by Ben Weiss, for the Call to Leap Team
After a quiet trading week last week, Steve and I were back at it this week with some trading opportunities we saw.
Waiting for my moment...I was assigned on my $190 AAPL cash-secured put this week so I had 100 new shares to sell a covered call against. As the stock price kept slipping lower through the week, I chose to wait a few days for AAPL to ideally have an "up" day, even if it was just a modest bounce. When selling calls, our premiums, or "fills", will generally be higher when the stock is having a green day compared to a down/red day. Conversely, when selling puts, fills will be higher on days when the stock is moving lower. We finally saw that green day on Friday so I made my move.
The cost basis for my AAPL shares is $190 minus $5/share of premium from selling the cash-secured put initially. So I felt comfortable selling my covered calls at the $185 strike. I could've also sold at the $190 strike to allow the stock to rise more before being called away, but the stock is showing weakness lately and premiums sharply decrease the farther out of the money you choose. My $185 strike allows the stock to move up $15, or about +9%, before being challenged. I can always look to roll the call up to a higher strike like $190 in the future if the stock rebounds and moves upward significantly.
Lastly, while we typically look to sell puts and calls 20-50 days to expiration, I chose to explore 2-3 months out to add more extrinsic time value into the premium I collected. For this call, I chose the May 17 "monthly" expiration date.
When to LEAPS and when to walk away...I'm currently in a LEAPS call position on GOOGL that has gone against me about 20% since opening—certainly not what I wanted to happen but also not the end of the world. We know that LEAPS are riskier positions than covered calls and cash-secured puts which is why we're careful not to overload on LEAPS options. Also, LEAPS don't expire for at least 1, or sometimes multiple, years, giving us lots of time for the stock to move how we want it to.
But how much is too much when it comes to cutting your losses and walking away from a LEAPS call that's lost significant value? Steve and I coach that 50% loss may be the most you want to accept because below that level, it becomes exponentially, not linearly, harder to recoup your investment. This chart really helps me visualize how much harder it gets to just break even with greater and greater losses.
At a 50% loss, it will take a 100% increase just to reach your original investment. While we always want to be smart and profitable, we won't always be correct in our trading thesis. When we're incorrect in our LEAPS, it can be very important to know when to walk away and live to trade another day.
Ben’s trades this week
Trade 1: PYPL cash-secured put (CTL Level 1)
Expiration Date: April 19, 2024 (a "monthly" expiration)
Step 1: Have $5,250 cash as collateral
Step 2: Sell 1 $52.50 strike put option (delta 0.14) for $0.54/share
Credit/premium received: $54/contract (minus fees and commissions)
Thoughts: PYPL has been beaten down pretty well recently but appears to be in a nice upward trend dating back to November 2023, making new higher highs and higher lows. I debated between the $52.50 and $55 strike prices going with the more conservative lower strike, however $55 could be an option if I were looking to be more aggressive with a delta 0.24.
This trade may not be for everyone as PYPL hasn't enjoyed a longer solid positive trend like other stocks we trade, nor does PYPL pay a dividend. However, I believe PYPL is undervalued and presents a lower-capital options trading alternative to the more expensive Magnificent 7 stock prices
Trade 2: TQQQ cash-secured put (CTL Level 1)
Expiration Date: April 19, 2024 (a "monthly" expiration)
Step 1: Have $5,500 cash as collateral
Step 2: Sell 1 $55 strike put option (delta 0.28) for $2.21/share
Credit/premium received: $221/contract (minus fees and commissions)
Thoughts: The ETF is still trading within the steeper green upward channel so I'm still feeling bullish. However we've seen some taller candlesticks this week indicating higher volatility so I chose a slightly more conservative $55 strike. But keep in mind, TQQQ being a leveraged ETF is already a relatively aggressive options play to begin with. As always, tweak these positions to whatever you feel comfortable with, and only consider this or any trade if it fits your risk tolerance.
🚨Caution: If you're not familiar with TQQQ, it's an ETF that follows the movement of the Nasdaq index fund QQQ. However, because it's 3x leveraged, it will increase or decrease 3 times the movement of QQQ. By nature, trading in leveraged ETFs can be highly volatile and isn't for everyone! I like trading TQQQ because of its much lower share price compared to QQQ, making it a more accessible way to trade in the broader Nasdaq index. Please reach out with any questions!🚨
Do you have the power?...Based off the great recommendation from Steve and lots of folks in the CTL community, I recently signed up for budgeting app Empower to get a better dashboard picture of all my various accounts and I've really been enjoying it so far. While I won't be using the app to invest or trade stocks and options directly, the insights I gain into how I'm spending and earning will certainly pay dividends 😉 So far the interface on desktop and mobile is very intuitive and user friendly and I'm excited to dig deeper. If you'd like to give Empower a try, click here to check it out!
Investing like clockwork...As always, I held true to the dollar-cost average (DCA) method and bought a share each of SPY, QQQ, SCHD. The DCA method allows me to check my uncertainty at the door about whether now is a good time buy or not. I like to stick to my schedule and buy a small number of shares every week regardless of the market's movement to keep me on track long term.
Steve's trades this week
Trade 1: GOOGL poor man's covered call (CTL Level 2 & 3)
Expiration Date: April 5, 2024 (a "weekly" expiration)
Step 1: Own 1 GOOGL LEAPS call option (if you don't already own a GOOGL LEAPS, this trade won't apply to you)
Step 2: Have $14,400 cash as collateral
Step 2: Sell 1 $145 strike call option (delta 0.20) for $0.99/share
Step 3: Submit a "good 'til canceled" (GTC) buy-stop order (BSO) to buy 100 shares of GOOGL at $144
Credit/premium received: $99/contract (minus fees and commissions)
Thoughts: Like Ben, I recently bought a LEAPS call option in GOOGL that has declined significantly in value since buying. To help make back some of the losses and while I wait for GOOGL to retrace up until my LEAPS call becomes profitable, I chose to sell a short-term call against my LEAPS call, forming a special type of diagonal calendar spread called a synthetic covered call or "poor man's covered call". Whereas in a natural covered call we use 100 shares to secure the sold call, in a PMCC we use the bought LEAPS call to secure the sold call—similarly to a bear call spread, except the sold call has a higher strike price than the sold call in a PMCC.
When you enter a PMCC, you would need to monitor the stock price more carefully because a significant retracement upwards could challenge the sold call. To reduce that risk and cover ourselves in case our sold call is goes in-the-money and is assigned to us, I like to create a buy-stop order below the sold call strike price to ensure I own 100 shares in case the stock rises and I'm likely to face assignment.
As always, tweak these positions to whatever you feel comfortable with and fits your risk tolerance.
You got this, everyone! Stay disciplined, pay yourself first, and always invest in your greatest asset—yourself. 🙌🏻
- Ben and Steve
Friendly reminders from Steve:
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