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Happy Sunday!
It has been a banner year for the bulls with the S&P 500 up over 26%.
And as 2019 winds down I’m starting to lock in some profits in my Dogs of the Dow portfolio.
The Dogs of the Dow is a mechanical investment approach that has shown to outperform the market significantly over the long-term.
Given the long-term success, I wanted to enhance the tried and true through the use of alternative strategies. My goal was to keep the core concept of the Dogs, but use additional, conservative strategies to not only enhance the returns, but to limit downside risk and overall capital requirements.
Our portfolio continues to outperform the benchmark indexes by a significant amount. In 2019 alone we are up 349.6% on a cumulative basis.
And we are adding new positions soon. Very soon.
We’ve already started to lock in some of our 2019 returns. On Wednesday, we locked in returns of 111.5% and 49.6% in Procter & Gamble (PG) and Verizon (VZ), respectively.
How are we doing it?
With a little-known strategy, known as the poor man’s covered call.
It’s a strategy 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 our trade in Procter & Gamble (NYSE: PG).
The stock exemplifies the typical scenario that you should look for when using our options strategy.
The next step in the PG trade is to choose an appropriate LEAPS contract to replace buying 100 shares of PG.
Back at the beginning of 2019 we decided to buy the January 2019 72.5 calls for $20.75 or $2,075. It would have cost us $9,026 to purchase 100 shares of PG. So, we saved $6,951, or 77% in capital by purchasing LEAPS rather than 100 shares of stock.
The savings in capital ($6,951) 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 actually sold calls nine times against our LEAPS contract. Our total gain at the end of the year using this options strategy . . . a staggering 111.5%.
Our poor man’s covered call strategy is 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. Now investors have the ability to use a covered call strategy that requires far less capital.
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.
It’s a powerful options strategy that takes advantage of some of the best mechanical stock-based strategies:
- Without locking up huge amounts of capital.
- Giving you downside protection AND upside protection.
- Giving you a mechanical, repeatable process to earn regular income.