Hey Gang!
We had a bit of a rollercoaster week, where we had a huge rally on Monday, and everything just pooped four days later.
Here's a snapshot of how the overall markets did:
Trade of the Week:
If you've been trading the Wheel Strategy, you most likely got assigned your 100 shares from your CSP or your covered calls expired worthless.
Just like last week, here are two options you can consider taking:
Option 1: To restart your Wheels again on Monday, you can consider selling around 4-6 weeks out at the same strike price that you sold last month. For example, if you had a Wheel for PINS and sold a covered call at the $76 strike, you can resell your next call at the $76 strike again. This way, you will still be collecting premium and lowering your cost basis as you patiently wait for your shares to retrace back up.
Option 2: Because you initially sold covered calls against your shares to lower your cost basis, you can also consider selling 1-2 strikes below your initial sold strike price. For example, if you purchased 100 shares of PINS for $76 and sold a call for $400, your new cost basis is $76 - $4.00 = $72.00. Instead of selling at the $76 strike, you can consider selling at the $75 or $74 strike. You will be obligated to sell your shares for a lower price than you initially purchased them for and higher than your new cost basis. However, you will be able to collect more premium since you are selling a little closer to the ATM strike.
Pay attention to the delta: You can always look at the delta of the call you are selling since the delta roughly approximates the probability of the price of the stock reaching the strike by expiration. If you see that the delta is 0.10, you know that there is roughly a 10% chance that the price of the stock will reach that strike price by expiration. Likewise, if you see that the delta is 0.20, you know that there is roughly a 20% chance that the price of the stock will reach that strike price by expiration.
If you're a beginner, we recommend you starting off with selling cash-secured puts around 1-3 strikes OTM. This is typically a conservative starting point when starting the Wheel Strategy. However, if you're more bullish about the markets, we recommend starting your new Wheel by selling a covered call around 1-3 strikes OTM to not only receive the premium, but also make capital gains if you are called away at expiration.
One thing to notice this week is that the implied volatility, or IV, has increased for most premiums. Why? IV tends to rise when there is uncertainty or fear in the markets. Retail investors and large institutions typically like to trade a high volume of options during this time where they like to place bets on if stocks will go up or down in a short amount of time.
Here are some trade recommendations and see what fits your personal risk-tolerance:
MSFT: Monday Open:$235.90 Friday Close:$231.60 Change: -1.82%
Starting a New Wheel: Selling a Cash-Secured Put on MSFT - MSFT's Current Price: $231.60 - Capital needed: $23,000.00 - Sell at the Expiration Date: 2021-04-01 - Select the Strike: $230.00 - Premium you'll receive: $637.50 - Cost basis: $230.00 - $6.38 = $223.62
Starting a New Wheel: Selling a Covered Call on MSFT - MSFT's Current Price: $231.60 - Capital needed: $23,160.00 - Sell at the Expiration Date: 2021-04-01 - Select the Strike: $232.50 - Premium you'll receive: $672.50 - Cost basis: $231.60 - $6.72 = $224.88
AMD: Monday Open:$85.37 Friday Close:$78.52 Change: -8.02%
Starting a New Wheel: Selling a Cash-Secured Put on AMD - AMD's Current Price: $78.52 - Capital needed: $7,800.00 - Sell at the Expiration Date: 2021-04-01 - Select the Strike: $78.00 - Premium you'll receive: $350.00 - Cost basis: $78.00 - $3.50 = $74.50
Starting a New Wheel: Selling a Covered Call on AMD - AMD's Current Price: $78.52 - Capital needed: $7,852.00 - Sell at the Expiration Date: 2021-04-01 - Select the Strike: $79.00 - Premium you'll receive: $355.00 - Cost basis: $78.52 - $3.55 = $74.97
AAPL: Monday Open:$123.75 Friday Close:$121.42 Change: -1.88%
Starting a New Wheel: Selling a Cash-Secured Put on AAPL - AAPL's Current Price: $121.42 - Capital needed: $12,100.00 - Sell at the Expiration Date: 2021-04-01 - Select the Strike: $121.00 - Premium you'll receive: $442.50 - Cost basis: $121.00 - $4.42 = $116.58
