Hey Wealth Builders!
It's been a pretty wild rollercoaster ride this week. Let's see what happened:
Here's SPY:
Here's QQQ:
Here's DIA:
What Happened This Week?
This week, the Federal Reserve announced that they may be increasing interest rates around 3 times in 2022. With that, markets have been reacting with an influx of volatility.
During this period, I recommend selling 4-week covered calls on your previously owned shares to ride through the volatility. If you are in the Premium Membership, we are planning on setting up some spreads to collect more premium.
Technical Analysis 📈📉
SPY:
For SPY, there is an apparent resistance level at around $470. The ETF has touched and rejected this level several times in the past few weeks. However, we do see that the ETF may wedge out soon as it will have to decide to break above the resistance line or break down under the orange support line. Since we are still above the orange resistance line, I am still dollar-cost averaging into this ETF. I may pause on adding anymore if I see the ETF break the support line, as it may trigger more selling from other algorithms. Please keep an eye out this week to see how institutions digest the interest rate news.
QQQ:
QQQ is also trending neutrally. I am still slowly adding some shares into my positions.
DIA:
We also see a similar pattern in DIA.
AAPL:
AAPL, along with many other stocks in the broad index, is experiencing a pullback. I want to see what the new trend is since the stock broke it's previous trend last week. It's possible that it may drift down a little bit more and use its previous resistance line as support. If you're selling covered calls on AAPL, just sit back and let theta decay your option premiums. It feels pretty good being able to still make money on a stock even if it goes down, right?
AMD:
Like many growth stocks, AMD, which is not part of the DOW30 and does not pay a dividend, is still in a downtrend. Remember that growth stocks like AMD typically fall the fastest during times of uncertainty as many algorithms will sell their shares to lock in their profits for the year.
MSFT:
MSFT also seems to be trending neutrally. I'm curious to see if perhaps the previous resistance line becomes the new support.
SBUX:
SBUX is still trending between $106 and $116. Keep selling your calls against your shares to collect your premiums and dividends.
NKE:
I thought NKE was going to break out of its pennant formation, but instead dropped with the rest of the markets. Though we don't have enough data points, it's possible that there is support with the orange line drawn. Also keep in mind that NKE's earnings date is coming up on the 20th. There may be some rough volatility with this stock. Keep your eyes peeled.
COST:
COST seems to still be holding near its ATHs compared to the rest of the markets. Institutions are definitely favoring this one right now. I'm going to be adding more shares to my portfolio.
ADBE:
It looks like ADBE could have hit a support line this week. If I see a bounce off of it next week, I might add some shares. If it breaks support, I will just wait to see when the selling stops.
V:
There seem to be a sector rotation into financials this week. If you compare the broad markets to how V moved, you can see that the broad markets dropped, while V stayed neutral.
MA:
You can see the same thing for MA too.
In a Nutshell:
There are some conflicted views on the markets right now. On one hand, we have many companies that delivered wonderful numbers and investors hoping for a routine Santa Claus Rally. On the other hand, we have looming news about rising interest rates, which Wall Street doesn't like.
Of course, if you're investing for the long-term, none of this really matters. You can keep investing and stay the course.
However, if you are selling your covered calls on the stocks you already own, you can take advantage of the higher premiums due to the high implied volatility that we are experiencing right now.
If you don't feel comfortable investing right now, I would recommend leaving your premiums as cash. I would then slowly add more shares once the markets break out and reach another ATH. This will signal to us that market sentiment is better and investors are also putting their money back into the markets.
If you are a seasoned investor and don't mind the volatility, you can add some more shares of your favorite stocks/ETFs. However, I would favor adding shares to stocks near their ATHs (favored by Wall Street), pay a dividend, and are part of the DOW30.
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 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: Just as a friendly reminder, we recommend to not go overboard with growth stocks, like AMD, 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. Please also be mindful that we recommend adhering to the 30/30/30/10 allocation.
