Hey Wealth Builders!
Looks like we had an interesting Thanksgiving week with the markets selling off on Friday. Let's take a look:
Here's SPY:
Here's QQQ:
Here's DIA:
So what happened? The markets fell after news of a new coronavirus variant in South Africa prompted another round of travel restrictions. This economic uncertainty, of course, triggered the markets into selling off.
The S&P 500 had its worst day since February as many nations, including the US, moved to prohibit travel from half a dozen or so African countries.
Algorithmic Trading
If this is your first market pullback, congratulations! Just know that there will always be fluctuations in the market and it is your job to be grounded in not getting spooked by short-term trends.
Remember that more than 80% of trading is done by computer algorithms. These computers are able to read news on the internet and act accordingly in micro seconds. If algorithms detect anything that may pose an economic threat, computers will automatically sell off shares to lock in profits and protect their portfolios.
I believe that the sell-off we had on Friday is an overreaction from computers.
Does this mean that we should jump in and buy with all our money? Well, no. Usually with these algorithmic sell-offs, there is a sell-off ripple effect that may last for a couple of days. A lot of these algorithms trade by seeing what other algorithms and large institutions are doing. I know. It sounds silly, but it is a bit of a game of "monkey see, monkey do."
Right now, it may be a good idea to keep a close eye on your favorite stocks on your watchlist. We want to wait for the markets to digest the news and we'll most likely start to see the markets moving higher again. We'll also start seeing news articles titled something like, "Markets shrug off concerns of Covid variant." When we see positive market sentiment, we can then start nibbling on discounted stocks.
Technical Analysis 📈📉
SPY:
If SPY continues to sell off even more, we might test the $453 level.
QQQ:
QQQ may also test the $382 level.
DIA:
DIA landed on a previous resistance line of $349. I'm thinking it might dip a little bit more and touch its yellow upward trendline before moving back up again.
AAPL:
APPL is still holding pretty well. We may drop down to the $155 level if the sell-of continues.
WM:
WM surprisingly did not seem to get affected as much this week. It does seem like we are wedging out soon. Let's see if we break out or break down below the yellow support and start consolidating sideways.
SBUX:
SBUX is still trending sideways, which makes it a great Wheel candidate.
NKE:
There is some sideways consolidation going on with NKE for the past four weeks. It may be setting itself up as a bullish flag. Right now, I believe NKE is still a great underlying for the Wheel.
MSFT:
MSFT broke its yellow support line this week. I'm not too sure where it wants to go right now since we don't have enough data points. It's possible that we might temporarily drop to the top of the previous resistance line.
AMD:
Another stock that surprised me this week was AMD. I've been trading AMD for years and typically when there is uncertainty, this stock tends to dive quickly. Let's see where it goes in the next couple of days.
Trade of the Week:
Spinning your wheels: 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 your shares were called away last week, you can consider restarting your wheel. For beginners, you can consider starting again by selling a cash-secured put, around 1-3 strikes OTM (or for a lower price).
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.
Keep It Balanced: Just as a friendly reminder, we recommend to not go overboard with growth stocks, like AMD, for your Wheels. Yes, they do have high premiums and they are relatively less expensive compared to AAPL, NKE, SBUX, and MSFT. However, just keep in mind that stocks that don't pay a dividend and have high premiums/IV typically drop the fastest when there is uncertainty in the markets. If you are brand new to starting the Wheel, we recommend starting off with AAPL, NKE, SBUX, or MSFT. Please also be mindful that we recommend adhering to the 30/30/30/10 allocation.
Extra Shares On The Side: As I mentioned before in the previous weeks, you can always keep some extra shares on the side in case your favorite stock runs past your strike price. So instead of purchasing 100 share and selling a covered call, you can purchase 125 shares. You can also buy 25 extra shares and sell a cash-secured put. This way, you will have an extra 25 shares to gain from the potential price move up.
