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The Most Reliable Way to Beat the Market in 2024

Selling options is one of the most reliable ways to beat the market, and in our current low-volatility environment, this strategy is my favorite way to do it.

Sparklers and Champagne Glasses

Market volatility (as measured by the VIX) is at the lowest levels it’s been at for years. Normally, that’s bad news for options sellers as lower volatility translates to lower premium levels for options contracts.

Fortunately, my favorite options strategy for next year, which is a reliable market-beater, works just as well for investors in a low-volatility environment.

That strategy, a poor man’s covered call (or a long call diagonal debit spread), is used when a trader is bullish on an underlying stock or ETF and the implied volatility is low.

Not only is the poor man’s covered call one of the least risky options strategies, but it also allows you to participate in all of the benefits of a covered call without the excessive capital requirements. In fact, by using a poor man’s covered call, your capital outlay is typically 60% to 85% less than a standard covered call.

There are numerous ways to approach poor man’s covered calls. My preference is to use LEAPS that have at least two years left until expiration.

Let’s take a look at one of the Small Dogs of the Dow stocks, Intel (INTC).

At the time of writing, the stock is trading for 45.69.

Now, if we followed the route of the traditional covered call, we would need to buy at least 100 shares of the stock. At the current share price, 100 shares would cost $4,569. Certainly not a crazy amount of money. But just think if you wanted to use a covered call strategy on, say, a higher-priced stock like Apple (AAPL), Microsoft (MSFT) or even an index ETF like SPDR S&P 500 ETF (SPY). For some investors, the cost of 100 shares can be prohibitive, especially if diversification amongst a basket of stocks is a priority. Therefore, a covered call strategy just isn’t in the cards … and that’s unfortunate.

So, it’s worth repeating, with a poor man’s covered call strategy you can typically save 60% to 85% of the cost of a covered call strategy. Again, rather than purchase 100 shares or more of stock, we only have to buy one LEAPS call contract for every 100 shares we wish to control.

As I said before, my preference is to buy a LEAPS contract with an expiration date of around two years. Some options professionals prefer to only go out 12-16 months, some even less, but I prefer the flexibility the two-year LEAPS offers.

Again, per my approach, I want to go out roughly two years in time, if not more. The January 16, 2026, expiration cycle with 760 days left until expiration is the longest-dated expiration cycle and would be my choice.

And when my LEAPS reach 10-12 months left until expiration, I then begin the process of selling my LEAPS and reestablishing a position with approximately two years left until expiration.

Now, once I have chosen my expiration cycle, I then look for an in-the-money call strike with a delta of around 0.80.

When looking at INTC’s option chain I quickly noticed that the 33 call strike has a delta of 0.81. The call is currently trading for approximately $17.70. Remember, always use a limit order. Never buy an option at the ask price, which in this case is $19.20.

So, rather than spend $4,569 for 100 shares of INTC, we only needed to spend $1,770. As a result, we saved $2,799 or 61.2%. Now we have the ability to use the capital saved to diversify our premium amongst other securities if we so choose.

After we purchase our LEAPS call option at the 33 strike, we then begin the process of selling calls against our LEAPS.

My preference is to look for an expiration cycle with around 30-60 days left until expiration and then aim for selling a strike with a delta ranging from 0.20 to 0.40.

The February 16, 2024, 50 call strike with a delta of 0.31 falls within my preferred range.

We could sell the 50 call option for roughly $1.24. The premium collected is 7% over 60 days or approximately 42% in premium collected annually. If we were to use a traditional covered call our potential return on capital would be less than half, or 2.7%.

And remember, the 7% is just the premium return; it does not include any increases in the LEAPS contract if the stock pushes higher. Moreover, we can continue to sell calls against our LEAPS position for another 12 to 16 months, thereby generating additional income or lowering our cost basis even further. And of course, we have the ability to get out of the position, for any reason, if we so choose.

Quick Aside: 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.

Regardless of your approach, you can continue to sell calls against your INTC LEAPS as long as you wish. Whether you hold a position for one expiration cycle or 12, poor man’s covered calls give you all the benefits of a covered call for significantly less capital allowing you to diversify your portfolio or income stream far more effectively and efficiently.

To learn about all my favorite strategies and see the system in action, consider subscribing to a Cabot Options Institute advisory today.

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.