May 13, 20236 min
Hi Wealth Builders! 👋
Quick announcement:
Based on multiple feedback I've received over the past few months, starting next week I will be splitting up my weekly premium positions article into separate article series:
1) Market news, commentary, education
2) Weekly Positions
3) Recent Q&A that I find everyone can benefit from
The two main benefits of this approach is
1) I get to share more learnings with you and I don't have to wait until end of every week
2) Shorter articles means you're not scrolling through a 100 page thesis!
It's important to my team and I that the content we're sharing is valuable and educational. At the same time, the teacher in me often wants to teach as much as I can (it makes me very proud to see all your DMs of what new things you've learned. This is a big part of why I do what I do and it warms my soul :)). So taking some of your great suggestions into action, splitting it up this way means you can get to specific topics quicker (shorter reads) and I can break out of only sharing learnings once a week (I have so much I want to share with all of you!)
Thank you all for constantly providing your feedback and being overly generous with your encouragement and recognition! It's truly fulfilling to be with you all on this journey to financial freedom, while having lots of fun and learning along the way. For the many new members that have signed up recently, you can always DM me your thoughts/feedback because my team and I are always focused on delivering the best experience for you!
So without further ado....let's dive right into this week's content:
What happened in the markets this week?📊
Markets pulled back a bit this week with the S&P500 falling 0.2% and Dow Jones remaining relatively flat while Nasdaq was lower by 0.4%.
What was newsworthy this week:
*Quick PSA: if you like what you're reading or are curious on any other topics, please feel free to DM me on our Discord. I always strive to do better and your feedback helps me know what's most valuable for you!
Inflation cools for the 10th month in a row
What happened: April year-over-year inflation showed that prices rose 4.9% from last year
Why it matters: Inflation has been a dominant factor in driving Fed policy since we hit a peak inflation of ~9% mid 2022. The main reason for the Fed's interest rate increases is to combat inflation and slow down the deteriorating value of the dollar's purchasing power.
My thoughts: In addition to inflation, the Fed is also know tracking very closely the impact of their interest rate actions on the health of the mid-size/regional banking sector. It's obvious now that there was significant impact and that the aftermath has a delayed effect. A lower inflation adds to the case for a rate pause though I believe the Fed will also want to see a few consecutive months of "healthy inflation" ranges before making a directional change.
PacWest Bancorp exploring potential sale
What happened: PacWest Bancorp is under pressure from an outflow of deposits and low customer confidence
Why it matters: The banking confidence crisis can have many impacts, from seeping into consumer confidence in other areas to changing the competitive landscape of the banking industry.
My thoughts: From SVB to Signature Bank to First Republic and now PacWest, depositors remained concerned about the safety of their deposits above the FDIC level. The core uncertainty of this issue will not stop until regulators announce a change reassuring the safety of customer deposits (e.g., raising the FDIC limit or announcing full commitment to future backstops). However, that brings its own problems because regulators then assume risk that were previously on banks which can lead to future excessive lending and other speculative practice, all in absence of risk to the banks. To complicate matters further, the longer it takes the regulators to present their solution, the more banks are likely to be sucked into this freefall and need bailout (reproducing our "at-risk" cohort from our last week's post below). To me, this is a reminder that there is no such thing as "risk-free" and even the safest deposit accounts can benefit from diversification (of banks in this case).
U.S. needs to raise the debt ceiling next month or risk default
What happened: Congressional Budget Office shared that unless the U.S. government raises its debt ceiling in the next two weeks, it will default on some bills
Why it matters: Currently U.S. enjoys high credit standing meaning the government can borrow high amounts for low interest rates. If the creditworthiness of the U.S. government starts deteriorating, that will impact future availability of funding and how much it costs the U.S. to issue loans.
My thoughts: This is a very complicated topic so I'll ignore the politics and focus on an economic lens, what we can learn from this: why the U.S. raises the debt ceiling to prevent default
Just like how you and I have a credit score (which often determines everything from the credit card we are eligible for to the rates on our loans or mortgages), governments (aka sovereigns) also have a creditworthiness rating. Except instead of Equifax/Transunion/Experian, it's Standard & Poor's/Moody's/Fitch. I think it's important to understand that part of the reason why the U.S. economy has been relatively stronger compared to many other regions (and the dominance that the dollar enjoys) stems from U.S. having high credit rating. Lenders believe that U.S. sovereign debt is low risk and is willing to lend more of it and at cheaper rates. There's a lot more we can unpack here so DM me if you're curious on any specific topic and I can dive in deeper!
Steve's Trades
1. GOOGL Bear Call Spread
Expiration Date: June 23, 2023
Step 1: Buy 1 $145 strike call option (delta 0.02) for $11
Step 2: Sell 1 $125 strike call option (delta 0.26) for $151
Step 3: Set a buy-stop order of 100 shares at $124
Credit/premium received: $151 - $11 = $140
Watchlist: AAPL LEAPS
Also, I wanted to mention that I'm currently monitoring an opportunity with AAPL LEAPS. My current thinking is to be conservative with our trades by continuing to collect premium and with a good amount of capital saved up, we can start with a deep ITM LEAPS. I strongly believe in using the profit from our wheels to do this (so you're using money you've made from the market). If you've never done wheel before, you should slowly scale in by buying shares directly (no theta decay) before buying LEAPS.
Looking at the charts, you can see that AAPL is approaching its long term resistance at around the $180 range. Breaking above that gives me another metric supporting investing in APPL LEAPS.
The other aspect is overall market because AAPL is such a big part of SPY and the broad market has a direct impact on stocks, I would like to see SPY break above the $418 range.
Both of these price levels represent resistance levels for AAPL and SPY that broken above, gives me more supporting evidence for initiating the LEAPS.
Ask Steve 🤔
Q: If I'm long on a underperforming stock, it recently took a sharp decline, and I'm looking to exit out of the stock permanently anyhow (not going to use wheel strategy), can you explain why I shouldn't sell deep in the money covered calls ~1 month out in expiration? The premium is huge and the stock is likely to get called away regardless; also, I have no desire to wait for the underlying to retrace because I want to exit anyways. Why not collect huge premium to mitigate my loss?
A: If you sell a DITM call option, you'll be obligated to sell the shares at a much lower price than what it currently is. You will have to calculate to see if the premium will offset the capital loss from selling the shares at a lower price.
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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. If you need help, feel free to send us a message.
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.