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Fundamentals
Realistic Strategies, Realistic Returns

February 17, 2023

Cabot Options Institute Fundamentals – Alert (CVX, DBC, TIP, VZ)

Growth/Value Portfolio

Chevron (CVX)

As a reminder, this trade is for the CVX position in the Growth/Value Portfolio, not the CVX position that resides in our Dogs of the Dow Portfolio. I have a CVX position in both, as both portfolios are looked at as separate entities to keep things mechanical and consistent. However, for most subscribers, it is unnecessary to have double exposure. Just understand that I will be treating each CVX position as two separate entities. I hope this clears up any confusion.

In the Growth/Value Portfolio we currently own the CVX January 19, 2024, 115 call LEAPS contract at $48.60. You must own LEAPS in order to use this strategy.

If you are new to the position, based on our approach, the LEAPS contract that works best is the one with a current delta of 0.80: the January 17, 2025, 120 calls. We typically initiate a LEAPS position, with a delta of roughly 0.80, that has roughly 18 to 24 months left until expiration.

Here is the trade (you must own LEAPS in CVX before placing the trade, otherwise you will be naked short calls):

Buy to close CVX February 17, 2023, 190 call for roughly $0.02 (adjust accordingly, prices may vary from time of alert)

Once you have CVX LEAPS in your possession:

Sell to open CVX March 24, 2023, 170 call for roughly $2.65 (adjust accordingly, prices may vary from time of alert)

Premium received: 5.5%

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 $48.60 (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 CVX.

All-Weather Portfolio

Invesco DB Commodity Index ETF (DBC)

We currently own the DBC January 19, 2024, 22 call LEAPS contract at $10.50. You must own LEAPS in order to use this strategy.

If you wish to enter the position and are uncertain about which LEAPS to purchase, please refer to the reports section of your subscriber page or our latest subscriber-exclusive webinar in which I go through the process, step by step, of entering a new position of an already established position. Based on our approach, the LEAPS contract that works best is the one with a current delta of 0.77: the January 17, 2025, 21 calls. We typically initiate a LEAPS position, with a delta of roughly 0.80, that has roughly 18 to 24 months left until expiration.

Here is the trade:

Buy to close DBC February 17, 2023, 25 call for roughly $0.02 or more (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 DBC March 17, 2023, 24 call for roughly $0.35 or more (adjust accordingly, prices may vary from time of alert)

Premium received: 3.3%

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 $10.50 (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 DBC.

Yale Endowment Portfolio

iShares TIPS Bond ETF (TIP)

We currently own the TIP January 19, 2024, 100 call LEAPS contract at $17.10. You must own LEAPS in order to use this strategy.

If you are new to the position, based on our approach, the LEAPS contracts with a delta of 0.81 are currently the January 17, 2025, 90 calls. We typically initiate a LEAPS position, with a delta of roughly 0.80, that has roughly 18 to 24 months left until expiration.

Here is the trade:

Buy to close TIP February 17, 2023, 110 call for roughly $0.05 (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 TIP March 17, 2023, 108 call for roughly $0.66 (adjust accordingly, prices may vary from time of alert).

Premium received: 3.9%

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 $17.10 (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 TIP.

Dogs of the Dow Portfolio

Verizon (VZ)

In the Dogs of the Dow Portfolio we currently own the VZ January 17, 2025, 30 call LEAPS contract at $10.40. You must own LEAPS in order to use this strategy.

If you are new to the position, based on our approach, the LEAPS contract that works best is the one with a current delta of 0.82: the January 17, 2025, 30 calls. We typically initiate a LEAPS position, with a delta of roughly 0.80, that has roughly 18 to 24 months left until expiration.

Here is the trade (you must own LEAPS in VZ before placing the trade, otherwise you will be naked short calls):

Buy to close VZ February 17, 2023, 41 call for roughly $0.02 (adjust accordingly, prices may vary from time of alert)

Once you have VZ LEAPS in your possession:

Sell to open VZ March 24, 2023, 41 call for roughly $0.65 (adjust accordingly, prices may vary from time of alert)

Premium received: 6.3%

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 $10.40 (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 VZ.

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.