Putting A Collar On The Dogs Of The Dow

But then why did the Dogs do worse than the Dow Index?

The idea behind the strategy is not only to pick up high dividends, but to also take advantage of sector rotation in the market. The thought is to buy under-valued stock that will eventually rotate back into favor. Unfortunately, sometimes this rotation can take years to happen. Dogs can remain dogs.

Under-performers can continue to under-perform until they get de-listed. All of our Dogs at the start of 2020 remained Dogs at the start of 2021, with the exception Pfizer (PFE) and ExxonMobil (XOM).

Not because they outperformed the others, but because they got de-listed from the Dow Jones Index.

Dogs of the Dow Using Options

Step 1: Sell Cash-Secured Puts to Acquire Stock

Sell cash secured puts one strike out-of-the-money with a monthly expiry about 30 days out or less.

Hold till expiration.

If assigned, we acquire the stock.

If not assigned, we keep the premium received and sell another put.

Step 2: Sell Covered Calls

Once shares of a stock is acquired, sell covered calls with a monthly expiry about 30 days out or less. If the 20-day moving average is sloping upwards, sell calls one strike out-of-the-money. If it is sloping down, sell calls one strike in-the-money.

Otherwise, sell calls at-the-money.

Step 3: Buy Protective Put to Complete the Collar

Buying protective puts is expensive, so we buy only when we need to. If and when the stock price closes more than 5% below the price at which it was acquired, buy a protective put one strike out-of-the-money below the current price.

Use the same expiry date as the covered call. This position now is a collar.

If we have a short put but no stock yet, then purchase a protective put whenever the stock price closes more than 5% below the strike price of our short put.

Buy the put one strike out-of-the-money below the current price to make this into a bull put spread. This limits the loss of a cash-secured short put.

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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