Hi Wealth Builders!
We had a bit of a sell-off this week. Let's take a look at what and why it happened:
Here's SPY:
Here's QQQ:
Here's DIA:
Federal Rate Hike Scare
Wednesday's Federal Reserve meeting minutes said that policy makers signaled three rate increases this year and three the following year as inflation concerns deepened. Fed Chairman Jerome Powell emphasized the ongoing pandemic’s risks to inflation and supply-chain issues, as opposed to growth. Many economists and strategists say the Fed is likely to raise interest rates quicker and shrink its balance sheet sooner than investors have expected.
Historically, whenever there is news about rising interest rates, the stock market will react negatively. As long-term investors, this shouldn't matter as this event will be a small blip in your investing journey. However, we can take a more cautious approach in the short-term to see how we manage our Wheels.
Technical Analysis 📈📉
SPY:
SPY dropped and broke the $470 support line, and we are currently red for the first week of 2022. I am still slowly buying some shares to dollar-cost average in. You can consider still adding some shares here and some more shares if we potentially hit the orange support line.
QQQ:
I am adding more shares of QQQ too. I would, however, be cautious with adding too many since tech stocks tend to drop the fastest during times of uncertainty.
DIA:
Notice that there may be a rotation from tech stocks into some DOW components, which as been on an upward trend for the past 6 weeks. I'm also slowly adding some more DIA shares to my portfolio.
SBUX:
SBUX is still in a neutral move. I would keep selling OTM calls against the shares your previously own.
NKE:
Now that we have more data points, it does look like NKE is in a temporary pullback. However, there may be a bull flag formation and a potential breakout in the future.
MSFT:
The same bull flag formation can be found with MSFT. There is a chance we may trend lower in the next couple of weeks and touch the previous support line.
AMD:
AMD may do the same and gravitate towards the yellow support line.
AAPL:
AAPL stood out this week as it didn't sell-off as deep as the rest of the stocks in the S&P500. It still seems to be in a mid-term upward trend.
MA:
I added a couple shares of MA this week since I've been observing that it's been on an upward trend, even with all other stocks falling. There could be a potential resistance line as shown in yellow. If the stock breaks out of it, I will feel more comfortable with adding even more shares.
V:
The same goes with V. I've been adding more shares to my portfolio but I want to see a breakout above the yellow resistance line before adding any more.
DIS:
Lastly, DIS has been on a strong upward trend for the past 6 weeks. I am slowly adding some shares to my position.
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.
Earnings: Though you will notice that IV and premiums are going to increase in the next couple of weeks, please keep in mind that there may be a lot of volatility due to earnings coming out. Stocks may significantly rise or drop after an earnings announcement, so if you are a beginner and don't feel comfortable opening a new Wheel position, you can wait to do so sometime in February. If you are experienced with the Wheel Strategy, you most likely don't mind the volatility and have a higher risk tolerance.
A Little Note: If you don't feel comfortable with the news that is going on right now and with the upcoming earnings, you can take a little pause with starting new Wheels. Instead, you can keep selling calls against your previously owned shares and keep your premiums as cash until the negative news has digested.
Here are some trade recommendations and see what fits your personal risk-tolerance:
MSFT
Monday Open: $335.35
Friday Close: $314.04
5-day change: -6.35%
Starting a New Wheel: Selling a Cash-Secured Put on MSFT
- MSFT's Current Price: $314.04
- Capital Needed: $31000.00
- Sell at the Expiration Date: 2022-02-04
- Select the Strike: $310
- Premium you'll receive: $868.00
- Cost Basis: $310.00 - $8.68 = $301.32
Starting a New Wheel: Selling a Covered Call on MSFT - MSFT's Current Price: $314.04 - Capital Needed: $31404.00 - Sell at the Expiration Date: 2022-02-04 - Select the Strike: $315 - Premium you'll receive: $1025.00 - Cost Basis: $314.04 - $10.25 = $303.79
AAPL
Monday Open: $177.83
Friday Close: $172.17
5-day change: -3.18%
Starting a New Wheel: Selling a Cash-Secured Put on AAPL
- AAPL's Current Price: $172.17
- Capital Needed: $17000.00
- Sell at the Expiration Date: 2022-02-04
- Select the Strike: $170
- Premium you'll receive: $483.00
- Cost Basis: $170.00 - $4.83 = $165.17
Starting a New Wheel: Selling a Covered Call on AAPL - AAPL's Current Price: $172.17 - Capital Needed: $17217.00 - Sell at the Expiration Date: 2022-02-04 - Select the Strike: $172.5 - Premium you'll receive: $565.00 - Cost Basis: $172.17 - $5.65 = $166.52
AMD
Monday Open: $145.14
Friday Close: $132.00
5-day change: -9.05%
Starting a New Wheel: Selling a Cash-Secured Put on AMD
- AMD's Current Price: $132.00
- Capital Needed: $13200.00
- Sell at the Expiration Date: 2022-02-04
- Select the Strike: $132
- Premium you'll receive: $840.00
- Cost Basis: $132.00 - $8.40 = $123.60
Starting a New Wheel: Selling a Covered Call on AMD - AMD's Current Price: $132.00 - Capital Needed: $13200.00 - Sell at the Expiration Date: 2022-02-04 - Select the Strike: $132 - Premium you'll receive: $910.00 - Cost Basis: $132.00 - $9.10 = $122.90
NKE
Monday Open: $167.53
Friday Close: $156.97
5-day change: -6.3%
