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Fundamentals
Realistic Strategies, Realistic Returns

COI Fundamentals Issue: February 12, 2024

I plan on ramping up the positions in our actively managed portfolios (Buffett and Growth/Value) over the next expiration cycle. My goal is to have a minimum of 5 positions per portfolio, but I’m not going to race to get there. I’ll continue to pounce when the opportunity presents itself. We’ve taken our time adding positions since initiating our portfolio and, so far, our patience has served us well.

Before I get started I wanted everyone to be aware that the next Fundamentals issue will go out next Tuesday (February 20) due to the upcoming market holiday on Monday.

Click here to register for the subscriber-exclusive event tomorrow, Tuesday, February 13 at 12 p.m. Eastern Time (ET).

I plan on ramping up the positions in our actively managed portfolios (Buffett and Growth/Value) over the next expiration cycle. My goal is to have a minimum of 5 positions per portfolio, but I’m not going to race to get there. I’ll continue to pounce when the opportunity presents itself. We’ve taken our time adding positions since initiating our portfolio and, so far, our patience has served us well.

As for the performance of our portfolios, well, all of our positions are delta positive, so inherently they are all bullish leaning. So, we should expect to see nice returns as the market continues to push higher, and that has mostly been the case.

That being said, our Dogs of the Dow positions have been challenged since the onset of the new year. But this is often typical when we initiate new positions, as we haven’t had the opportunity to build much in the way of call premium. And remember, depending on the underlying stock, we should have the opportunity to sell at least 20% to 60% of call premium over the course of the year, which acts as a nice hedge if our positions turn lower.

Current Positions

Click here to access the “Portfolios” section to view each portfolio’s respective positions.

Options Education

Today, I want to go over a question that is asked quite often: “What do we do when the stock pushes above our short call strike?” I hope the following helps to answer that question. I also plan on going over this in greater detail in the webinar on Tuesday.

Question: What happens if the price of the underlying stock or ETF goes above our short call strike price?

Answer: The benefit of a poor man’s covered call over a traditional covered call is that we are not limited to the short call capping our upside gains. The overall position, when initiated, of a poor man’s covered call is delta positive. So, even with the underlying stock or ETF hitting the short call strike (and pushing above it), the position will still participate in upside gains as the position is still delta positive … that is until the underlying stock continues to push even higher and the delta of the LEAPS contract is at parity with the short call.

Remember, the LEAPS contract has a delta much higher than that of the short call so even if the underlying stock or ETF’s price pushes past the short call strike we are still making money on the trade.

Once the short call and LEAPS position have roughly the same delta we will begin the process of buying back our short call and rolling it out further and back to a delta of roughly 0.20 to 0.40.

The stock moving higher is the best-case scenario for a poor man’s covered call position, as it is a delta-positive position at the onset of the trade and continues to be until the delta of the short call equals that of the LEAPS position.

Again, at that point, we simply buy back our short call and sell more premium or simply take the entire position off for a nice profit. Also, remember, the cost of using a poor man’s covered call is significantly less than that of a covered call. This enables you to diversify amongst a basket of stocks and create significantly more premium. I hope this helps.

Portfolio Discussion

All-Weather Portfolio

The latest market surge has left the All-Weather portfolio up a respectable 15.8%, with our poor man’s covered call in the Vanguard Total Stock Market ETF (VTI) continuing to do the heavy lifting, up 42.4%.

Our SPDR Gold Shares ETF (GLD) position has been resurgent of late. After being down roughly 20%, our poor man’s covered call position in GLD now sits 15.1% higher.

Both bond funds (TLT and IEF) and the commodity fund (DBC) continue to lag behind, but that is the yin-yang protective nature of the All-Weather portfolio just doing its job. All three have made considerable gains over the past few months, before taking a small step back recently.

All of our positions continue to outperform their respective ETF benchmarks, once again showing the power of using a poor man’s covered call approach.

Two of our short call positions (GLD, DBC) need to be rolled this week. I plan to buy back our short calls and immediately sell more call premium for the March expiration cycle.

Yale Endowment Portfolio

Our Yale Endowment portfolio is up 20.1% since initiating back in early-June 2022.

