Saturday, March 29, 2014
It got so ridiculous, we were hoping for a loss...
It's not often we root for our editors to post a losing trade. But the amount of hate mail Stansberry & Associates was receiving about Dr. David "Doc" Eifrig's track record in Retirement Trader was getting ridiculous.
From the July 2010 launch of Retirement Trader through September 2013, Doc closed an outstanding 136 winning trading positions in a row. It was the most impressive streak we have ever seen in the newsletter industry... And many of our readers didn't think we were telling the truth. In September, Doc finally closed out of two positions at a loss.
But he's already back to his old tricks... Doc has strung together 26 more winning positions. To date, he has only had two losing positions out of 168. That's not a misprint. That's 166 winners out of 168 trades... a 99% win rate.
So why are we telling you this? Well, we believe the strategy Doc used to amass this track record is one of the safest and most consistent ways to generate extra income in the market: selling put options. That's also why we've encouraged you to use this strategy for years in our newsletters... We want every person that reads our services to at least try selling puts.
We know that once you see how easy and safe this strategy is, you'll be hooked.
That's why we're going to show you Doc's strategies for selling puts – including the finer points of selling puts and a sample trade. Let's get started with exactly what selling a put option entails.
First things first, a "put" is a stock option. When someone buys a put option, he buys the right – but not the obligation – to sell a stock at a set price (the "strike price") at an agreed-upon date in the future. When you buy a put, no matter what happens to the share price in the open market, you can still sell it at the strike price.
You can think of put options as a form of insurance. The option-buyer 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."
Think of it like home insurance.
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.
When you sell a put, 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 (and still keep the upfront premium). That's why it's important to only sell puts on companies you want to own.
One of the keys to successfully selling puts is to focus on the world's best companies... As we mentioned above, these are companies you'd be happy to own. Only when selling puts, you're able to name the price you'll pay for those shares... and you're paid cash for that privilege.
That's one of the beauties of selling puts on blue-chip companies... You only have to focus on a handful of firms. You can literally ignore the rest of the market.
Blue-chip stocks are the stock market's equivalent of beachfront property...
Beachfront property is always in demand. It resists down markets better than undesirable locations. It's the best.
Despite our repeated warnings to only "buy the best," some folks still stray. It's true, you can earn more premium selling options on riskier, volatile stocks. Tempted by the allure of larger cash premiums, many investors sell options on risky stocks. And yes, these investors might collect a big cash premium, but they put themselves in great danger by taking on the potential obligation of buying and owning shaky stocks.
That's why we want you to stick with the best, strongest, safest stocks in the world. We want you to stick with blue chips. Blue chips typically have extremely robust business models... wide profit margins... big competitive advantages... and low debt levels.
Just remember... When selling puts, you may be obligated to buy the stock. So be sure you'd be happy to own it.
It's also important to be conservative with your position sizing... One option contract controls 100 shares of stock. So if shares fall below the strike price and you have to buy, you're on the hook for 100 shares. Never sell more put options than you can afford.
The best way to learn the art of put-selling is to actually execute a trade. But walking you through an actual trade, step by step, is a fantastic way to understand this strategy, too. So we're going to walk you through a trade Doc closed last month.
As we mentioned, selling a put starts with identifying a high-quality company whose shares you would like to own. In this case, Doc chose CVS Caremark (CVS), the highly profitable operator of 7,667 drug stores and the No. 1 prescription provider in the country.
In addition to having a solid balance sheet and great cash flow, Doc likes CVS because it will profit from aging Baby Boomers and their growing dependence on pharmaceuticals.
On January 24, CVS shares traded for about $68. Doc recommended selling a put with a strike price of $67.50 expiring on March 21. For selling the put, his readers received a "premium" of $1.78 per share. Since each option contract covers 100 shares, Doc's subscribers received $178 in their account for each option contract they sold.
From that point, two things could happen over the next two months...
If CVS had closed below $67.50 per share at expiration, Doc's subscribers would have had to buy shares at $67.50. That's why you always sell puts only on excellent companies that you would be happy to own. But as we explained above, we're happy to own shares of CVS.
On the other hand, if CVS had closed above $67.50 at expiration, readers would have kept the premium they earned for selling the option.
In this example, CVS rose so quickly that Doc closed out the trade before the expiration date and pocketed $1.69 per option. A broker requires you to hold 20% of the purchase obligation (in this case, $13.50 per share) in cash in your account while you own the put as a margin requirement. Readers earned a 12.5% return on margin in 35 days, or more than 130% on an annualized basis.
We'll say it again... Selling puts is one of the safest and most consistent strategies we've discovered for generating extra income in the market. And Retirement Trader readers agree... We've probably received more positive feedback about Retirement Trader than any other advisory we publish. Like this note from subscriber Brian S...
It's clear that the people who have taken the time to learn about Doc's trading strategies are making money... and lots of it. And they're mastering one of the safest and most consistent money-making strategies in the market.
Doc still wants more people to understand and use this strategy... That's why he's extending a special discount of his Retirement Trader research advisory. To learn how you can claim one year of Retirement Trader free of charge – along with a six-month, 100% money-back trial – click here.
We hope our discussion of put-selling has encouraged you to consider using this strategy. Once you sell your first put and see that money hit your account, you'll be hooked. You may find it hard to do anything else in the markets.
Date Range:3/20/2014 to 3/27/2014
Date Range:3/20/2014 to 3/27/2014