Hi Wealth Builders!
Stocks continued to fall this week amid Russia-Ukraine news and with the look out for next week's Federal Reserve rate hike. Inflation continues to rise as February’s consumer price index was up 7.9% year over year, which is the highest it's been since January 1982.
Let's take a look at the overall markets:
Here's SPY:
Here's QQQ:
Here's DIA:
Technical Analysis 📈📉
SPY:
This week, we fell back down to the $420 support line. However, I am still bearish as the technicals still show that we are still trending downward. We may be trending back towards the $411 support.
Understand that during times of uncertainty, volatility is usually high. This means that you'll most likely experience dramatic up and down days. Make sure to keep your emotions in check. I anticipate this rollercoaster ride to persist in the next couple of weeks.
QQQ:
Again, we are still range bound in the downward channel. We may be heading down to our previous $318 level.
AMD:
AMD retested the $103 support this week. This line seems to be a strong area of support as we bounced off of it during October 2021 and February 2022. We need to keep an eye out in the next couple of days because we are also going to be wedging out with our strong resistance line and support line sandwiching the stock. Hopefully there will be good news to give reason for the stock to break out.
WM:
WM is still holding pretty well during this market turmoil. I purchased some shares last week. However, I want to see if there are some higher highs and lows before adding more.
COST:
The same goes with COST as it's holding near its highs during last December. I also added a few more shares last week.
PYPL:
I'm still keeping my eyes peeled on PYPL and want to see the magenta level of support hold. I'm hoping this is the bottom of the sell-off.
DIS:
As for DIS, we dropped back down to the $131 support. Let's see if this holds.
AMZN:
Lastly, AMZN reported that they were initiating a 20-for-1 stock split and a $10 billion buy back. This means that if you have 1 share of AMZN, the share will equally split into 20 shares. The market cap is still the same, but it will now be less expensive to purchase one whole share.
Like GOOGL, AMZN is following suit with making their shares accessible to investors. This is something that we typically see in the markets where if one company announces something big, other large companies may announce the same to get more attention on their stock. Do you remember when AAPL announced their stock split and Tesla announced theirs a couple of weeks later? Do you remember when SQ and FB announced their name change at around the same time too? I'm predicting that other companies with share prices above $500-1000 may be inclined to split their shares too within the next 12 months.
Also, typically with companies buying back their own shares, it indicates company confidence. It also reduces the number of available shares to trade, meaning that it can lead to higher demand and ultimately a rise in the share price.
Would I buy more shares of AMZN right now? My answer is no. Looking at the technicals, I still see that we are trending downwards and have not broken out due to all the geopolitical events. Once we are in the clear, I may be inclined to purchase 1-2 shares. I am also going to look at their earnings and technicals in the next couple of months to see if this may also be a potential candidate to utilize the Wheel Strategy on. Stay tuned.
Trade of the Week:
Current Market Conditions: Because we are still in a market downturn, I do not recommend starting any new wheels. Instead, you can keep selling calls against the shares you already own. Depending on how much your underlying has dropped and what price you were assigned your shares, I recommend selecting covered call strikes according to your adjusted cost basis.
For example, if you bought 100 shares of XYZ at $150 each and received a premium of $700 (or $7.00 per share) you can sell calls at the $143 strike ($150 - $7 = $143). You may have to go out a 6 weeks in expiration to get a larger premium due to the larger extrinsic value.
Another strategy is to sell your calls at around the delta 0.10 strikes. This means that there may be around a 10% chance of your underlying stock hitting the strike price by the day of expiration. Again, you may need to go out around 6 weeks to get a larger premium.
What If I Sell A Call And The Stock Rallies?
Not to get too advanced since this post is for the Standard Membership, understand that due to all the market uncertainty, implied volatility, or IV, has increased. You may have noticed that all of the just OTM premiums for the majority of your stocks have risen significantly.
If you sell a call during high IV and the stock starts to rally due to positive news, market uncertainty may decline, which leads to IV dropping.
Also, as stocks begin to rally, understand that the rate of the stock rising to the rate of a stock dropping are typically different. Stocks usually drop faster than when stocks retrace back up. From a technical perspective, there are several resistance lines, or "obstacles," that the stock has to face when climbing back up to its all time highs.
Because of the (1) IV dropping and (2) slower rate of upward retracement, there is a higher chance that your sold call options may have significantly declined in value, even with your underlying stock rallying up. If we sell calls against our shares and then observe a trend change where stocks are moving back up, we can then consider purchasing our call options back, hopefully for a lower price than we sold them for. We can then consider selling at higher strikes than before and with a further expiration date. This strategy is called buying back and rolling up and out.