Not much has changed from the last expiration cycle. Our S&P 500 (SPY) position is up 33.4%, emerging markets (EEM) is up 5.7%, and the European Union (EFA) is up 16.5%. The three ETFs have led the way for the Yale Endowment Fund while bonds (TIP) and real estate (VNQ) continue to lag, even though both are making great strides to get back to breakeven levels.

All of our positions besides SPY have short calls that need to be rolled this week.

Dogs (and Small Dogs) of the Dow

Our first year (2023) using the Dog-based approach at Cabot came with decent results.

  • Dogs of the Dow: -2.0%
  • Dogs X: -2.2%
  • Small Dogs: 18.9%
  • Small Dogs X: 35.3%

Our 2024 Dog portfolios have no doubt stumbled out of the starting block.

  • Dogs of the Dow: -7.3%
  • Dogs X: -9.8%
  • Small Dogs: -2.8%
  • Small Dogs X: 0.1%

As I stated earlier, these types of early losses are actually normal at the onset of each year for the Dogs as we have only sold premium for one expiration cycle. As we continue to build our call premium sold, we should start to see the Dogs positions even out a bit. And of course, a push higher in our held positions will obviously help our bullish-leaning positions.

I’ll be rolling our remaining February call positions into March expiration early this week. We have quite a few trades to place with 8 out of our 10 short call positions needing attention. This should bring in an additional 2% to 6% worth of premium for each position.

Warren Buffett’s Patient Investor Portfolio

Our average return per trade in the portfolio stands at 22.1%.

At the moment, we have three positions (AAPL, GOOGL, TXN) and, as stated before, intend to add several more over the coming weeks, if the market cooperates … again, a statement we’ve been making for quite some time now.

Back in late June we added Alphabet (GOOGL). Since adding the position, we are up 67.2%, while the overall stock is up only 23.7%.

I wish we could say similar things about our position in Texas Instruments (TXN). Our position started off great, but a few sour earnings reports several cycles ago pushed the position lower and, as a result, TXN has yet to fully recover. Our position is down 11.6%, but up from last expiration cycle.

Our longest-standing position, AAPL, is up 10.7% after being down close to 25% just a few months ago. A rally in AAPL will obviously help to push our position higher, and until then we will continue to lower our cost basis by selling more and more call premium.

As I have written in our last few issues, I will be building out the portfolio to a minimum of five positions over the coming expiration cycles, and remember, because this is an active portfolio, we will be rebalancing every month around expiration, with the next one occurring around the February 16 expiration cycle.

James O’Shaughnessy’s Growth/Value Portfolio

Our average return per trade in the portfolio stands at 35.5%.

Absolutely nothing has changed since last expiration. Like the Patient Investor portfolio, my Growth/Value portfolio continues to take a cautious approach. My hope is to add numerous positions over the next few expiration cycles. Of course, we’ve been planning this approach for several months, but our indicators and low options premium have kept us on the sidelines. A short-term pullback would certainly help to present a much greater opportunity to build out the portfolio.

Next Live Analyst Briefing with Q&A

Our next Live Analyst Briefing with Q&A is scheduled for tomorrow, February 13, 2024, at 12 p.m. ET, where we will be discussing the options market, giving a detailed look at open positions, strategies used, and will have a follow-up with live questions and answers. Register here.


The next Cabot Options Institute – Fundamentals issue

will be published on March 11, 2024.


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Andy Crowder is a professional options trader, researcher and Chief Analyst of Cabot Options Institute. Formerly with Oppenheimer & Co. in New York, Andy has leveraged his investment experience to develop his statistically based options trading strategy which applies probability theory to option valuations in order to execute risk-controlled trades. This proprietary strategy has been refined through two decades of research and real-world experience and has been featured in the Wall Street Journal, Seeking Alpha, and numerous other financial publications. Andy has helped thousands of option traders learn and implement his meticulous rules-driven options trading strategies through highly attended conferences, one-on-one coaching, webinars, and his work as a financial columnist. He currently resides in Bolton Valley, Vermont and when he’s not trading, teaching and writing about options, he enjoys spending time with his wife and two daughters, backcountry skiing, biking, running and enjoying all things outdoors.