Oct 29, 20227 min
Hey Wealth Builders!
We had a lot of wonderful earnings this week. Let's see which companies did well, and which ones I think are a bit iffy. 🙌
Technicals 📈
Here's this week's heat map:
SPY
Congrats folks! It looks like there is a trend change for now and that we may be moving higher. We broke out of some resistance this week and there seems to be a short-term upward trending support line denoted in orange.
The breakout was caused by major corporate earnings we've had. I'm personally impressed by the numbers many companies gave and how they were able to increase their revenue year-over-year, especially with all the macroeconomic factors in the air.
Am I buying more shares of SPY? I'm personally going to wait a little bit more until we break the yellow resistance line. But again, I don't want to hinder you with your investment decision. In the long-term perspective, the stock market as a whole is going to rise again, especially with all these companies doing exceptionally well during a storm. This entire bear market we're experiencing is going to eventually end and it will be a small blip in the overall chart.
Steve's Trades
This week, I'm going to take a pause on trading and observe what the market sentiment is like in the next couple of days. I also closed out the majority of my covered calls (against my initial positions) and bear call spreads (ex. AMZN, AMD, V, AAPL, etc.)
If you had AMZN bear call spreads, you should have been able to close out your trades and lock in your profits. Woohoo!
If you've been selling covered calls on your initial positions or setting up bear call spreads, did you notice the IV crush right after earnings? You should have seen your contract values drop exponentially, which means you were able to close your positions to lock in your profits.
Why does this happen? Remember that OTM option contracts are made up of extrinsic value. This extrinsic value is primarily made up of (1) time and (2) IV. Right after earnings, IV typically drops, meaning that the overall contract value will also drop.
Earnings
Remember that one of the primary drivers of the stock market is revenue. Yes, there are other metrics like future guidance, monthly active users, etc. But at the end of the day, what Wall Street really cares about is if a company is still consistently generating revenue. The stock price of companies may not automatically be reflected now since a lot of the buying and selling are based on emotion/sentiment and algorithmic trading. But in the long term, a stock has an incredible tendency to rise if the company is making increasing revenue.
MSFT
The company reported $50.1 billion in top line revenue, which is an 11% increase year-over year.
Their Intelligent Cloud revenue was $20.3 billion, which is up 20% year-over-year.
Their Productivity and Business Processes, like their Office products, was $16.5 billion, which is up 9% year-over-year.
Their More Personal Computing was $13.3 billion, which did not have much growth from last year.
I still like MSFT as a long-term hold but will not buy anymore shares until I observe a positive market sentiment and upward trend in the technicals. I’m still selling covered calls against my initial shares to collect some premium along with the dividends.
AAPL
Product revenue, like iPhone and iPad sales, came in at $316 billion, up from $297 billion last year.
And Services revenue, like their cloud and iTunes, came in at $78 billion, compared to $68 billion last year.
I believe Apple is still doing a wonderful job in this current environment. Though growth has slowed down like many other companies, they are still generating more revenue than before. Again, I will add more shares later once I see a change in sentiment and trend. AAPL may also be my next LEAPS candidate.
AMZN
The company made $365 billion in top line revenue, compared to $332 billion a year ago.
AWS, which is their cloud business, generated $59 billion, compared to $44 billion a year ago.
Overall, revenue grew 15% in the third quarter, but it "fell short of Wall street’s projections."
I believe Amazon is still a wonderful company. I will be adding more shares and starting wheels on this stock once we see a change in sentiment and trend. After some more observation, I may continue to set up bear call spreads to collect income.
GOOGL
The company made $207 billion in top line revenue, compared to $182 billion a year ago.
YouTube ads made $21 billion, compared to $20 billion a year ago.
Google ads overall made $165 billion, compared to $148 billion a year ago.
Google Cloud made $19 billion, compared to $14 billion a year ago.
Google is still a great company. After some more observation, I may set up some bear call spreads on this stock later.
Meta
The company reported revenue of $27.71 billion for the quarter, a decrease of 4% year-over-year.
