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Realistic Strategies, Realistic Returns

June 2, 2023

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

International Business Machines (IBM)

Our short calls are in-the-money and are due to expire today. As a result, we are going to buy back our short calls and immediately sell more premium.

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 0.78: 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 132.80.

Here is the trade:

Buy to close IBM June 2, 2023, 127 call for roughly $5.80 (adjust accordingly, prices may vary from time of alert)

Once that occurs (and you have LEAPS in your possession):

Sell to open IBM July 21, 2023, 135 call for roughly $3.45 (adjust accordingly, prices may vary from time of alert)

Premium received: 8.0%

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.