Hey Wealth Builders!
Woohoo! We had another wonderful rally, with tech shares leading the way!Woohoo! We had another wonderful rally, with tech shares leading the way!
Technical Analysis 📈
SPY
SPY consolidated sideways this week. Like what I mentioned in last week's post, the markets are still testing the $415 resistance line, which we haven't broke through yet. If you bought some shares of SPY last week, I would wait until we break and stay above the $415 level before slowly adding more shares to our positions.
Again, we are now using the capital that we have been building up from (1) covered call premiums, (2) bear call spreads, (3) dividends, and (4) monthly deposits.
Also note that there may be a new resistance line in the near future. I've denoted this in yellow.
QQQ
QQQ had a massive rally this week, with tech shares leading the way. If you bought some shares of QQQ last week, I would wait until we break and stay above the yellow resistance line before slowly adding any more.
Remember, tech shares are much more volatile. Though they rise quickly during a bullish market, they drop quickly whenever there is uncertainty in the news. Please invest responsibly and according to your own risk tolerance.
Stocks That Are Favored In This Market:
AAPL:
AAPL is still trending higher, especially after delivering their strong numbers last week. I will be slowly adding more shares to my long-term holds.
WM:
I'll be adding more shares of WM to my portfolio if it breaks and stays above its previous all-time-high. I know WM is a "boring" company, but it's one of those companies that have steady and consistent revenue, and pays a dividend!
COST:
Costco is another strong company that pays a dividend and is rarely talked about in the media. I am slowly adding more shares to my position as the stock continues to trend higher.
Folks, the name of the game is patience. The longer you stay disciplined in being invested, the more you'll be rewarded in the future.
Earnings
As we look at some of the companies that delivered earnings this week and their financial statements, remember that we are looking for overall top-line revenue growth. At the end of the day, Wall Street investors want to see if companies are able to make increasing revenue compared to the same prior time period, and if they are projected to make more in the future.
Investing is like dating. You want to make sure the person you date is financially stable and getting an increase in salary each year. Likewise, we want to make sure the companies we "date" are making more and more money each year.
Lastly, remember that the numbers in the financial statements below are typically represented in the thousands. You can stick on another three zeros at the end of each revenue figure.
AMD:
AMD has had another profitable quarter with top-line revenue coming in at $6.6 billion. Revenue from Data Center, Client, Gaming, and Embedded segments have increased in a quarter over quarter and year over year basis.
Because AMD has broken out of its downward trending channel, we can cautiously add onto our positions and start a wheel by selling a cash-secured put. Be aware that AMD is in the semiconductor space, meaning that volatility will be high. Do no be seduced by the high premiums and have your portfolio become overweight in this particular stock.
SBUX:
Starbucks reported quarterly top-line revenue of $8.2 billion, with an increase of top-line revenue on a quarter over quarter and year over year basis.
CEO Howard Schultz suspended Starbucks’ stock repurchases and did not report their financial guidance for the second half of the fiscal year. The company plans to increase wages and benefits for workers but cautions that the company is prohibited by law “from promising new wages and benefits at stores involved in union organizing.” Starbucks has increased prices twice in the past calendar year due to rising costs for labor. The CEO said that more price increases are expected this year.
Though Starbucks in North America rose 9%, almost all of this is due to higher prices. They declined 18% internationally with a 44% decline in China.
I observe SBUX trending higher in the technical charts, but I am not too confident in investing in this company at the moment until they are able to increase their international numbers and the sentiment about unionization starts to become positive.
PYPL:
PYPL delivered quarterly top line revenue of $6.8 billion, with increased top line revenue growth quarter over quarter and year over year.
Here are some company highlights:
$339.8 billion in TPV (total payment volume), up 9%
Venmo processed $61.4 billion in TPV , growing 6%, on top of 58% in Q2'21
0.4 million NNAs (Net new active accounts) added, with total active accounts of 429 million, up 6%
5.5 billion payment transactions, up 16%
48.7 payment transactions per active account on a trailing twelve month basis, growing 12%
Revenue Guidance: Expect revenue growth of ~10% to ~$6.80B
I'm amazed at how much PYPL has consistently grown over the years and their expected growth in the future. I believe that the digital payment space will continue to grow as we progress further into a cashless society.
