Hey Everyone!
Well, well, well. Look who came crawling back to the top. The major indices had another tremendous week of retracement. Let's take a look:
Here's SPY:
Here's QQQ:
Here's DIA:
Technical Analysis 📈📉
AAPL:
AAPL had a strong rally and retested its $149 level. I believe the stock will break out soon once earnings are released.
WM:
Once again, WM is still progressing higher. I would be more on the cautious side here since the RSI is nearing the 80s and earnings are coming up.
SQ:
SQ broke out of its downward channel this week. I am planning on slowly adding a couple more share to my portfolio.
SBUX:
For SBUX, there is strong support at the $109 level and it's nearing the top of its orange resistance line. If it breaks out, I may be adding a couple more shares to my long-term holds.
PYPL:
There were some talks this week about PYPL acquiring PINS with a $45 billion deal. Typically when one company acquires another, the stock price of the acquiring company tends to temporarily drop, while the stock price of the company that is being purchased tends to rise. Why does this happen? The acquiring company's share price drops because it pays a premium to acquire the target company and incurs debt to finance the acquisition.
The target company's short-term share price tends to go up because the shareholders only agree to the deal if the purchase price exceeds their company's current value. In the long-term, an acquisition tends to increase the acquiring company's share price. We've seen this pattern happen many times in the past, specifically with tech giants like Microsoft and Apple. However, keep in mind that this is not official and may not even happen.
From a technical standpoint, PYPL dropped so much that it broke its support line. It may be heading towards the $235 level in the next couple of days. Once I see the selling stop and an upward trend change, I will be inclined to add more to my long-term positions. As of now, I recommend being patient and just keeping an eye out.
PINS:
When PINS spiked this week, we noticed that it kissed the $66 level and dropped back down again. It's possible there is a resistance line as shown in yellow. Let's be patient and see what they report for their earnings.
NKE:
There is strong retracement seen in NKE too. Doesn't that look like a nice swoosh sign in the charts?
MSFT:
MSFT looks like its moving up again. However, remember that earnings are coming up and from past patterns, many stocks like to have a temporary sell-off after their numbers are delivered.
HD:
HD broke its horizonal resistance line of $340 a couple of days ago. I would be more on the cautious side since we are running a little high in RSI.
FB:
I'm going to wait to see how FB does after their earnings are released next week and if the price holds above their 200 EMA. I think FB is at a discounted price at these levels, but I would only purchase more once I see an upward trend change.
AMD:
Woohoo! AMD retraced back to its August levels this week.
COST:
Lastly, we have COST and we see that the stock rose again to its ATH this Friday. I'm adding a couple more shares to my long-term positions.
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 and PINS, 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.
Upcoming Earnings: Please be mindful of company earnings coming up in the next couple of weeks. If you don't feel comfortable with the volatility, you can wait until after your favorite companies deliver their numbers to see if you want to start a new Wheel. If you want to still continue your Wheel to take advantage of the higher IV, you can certainly do so.