The company generated $84 billion over the year, which barely had any growth in a year-over-year basis.
Family daily active people (DAP) – DAP was 2.93 billion on average for September 2022, an increase of 4% year-over-year.
Family monthly active people (MAP) – MAP was 3.71 billion as of September 30, 2022, an increase of 4% year-over-year.
Facebook daily active users (DAUs) – DAUs were 1.98 billion on average for September 2022, an increase of 3% year-over-year.
Facebook monthly active users (MAUs) – MAUs were 2.96 billion as of September 30, 2022, an increase of 2% year-over-year.
Even with the decrease in ad revenue, the company is still adamant with investing nearly $15 billion into the metaverse, well above the $10 billion annual figure the company had previously given.
Overall, Meta has been slowly increasing their users on their platforms. However, revenue has not been following suit. Right now, I am not going to add anymore shares until I see evidence that they can increase their revenue. I am a bit iffy on the company's fundamentals right now.
Looking at the charts, Meta has dramatically fallen out of Wall Street's favor over the past year.
Visa
The company generated an overall $29 billion in top line revenue for the year, which is a 22% increase.
Payment Volume, Cross-Border Volume, and Processed Transactions all had double digit increases, mostly due to higher spending and traveling.
I still believe Visa is a great long-term hold as we continue to see a shift into more digital spending.
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Q1. I routinely sell OTM covered calls with low Delta .25 or less almost always less than 30 DTE. I closely manage the options because I really don’t want to sell the underlying as they are for dividend payers I have held for a long time. These trades are directional in nature (my hope is to not get assigned and go on to collect the Dividends) Lately I have been reading about selling deep in the money covered calls, as a strategy. What are your thoughts on the subject?
A: When selling DITM covered calls, you will get more premiums in return due to the higher intrinsic value these call options hold. However, since these contracts are already ITM, there is a higher chance of getting your shares called away at the selected strike price. If your goal is to sell call option contracts against your dividend paying shares by reducing the probability of getting your shares called away, it may be statistically favorable to sell OTM call options.
Circling back, yes, it is typically more favorable to sell around a delta 0.16 to 0.25 around 30-45 DTE. Always keep in mind that the higher the delta chosen, the higher probability your shares will be called away.
Q2. Hi Call to Leap peeps,
I have a question about the bear call spread/buy stop order trade. I took Steve’s advice last week and sold to open a bcs on AMZN 128/144. I then put in order for a buy stop at 127 if the underlying goes up that much. So say my buy stop triggers at 127 and I buy 100 shares. What happens to the bear call spread? Do I buy to close and take a loss? Please clarify.
A: Once you buy the 100 shares, you will now pair it with the second leg of your bear call spread, which in turn will become a covered call trade. You can then sell your first leg of your bear call spread as you are not contractually obligated to hold it.
Q3. Also, why are we only doing bear call spreads on AMZN and no other tickers? Just wondering. Thanks.
A: AMZN is a growth stock that doesn't pay a dividend. Looking at the trend, AMZN has a high tendency to drop, especially even if there is a whiff in uncertainty. If you set up bear call spreads on this underlying, feel free to close it out to lock in your profits.
Q4. Hi Call To Leap team! I hope all is well! Given the news with GOOGL missing earnings, would now be a good time to set up a Bear Call Spread? Also, would you recommend this strategy on any DOW30 company that misses earnings (and I wouldn't mind owning 100 shares of)?
A: Yes. GOOGL seems like a good BCS candidate. Let me see how to market sentiment is for the next couple of days as we can give institutions more time to digest the numbers. I'll keep you all posted.
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Let's see how institutions respond to all the earnings next week. Perhaps with all the growth we've been seeing for most companies, it may show Wall Street that the economy is still going strong. We are also coming close to the mid-term elections. I want to see if there's any positive news that may come out in the next couple of days that may spark some sort of Santa Claus Rally.
I'll keep you all posted.
Stay patient everyone!
-Steve and the Call to Leap Team
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