Hi Wealth Builders!
We had another bumpy week. Let's see what happened.
Here's SPY:
Here's QQQ:
Here's DIA:
Why Are The Markets So Volatile? 😮
On Thursday, Russia launched an invasion against neighboring Ukraine on Thursday using land, air and naval forces.
Should we be worried? No.
I understand that past performance does not guarantee future results. However, looking at the statistics, you can see that it takes around 43.2 days for the markets to recover after major geopolitical events.
And with all these events, 83% of the time the markets rally back up and have a positive return within a 1 year period.
As for the upcoming interest rate hikes, know that past data shows that we still rally up 78.6% of the time.
I still believe that we are going to have a rocky path in the short-term. Hang on tight and continue to sell your OTM calls against the shares you already have with an expiration date of around 4-6 weeks out. I do not recommend starting any new wheels at the moment due to our current market conditions. It may also be strategic to keep setting up your bear call spreads to collect even more premium, as we've been doing for the past several weeks.
As from a long-term perspective, there is honestly nothing to worry about since we know that the markets have always retraced back up 100% of the time.
Technical Analysis 📈📉
SPY:
SPY ended the week with a bullish hammer candlestick, which often signals bullishness and a potential reversal. The ETF dropped down to the $410 level and rallied back up to $437, which is a significant range in price movement. I am, however, still a little cautious because the overall short-term trend is still downward. I would be more optimistic if we can break out of the downward trending resistance line. If so, I would be more inclined to adding more shares to my portfolio.
QQQ:
We see the same pattern in QQQ. However, I am noticing that tech stocks in the NASDAQ rallied faster than stocks in the S&P500 and DOW30 indices. Is it possible that institutions are exhausted from selling and are ready to buy back many of these growth stocks?
DIA:
We see the same bullish hammer for DIA.
NKE:
NKE does not seem to have a lot of institution conviction as it is still consolidating at its current levels.
MSFT:
MSFT, however, finished the week strong with a bullish candlestick. I am still waiting for a confirmed upward reversal before adding more shares.
AAPL:
AAPL touched its upward trending long-term support line this week and had a strong bounce. However, I am also still waiting for more higher highs and lows before adding any more shares.
AMD:
Like for the past two months, if you are selling calls against your initials AMD shares, you may want to pair your trade with some bear call spreads. This stock has been a wonderful underlying to set up spreads due to its high premiums.
SBUX:
Like NKE, SBUX does not seem to have a lot of conviction like the rest of the stocks in the major indices. If you have a wheel for this stock, you can read my response to Ali's question this week where you can sell calls at a lower strike than your cost basis.
PYPL
Now that we patiently let PYPL sell off for the past several weeks, there is a chance that the stock is coming to a bottom. Looking at the charts, PYPL bounced off of its long-term trendline denoted in magenta. I am planning on slowly buying more shares in the next couple of weeks if I see an upward trend with higher highs and higher lows. I will keep you posted.
Trade of the Week:
Current Market Conditions: Again like the couple of weeks, I don't recommend starting any new wheels at the moment and to only sell calls against the shares you already own to lower your cost basis. If you want to start new wheels, you can, but I would proceed with some caution. My pick for the wheel would include AAPL for now since it's holding up pretty well for the past several weeks.
Here are some trade recommendations and see what fits your personal risk-tolerance:
AAPL Monday Open: $164.98 Friday Close: $164.85 5-day change: -0.07%
Starting a New Wheel: Selling a Cash-Secured Put on AAPL - AAPL's Current Price: $164.85 - Capital Needed: $16000.00 - Sell at the Expiration Date: 2022-03-25 - Select the Strike: $160 - Premium you'll receive: $322.00 - Cost Basis: $160.00 - $3.22 = $156.78
Starting a New Wheel: Selling a Covered Call on AAPL - AAPL's Current Price: $164.85 - Capital Needed: $16485.00 - Sell at the Expiration Date: 2022-03-25 - Select the Strike: $165 - Premium you'll receive: $488.00 - Cost Basis: $164.85 - $4.88 = $159.97
If you don't want to sell NTM strikes for your CSPs, you can also go with a conservative strategy of selling further OTM. I favor deltas that are around -0.16 (or a 16%). Just know that if you sell further OTM, you will receive less premium because the probability of the stock hitting the strike by expiration is going to be less likely.
