Hey Wealth Builders!
This week, reports of the Consumer Price Index rose 8.2 percent in the year through September, another high result driven by more costly food, rent and other items. Because of this, the Federal Reserve may now have a higher incentive to lock in another 75 basis point interest rate hike on November 2. So far, the Federal Reserve has raised interest rates five times this year Raising rates decreases demand and is the Fed’s main tool for trying to decrease inflation.
Since the stock market does not like interest rate hikes, we saw some whiplash movement in the markets and an overall drop in the S&P500 this week.
What's Happened? 📈
Here's this week's heat map:
SPY
I was surprised to see a massive rally on Thursday, especially with the CPI coming out relatively high. Of course, we had another sell-off on Friday to erase the majority of the prior day's gains. I believe this type of volatility (or major upward and downward swings) will continue throughout the rest of the year as the bulls and bears fight.
Zooming out, there may be some levels that SPY may retest. If we continue the sell-off, we may retest the $339 level. If we break that level, we may retest the $322 level.
QQQ
Following the same pattern, QQQ, which tracks the NASDAQ100 tech companies, had a steeper drop. Again, notice that the components that make up this index dropped at a faster rate compared to the S&P500 and DOW30. This is why I've been mainly staying away from high-growth, tech stocks that don't pay a dividend.
If we continue to sell off, I wouldn't be surprised if we revisited the $237 level.
AAPL
Though we had a brief dip under, AAPL managed to close right above the $138 support. If we break below, I anticipate hitting the $129 level, which is our previous June lows.
AMD
AMD broke through the $58 support level as it continues its sell-off. We may be retesting the $52 and $48 levels back in 2020.
AMZN
AMZN may be retesting the $101 support level back from May.
SBUX
Surprisingly, SBUX has a bit of divergence from the overall markets where the short-term trend is up. I'm keeping a close eye on this one to see if it can break above the $93 resistance level.
Steve's Trades
Again, like for many weeks, I am 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.
If you recently set up some AMZN 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. We are essentially setting up spreads every week or every other week and closing our positions early. We like to sell decaying option contracts to others, like selling covered call contracts, without initially owning the 100 shares as collateral.
Again, by setting up bear call spreads, you are willing to purchase shares to cover yourself in case the underlying stock rises.
AMZN Bear Call Spreads:
Looking at the charts, I believe there is some resistance at the $125 level, which is why I'm selecting the $128 strike as my second leg of the trade.
Be mindful that earnings are coming up. If you don't feel comfortable with the volatility, you can sit this one out.
Expiration Date: November 25, 2022
Step 1: Buy 1 $144 strike call option (delta 0.04) for $32.
Step 2: Sell 1 $128 strike call option (delta 0.15) for $119.
Step 3: Set up a buy stop order for 100 shares for $127 to cover
Credit received: $119 - $32 = $87 per spread
All in all, make sure to see if this trade fit 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.
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.
📌What Now? 🤷♂️🤷♀️
Right now, I prefer to do the following given these market conditions:
Keep depositing money into your account.
If you feel comfortable, you can sell far OTM covered calls on the shares you already have. Do not sell at strikes you are not comfortable with. I may even sell some contracts out to the December expiration dates.
I would not start any new wheel trades at the moment. I prefer to be more conservative.
If you feel comfortable, you can set up bear call spreads.
Let your weekly/monthly contributions, premiums, and dividends sit as cash for now. I want to make sure you're in an established position, so when the bull market comes back, you'll have a lot of capital to deploy.
Keep an eye out for earnings. I expect volatility to be high in the next several days in October and November.
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Q1. During a bearish market, is it better to wait for retracement or sell OTM strike?
A: Great question! It is completely up to you. What we recommend is as long as you are comfortable letting your shares go at a certain strike price, you can consider selling a OTM covered call. You can also wait for a retracement to collect more premium too, but we never know when that will happen as timing the market is impossible. You can consider selling 2-3 month expiration date contracts to collect higher premium due to the larger extrinsic time value.
Q2. How do I figure out if the market will be bullish or bearish or stay the same?
A: You can tell where the markets are going by looking the trend. Right now, we are still in an overall downward trend since we see lower highs and lower lows. Feel free to check out my technical analysis above.
Q3. Hi Steve, I have been curious about the technical analysis strategies you use. Do you have any videos or articles explaining your analysis techniques that you use when analyzing stock patterns? If not, what good resources do you recommend that I can learn some of these strategies?
A: I have a technical analysis video in the archived section. However, I can make another one this week.
Q4. Hey Steve! I‘m debating whether I should switch my broker account to a margin account but I’m a bit reluctant since I know that a lot of people lost a lot of money by using margin.
I’ve been trading actively for around 2 years now and started to trade options about a year ago so I think I could get some benefits by using margin responsibly. What are some tips of how to best use a margin account / what should I look out for? Thanks!
A: If you don't feel comfortable using margin, I would sit out. However, if you decide to use your available margin to increase your buying power, I would not use more than 25-50% of your entire portfolio amount. I would also use margin as back up collateral in case I need to cover myself for my bear call spreads. By doing this, I am not technically using margin since I did not use the capital to purchase shares, thus I would not be charged interest on it. In the end, see what your risk tolerance is.
📌Submit Your Questions 🙋♂️🙋♀️
Have any other questions? Before asking me and my team, feel free to check out our Level 1 FAQ. This FAQ is located on the Dashboard. You might find what you're looking for. 😊
If you do have questions, make sure to ask them on our Dashboard, rather than asking us via email. We also encourage you to watch all of the core video content and some of the past archived videos, read past Membership Positions, and take all the quizzes before sending us your questions.
📌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.
Again, I expect more volatility from now until the beginning of November. Let's see how the markets react once we get to October/November earnings and the mid-term elections. Stay calm and patient. 🙏
-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.