Hey Everyone!
We had a pretty wild week! We had a major sell-off on Monday followed by retracement. If you didn't look at your accounts this week, you probably didn't see any change since we fell right back to where we were last week.
Here's SPY:
Here's QQQ:
Here's DIA:
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 already have your prior wheels spinning, you can keep selling calls against your initial shares to collect premium. If you are new to trading and/or are uncomfortable with the volatility, you might want to wait until after earnings before starting a wheel.
Here are some trade recommendations and see what fits your personal risk-tolerance:
MSFT Monday Open: $296.33 Friday Close: $299.35 5-day change: 1.01%
Starting a New Wheel: Selling a Cash-Secured Put on MSFT - MSFT's Current Price: $299.35 - Capital Needed: $29500.00 - Sell at the Expiration Date: 2021-10-22 - Select the Strike: $295 - Premium you'll receive: $440.00 - Cost Basis: $295.00 - $4.40 = $290.60
Starting a New Wheel: Selling a Covered Call on MSFT - MSFT's Current Price: $299.35 - Capital Needed: $29935.00 - Sell at the Expiration Date: 2021-10-22 - Select the Strike: $300 - Premium you'll receive: $628.00 - Cost Basis: $299.35 - $6.28 = $293.07
AAPL Monday Open: $143.80 Friday Close: $146.92 5-day change: 2.16%
Starting a New Wheel: Selling a Cash-Secured Put on AAPL - AAPL's Current Price: $146.92 - Capital Needed: $14600.00 - Sell at the Expiration Date: 2021-10-22 - Select the Strike: $146 - Premium you'll receive: $294.00 - Cost Basis: $146.00 - $2.94 = $143.06
Starting a New Wheel: Selling a Covered Call on AAPL - AAPL's Current Price: $146.92 - Capital Needed: $14692.00 - Sell at the Expiration Date: 2021-10-22 - Select the Strike: $147 - Premium you'll receive: $335.00 - Cost Basis: $146.92 - $3.35 = $143.57
AMD Monday Open: $101.58 Friday Close: $105.80 5-day change: 4.15%
Starting a New Wheel: Selling a Cash-Secured Put on AMD - AMD's Current Price: $105.80 - Capital Needed: $10500.00 - Sell at the Expiration Date: 2021-10-22 - Select the Strike: $105 - Premium you'll receive: $335.00 - Cost Basis: $105.00 - $3.35 = $101.65
Starting a New Wheel: Selling a Covered Call on AMD - AMD's Current Price: $105.80 - Capital Needed: $10580.00 - Sell at the Expiration Date: 2021-10-22 - Select the Strike: $106 - Premium you'll receive: $395.00 - Cost Basis: $105.80 - $3.95 = $101.85
NKE Monday Open: $153.73 Friday Close: $149.59 5-day change: -2.69%
Starting a New Wheel: Selling a Cash-Secured Put on NKE - NKE's Current Price: $149.59 - Capital Needed: $14500.00 - Sell at the Expiration Date: 2021-10-22 - Select the Strike: $145 - Premium you'll receive: $212.00 - Cost Basis: $145.00 - $2.12 = $142.88
Starting a New Wheel: Selling a Covered Call on NKE - NKE's Current Price: $149.59 - Capital Needed: $14959.00 - Sell at the Expiration Date: 2021-10-22 - Select the Strike: $150 - Premium you'll receive: $470.00 - Cost Basis: $149.59 - $4.70 = $144.89
PINS Monday Open: $53.75 Friday Close: $54.20 5-day change: 0.83%
Starting a New Wheel: Selling a Cash-Secured Put on PINS - PINS's Current Price: $54.20 - Capital Needed: $5400.00 - Sell at the Expiration Date: 2021-10-22 - Select the Strike: $54 - Premium you'll receive: $213.00 - Cost Basis: $54.00 - $2.13 = $51.87
Starting a New Wheel: Selling a Covered Call on PINS - PINS's Current Price: $54.20 - Capital Needed: $5420.00 - Sell at the Expiration Date: 2021-10-22 - Select the Strike: $55 - Premium you'll receive: $185.00 - Cost Basis: $54.20 - $1.85 = $52.35
SBUX Monday Open: $111.35 Friday Close: $114.11 5-day change: 2.47%
Starting a New Wheel: Selling a Cash-Secured Put on SBUX - SBUX's Current Price: $114.11 - Capital Needed: $11400.00 - Sell at the Expiration Date: 2021-10-22 - Select the Strike: $114 - Premium you'll receive: $231.00 - Cost Basis: $114.00 - $2.31 = $111.69
Starting a New Wheel: Selling a Covered Call on SBUX - SBUX's Current Price: $114.11 - Capital Needed: $11411.00 - Sell at the Expiration Date: 2021-10-22 - Select the Strike: $115 - Premium you'll receive: $283.00 - Cost Basis: $114.11 - $2.83 = $111.28
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
John
Q: Thanks for all the help so far! I have a question about the 30-30-30-10 allocation, but more so about the Wheel. In your team's experience, has doing the Wheel gotten you better results than if you had not? Say your friend did 45 (div)-45 (growth)-10 (cash) and invested in the same stocks and duration. Can you say that the Wheel helped you perform better than your friend? I ask this because in the past 10 years, we've mostly seen a bull market and the Wheel does better in neutral markets.
