Today I’m going to start with one trade in the All-Weather portfolio. I’m going to go over it step by step, so we all have a good understanding of how a poor man’s covered call works. Typically, my alerts will not be nearly this long, but I want to make sure we are all on the same page before trades start to pick up. If you have any questions, please do not hesitate to email me at andy@cabotwealth.com. Because next week we are going to be ramping up quick with upwards of 10 trades, possibly more.
As I said a few days ago, there will be roughly five positions for each passive portfolio and at least five, if not more, for our active portfolios. I say this because I realize some of you may choose to follow just one portfolio, while others may follow several. Of course, others will choose to trade a variety of positions across all the portfolios, and for those that wish to be a bit more active, you may choose to take on positions with the intent of moving in and out of positions for short-term trades.
Regardless of your approach, understand that I will be sending out numerous alerts over the next several weeks as we build out each portfolio. So don’t feel the need to jump on the latest alert, especially if you think you might want to participate in other portfolios. Be patient. There will never be a shortage of trades or trade ideas in this service.
All Weather Portfolio
SPDR Gold Trust (GLD)
There are numerous ways to approach poor man’s covered calls. My preference is to use LEAPS that have at least two years left until expiration.
For example, let’s take a look at SPDR Gold Trust ETF (GLD). It’s a fairly expensive ETF, trading for roughly 172, and that can be a huge deterrent for some investors; but that might not be an issue with a poor man’s covered call.
As you can see in the chart below the GLD is currently trading for 172.46.
Now, if we followed the route of the traditional covered call, we would need to buy at least 100 shares of the stock. At the current share price, 100 shares would cost $17,246. That’s certainly not a crazy amount of money. But just think if you wanted to use a covered call strategy on a variety of higher-priced stock like Apple (AAPL), Microsoft (MSFT) or even an index ETF like SPDR S&P 500 ETF (SPY). For some investors, the cost of 100 shares can be prohibitive, especially if diversification amongst a basket of stocks is a priority. Therefore, a covered call strategy just isn’t in the cards … and that’s unfortunate.
But with a poor man’s covered call strategy you can typically save 55% to 85% off the cost of a covered call strategy.
So again, rather than purchase 100 shares or more of stock, we only have to buy one LEAPS call contract for every 100 shares we wish to control.
As I said before, my preference is to buy a LEAPS contract with an expiration date around two years. And when my LEAPS reach 10-12 months left until expiration, I then begin the process of selling my LEAPS and reestablishing a position with approximately two years left until expiration.
Once I have chosen my expiration cycle, I then look for an in-the-money call strike with a delta of around 0.80.
When looking at GLD’s January 19, 2024, option chain with 595 days left until expiration I quickly noticed that the 145 call strike has a delta of 0.78. The 145 call strike price is currently trading for approximately $37. Remember, always use a limit order. Never buy an option at the ask price, which in this case is $37.40.
So, rather than spend $17,246 for 100 shares of GLD, we only needed to spend $3,700. As a result, we saved $13,546, or 78.5%. Now we have the ability to use the capital saved to diversify our premium amongst other securities, if we so choose.
After we purchase our LEAPS call option at the 145 strike, we then begin the process of selling calls against our LEAPS.
My preference is to look for an expiration cycle with around 30-60 days left until expiration and then aim for selling a strike with a delta ranging from 0.20 to 0.40, or a between 60% and 85%.
As you can see in the July 15, 2022, options chain below, the 181 call strike with a delta of 0.20 falls within my preferred range.
We could sell the 181 call option for roughly $1.00, if not higher.
Our total outlay for the entire position now stands at $36 ($37.00 – $1.00). The premium collected is 2.7% over 42 days.
And remember, the 2.7% is just the premium return, it does not include any increases in the LEAPS contract if the stock pushes higher. Moreover, we can continue to sell calls against our LEAPS position for another 8 - 12 months, thereby generating additional income or lowering our cost basis even further.
An alternative way to approach a poor man’s covered call, if you are a bit more bullish on the stock, is to buy two LEAPS for every call sold. This way you can benefit from the additional upside past your chosen short strike, yet still participate in the benefits of selling premium.
The Trade
Buy to open January 19, 2024, GLD 145 calls for $37.00
Once that occurs:
Sell to open July 15, 2022, GLD 181 calls for $1.00
You could also place the order as a long diagonal debit spread, but I will go over that and much, much more in our upcoming webinar in a few weeks.
As always if you have any questions, please feel free to email me at andy@cabotwealth.com.