Starting a New Wheel: Selling a Cash-Secured Put on NKE
- NKE's Current Price: $156.97
- Capital Needed: $15500.00
- Sell at the Expiration Date: 2022-02-04
- Select the Strike: $155
- Premium you'll receive: $313.00
- Cost Basis: $155.00 - $3.13 = $151.87
Starting a New Wheel: Selling a Covered Call on NKE - NKE's Current Price: $156.97 - Capital Needed: $15697.00 - Sell at the Expiration Date: 2022-02-04 - Select the Strike: $160 - Premium you'll receive: $267.00 - Cost Basis: $156.97 - $2.67 = $154.30
SBUX
Monday Open: $116.47
Friday Close: $107.57
5-day change: -7.64%
Starting a New Wheel: Selling a Cash-Secured Put on SBUX
- SBUX's Current Price: $107.57
- Capital Needed: $10700.00
- Sell at the Expiration Date: 2022-02-04
- Select the Strike: $107
- Premium you'll receive: $318.00
- Cost Basis: $107.00 - $3.18 = $103.82
Starting a New Wheel: Selling a Covered Call on SBUX - SBUX's Current Price: $107.57 - Capital Needed: $10757.00 - Sell at the Expiration Date: 2022-02-04 - Select the Strike: $108 - Premium you'll receive: $328.00 - Cost Basis: $107.57 - $3.28 = $104.29
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Jodie
Q1. I am planning on starting my very first wheel this month, beginning with selling a cash secured put on one stock as suggested. Once I place the order, what happens next?
A: Woohoo! Once you sell your cash-secured put, you just wait until expiration to see where the underlying stock price ended. Based on where the stock ends, you'll either get assigned or not.
Q2. If the stock hits the strike at any point during the contract period will I be assigned the shares? Or am I only assigned if it hits the strike price at expiration?
A: Technically, the person on the other side of the contract can execute their contract whenever they'd like. If the stock price falls below the strike price of your CSP on the day of expiration, you will most likely get assigned the 100 shares. If the stock price falls below the strike price of your CSP any time before the day of expiration, you may not get assigned the shares yet.
Q3. Do I need to do anything or does all this happen automatically? Also, when does the money from selling the contract hit my account? Thanks!
A: This all happens automatically and the premium should be deposited into your account immediately after you sell a CSP.
Noel
Q1. Hey Steve, I am planning to do my first cash secured put this week after buying your program 5 months ago - I'm a slow learner. For the wheel strategy would I start 2 cycles of a cash secured put or would I do 1 cycle of a cash secured put and 1 cycle of a covered call. I was planning on starting off with Starbucks and apple. Love apple since I've been buying shares since they were at 115 bucks. thanks Noel
A: Woohoo! Thank you for being a part of our wealth building community Noel. Great job on taking action! We are always here to answer any questions you may have, so please reach out! :)
To answer your question, it is completely up to you, your risk tolerance, and portfolio size. You can consider doing 1 wheel at a time to get the hang of it and then when you're comfortable, you can consider doing another. Whether you do a CC or a CSP is up to you. You can consider starting with a CSP on AAPL or SBUX to start.
Shubham
Q1. I wanted to understand which strategy would in general be more profitable?, when you have an X amount of money to invest. Currently, I only understand the wheel strategy. Would it not be more profitable to just invest in stocks / index funds which have strong fundamentals. Or is the idea behind wheel strategy, that we make money on cash that we cannot lock up for long term (5 yrs). PS. I am not asking for financial advice, just analysis for different scenarios with some eg.
A: It is difficult to say which strategy will be the most profitable. It truly depends on market conditions. The power of the wheel is ultimately seen in a neutrally trending market. For example, if a stock stays at $100 the entire year and you're not doing the wheel on it, you have made no gains on your money. However, if you do the wheel strategy and if you make a 2.5%+ return every month, you would've made a 30%+ return on your money in that year.
The goal is to do the wheel, have long-term holds, do LEAPs and BCSs whenever the opportunity presents itself to make the most return on investment, per year. Therefore, in regards to portfolio distribution, we recommend a 30/30/30/10 distribution. 30% in strong, dividend paying stocks/ETFs, 30% in growth stocks, 30% in the wheel strategy and 10% in LEAPs. However, what you do with your portfolio is completely up to you. We only do the wheel strategy on stocks we believe are fundamentally and technically strong. In our program, we teach how to invest in companies that we believe are strong based on our criteria mentioned in our videos.
Submit Your Questions 🙋♂️🙋♀️
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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.
Fundamentals Haven't Changed ✊
When we see the majority of stocks fall in the S&P500 and/or DOW30 due to news, it's typically a broad-base sell-off. This means that algorithms are triggered into selling all stocks in these indices as a whole. This doesn't necessarily mean that anything has fundamentally changed in the companies we are holding. Microsoft is still doing well. Apple is still doing well. Costco is still doing well.
Stay focused on the fundamentals and don't let the news distract or scare you.
Be patient with the stock market and let's control our emotions. 👌
You got this! 😀👍
-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.