Hey Everyone!
It looks like SPY and QQQ advanced this week, while DIA took a little breather and trended sideways.
Here's SPY:
Here's DIA:
Here's QQQ:
Are you adding more of these ETFs to your portfolio? I sure am!
Trade of the Week:
Spinning your wheels: If your covered calls expired worthless this Friday, we recommend selling more calls at around the same strike price as before to collect more premium. If you sold some cash-secured puts and they lost around 80% of their value, you can consider buying back the contracts and reselling them for a further date to collect more premium. If your shares were called away last week, you can consider restarting your wheel. For beginners, you can consider starting again by selling a cash-secured put, around 1-3 strikes OTM (or for a lower price).
Pay attention to the delta: You can always look at the delta of the call you are selling since the delta roughly approximates the probability of the price of the stock reaching the strike by expiration. If you see that the delta is 0.10, you know that there is roughly a 10% chance that the price of the stock will reach that strike price by expiration. Likewise, if you see that the delta is 0.20, you know that there is roughly a 20% chance that the price of the stock will reach that strike price by expiration.
Keep It Balanced: I know we are in a bullish market, but I still want to give you a friendly reminder to not go overboard with growth stocks, like AMD and PINS, for your Wheels. Yes, they do have high premiums and they are relatively less expensive compared to AAPL, NKE, SBUX, and MSFT. However, just keep in mind that stocks that don't pay a dividend and have high premiums/IV typically drop the fastest when there is uncertainty in the markets. If you are brand new to starting the Wheel, we recommend starting off with AAPL, NKE, SBUX, or MSFT.
Here are some trade recommendations and see what fits your personal risk-tolerance:
MSFT Monday Open: $303.25 Friday Close: $299.72 5-day change: -1.16%
Starting a New Wheel: Selling a Cash-Secured Put on MSFT - MSFT's Current Price: $299.72 - Capital Needed: $29750.00 - Sell at the Expiration Date: 2021-09-17 - Select the Strike: $297.5 - Premium you'll receive: $553.00 - Cost Basis: $297.50 - $5.53 = $291.97
Starting a New Wheel: Selling a Covered Call on MSFT - MSFT's Current Price: $299.72 - Capital Needed: $29972 - Sell at the Expiration Date: 2021-09-17 - Select the Strike: $300 - Premium you'll receive: $453.00 - Cost Basis: $299.72 - $4.53 = $295.19
AAPL Monday Open: $148.31 Friday Close: $148.60 5-day change: 0.19%
Starting a New Wheel: Selling a Cash-Secured Put on AAPL - AAPL's Current Price: $148.60 - Capital Needed: $14800.00 - Sell at the Expiration Date: 2021-09-17 - Select the Strike: $148 - Premium you'll receive: $234.00 - Cost Basis: $148.00 - $2.34 = $145.66
Starting a New Wheel: Selling a Covered Call on AAPL - AAPL's Current Price: $148.60 - Capital Needed: $14860.00 - Sell at the Expiration Date: 2021-09-17 - Select the Strike: $149 - Premium you'll receive: $284.00 - Cost Basis: $148.60 - $2.84 = $145.76
AMD Monday Open: $105.3 Friday Close: $111.40 5-day change: 5.79%
Starting a New Wheel: Selling a Cash-Secured Put on AMD - AMD's Current Price: $111.40 - Capital Needed: $11100.00 - Sell at the Expiration Date: 2021-09-17 - Select the Strike: $111 - Premium you'll receive: $397.00 - Cost Basis: $111.00 - $3.97 = $107.03
Starting a New Wheel: Selling a Covered Call on AMD - AMD's Current Price: $111.40 - Capital Needed: $11140.00 - Sell at the Expiration Date: 2021-09-17 - Select the Strike: $112 - Premium you'll receive: $450.00 - Cost Basis: $111.40 - $4.50 = $106.90
NKE Monday Open: $169.45 Friday Close: $167.58 5-day change: -1.1%
Starting a New Wheel: Selling a Cash-Secured Put on NKE - NKE's Current Price: $167.58 - Capital Needed: $16750.00 - Sell at the Expiration Date: 2021-09-17 - Select the Strike: $167.5 - Premium you'll receive: $308.00 - Cost Basis: $167.50 - $3.08 = $164.42
Starting a New Wheel: Selling a Covered Call on NKE - NKE's Current Price: $167.58 - Capital Needed: $16758.00 - Sell at the Expiration Date: 2021-09-17 - Select the Strike: $170 - Premium you'll receive: $438.00 - Cost Basis: $167.58 - $4.38 = $163.2
PINS Monday Open: $53.92 Friday Close: $57.22 5-day change: 6.12%
Starting a New Wheel: Selling a Cash-Secured Put on PINS - PINS's Current Price: $57.22 - Capital Needed: $5700.00 - Sell at the Expiration Date: 2021-09-17 - Select the Strike: $57 - Premium you'll receive: $194.00 - Cost Basis: $57.00 - $1.94 = $55.06
Starting a New Wheel: Selling a Covered Call on PINS - PINS's Current Price: $57.22 - Capital Needed: $5722.00 - Sell at the Expiration Date: 2021-09-17 - Select the Strike: $57.5 - Premium you'll receive: $191.00 - Cost Basis: $57.22 - $1.91 = $55.31
SBUX Monday Open: $114.71 Friday Close: $115.12 5-day change: 0.35%
Starting a New Wheel: Selling a Cash-Secured Put on SBUX - SBUX's Current Price: $115.12 - Capital Needed: $11500.00 - Sell at the Expiration Date: 2021-09-17 - Select the Strike: $115 - Premium you'll receive: $174.00 - Cost Basis: $115.00 - $1.74 = $113.26
Starting a New Wheel: Selling a Covered Call on SBUX - SBUX's Current Price: $115.12 - Capital Needed: $11512.00 - Sell at the Expiration Date: 2021-09-17 - Select the Strike: $116 - Premium you'll receive: $224 - Cost Basis: $115.12 - $2.24 = $112.88
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Greg
Q1: Am I correct in assuming that Premiums are taxed as income and all gains from the sale are short term capital gains which have a higher tax rate?
