Hey Everyone!
It looks like this week's winners are clearly some of the stocks in the S&P500 and DOW30, which made all-time highs. The DOW30 finished with a nice weekly green candle stick. Woohoo!
The QQQ, which contains many tech stocks, also clawed it's way back up to it's past January levels. However, these stocks are still a bit away from their all-time highs.
Here's a snapshot of how the overall markets did this week:
Testimonies For 1-Month Off
My team and I want to thank all of you for being part of this wealth-building community. If you've been enjoying the content and support that this community has been providing, we would truly appreciate it if you can send us a testimony of your experience. As a thank you, my team and I can give you a free month off of your subscription if we choose to use your testimony for our site. We will most likely choose around ten testimonies. 😀
Here are the details:
What:
-Full name
-Age
-Location
-A testimony between 100 to 200 words
-A beautiful picture of yourself
When:
Please submit this to us by March 28, 2021, 11:59 PST.
Where:
Please send this to our email: info@calltoleap.com, with the subject line: 2021 Testimony - Name.
Trade of the Week:
If you've been trading the Wheel Strategy, you most likely got assigned your 100 shares from your CSP or your covered calls expired worthless.
Just like last week, here are two options you can consider taking:
Option 1: To restart your Wheels again on Monday, you can consider selling around 4-6 weeks out at the same strike price that you sold last month. For example, if you had a Wheel for PINS and sold a covered call at the $76 strike, you can resell your next call at the $76 strike again. This way, you will still be collecting premium and lowering your cost basis as you patiently wait for your shares to retrace back up.
Option 2: Because you initially sold covered calls against your shares to lower your cost basis, you can also consider selling 1-2 strikes below your initial sold strike price. For example, if you purchased 100 shares of PINS for $76 and sold a call for $400, your new cost basis is $76 - $4.00 = $72.00. Instead of selling at the $76 strike, you can consider selling at the $75 or $74 strike. You will be obligated to sell your shares for a lower price than you initially purchased them for and higher than your new cost basis. However, you will be able to collect more premium since you are selling a little closer to the ATM strike.
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.
If you're a beginner, we recommend you starting off with selling cash-secured puts around 1-3 strikes OTM. This is typically a conservative starting point when starting the Wheel Strategy. However, if you're more bullish about the markets, we recommend starting your new Wheel by selling a covered call around 1-3 strikes OTM to not only receive the premium, but also make capital gains if you are called away at expiration.
Implied volatility, or IV, has increased for most premiums for these past couple of weeks. Why? IV tends to rise when there is uncertainty or fear in the markets. Retail investors and large institutions typically like to trade a high volume of options during this time where they like to place bets on if stocks will go up or down in a short amount of time.
Be mindful of NKE's earnings date coming up on March 18. Premiums are higher for NKE due to it's higher IV. Also, there may be a huge move in price, up or down, after earnings are released. Trade conservatively and based on your personal risk tolerance.
Here are some trade recommendations and see what fits your personal risk-tolerance:
MSFT:
Starting a New Wheel: Selling a Cash-Secured Put on MSFT
- MSFT's Current Price: $237.13
- Capital needed: $23,500.00
- Sell at the Expiration Date: 2021-04-09
- Select the Strike: $235.00
- Premium you'll receive: $645.00
- Cost basis: $235.00 - $6.45 = $228.55
Starting a New Wheel: Selling a Covered Call on MSFT
- MSFT's Current Price: $237.13
- Capital needed: $23,713.00
- Sell at the Expiration Date: 2021-04-09
- Select the Strike: $237.50
- Premium you'll receive: $585.00
- Cost basis: $237.13 - $5.85 = $231.28
NKE:
Starting a New Wheel: Selling a Cash-Secured Put on NKE
- NKE's Current Price: $141.19
- Capital needed: $14,100.00
- Sell at the Expiration Date: 2021-04-09
- Select the Strike: $141.00
- Premium you'll receive: $587.50
- Cost basis: $141.00 - $5.88 = $135.12
Starting a New Wheel: Selling a Covered Call on NKE
- NKE's Current Price: $141.19
- Capital needed: $14,119.00
- Sell at the Expiration Date: 2021-04-09
- Select the Strike: $142.00
- Premium you'll receive: $500.00
- Cost basis: $141.19 - $5.00 = $136.19
AMD:
Starting a New Wheel: Selling a Cash-Secured Put on AMD
- AMD's Current Price: $81.23
- Capital needed: $8,100.00
- Sell at the Expiration Date: 2021-04-09
- Select the Strike: $81.00
- Premium you'll receive: $387.50
- Cost basis: $81.00 - $3.88 = $77.12
Starting a New Wheel: Selling a Covered Call on AMD
- AMD's Current Price: $81.23
- Capital needed: $8,123.00
- Sell at the Expiration Date: 2021-04-09
- Select the Strike: $81.50
- Premium you'll receive: $372.50
- Cost basis: $81.23 - $3.72 = $77.51
AAPL:
Starting a New Wheel: Selling a Cash-Secured Put on AAPL
- AAPL's Current Price: $121.96
- Capital needed: $12,100.00
- Sell at the Expiration Date: 2021-04-09
- Select the Strike: $121.00
- Premium you'll receive: $440.00
- Cost basis: $121.00 - $4.40 = $116.60
Starting a New Wheel: Selling a Covered Call on AAPL
- AAPL's Current Price: $121.96
- Capital needed: $12,196.00
- Sell at the Expiration Date: 2021-04-09
- Select the Strike: $122.00
- Premium you'll receive: $402.50
- Cost basis: $121.96 - $4.03 = $117.93
PINS:
Starting a New Wheel: Selling a Cash-Secured Put on PINS
- PINS's Current Price: $71.88
- Capital needed: $7,100.00
- Sell at the Expiration Date: 2021-04-09
- Select the Strike: $71.00
- Premium you'll receive: $485.00
- Cost basis: $71.00 - $4.85 = $66.15
Starting a New Wheel: Selling a Covered Call on PINS
- PINS's Current Price: $71.88
- Capital needed: $7,188.00
- Sell at the Expiration Date: 2021-04-09
- Select the Strike: $72.00
- Premium you'll receive: $502.50
- Cost basis: $71.88 - $5.03 = $66.85
Buying Back and Rolling Out Covered Calls
If you've been selling covered calls on your shares and notice that the value of your calls have dramatically dropped to around 80%, you can now buy back the call and sell it further in expiration. In return, you'll collect more premium. This strategy is called buying back and rolling out.
