Hey Wealth Builders!
On Friday, the broad markets had another volatile drop due to the latest CPI data.
The May consumer price index rose 8.6% year-over-year, which is the highest level since 1981, while many economists had only forecasted an 8.3% increase. The core index, which excludes food and energy prices, rose by 6%, which is slightly higher than the estimated 5.9%.
Because of these number, many Wall Street investors are worried about another possible economic downturn, and the potential of a larger interest hike from the Federal Reserve. Instead of a 25 bps increase, it seems that a 50 or 75 bps increase is more likely on the table.
Technical Analysis 📈
SPY
On a technical level, we were rejected from our downward magenta resistance line. I would not be surprised if we retested our lows of around the $384 level, or even the downward, light blue support line.
QQQ
QQQ may be falling back down to the $281 level.
DIA
DIA may drop back down to the $306 level.
MSFT
MSFT may retest the $246 level.
AAPL
AAPL is straddling on the $137 key support. If we break, we may revisit the $132 support.
AMD
AMD seems to be holding above it's short term purple support. However, I think if there is any other negative news, the stock may break down. Notice that this may also be a bear flag formation.
Bear Flag Example:
Stock Splits
Amazon just had their 20-for-1 stock split this week. This means that if you had 1 share of AMZN, you would now have 20 shares (all of which are equal fractions of the initial share).
Though I'm considering starting a wheel on this stock since the share price is more attainable for retail investors like us, I would not do it yet until the markets feel more confident. Looking at the charts, the stock is still in a downward trend.
I also know that many of you are considering starting the wheel on Google. However, just like with Amazon, I would wait until the markets start to retrace.
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Q1: What put should I invest in right now?
A1: As mentioned in previous membership positions over the last several months, we do not recommend starting any new wheels due to the current market conditions. You can, however, consider setting up bear call spreads once you are familiar with options Greeks. As of now, you can consider trading in a paper trading account.
Q2: Hi team,
I been selling covered calls on my shares around 0.30 delta and under however the couple Green Day’s in the market pushes the stock prices close to or itm for my strike prices is it wise to btc and roll out 4-6 weeks further as many times in incurring loss when I btc thank you for your help!
A2: Wonderful question and great job on collecting premium! When we sell covered calls, our intention is to sell them at the selected strike price. Therefore, we don't mind letting our shares get called away at expiration if they are ITM. However, if you would like to buy back and roll up and out, you can consider doing so by selling a further dated expiration and at a higher strike price. Keep in mind that if you buy back the call option for a higher price, you will essentially be increasing the cost basis of your shares, opposed to reducing them. At the end of the day, what you do with your portfolio is completely up to you!
Q3: Say an underlying stock is $100, you purchase 100 shares, sell a covered call with strike of $101, exp 1 month out for premium of $300. If the stock market tanks to say $90 in wk 2, am I allowed to set a stop loss at $97 (break even) and a buy stop order at $100 in case the stock retraces near expiration. Selling a covered call assumes we hold the shares until expiration, but I’m wondering if we can sell out if it drops a lot and pick it back up when retracing. Pros and Cons?
A3: (I typically don't like to post advanced options questions here, but I'll make an exception this week. If you are a beginner, you can ignore the response below.)
No. If you sell a covered call against your 100 shares, you are contractually obligated to hold those shares as collateral.
However, there is an advanced strategy you can explore.
Though I don't typically recommend selling shares for a loss, you could technically purchase a call option with the same expiration date in place of your 100 shares as collateral. Once you do this, your sold call and purchased call will pair into a bear call spread. You would now be contractually free from holding your 100 shares, meaning that you could sell them at a loss.
If you think about it, these are the reverse steps to our contingency plan when we set up our bear call spreads and have the underlying stock rise to the second leg strike.
This is where I imagine a lot of you advanced traders have lightbulbs turn on. 😲
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.
Steve's Thoughts 💡
Keep in mind that we have our Federal Reserve meeting this upcoming week, meaning that we may experience some more market volatility. Knowing this, we can continue to buy to close our covered call positions once they shrink down to around 50-80% of their values, and roll out to a further date to collect more premium. This is a great environment to sell short-term options as IV is high due to all the fear.
I currently recommend selling covered calls around 45-days out on our initial positions (not starting any new wheels). Again, even though we are choosing further expirations, you can always close your positions early whenever the value of your contracts shrink 50-80% and resell (roll) your contracts for a further expiration date. It's a boring and repetitive process, but it's like collecting free money while 95% of other retail investors are panicking.
Folks, keep up the good work with your discipline of monthly/weekly contributions and dividend and covered call premium collections. I still recommend keeping our capital as cash and building up our ammo of when the bull market returns.
Stay patient and your eyes-peeled this upcoming week! Let's see if there are any trend changes next 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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