Happy Sunday! Andy here with another discussion on my Delta Codes strategy. I want to dig a little deeper today; I will be going over several live trades my webinar on Tuesday, so I want to prepare a bit for what’s to come.
But before I get to the nitty-gritty, I want to back-up a second for those of you who are new to the strategy.
What exactly is the Delta Codes strategy?
The Delta Codes strategy is similar to a traditional covered call strategy, with one exception. Rather than buying 100 or more shares of stock, you simply buy an in-the-money LEAPS call and sell 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.
First of all, you always start – just like when you’d use a traditional covered call strategy – by choosing a stock or ETF that you are comfortable owning for the long term. This is a crucial first step.
Let’s look at an older trade in Boeing (NYSE: BA).
The stock exemplifies the typical scenario that you should look for when using the Delta Codes strategy.
The next step is to choose an appropriate LEAPS contract to replace buying 100 shares of BA.
Back at the beginning of 2017 we decided to buy the January 2019 120 calls for $39.90 or $3,990. It would have cost us $15,568 to purchase 100 shares of Boeing. So, we saved $11,578, or 74.5% in capital by purchasing LEAPS rather than 100 shares of stock.
The savings in capital ($11,578) allows the ability to invest our hard-earned capital in other ways.
The next step is to sell a call with 30-60 days until expiration against the LEAPS contract. The goal is to sell calls at least 6-8 times annually, if not more.
We sold calls six times against our LEAPS contract. Our total gain at the end of the year . . . a staggering 128.5%.
Delta Codes are a great income alternative to traditional covered calls. All research points to covered calls being one of the best income strategies in the investment world and now you have the ability to use a covered call strategy with far less capital. LEAPS are a great alternative. The capital saved allows you the ability to diversify the strategy amongst a basket of well-known blue-chip stocks. That’s a far better approach than buying one stock and hoping for the best.
Next week I will be going over three live trades using my Delta Codes strategy. I will be examining each trade, step-by-step, so by the end you should feel very comfortable using the strategy . . . and hey, you might have a trade or two that you can make in your own account.