Editor's note: Today's piece is longer than what we normally publish. But the idea we're covering is critical to your success as an investor.
Our colleague, Dr. David Eifrig, has used the strategy you'll learn about today to string together an unprecedented 83 consecutive winning positions. We believe it's a "must read" for anyone looking to generate regular, safe streams of income.
Saturday, September 29, 2012
The idea we are about to cover regularly gets us accused of "making up" numbers... of fraudulent marketing. We've received loads of hate mail about how we market this idea.
On the other hand, this idea is extremely important. It's an idea we want every single reader to understand. We want our parents to understand it. We want our children to understand it. Knowing about this idea – and using it – is one of the real keys of successful investing.
It's a "high level" idea most of our senior analysts and employees use to make money in the market. Some of the more advanced investors on our staff use this strategy almost exclusively. We're proud of this idea... and proud of the claims we are able to make about it.
OK... we hope you're interested... because learning this idea means taking a major step forward in your sophistication as an investor. It's moving from little league to the major leagues.
And we hope you're skeptical of anyone who claims he has profited on 83 of his last 83 positions.
You see, that's the source of controversy surrounding one of S&A's exclusive trading services, Retirement Trader. Editor Dr. David "Doc" Eifrig has put together an unbelievable track record in the service. We mean that literally. People don't believe that going "83 for 83" is possible. We've been accused many times of making up the numbers.
We're actually happy that many of our readers are skeptical of these types of claims. We certainly are. A healthy dose of skepticism is a great thing for consumers of financial services and information. And it's good to be skeptical of a claim that someone has gone "83 for 83." It's just impossible, right? Isn't it too good to be true?
Actually, no. It's not. In the case of Retirement Trader, what Doc has done for his readers is incredible. He has strung together a series of 83 consecutive winning positions.
Doc has shown thousands of retirees how to safely and regularly pull thousands of dollars out of the stock market... and put it into their retirement accounts. It's no wonder we receive more positive – even gushing – feedback about this service than we do any other service we publish. We sometimes worry Doc has so many loyal readers, he has developed a "cult" following.
For example, here's a feedback e-mail from subscriber Rick F., an experienced trader...
As some of our readers know (and Rick alludes), the trading method behind Doc's unbelievable track record is the options strategy of "selling puts."
A "put" is an option. When someone buys a put option, he's buying the right (but not the obligation) to sell a stock at a set price (called the "strike price") by an agreed-upon future date. So when you buy a put, no matter how low a stock's price falls, you can still sell for the strike price.
You can think of a put option as insurance. The buyer of the option is paying a small premium to insure his position against a decline in price. But what most people don't realize is that individual investors can also sell someone that insurance and collect the so-called "option premium."
Most folks find it easier to think in terms of insuring a home.
When you insure your home, you are essentially buying the right to sell your house to the insurance company for a certain value, under certain conditions, for a limited period of time. In return, you pay the insurance company to accept those terms – whether or not you ever exercise the terms of the policy.
Put options work the same way. When you sell a put option, you're acting like the insurance company. You're agreeing to buy someone else's shares of a particular stock for a set price, under certain conditions, for a limited period of time.
In the case of your house, you'd exercise your policy in a disaster... when a fire or catastrophic weather damage wrecks the value of your home. In the case of a put option, the holder would exercise his right to sell us his stock if the market value of his shares falls below the price we agreed to pay.
When you sell a put option, the trade works one of two ways. You either collect the entire premium without any obligation... or you end up buying shares at a discount. Considering the latter outcome, it's important to only sell puts on companies you want to own.
As an example, let's walk through an actual trade Doc recommended in Retirement Trader...
On November 22, 2011, Doc sold January 2012 $25 puts on Microsoft. At the time, shares of Microsoft were trading for $24.79.
In this example, $25 is the strike price. As long as shares of Microsoft traded for more than $25 by the expiration date (in this case, January 20, 2012)... subscribers who followed Doc's recommendation would book the entire premium with no obligation to buy shares. (After all, why would the buyer of that put exercise his option and sell shares for less than he could get in the open market?)
When Doc made his recommendation, the option premium for selling those puts on Microsoft was $1.15... An option contract covers 100 shares, so readers following his recommendation immediately collected $115 for every contract they sold.