Starting a New Wheel: Selling a Covered Call on AAPL - AAPL's Current Price: $121.42 - Capital needed: $12,142.00 - Sell at the Expiration Date: 2021-04-01 - Select the Strike: $122.00 - Premium you'll receive: $437.50 - Cost basis: $121.42 - $4.38 = $117.05
PINS: Monday Open:$82.57 Friday Close:$68.14 Change: -17.48%
Starting a New Wheel: Selling a Cash-Secured Put on PINS - PINS's Current Price: $68.14 - Capital needed: $6,800.00 - Sell at the Expiration Date: 2021-04-01 - Select the Strike: $68.00 - Premium you'll receive: $495.00 - Cost basis: $68.00 - $4.95 = $63.05
Starting a New Wheel: Selling a Covered Call on PINS - PINS's Current Price: $68.14 - Capital needed: $6,814.00 - Sell at the Expiration Date: 2021-04-01 - Select the Strike: $68.50 - Premium you'll receive: $485.00 - Cost basis: $68.14 - $4.85 = $63.29
NKE: Monday Open:$135.64 Friday Close:$133.35 Change: -1.69%
Starting a New Wheel: Selling a Cash-Secured Put on NKE - NKE's Current Price: $133.35 - Capital needed: $13,300.00 - Sell at the Expiration Date: 2021-04-01 - Select the Strike: $133.00 - Premium you'll receive: $562.50 - Cost basis: $133.00 - $5.62 = $127.38
Starting a New Wheel: Selling a Covered Call on NKE - NKE's Current Price: $133.35 - Capital needed: $13,335.00 - Sell at the Expiration Date: 2021-04-01 - Select the Strike: $134.00 - Premium you'll receive: $540.00 - Cost basis: $133.35 - $5.40 = $127.95
Buying Back and Rolling Out
If you've been selling covered calls on your shares and notice that the value of your calls have dramatically dropped to around 80%, you can now buy back the call and sell it further in expiration. This strategy is called buying back and rolling out.
For example, say you sold a covered call for AMD at the $88 strike last week for the March 26, 2021 expiration date, collected a $350 premium, and the value of the call dropped around 80% or to around $70. You can consider buying back the call option for $70 and reselling it further in expiration, such as the April 9, 2021 expiration date, at the same $88 strike. In return, you can pull in a premium of around $158.
To do this, you can go to your brokerage app, click on your sold covered call position, and select "buy to close," since you are buying back the option to close your position. You would then go to the option chain, select a further expiration date, and sell at the same strike. In return, you can get a larger premium.
Collecting Rent 🏡💸
During this pullback, we encourage you to not be so fixated on your portfolio amount. Please remember that the value that you see is only an unrealized loss since you haven't sold anything.
Think of it this way, when you have a house and you rent out your room, the house value itself is constantly fluctuating. Sometimes it can go up or down a couple of hundred dollars per day. Do you panic and sell your house if it drops $1000? Of course not! It's the same perspective that I want you to have when selling covered calls. When you sell covered calls, you are using your stocks or "house" and collecting premiums or "rent" each month.
When buying property and renting out the rooms, you want to make sure the property itself is made up of strong material and is in a good location. Likewise, when selling covered calls, you want to make sure your underlying is fundamentally strong. Though your stock value or "house value" is down, it hasn't really changed any of it's fundamentals.
Yeah, sometimes your toilet might get clogged up. Sometimes your dog will poop on the carpet. Sometimes your kids will grab a black sharpie and decide to make artwork on the living room wall. The value of your house might temporarily go down. However, these are easy fixes and hasn't changed the actual structure of your house.
Stay calm and patiently let your "house" value retrace up over the next couple of weeks.
Stock Rotation 🎡
I'm sure that many of you noticed a stock rotation this week and have seen some of the big money flow into companies that have taken a beating last year when the pandemic started. We've seen stocks in energy, financials, and industrials slowly rise. We've even seen companies for cruise lines and airlines increase. For us, we don't really recommend investing in these stocks as we would like to see actual evidence that these companies are truly making more money.
