Cabot Options Institute Fundamentals – Dogs of the Dow Alert (VZ, CSCO)
With 11 days left until the June 16, 2023, expiration cycle ends, we need to begin the process of rolling the remainder of our short calls and immediately selling more call premium, preferably in July. In addition, CSCO has rallied as of late, which has pushed our short calls in the money. As a result, I want to buy our short calls back and immediately sell more.
Verizon (VZ)
Verizon is currently trading for 34.72.
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 0.77: the January 17, 2025, 28 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 June 16, 2023, 39 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 VZ July 21, 2023, 36 call for roughly $0.46 (adjust accordingly, prices may vary from time of alert)
Premium received: 4.4%
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 $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.
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.
Cisco Systems (CSCO)
We currently own the CSCO January 17, 2025, 35 call LEAPS contract at $15.65. 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 0.79: the January 17, 2025, 35 calls. We typically initiate a LEAPS position, with a delta of roughly 0.80, that has about 18 to 24 months left until expiration.
CSCO is currently trading for 50.48.
Here is the trade:
Buy to close the CSCO June 23, 2023, 48 call for roughly $2.75 (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 CSCO July 14, 2023, 52 call for roughly $0.49 (adjust accordingly, prices may vary from time of alert)
Premium received: 3.1%
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 $15.65 (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 CSCO.