Hey Wealth Builders!
It was a pretty red week in the markets this week. Let's take a look:
Here's SPY:
Here's QQQ:
Here's DIA:
So what's going on?
Omicron Variant 🦠
There is still news surrounding the development of the Omicron Variant. So far, at least five U.S. states have reported at least one case of the variant. The World Health Organization also found the variant in more than three dozen countries globally and suggests that there may be increased transmissibility.
Rising Interest Rates 💹
This week, the Federal Reserve came out and stated that they are retiring the word "transitory" and may be signaling an interest rate hike sometime in the future.
Market Reactions 😲
If you have been a stock market investor and trader for a while, you know that whenever there are threats to the economy, the markets will want to sell off. The market typically do not like rising interest rates as it increases the cost for businesses to borrow money, thus affecting their revenues. Many companies may choose to eat the costs or pass them down to consumers by raising the prices of their goods and services. In a nutshell, rising interest rates causes a ripple effect in business revenue and consumer spending.
Rising and falling of interest rates are a normal part of the economy. Stock price fluctuations are also a normal part in the markets. As long as you are investing for the long-term, you will be fine. 👌
Right now, I recommend selling 4 week OTM CCs or CSPs to collect upfront premiums and more extrinsic value to ride through the volatility. If you don't feel comfortable starting a new Wheel, you can wait to see what happens in the next couple of days but still sell calls against the shares you already own to keep collecting cash.
You can also consider holding off with adding to your long-term holds if you feel that the markets are too volatile. Just let your couple of hundred/thousand of dollars worth of premiums and deposits sit in your account for now until we start to see positive news and sentiment from the markets.
Technical Analysis 📈📉
SBUX:
SBUX is still trending neutrally and I am still selling covered calls on this stock.
MSFT:
MSFT is experiencing a pullback and bounced off of its previous resistance line. Let's see if this support line holds for the next couple of weeks.
NKE:
NKE is still in consolidation and still bouncing between the $170 and $180 range.
MA:
MA is still trending downwards overall. However, I noticed that there was quick retracement after Wednesday's sell-off, giving it a weekly candle with a long tail. I would still stay away from MA right now until it breaks its support line.
V:
Like MA, V is also still trending downwards. Again, lets wait until we start to see upward retracement.
HD:
HD seems to be taking a breather but is holding its price near its all-time-highs.
LOW:
We can observe the same thing with LOW. This may show us that institutions are selling off other stocks in the S&P500/DOW30, yet keeping these two home improvement stocks in their portfolios.
AMD:
AMD had a significant drop this week. If you are a Premium Member, we may be considering setting up some spreads on this one.
AAPL:
APPL reached an all-time-high this week and ended right near its resistance line. I see that larger institutions are favoring this DOW component.
EL:
EL is still holding strong in its overall upward long-term trend. I'm planning on adding a couple more shares to my portfolio next week.
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: $334.94 Friday Close: $323.01 5-day change: -3.56%
Starting a New Wheel: Selling a Cash-Secured Put on MSFT - MSFT's Current Price: $323.01 - Capital Needed: $32000.00 - Sell at the Expiration Date: 2021-12-31 - Select the Strike: $320 - Premium you'll receive: $980.00 - Cost Basis: $320.00 - $9.80 = $310.20
Starting a New Wheel: Selling a Covered Call on MSFT - MSFT's Current Price: $323.01 - Capital Needed: $32301.00 - Sell at the Expiration Date: 2021-12-31 - Select the Strike: $325 - Premium you'll receive: $1013.00 - Cost Basis: $323.01 - $10.13 = $312.88
AAPL Monday Open: $159.37 Friday Close: $161.84 5-day change: 1.54%