Earnings 📅
Costco | COST
This week, Costco reported their quarterly earnings. However, they reported a little below Wall Street expectations, due in part to higher wages amid the pandemic. Costco reported $951 million of revenue for their fiscal second quarter, which included a pretax $246 million in costs mostly related to COVID-19 “premium” wages.
Costco's annual top-line revenue for 2020 came in at $166.76 billion, which was a 9% increase from their previous annual top-line revenue. The earnings compared with net income of $931 million in the year-ago quarter and their sales rose 14.7% to $43.89 billion, from $38.26 billion a year ago.
Total comparable-sales rose 13%, with e-commerce sales rising nearly 76%. Costco's February sales rose 15% to $14.05 billion. Costco reported net sales for the second quarter of $43.9 billion, up 14.7% year-over-year. Six-month sales of $86.2 billion reported by the company were up 15.8% year-over-year.
Here's a look at Costco's annual top-line revenue growth:
2016: $118.72B
2017: $129.03B
2018: $141.58B
2019: $152.7B
2020: $166.76B
Here's a look at the 5-year chart of COST:
Summary
COST is still reporting increasing annual top line revenue, but it doesn't seem that it's in favor by Wall Street right now. However, taking a look at it's technicals, the stock has taken a beating, is around 20% off from it's all time highs, and may present a potential buying opportunity. If you want to stick to our 5-10% investing guideline, where we only add onto our initial position once our shares rise around 5-10%, you can probably wait until COST retraces back up to it's highs. If you want to invest in COST at these current levels, we would probably recommend buying some shares once there is a bottom with consolidation or when the stock retraces upwards with higher highs and higher lows. This will typically show us that the selling has stopped and institutions are putting their money back into this company. We want to avoid buying shares while it's still being sold off.
At Call to Leap, we believe that Costco COST is still great long-term investments. If you like the company and believe in their fundamentals, you can consider investing in a couple of shares. Like always, remember to see if the stock fits your risk-tolerance and to slowly scale in, rather than buying a whole bunch of shares all at once.
Time to Panic?! 📉😲
I get it. Sometimes when we have these pullbacks and corrections, it's hard to not to panic. We're constantly checking our phones and laptops over and over again, with these bright red negative numbers glowing right in front of our eyes.
However, I have good news for you; this is temporary.
Yes, inflation are in talks of rising. Yes, interest rates may go up, which may in turn make it more expensive for our favorite companies to borrow money. However, haven't we had inflation and interest rates always fluctuate up and down in the past? Is this really anything new?
What about the companies we're investing in? Did they all of a sudden change fundamentally and stop making revenue?
The selling that you see now is more than likely an overreaction. Large institutions are currently sitting out with cash on the side, just waiting until the dust settles. A lot of them may even be messing with you, hoping that you'll sell your shares, so they can pick up your shares for an even lower price.
I encourage you to be patient and to always keep your eyes looking forward.
Here are some calming pictures to look at to remind you to keep your long-term perspective. Go ahead. Light up a candle, play some peaceful meditation music, and enjoy:
AAPL:
MSFT:
AMD:
V:
MA:
S&P500:
Towards Christmas time this year, you're most likely going to look back at this period and wonder why you even panicked. Heck, you might even ask yourself why you didn't even pick up a couple of shares here and there.
Stay patient, Gang! We'll get through this together!
Testimonies For 1-Month Off
My team and I want to thank all of you for being part of this wealth-building community. If you've been enjoying the content and support that this community has been providing, we would truly appreciate it if you can send us a testimony of your experience. As a thank you, my team and I can give you a free month off of your subscription if we choose to use your testimony for our site. We will most likely choose around ten testimonies. 😀
Here are the details:
What:
-Full name
-Age
-Location
-A testimony between 100 to 200 words
-A beautiful picture of yourself
When:
Please submit this to us by March 14, 2021, 11:59 PST.
Where:
Please send this to our email: info@calltoleap.com, with the subject line: 2021 Testimony - Name.
Discord Launched! 💬
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.
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.
Level 1 FAQ 🙋♂️🙋♀️
Have questions? Before asking me and my team, feel free to check out our Level 1 FAQ. This FAQ is located on the Level 1 page. You might find what you're looking for. 😊
Stay positive, everyone! You've got this! 😀
-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.