Hey Wealth Builders!
The S&P500 closed one of the best weeks since June as a report on Thursday showed slowing inflation and raised hopes that the Federal Reserve would soon slow with raising interest rates. The Consumer Price Index rose 7.7% for the year ending in October, a much slower pace of increase than the 8% economists had expected and the lowest annual inflation reading since January.
Technicals 📈
Here's this week's heat map:
SPY
Looking at SPY, which tracks the S&P500, I've adjusted some lines according to new data points in the past few days. I'd say that we are currently in a short-term upward trend.
However, if we zoom out, you may notice that we're still trading in between our downward trending channel. One of our biggest barriers is the resistance line that we've rejected three times already. I've denoted this resistance line in green.
Though there was some positive news with CPI decreasing, we still aren't too sure how the Federal Reserve will respond, specifically with slowing or pausing interest rate hikes.
In this market, I think we are still sensitive to any negative news, even if the news is small.
What am I doing? I'm still going to wait for us to break above the green resistance line before I become a little bit more comfortable with investing heavier. I'm also keeping an eye to see if we surpass the $431 level as this is the previous high that we hit in August. Remember that an upward trend requires higher highs and higher lows. I'll keep you all posted with what I see in the next couple of weeks.
QQQ
With a quick glace at QQQ, which tracks the NASDAQ, you'll notice that the tech-heavy ETF has not broken its yellow resistance.
DIA
However, DOW30 components in the DIA broke above this week. I would like to see if we can get above the previous high of $342.
And as a side note, remember that DOW30 components (ex. AAPL, V, MSFT, SBUX, NKE, HD, etc) are typically more steady than high growth tech stocks in the NASDAQ (ex. SQ, AMD, AMZN, etc.), especially during market uncertainty. Moving forward, I suggest that we take a look at our portfolios to see if we are properly balanced with more of these Steady Eddies.
AMD
Looking at AMD, we hit the $72 resistance line this week. If we break above, our next area of resistance would be around $84.
SBUX
Since SBUX broke the $93 level, I will be slowly adding some shares to my portfolio.
AMZN
Lastly, AMZN hit it's $100 resistance line.
The $100 level served as a level of resistance back between 2018-2020. If we break above, we may fill in the $104 to $110 gap in the short-term.
Steve's Trades
Just like the previous weeks, I'm not starting any new wheels (selling covered calls and cash-secured puts) at the moment. I am, however, still selling call options against some of my initial shares while setting up bear call spreads. I've been rolling out my covered calls to the January 2023 expiration dates, at around delta 0.10s.
As we discussed last week about AMZN being a bit oversold and having a short-term rally, you can now consider setting up some bear call spreads if you feel comfortable.
If you recently set up any bear call spreads, didn't close your positions, and the underlying stock rallied, you may see that the stock price may come close to your second leg strike. Usually with a swift rally, there is a bit of a break afterwards. Again, by setting up bear call spreads with the method I use at Call to Leap, you are willing to purchase shares to cover yourself in case the underlying stock rises too fast.
AMZN Bear Call Spreads:
Expiration Date: December 30, 2022
Step 1: Buy 1 $145 strike call option (delta 0.03) for $25.
Step 2: Sell 1 $119 strike call option (delta 0.15) for $94.
Step 3: Set up a buy stop order for 100 shares for $106 to cover
Credit received: $94 - $25 = $69 per spread
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:
Q1: Set Buy Stop Order-can you explain this more and why it's important?
A: Great question! The buy stop order serves as a way to purchase 100 shares to cover yourself just in case the underlying stock expires at or above your second leg (sold call option). If the underlying stock price expires at or above our second leg, we are required to deliver 100 shares. Here is why it is important:
If we do not set up a buy stop order and the underlying stock is above our second leg, we must purchase 100 shares at a higher price and deliver them at a lower price, resulting in a loss. Example: Let's say we are at expiration and our second leg is at $100, but underlying stock is at $110. If we do not have 100 shares to deliver at $100, we are required to purchase 100 at $110 and deliver it at $100. This is a $1,000 loss. This is why it is important to buy 100 shares below your second leg (buy stop order) so you can deliver them if the underlying stock expires at or above your second leg and avoid significant losses if the stock continues to rise.
Q2: Help! I opened a BCS on the CTL Friday (11/4) recommendations. I accidentally bought for the 23 January date, instead of the December 23 dates. I'm guessing it's the same situation since the markets are up now - I can buy back at a loss (roughly $200 right now), or let it ride and make a $100 ($109 buy stop, $110 strike) if the price is above the $110 on 23 January. I may miss out out on gains, but I won't lose. It that right??
A: Overall, you were able to make some premium from the credit spread you collected. Since the underlying stock has not hit your buy stop order yet, you can consider waiting to see where the stock moves.
If you are comfortable purchasing 100 shares at $109, you can consider letting it ride out. Once you are triggered into purchasing 100 shares you can consider selling back your first leg for a profit. You will now be left with 100 shares and your second leg which is now essentially a covered call. If the underlying stock expires at or above your second leg, then you would also make an additional $100 in capital gains.
To answer your question, you won't be able to capture any additional gains if the stock goes beyond your second leg's strike price as you are contractually obligated to deliver your 100 shares at the selected strike.
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📌Join Our Discord 💬
Investing, trading, and building wealth was a lonely journey for me. This is why my team and I created a Discord group for you and the other members to shares ideas and support one another. You don't have to go through it alone as we're all here to help. 😉
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.
Hang in there everyone. Hopefully with the new CPI data, the Federal Reserve will be data dependent and slow/pause interest rate hikes. When this happens, there is a high probability that the stock market will begin a new bull market.
-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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