Hi Wealth Builders! Also, welcome to all of the new members this week!
Whew! We had a rocky week with the Federal Reserve hinting more aggressive interest rate hikes next quarter. As you know, higher interest rates typically affect growth companies as higher borrowing rates may affect their bottom-line revenue. As a result, we observed a flight to quality, where investors shifted away from these high-growth tech stocks and may be potentially reallocating their funds into dividend-paying, value stocks that are mostly in the DOW30. Let's take a look at the overall markets:
Here's SPY:
Here's QQQ:
Here's DIA:
Technical Analysis 📈📉
SPY:
SPY seems to have trouble staying above its $457 level. Before adding anymore shares to my portfolio, I'm going to patiently wait to see how it performs in the next couple of weeks to gather more data points and to solidify the new trend. My short-term outlook for the markets is neutral.
QQQ:
Notice that many tech stocks in the QQQ have lower candle sticks for the past couple of days.
DIA:
This is in contrast to the performance of DOW30 stocks that have slowly gone up.
AMD:
AMD is hovering above its $100 horizontal support line that it tends to bounce off of. From a broader perspective, the stock is also hovering above its long-term, upward-trending orange support line. However, with the future interest rate hike, AMD being a growth stock, and upcoming earnings, it may be a good idea to proceed with caution. We want to see if this support line holds.
SBUX:
Though I like SBUX, there still seems to be a lot of negative news that the company just can't seem to shake off, specifically with news surrounding their unionization push, geopolitical tensions with the company's main international market of China, the unexpected resignation of their CEO, and from this week, the suspension of the company's buyback program. If the stock makes any new lower lows, I am planning on exiting out of my position and using it to reduce my capital gains for 2022. Let's stay patient and take the role of an observer for the next few weeks until they release earnings. I will keep you posted.
AAPL:
AAPL is still holding strong near its highs.
WM:
WM is still on a climb up. I've been adding more shares to my portfolio over the past couple of weeks. However, since the RSI is running a little high, there is a chance that the stock may take a little breather.
COST:
The same goes for COST as it has been climbing up quickly over the past several weeks.
HD:
Right now, I'm keeping a close eye on the price action for HD. Looking at its long-term trend, I see that the stock may have hit a potential support line (with the exception of the March 2020 crash) denoted in magenta. I would, however, like to see it hold above this as it would provide more evidence that it is a strong support line.
Zooming in, you can see that there may also be a mid-term $299 horizontal support with the stock having two strong, bullish candlesticks. I will be inclined to add more shares if I start to see some sort of divergence with the overall markets moving down or sideways, while this stock moves up. This will give me an indicator that there may be a rotation of money going back into this dividend-paying company. Keep your eyes peeled.
Trade of the Week:
This week, we have a bit of a neutral outlook, so we can see how Wall Street digests the latest news from the Federal Reserve. Also keep in mind that major earnings reports are set to be released later this month, which means that there may be some volatility ahead. If you are accustomed to this volatility and want to take advantage of the higher premiums, you can start new wheels. However, if you want be more conservative, you can wait until after the reports are released and see how Wall Street reacts to the numbers. You can instead continue to sell covered calls against the initial shares that you already own.
Buying Extra Shares:
If you are concerned with your underlying stock surpassing your covered call strike price on the day of expiration, why not buy an extra 25 shares on the side? This way, not only can you receive premium from your covered call, capital gains, and potential dividends, you can also ride the wave up with the free, extra 25 shares.
For example, instead of purchasing 100 shares to sell a covered call, you can buy 125 shares first. Or, if you want to start your wheel by selling a cash-secured put, you can buy 25 shares and sell a CSP.
Pay Attention to Delta:
If you do not prefer to sell NTM contracts, you can consider selling contracts based on their deltas.
For example, if you sell a covered call with a delta 0.30, this means you will roughly have around a 30% chance of getting your shares called away on expiration.
If you sell a cash-secured put with a delta -0.30, this means you will roughly have around a 30% chance of getting your shares assigned to you on expiration.
