Small Dogs of the Dow Trades 2022 - Part Two - Cabot Wealth Network

Small Dogs of the Dow Trades 2022 – Part Two

dogs-of-the-dow-2022

Today I am going to go over the remainder of the Small Dogs of the Dow.

Yesterday, I covered Verizon (VZ) and Dow (DOW).

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Andy Crowder quit a lucrative job on Wall Street so that he could share his expertise with regular investors – instead of super-rich investment banks and hedge funds.

Today, he publishes four different specialized options services for Cabot Wealth Network.

When you join Cabot Options Institute Masters Club, you get all four, at half the price of each separately!

These services each offer a safe way to generate reliable returns – based on statistical likelihoods that give you an 80% chance of success.

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Dogs of the Dow – Long Call Diagonal Spread (Poor Man’s Covered Call Strategy)

Intel (INTC)

Intel is currently trading for 55.81.

Intel-INTC-Poor-mans-covered-calls-2022

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 $5,581.

But with a poor man’s covered call strategy you can typically save 55% to 85% off the cost of a covered call strategy.

So 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 around two years. Some options professionals prefer to only go out 12-16 months, but I prefer the flexibility the two-year LEAPS offers.

Again, I want to go out roughly two years in time. The January 19, 2024, expiration cycle with 744 days left until expiration is the longest dated expiration cycle and would be my choice.

So, 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.

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 Intel’s option chain I quickly noticed that the 37.5 call strike has a delta of 0.80. The 37.5 call strike price is currently trading for approximately $21.00. Remember, always use a limit order. Never buy an option at the ask price, which in this case is $22.25.

So, rather than spend $5,581 for 100 shares of INTC, we only needed to spend $2,100. As a result, we saved $3,481, or 62.4%. Now we have the ability to use the capital saved to diversify our premium amongst other securities, if we so choose.

INTC-poor-mans-covered-call-LEAPS-2022

After we purchase our LEAPS call option at the 37.5 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, or a probability of success between 60% and 85%.

As you can see in the options chain below, the 57.5 call strike with a delta of 0.40 falls within my preferred range.

INTC-poor-mans-covered-calls-short-calls

We could sell the 57.5 call option for roughly $1.70.

Our total outlay for the entire position now stands at $19.30 ($21.00 – $1.70). The premium collected is 8.1% over 44 days.

If we were to use a traditional covered call our potential return on capital would be less than half, or 3.0%.

And remember, the 8.1% is just the premium return, it does not include any capital appreciation in the LEAPS contract if the stock pushes higher. Moreover, we can continue to sell calls against our LEAPS position for another 8 – 12 months, thereby generating additional income or lowering our cost basis even further.

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.

Now let’s try the same poor man’s covered call approach with Walgreens Boots Alliance (WBA).

Walgreens Boots Alliance (WBA)

Walgreens Boots Alliance (WBA) is currently trading for 54.13.

WBA-poor-mans-covered-calls-2022

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 $5,413.

So 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 around two years. Some options professionals prefer to only go out 12-16 months, but I prefer the flexibility the two-year LEAPS offers.

Again, I want to go out roughly two years in time. The January 19, 2024, expiration cycle with 744 days left until expiration is the longest dated expiration cycle and would be my choice.

So, 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.

Then, just as with Intel, I look for an in-the-money call strike with a delta of around 0.80.

When looking at WBA’s option chain I quickly noticed that the 40 call strike has a delta of 0.79. The 40 call strike price is currently trading for approximately $15.90. Remember, always use a limit order. Never buy an option at the ask price, which in this case is $16.05.

So, rather than spend $5,413 for 100 shares of WBA, we only needed to spend $1,590. As a result, we saved $3,823, or 70.6%. Now we have the ability to use the capital saved to diversify our premium amongst other securities, if we so choose.

WBA-LEAPS-poor-mans-covered-calls

After we purchase our LEAPS call option at the 40 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, or a probability of success between 60% and 85%.

As you can see in the options chain below, the 55 call strike with a delta of 0.44 falls just outside my preferred range.