A1: Correct. Short-term capital gains have a higher tax than long-term capital gains. We are not tax advisors and therefore we can't advise on taxes. We recommend seeking out professional tax services to answer these types of questions.
Q2: When pulling the profits/Premiums from the brokerage account to use as income how do you set aside money to pay taxes? Do you put a percentage in a savings account to have at the end of the year to pay uncle Sam? Do you keep it in a different kind of account with better interest?
A2: We would typically set aside a percentage we make from the premiums to account for taxes. Many people reallocate some capital into a high yield savings account as they wait for tax day. It is up to you how you want to account for taxes and how you want to go about paying them. You would do the same thing when you set aside some money for taxes for your income from your job.
Sharon
Q1: Do you normally need to sell the put at opening on Monday or can you do it anytime?
A1: We typically recommend starting the wheel on Mondays, 1 hour after the market opens. However, you can trade whenever you would like to.
Q2: I see that the order is only available for one trading day, what should I do if it gets cancelled, do I put another order in the next day or do I need to wait until the following Monday?
A2: It looks like you're using Robinhood. On other platforms such as TD Ameritrade, there is a "Market" selection when putting in your trade that allows you to execute your trade as soon as possible. It typically sells immediately. For Robinhood, consider trying different values in your limit order to see when you get executed. For example, if you try to sell your covered call for $300 and it doesn't work, you can then try $295. If that doesn't work either, you can then try $290.
Raquel
Q1: Hello, I was wondering what happens when you buy back your contract? More specifically if there are any “ethical or moral” rules or a certain trading etiquette? I sold a CSP and within a week my premium was at 90% and the rest of the month it slowly increased to 100%. If by the week I would of bought back the contract for the remaining 10% and then start another put is that allowed? Does it leave a mark that I don’t follow through with my contracts or let’s the “other side” thinking I’m “unreliable”? Or is it a “c’est la vie, it’s just business” scenario?
Thanks in advance. (Hopefully I made sense.)
A1: Such a wonderful question! When you buy back your contract you are "cancelling" your obligation to either sell your shares (covered calls) or buy shares at the certain strike price you agreed on (cash-secured puts). There is no etiquette while trading. Contracts are constantly being traded to different people. For example, the contract you sold to Craig, can be traded to Bob and it can then be traded to Joe. It is still your contact, but it is essentially getting passed around if that makes sense. You can buy back a contract that has gained 90% and then consider selling another contract afterwards. It is a business scenario. You made sense! :)
Q2: Oh! Let’s say that a premium is $350 and $300 hits your account, then the remainder is $50 so it’s $50 to buy it back, does that “$50” come out from your brokerage account or it “cancels” the contract and you keep whatever was already accrued?
A2: Whenever you sell a contract, the premium earned goes to your brokerage account upfront. The price to "buy back" your option continues to fluctuate based on the price of the underlying stock. Let's say you earn a premium of $350 and the price to buy back your option is now $50. You can consider buying back your option for $50, which would lock in your $300 profit and cancel your contract. Because you were given a $350 premium upfront and now you're buying it back for $50, you're essentially using your premium money to buy it back, giving you a total profit of $300 for that trade.
Christian
Q1: I have just finished level 1. I am looking into reconfiguring my portfolio toward the recommendations given. After that I want to set up my first covered call ITM as recommended. As far as technical analysis the only thing we have to look for is that the overall graph is bullish, correct? (I am looking into Verizon and Cisco for my first covered call) Do we have to do more technical analysis other than that?
