A New Chapter Begins…
As we bring close to 2023, it’s time to reflect our accomplishments and achievements, both for good and for bad.
Although the stock market did not perform as well as the previous year, it is not all lost but many other opportunities were present, great companies at significant discounts that we can enjoy the fruits in years to come.
Tough times also creates stronger minds and build up our phycology as an investor/trader, sticking to our investing and trading rules testing our patience and perseverance.
As we open our new chapter in a few days more…it is not a beginning but a continuation of our struggles and dedication to achieve financial success in the investment/trading world or whatever goals you are striving for. The path is there in front of us and we just need to walk it through…the next step may well be the step that brings you to your goals…you will never know which..so just keep going….
SPX (3844)
Once again good news brought down the market. On Thursday the good GDP data of 3.2% against forecast of 2.9% brought SPX down by almost 3% before it regained some grounds closing at 3822. Besides that the lower than expected unemployment claims also shows that the job market is also not as bad as the Fed wants it to be.
Remember, when there is good news in the economy and job market means that the Fed is not achieving its results by hiking interest rates because the target for them is to sizzle down the economy and job market to bring down inflation. Hence, the market fears that the Fed will continue on its aggressive stance in interest hike although the first pivot to slow down the level of rate increase has already started in the last Fed Rate Hike from 75 bps to 50 bps.
For next week, wholesale inventory and pending home sales data may be the last movers for the year.
SPX is holding well at 3800 levels and may be possible for it to bounce back up to 3950 level to close the year.
The trading range for the week is between 3700 and 3950.
NDX (10985)
NDX is inching back to the previous year’s low of 10440. It bounced off the lows of around 10800 on Thursday and closed higher on Friday. Things does not look too good for NDX and the likelihood of it hitting lower lows into 2023 is high.
Nevertheless, we hope to see some recoveries into next week before that happens start of the year. The next Fed Rate hike is expected to happen in February 2023 where the Fed will bring the rate up to 5.1% at least.
The trading range for the week is between 10500 and 11250.
SELLING CALLS
You would have heard this quite often… never sell a NAKED Call…
But don’t mistake that by avoiding in totality on selling calls when trading. Because selling calls can come in very handy in various options strategies and scenarios.
One of the most basic strategy in selling of calls is Covered Calls. This involves:-
owning 100 shares and selling a call against it for additional income. The strike we sell the call would need to be above the cost of the shares to avoid getting into the risk of the shares being called away if the call sold gets ITM.
In a bear market though, where I do not have any intention to sell off my shares even if it goes down below my cost, I would tend to deviate from the common rule of selling calls below the cost of my shares. The rationale is the stock price will go down anyway, why not make some premium to offset the losses. Of course the downside is that you cap the gains of the stock if it shoots above the strike price. Hence, knowing when you should sell a call is essential to minimise this downside. eg. sell when the stock hits resistance during an upswing. Or continue to roll the ITM call and wait for the price to come back down as you have nothing to lose between getting assigned and lose our shares as opposed to continuing to earn premium until it retraces. As long as the overall market trend is still bearish, the chances we can continue to get premiums by selling calls is high.
The other strategy of selling calls involve strategies like Bull Call Spreads. We sell the calls to reduce the price of our long call, in this instance same expiry short call with the long call. Take note that you cap your profits to the short call strike less premium paid for the trade and that the max profit will only be achieved closer to the expiry of the option. So when choosing strike price to sell, chose one which you think the price will fall to on expiry. As it is difficult to guess, we would just use the expected move of the share price at the expiry date.
The more advanced strategies involving selling of calls would be Diagonal and Calendar strategies, which involve selling a short dated call over a longer dated long call. Short Strike price of a Diagonal will be above the Long Call Strike whereas for a Calendar the strike price is the same. Note that when doing Diagonals and Calendar, we never sell a call below the long call price. This is because your long call will expire and if the strike price does not move up above the long call strike by then, you will have nothing to deliver and would lose the difference between the short strike and the market price of the stock.
It is also not always the case where we need to deploy strategies of selling calls when the trade is first entered. We can deploy selling call strategies anytime during the duration of the trade. For example if you enter into a long term call like a LEAPS. During time when you anticipate price resistance or retracement, you can sell a call to offset some theta decays. Overtime if the stock long term trend is up, eventually you can still make a gain but the calls sold in between is just extra income. However, as like in a Bull Call Spread or a Covered Call, your gains are capped each time you sell a Call. So during a run-up in price or when the stock is oversold, don’t sell any calls until that phase passes to an overbought position or a hitting price resistance.
Even more advanced trade strategy like a ZEBRA which involves:-
Buying 2 ITM Calls
Selling 1 ATM Call (to offset all extrinsic value of the 2 long calls)
Objective is to achieve almost 100 Deltas similar to holding 100 shares but with lower buying power and defined risk on the downside.
Even with a ZEBRA you can sell an additional OTM call to create a synthetic like Covered Call.
Strategies in Option trading are fluid and can be used in various situations as long as you know what you are doing and know how to protect and unwind when the trade goes against you. Besides, it is one of the ways we can extend the duration of the trade when price is not going our way…nurturing and keeping our trade alive until the price moves up.
So selling of calls is one additional advantage to you in trading options because if you do not know how, you will likely be handicapped and earn/profit less long term.
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TIKTOK VIDEOS
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DISCLOSURES
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
MYstyework is an Online Financial Literacy Educator and materials provided is solely by MYstylework and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. MYstylework, through its contents, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. MYstylework is not in the business of transacting securities trades or an investment adviser.