Looking at the charts, it seems that PYPL has potentially found a bottom and consolidated sideways for the past few weeks. Once I start to see an upward trend with higher highs and higher lows, I'll slowly and carefully add more shares to my long-term holds. Again, please be mindful that PYPL is a high-growth, tech stock that can be susceptible to negative market sentiment. Invest responsibly.
Trade Of The Week:
Now that we have some earnings released and a look at the technical charts, we can start to see what trades to put on.
Bear Call Spreads (Premium Members)
Like stated last week, if you're a Premium Member and have been setting up bear call spreads, you most likely have your buy-stop-orders triggered into purchasing your shares to cover yourself. If that's the case, you would have made money from the premiums and capital gains, and converted your bear call spreads into covered call trades. I would let your covered calls reach until expiration, and hopefully have your shares get called away. When this happens, you will have free capital to start new wheels.
Cash-Secured Puts
Same as last week, if you want to start new wheels, I recommend SLOWLY selling cash-secured puts first on stocks that have delivered positive earnings and are showing a positive trend change in the technicals. Don't get too greedy because the markets can have a reversal at any time. Stocks that I favor right now include AAPL, MSFT, AMZN, GOOGL, and AMD.
However, because I'm still a little wary with where the markets are going and if we'll have another pullback, you can consider being more conservative with choosing your underlying stock and strike prices. I personally favor AAPL and MSFT more since they pay dividends and are also part of the DOW30, compared to AMZN, GOOGL, and AMD.
You may want to sell a cash-secured put around 30-days out, or the September 2 expiration date. I would also choose a strike around $5-10 OTM, or below the price of the current market price. Or, to be more specific, I would choose a delta that ranges from -0.30 to -0.16.
Make sure that if you are going to do this, you are comfortable with being assigned 100 shares of the stock at the strike price you choose in case the stock drops. If this happens, you can then convert the trade into a covered call to generate more premium.
If you are more bullish, you can sell cash-secured puts a little bit closer NTM. This will give you more premium, but also increase the probability of assignment at expiration.
Here are some recommendations you can consider:
MSFT Monday Open: $277.82 Friday Close: $282.91 5-day change: 1.83%
Starting a New Wheel: Selling a Cash-Secured Put on MSFT
- MSFT's Current Price: $282.91
- Capital Needed: $28000.00
- Sell at the Expiration Date: 2022-09-02
- Select the Strike: $280
- Premium you'll receive: $605.00
- Cost Basis: $280.00 - $6.05 = $273.95
AAPL
Monday Open: $161.01
Friday Close: $165.35
5-day change: 2.69%
Starting a New Wheel: Selling a Cash-Secured Put on AAPL
- AAPL's Current Price: $165.35
- Capital Needed: $16500.00
- Sell at the Expiration Date: 2022-09-02
- Select the Strike: $165
- Premium you'll receive: $430.00
- Cost Basis: $165.00 - $4.30 = $160.70
AMD
Monday Open: $95.59
Friday Close: $102.31
5-day change: 7.03%
Starting a New Wheel: Selling a Cash-Secured Put on AMD
- AMD's Current Price: $102.31
- Capital Needed: $10200.00
- Sell at the Expiration Date: 2022-09-02
- Select the Strike: $102
- Premium you'll receive: $500.00
- Cost Basis: $102.00 - $5.00 = $97.00
GOOGL
Monday Open: $115.30
Friday Close: $117.47
5-day change: 1.88%
Starting a New Wheel: Selling a Cash-Secured Put on GOOGL
- GOOGL's Current Price: $117.47
- Capital Needed: $11700.00
- Sell at the Expiration Date: 2022-09-02
- Select the Strike: $117
- Premium you'll receive: $328.00
- Cost Basis: $117.00 - $3.28 = $113.72
AMZN
Monday Open: $134.96
Friday Close: $140.80
5-day change: 4.32%
Starting a New Wheel: Selling a Cash-Secured Put on AMZN
- AMZN's Current Price: $140.80
- Capital Needed: $14000.00
- Sell at the Expiration Date: 2022-09-02
- Select the Strike: $140
- Premium you'll receive: $483.00
- Cost Basis: $140.00 - $4.83 = $135.17
All-in-all, see what you're most comfortable doing and your level of risk tolerance. 👍
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Q1. Hi there
As a follow up on question two: I understand the process now and the examples you provided as well. But could you clarify what is the best strategy? Would it be better to set a higher strike price (i know that's less premium) to in order to avoid getting your shares called away? This way you can keep lowering your cost basis without needing to repurchase at the higher price. Is this the right thinking or is there a better strategy ( in your opinion) for covered calls?
