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Fundamentals
Realistic Strategies, Realistic Returns

December 30, 2022

Before I get started, I wanted to wish everyone a wonderful and safe New Year!

Cabot Options Institute Fundamentals – Alert (EFA)

Yale Endowment Portfolio

iShares EAFE ETF (EFA)

Before I get started, I wanted to wish everyone a wonderful and safe New Year!

I also want to remind everyone that I will be introducing new positions next week in my Small Dogs and Dogs of the Dow portfolios. I’ve decided to introduce the trades over the first two to three days of the first week of 2023 starting with the Small Dogs.

As for our current positions, our 67 calls are due to expire today, December 30. As a result, we want to sell more premium while also bringing the delta of our position back to “normal” state. Again, “normal” means a delta between roughly 0.40 and 0.60. The recent rally in EFA has pushed the overall delta of our position to near flat. As a result, we are going to buy back our 67 calls and sell some 67.5 calls in January. Once we are through with the January expiration cycle I plan to sell my current LEAPS position and buy more LEAPS.

We currently own the EFA January 19, 2024, 45 call LEAPS contract at $19.50. You must own LEAPS in order to use this strategy.

The LEAPS contracts with a delta of 0.81 are currently the January 17, 2025, 56 calls. We typically initiate a LEAPS position, with a delta of roughly 0.80, that has about 18 to 24 months left until expiration.

Here is the trade:

Buy to close EFA December 30, 2022, 67 call for roughly $0.02 (adjust accordingly, prices may vary from time of alert).

Once that occurs (or if you are new to the position and already own LEAPS):

Sell to open EFA January 20, 2023, 67.5 call for roughly $0.55 (adjust accordingly, prices may vary from time of alert).

Premium received: 2.8%

Once the initial LEAPS purchase occurs, we maintain the position and focus on selling near-term call premium against our LEAPS, lowering the original cost basis of $19.50 (or the price at which you purchased your LEAPS) with each and every transaction.

We can continue to sell calls against our LEAPS contract every month or so to lower the total capital outlay. But remember, options have a limited life, so when we get closer to the LEAPS contract’s expiration, we will simply sell the contract and use the proceeds to continue our poor man’s covered call strategy in EFA.

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.