Mar 4, 20237 min
Updated: Mar 5, 2023
Hi Wealth Builders! 👋
After a rough February where the S&P closed lower by 2.3%, we're starting March on a high note by the index gaining 1.08% over this past week. The main read from the markets is that investors are less shocked by expectations of rate increases and are focusing on a stronger economy instead. If any of you were wondering if a strong economy was literally a factor in depressing markets over the past few weeks, you are absolutely correct! It seems that whereas before investors were concerned about economic strength because it pressured the Fed to increase interest rates to combat inflation, now some investors believe the economic resilience can sustain the impact of expected rate hikes and speculating that all future Fed actions have been already priced in.
To me, this is yet another sign of the excessive noise that investors focusing on the short term will often run into. That's why I take a long-term view on investing, focus on fundamental factors in strong companies I don't mind holding over time, and monitor the markets for tactical opportunities to open positions that generate me income.
Heat Map📈
Here's this week's heat map:
Below is last week's heat map for comparison:
Remember to focus on the long-term and invest according to the risk level you're comfortable with!
How's the S&P500 doing?📊
SPY
All three major indices finished the week with gains. At the sector level, strong data from the services sector today further bolstered investors' confidence in the economy's resiliency. This is encouraging news and a directional change for the better. I will be monitoring my watchlist favorites for any income generating opportunities to build up positions slowly and I'm hoping to see this week's trend cement a bit more to give me more confidence.
Steve's Trades
We have 3 trades for the upcoming week: SBUX Cash Secured Puts, SBUX Bear Call Spread, and SBUX Jade Lizard (which is really trading both the Cash Secured Puts and Bear Call Spread positions detailed below).
1. SBUX Cash-Secured Puts:
Expiration Date: April 14, 2023
Step 1: Have $9,800 of cash as collateral
Step 2: Sell 1 $98 strike put option (delta -0.20) for $99
Credit/premium received: $99
This position expresses that you are willing to buy 100 shares at the strike price of $98. If the shares are assigned to you, we can start earning premium from covered calls on this new position.
2. SBUX Bear Call Spread:
Expiration Date: April 14, 2023
Step 1: Buy 1 $125 strike call option (delta 0.02) for $8
Step 2: Sell 1 $111 strike call option (delta 0.23) for $94
Step 3: Set a buy-stop order of 100 shares at $110
Credit/premium received: $94 - $8 = $86
3. SBUX Jade Lizard (SBUX Cash Secured Put + SBUX Bear Call Spread):
If you feel comfortable about both of the trades above, you can implement both trades to form what we call a Jade Lizard (it's called a Jade Lizard because the profit and loss graph of this position looks like a lizard with its tail hanging off to the left hand side)
Expiration Date: April 14, 2023
Cash Secured Puts Trade (from above)
Step 1: Have $9,800 of cash as collateral
Step 2: Sell 1 $98 strike put option (delta -0.20) for $99
Credit/premium received: $99
Bear Call Spread Trade (from above)
Step 1: Buy 1 $125 strike call option (delta 0.02) for $8
Step 2: Sell 1 $111 strike call option (delta 0.23) for $94
Step 3: Set a buy-stop order of 100 shares at $110
Credit/premium received: $94 - $8 = $86
Total credit/premium received from both trades: $99 + $86 = $185
Our goal from the Jade Lizard is for SBUX to stay between $111 and $125. If the stock rapidly rallies up, we can close our CSP early and if the stock rapidly drops, we can close our BCS early. As always, check to see if you are comfortable with these trades and if it fits your risk tolerance.
Ask Steve 🤔
Q: I understand that LEAPS have a higher profitability; however, you have to buy a LEAPS call option and the timeline is longer to wait in order to sell for a potential profit (and I understand that you can sell at any time when you see a profit). Why is it not more beneficial to just sell covered calls on a weekly or monthly basis and obtain that same 20-50% ROI over the year and you are not having to buy anything? What am I missing?
A: Great question! You're not missing anything Toni. We actually do both as they are both beneficial in different market conditions. LEAPS are lucrative in bull markets as you can get a higher return on your investment, quicker. For example, if a LEAPS costs you $5,000 and a stock moves $10 in 3 days, that could be $800 in 3 days if you bought a delta 0.80. This is a 16% return on your investment in just 3 days. However, as you know, LEAPS are much riskier as we could potentially lose all of our money we used to buy the option. If you prefer not to take the risk, then you can definitely just stick to covered calls and cash-secured puts.
Q: The video states BCS can be lucrative during a downward trend which I understand, as if the market is trending down & if you are buying & selling calls w/the anticipation that the market is going down, there is a high probability that your stock won't get called away. HOWEVER....if I'm selling puts.....as an example I sell a $150 APPL option trade and AAPL not only goes down to the $150 price per share but falls all of the way down to $100 per share, is there also a protection spread for that?
A: To clarify, we don't buy any short-term calls. We also do not purchase any LEAPS in a downtrend market as the value of that contract would decline significantly. Additionally, there is no spread to protect you from getting assigned the shares from a cash-secured put. When we sell a cash-secured put, we initiate the position with the mentality of being okay owning those shares at the strike price we select. This is also why we choose only stocks we’re willing to hold over the long-term.
Q: Hi team, is the current position (AAPL) for this week a jaded lizard? And if so do you need the total collateral to equal that of the CSP and BCS?
A: It is essentially a Jade Lizard where we simultaneously sell a CSP and set up a BCS. Theoretically, you should have enough collateral to cover both trades just in case the stock reaches your buy stop order, but then drops significantly to $125 or below and expires there, causing you to purchase 100 shares for your CSP as well. We personally have not seen this happen, but anything can happen in the stock market and we must be aware of the risks. As you’ve probably heard us say countless times, invest to your risk comfort level!
Q: The dividend stock internet group is very high on JNJ right now because its price is down to a price not seen in a while. Do you ever buy a stock that is normally strong because its price is currently low compared to where it has been recently (potentially implying a good value)?
A: I personally like to buy more shares if I like the fundamentals and I see the stock price rising, meaning that I would like to see a consistent pattern of higher highs and higher lows. Even if there is a stock I like and the price continues to move down, I would hold off on purchasing the shares until I have technical evidence that the stock price is moving back up, which typically signals that large institutions are putting their money back into the underlying again. Finally, I would point to the common “value trap” where a stock looks cheap only based on price data but that “cheap” isn’t backed by any fundamentals. Investors call it a "value trap" because oftentimes their thesis doesn't pan out and the price never reverts (or takes too long to mean revert).
Q: My other question is are you putting more cash aside (greater than 10% of your portfolio) in case the market drops 10% or more so you can buy back in at a lower cost basis?
A: Yes. I am still keeping a lot of my capital as cash at the moment. As the markets as a whole start to rise, I am SLOWLY scaling back into my long-term positions. I like to wait for the stock to come up to me, rather than me chasing the stock down.
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Have a wonderful weekend! It looks like we are slowly going higher! 😀
-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.