Hey there, Power Profit Traders!
Good morning! Boy, it is good to be back in the saddle sharing my newest trade ideas with you here, as well as in my LIVE trading sessions. I’m excited to present you with new trade opportunities in stocks, options and, of course, the best-performing cyber coins.
In fact, make sure you catch me at 9:30 a.m. ET TODAY right here! (And don’t forget to bookmark this page for REPLAYS of my sessions.)
This week, I’ve already gone over my “Flying Five” strategy during my 9:30 sessions, after discussing it with Oliva Voz on the Money Morning LIVE pre-market show…
You can watch the entire clip here, but I also want to break it down for you in today’s Power Profit Trades newsletter, because it involves my adaptation of the time-tested strategy of buying cheap blue-chip stocks in January and holding them through year’s end.
Watch the full clip here
If you’ve been trading a while, you’re probably already aware of the strategy, known as buying the Dogs of the Dow.
But for the new kids – the Dogs of the Dow are the 10 stocks of the Dow Jones Industrial Average (INDU) with the greatest dividend yields. (The idea has various historical origins based on measurements beyond just dividend yields… but for the past 30-plus years, the Dogs have been based on the biggest yields.)
The concept is that these stocks are not only relatively cheap, but derive from companies with a proven commitment and capability to pay higher dividends. This suggests the stocks are undervalued by the current market at the start of the year – but could gain ground, as they remain dependable fundamentally.
That said, I then take the Dogs and do a bit more whittling to come up with my Flying Five – also known as the small dogs of the Dow – focusing on the five cheapest stocks from the Dogs of the Dow list.
And instead of buying & holding these stocks all year, I put one more twist on the traditional Dogs strategy… using options to speculate on cheap stocks for even cheaper.
Take the Leap to Greater Gains
My Flying Five stocks – which represent a diverse array of sectors – and their respective dividend yields are:
- Dow Chemical (DOW) – 4.94%
- Verizon (VZ) – 4.93%
- Walgreens Boots Alliance (WBA) – 3.57%
- Coca-Cola (KO) – 2.84%
- Intel (INTC) – 2.70%
To put that into perspective, the forward yield for the Dow Jones Industrial Average is running at only 1.86%.
What’s more, the Flying Five are all trading between $50 and $60, as you can see in the clip above. So, compared to trading shares of, say, Amazon (AMZN) or Tesla (TSLA), the price tag on this group already doesn’t break the bank.
And by leveraging the power of options, I can bet on a bounceback for these stocks at a fraction of what it’d cost to buy them outright.
Specifically, I buy Long-term Equity AnticiPation Securities (LEAPS) call options. LEAPS are options that expire each January, going several years out.
The goal of buying near-the-money LEAPS calls is to get bullish exposure to the Flying Five stocks over the next year, but without as much cash outlay as purchasing 100 shares of each stock outright (since one option contract controls 100 shares).
Of course, by purchasing LEAPS instead of shares, I won’t get any of the actual dividends a shareholder would. But that’s fine, considering the money I’m saving out of the gate.
Not only will my LEAPS calls benefit the higher the stocks rise over the next year – I could also capitalize on the increasing delta of the calls.
Delta is one of the options “Greeks,” and in the simplest terms, it measures the option’s sensitivity to the underlying stock price changes. A call with a delta of 1.0 will essentially move in step with the shares themselves, gaining $1 in value for every 1-point increase in the stock price.
Delta tends to increase as an option moves deeper into the money (meaning the stock price moves above the call strike price) and as expiration approaches (for in-the-money or at-the-money contracts).
And speaking of expiration – another Greek that will eventually come into play is theta. Theta measures the estimated amount by which an option’s value will decrease as expiration approaches. Or, in simpler terms, it’s like a price tag rolling backwards, dropping each day as time value dwindles.
But if my prognosis for the Flying Five comes to fruition – and my Money Calendar Pro seasonality tools suggest history is on our side – delta should increase on the LEAPS calls in 2022.
So, kids, that’s your Power Profit Trades lesson for today!
Be sure to tune into this morning’s Power Profit Trades session at 9:30 a.m. ET right here! You never know when I’ll drop more trade ideas…
Have a great day!
Tom Gentile
America’s #1 Pattern Trader