For example, say you sold a covered call for AMD at the $90 strike last week for the March 26, 2021 expiration date, collected a $350 premium, and the value of the call dropped to around $45. You can consider buying back the call option for $45 and reselling it further in expiration, such as the April 23, 2021 expiration date, at the same $90 strike. In return, you can pull in a premium of around $200.
Since you bought the option back for $45 and sold a further call option for $200, you made a net $155. You can then use this $155 to further reduce the cost basis of your shares as you patiently let your shares retrace back up.
Here are the steps:
Step 1: Click on your sold call option position
Step 2: "Buy to close" the option. Make sure to buy back the option for a lower price than you sold it for.
Step 3: Go to the option chain and go further out in expiration, perhaps the 4-6 weeks out.
Step 4: Sell another covered call, either at the same strike or 1 strike lower. In return, you will collect more premium.
Buying Back and Rolling Out Cash-Secured Puts
If you've been selling cash-secured puts and the underlying stock dropped dramatically, your put option is most likely ITM and more expensive than what you sold it for. You can buy back your put option for a more expensive price than you sold it for, and resell another put option at the same strike price further out in date.
For example, if you sold a cash-secured put on AMD at the $86.50 strike for the March 19, 2021 expiration, collected a $400 premium, and then AMD dropped, then your put option may have gained value and became $615. You can buy back the put option for $615, and resell another put option at the same strike for the April 23, 2021 expiration date. In return, you receive a $845 premium.
Since you bought the put option for $615 and sold a further put option for $845, you made a net $230. You can then use this $230 to further reduce the cost basis of your shares as you patiently let your shares retrace back up.
Here are the steps:
Step 1: Click on your sold put option position
Step 2: "Buy to close" the option.
Step 3: Go to the option chain and go further out in expiration, perhaps the 4-6 weeks out.
Step 4: Sell another cash-secured put, either at the same strike or 1 strike lower. In return, you will collect more premium.
Having a Balanced Portfolio
As you may have noticed, many stocks are diverging from each other. We saw this happen during the pandemic, where many tech stocks in the QQQ rallied up much faster than some of the stocks in the DOW30. With some institutions rebalancing their portfolios right now, the opposite is happening, and you can see that some of the DOW30 stocks are advancing forward and much faster than some tech stocks.
Looking at trends, it looks like MSFT, NKE, DIS, MA, and V are near their all-time highs and are resilient during this time. Remember that many institutions often feel safer when they have a portion of their portfolios in boring dividend-paying DOW30 stocks, especially in times of uncertainty.
Sometimes during these rotational periods, institutions may take profits from high-flying, riskier stocks that have already made a large annual gain. They would then reallocate these profits into safer, quality stocks. This shift is often known as a "flight to quality."
We often recommend using the Wheel Strategy on different stocks. However, we know that we might sometimes get seduced by the premiums from particular growth stocks, where they can often generate 5% monthly returns. Keep in mind that when you see a stock with higher premiums, it typically means that there is greater risk and implied volatility.
Take a look at your portfolio this weekend and see if you have a balanced portfolio that fits your risk tolerance. If not, it may be time to reallocate your portfolio with a balance between growth stocks and steady, DOW30, dividend-paying stocks.
Collecting Rent 🏡💸
During this pullback, we encourage you to not be so fixated on your portfolio amount. Please remember that the value that you see is only an unrealized loss since you haven't sold anything.
Think of it this way, when you have a house and you rent out your room, the house value itself is constantly fluctuating. Sometimes it can go up or down a couple of hundred dollars per day. Do you panic and sell your house if it drops $1000? Of course not! It's the same perspective that I want you to have when selling covered calls. When you sell covered calls, you are using your stocks or "house" and collecting premiums or "rent" each month.
When buying property and renting out the rooms, you want to make sure the property itself is made up of strong material and is in a good location. Likewise, when selling covered calls, you want to make sure your underlying is fundamentally strong. Though your stock value or "house value" is down, it hasn't really changed any of it's fundamentals.
Yeah, sometimes your toilet might get clogged up. Sometimes your dog will poop on the carpet. Sometimes your kids will grab a black sharpie and decide to make artwork on the living room wall. The value of your house might temporarily go down. However, these are easy fixes and hasn't changed the actual structure of your house.
Stay calm and patiently let your "house" value retrace up over the next couple of weeks.
Discord Launched! 💬
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.
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.
Level 1 FAQ 🙋♂️🙋♀️
Have questions? Before asking me and my team, feel free to check out our Level 1 FAQ. This FAQ is located on the Level 1 page. You might find what you're looking for. 😊
Stay positive, everyone! 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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