Extra Shares On The Side: As I mentioned before in the previous weeks, you can always keep some extra shares on the side in case your favorite stock runs past your strike price. So instead of purchasing 100 share and selling a covered call, you can purchase 125 shares. You can also buy 25 extra shares and sell a cash-secured put. This way, you will have an extra 25 shares to gain from the potential price move up.
Here are some trade recommendations and see what fits your personal risk-tolerance:
MSFT
Monday Open: $340.68
Friday Close: $323.80
5-day change: -4.95%
Starting a New Wheel: Selling a Cash-Secured Put on MSFT
- MSFT's Current Price: $323.80
- Capital Needed: $32000.00
- Sell at the Expiration Date: 2022-01-14
- Select the Strike: $320
- Premium you'll receive: $840.00
- Cost Basis: $320.00 - $8.40 = $311.60
Starting a New Wheel: Selling a Covered Call on MSFT - MSFT's Current Price: $323.80 - Capital Needed: $32380.00 - Sell at the Expiration Date: 2022-01-14 - Select the Strike: $325 - Premium you'll receive: $990.00 - Cost Basis: $323.80 - $9.90 = $313.90
AAPL
Monday Open: $181.12
Friday Close: $171.14
5-day change: -5.5%
Starting a New Wheel: Selling a Cash-Secured Put on AAPL
- AAPL's Current Price: $171.14
- Capital Needed: $17000.00
- Sell at the Expiration Date: 2022-01-14
- Select the Strike: $170
- Premium you'll receive: $593.00
- Cost Basis: $170.00 - $5.93 = $164.07
Starting a New Wheel: Selling a Covered Call on AAPL - AAPL's Current Price: $171.14 - Capital Needed: $17114.00 - Sell at the Expiration Date: 2022-01-14 - Select the Strike: $172.5 - Premium you'll receive: $583.00 - Cost Basis: $171.14 - $5.83 = $165.31
AMD
Monday Open: $138.25
Friday Close: $137.75
5-day change: -0.36%
Starting a New Wheel: Selling a Cash-Secured Put on AMD
- AMD's Current Price: $137.75
- Capital Needed: $13700.00
- Sell at the Expiration Date: 2022-01-14
- Select the Strike: $137
- Premium you'll receive: $845.00
- Cost Basis: $137.00 - $8.45 = $128.55
Starting a New Wheel: Selling a Covered Call on AMD - AMD's Current Price: $137.75 - Capital Needed: $13775.00 - Sell at the Expiration Date: 2022-01-14 - Select the Strike: $138 - Premium you'll receive: $878.00 - Cost Basis: $137.75 - $8.78 = $128.97
SBUX
Monday Open: $116.16
Friday Close: $108.63
5-day change: -6.48%
Starting a New Wheel: Selling a Cash-Secured Put on SBUX
- SBUX's Current Price: $108.63
- Capital Needed: $10800.00
- Sell at the Expiration Date: 2022-01-14
- Select the Strike: $108
- Premium you'll receive: $272.00
- Cost Basis: $108.00 - $2.72 = $105.28
Starting a New Wheel: Selling a Covered Call on SBUX - SBUX's Current Price: $108.63 - Capital Needed: $10863.00 - Sell at the Expiration Date: 2022-01-14 - Select the Strike: $109 - Premium you'll receive: $293.00 - Cost Basis: $108.63 - $2.93 = $105.70
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Junie
Q1. Hi Steve and Team, with the recent downward trend in the mkt, as a beginner, I understand we should start w Level 1. Hence what should I do to start? I'm quite lost.
A: No worries, Junie! This is exactly what we are here for. To help you understand and guide you through the process :)
Once you've watched our level 1 wheel strategy videos and have seen our tutorial videos in level 1 section for trading the wheel on think or swim, "The Wheel Strategy on AAPL using Think or Swim", you can consider selling a cash-secured put or covered call on AAPL, MSFT, AMD, NKE or SBUX. Please let us know if you have any further questions! We eagerly await your response.
