My options strategy continues to evolve into something that is better positioned to weather a bear market.

music selection:  “The Wicker Man” — Iron Maiden

Recently, I started replacing covered calls and written puts with bull call spreads and bear put spreads and even an Iron Condor.  That experiment is going well but relies on trying to capture the upward or downward movement in a stock.  Where I really want to do is find a way to bet on big slow moving slugs that rarely change more than a few percent a month.  I want to take advantage of time decay in the options market with low risk, low capital deployed, and a defined maximum risk per trade.  I want all of this while still earning good income.

I revealed my plan to achieve all of this last week – to email subscribers only.  NOTE – there is sometimes bonus material in the weekly email that is NOT on the blog.  The only way to get it is to subscribe!  I bought a calendar call in JPM.  The bet was that the company was solid with Jamie Dimon at the helm and the share price would not likely suddenly tank nor rally 20%.  To do this, I entered a combo order to sell JPM190621C00110000 (I got 1.87 a share) and buy JPM190920C00110000 (I paid 4.60 a share).  My net debit was 2.73 a share.

Here is how it works.  Options have Time Value (TV) that represents the value of their optionality and the increasing likelihood of finishing in the money with more time.  Thus longer dated options have more TV.  This time value decays as the clock ticks.  But the decay is not linear.  The decay accelerates when the time remaining is under 6 weeks and is very slow on long dated options.  Thus my short call will decay to zero faster than my long call will decay.  I plan to capture the difference as profit so long as JPM doesn’t make any large moves close to the expiry of the June call.

JPM has moved 0.28% since I opened the calendar spread.  The spread is already selling for 3.17 a share.  That is a 16% positive move in just a few days while a mega cap did just as expected by moving slowly.  I’ll be mixing in calendar spreads in the coming weeks and hoping rolling existing covered call trades off my radar as shares get called away.  I’ll be targeting companies with market cap greater than 50 billion and low Betas (I want stocks that move slower than the market).  And I’ll be using put based calendar spreads so I’m protected against price declines and am only at risk if a mega cap unexpectedly jumps a “large” amount near expiry.  That just isn’t likely to happen.  I’ll make great money while positioning the portfolio defensively.

I’m currently looking at:

• ZTS – Beta 0.60
• INTC – Beta 0.61
• CB – Beta 0.63
• ECL – Beta 0.64
• EL – Beta 0.68
• DIS – Beta 0.69
• AVGO – Beta 0.72
• JNJ – Beta 0.72
• UNH – Beta 0.73
• BMY – Beta 0.74
• NVO – Beta 0.75
• BKNG – Beta 0.79

These names are all over 50 billion market cap and move slower than the market at large.  I think they make good candidates for capturing time decay with a limited amount of capital at risk.