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Sophia
Q: Has anyone had any fractional shares with Robinhood?
A: Yes. If you don't have much capital, buying fractional shares is a great way to start investing.
Fernando
Q: When would it be advisable to close a position on a covered call or put?
A: We typically recommend closing a position on a covered call or put when you've received around 80-90% of your premium. For example: If your premium is $500, you can consider closing when you've received around $400-450.
Junie
Q: Hi Steve & Team, as I just started out the Wheel I'm still trying to figure out how to read the amount of money inside the account. I have sold a CSP and by right the premium should be credited into the account immediately. My question is, where do I look on TOS for the figures to be reflected? Also, are these premiums considered "locked" until the expiry of the contract, where it becomes rightfully mine? Hope u don't mind my very basic questions!
A: Great job! Premiums should immediately go directly into your cash pile. The premiums are yours to keep so long as you let the option you sold, expire. You can also lock in your premiums early if the stock rises when selling a CSP. For example, if you sell a CSP for $500 premium and if your contract is now worth $50 to buy back, you can consider buying it back for $50 early to lock in $450 in profit and exit the contract to keep that premium. We love your questions! This is exactly what we are here for, Junie. Keep up the great work and reach out if you have any additional questions :).
Ali
Q: Last year I purchased SBUX stock for $119 and since then the stock has plummeted to $90. So far, I've lost 3,000+ on the stock and I'm not sure if I'm going to be able to recover that amount. I'm inclined to just pull out and sell my stocks and cut my losses, but I wanted to know if there was a better strategy to employ for this kind of stock that is slowly sinking. Frustrated and worried, Ali
A: I still believe in SBUX's fundamentals and that the stock will retrace in the future. One potential trade you can consider is to sell a call at around the $99-$100 strike to receive a larger premium. If the stock begins to rise towards the strike, you have two options:
Option 1: You can look at the value of your sold call to see if theta has decayed the majority of the option. If so, you can buy back the option for a lower price than you sold it for and resell another call at a higher strike and further into the future. This strategy is called "buying back and rolling out."
Option 2: You can set a buy-stop order of 100 shares at around $98-99 or manually purchase 100 shares if the stock reaches around $98-99. When this happens, you will now have 200 shares of SBUX, with 100 shares contractually obligated to be delivered to the other party, and the other 100 shares free to ride the wave back up.
If you choose not to sell at lower strikes, you can still sell at around the $119 strike, but with a much longer expiration date. You may want to go out to 2 months. The premiums will be much less, but you can view it as a "dividend" that you are collecting while you wait for SBUX to retrace.
In the end, see which trade fits your risk tolerance.
Earnings 📰
Block | SQ
Block, formerly known as Square, reported an annual revenue of $17.6b billion, which is up from $9.49 billion a year earlier.
Quarterly revenue was $4.08 billion, which is up from $3.16 billion a year earlier.
Transaction-based revenue was $1.31 billion, which is up from $929 million a year earlier.
Subscription and services-based revenue was $772 million, which is up from $449 million a year earlier.
Bitcoin revenue was $1.96 billion, which is up from $1.75 billion a year earlier.
The company ended the quarter with 44 million monthly average users, above his target for 43 million, and added users at a consistent rate with prior quarters, he noted.
The company also disclosed more than 13 million monthly active users for its debit card, indicating that nearly a third of its user base is using the card, up from 20% at the end of 2020.
With all of these impressive numbers, I am still bullish on this company and believe it is a wonderful long-term investment.
Remember that Block is a company that focuses on financial services by building tools to help people access the economy. Their main building blocks are made up of Square and Cash App. Square helps sellers run and grow their businesses with its integrated ecosystem of commerce solutions, business software, and banking services. You've most likely have seen Square POS systems at your favorite stores that facilitate with transactions. Cash App allows anyone to send, spend, or invest their money in stocks or Bitcoin.
Looking at the long-term chart, there might be a chance that we found the bottom of the sell-off as there seems to be resistance at around the $86 level.
Looking at the short-term, the stock has also broken out of it's downward trending resistance line.
I will be keeping a close eye on Block and may slowly add more shares if I continue to see higher highs and higher lows. Please be mindful that Block is a growth tech stock and is easily sold-off during times of uncertainty. If you are going to buy more shares, I would make sure to slowly do so and to not exceed your 30% growth portfolio allocation. Always be mindful of your own risk tolerance and if you are able to stomach the volatility.