Q2. For TOS, I opened a cash account. Can I trade options with that?
A: Yes, you can trade options in a cash account. However, in order to trade options, you must first be approved to do so in your brokerage account. Next, your funds must also be cleared. This typically takes 4 business days to clear. Once cleared, you can then execute option trades.
Nicholas
Q1. I'm just curious about the following Scenario;
Starbucks is currently priced at about $114.71. I see that I can sell a covered call at a strike price of $60 that expires in 4 days for a premium of Bid: 53.95. This would provide a premium of $5,395 dollars for 1 option.
Given the likelihood that the price of Starbucks will not fall to $60 in 4 days, wouldn't this be a lucrative opportunity?
Perhaps I'm missing something? Why might this be a bad idea?
A: This is a bad idea because you would be selling shares for less than what you purchased them for. You will take a loss of $5,471. The premium you receive will not be more than the loss. Instead, we recommend selling a few strikes higher than what you purchased your shares for to get premium + potential capital gains at expiration.
Anjali
Q. To sell a covered call, your videos always use the example of buying 100 shares, is that necessary? Can I buy 50 shares instead? If its not necessary, whats your reasoning behind recommending it?
A: Options are only sold in contracts. 1 contract = 100 shares. Therefore, you can't sell a covered call without first owning 100 shares.
Q3. I see a lot of your videos on instagram where you do a covered call on Robinhood, could you do an example on TDAmeritrade?
A: In our level 1 tutorial videos, we do a walk through on trading the wheel on the thinkorswim web platform. This is essentially TDAmeritrade's platform :).
Feel free to check it out!
Tax-Loss Harvesting
Since we are nearing the end of 2021, it may be a good idea to take a look at some of the stocks that may not have done well in your portfolio. If you have a taxable cash account, you can consider intentionally selling your losing stocks and to reallocate your capital to other stocks that are in favor. When you incur a realized loss, you can use that loss to offset your realized gains.
For example, if you earned $100,000 in Wheel premiums, you may be subject to paying more taxes due to the higher tax bracket. However, if you sell some of your shares for a $20,000 loss, you can deduct that from your $100,000 realized gains. You would now have a capital gain of $100,000 - $20,000 = $80,000 for the year. This $80,000 would essentially be taxed less.
Here's a great video from Charles Schwab if you want more reference:
For you clever people who want to game the system, please know that if you sell your shares for a loss, I do not recommend buying the same shares again within a 30-day period. Why? It's because this may incur a Wash Sale, which will disallow you from claiming the deduction.
Yes. Having losses is part of the wealth-building game and wealthy people understand how to use it to their advantage. Because taxes are complex and we are not legal tax advisors, we recommend that you seek professionals to help you. Remember that everyone's situation is unique.
Christmas Giving
Speaking of gains, I want to encourage you to help someone or a family in need during this holiday season. Many of you have done extremely well with your portfolios and have made 5-6 figures of premium! I think it would be amazing if we could take some of our premiums and spread some cheer to the loved ones around us.
If you want to give more than your premiums and even sell some of your long-term shares, such as SPY or QQQ, I would recommend that you sell the shares that you purchased more than a year ago. This way, you will be taxed less with long-term capital gains. Your brokerage app is oftentimes defaulted to FIFO, or first in first out. This means that whenever you sell stocks or ETFs, your brokerage will sell the shares that you bought first (compared to the ones you just bought this month).
If you are someone who may have changed the settings from FIFO to LIFO, or last in first out, make sure to change it back. Otherwise, your brokerage app will first sell the shares that you bought most recently and may incur a short-term capital gain, which is taxed more than long-term capital gains. To see what settings you have, you may want to contact your brokerage's customer support since every platform is different.
Again, make sure to talk to a tax professional if you want to gain more clarity.
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.
Happy Holidays! Enjoy your week with your friends and family! 🎅🤶❄🎄
-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.
Comments