Hey there, Power Profit Traders!
Good morning!
It’s been an exciting week back for me so far, with lots of opportunities firing in the stock, options, and coin markets!
Plus, as I told you in yesterday’s LIVE 9:30 a.m. ET session, my Money Calendar tools indicate there are even MORE bullish opportunities ahead in January, if the past 10 years’ of data is any guide.
Catch the entire replay right here
And speaking of my LIVE sessions, please note that my time slot is changing for next week. I am moving to 11:30 a.m. ET every Monday, Wednesday, and Friday, starting Monday, Jan. 10.
The best part? I’ll be LIVE with my buddy and fellow crypto expert Nick Black!
We will be showcasing more coin trading lessons and talking all things crypto. It’s gonna be fun, so follow the Money Morning LIVE calendar to make sure you never miss a show.
Even before that, though, you can catch me this Monday, Jan. 10, on the 8:30 a.m. ET Money Morning LIVE show with the gang, and then I’m honored to be the debut feature guest on a NEW show with Olivia Voz at 10 a.m. ET!
It’ll be a day jam-packed with LIVE trading – and lots of opportunities for my Power Profit Traders.
Today, though, I want to expound on a strategy we discussed yesterday around trading my Flying Five stocks.
Specifically, we went over how I utilize call options expiring in January 2023 – known as LEAPS, or Long-term Equity AnticiPation Securities – to simulate buying these five blue-chip stocks outright.
This time, I want to show you another twist on this strategy – one that still offers plenty of reward potential, but at a lower cost than buying the stock or a lone call outright. This is a great strategy when the underlying stock’s options are expensive – like those on today’s Power Profit Trades Watchlist…
A Chemistry for Profits
Today’s Watchlist is based on the Morning Report’s Expensive IV tool.
This data is updated after the closing bell each session and compares current implied volatility (IV) against a set of near-the-money options over the last year.
Expensive IV means the current IV is at the high end of this 52-week range, meaning option premiums are running hotter than normal — a ripe atmosphere for selling to open options, like I do in my Rocket Wealth Initiative program.
However, expensive IV obviously isn’t a friend of the option buyer.
That’s where today’s lesson comes in.
Before we dive into that discussion, though, let’s review my Flying Five stocks. Here’s a clip from my LIVE session where I introduced them to Olivia Voz on the Money Morning LIVE pre-market show earlier this week, but in summary, they derive from the old Dogs of the Dow theory.
This theory suggests buying the 10 stocks of the Dow Jones Industrial Average (INDU) with the greatest dividend yields in January, and holding through year’s end.
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 list, which are:
- Dow Incorporated (DOW)
- Verizon Communications Incorporated (VZ)
- Walgreens Boots Alliance Incorporated (WBA)
- The Coca-Cola Company (KO)
- Intel Corporation (INTC)
Watch the full clip here
As noted, in Wednesday’s Power Profit Trades newsletter, I reviewed buying long-term calls on these stocks.
But I could also add another leg to those trades, in order to reduce the cost of entry (and maximum risk) when option prices are running hot.
We’ll use Dow Incorporated (DOW) as an example, since it’s on the Flying Five list.
Dow Inc – formerly Dow Chemical – makes and sells a variety of industrial chemicals and materials used across a wide variety of industries.
DOW’s dividend yield is one of the highest inside the Dow Jones Industrial Average, and it is now valued at a 10% discount from its trailing sales value (price-to-sales ratio). Meanwhile, the company’s sales are soaring, growing 52.76% last quarter.
In other words, DOW looks fundamentally strong and relatively cheap under $60.
Dow Incorporated (DOW) since January 2021 – Source: Bloomberg
So, instead of simply buying LEAPS calls – which already have a lot of time value priced in, since they don’t expire for a year – I could ALSO sell a higher-strike call (about 7% to 10% above my bought strike) to make it a bull call spread.
The premium received from the sold leg would help offset the cost of the bought call, lowering the cost of entry, risk, and breakeven.
The downside of this strategy, of course, is it puts a ceiling on my maximum reward. No matter how high DOW might move above the sold call strike by January 2023, the maximum profit potential is capped – as opposed to a lone bought call or purchased shares, where the profit potential is theoretically unlimited.
So, kids, that’s your Power Profit Trades lesson for today! Talk to you again tomorrow.
Tom Gentile
America’s #1 Pattern Trader