Starting a New Wheel: Selling a Cash-Secured Put on AAPL - AAPL's Current Price: $161.84 - Capital Needed: $16000.00 - Sell at the Expiration Date: 2021-12-31 - Select the Strike: $160 - Premium you'll receive: $478.00 - Cost Basis: $160.00 - $4.78 = $155.22
Starting a New Wheel: Selling a Covered Call on AAPL - AAPL's Current Price: $161.84 - Capital Needed: $16184.00 - Sell at the Expiration Date: 2021-12-31 - Select the Strike: $162.5 - Premium you'll receive: $528.00 - Cost Basis: $161.84 - $5.28 = $156.56
AMD Monday Open: $157.50 Friday Close: $144.01 5-day change: -8.56%
Starting a New Wheel: Selling a Cash-Secured Put on AMD - AMD's Current Price: $144.01 - Capital Needed: $14400.00 - Sell at the Expiration Date: 2021-12-31 - Select the Strike: $144 - Premium you'll receive: $885.00 - Cost Basis: $144.00 - $8.85 = $135.15
Starting a New Wheel: Selling a Covered Call on AMD - AMD's Current Price: $144.01 - Capital Needed: $14401.00 - Sell at the Expiration Date: 2021-12-31 - Select the Strike: $145 - Premium you'll receive: $878.00 - Cost Basis: $144.01 - $8.78 = $135.23
NKE Monday Open: $169.83 Friday Close: $170.24 5-day change: 0.24%
Starting a New Wheel: Selling a Cash-Secured Put on NKE - NKE's Current Price: $170.24 - Capital Needed: $17000.00 - Sell at the Expiration Date: 2021-12-31 - Select the Strike: $170 - Premium you'll receive: $783.00 - Cost Basis: $170.00 - $7.83 = $162.17
Starting a New Wheel: Selling a Covered Call on NKE - NKE's Current Price: $170.24 - Capital Needed: $17024.00 - Sell at the Expiration Date: 2021-12-31 - Select the Strike: $175 - Premium you'll receive: $595.00 - Cost Basis: $170.24 - $5.95 = $164.29
SBUX Monday Open: $111.36 Friday Close: $111.24 5-day change: -0.1%
Starting a New Wheel: Selling a Cash-Secured Put on SBUX - SBUX's Current Price: $111.24 - Capital Needed: $11100.00 - Sell at the Expiration Date: 2021-12-31 - Select the Strike: $111 - Premium you'll receive: $348.00 - Cost Basis: $111.00 - $3.48 = $107.52
Starting a New Wheel: Selling a Covered Call on SBUX - SBUX's Current Price: $111.24 - Capital Needed: $11124.00 - Sell at the Expiration Date: 2021-12-31 - Select the Strike: $112 - Premium you'll receive: $325.00 - Cost Basis: $111.24 - $3.25 = $107.99
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Alex
Q1: I have a question as to how I can begin investing. I have about 100K saved up and I'm not sure how to invest into stocks. I opened up a ROTH IRA via TD Ameritrade and put in the max amount of money for the year (per Steve's video). I'm not sure what the next steps are to take. Do I select stocks to invest in through TDAmeritrade?
A1: Great job on saving $100k and opening up a Roth IRA. You can consider continuing to invest in your Roth IRA as the years go by and opening up an additional cash account. A cash account is more liquid in a sense to where you can pull money out whenever you'd like. For your next steps, you can consider slowly investing in these two accounts. Consider investing in fundamentally strong stocks that are part of the S&P500 and/or Dow30, pay a dividend and have a strong upwards trend. Some of these companies include MSFT, HD and COST. You can also consider slowly investing in ETFs that track the S&P 500 like SPY and VOO. You can use TDAmeritrade to purchase these stocks/ETFs. With that being said, overall, we recommend the 30/30/30/10 portfolio allocation. This means having 30% of your portfolio in fundamentally strong stocks/ETFs, 30% in the wheel strategy, 30% in growth stocks (like AMD) and 10% in cash/LEAPs.
Q2: I also have a Robinhood & Public account with some small investments in stocks. Should I continue using those apps to invest more?
It is completely up to you and your investing goals. We like TDAmeritrade and Charles Schwab. As long as you're able to purchase stocks/ETFs and trade options, you should be okay :). Some members may decide to use different brokerages for different things like options, long-term holds, etc.
Ali
Q: Hi team, I sold a cover call on SBUX a couple of months back and purchased 100 shares for $119. Now, I'm planning to sell a cash-secured put on those 100 shares. Does it make sense to select a strike price of $110 as suggested in the weekly positions or should I select a strike of $119 (expiration 12/21) so I can get the shares called away from me at the price I paid for them?