On January 20, 2012, the Microsoft options "expired worthless." Shares of Microsoft were trading at $29.71 on the day the options expired – well above the $25 strike price. And Retirement Trader readers kept the entire premium for a 23% return on margin.
That word "margin" is important. When you sell put options, your brokerage requires you to set aside 20% of your potential obligation. Using the Microsoft example... If we sold one option contract, we're responsible for 100 shares at $25 (or $2,500). In this case, we'd deposit $500 (20% of $2,500).
Because we collected $115 in premiums and only had to deposit $500, we made 23% on the trade in about two months... That's a 142.3% annualized return.
So we've walked through the basics of put selling. Now we'll cover a huge factor in the success an investor has with put options. You see, there's a right way to sell puts (the safe way), and there's a wrong way to sell puts (the risky way).
First, the wrong way...
Remember... by selling a put, you agree to buy a stock at a predetermined price at a predetermined point in the future. If you agree to buy a stock at $25 per share two months into the future, and the shares decline to $10 per share, you still have to buy shares at $25. Thus, you lose $15 ($25 minus $10 = $15) for every share you agree to buy, unless you take the loss early and cover the trade, which still results in a large loss.
This is important. So I'll repeat it: By selling put options, you are "on the hook" for buying shares. If the stock you sell puts on plunges, you can suffer large losses. And this is where the vast majority of put sellers go wrong... and where Doc and his readers "go right."
You see, the premiums an investor can collect by selling puts on risky, volatile stocks are typically higher than the premiums he can collect on safe, steady blue-chip stocks, like Microsoft or Coca-Cola.
So tempted by the allure of larger cash premiums, many investors sell puts on risky stocks. And yes, these investors might collect a big cash premium, but they put themselves in great danger... and leave themselves "exposed" to a large loss should that risky stock experience a big price decline.
To put "real money" amounts on the example above... let's say you sell options that put you on the hook to buy 500 shares of a stock at $25 each. And imagine that by the time your options expire, the stock has plummeted 40% to $15 per share. In that case, you would be obligated to buy $12,500 worth of stock (500 shares times $25 per share)... even though the current market value is $7,500 (500 shares times $15 per share). In this example, you would lose $5,000 ($12,500 minus $7,500).
I know a 40% fall sounds drastic... But these types of declines frequently occur in risky stocks. I'm talking about expensive growth stocks and low-margin businesses like airlines and steelmakers. And these types of falls represent a big risk for put sellers.
Doc mitigates this risk by only selling puts on the world's safest blue-chip companies that are trading at bargain prices. He only sells puts on stocks he is happy to own. Our publisher Porter Stansberry, and many of our other analysts, have called selling puts on high-quality, blue-chip stocks "the most consistent trading strategy" they've ever used.
Regular readers know about these kinds of stocks. We call them "dominator" businesses, like Intel, Coke, Microsoft, and Wal-Mart. They hold No. 1 positions in their markets... rake in huge amounts of cash... and usually pay safe, growing dividends. They rarely suffer substantial declines... and when they do, it's usually a temporary stumble. Those dips are almost always a great time to step in and buy the stocks at bargain prices.
Again... these stocks rarely suffer large price declines. So most of the time, Doc's readers never have to buy the stocks. They simply keep the cash premiums because the stock doesn't sink below the price they've agreed to pay. But even when these stocks do suffer a decline... down to bargain prices... you're happy to buy the shares. You're happy to buy "dominator" businesses on the cheap. And you're happy to start collecting steady dividends.
That's what makes this strategy so safe and profitable. It offers lots of ways to win. This is in contrast with many other trading strategies that have only one way to win... and lots of ways to lose.
So far, about 79% of Doc's initial put sales have resulted in the option expiring worthless... In other words, readers who followed Doc's advice kept the premium and did not have shares "put" to them. In these situations, readers simply book the premiums and move on to the next trade.
Here's how one such trade worked out...
On September 6, 2011, Doc sold October $19 puts on Intel. As you probably know, Intel dominates the semiconductor industry to such a degree that competing with it is usually a sure path to bankruptcy. It has a "fortress" balance sheet, huge cash flows, and pays a dividend of more than 3%. At the time of Doc's put sale, shares of Intel were trading for $19.54.
The strike price in this case is $19... So as long as shares of Intel were trading for more than $19 when the options expired in mid-October, subscribers would keep the entire premium.
