Hi Wealth Builders! 👋
Perhaps no better picture sums up this past week than the BG Dab..
What happened in the markets this week?📊
Markets posted solid gains this week with the S&P500 and Dow Jones increasing by 0.9%, while Nasdaq added 1.3%. The big movement I alluded to last week turned out favorable as GOOGL, MSFT, and META all pleased investors with their earnings results. Notable mention is AMZN which did rally but gave it all back after warning investors about cloud headwinds.
What was newsworthy this week:
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Tech rally this week boosts U.S. markets
What happened: Most Big Tech companies have reported earnings this week and investors are pleased, awarding companies like MSFT ~8%+ and META ~13%+
Why it matters: The influence of Big Tech has dominated the markets for many years so the direction and magnitude of movement in the sector heavily influences overall market health and direction.
My thoughts: We've all seen the layoffs in the news so I feel that the "belt tightening" throughout the tech sector is starting to appease some investors. Taking a long term view, I won't be surprised once we enter into the next era of exuberance that spending will become much more lax again. As I always encourage my members...do your own homework! For companies of this size, there's a fine balance between continued investments in innovation vs. bad strategic planning so make sure you understand where your portfolio companies are investing and how are they spending.
Q1 GDP grew 1.1%
What happened: Reports show that the U.S. GDP expanded by 1.1% (annualized).
Why it matters: Keeping an eye on overall macroeconomic signals give clues to how these impacts will trickle down to the companies we invest in.
My thoughts: I look at two things whenever we're talking about GDP: 1) period-over-period change 2) multi-period trend. In this case, our period-over-period change as 1.1%+ meaning our economy "expanded" by 1.1%. Of course, that's lower than the 2.0% estimate but positive growth is good considering all that's happening at this time. Looking at the multi-period trend, I see a deceleration where we had 2.6% growth in Q4 (vs. 1.1% this quarter). This is unsurprising because of efforts by the Fed to combat inflation (i.e., fastest rate hikes in decades) though I expect the Fed to be a bit more careful now because if we extrapolate the same GDP trend going into next quarter, we will be at ~0% growth. The Fed must balance between combating inflation and single-handedly creating an uncontrollable recession.
First Republic needs rescuing
What happened: As of Friday, various parties (e.g., U.S. government, big banks, private equity groups, etc.,) are in talks to save First Republic Bank after they revealed last week that Q1 deposit outflows surpassed $70B.
Why it matters: First Republic is the next bank needing rescue (after SVB and Signature) and how regulators react will be telling on how much future support and the types of aid banks in trouble can expect to receive. If any solution comes from the private sector, that solution can also serve as an additional option.
My thoughts: The banking crisis is not over and there's more below the tip of the iceberg that will take time to be revealed. I feel regulators didn't immediately swoop in the take control of First Republic like they did SVB was to "pace themselves" and pace the rate of panic from investors. If the government goes around taking over banks rapidly, it would signal a lack of confidence in the banking sector. That's why I feel the government is letting private sector take a first stab at coming up with a solution and bringing back consumer confidence in the sector.
Steve's Trades
1. SBUX Cash Secured Put
Expiration Date: June 16, 2023
Step 1: Have $10,500 of cash as collateral
Step 2: Sell 1 $105 strike put option (delta -0.19) for $138
Credit/premium received: $138
2. SBUX Bear Call Spread
Expiration Date: June 16, 2023
Step 1: Buy 1 $145 strike call option (delta 0.01) for $5
Step 2: Sell 1 $125 strike call option (delta 0.17) for $80
Step 3: Set a buy-stop order of 100 shares at $124
Credit/premium received: $80 - $5 = $75
In setting the $125 lower strike in our BCS, I'm being a bit more conservative in case we see a pullback in SBUX. Based on the SBUX RSI of 80+ (a metric that tells us whether a stock is oversold or overbought), we are in overbought territory. In addition, given upcoming earnings release next week, we can place this trade 30 minutes before SBUX reports to take advantage of the IV (implied volatility) crush. Typically right after earnings, the Implied Volatility decreases rapidly as previously critical information is revealed.
Ask Steve 🤔
Q: If I were to buy put leaps, what delta should we be looking at? more than 0.70 delta with 1 year to expiration date?
A: Yes, I would choose around a delta 0.7 and higher with at least a year expiration. These LEAPS have higher intrinsic value because they are deep in the money (DITM) and have lower risk of theta decay. However, I don't like buying LEAPS options since the markets typically like to move higher rather than lower.
Q: I think there was error on the level 3 , basic bear call explanation, we should be receiving 100 premium due to premiums we have collected (120-20), additionally, with capital gain of 100 , on top of 2nd leg of the increment of calls purchased.
A: So when we set up a BCS, we first buy a far OTM call and then sell a call against it at a lower strike. The difference in premium is our net profit. In the example mentioned above, we had a net profit of $100 if we bought a call for $20 and sold a call against it for $120. If we are triggered into buying 100 shares and the stock ends up expiring at our second leg ($1 more than what we purchased 100 shares for), then we would also make $100 in capital gains, bringing our total profit to $200.
Q: When we talk about holding stocks for dividends, does having sell put options on that stock entitled for the dividends?
A: No. You will have to own the actual shares before the ex-div date to obtain dividends on the next payout date.
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Stay disciplined everyone! I know that people usually get excited with these rallies, but be mindful that there is still some uncertainty with the Fed and them raising interest rates. Also be mindful that we are getting close to earnings season at the end of April, which means that there are going to be some volatile weeks.
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.