A: Ali, we think you sold a covered call and your option expired worthless, which means you still have your 100 shares, correct? If so, you wouldn't sell a cash-secured put as this would be a different trade, requiring you to have collateral for an additional 100 shares. In your situation, if we're correct and you still have your 100 shares you got for $119, you can consider selling another covered call at or above your cost basis which is $119+. We wouldn't want to sell shares for less than what we purchased them for. When your shares get called away at expiration, you can consider restarting your wheel by either selling a covered call or a cash-secured put.
Luciano
Q: Started my first SBUX wheel on 11/22. SBUX 12/17 112 Put @ 2.41. Wondering if I should be looking to cycle this or just keep riding to expiration? Currently the position is at 3.55 to close (down 47%).
A: Congratulations on starting your first wheel! We recommend waiting until expiration. At expiration, your option will either expire worthless or you will get assigned 100 shares. Based on what happens at expiration, you can then consider either selling another CSP (if you don't get assigned) or selling a covered call on your 100 shares, at or above your cost basis (if you get assigned 100 shares).
Augustine
Q: What should I do with the Pinterest stocks that were assigned to me? Do I take the loss and reinvest or hold?
A: We're not sure at what price you were assigned at, but we typically recommend selling covered calls at or above the price you were assigned at. If your cost is far OTM to where you're not making anything in premium, consider selling covered calls at a lower strike that you'll be comfortable with selling your shares at while receiving some premium. We know the premium won't be great and you might take a loss if your shares get called away, but it can lower your cost basis every time you sell covered calls.
At the moment, we see that institutions are not favoring PINS and we are exiting our positions by selling around $5-10 OTM of where the current price of the stock is.
Kevin
Q: My shares didn't get called away. can i write another call against those shares. when i attempt to write another call it looks like there is an amount (the value of 100 Shares) held. I would expect that the 100 shares i already hold in my account would be leveraged?
A: Great job! Yes, you are able to sell another covered call if your shares did not get called away. You should have an average cost of those 100 shares you bought. For example, if you bought 100 shares at $100, your average cost should be $100. Therefore, when selecting a strike price for your covered call, you can consider selecting $100+ because you don't want to sell shares for less than what you purchased them for. When you sell a covered call, you already own the shares. You're selling a call, backed by the 100 shares you have. At expiration your shares will either get called away or not. If they are called away, you'll make premium and capital gains (if you sell for more that what you bought for). If they are not called away you can consider repeating and selling another covered call.
Sabrina
Q: What indicators do you use on your charts? Do you have any sessions on charting?
A: We like to keep things simple here at Calltoleap. We typically like using RSI. This lets us know if a stock is oversold or overbought. During analysis we mostly identify trends and patterns. We like to identify resistance and support lines. We use horizontal lines and draw lines in. We currently don't have any sessions on charting.
In the end, we are more driven by fundamentals over technicals and focus on company earnings.
Taylor
Q: So i have a Schwab account and i just got approved to trade options. forgive the ignorant question, but how do i calculate the premium and the intrinsic and extrinsic value of each strike price? obviously the options chain doesnt look like the graph made for the videos. i know that intrinsic + extrinsic value= the premium, but "premium," and "intrinsic and extrinsic" values aren't written anywhere in the options chain so...i'm lost
A: Never an ignorant question! We are here to help. Yes, intrinsic + extrinsic = premium. There should be a setting to where you can include intrinsic and extrinsic values on the option chain.
To calculate intrinsic value: Current stock price - strike price x 100 (shares).
For example: MSFT is trading at $320. Let's look at the intrinsic value for the strike of $300.
Intrinsic value = ($320 - $300) x 100 shares = $2,000.
To calculate extrinsic value: Option premium - intrinsic value.
As mentioned below in the next paragraph, the option premium is in the bid column.
Example: MSFT's $300 strike price has an intrinsic value of $2,000 and the current option premium for the $300 strike is 28.45 ($2,845 because x 100 shares).
Extrinsic value = $2,845 - $2,000 = 8.45 or $845.
In regards to the premium, there is no category named "premium". Instead, the premium for let's say selling a covered call can be found on the option chain to the LEFT of your desired strike price, in the "bid" column. For example, the bid is 3.50. The premium would be $350 because $3.50 x 100 shares = $350. We have a walk through video on how to trade the wheel on Charles Schwab in our level 1 past videos, under "tutorials". Feel free to watch it as it can help you understand how to execute the trade on the Charles Schwab platform. We know it can be a little confusing at first, because it was for us, but with time you'll get it!
