🔒Premium Membership Positions - January 8, 2023
- Call to Leap
- Jan 6, 2023
- 7 min read
Updated: Jan 13, 2023
Hi Wealth Builders! 👋
U.S. stocks rallied on Friday, with the Dow jumping 700 points, after an employment report showed wage gains slowed in December. The report fueled hopes that the Federal Reserve’s interest rate hikes are starting to have a positive effect on the economy, which will lead to potential rate hike pauses.
Heat Map📈
Here's this week's heat map:
How Are The Major Indices?📊
SPY
Regardless of the rally we had this week, the S&P500 is still in short-term consolidation and still in an overall downward trend. I believe it's important that we still wait for a breakout.
QQQ
QQQ is still near it's previous lows, which still indicate that this is not the best time to invest in high-growth tech stocks that don't pay a dividend.
DIA
And of course, DIA, which tracks the DOW30, is doing well with staying afloat. I am focusing my investments on these components first.
Dividend-Paying Stocks I'm Eyeing
During times of uncertainty, billion dollar institutions focus more of their investments in "boring," dividend-paying stocks that typically have weathered through many past storms.
Here are the same stocks I'm still eyeing. I haven't bought anymore shares since a couple of weeks ago. However, if I observe these stocks continue to trend higher than before and break certain resistance lines, I will be inclined to purchase more. If the stocks drop, I will stay put and do nothing.
V
Visa has a resistance line at $217. I will be adding around 2-5 more shares if it breaks above.
MA
MA has a resistance line at $367. I will be adding around 2-5 more shares if it breaks above.
SBUX
SBUX has a resistance line at $106. I will be adding around 2-5 more shares to my long term holds if it breaks above. I will also be starting new CSP positions.
NKE
Visa has a resistance line at $214. I will be adding around 2-5 more shares if it breaks above.
Remember to let the trend be your friend.
Some of you are still starting new wheels on high-risk underlyings or adding more shares to your long-term holds. Again, you can do what you want with your portfolio. However, market conditions do not favor these growth stocks at the moment. If you continue to add more shares of stocks that are continuously trending downward, you will continue to magnify your unrealized loss.
Stay patient and observe the news and technical trends. Once we see some positive sentiment and a confirmed upward trend, we can then slowly scale into these growth stocks. For now, I would focus more on the steady, dividend-paying, DOW30 components.
Steve's Trades
I'm still selling covered calls against my long-term holds. I'm choosing around delta 0.10s or lower with expiration dates in mid-February.
If you're going to do the same, make sure you choose a strike you are comfortable with. Remember that the markets will rally again sooner or later and you want to be prepared for that.
SBUX Cash-Secured Puts:
If you had cash-secured puts from a couple of weeks ago and see that your option contracts have decayed around 50% or more, feel free to close your positions.
Because SBUX is still trending higher, along with some other DOW30 components, I am going to sell a further OTM CSP.
Keep in mind that they are expected to report earnings on February 2, 2023. If you are not comfortable with the volatility, feel free to sit it out.
Expiration Date: February 3, 2022
Step 1: Have $9,800 of cash as collateral
Step 2: Sell 1 $98 strike put option (delta 0.18) for $102.
Credit/premium received: $102
AMZN Bear Call Spreads:
If you had bear call spreads from a couple of weeks ago and see that your option contracts have decayed around 50% or more, feel free to close your positions.
This week, I'm choosing AMZN as my underlying stock to set up bear call spreads. Looking at the technicals, we are still trending downward with a potential resistance level at around $102.
However, keep in mind that they are expected to report earnings on February 2, 2023. If you are not comfortable with the volatility, feel free to sit it out.
Expiration Date: February 17, 2022
Step 1: Buy 1 $170 strike call option (delta 0.01) for $04.
Step 2: Sell 1 $105 strike call option (delta 0.13) for $83.
