Hi Wealth Builders!
What a crazy week! It looks like we finished with a huge rally with our portfolios in the green!
Let's take a look at the overall markets:
Here's SPY:
Here's QQQ:
Here's DIA:
Technical Analysis 📈📉
SPY:
After the Federal Reserve announced a 25 basis point interest rate hike, the markets reacted positively to the news. This week, we had four consecutive green days, with all three major indexes notching their best weekly performance since November 2020. SPY finally broke out of its downward trending resistance line.
Am I going to add more shares of SPY right now? Short answer: Yes. However, I'm only going to nibble since I prefer to see more higher highs and higher lows. I want to see if the upward trend continues because it is possible that the markets can even start consolidating sideways for a couple of months. I am going to use the income I've generated from my bear call spreads and covered calls to slowly add some shares.
QQQ:
We see that QQQ also broke out. However, notice that the level we ended this week is about the same level as the previous high in early March. In comparison, QQQ's rally did not move as much as SPY and DIA's move since these two indices surpassed their previous March highs.
DIA:
Interestingly, many DOW stocks in the DIA hit its resistance line this week. Since all DOW stocks are also included in the S&P500, if DIA rejects the resistance line, there is a high chance that we may also see SPY drop too. Let's see what happens next week and if we break out.
AMD:
AMD is still below its resistance line and has not broken out. Let's keep our eyes peeled to see if there is a break out. If so, and we see higher highs and lows, we can consider trading this stock again for our wheels.
WM:
I'm still keeping a close eye on WM and will be prepared to add more shares once I see some higher highs.
COST:
I am planning on adding more shares of COST as I see that institutions are favoring this stock. There have been higher highs and lows over the past several weeks, even in the midst of the broader indices falling.
HD:
I'm also slowly adding some shares of HD...
LOW:
... and LOW.
PYPL:
Woohoo! I see that PYPL had a strong bounce off of the magenta support line. Again, once I see higher highs and lows, I am going to add more shares. I am in no rush to adding more shares until I see more of an upward trending confirmation.
SQ:
It seems that institutions are putting their money back into SQ. I am planning on slowly adding some shares around these levels since there are some higher highs and lows. However, keep in mind that this stock is highly volatile and it's recommended to proceed with caution. This stock has a tendency of selling off whenever there is negative news.
NVDA:
Lastly, I am keeping a look out on NVDA and if there are higher highs and lows before adding shares.
Do we all see the theme that I'm sharing with you all this week? Now that we have patiently waited for the markets to finish selling off and have our favorite stocks change its trend, we are moving to our next phase of observing higher highs and lows. If we observe this pattern, there is a stronger chance that we may be retracing back from our correction.
With that said, we ought to reflect on what happened to our portfolios over the past several weeks. If we were overburdened with growth tech stocks, we see how easily institutions are willing to sell off their shares in a short amount of time during market uncertainty.
Remember, I recommend that we keep at least 30% of our portfolio in DOW30 dividend-paying stocks and/or ETFs like SPY and DIA. I get that they are boring investments. However, if we face uncertainty again, which I do foresee since the Federal Reserve is planning on raising interest rates later on this year, this 30% of your portfolio is what will prevent you from getting a heart attack.
And yes, I believe it's always a good idea to keep some cash on reserve just so we have more capital to invest when the bull market comes back.
For Call to Leap discipline, make sure that when we invest or trade the Wheel in anything, we do it slowly and not go all in with our money. We also want to make sure that we believe in the companies that we invest in and are willing to hold onto them for the next couple of years. I get that it's exciting when we first start and we have a tendency to try to make as much money as possible. However, it's important that we pace ourselves. Just like when we go to a buffet, we don't want to stuff our face with as much food as possible because we have some fear that the food is going to disappear. What ends up happening if we eat too much too quickly? We often get stomachaches. And guess what? The chefs in the back come out with even more food that is much more fresh!
The stock market will always be here and we don't have to worry that it's going to disappear. Stay patient and disciplined and you will reap the rewards.
Trade of the Week:
This week, I still don't see any opportunity to set up new wheels as I err on the cautious side. Rather, we can set up some bear call spreads as our initial position if we want to convert it into a covered call. I will be going over the details in our Premium Position.
If you already have wheels and you sold OTM covered calls 2-3 weeks ago, you may have noticed that many of your contracts have decayed by theta. If this is the case, you can consider buying back your calls for a lower price than you sold them for. You can then roll them up and out towards the strike that you were assigned your shares and into a further expiration date.
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Fernando
Q: I have sold a CC for AMD at 116.00 set to expire on 3/18. AMD is currently at 115.37 when market closed today. I don't want to assign the 100 shares. I watched your Buy Back and Roll Out video and was confused that this strategy should be done when the underlying stock drops in value but it didn't mention what to do when the underlying stock is close to expire ATM or OTM. Please let me know what I should do or clarify the above. Thanks!
A: We think you meant that you don't want to have your shares called away. What you do is completely up to you. You can consider having your shares called away if AMD is at/above your strike price at expiration. Assuming you bought the shares at a lower price than what you're going to get called away at, you should be making premium + capital gains. This is great!
If you don't want to have your shares called away, the only way you can prevent this from happening is to buy back your contract. Assuming the stock's price rose higher than when you sold the covered call (let's say AMD was trading $105 and you sold a covered call at the $116 strike), your contract should be more expensive to buy back.
This means that if you got let's say $500 premium for selling that covered call, the price to buy back that option may now be worth $750. If you decide to cancel the contract, you would have to pay the premium you got + the additional $250 to cancel your obligation to deliver shares at that strike price. This would be a negative return of $250.
The beauty of the wheel strategy is that you can consider starting another wheel (We don't recommend starting new wheels in current conditions) the following Monday with either a CSP or a CC again for more premium.
Buying back and rolling out is a little more advanced. When selling a covered call or a cash-secured put and the underlying stock drops significantly with a few weeks still left in the contract, we can consider buying back and rolling out. As mentioned in the video, we do this to receive higher premium per week. CCs and CSPs differ in regards to how much it will cost to buy back when the stock drops. CCs will be cheaper to buy back while CSPs will cost more when the underlying stock price drops. With CSPs, you buy it at a higher price, but then sell it at an ever higher price. We typically don't cancel covered calls that are ATM or OTM as we like to keep our premium and make capital gains. If you are still getting the hang of the wheel, we recommend letting your options expire.
We know it can be a little overwhelming, but take some time to review these concepts to further solidify them. Repetition is key! Please reach out for any other questions you may have :)
Jhena
Q: I had a question about CSP, what happens when the stock price jumps and now it’s $5 more, I wouldn’t be able to gain the profit from that difference would I? At the end of the day, it’s closing at -$55. Thanks for your time!
A: When you sell a CSP and the underlying stock rises, your contract becomes cheaper to buy back. The thing with a CSP is that if a stock is trading at $100 and you sell a CSP at $99 and the underlying stock rallies to $105 and expires at $105, you do not benefit from this upward movement by holding onto the actual shares. However, the benefit you get is keeping your premium and not getting assigned 100 shares of that company.
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 💬
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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.
Have a wonderful weekend, 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.
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