Hi Advanced Traders!
Grab a cup of coffee and notebook because there are a couple of topics I want to go over this week for you to think about as we move forward in this market.
1. Converting Your Spreads Into Covered Calls
Some of you may have gotten triggered into buying 100 shares for your second leg of your spreads. This happened to me this week when I was triggered into buying 100 shares of AMD for $124 to cover for my $125 strike leg. When this happens, I will typically sell my first leg and have a covered call trade left over since I now have (1) 100 shares and (2) a sold call. I usually don't mind having my newly purchased shares bought away from me if the stock continues to move higher since I would have already collected the premiums and collect the $100 capital gain.
However, since the markets pulled back, particularly with AMD, I bought back and rolled out (BBRO) my call option. My second leg dropped from $120 to $20, and I bought to close my call option. I then sold a 4-week out call option at the same $125 strike to collect more premium and continue my AMD covered call trade.
If you used margin to buy your shares, you can consider increasing the probability of selling your shares by choosing to sell a lower strike, preferably at the strike price that you purchased your 100 shares for. You will get a higher premium up front and be selling at a higher delta, which serves as an approximate probability of your shares being called away.
2. Cycling Your LEAPS
If you recently purchased LEAPS and your underlying stock rallied, you may have noticed that your LEAPS option may have quickly gained around 5-10%, which you hopefully took profits from by "selling to close" your LEAPS.
Sometimes it's okay to take a quick profit because in the end, all money is good money. There is nothing wrong with locking in your $250-500.
When you buy your LEAPS and your underlying stock rallies, you may also notice that the delta also increases. For example, you may see a $5,000 delta 0.70 LEAPS turn into a $6,000 delta 0.75 LEAPS. If this is the case, you can sell your LEAPS, use the $1,000 profit to purchase more long-term shares of dividend paying stocks or ETFs, and re-enter again with a new delta 0.70 LEAPS, which may often cost around the same or a little more than the initial $5,000 delta 0.70 LEAPS.
To simply this, you can (1) buy a LEAPS, (2) sell your LEAPS for a profit, (3) use your profits to buy long-term shares, and (4) repeat the cycle by buying another LEAPS.
This is a strategy that I've used time and time again to compound my portfolio since I am reinvesting my stock market profits to increase my overall long-term share count.
What's the goal of this wealth game we're playing? It's to see who can collect the most number of appreciating shares as possible by the time we decide to retire or become work-optional. Remember that each share is like a little worker for your business. Not only do they bring money to you each quarter via dividends, they also grow in value. All wealthy people have a huge number of assets, whether it's in stocks or real estate, and they bring them some sort of passive income each month, quarter, or year.
Always keep the big picture in mind.
3. LEAPS
You can still consider purchasing LEAPS at this time. However, make sure that you follow our LEAPS purchasing guidelines.
This week, I am eyeing MSFT, AAPL, and NKE LEAPS. If you are going to purchase any, I would only favor those with a delta higher than around a 0.65 and an expiration date of 2024. Also, if your LEAPS go south, I want you to be ready to convert them into PMCC's.
Please be responsible with your LEAPS purchases. 🙏
4. Setting Intentions
Lastly, we ought to talk about setting intentions with our investments and trades.
When stocks go down, people become fearful because their long-term holds, underlying stocks for their wheels, and LEAPS options drop in value.
When stocks stay neutral, people get frustrated because they don't see their long-term holds appreciate as fast as they wish.
When stocks go up, people complain about how they wish they had gotten into particular assets earlier or that their bear call spreads and covered calls are going to be exercised.
When we buy long-term holds, our intention is to hold onto them for at least 2-5 years, or if their fundamentals change.
When we sell covered calls, our intention is to collect the upfront premium as income and be okay to let our shares go at the strike price that we chose. We are still making money either way.
When we set up bear call spreads, our intention is to let the markets drop or stay neutral. We are also okay to let our underlying stock rally because we are able to convert our trades into a covered call, which again, also makes money.
When we buy LEAPS, our intention is to either (1) quickly sell them when they hit a 5-10% profit or (2) hold them until the next quarter or two before the underlying stock's earnings report.
Remember that we must be intentional with all of our trades and investments and be okay with whatever happens in the market. All in all, we are long-term investors and we trade for short-term income, which we either use to fund our lifestyle or reinvest back into long-term holds.
Have a wonderful weekend! You got this!😀
-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.