A: This is such a great question. In short, we believe utilizing the Wheel Strategy gets us better results than not utilizing the strategy. One of the reasons is because with the wheel, we make guaranteed premium each month and potential capital gains that we can then re-invest into long-term holds that can allow us to exponentially grow our wealth over time. Another reason is because we are not always in a bull market.
When you talk about the last 10 years, overall it has risen, but during those 10 years we also had corrections, crashes, pullbacks and times when the market trended neutral. Someone who did not use the wheel during these times and only held their long-term shares and did not "gain" anything.
When you invest in a long-term hold, the only way you "make money" is when the stock goes up. Therefore, these long-term holders who didn't use the wheel, had to wait for their shares to retrace and rise higher to make more unrealized gains. Those who traded the wheel during these times however, took advantage of these conditions and still made money.
When you sell covered calls during bull markets, you can consider selling far OTM to decrease your chances of getting called away. This way, you still get a little premium and it allows you to capture the gains of the stock. Consider zooming into the charts to see these fluctuations.
Kenneth
Q: I was assigned AMD shares at $112 strike on Friday on my expiring put option when AMD hit $104. I'd planned on selling a CC on Monday at or near my strike, but AMD has gone down further to $99. Should I wait for it to retrace a bit before selling a CC closer to original strike? Or do you sell CC at lower strike and try to recoup via premiums?
A: You can consider selling a covered call at the price you were assigned at. We try not to time the market. The wheel strategy is a very passive strategy and we believe that the numbers are still great in the long-term. Because we are in a pullback, you can consider selling it 5 weeks out for more premium.
Joe
Q: What would capital/portfolio need to be to earn $5000.00 monthly? $7500.00 monthly? $10,000.00 monthly? applying the strategy.
A: Our goals are for our members to get a 2.5%+ return on their money each month utilizing the wheel strategy. This percentage varies based off of the market conditions and the stock you're doing the wheel on. Let's say we can get a minimum of $250 premium per AAPL contract.
AAPL is currently trading at $143. So each contract would cost you $14,300 to make you $250 in premium. So you divide your goal monthly income by the premium you can make per contract and see how many contracts you would need to make $5,000 a month. You would then multiply the amount of contracts needed by how much 1 contract costs.
Example: $5,000 (Desired monthly income) divided by $250 (Premium per contract) = 20 contracts needed.
1 AAPL contract costs $14,300. You need 20 contracts (for a $5,000 monthly return) so multiply: $14,300 x 20 = $286,000 capital needed.
A $5,000 monthly return on your investment of $286,000 is a 1.74% return. These numbers were conservative, as you may get $300+ from selling an AAPL contract. Feel free to play with these numbers.
George
Q: Hi Steve! I recently signed up for your premium membership, and started the process of selling my first CSP. I opened a CSP for NKE on 8/30 with an expiration date of 9/24 (not realizing that the exp. date falls on the earnings date for NKE). The stock price when I began was $167 and my strike price is $165. If NKE is below $165 by this Friday, which looks likely, how should I proceed on selling a CC for NKE if it stays around its current price ($154)? Thanks!
A: Congratulations and welcome to our wealth building community! We are excited to be a part of your financial freedom journey! If at expiration you get assigned the shares, you can sell a covered call at the same strike price you were assigned at, which looks like $165. You will most likely receive less premium for your covered call, as your strike price is further OTM.
You can also consider selling your next covered call by choosing a strike price closer to your cost basis. So if you were assigned your 100 NKE shares at $165 and received a $400 premium, your new cost basis would be $161. You can consider selling at a strike between $161 and $165, depending on your risk tolerance of you wanting to get your shares called away at expiration.
All in all, we recommend being patient and wait for the underlying stock price to retrace back up again.