KO-short-calls-poor-mans-covered-calls

We could sell the 55 call option for roughly $1.74.

Our total outlay for the entire position now stands at $14.16 ($15.90 – $1.74). The premium collected is 10.9% over 44 days.

If we were to use a traditional covered call our potential return on capital would be less than half, or 3.2%.

And remember, the 10.9% is just the premium return, it does not include any capital appreciation in the LEAPS contract if the stock pushes higher. Moreover, we can continue to sell calls against our LEAPS position for another 8 – 12 months, thereby generating additional income or lowering our cost basis even further.

Now let’s try the same poor man’s covered call approach with Coca-Cola (KO).

Coca-Cola (KO)

As you can see in the chart below, Coca-Cola (KO) stock is currently trading for 61.00.

KO-poor-mans-covered-calls-2022

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 $6,100. Again, not a crazy amount of money. But 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 again, rather than purchase 100 shares or more of stock, we only have to buy one LEAPS call contract.

The image below shows every expiration cycle available for Coca-Cola. Again, I want to go out roughly two years in time. The January 19, 2024 expiration cycle with 744 days left until expiration is the longest dated expiration cycle and would be my choice.

As with the other positions, I’ll begin the process of unwinding the position when my LEAPS reach 10-12 months until expiration.

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 Coca-Cola’s option chain I quickly noticed that the 47.5 call strike has a delta of 0.81. The 47.5 call strike price is currently trading for approximately $14.75. Remember, always use a limit order. Never buy an option at the ask price, which in this case is $14.95.

So, rather than spend $6,100 for 100 shares of Coca-Cola, we only needed to spend $1,475. As a result, we saved $4,625, or 75.8%. Now we have the ability to use the capital saved to diversify our premium amongst other securities, if we so choose.

KO-LEAPS-poor-mans-covered-calls-2024

After we purchase our LEAPS call option at the 47.5 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, or a probability of success between 60% and 85%.

As you can see in the options chain below, the 62.5 call strike with a delta of 0.33 falls within my preferred range.

KO-short-calls-poor-mans-covered-calls

We could sell the 62.5 call option for roughly $0.76.

Our total outlay for the entire position now stands at $13.99 ($14.75 – $0.76). The premium collected is 5.2% over 44 days.

If we were to use a traditional covered call our potential return on capital would be less than half, or 1.2%.

And remember, the 5.2% 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 8 – 12 months, thereby generating additional income or lowering our cost basis even further.

As with our other poor man’s covered call trades, if you are a bit more bullish on KO stock, you can 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 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.

As always, if you have any questions, please do not hesitate to email me or post a question in the comments section below. And don’t forget to sign up for my Free Newsletter for education, research and trade ideas.

Comments

  • Greetings. Just a note, for your WBA example above, it looks like the table associated with the short side is for KO, not WBA. It probably should be corrected.

    Regards

  • Raaj H.

    Hi Andy – thanks for the ideas….what happens if the price reaches the call strike? do we exercise the leaps contract ?

    • Gregg,

      Not really, I’m looking more at the premium left in the short call. I’m always looking to take off 50% to 75% of my original premium. If I can take more, I will, it just depends on the probability of success at the time and how much time is left until expiration. I hope this helps.

      • So if the short call falls to 50% to 75% you roll it to the .3 delta next month, or to the new .3 delta in the same month? Like with INTC after earnings?

        The other possibility is like DOW where the short call has gone in the money. How would you roll that? or just take the profitable trade off and start over? Thx

        • Gregg,

          You can buy back the short call, lock in profits and sell more premium either in the same month (if premium allows) or go out further in time. It truly is up to you to decide. I just try to keep my deltas in a reasonable window. If an underlying stock pushes higher, I simply buy back the calls and see more premium. I’m losing out on the short call, but I’ve more than made up for it in my LEAPS contract. But hey, taking off the profit and moving on is always a choice as well. Again, it truly depends on your outlook going forward. I hope this helps. 🙂

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