Below are some trade recommendations. See if they fit your risk tolerance before trading:
MSFT
Monday Open: $310.09
Friday Close: $296.97
5-day change: -4.23%
Starting a New Wheel: Selling a Cash-Secured Put on MSFT
- MSFT's Current Price: $296.97
- Capital Needed: $29500.00
- Sell at the Expiration Date: 2022-05-06
- Select the Strike: $295
- Premium you'll receive: $930.00
- Cost Basis: $295.00 - $9.30 = $285.70
Starting a New Wheel: Selling a Covered Call on MSFT - MSFT's Current Price: $296.97 - Capital Needed: $29697.00 - Sell at the Expiration Date: 2022-05-06 - Select the Strike: $300 - Premium you'll receive: $868.00 - Cost Basis: $296.97 - $8.68 = $288.29
AAPL
Monday Open: $174.57
Friday Close: $170.09
5-day change: -2.56%
Starting a New Wheel: Selling a Cash-Secured Put on AAPL
- AAPL's Current Price: $170.09
- Capital Needed: $17000.00
- Sell at the Expiration Date: 2022-05-06
- Select the Strike: $170
- Premium you'll receive: $563.00
- Cost Basis: $170.00 - $5.63 = $164.37
Starting a New Wheel: Selling a Covered Call on AAPL - AAPL's Current Price: $170.09 - Capital Needed: $17009.00 - Sell at the Expiration Date: 2022-05-06 - Select the Strike: $175 - Premium you'll receive: $328.00 - Cost Basis: $170.09 - $3.28 = $166.81
NKE
Monday Open: $133.05
Friday Close: $128.15
5-day change: -3.68%
Starting a New Wheel: Selling a Cash-Secured Put on NKE
- NKE's Current Price: $128.15
- Capital Needed: $12800.00
- Sell at the Expiration Date: 2022-05-06
- Select the Strike: $128
- Premium you'll receive: $383.00
- Cost Basis: $128.00 - $3.83 = $124.17
Starting a New Wheel: Selling a Covered Call on NKE - NKE's Current Price: $128.15 - Capital Needed: $12815.00 - Sell at the Expiration Date: 2022-05-06 - Select the Strike: $129 - Premium you'll receive: $353.00 - Cost Basis: $128.15 - $3.53 = $124.62
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Q: Hi, regarding buying back and rolling out: the example in the Q&A says, if you sell a CC for 300 and the call decays to 30, you can buy back etc. What exactly is decaying and where do I see this? Is the premium decaying ? I get the premium when I sell a CC anyway. What am I missing here? Thanks in advance
A: Wonderful question, Sven! "Theta decay" can be thought of as the value an option loses every day. For example, an option that has a theta of -0.01 loses $1 a day while a theta of -0.12 loses $12 a day. If you were given $300 in premium for selling a covered call and the value of theta is -0.10, the option you sold loses $10 every day, assuming everything else stays the same. Eventually, theta will decay the entire option at expiration leaving you with $30 premium. You can find theta on the option chain, scrolling to the side of the strike price.
As time progresses, theta might decay the option you sold to $30, making it cost $30 to buy it back. If you buy it back for $30, you essentially locked in $270 of profit.
Yes, you'll get the premium upfront anyways, but if you are able to lock in the majority of your premium in 2 weeks out of the 4 weeks you sold it for, it doesn't make sense to wait another 2 weeks to make the rest of your $30 (out of $300 premium), when you can lock in your profits of $270 by buying back your covered call for $30 and then sell another covered call for more profit. Consider revisiting our buying back and rolling out video for a more thorough explanation of the unit rate per week as this can be a confusing topic.
Page
Q: Is there a beginner (step by step) video tutorial showing how to place my first put and covered call on TD Ameritrade? Ready to get started... But, very unfamiliar and overwhelmed with the platform and scared to do the wrong thing.
A: Of course! You can find this by looking under our level 1, selecting "see past videos", scrolling to the bottom and clicking ""The Wheel Strategy on AAPL using Think or Swim." Here we walk you through the steps of executing the trade.
We use TD Ameritrade's Thinkorswim Web platform to trade options. You can consider following along and using this platform too! We understand it can be very unfamiliar and overwhelming. You can consider paper trading to become more familiar with the process and logistics. Once you feel comfortable, you can consider trading the wheel :)
Brad
Q: As I have been doing covered calls for the past month, I was wondering how you decide what Premium price and if you won't go below a certain amount compared to the share price? Say, I have 100 shares of AMD I bought for $101 or 100 shares of MSFT for $300. Would you say, I'm not going below $150 for AMD or $600 for MSFT, or do you find it to be more complicated than that?
A: The premium prices don't typically guide our decisions because these always fluctuate and we can't control the market. Instead, it is more of selling at or above your cost basis and your goals for the shares. We wouldn't want to sell shares for less than we purchased them for.
For example, if you bought XYZ for $100 and you are okay with letting them go at $101, then you receive whatever premium the contract for that specific strike is currently selling for. If you really don't want your shares to get called away, you can minimize your chances by selling delta 0.30 covered calls. If you sell a covered call and the underlying stock drops significantly below your cost basis, you would receive little premium when you sell another covered call because you would now be selling far OTM (at/above your cost basis). The more OTM you sell, the less premium you get.
In short, our strike prices and goals for our shares typically gauge our decisions and we receive whatever premium we can get at those strikes.
Submit Your Questions 🙋♂️🙋♀️
Have any other questions? Before asking me and my team, feel free to check out our Level 1 FAQ. This FAQ is located on the Dashboard. You might find what you're looking for. 😊
If you do have questions, make sure to ask them on our Dashboard, rather than asking us via email. We also encourage you to watch all of the core video content and some of the past archived videos, read past Membership Positions, and take all the quizzes before sending us your questions.
Join Our Discord 💬
Investing, trading, and building wealth was a lonely journey for me. This is why my team and I created a Discord group for you and the other members to shares ideas and support one another. You don't have to go through it alone as we're all here to help. 😉
Make sure to check it out on the bottom of your "Dashboard" and follow the instructions on how to sign up. 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, everyone! 😊
-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.