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A More Profitable Twist on Dogs of the Dow

At the beginning of 2017 you have a rare opportunity to vastly increase your income using what might be the simplest investment strategy ever. Today, I’m hosting a live event dedicated to showing you how to use this strategy. It’s called: Trading for Income with the “Dogs of the Dow.dogs.of.dow

Click here to attend.

As you’ll see, this strategy works incredibly well over the long term. We know that most people like to think they’re “long-term” investors, but we also know that the average holding period for stocks is less than six months.

But if you are a long-term investor (or you’d like to be), here are the full details of how you can beat the market.

The strategy is called the “Small Dogs of the Dow.”

The Small Dogs of the Dow is a simple and effective strategy that has outperformed the Dow Jones Industrial Average and the S&P 500 index significantly over the last 20 years.

 

Take a look:

Small Dogs of the Dow

 

Investment 1 Year 3 Year 5 Year 10 Year 20 Year
Dogs of the Dow -0.4% 17.90% 3.40% 6.70% 11.10%
Small Dogs of the Dow 6.6% 18.00% 1.80% 7.70% 12.50%
Dow Jones -1.5% 15.00% 4.40% 6.10% 10.80%
S&P 500 0.10% 14.50% 2.40% 5.00% 9.60%

So, what is the Small Dogs of the Dow strategy? And how does it work?

First, you must understand the Dogs of the Dow. These are the 10 highest-yielding stocks in the Dow Jones Industrial Average. The Dogs of the Dow strategy recommends buying these 10 high-yield Dow stocks at the beginning of each year and rebalancing annually.

The Small Dogs of the Dow offers a slight twist on this winning investment strategy. And the results are certainly worth your attention.

One of the key attractions of using this conservative strategy is that it requires very little research or time. Simply take the five lowest-priced Dogs of the Dow stocks and invest an equal sum in each stock.

Every year, the whole process starts over. Oftentimes, most of the stocks will remain on the list from one year to the next, simplifying things from a tax perspective (no gains or losses to report) and helping to lower commission costs.

But I have a unique alternative that is far more cost-effective and in most cases, more profitable than purchasing the five stocks that make up the Small Dogs of the Dow.

The strategy is known as a poor man’s covered call – which is what I’ll talk about during my free live event this Tuesday. (For more info, just click here.)

A poor man’s covered call is similar to a traditional covered-call strategy, with one exception in the mechanics. Rather than buying 100 or more shares of stock, an investor simply buys an in-the-money LEAPS call and sells a near-term out-of-the-money call against it.

LEAPS, or long-term equity anticipation securities, are basically options contracts with an expiration date longer than one year. LEAPS are no different than short-term options, but the longer duration offered through a LEAPS contract gives an investor the opportunity for long-term exposure.

Other than reducing the capital required, the reason we purchase LEAPS is to minimize the extrinsic value and theta decay.

Poor Man’s Covered Call on a Small Dogs of the Dow Stock

As an example, I’ll start with one of the expected stocks that will reside in the Small Dogs of the Dow portfolio in 2017…

Take, for instance, the Cisco Systems (NASDAQ: CSCO):

ANDY.TUES.1.CHART

The next step is to choose an appropriate LEAPS contract to replace buying 100 shares of CSCO.

If we were to buy CSCO shares at $30.75 per share, our capital requirement would be a minimum of $3,075 plus commissions ($30.75 times 100 shares).

If we look at CSCO’s option chain, we will quickly notice that the expiration cycle with the longest duration is the January 2019 cycle, which has roughly 760 days left until expiration.

ANDY.TUES.2.CHART

 

With the stock trading at $30.75, I prefer to buy a contract that is in the money at least 10%, if not more. For the options geeks out there, I like to buy a LEAPS contract with a delta of around 0.80.

Let’s use the $23 strike for our example since it has a delta of 0.84.

We can buy one options contract, which is equivalent to 100 shares of CSCO, for roughly $8.15, if not cheaper. Remember, always use a limit order – never buy at the ask price, which in this case is $8.45.

If we buy the $23 strike for $8.15 we are out $815, rather than the $3,075 we would spend for 100 shares of CSCO. That’s a savings on capital required of 73.5%. Now we can use the capital saved ($2,260) to work in other ways.

Next Steps

The next step is to sell an out-of-the-money call against our LEAPS contract.

I like to go out 30 to 60 days when selling premium against my LEAPS contract. Let’s sell the January 31 strike with 60 days left until expiration.

ANDY.TUES.3.CHART

 

So again, let’s say we decide to sell the 31 strike for $0.70, or $70, against our LEAPS contract.

Our total outlay or risk now stands at $3,005 ($3,075 LEAPS contract minus $70). At first, the premium seems small, but on a percentage basis selling the 31 call for $70 reaps a return on capital of 2.3% over 60 days. Of course, your upside is limited to $31 with this trade.

An alternative technique, if you wish to participate on a continued upside move in CSCO, is to buy two leaps in the stock and only sell one call against it. This strategy will increase your deltas and allow half of your position to participate in a move past $31.

No matter the approach, 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 (typically around nine to 12 months) we will simply sell the contract and use the proceeds to continue our poor man’s covered-call strategy.

If you are interested in further increasing your Small Dogs of the Dow performance using a unique options trading approach, please consider registering for the webinar today at noon EST. I’ll be discussing how to use poor man’s covered calls on the Dogs and Small Dogs of the Dow.

When you attend, I’ll also give you a free copy of my special report on the Dogs of the Dow, which goes into more detail. Click here to attend.

 

Kindest,

Andy Crowder

P.S. Today’s event is the LAST event we’re hosting this year. I’ve also heard that the price of my options research is likely to go up in 2017 (as it has the past several years), so if you’re interested in getting more information about my Dogs of the Dow strategy, or if you want to take a risk-free look at my premium options research, I urge you to attend.

Click here to register now.

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