🔒 Membership Positions - May 16, 2021
- Call to Leap
- May 15, 2021
- 9 min read
Updated: May 27, 2021
Hi Everyone!
Eesh! We had an overall red week in the major indices. However, we did get a nice rally on Friday.
Here's a snapshot of how the overall markets did this week:
Could We Be Heading Higher?
Let's take a look at some technicals. Here's SPY:
Here's QQQ:
MSFT:
SBUX:
WM:
AMD:
SQ:
PINS:
Notice how even though all these stocks "dance" the same up and down moves on the same days, some of their movements are more magnified than others. For example, when there are up days for the major indices, MSFT, SBUX, and WM move up MORE compared to stocks like AMD and PINS. At the same time, when there are down days for the major indices, MSFT, SBUX, and WM move down LESS compared to stocks like AMD and PINS.
It looks like many of the stocks we are trading and investing have touched the bottom of their support lines and even touched a low RSI. I am personally bullish at the moment and do see retracement coming back in the next 30-60 days. Is it possible that these stocks break their support lines and go down lower? Of course! There is still a fear of increasing inflation, interest rates, and taxes and if any "negative" news gets out, it may trigger some algorithms to sell off some stocks. However, given the great earnings that were reported and the current technicals, I am leaning more towards the bullish side.
Again, all these technicals don't really matter as much because we're just looking at mid-term and short-term trends. As an investor and wealth builder, we still want to practice patience and keep our eyes on the long-term perspective.
If you've been investing for a couple of years already, you've seen pullbacks and neutral trending markets all the time. The movie is always the same and always has the same ending. If you just started investing for less than a year, you might think that it's going to be like this forever. Let me remind you, stocks with strong fundamentals and revenue growth will rise over time. Be patient. Be patient. Be patient.
High Volatility Stocks
I get it. High volatility stocks are tempting, especially with their high premiums. However, these stocks have high premiums for a reason! They typically have large price fluctuations!
If you see a stock where the 1 month, 1 strike OTM call is around a 5%+ premium, get ready to buckle your seatbelts because you're in for a bumpy ride.
Please make sure you are balanced with the stocks you have in your portfolio. What does a balanced portfolio look like? We recommend having a 30/30/30/10 allocation:
✅ 30% of stocks/ETFs in the Wheel Strategy to generate income (ex. MSFT, AMD, NKE, PINS, AAPL, etc.)
✅ 30% in growth stocks/ETFs (ex. SQ, PYPL, MA, AMZN, FB, ADBE, ROKU, ETSY, EL, QQQ, etc.)
✅ 30% in stable, dividend-paying stocks (ex. V, HD, WM, COST, SPY, DIA, VOO, VTI, etc.)
✅ 10% in cash (and/or LEAPS options if you are in the Premium Membership)
If you have your entire portfolio in TSLA (which I don't necessarily recommend), PINS, AMD, SQ, and ROKU, you better be prepared to have extreme fluctuations in your account value. I know these growth stocks are exciting. However, please keep disciplined with also investing in steady, dividend-paying stocks/ETFs like MSFT, AAPL, V, WM, HD, SPY, VTI, VOO, and DIA. When there is uncertainty in the markets, the first stocks that usually get sold off the fastest are the growth stocks that don't pay a dividend. Institutions feel safer with dividend-paying stocks since during a pullback or correction, they still get paid a dividend no matter what. Think about it, if a company pays $1 dividend per share and an institution has a million shares, they still are able to generate $1 million during that quarter in a middle of a pullback!
When there is a bull market, everyone thinks they are a genius investor. Greed gets into their head and they just want to see more and more growth in their portfolios. They get sidetracked by the hype that everyone else is investing in, especially with investing in companies they know nothing about. However, it's when the stock market pulls back, you get to see the weaknesses in their portfolios.
If you have been keeping a balanced portfolio, keep it up! If you haven't, then let this be a good teaching moment. Will there be another pullback or correction in the future? 100% yes! It is your responsibility to make sure you are ready for it.
Trade of the Week:
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 you were assigned your 100 shares from your cash-secured put, you can sell a call against your shares and convert your trade into a covered call trade.