Home Depot | HD
Home Depot reported annual revenue of $151.2 billion, which is up from $132.1 billion a year ago. This is a 14.4% increase.
Quarterly revenue was $35.7 billion, which is up $32.2 billion a year ago. This is a 10.7% increase.
Between mid-2020 and mid-2021, the retailer posted four straight quarters of comparable sales growth above 20%, fueled by consumers' surging demand for home-improvement goods as the public-health crisis's social disruptions left people spending more time in their houses.
Customer transactions for the quarter was 402.5 million, which is down from 416.8 million a year ago. This is a 3.4% decrease.
Customer transactions for the fiscal year was 1.7597 billion, which was almost similar to 1.7563 billion a year ago. This is a 0.2% increase.
However, the average ticket sale for the quarter was $85.11, which is up from $75.69 a year ago. This is a 21.4% increase.
The average ticket sale for the year was $83.04, which is up from $74.32 a year ago. This is a 11.7% increase.
Home Depot also said on Tuesday it will raise its dividend by 15%, to $7.60 annually.
As for their fiscal 2022 guidance, the company predicts sales growth and comparable sales growth to be "slightly positive."
Remember that The Home Depot is a home improvement retailer. The company offers its customers an assortment of building materials, home improvement products, lawn and garden products, decor products, and facilities maintenance, repair and operations products and provide a number of services, including home improvement installation services and tool and equipment rental. It operates approximately 2,296 The Home Depot stores located throughout the United States.
I am still bullish on HD for the long-term. However, I may not be adding anymore shares at this time.
Overall, HD is still in a downward trend. It is possible that the previous $316 support line may hold, as it did back in June 2021. I would like to see the stock get above the $340 horizontal level and break out of the downward trending resistance line before adding anymore shares.
I'll be keeping an eye out and let you know when I scale in my position in the upcoming weeks. 👀
ETSY | ETSY
Etsy reported quarterly gross merchandise sales (GMS) of $4.2 billion, which is up from $3.6 billion a year ago. This is a 16.5% increase.
Annual GMS revenue was $13.5 billion, which is up $10.3 billion a year ago. This is a 31.2% increase.
Overall quarterly revenue was $717.1 million, which is up from $617.4 million a year ago. This is a 16.2% increase.
Overall annual revenue was $2.3 billion, which is up $1.7 billion a year ago. This is a 35% increase.
Etsy operates two-sided online marketplaces that connect people and buyers, and sellers around the world. Its primary marketplace, Etsy.com, is the global destination for creative goods. For sellers, the Company offers a range of tools and services that address key business needs. For the Etsy marketplace, primary optional services include on-site advertising services, which allow Etsy sellers to pay for placement of their listings in search results, and Etsy Shipping Labels.
I am bullish on ETSY for the long-term as I see the company is still growing exponentially.
Looking at the charts, ETSY is holding strong above the 200 EMA. If I see there is a confirmed upward trend, I will slowly add shares to my position. Keep in mind that ETSY is a growth stock and does not pay a dividend. This means there is a high chance that this stock can drop quickly during market uncertainty. Again, I will update you in the upcoming weeks.
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Stay patient folks. I believe this volatility will persist for the next couple of weeks as we enter March. Also keep in mind that we are most likely going to get two or three more rate hikes later this year, which can cause even more market uncertainty. If the markets continue to stay fearful, I recommend that you brush up your skills with setting up bear call spreads to collect even more premium.
What am I doing during this period? I am still...
...depositing money into my account
...selling calls against my initial shares to collect premium
...collecting dividends
...setting up bear call spreads
...letting my premiums, dividends, and deposits sit as cash, while patiently waiting until the sentiment turns positive
I would also like for you to see if you are properly allocated in your portfolio. If you broke the 30/30/30/10 discipline, and had more than, say, 80% of your portfolio in growth tech stocks, there is a good chance that your portfolio got hit hard during the past couple of weeks.
Always remember that stocks that are part of the DOW30 and pay a dividend typically weather through the storms. For 2022, I would focus more on allocating more into these stocks as there may be some more bumpy roads due to future rate hikes. Or, if you don't feel comfortable investing, you can always keep the majority of your position as cash. This will give you more ammo when the markets start to retrace back up.
Hang in there 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.