order of 100 shares at $113
Credit/premium received: $130 - $20 = $110
Remember, you can always close your positions early when you have your contracts decay to around 50%+ to lock in your gains.
Ask Steve 🤔
Q: When you enter a spread position, and I know my max upside and downside potentials; if the trade has time but seems to go in a direction contrary to my "strike", can I wait and give the position time to reverse or should I quit and abandon the trade. I guess I wondering if the position is far from where I need to be; what's the give-up zone?
A: Great question! Let's take a Bear Call Spread as an example. In this scenario, we want the stock to go down as we can lock in our profits without having to purchase 100 shares. However, when we enter this trade, we go in with the mentality of willing to purchase 100 shares at our buy stop order if it is triggered. If this happens, we would then close out our 1st leg and convert this trade into a covered call.
When we set up this spread, we don't "abandon" it. However, we do like to lock in our profits once the stock price drops and we have collected the majority of our premium. If the stock rises, this is okay too because we would then just purchase 100 shares at our buy stop order and convert our trade into a covered call. Whenever we sell a covered call, cash-secured put or set up a spread, we are okay with whichever direction the stock moves. It is important to mention that BCSs are capital intensive so you should be very careful to not over do these spreads if you can't cover your buy stop orders as it will result in purchasing many shares on margin which is risky.
Q: By selling covered call, we are expecting to profit while the stock price is going down, right?
A: When we sell a covered call, the goal is to collect premium whether the stock goes up or down. If the stock goes up and expires at or above our selected strike price, we are okay with letting our shares go at our selected strike price because we would collect premium + capital gains assuming we sold shares above our cost basis. If the stock drops after we sold a covered call, this is great too because essentially we can collect premium and keep our shares as well. We are expecting to profit regardless of where the stock moves.
Q: Why do we still need to roll out? And under what circumstances, we need to roll it? I had watched the buying back options and close early video and still couldn't get it.
A: We don't always buy back and roll out. However, there is a scenario when we may decided to do so. One scenario is when we have received 85-90% of our premium and still have perhaps 2 weeks left until expiration, it may not be beneficial to wait that long just for let's say an extra $20 of premium. So, we may decide to buy back and roll out to a later date. When we do this, we select the same strike, but at a further date to collect more premium. I've mentioned to members before a "unit rate per week". Essentially, we can make more "per week" when we do this because we are essentially receiving more premium while we wait.
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Stay disciplined everyone! I know that people usually get excited with these rallies, but be mindful that there is still some uncertainty with the Fed and them raising interest rates. Also be mindful that we are getting close to earnings season at the end of April, which means that there are going to be some volatile weeks.
Have a wonderful weekend! 🙂
-Steve and the Call to Leap Team
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