If you entered your Wheel on PINS or AMD at a higher price, there are some options you can consider:
Stay patient and let the stock retrace. You can consider selling a call against your shares around 2-3 months out, rather than our typical 4-6 weeks out, at around the same price that you purchased your shares.
You can consider selling a call against your shares around 4-6 weeks out at around the bottom range of your cost basis.
You can consider selling a call against your shares around 4-6 weeks out at around 1-5 strikes below the bottom range of your cost basis. Yes, you will take a loss on your trade, but you can free up capital to move to another stock that is in favor by Wall Street. This like breaking up with your girlfriend or boyfriend. It hurts in the beginning, but you sometimes may want to move on to another person.
For me personally, I am going with options 1 and 2 and will continue to lower the cost basis of my shares, even if it might be around $50 per contract. I don't mind being patient with these stocks since I have Wheels on MSFT, AAPL, and NKE still running on the side.
Keep in mind that even though PINS and AMD have fallen pretty fast, they can also retrace back up quickly. I am still very bullish on these companies in the long-run due to their fantastic numbers.
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. If you have been using the Wheel Strategy for a while and have a more bullish outlook, 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.
If you want to still trade the Wheel on PINS and AMD, please keep in mind that these stocks are very volatile. We may recommend selling further OTM strikes for your CSPs, around 3-6 strikes away to play it more conservatively. Of if you just want to play it safe, you can just sit this one out for now.
Also, notice that we added SBUX to our Wheels list. This stock is generally more conservative as it's part of both the S&P500 and DOW30, pays a dividend, and has strong earnings growth. It also has an upward trend and looks like it is currently being favored by Wall Street.
Here are some trade recommendations and see what fits your personal risk-tolerance:
MSFT:
Monday Open:$250.87
Friday Close:$248.15
Change: -1.08%
Starting a New Wheel: Selling a Cash-Secured Put on MSFT
- MSFT's Current Price: $248.15
- Capital needed: $24,750.00
- Sell at the Expiration Date: 2021-06-11
- Select the Strike: $247.50
- Premium you'll receive: $580.00
- Cost basis: $247.50 - $5.80 = $241.70
Starting a New Wheel: Selling a Covered Call on MSFT
- MSFT's Current Price: $248.15
- Capital needed: $24,815.00
- Sell at the Expiration Date: 2021-06-11
- Select the Strike: $250.00
- Premium you'll receive: $452.50
- Cost basis: $248.15 - $4.53 = $243.62
AAPL:
Monday Open:$129.41
Friday Close:$127.45
Change: -1.51%
Starting a New Wheel: Selling a Cash-Secured Put on AAPL
- AAPL's Current Price: $127.45
- Capital needed: $12,700.00
- Sell at the Expiration Date: 2021-06-11
- Select the Strike: $127.00
- Premium you'll receive: $325.00
- Cost basis: $127.00 - $3.25 = $123.75
Starting a New Wheel: Selling a Covered Call on AAPL
- AAPL's Current Price: $127.45
- Capital needed: $12,745.00
- Sell at the Expiration Date: 2021-06-11
- Select the Strike: $128.00
- Premium you'll receive: $320.00
- Cost basis: $127.45 - $3.20 = $124.25
AMD:
Monday Open:$78.20
Friday Close:$74.59
Change: -4.62%
Starting a New Wheel: Selling a Cash-Secured Put on AMD
- AMD's Current Price: $74.59
- Capital needed: $7,400.00
- Sell at the Expiration Date: 2021-06-11
- Select the Strike: $74.00
- Premium you'll receive: $256.00
- Cost basis: $74.00 - $2.56 = $71.44
Starting a New Wheel: Selling a Covered Call on AMD
- AMD's Current Price: $74.59
- Capital needed: $7,459.00
- Sell at the Expiration Date: 2021-06-11
- Select the Strike: $75.00
- Premium you'll receive: $267.00
- Cost basis: $74.59 - $2.67 = $71.92
NKE:
Monday Open:$138.00
Friday Close:$135.93
Change: -1.5%
Starting a New Wheel: Selling a Cash-Secured Put on NKE
- NKE's Current Price: $135.93
- Capital needed: $13,500.00
- Sell at the Expiration Date: 2021-06-11
- Select the Strike: $135.00
