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Fundamentals
Realistic Strategies, Realistic Returns

January 11, 2023

Cabot Options Institute Fundamentals – Alert (DOW)

Since initiating our Dogs of the Dow positions we’ve seen nothing but a higher market, which has been great for our inherently long delta (bullish) Dogs of the Dow portfolio. Of course, we are only a few days into 2023.

The recent rally has pushed the delta of our DOW position close to neutral (LEAPS almost at parity with short calls) so we need to follow the mechanics of the strategy and buy back our February 17, 2023 calls and sell more premium. This will bring our deltas back to a more comfortable level, especially if we see DOW extend its recent gains.

Dow Inc. (DOW)

DOW is currently trading at 57.59.

Our position is up 11.8% since initiating it just six days ago.

Here is the trade:

Buy to close the DOW February 17, 2023, 55 call for roughly $4.00 (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 DOW February 17, 2023, 60 call for roughly $1.23 (adjust accordingly, prices may vary from time of alert)

Premium received: 7.2%

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 $16.85 (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 DOW.

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.

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.