A1: We currently don't recommend doing the wheel strategy on Verizon and Cisco. Consider looking at our positions for what we do currently recommend. With that being said, you are free to do whatever you like with your portfolio. There are multiple factors and criteria to take into consideration when doing the wheel as mentioned in our videos. When doing the wheel, we only do them on stocks we wouldn't mind holding long-term too. You can consider looking at the different timeline charts (5 year, 1 year, 3 month, 1 month) and also determining if we are in a bull, bear or neutral market. We have recommended expirations based on each market condition respectively in our videos. These are guidelines and anything can happen in the stock market. At the end of the day it is up to you what you would like to do with your portfolio.
Q2: Can you lose an unlimited amount on a covered call? (I'm thinking no)
A2: When you sell a covered call, you are given a premium. If your shares get called away and your strike price is higher than what you bought the stocks for, then you would make capital gains too. If your shares don't get called away and the underlying stock price drops, you still make premium, but the value of your stocks drop. These would be unrealized losses. If you sell your shares for less than what you bought them for, this would be a loss.
The only time when you would lose all your money in a covered call is if your underlying stock goes down to $0, which is an unlikely event since we tend to choose stocks with a history of consistent growth.
Yoon
Q: Ok this is all great. I truly believe that I can become financially free with this goal in mind. But what if… something like 2008 Hits??? That’s the only thing I worry about. Do I set cash aside and not trade? Sell more puts? More Leaps? Which would make the goal amount higher. Will I be okay on those rainy days? How do u prepare.
A: Wonderful question! Because we're bullish on the long-term trend and we only invest in high quality stocks, we don't mind being patient waiting for the market to retrace. It is important to understand your risk tolerance and invest only what you are comfortable investing just in case something like this happens. The stock market is unpredictable and nobody can time the market. We can still use strategies like bear call spreads and the wheel once the market "stabilizes". Consider preparing by not having debt, having an emergency fund and having cash on the side to purchase "discounted" stocks.
Jonathan
Q: Could you give an example of the favors you'd used to choose a stock, and possibly use a stock that you're familiar with? Such as Microsoft?
A: Of course! Based on our criteria, we like to pick stocks that are:
1. Part of the S&P 500 and/or Dow 30.
2. Strong fundamentals (How the company makes money/outlook for the future, increasing top-line revenue year-to-year or quarter-to-quarter and innovative).
3. Technically strong (5 year, 1 year and 3 month chart has an upwards trend).
4. Pays a dividend.
So we see that MSFT is part of both the S&P 500 and Dow 30. We believe that MSFT has strong fundamentals due to the multiple services and products they offer for consumers and how they're innovative. We are in a digital world and therefore we believe the outlook of the company is great. We also see that they have increasing annual top line revenue and have consistent quarterly beats. If you take a look at the 5 year, 1 year and 3 month chart, you can see an upwards trend. You can also see how MSFT pays a dividend. You can consider looking at any stock and applying this criteria to see if you would like to invest in the company. It is important to do your own due diligence when investing as well. Consider watching our videos again to solidify these concepts.
Jake
Q: Why do you say "sell calls against your 100 shares"? Why "against"?
A: Great question. In the options world, we typically say we sell covered calls against our shares, rather than saying we sell them on our shares.
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 Level 1 page. 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.
Technical Analysis 📈📉
MSFT:
Microsoft is still progressing forward and we can see that this company is one of the large reasons why the major indices are moving up. The stock seems to be still trending on its upward support line.
AAPL:
AAPL is still in consolidation right now, which still makes it a perfect candidate to sell covered calls. Let's see if there are any breakouts in the next couple of weeks.
SBUX:
I'm not too sure if this would be a strong support line for SBUX, but I want to see if this hold for the next couple of days. It looks like the stock has fallen back to it's previous levels back in May.
PINS:
We had a huge rally for PINS this week as the stock advanced from $52 to $57, which is around a 10% increase. It seems like the selling has stopped for now as it kissed the $52 level again like in November of last year. If the trend continues, the stock could be testing the $60.84 level soon and may even break out to fill in the July earnings gap down.
AMD:
I still can't pinpoint what's exactly happening with AMD yet. My hunch is that the stock may be consolidating and might trend sideways for a while.
NKE:
Ah, it looks like with the 4 points drawn in the chart, this may be NKE's support line for the short-term. So far, it's still looking pretty good.
Here are some companies that I've been adding a couple shares to my portfolio:
V:
WM:
GOOGL:
EL:
FB:
ADBE:
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.
Remember to stay disciplined, everyone! I do ask that you leave some of your premiums as cash in your account. Like what I said last week, I have a little hunch that we might get a healthy pullback within the next two months. If we do, I want you to be ready to get some shares on sale.
Stay patient and 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.