- Premium you'll receive: $301.50
- Cost basis: $135.00 - $3.01 = $131.99
Starting a New Wheel: Selling a Covered Call on NKE
- NKE's Current Price: $135.93
- Capital needed: $13,593.00
- Sell at the Expiration Date: 2021-06-11
- Select the Strike: $136.00
- Premium you'll receive: $302.00
- Cost basis: $135.93 - $3.02 = $132.91
Starting a New Wheel: Selling a Cash-Secured Put on PINS
- PINS's Current Price: $58.05
- Capital needed: $5,800.00
- Sell at the Expiration Date: 2021-06-11
- Select the Strike: $58.00
- Premium you'll receive: $309.00
- Cost basis: $58.00 - $3.09 = $54.91
Starting a New Wheel: Selling a Covered Call on PINS
- PINS's Current Price: $58.05
- Capital needed: $5,805.00
- Sell at the Expiration Date: 2021-06-11
- Select the Strike: $59.00
- Premium you'll receive: $277.00
- Cost basis: $58.05 - $2.77 = $55.28
SBUX:
Monday Open:$114.12
Friday Close:$111.20
Change: -2.56%
Starting a New Wheel: Selling a Cash-Secured Put on SBUX
- SBUX's Current Price: $111.20
- Capital needed: $11,100.00
- Sell at the Expiration Date: 2021-06-11
- Select the Strike: $111.00
- Premium you'll receive: $243.00
- Cost basis: $111.00 - $2.43 = $108.57
Starting a New Wheel: Selling a Covered Call on SBUX
- SBUX's Current Price: $111.20
- Capital needed: $11,120.00
- Sell at the Expiration Date: 2021-06-11
- Select the Strike: $112.00
- Premium you'll receive: $216.00
- Cost basis: $111.20 - $2.16 = $109.04
Earnings
Whoa! Let's take a look at some report cards that came out this week!
DIS
On Thursday, Disney reported fiscal second-quarter earnings of $901 million on sales of $15.61 billion, down from $18 billion a year ago. However, we need to keep in mind that DIS was affected by the pandemic so comparisons with the year prior isn't entirely accurate.
This is Disney's last quarter to compare to results that mainly were unaffected by the pandemic, which has affected many of Disney’s core businesses, such as theme parks and movies. Disney's streaming service, Disney+, was able to top 100 million subscribers thanks to large growth during the pandemic.
Chief Executive Bob Chapek reported that they now had 103.6 million subscribers on Disney+. However, some analysts on average expected 109.26 million subscribers. Because of this, DIS shares sold off.
Chapek stated "We are on track to achieve our guidance of 230 million to 260 million [Disney+] subscribers by the end of fiscal 2024." He also stated, “Looking at our entire portfolio of streaming services, we expect that as full production levels resume and we get to a more normalized cycle, the increased output will help fuel additional sub-growth across Disney+, ESPN+, Hulu, and Hotstar.”
Disney’s theme parks and product sales segment reported $3.17 billion in revenue, which is up from $2.4 billion a year ago, though most of their theme parks were closed or had limited attendance during the quarter, which ended March 31.
Disney’s U.S. theme parks are now open and analysts expect that revenue in that segment would jump to $2.46 billion in the current quarter.
Chief Financial Officer, Christine McCarthy stated, “Forward-looking bookings for park reservations at both of our domestic parks are strong, demonstrating the strength of our brands as well as growing travel optimism as case counts decline, vaccine distribution ramps, and government restrictions loosen."
Conclusion
We believe that DIS is still a great long-term investment. This company is part of the S&P500 and DOW30 and pays a dividend. Even though DIS didn't meet analysts' expectations on their Disney+ subscribers, Disney still managed to cross the 100 million subscriber milestone, which I think is an incredible accomplishment. On top of that, I am optimistic to see parks reopening and seeing that the country is returning to a level of normalcy soon.
As always, remember to keep a balanced portfolio with the 30/30/30/10 ratio and see if the stocks you are investing in is something you believe in and fits your own risk tolerance.
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Stay positive and optimistic! 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.