Why? It's because we are buying back our call options, and rolling out to a longer expiration date. We are also rolling up to a higher strike, preferably a strike that is higher than our adjusted cost basis or at the price of share assignment.
If you are a Premium Member, I will be making another video in place of a Premium Membership Position to talk about this concept further in detail and how it also applies to bear call spreads. I encourage you to watch the video and utilize your weekend to study the mechanics of bear call spreads and options Greeks.
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Page
Q1. I am struggling to make sense of why I wouldn’t want to use this downward market as a buying opportunity. Can you help shed some light? thanks.
A: Of course! I know it may be tempting to purchase shares right now as they definitely are at a discount. The reason is because we want to respect the trend and there is currently a negative market sentiment. Respecting the trend is knowing the direction in which a stock is moving and following that. You can see this in our membership positions. If the stock is in a downward trend, it often continues until it "breaks out" of it's resistance line. When it does, we then like to see "higher highs and lower lows". This can typically means that Smart Money is putting money back into the stock and it is now trending upwards. We can then consider slowly investing and ride the wave up.
A perfect example can be seen here. This question was asked March 5th. If we look at how the market has been behaving since yesterday, we see that the "knife" continues to drop. Had we bought yesterday, our portfolios would've been lower today. Instead, we want to see a trend reversal and positive market sentiment before slowly investing on the way up. We don't want to catch this falling knife and use our buying power because we don't know how low this can go. Instead we want to look for a change in trend and positive market sentiment before investing.
Marco
Q1. When creating an account with TD Ameritrade for thinkorswim, what Tier should I select?
A: Level 1 allows you to sell covered calls and cash-secured puts. If you want to trade the wheel, you're required to be approved for level 1 at minimum. Level 2 is for buying options (LEAPS) and level 3 is for spreads (Bear Call Spreads, etc.).
Q2. When in the option chain, am I looking at the bid or the ask for cash-secured puts? Am I looking at the same thing for selling covered calls?
A: On the option chain, the values on the left of the strike prices are for covered calls, the values on the right are for cash-secured puts. You can consider selecting more towards the bid price when trying to sell a covered call or a cash-secured put. Feel free to check out our videos on how to trade the wheel strategy on different platforms :)
Q3. Third (and hopefully last question of the day), when I open the option chain, what does "Weekly" mean? I see those for even a few weeks out?
A: Weekly options are similar to monthly options, except they expire every Friday instead of the third Friday of each month. Originally, there were only monthly options. However, weekly options were introduced so traders can sell on a shorter term basis.
Daniel
Q1. Would you recommend deposit dividends and capital gains into core accounts to have cash in hand? Or to reinvest into the security?
A: Depending on market conditions, we typically reinvest our premiums, dividends and capital gains into more long-term holds. This way, our wealth can exponentially grow. When market conditions are positive, we can consider slowly investing our premiums into more long-term holds. When markets are negative, like they are now, we like to wait until a positive market sentiment and a trend reversal before slowly investing our premiums into long-term holds again.
Martin
Q1. Hello my question is are the greeks implemented on cover calls or all options i had a secured put and i received the full premium i thought i was going to earn less because or theta. Can you help clarify a bit more
A: The Greeks apply to all options. When selling covered calls, you can know that delta tells us the approximate probability of the underlying stock hitting that strike price by expiration. For example, a delta 0.30 has around a 30% chance, while a delta 0.15 has a 15% chance.
Theta tells us how much dollar amount is "decayed" or lost, per day. As option sellers, we favor higher "theta decay" because this means the option is loses value for the person on the OTHER SIDE at a significant rate while we "gain it" on our end.
For example, a theta of -0.10 loses or "decays" $10 per day. Someone who pays us $300 premium, is losing $10 a day until expiration. Also, if that stock does not hit their strike price by expiration, they lose everything. As option sellers, we don't typically worry about theta decay as it is more worrisome for the option buyer.
With that being said, whenever you sell a CC or a CSP, you always receive the premium upfront, whatever that may be. As option sellers, theta decays in our favor.
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.
What do you want to focus on doing for the next couple of weeks?
Deposit more money into your account so you have more cash to deploy when the markets rally again
Sell calls against your initial shares to collect premium
Collect dividends
Set up bear call spreads
Let the majority of your premiums, dividends, and deposits sit as cash, while patiently waiting until the sentiment turns positive
Make sure that you are properly allocated with the 30/30/30/10 allocation and well-diversified
Be patient, 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.