A1: There really is no "best" strategy as we can't predict the direction of the stock. Instead we ask ourselves what our goals are for our shares. For example, if our goal is to use our shares to receive maximum premium, then we can consider selling ATM or a few strikes OTM, understanding that the stock may rise above our strike price and we miss out on the additional capital gains.
If our goal for our shares are to not get called away and still receive a little premium, we can consider selling lower deltas to decrease the likelihood of our shares being called away. Here we understand that we will receive less upfront premium with less chances of our shares getting called away, but we can capture more capital gains if the stock rises and is at or above our strike price at expiration.
We know it can be frustrating as we try to get the best return on our investments. However, it is impossible to time or predict the direction of stock market. Therefore, we make trades based on what our goals are for our shares. This way, regardless of what happens, we are okay with the outcome.
And remember, when in doubt, split it out. If you have a multiple contracts to sell, you can select different expirations dates and strike prices to spread your risk.
Q2: I owned 100 shares of AAPL at $163/share and got my shares called away last week on a covered call at $ 149/share. I was able to generate about $700 in premium selling covered calls in the past several months. Now that AAPL has jumped up in price do I start the wheel strategy again? My concern is that I would have to risk the premium I earned to repurchase those shares. Is that part of the wheel strategy?
A2: In this scenario, you would have incurred a realized loss since you sold your shares for a lower price. You can consider using the loss to offset your capital gains tax this year.
I would also be mindful of the wash-sale. If you sold your shares at a loss, you may want to consider waiting 30 days before buying the shares again.
If you want to re-enter your AAPL wheel, you can start again by selling a CSP, rather than buying the shares and selling a covered call.
Q3: I have 2 CCs for AAPL at 160 expiring on 8/12. I have 218 shared of AAPL and my cost basis is 33,040.70 making my cost basis 151.56 per share. I just want to double check that if the CC expires ITM that I will be making profit? Also will I be making capital gains?
A3: You will technically make a profit if you sell all of your shares above your cost basis. However, based off if you are FIFO or LIFO and the different prices you bought the stocks, you brokerage might count some shares as capital losses. For example, if you bought 10 shares of AAPL at $180 and then some at $170 and many at $130 and if you're selling your shares, the ones you bought for $180 might be sold at a "loss" because you would be selling them at $160. However, overall you should be making a profit if you are selling above your cost basis. We recommend reaching out to your brokerage for further clarification.
Q4: Let's say you open a roth ira with a income of $50,000. And in 5 years you ended up making $200,000, doesn't that mean you have to closed your account or you just can't contribute money?
A4: If you make more than the MAGI limits, you will not be able to contribute to your Roth IRA. However, you can still keep the account open. You can also consider utilizing a backdoor Roth IRA.
Q5: How would you generate income with a roth ira if you can't take out money until your 59 1/2? Is it better to generate income with a regular brokerage account?
A5: Wonderful question! Like you said, you won't be able to pull out monthly income from your Roth IRA. However, you can still trade options in it to grow your wealth over time in your Roth IRA. If you would like to generate monthly income, you can do so in a regular taxable brokerage account. You will be able to withdraw your premiums without getting an early withdrawal penalty.
Q6: I'm thinking of using my cash account to sell calls and puts for income and then using my roth ira for long term investments. What are your thoughts on this.
A6: Yes, you can totally do this. What you do with your portfolio is completely up to you. You can consider selling options in both. Personally, we do both. If you'd like to just keep long-term holds in your Roth you can consider doing that too.
Q7: Hello, what would you suggest to do if someone doesn’t have enough money to sell covered puts? Would you keep buying the same stock until you have 100 shares of it?
A7: Yes, you can consider slowly investing in a stock you would like to trade the wheel on. Once you have 100 shares, you can then consider selling a covered call on your shares :).
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Have a wonderful weekend!🙂
-Steve and the Call to Leap Team
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