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 Level 1 page. 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.
Technical Analysis 📈📉
PINS:
PINS is still trending sideways and a little down. If you already have shares for your Wheels, you can keep selling OTM calls to collect premium. They may not be that much, but stay patient. The company has earnings coming up in about a month. It is possible that PINS breaks out of the orange resistance line in the next couple of weeks and runs up towards its earnings date.
AAPL:
AAPL seems to be holding on above the $143 support line. From past quarters, AAPL typically likes to sell off after earnings and then run up into the next. I'm thinking that AAPL might do the same again.
AMD:
AMD is still drifting sideways and approaching the yellow support line. It is totally possible that AMD might kiss the $100 level again and I want to see if the line holds. If you are part of our Premium Membership, you can continue to set up your spreads on this one as we patiently wait for the stock to retrace.
MSFT:
MSFT, as usual, is still holding near its ATH. If you are selling covered calls on this stock, you'll most likely notice that you're barely getting called away.
HD:
HD is doing well as you can see that retracement has been taking place every since its last earnings date sell-off. I'm still adding more shares to my portfolio.
PYPL:
I am also adding more shares of PYPL to my portfolio as I see that it's holding strong above its green support line. Keep in mind that there might be some volatility as we approach its earnings date in October.
V:
Woohoo! V finally broke out of its downward channel. I am slowly adding more shares to my portfolio for this one.
MA:
And the same goes with MA!
Earnings
We had some earnings this week. Let's take a look at some of these companies' report cards.
COST:
COST reported that their full year sales grew 17.7% to $192.05 billion from $163.22 billion in the 2020 fiscal year. This is the largest year-over-year growth for Costco since the 1992 fiscal year, when sales grew 19.6%! Sales jumped to $61.44 billion from $53.38 billion in the same quarter last year, topping $60 billion in quarterly sales for the first time in the company’s history. Woohoo!
Here's a 5-year chart of COST. Not bad at all!
Let's zoom in a little more.
After COST announced their earnings, you can see that institutional money poured back into the stock and moved it higher. If you like the company and their fundamentals, I recommend adding more shares to your portfolio or to start a small position if you haven't done so already. I believe COST is a great company to hold for the long-term.
NKE:
Nike reported that they earned $1.9 billion in the fiscal first quarter, compared to $1.5 billion in the year-ago period. Quarterly top line revenue rose 16% to $12.2 billion, from $10.6 billion a year ago. However, they said that selling and administrative expenses increased 20% to $3.6 billion and that they have temporary supply chain disruptions.
Here's a 5-year chart of NKE. Looks like a pretty strong uptrend!
Here's a more zoomed in look of NKE's price action.
I believe that increasing expenses from higher wages is expected and that supply chain disruptions will ultimately resolve. NKE still has a strong core business, especially with their digital marketing and sales, and increasing top line revenue. If you want to start a new wheel on NKE, I would wait a couple of days to see when the selling stops and if there is a change in trend. I am still trading this stock and adding more shares to my long-term holds.
ADBE:
ADBE beat Wall Street expectations but recurring revenue figures barely exceeded their estimates. The software company reported third-quarter net income of $1.21 billion, compared to $955 million in the year-ago period. Quarterly top line revenue rose to a record $3.94 billion from $3.23 billion in the year-ago quarter. Yay!
Remember that ADBE makes money by selling subscription services, such as Photoshop and Premiere, which are tools many creatives use to create and edit digital media that you see on Instagram and YouTube. Annual recurring revenue for these services was $11.67 billion. Analysts forecasted $11.65 billion. Adobe expects fourth-quarter revenue of about $4.07 billion, while analysts forecast earnings of $4.04 billion.
Here's a closer look at ADBE.
I still believe ADBE is a wonderful long-term hold. Before adding more shares, I would like to wait until the selling stops and a trend change with higher highs and higher lows. Remember that when a stock goes down, it often just shows that institutions are taking profits from a big gain and that they'll eventually re-enter at a lower price.
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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.
October Pullback? 🎃
Like what we've been discussing for the past couple of weeks, I had a feeling that we were running a little high with the major indices since we haven't had a healthy pullback or correction since last November. Though we did have a larger than normal drop this Monday, which was then followed by a bounce up, I'm still thinking that there may be another pullback or correction looming in the next couple of weeks. Again, I'm writing this because I want to make sure you are emotionally ready and balanced with around a 30/30/30/10 allocation just in case something happens and triggers a market sell-off. This is not to worry anyone because we are always long-term investors first.
Stay patient and disciplined 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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