Here are some trade recommendations and see what fits your personal risk-tolerance:
MSFT Monday Open: $344.62 Friday Close: $329.68 5-day change: -4.33%
Starting a New Wheel: Selling a Cash-Secured Put on MSFT - MSFT's Current Price: $329.68 - Capital Needed: $32750.00 - Sell at the Expiration Date: 2021-12-17 - Select the Strike: $327.5 - Premium you'll receive: $750.00 - Cost Basis: $327.50 - $7.50 = $320.00
Starting a New Wheel: Selling a Covered Call on MSFT - MSFT's Current Price: $329.68 - Capital Needed: $32968.00 - Sell at the Expiration Date: 2021-12-17 - Select the Strike: $330 - Premium you'll receive: $873.00 - Cost Basis: $329.68 - $8.73 = $320.95
AAPL Monday Open: $161.68 Friday Close: $156.81 5-day change: -3.01%
Starting a New Wheel: Selling a Cash-Secured Put on AAPL - AAPL's Current Price: $156.81 - Capital Needed: $15500.00 - Sell at the Expiration Date: 2021-12-17 - Select the Strike: $155 - Premium you'll receive: $370.00 - Cost Basis: $155.00 - $3.70 = $151.30
Starting a New Wheel: Selling a Covered Call on AAPL - AAPL's Current Price: $156.81 - Capital Needed: $15681.00 - Sell at the Expiration Date: 2021-12-17 - Select the Strike: $157.5 - Premium you'll receive: $432.00 - Cost Basis: $156.81 - $4.32 = $152.49
AMD Monday Open: $157.14 Friday Close: $154.81 5-day change: -1.48%
Starting a New Wheel: Selling a Cash-Secured Put on AMD - AMD's Current Price: $154.81 - Capital Needed: $15250.00 - Sell at the Expiration Date: 2021-12-17 - Select the Strike: $152.5 - Premium you'll receive: $668.00 - Cost Basis: $152.50 - $6.68 = $145.82
Starting a New Wheel: Selling a Covered Call on AMD - AMD's Current Price: $154.81 - Capital Needed: $15481.00 - Sell at the Expiration Date: 2021-12-17 - Select the Strike: $155 - Premium you'll receive: $783.00 - Cost Basis: $154.81 - $7.83 = $146.98
NKE Monday Open: $174.98 Friday Close: $168.02 5-day change: -3.97%
Starting a New Wheel: Selling a Cash-Secured Put on NKE - NKE's Current Price: $168.02 - Capital Needed: $16750.00 - Sell at the Expiration Date: 2021-12-17 - Select the Strike: $167.5 - Premium you'll receive: $520.00 - Cost Basis: $167.50 - $5.20 = $162.30
Starting a New Wheel: Selling a Covered Call on NKE - NKE's Current Price: $168.02 - Capital Needed: $16802.00 - Sell at the Expiration Date: 2021-12-17 - Select the Strike: $170 - Premium you'll receive: $425.00 - Cost Basis: $168.02 - $4.25 = $163.77
SBUX Monday Open: $111.11 Friday Close: $110.66 5-day change: -0.4%
Starting a New Wheel: Selling a Cash-Secured Put on SBUX - SBUX's Current Price: $110.66 - Capital Needed: $11000.00 - Sell at the Expiration Date: 2021-12-23 - Select the Strike: $110 - Premium you'll receive: $286.00 - Cost Basis: $110.00 - $2.86 = $107.14
Starting a New Wheel: Selling a Covered Call on SBUX - SBUX's Current Price: $110.66 - Capital Needed: $11066.00 - Sell at the Expiration Date: 2021-12-23 - Select the Strike: $111 - Premium you'll receive: $309.00 - Cost Basis: $110.66 - $3.09 = $107.57
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Aaron
Q1: So I did a cash-secured put on SBUX at a 115 strike last week, which expired yesterday (Friday 19 NOV). Based on the classes, I assume I need to wait until the stock retraces past 115. How far past 115 should I wait until I execute a covered call on my SBUX position?
A1: You can actually consider selling a covered call today, 3-4 weeks out at the strike of $115 or above. You would receive less premium due to your strike price being a little more OTM. However, all money is good money :)
Juan
Q1: Hows it going, I have a lot of stocks now, My portfolio varies, I invested in Call To Leap in order to perfect and learn how to be able to make safe calls and puts, as well as to earn enough money to get to 100 shares of microsoft or apple. is there nothing I can do at this time via your coaching with out being able to own 100 shares of something? I can start investing heavily into one or two things but most of the money I have currently is already tied up in long term stocks or loses I not sold.
A1: Welcome to our wealth building community! We are excited to be a part of your financial freedom journey. In order to trade the wheel strategy, we are required to have 100 shares of a stock because 1 contract = 100 shares. Without 100 shares, you won't be able to trade the wheel strategy. If you have enough capital to purchase 100 shares, you can consider selling a cash-secured put or a covered call on AAPL to start off.
We understand your portfolio is varied. You can consider redistributing your portfolio to allow you to trade the wheel strategy or you can slowly invest and buy shares until you have 100 shares of AAPL/MSFT to do the wheel. You can definitely follow our position posts and practice paper trading in the meantime to solidify and practice our trading concepts.
Q2: Sorry to bother you again but I wanted to follow up, in order to sell cash secured puts, don’t I have to have the money to buy it, in case it gets triggered ? So I would have to sell puts for something cheap that I can afford or what am I getting wrong.
A2: You're never bothering us! That is exactly what we're here for :). Please do not hesitate to reach out and ask any questions that you may have. We look forward to answering them.
Correct. In order to sell a cash-secured put, you're required to have the money to cover 100 shares at the strike price you choose. Your brokerage account will hold it as collateral for the duration of your contract. The only way for the money to be released is if you buy the contract back or if the underlying stock price is above your strike price at expiration.
Marvin
Q: Hi guys. Do you still recommend playing PINS for starting the wheel? Haven’t seen a recommend play for it in a while. If not why? And if should play it when should I jump back in or expect back to jump back in?
A: We see that PINS is currently in a downward trend with a strong resistance line. We see that Wall Street is not currently favoring this stock. Therefore, we are not recommending to enter a PINS wheel at this time.
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.
Stay patient and disciplined. This pullback will most likely end shortly. 👍
-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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