Hey Wealth Builders!
Just as a quick note, I decided to consolidate all Standard and Premium posts moving forward as a way to make it easier for all of you to read everything in one place. 😊
The S&P500 dropped more than 2.8% after reports that the U.S. economy added 263,000 jobs in September, slightly below the estimate of 275,000. However, the unemployment rate came in at 3.5%, down from the 3.7% in the previous month in a sign that the jobs continues to strengthen. Investors are still worried about the Federal Reserve wanting to still increase interest rates to battle inflation.
What's Happened? 📈
Though we had a drop in the markets on Friday, we had an overall flat week.
SPY
We had a short-lived rally in the beginning of the week. Looking at the technicals, there is a possible downward resistance I denoted in magenta. If we are not able to hold the $356 level, we may retest the $322 level. Looking at the overall trend, we are still trading between a downward channel with a resistance denoted in yellow and support denoted in teal. Nothing has economically changed, specifically with the Federal Reserve wanting to raise interest rates.
Again, I have paused on my long-term investments. This may change once I start to observe positive market sentiment (pausing/decreasing interest rate hikes, lower CPI, etc.) and if we begin to break and stay above resistance lines, specifically the one I denoted in yellow. I would feel more comfortable with investing and starting new wheels once we have evidence of higher highs and higher lows.
I know it's boring to just sit and wait, but many of you can see that patience has paid off over the last half year of having a more cautious lens.
AAPL
AAPL is still in a downtrend with a resistance line denoted in green. I am keeping a close eye to see if we can break above it. If not, I expect us to retest the $138 or the $129 level again.
AMD
AMD dropped 7.76% this week after the chipmaker cut its sales forecast on Thursday for the third quarter, forecasting a larger-than-expected decline in the personal computer market and supply chain issues.
AMD now expects preliminary quarterly revenue of about $5.6 billion due to “reduced processor shipments.” That’s more than $1 billion below the $6.7 billion it had previously forecast as the midpoint of its revenue expectations for the quarter.
Other semiconductor stocks, such as INTC and NVDA also took a hit in share price.
Looking at the technicals, we landed right on the $58 horizontal support. I have a hunch the share price will bounce back up in the short-term. However, like the majority of the S&P500 components, we are still in an overall downward trend with the next support being at $48.
Steve's Trades
Again, 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.
Again, remember that 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 technicals, there is an unlikelihood that AMZN will have a 20% increase from $114 to $136 within the next month and a half. Because of this, I've decided to sell my second leg at around the $136 strike with a delta 0.15.
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 18, 2022
Step 1: Buy 1 $150 strike call option (delta 0.05) for $37.
Step 2: Sell 1 $136 strike call option (delta 0.15) for $128.
Step 3: Set up a buy stop order for 100 shares for $135 to cover
Credit received: $128 - $37 = $91 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 weeks in October.
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Q1. So with a bear call spread if we are placing a buy stop order as protection, what's the point of buying a further call OTM. isn't the buy stop order your protection?
A1. Your broker will not allow you to sell call options unless you have 100 shares or another purchased call option contract, which acts as a proxy of 100 shares.
The only time you are allowed to sell call options without the collateral is if you are approved for level 4 options trading. This would be you selling naked calls, which has undefined risk.
Q2. This excerpt was posted on the May 29th membership positions " It may be a wiser decision to respect the market trend, as we know that we cannot control the direction of the markets. The team and I are still waiting for a trend reversal" What exactly are you and the team looking for that will indicate a trend reversal?
A2. We are looking to see if the overall trend is upward with higher highs and higher lows. As mentioned above, we want to see the overall S&P500 break it's downward trending yellow resistance before we start to pivot our strategies.
Q3. Where can I see the earnings report and does it come out quarterly?
A3. You can Google the investor relations page for the company you would like to review. (ex. AAPL investor relations)
Yes, earnings come out quarterly. You can see these dates on NASDAQ.com or earningswhisper.com.
Q4. How often do you roll your covered calls? I have a few covered calls where the stock price has gone well above my short call and I'm not sure if I should pay a premium to roll it or just let the shares get assigned 5-10% below the current market price. Please let me know your thoughts. Thank you!
A4. When we sell covered calls, we typically sell at or above our cost basis. If the stock price rises, we typically don't roll out our covered calls because when we sell a covered call, our intention is for our shares to get called away.
If we sell a covered call and the stock drops and we receive 50-80% of our premium, we typically close our position and lock in our profits. We can then sell another covered call at or above our cost basis further out in time (expiration date) to collect more premium due to the higher extrinsic value.
Q5. I hope all is well and thank you for your insight here! Very helpful!
Do you typically abide by the same rules when you sell covered calls on a LEAP?
A5: Great question! If you are referring to a Poor Man's Covered Call (PMCC) where you first purchase a LEAPS and then sell a call against your LEAPS, it is a little different.
When we set up a PMCC, we are anticipating that the direction of the stock will trend neutral or go down. The goal is to receive premium without getting triggered into purchasing 100 shares at our buy stop order. In the event that our buy stop order is triggered, we can consider selling our LEAPS for a profit. We are now left with 100 shares and the second leg we sold, which has now been converted into a covered call.
In this environment, we don't recommend setting up PMCCs due to the volatility and risk of having a LEAPS option as our first leg.
📌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 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.