Step 3: Set up a buy stop order for 100 shares for $104 to cover
Credit received: $83 - $4 = $79 per spread
Since AMZN is currently around $86, the probability of the underlying jumping to $104 is less probable. This $18 rise in the stock means that the stock must rally around 21% in the next 45 days, which I do not think is very likely. This doesn't mean that it's impossible. It just means that it is not likely. You still want to make sure you are able to cover yourself in case the underlying surpasses your sold strike price.
All in all, make sure to see if this trade fits your own risk tolerance. You can also tweak some of the numbers around so you feel more comfortable. And of course, you can always practice these trades in a paper trading account to understand the numbers better.
As always, please don't get too greedy. Many of you made thousands of dollars during the downward market in the first half of the year. However, some of you had too many spreads open and weren't able to cover yourselves when we had a reversal back up or maybe you set your second leg strike prices too low (close to the money) to get those larger premiums.
Remember that the markets will eventually go back higher in the long run, so it's important that you prepare yourself when this happens.
Trade responsibly and stay patient.
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Q: Hello I just wanted to get my thoughts together. When we buy a call for the strike price at 105 and the current price is 100. If the delta is 50, even if the price never gets to the 105 we would make money if we close our position at 103 making us around 150 dollars?
A: Hi! We're not sure what you are referring to specifically. To clarify, when we are trading the wheel strategy, we are not buying options. We are actually selling covered calls and cash-secured puts instead. To answer your question, we can close out our positions any time we are profitable.
If you are referring to LEAPS and purchase a delta 0.50 LEAPS, as soon as the underlying stock rises (with all variables kept the same), your LEAPS becomes profitable and you can lock in our profits by selling the contract.
For example, let's say that an underlying stock is trading at $100 and we purchased a delta 0.50 LEAPS. As soon as the stock moves up $1 to $101, the LEAPS increases $50 in value. If it moves up $2, the LEAPS increases $100 in value. If the underlying stock does not go anywhere, theta decay eats away at our LEAPS. If the underlying stock drops $1, our LEAPS option loses $50 in value. As always, we can close this position once we are profitable.
If you are referring to purchasing short-term (1 month) options, we do not recommend doing this as it is very risky. Instead, we like to be short-term option sellers as the odds are in our favor.
Q: I sold a CSP on SBUX weeks ago with a 1/20 expiry at a strike price of 90. At this point, I don’t know if it’s better to buy to close the position because theta has decayed the price more than 80% or get assigned and buy the 100 shares and then start selling covered calls. The underlying is currently at $104. Since my cost basis will be below $90 (because of the premium I collected on the CSP), it seems like I could collect a high premium on covered calls. Hope this makes sense. Thanks.
A: Great job on collecting premium! Yes, I would buy to close your position since your option has decayed more than 80%. Your cost basis is not $90 since you did not get assigned the shares. You only collected the premium from selling the contract. You can consider restarting your wheel by selling another OTM cash-secured put with a longer expiration date.
Q: Is it a good idea to have multiple brokerage accounts ex. Robinhood and TD one for long term investments, the other for doing the calls/options trades? Or, can one easily track long term stocks,and stock trades under 1 brokerage account? Or how to keep track of it?
Thank you!
A: Many of our members have different brokerage accounts for different trading strategies. For example, someone may want to have their long-term holds in Charles Schwab and then only trade options in TD Ameritrade. It does get a little tricky when you are selling options and having long-term holds in the same brokerage account. Therefore, if you don't want to accidentally sell your long-term holds, we recommend having two separate brokerage accounts.
Q: I have been having good success with LEAPs and options. Do you recommend LEAPs on SPY? Yes or no, and why?
A: We are not recommending any LEAPS at this time due to the current market sentiment, downward trend, rising rates and geopolitical factors. Once we have a change in trend, positive market sentiment and rates stop rising, we can consider buying LEAPS again. When we do, you can consider buying a LEAPS on SPY. However, we typically like to purchase LEAPS on individual companies between quarters instead. Here we can take advantage of low IV after earnings and high IV before earnings. It is also easier to individually monitor one company that is in a strong upwards trend as opposed to SPY that holds various different companies that are all performing differently and having earnings at different times. Ultimately, what you do with your portfolio is completely up to you.
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-Steve and the Call to Leap Team
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