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Fundamentals
Realistic Strategies, Realistic Returns

November 22, 2022

Cabot Options Institute Fundamentals – Alert (TLT, EFA)

ALL-WEATHER PORTFOLIO

iShares 20 Year Bond ETF (TLT)

We want to bring the delta of our position back to “normal” state. In our terms “normal” means a delta between roughly 0.40 and 0.60. As it stands, with TLT rallying as of late, our deltas are near parity.

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.

Based on our approach, the LEAPS contract that works best is the one with a current delta of 0.81: the January 17, 2025, 75 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 December 16, 2022, 100 call for roughly $2.90 (adjust accordingly, prices may vary from time of alert)

COI_F_112222_TLT_close.png

Once that occurs (or if you are new to the position and already own LEAPS):

Sell to open TLT December 16, 2022, 103.5 call for roughly $1.30 (adjust accordingly, prices may vary from time of alert)

COI_F_112222_TLT_open.png

Premium received: 4.5%

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 $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.

Yale Endowment Portfolio

iShares EAFE ETF (EFA)

Like the TLT trade above, we want to bring the delta of our position back to “normal” state. Again, “normal” means a delta between roughly 0.40 and 0.60. The recent rally in EFA has pushed the overall delta of our position to near flat. As a result, we are going to buy back our 63 calls and sell more, going out a few additional weeks, and sell some 67 calls.

We currently own the EFA January 19, 2024, 45 call LEAPS contract at $19.50. You must own LEAPS in order to use this strategy.

The LEAPS contracts with a delta of 0.80 are currently the January 17, 2025, 45 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 EFA December 16, 2022, 63 call for roughly $2.90 (adjust accordingly, prices may vary from time of alert).

COI_F_112222_EFA_close.png

Once that occurs (or if you are new to the position and already own LEAPS):

Sell to open EFA December 30, 2022, 67 call for roughly $0.73 (adjust accordingly, prices may vary from time of alert).

COI_F_112222_EFA_open.png

Premium received: 3.7%

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 $19.50 (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 EFA.

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.