With that being said, we prefer using the "Thinkorswim" trading web platform from TDAmeritrade. Charles Schwab and TDAmeritrade are merging. For now, we recommend using TDAmeritrade as you'll get access to the "Thinkorswim" web platform. We use this platform in many of our training videos so it can be helpful to follow along :)
Page
Q1: Hi, I have been looking to expand my wheel options and was curious if Steve recommends doing wheels on larger stocks like microsoft and costco? If not, then why not? I know he adds them to his long term portfolio but what about his wheels? thanks!
A1: Steve does recommend doing the wheel on MSFT. We currently don't recommend doing the wheel on COST. In our membership positions every week, Steve recommends stocks to do the wheel on. Feel free to check them out! When looking for wheels, we like doing them on stocks that have high open int. This means that many people are trading these contracts so it will be easier to get in and out of trades. AAPL has high open int while COST has low open int.
Q2: Why is it recommended to select expirations more than a week out when the 1 week premiums seem to be the highest percentage of all weeks (usually)?
A2: It may sound attractive to do 1 week options, but if the stock suddenly pulls back and stays down for a while, you would miss the higher upfront premium you would've gotten if you did 4 weeks out. Instead, you'd be "stuck" selling far OTM covered calls receiving lower premium until the stock retraces again. Depending on market conditions, this is why we typically like doing 4 weeks out for a higher upfront premium. We have an amazing video on this concept in our level 1 fundamental videos, titled "4 week vs. 1 week options." Feel free to check it out!
Q3: Also, on puts...why is it recommended to select strikes so close to the money? Wouldn't selecting strikes further away even by a dollar or 2 more give more downside protection?
A3: When selling OTM cash-secured puts and covered calls, the premiums are highest, the closer you are to the current stock's price. The further strike OTM you select from the current stock price, the lower your premium will be. This is why it is recommended to sell close to the current stock price because it gives us higher upfront premium. When selling cash-secured puts, the more OTM you sell (below the current stock price) you would get more downside protection, but your premium would be lower. We like high upfront premiums because we can't predict the stock market.
Junie
Q: Hi Steve & team, i have finished Level 1 tutorials and started paper trading on Think or Swim for a few weeks. Honestly, i still can't quite understand how the system works. Can't seem to see the premiums entering the account and am not sure what to look out for when the option expires. Do you have any video or info on how it works? i'm apprehensive to start real trading without understanding how the system works. Thanks guys!
A: Wonderful job on practicing, Junie! So the premiums should show up in your "cash" section immediately after you execute a trade. When the option expires with a covered call, your shares will either be called away or you will keep your shares depending on where the underlying stock price ends and where your strike price is. When selling cash-secured puts, you will either be assigned shares or not be assigned shares, depending on the underlying stock price and your strike price. In any case, the contract should resolve automatically after Friday. On Monday you should be cleared from the contract and able to do another trade. We don't have specific videos on the logistics of what happens, but we do have wheel strategy videos in our level 1, under our tutorials and fundamental past videos. Feel free to check them out! As always, we are here to help if you have any additional questions :)
Tony
Q: Hey Steve, here's the general guidelines you provided for selling CCs & CSPs: - Bullish market - CC: 2-3 weeks, OTM - CSP: 2-3 weeks, ITM - Neutral market - CC: 4 weeks, NTM - CSP: 4 weeks, NTM - Bearish market - CC: 5-6 weeks, ITM - CSP: 5-6 weeks, OTM or wait for retracement The implied reason behind selling ITM, NTM, or OTM for these different scenarios is pretty clear, but can you explain the reason behind 2-3 weeks, 4 weeks, vs 5-6 weeks?
A: Of course! So in a bullish market we know that prices are going up. Therefore, 2-3 weeks is optimal because the underlying stock price may be over our strike price by that time. In a neutral market, the stock may rise and then go back where it started. Therefore, 4 weeks is optimal. In a bear market, we know prices are going down so therefore we like to do 5-6 weeks out to get more upfront premium and give the underlying stock price more time to retrace back up again by selecting a longer expiration date.
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.
Hang on tight. I expect a little more volatility in the short-term.
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.
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