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Fundamentals
Realistic Strategies, Realistic Returns

February 8, 2023

Cabot Options Institute Fundamentals – Dogs of the Dow Alert (IBM, MMM)

With February 17 right around the corner and several of our positions with little to no premium left, I want to start the process of buying back our short calls and immediately selling more premium.

I’m going to start today with a few Dogs of the Dow trades, but will also send out trades over the coming days in our passive portfolios which include the All-Weather Portfolio and Yale Endowment Portfolio.

International Business Machines (IBM)

We currently own the IBM January 17, 2025, 105 call LEAPS contract at $43.15. 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, 105 calls. We typically initiate a LEAPS position, with a delta of roughly 0.80, that has about 18 to 24 months left until expiration.

IBM is currently trading for 136.29.

Here is the trade:

Buy to close the IBM February 17, 2023, 150 call for roughly $0.03 (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 IBM March 17, 2023, 140 call for roughly $1.20 (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 $43.15 (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 IBM.

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.

3M (MMM)

We currently own the MMM January 17, 2025, 90 call LEAPS contract at $41.40. 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 0.81: the January 17, 2025, 85 calls. We typically initiate a LEAPS position, with a delta of roughly 0.80, that has about 18 to 24 months left until expiration.

MMM is currently trading for 115.84.

Here is the trade:

Buy to close the MMM February 17, 2023, 135 call for roughly $0.03 (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 MMM March 17, 2023, 120 call for roughly $1.58 (adjust accordingly, prices may vary from time of alert)

Premium received: 3.8%

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 $41.40 (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 MMM.

Cabot Options Institute Fundamentals – All-Weather Portfolio Alert (GLD, TLT, IEF)

SPDR Gold Trust ETF (GLD)

I’ve decided to hold on to my current LEAPS position, the January 19, 2024, 145 calls. Theta, or time decay, is still incredibly low so I’m going to hold on for another expiration cycle, but will be buying back my LEAPS as we near the March 17, 2023 expiration cycle. However, for those that are new to the Fundamentals service and wish to open a position, as always, with each trade alert I include the LEAPS position that currently works best given our guidelines.

Again, we currently own the GLD January 19, 2024, 145 call LEAPS contract at $37.00. You must own LEAPS in order to use this strategy.

Based on our approach, the LEAPS contract that works best is the one with a current delta of 0.80: the January 17, 2025, 162 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 GLD February 17, 2023, 184 call for roughly $0.07 or less (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 GLD March 17, 2023, 180 call for roughly $1.41 or more (adjust accordingly, prices may vary from time of alert)

Premium received: 3.8%

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 $37.00 (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 GLD.

iShares 20-Year Bond ETF (TLT)

We currently own the TLT January 19, 2024, 85 call LEAPS contract at $29.10. 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 0.78: the January 17, 2025, 85 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 TLT February 17, 2023, 110 call for roughly $0.12 (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 TLT March 17, 2023, 108 call for roughly $1.50 (adjust accordingly, prices may vary from time of alert)

Premium received: 5.2%

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 $29.10 (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 TLT.

iShares 7-10 Year Treasury Bond ETF (IEF)

We currently own the IEF January 19, 2024, 85 call LEAPS contract at $19.00. You must own LEAPS in order to use this strategy.

Based on our approach, the LEAPS contracts with a delta of 0.80 are currently the January 17, 2025, 91 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 IEF February 17, 2023, 101 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 IEF March 17, 2023, 99 call for roughly $0.65 (adjust accordingly, prices may vary from time of alert)

Premium received: 3.4%

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 $19.00 (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 IEF.

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.