Retirement Trader readers received $0.90 in premium for selling puts on Intel. Remember, each put contract you sell is for 100 shares... So in this example, subscribers would have earned $90 per contract sold. Selling 10 contracts would have produced $900 in premiums.
These options "expired worthless" on October 21, 2011... From the time Doc sold puts on Intel, the stock rallied from $19.54 to $24.03. Readers who followed his recommendation walked away from the trade with hundreds, even thousands, of dollars collected safely.
Now remember... we said there are several ways to win with selling puts. And occasionally, Doc's readers are "put" the shares of these blue-chip dominators. (That means the stock was trading below the strike price at the expiration date, and subscribers were responsible for buying those shares at the strike price.)
Some folks consider this a "losing trade"... But because we only sell puts on companies we'd want to own in the first place, this can actually be a great thing.
There's one last big question out there... How can we say Doc has never closed a losing position in Retirement Trader since it launched in April 2010, when several positions resulted in stocks being "put" to subscribers? Let us explain...
As we've said many times... selling puts is one of the greatest trading strategies out there. It generates super-safe income. And if done properly, your odds of losing money are very, very slim.
Like we mentioned earlier, there's a right way and a wrong way to sell puts... As long as you sell puts the "right way," you too can enjoy the kind of phenomenal success Doc has had. And it's not difficult. To sell puts the "right way," only sell them on the world's safest blue-chip companies when they're trading at bargain prices.
As we said... sometimes the stock will trade for less than the put option's strike price on option-expiration day. In that case, you will have to buy 100 shares at the strike price. (Remember... for every put-option contract you sell, you are responsible for 100 shares of stock.)
That's called being "put" the stock. Many people think if they're put a stock, they lose...
But we're only selling puts on stocks we want to own – the world's best companies... So having to buy the stock isn't a bad thing. In fact, it can be a great thing. We get to name the price we're happy paying to own the stock. And we keep the initial premium.
Plus, once we are put the stock, we can immediately start generating more income.
Remember... to date, about 79% of Doc's put sales result in the option expiring worthless. In those cases, Retirement Trader subscribers did not have shares put to them... They simply kept the premium free and clear. But what about the other 21% of the time?
As we said, in those cases, they ended up buying shares. But because Doc has only recommended trades around blue-chip stocks, subscribers wound up holding shares of some of the greatest companies in the world (which, in most cases, pay a healthy dividend).
They also used the stock positions to generate an extra 12%-20% a year in income... To do that, we use another trading strategy called "selling covered calls."
Like a put, a call is an option.
When someone buys a put option, he's buying the right (but not the obligation) to sell a stock at a set price (called the "strike price") by an agreed-upon future date.
When someone buys a call option, he's buying the right (but not the obligation) to buy a stock at a set price by an agreed-upon future date.
We're not interested in buying calls in this example... We're only interested in selling them. So we're selling someone else the right to buy our stock at a set price in the future... In short, we're taking cash up front and agreeing to sell the stock we own for more than we've paid for it.
"Covered" simply means we own enough shares to cover the liability should the call option be exercised and we're forced to sell our shares. (That's known as having our shares "called away.")
There are two basic outcomes when selling covered calls. The first is that the stock closes below the strike price at expiration. In this case, you keep your stock and the premium... And you can sell another round of calls to generate more income.
The second outcome is that your shares are called away... The stock closes above the strike price at expiration. You keep the premium and sell your shares for the strike price. So your profit is equal to the premium plus the difference between the prices at which you bought and sold shares (the "capital gains").
To better help you grasp the concept, we're going to walk through an actual trade where Doc was put the stock and started selling covered calls...
On March 23, Doc recommended subscribers sell the May $33 puts on Wells Fargo. At the time, shares of Wells Fargo were trading for $33.53. And Retirement Trader subscribers collected about $1.25 in premium for each contract they sold.
In this example, $33 is the strike price. As long as shares of Wells Fargo traded for more than $33 by the expiration date (in this case, May 18), subscribers who followed the recommendation would book the entire premium with no obligation to buy shares.
But when the options expired, shares of Wells Fargo were trading for $30.94 – below the strike price. So we were "put" shares of Wells Fargo. On the morning of May 21 (the Monday following the expiration date), Retirement Trader subscribers purchased shares of Wells Fargo for the strike price, $33 a share. Meanwhile, Wells Fargo traded as high as $31.47 in the market.
