Hey everyone!
We had some great earnings that came out this week. However, looking at the overall markets, like SPY and QQQ, we might be running a little high in the charts.
LEAPS
I know. IV is lower right now since many of our favorite companies delivered their earnings. It's up to you if you want to buy LEAPS options now. For me personally, I may want to wait a little bit to see how to markets open up for the first week of May. I would also like to see more earnings come out and how the markets react. I think the markets are a little high right now and there might be some temporary storms ahead due to fears of rising interest rates, inflation, and tax.
If you want to purchase a LEAPS option, I would play it conservatively by purchasing between a delta 0.70-0.80 LEAPS option first. The underlying stocks I recommend are MSFT and AAPL.
MSFT LEAPS
Expiration Date: June 16, 2023
Delta: 0.75
Strike: $200
Premium: $7100
AAPL LEAPS
Expiration Date: June 16, 2023
Delta: 0.77
Strike: $100
Premium: $4060
I would recommend selling your options if the underlying stock moves up around $5, or when your option value gains around $200-400.
Please do not break discipline and buy 20 LEAPS options, or even worse, short-term OTM options. We know some members who did this in the past and their portfolios were crushed. We recommend following the guidelines outlined in our Level 2 video series.
Bear Call Spreads
On the other hand, I would also recommend setting up some bear call spreads on AMD and PINS, just in case we trend neutrally or even have a temporary pullback. I know some of you tried your first bear call spread last week and were amazed on how fast your option legs can shrink right after earnings, letting you profit from the IV crush.
PINS Bear Call Spread
Step 1: Buy one June 4, 2021 call option at the $105 strike for $10 (Delta 0.01)
Step 2: Sell one June 4, 2021 call option at the $75 strike for $121 (Delta 0.24)
Step 3: Set a buy stop order for 100 shares at $74.
Profit: $121 - $10 = $111 per contract
AMD Bear Call Spread
Step 1: Buy one June 4, 2021 call option at the $120 strike for $12 (Delta 0.02)
Step 2: Sell one June 4, 2021 call option at the $90 strike for $108 (Delta 0.22)
Step 3: Set a buy stop order for 100 shares at $89.
Profit: $108 - $12 = $96 per contract
The goal for these trade is to have PINS and AMD stay below the strike of the sold call option.
Just like last week, I recommend setting up bear call spreads on a 1:1 ratio to your covered calls on AMD. For example, if you have 5 Wheels on AMD, you can set up 5 bear call spreads. This way, not only are you collecting premium from your covered calls on AMD, you are also collecting premium from the bear call spreads.
Remember that even though the expiration date is June 4, 2021, you don't necessarily have to wait until then to close your position. You can close your position at any time, especially if your option values have decayed to around 50%. You can then set up another round of bear call spreads with a further expiration date. You are essentially "buying back and rolling out" your spreads.
If you are brand new to setting up bear call spreads, you can consider just setting up one first to observe how the price of your spread fluctuates.
Happy trading and investing! 😎
-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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