Hey Wealth Builders!
We had a huge stock market sell-off this week after the Federal Reserve bumped up interest rates by another 75 basis points (as expected) and gave another shaky warning that they will continue to increase interest rates to combat inflation. Surprised? Eh, not really.
Technicals 📈
Here's this week's heat map:
SPY
Last week's rally was a bit short-lived. I'm still keeping my guards up with not adding anything to my portfolio just yet as we get more data points in the charts. It's possible that we may still be moving higher, but we would need more data points to confirm this trend.
Keep in mind that mid-term elections are coming up this week. I want to see if this serves as a catalyst to ignite the markets.
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 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.
If you recently set up any bear call spreads, hopefully you were able to close out your positions and lock in your profits.
As always, remember that we typically like to automatically close our profits when our bear call spreads decay to 50-80% of their value.
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.
AMZN Bear Call Spreads:
Looking at the technicals, we may be in some short-term oversold territory since our RSI (relative strength index) is around 23. Remember that when RSI drops to somewhere around in the 20's, it may give us a signal that we may bounce back, at least in the short-term.
With that said, I still see that AMZN is in a downward trend. This means that we can wait for a potential rally this upcoming week before setting up the trade.
Or, when in doubt, you can split the trade out. You can set up a bear call spread now, and set some up later.
Be mindful that mid-term elections are coming up, meaning that news from this event may spark some sort of movement in the markets. If you don't feel comfortable with the volatility, you can sit this one out.
Expiration Date: December 23, 2022
Step 1: Buy 1 $140 strike call option (delta 0.01) for $11.
Step 2: Sell 1 $107 strike call option (delta 0.16) for $98.
Step 3: Set up a buy stop order for 100 shares for $106 to cover
Credit received: $98 - $11 = $87 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.
Earnings
Remember that one of the primary drivers of the stock market is revenue. Yes, there are other metrics like future guidance, monthly active users, etc. But at the end of the day, what Wall Street really cares about is if a company is still consistently generating revenue. The stock price of companies may not automatically be reflected now since a lot of the buying and selling are based on emotion/sentiment and algorithmic trading. But in the long term, a stock has an incredible tendency to rise if the company is making increasing revenue.
SBUX
SBUX reported a record $32.3 billion in top line revenue, which is an 11% increase year-over year from $29.1 billion.
Company-operated stores generated $26.6 billion, a 8% year-over-year increase.
Licensed stores generated $3.7 billion, a 36.2% year-over-year increase.
Global comparable store sales increased 8%, driven by a 5% increase in average ticket and a 2% increase in comparable transactions
North America comparable store sales increased 12%, driven by a 7% increase in average ticket and a 5% increase in comparable transactions.
International comparable store sales decreased 9%, driven by a 5% decline in comparable transactions and a 4% decline in average ticket.
Overall, it seems that Wall Street is favoring this stock again as there has been a steady increase in price over the couple of months. Looking at the short-term technicals, it seems that we tested the $93 resistance level. If we are able to break through, I may add a couple of more shares to my portfolio.
Here is the 5 year long-term trend:
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Q1: Prior to getting into options trading, I had accumulated a large number of stock in one
particular stock. I bought it when it was really low and also when it went up really high as I really believe in this stock. It is now heading back to even lower to when I initially purchased the stock so my question is: Should I open up another trading account with another brokerage. As if I want to do covered calls on when it was low back with my 2019 purchases, that would be fine; however, if I want to acquire more stock, regardless if I do LIFO or FIFO, I'm going to have to possibly sell my stock that I really want to keep at the lower price versus if I open another brokerage account, the LIFO stock, will be at the higher price and I won't care if that gets called away once the market does retrace. The stock I have purchased has been between $14-$70. The stock price is back down to $13 currently.
A: What you do with your portfolio is completely up to you. If you want to make your trading and long-term investing more simple, you can have an account designated for each. This is what some members do too to reduce confusion.
As a reminder, we typically only invest in companies that are part of the S&P 500 and/or DOW 30, have a strong upwards trend, have strong fundamentals and pay a dividend. Perhaps the reason why the stock you are speaking of has dropped significantly is because during times of uncertainty, these stocks that don't have the above mentioned criteria are typically the ones that are sold off the fastest because they are riskier.
Q2: If the price at the expiration date is lower than the strike price, I understand that I still get to keep the premium, but what happens to the shares I bought. I understand that "Craig" will no longer buy my shares but do I still get to keep the shares or I have to sell all the shares away at the lower price at the expiration date?
A: When selling covered calls, if the underlying stock price is BELOW your strike price at expiration, you keep your premium and your shares.
Q3: Not sure if this went through, but I've had some confusion on BCS. Do I need to have the "Spreads" trading option on my brokerage account? In the videos it mentions not actually buying the calls (unless it doesn't expire worthless) but I can't seem to get it to do that (I do not have the "Spreads" level of options trading).
A: Yes, you need to be approved for level 3 options trading which allows you to set up spreads. If you are not approved for spreads, you can consider applying or reaching out to TD Ameritrade's customer support for help.
To review, when setting up a BCS, we buy a far OTM call and then sell a call against the call we initially purchased at a lower strike. The difference in premium is our net profit.
Once we do this, we then set up a buy stop order for 100 shares $1 below our second leg (sold call option). We do this just in case the underlying stock rises. If our buy stop order is triggered and we purchase 100 shares, we now have shares to deliver at our second leg if the underlying stock expires at or above our second leg. We would also make a $100 profit if our shares are called away.
Q4: If I am already saving for the long term by maxing out my Roth IRA which already invests in S&P 500 related ETFs, Index Funds, etc., would it be okay to use another account to only use the wheel strategy?
A: Great job on maxing out your Roth IRA! You can absolutely consider having another account dedicated to options trading. Many of our members have different accounts for different investing/trading strategies!
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I'm curious to see how the markets are going to react to the mid-term elections this week. Hang in tight and stay disciplined with paying yourself first!
-Steve and the Call to Leap Team
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