Mar 18, 20237 min
Hi Wealth Builders! 👋
Wow...what a week! There's a lot to unpack this week so Iet's dive straight in:
Fed backstopped SVB/Signature deposits: To bolster investor confidence in the financial system, the US regulators decided to backstop all deposits of SVB and Signature Bank following their collapse. This means that all funds above the $250,000 FDIC insured amount is also guaranteed through this special backstop.
Fed created Bank Fund Term Program (BFTP): To get ahead of liquidity crunches other similar sized banks may run into, the Fed announced a new BFTP program which gives loans up to one year. By some estimates, this program can be as much as $2 trillion (which is also the par value of bonds currently held by US banks).
Multi-Bank consortium steps in to help out First Republic: Finding many of the similarities between First Republic Bank and SVB (e.g., regional, size, high net worth focus, etc.,), investors confidence in First Republic Bank waned which tanked shares throughout the week. On Thursday, a group of banks including JP Morgan, Citigroup, Bank of America, Wells Fargo, and others deposited $30 billion in First Republic to shore up investor confidence. On Friday, investors were unconvinced that this rescue deal fundamentally changes anything at First Republic and shares plunged another 30%. Over this week, First Republic has lose almost 70% of it's market value and investors are wonder if they'll be forced to sell.
Credit Suisse taps ₣50B Swiss francs lifeline: Swiss bank Credit Suisse was also affected by current fears of banking instability which hit its shares hard on Wednesday. The bank exercised its option to raise up to ₣50B Swiss Francs to quell investor concerns around liquidity. Credit Suisse also committed to buying back some $529M in debt securities to reduce its interest expense and more importantly interest rate risks. Since the SVB collapse last week, they've tried to emphasize that unlike SVB, they have fully hedged for interest rate risk.
A key takeaway for me on this recent turn of events is that the investment approach of buying quality, long-term, fundamentally strong investments is a time tested strategy. In this instance of our banking panic, depositors shifted their money from smaller regional banks to larger megabanks in a flight to safety.
Secondly, I've received some questions from members asking if now is a good time to buy these banks for cheap. Personally, I like investing in company I know well whereas many of these banks I'm hearing for the first time. In addition, whenever a stock is cheap, I take a moment and think about whether this is a value play or a value trap. There's no guarantee that the Fed will backstop any future bank liquidity crunches and the multi-bank consortium depositing into First Republic bank was only one time for as long as I can remember. Taking a look at this graph (Source: Factset), I still see quite a few peer banks to First Republic, all of which we have yet to hear about in the news. So if I buy any of these stocks now, it may be I bought a stock for really cheap - or - it may be I just bought the next bank that is preparing to file for Chapter 11 bankruptcy!
Finally, I think the Fed will be very careful before announcing any slowdown in interest rate hikes because inflation is still a real issue they need to address. Most likely, they are waiting to see how this continues to spread/subside and are planning to pivot based on the turn of events.
Heat Map📈
Here's this week's heat map:
How's the S&P500 doing?📊
SPY
Despite all the fear around the banking sector, SPY is actually up 1.4% for the week. Nasdaq is up 4.5% while the Dow finished slightly lower. Big winners this week are MSFT and chipmakers AMD and NVDA. For MSFT, investors were excited about ChatGPT-4 which expands to both text and image inputs and are hopeful in the additional value AI can bring to MSFT's ecosystem of products. For NVDA and AMD, investors are betting on the bottoming of the PC & consumer electronics market, an accelerated demand for data centers riding on the current AI trend, and a stronger than expected consumer market.
Steve's Trades
1. AAPL Cash-Secured Puts:
Expiration Date: April 28, 2023
Step 1: Have $14,000 of cash as collateral
Step 2: Sell 1 $140 strike put option (delta -0.16) for $148
Credit/premium received: $148
This position expresses that you are willing to buy 100 shares at the strike price of $140. If the shares are assigned to you, we can start earning premium from covered calls on this new position.
2. AAPL Bear Call Spread:
Expiration Date: April 28, 2023
Step 1: Buy 1 $185 strike call option (delta 0.02) for $8
Step 2: Sell 1 $165 strike call option (delta 0.26) for $205
Step 3: Set a buy-stop order of 100 shares at $164
Credit/premium received: $205 - $8 = $197
Ask Steve 🤔
Q: Where do you invest your cash position in TD Ameritrade so it's not just earning nothing while waiting for it to be used on various positions? A money market or money market ETF?
A: You have a couple of options where to put your money: money market funds, bonds, or CDs. If you want to leave your capital in your brokerage account, you could consider trading bear call spreads and use the free capital as cash to cover your positions. Also, most brokerages have their own cash management program though they aren’t near any of the HYSA rates in the market. Also, clarify with your brokerage how long it takes cash to “settle” as sometimes cash invested into one of their cash management/money market funds may take a day to settle so you may not have cash available to you instantly.
Alternatively, if you want your cash to be more liquid and not as much at risk, you can consider putting your money into a high-yield savings account. There are many accounts that give around 3-4% due to our high-interest environment. However, as we’re experiencing the recent banking instability (e.g., Silicon Valley Bank, Signature, Silvergate, now First Republic), I like to make sure my accounts are within the $250K cash limit.
Q: Hello, I was thinking of doing a covered call on Charles Schwab. I saw the prices go down considering what is going on with the banks currently. Is this a good idea?
A: We only sell covered calls on companies that we want to own for the long-term anyways. Before making any trade, it is important to always do your due diligence. With that being said, what you do with your portfolio is completely up to you. If you'd like to own Charles Schwab for the long-term, then you can consider trading the wheel on it. Also, keep in mind that these stocks are very volatile at the moment. I personally am waiting to see how much of this banking “contagion” will continue to manifest and am waiting to see because there’s also significant Fed policy risk.
Q: Forgive me for asking a few silly questions. I appreciate the time you took to answer my last one. I'm getting around to learning the Greeks, but with a little curiosity and procrastination, I had a further question regarding Averaging Down Cash Secured Puts. Is it a good idea to also Average Down Cash Secured Puts and Long Puts simultaneously?
A: No need to be sorry for your questions! We're all here to learn. If you are bullish on a particular underlying stock for the long-term, then yes, you can consider averaging down your positions by selling OTM cash-secured puts. However, I would not buy long puts in this environment because of the volatility we are experiencing.
Q: I'm actually biased that the market will go up on good stocks, especially if they're listed on the S&P500 and/or the Dow Jones 30. Would Averaging Up with my Covered Calls and Long Calls, simultaneously, be a good idea, or just Averaging Up Covered Calls and leaving my Long Call(s) neutral?
A: Yes, you can "average up" and sell OTM covered calls against your positions if you are bullish on the underlying stock. I would be more cautious with purchasing call options right now since there is still a lot of uncertainty in the markets.
Q: And finally, would Averaging Up Cash Secured Puts and Long Puts be of any use, or would Averaging Down Cash Secured Puts and Averaging Up Long Puts be of any use?
A: To be clear with the terminology and trades, it is optimal to sell cash-secured puts and covered calls against underlying shares that you believe will be neutral to slightly bullish. When you are "long on puts," this means that you are purchasing puts. When you are "long on calls," this means that you are purchasing call options. I do not recommend purchasing options at this time due to all the uncertainty in the markets and the IV being higher than usual.
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Have a wonderful weekend! It looks like we are slowly going higher! 😀
-Steve and the Call to Leap Team
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