Hey Wealth Builders!
We finally had an upward movement this week, with MSFT, AMZN, and AAPL leading the S&P500. 🙌
Also, did you see my recent technical analysis video in the Dashboard? 👀
What's Happened? 📈
Here's this week's heat map:
SPY
There seems to be a trend change as we can observe SPY breaking out of the green resistance line I previously drew, which was also parallel to the magenta support line. You can see the break in resistance with my orange arrow.
I readjusted my green resistance line so that the peaks of the previous highs are now touching.
Looking closely, we may be getting close to a level of resistance. It seems that we had a challenging time breaking and staying above around the $375 level. You can see how we bounced off or were rejected by this level denoted in my yellow circles.
Be mindful to still take a zoom out to observe where we really are in the 1 year time frame. Overall, we are still in a downward trending channel, with the yellow line acting as resistance and the purple line acting as support. I am still being patient and waiting for the markets to break above some areas of resistance before adding more shares. Remember, we have to let the trend be our friend.
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 set up some AMZN bear call spreads a couple of weeks ago and see that the value of your contracts have decayed, you can close out your positions to lock in your profits.
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:
Be mindful that earnings are coming up, which means that there may be volatile swings after earnings are released for Amazon. The company is expected to report this Thursday, October 27. If you don't feel comfortable with the volatility, you can sit this one out.
Expiration Date: December 2, 2022
Step 1: Buy 1 $160 strike call option (delta 0.04) for $27.
Step 2: Sell 1 $142 strike call option (delta 0.15) for $118.
Step 3: Set up a buy stop order for 100 shares for $141 to cover
Credit received: $118 - $27 = $91 per spread
The goal for this trade is to have the stock not really go anywhere and to have the option contracts undergo IV crush. Since IV levels are typically high right before earnings, they tend to drop right after earnings, meaning that the extrinsic value of the call option contracts shrink. When this happens, you can close out your positions and lock in your profits.
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: Getting Started and Allocation in this video around the 3min mark.... you say, i have a chance of getting my shares called away. For example, If I were to buy 200 stocks on Microsoft and put 100 shares on a covered call, can the buyer call away my other 100 remaining shares? Or just the 100 I put for sale?
Great question! If you had 200 shares of MSFT and you sold 1 covered call (100 shares) and your shares were called away at your strike price, you would only sell 100 shares. If you had sold 2 covered calls and they were called away at your strike prices, you would sell all 200 of your shares.
Q2: I have a few general questions! How did you know time to “retire”? Just when you hit your financial freedom number, or was there more?
I was able to cover my monthly expenses with my premiums from covered calls, spreads, and LEAPS, capital gains from getting shares called away, and dividends. I also rented out my rooms and tutored my students as more of a side hobby. As you know, I live a very frugal life. I still meal prep each week for my lunches, buy things from thrift stores, and even cut my own hair (I'm not even joking).
Q3: Did you have a plan for what you would do to feel useful or just did it? What did you do to prepare (mentally and otherwise) to stop working?
As I learned over the years, the best way to progress for many aspects in life is to do things in progressive overlapping stages. I don’t like to go “all in” at once. For example, after calculating that I was able to sustain myself with my other income streams, I started to build Call to Leap while I was still teaching in public school and had my side tutoring business. After some time building Call to Leap and my team, I quit my public school job, but was still tutoring online. As time progressed, I discovered that my Call to Leap Team needed to grow, which meant that I started to decrease my time tutoring, and increase my time with developing my online community. I eventually quit tutoring altogether to put more focus on Call to Leap.
Notice that I didn't just quit everything or make a big transition all at once. I did every in progressive overlapping stages.
My life’s mantra is to be a patient and resilient turtle that ultimately gets to its goals. I learned that when I put too much weight onto my barbell, I would pull my back or hurt my shoulders. I learned that when I tried to build muscle as fast as possible by gorging on a lot of food, I just ended up getting fat. In college, I ballooned up from a skinny 160 pound kid to a 197 pound awkward looking Gumby (Fitness is my side passion if you didn’t know). If I added too many high growth, tech stocks into my portfolio at once or used too much margin, my portfolio suffered whenever there was an unexpected event in the markets.
To do things in progressive overlapping stages is the way to go. I like to slowly add an extra rep or additional weight to my barbell each week or month. I like to slowly add positions to my long-term holds. I like to stagger and overlap my call option contracts. Life is a marathon, not a race. Enjoy the journey.
Q4: I'm curious what you have been making (% return) on the Wheel Strategy this year? I cannot seem to get to 1%, but realize the market is unusually volatile/low, and wondering if I am missing something.
During a bull market, I only use around 30% of my portfolio to sell covered call options. I don’t usually sell covered calls against my long-term shares.
However, since many underlying stocks have dropped in value, I am now selling covered calls on both my wheel and long-term holding positions to collect more premium.
Because I have been diligently increasing my cash reserves by depositing money on a monthly basis and letting my dividends and option premiums sit as cash, I am able to increase my buying power for both cash and margins. Remember that brokerages typically give you a 1:1 margin ratio, meaning that if you have $1 in your account, your brokerage will give you another $1 in margin. Because of the higher buying power of unused capital, I’m able to set up bear call spreads to use the capital as collateral to cover myself. The beauty of setting up bear call spreads is that I don’t have to initially buy 100 shares to sell call option contracts. I also do not get charged interest from having the extra buying power with my margin because I did not technically use the margin capital to purchase actual shares. The margin is only there just in case I need to cover myself.
📌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.
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