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 to start a Wheel, you can purchase 125 shares. 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: $303.57 Friday Close: $309.16 5-day change: 1.84%
Starting a New Wheel: Selling a Cash-Secured Put on MSFT
- MSFT's Current Price: $309.16
- Capital Needed: $30500.00
- Sell at the Expiration Date: 2021-11-12
- Select the Strike: $305
- Premium you'll receive: $463.00
- Cost Basis: $305.00 - $4.63 = $300.37
Starting a New Wheel: Selling a Covered Call on MSFT - MSFT's Current Price: $309.16 - Capital Needed: $30916.00 - Sell at the Expiration Date: 2021-11-12 - Select the Strike: $310 - Premium you'll receive: $670.00 - Cost Basis: $309.16 - $6.70 = $302.46
AAPL Monday Open: $143.45 Friday Close: $148.69 5-day change: 3.65%
Starting a New Wheel: Selling a Cash-Secured Put on AAPL - AAPL's Current Price: $148.69 - Capital Needed: $14800.00 - Sell at the Expiration Date: 2021-11-12 - Select the Strike: $148 - Premium you'll receive: $315.00 - Cost Basis: $148.00 - $3.15 = $144.85
Starting a New Wheel: Selling a Covered Call on AAPL - AAPL's Current Price: $148.69 - Capital Needed: $14869.00 - Sell at the Expiration Date: 2021-11-12 - Select the Strike: $149 - Premium you'll receive: $365.00 - Cost Basis: $148.69 - $3.65 = $145.04
AMD Monday Open: $111.90 Friday Close: $119.82 5-day change: 7.07%
Starting a New Wheel: Selling a Cash-Secured Put on AMD
- AMD's Current Price: $119.82
- Capital Needed: $11900.00
- Sell at the Expiration Date: 2021-11-12
- Select the Strike: $119
- Premium you'll receive: $480.00
- Cost Basis: $119.00 - $4.80 = $114.20
Starting a New Wheel: Selling a Covered Call on AMD - AMD's Current Price: $119.82 - Capital Needed: $11982.00 - Sell at the Expiration Date: 2021-11-12 - Select the Strike: $120 - Premium you'll receive: $533.00 - Cost Basis: $119.82 - $5.33 = $114.49
NKE Monday Open: $157.31 Friday Close: $163.48 5-day change: 3.92%
Starting a New Wheel: Selling a Cash-Secured Put on NKE - NKE's Current Price: $163.48 - Capital Needed: $16000.00 - Sell at the Expiration Date: 2021-11-12 - Select the Strike: $160 - Premium you'll receive: $173.00 - Cost Basis: $160.00 - $1.73 = $158.27
Starting a New Wheel: Selling a Covered Call on NKE - NKE's Current Price: $163.48 - Capital Needed: $16348.00 - Sell at the Expiration Date: 2021-11-12 - Select the Strike: $165 - Premium you'll receive: $385.00 - Cost Basis: $163.48 - $3.85 = $159.63
SBUX
Monday Open: $111.44
Friday Close: $114.55
5-day change: 2.79%
Starting a New Wheel: Selling a Cash-Secured Put on SBUX
- SBUX's Current Price: $114.55
- Capital Needed: $11400.00
- Sell at the Expiration Date: 2021-11-12
- Select the Strike: $114
- Premium you'll receive: $264.00
- Cost Basis: $114.00 - $2.64 = $111.36
Starting a New Wheel: Selling a Covered Call on SBUX - SBUX's Current Price: $114.55 - Capital Needed: $11455.00 - Sell at the Expiration Date: 2021-11-12 - Select the Strike: $115 - Premium you'll receive: $315.00 - Cost Basis: $114.55 - $3.15 = $111.40
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Sean
Q: I have begun setting up my portfolio for the long term. I plan on starting with AAPL, AMD and MSFT. Is this too heavy on tech stocks? I have 3 other ETF positions going already. Thank you!
A: If you want to diversify, you can consider adding some retail or financial stocks like COST or V. You can also consider buying ETFs that track the S&P 500 like SPY or VOO. We like having a well balanced portfolio :). At the end of the day, it is up to you to decide what you would like to do with your portfolio.
Tony
Q: Hey Steve, just for my own curiosity, do you have any recommendations of resources to get a better idea of the math behind options?
A: You can consider reading The Options Playbook, which can be purchased on Amazon. However, we do recommend to keep your trading simple as there is a multitude of different strategies out there and the mathematics can often be overbearing for people.
Gary
Q: I have 100 shares of AMD at $109.97 and my sold covered call is set to expire at 10/29 at $300 premium. Should I buy back the call right now at $1080 asking and sell another call?
A: We would not recommend buying the option back since you will be purchasing the option back for a higher price than you initially sold it for. Keep in mind that AMD earnings are coming up this week and IV for all options are generally higher. This means that if you purchase the option back, you will most likely buy it back with an inflated extrinsic value. You can let the contract expire, get your shares called away, and restart your Wheel the following week, if you choose to continue to spin the Wheel on this stock.
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Upcoming Earning:
Remember that with earnings coming up, stocks may sometimes sell-off right after companies deliver their reports. This is totally normal as many institutions like to take a profit from the quarterly run up in the stock price. Make sure to do you own due diligence and keep your eyes open this week to see how well companies perform.
Stay patient! Great things are coming your way!
-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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