Even if you take the highest possible price you could have gotten that day for Wells Fargo shares – $31.47 – and add the $1.25 premium collected for selling the puts, you have "just" $32.72. That's still $0.28 below the strike price... meaning readers were, at best, down $0.28 on the position.
That's why many people consider being put shares a loss. And it would be... if you sold your Wells Fargo shares that Monday and closed the position.
But Doc didn't do that...
On the same day readers purchased the stock (May 21), Doc recommended selling the July $33 call options on Wells Fargo. Retirement Trader readers collected $0.86 for every contract they sold.
When the calls expired on July 20, Wells Fargo was trading at $33.81. Because the stock was above the strike price, the July calls were exercised and subscribers' shares were "called away." In other words, they sold their stock for $33 a share... The same price they paid for it.
And because they collected the extra $0.86 in premium from selling covered calls, they turned what could have been a $0.28-per-share loss into a gain. By following Doc's recommendation to the end... subscribers could have booked a 6.6% gain on this trade in less than four months. That's an annualized gain of 20.4%.
And that's how Doc has achieved his incredible track record.
Thanks to selling covered calls, even when you are put a stock, the trade can end up a winner. That's why it's so important to only sell puts on high-quality companies you want to own.
There are many other examples of situations where Retirement Trader subscribers made a profit by selling calls after being put a stock...
Doc recommended selling December $25 puts on dominating computer-chip maker Intel on October 28, 2011. Subscribers who followed his recommendation were put the stock on December 19 at $23.82. (That accounts for the $1.18 in premium they received at the outset of the trade.)
The same day, Doc recommended selling the February $24 calls. Subscribers collected an additional $0.65 in premium. And they received $0.21 a share in dividends. The shares were called away in February for an 8.6% gain in about four months... That's a 27.9% annualized return.
Last July, Doc recommended selling September $65 puts on the health care products giant Johnson & Johnson for a $0.95 premium.
Subscribers were put the stock $64.05 a share. (Again, that accounts for the put premium we received up front.) And Doc immediately recommended selling the November $65 calls for an additional $1.60 in premium. The November calls expired worthless, and subscribers were able to sell another set of calls – the January 2012 $65 calls – for $1.22. They also received $0.57 a share in dividends while holding the stock.
Readers' Johnson & Johnson position was called away in January for a 6.7% profit in six months.
Staying in the medical sector, Doc recommended selling August $50 puts on pharmaceutical company Abbott Laboratories on June 24, 2011. Subscribers collected $0.90 in premium.
Come expiration day, Abbott shares were just below the strike price. So subscribers who sold the option were put shares. Then Doc recommended they sell the November $50 calls for $2.13 in premium. Subscribers also received $0.48 a share in dividends while they held the stock.
Like in the two examples above, subscribers' Abbott Labs shares were called away in November for a 5.1% gain in less than six months... a 12.6% annualized gain.
It doesn't happen often... But if you sell puts, sometimes you will have to buy shares. (And in Retirement Trader, about 21% of Doc's recommended put sales have resulted in subscribers being put shares.)
If you sell puts on risky stocks (in hopes of capturing larger premiums), that can cause losses. But if you only sell puts on blue-chip companies (all of today's examples qualify), you can still end up booking a profit on the position. It's no wonder Doc has produced such an incredible track record.
Doc has said his winning streak can't last forever... At some point, one of his recommended positions will close at a loss... But even then, it's likely to be a small percentage loss.
Most trading strategies have the potential to produce losses of 25%... 50%... even 75% on positions. But Doc's approach of using options to generate large income streams ends up producing "losing" situations where investors are losing tiny amounts... or even making 4%... 8%... or 10%. Again, when you use a strategy that offers so many ways to win, it's hard to lose.
That's why Doc's Retirement Trader is a "must read" publication for folks interested in earning safe income on their savings. And right now, he's offering a big discount on his service... but only until October 4. If you're interested in regular, in-depth commentary on the world's best put-selling opportunities, we encourage you to learn more, right here.
Brian Hunt and Sean Goldsmith
Date Range:9/20/2012 to 9/27/2012
Date Range:9/20/2012 to 9/27/2012