Apr 23, 20236 min
Hi Wealth Builders! 👋
What happened in the markets this week?📊
Markets ended relatively unchanged this week as the S&P500 trailed lower 0.1%, Nasdaq dropped by 0.4%, and Dow Jones fell by 0.3%. I won't be surprised to see more movement next week as earnings pick up even more next week for some of the biggest companies in our markets (e.g., MSFT, AMZN, GOOG, etc.,).
What was newsworthy this week:
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Investors continue to invest in stocks with an eye on risk
What happened: investors invested a net $77.4B into equities in the first quarter.
Why it matters: Unlike the pandemic era of retail trading and Wall Street Bets style speculation, this past quarter suggests investor focusing more on risk management and leaning into index investing.
My thoughts: Risk management is an age-tested best practice. I remember meeting a financial advisor in my undergrad days and sharing my investing philosophy. For as long as I can remember, I've preferred high quality, less speculative investments that helps me build wealth over time. His main message to me was to keep doing what I was doing and let diversification and time do its job. As I lingered at the door, his last comment was "if you can keep what you invest and resist tempting gains that often are accompanied by catastrophic losses, you will beat the majority of the street."
Regulators continue to learn from the recent banking crisis
What happened: for those of you who read through some of my posts last month, here's the next episode in our banking crisis saga. As with any crisis, after all the noise shakes out people ask why and how do we prevent this in the future. Regulators are close to proposing tightened regulations for smaller and regional banks (e.g., Capital One, Truist, etc.,) that were previously exempt from the stricter restrictions that was imposed on the nations largest banks (J.P. Morgan Chase, Bank of America, Citigroup, etc.,).
Why it matters: if the proposals are adopted, tighter restrictions usually translates to slower growth, lower risk, and fewer buybacks for the smaller banks (i.e., $100B-$700B in assets). This will affect the strategy and growth models of banks within this asset range as they seek alternative and new ways to compete with the largest banks.
My thoughts: as an investor myself, I have a soft spot for investor protection and am supportive of actions that protect us from convoluted big corporate strategies that sometimes are hard for us to understand. The bigger lesson I took from this however is we can't solely rely on regulators. For example, although it was extremely difficult to spot SVB's unrealized losses, a hawk-eyed investor can spot crumbs such as through the filing footnotes. It's up to the regulators to make sure that investors do not need hawk eyes to spot red flags but all things equal, more due diligence is always better. That's why I stick to what I know because the experience (and hard lessons learned) accumulate over time to give me an advantage and better positions me for my investments.
Steve's Trades
1. SBUX Cash Secured Put
Expiration Date: June 2, 2023
Step 1: Have $10,300 of cash as collateral
Step 2: Sell 1 $103 strike put option (delta -0.28) for $186
Credit/premium received: $186
2. SBUX Bear Call Spread
Expiration Date: June 2, 2023
Step 1: Buy 1 $130 strike call option (delta 0.02) for $14
Step 2: Sell 1 $115 strike call option (delta 0.25) for $118
Step 3: Set a buy-stop order of 100 shares at $114
Credit/premium received: $118 - $14 = $104
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: 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 plus the 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: Great question! 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 mention 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.
Q: Like with your guidelines for covered calls, do you advise avoiding selling cash-secured puts before ex-dividend or near earnings date?
A: With respect to selling CSPs right before and through an ex-dividend date, it doesn't matter as much because in this case, you would not own any shares. There may be a slight price impact before and ex-dividend but research has not shown material impact. On the other hand, when selling a covered call, you own the shares and someone might want to execute their option in order to receive the shares before this date and be eligible to receive the dividend.
With respect to selling CSPs near earnings, this is actually one advantage to sell these short-term options because implied volatility is usually higher, which often means we get higher premiums. However, make sure you're investing to your comfort level to sell CSPs or CCs during this time as prices can dramatically either increase or drop after earnings are released. The volatility can sometime even cause price gap up and gap downs where your buy stops may not even trigger. That's why I will go a bit more out of the money if I want to be conservative. Great question here - keep it up! :)
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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
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.