Saturday, November 8, 2014
The Weekend Edition is pulled from the daily S&A Digest. The Digest comes free with a subscription to any of our premium products.
Today, we'll cover one of the most important – and controversial – topics in our business right now. 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 Stansberry Research subscriber 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... I 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 I hope you're skeptical of anyone who claims he has profited on 189 of his last 191 trades – a 98.9% win rate. You see, that's the source of controversy surrounding one of our 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 "189 for 191" 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 "189 for 191." 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 an unbelievable 189 of 191 winning trades, including 41 in a row. 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 an e-mail we received from subscriber Rick F., an experienced trader...
As some of our readers know (and to which 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."
Again... 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 July 25, Doc sold September $97.50 puts on Occidental Petroleum (OXY). At the time, shares of OXY were trading for $100.25. In this example, $97.50 is the strike price. As long as shares of OXY traded for more than $97.50 by the expiration date (in this case, September 19)... 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 Occidental Petroleum was $2.13 per share... An option contract covers 100 shares, so readers following his recommendation immediately collected $213 for every contract they sold.
On September 19, the OXY options "expired worthless." Shares of OXY were trading at $97.71 on the day the options expired. And Retirement Trader subscribers kept the entire premium for a 10.9% 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 OXY example... If we sold one option contract, we were responsible for 100 shares at $97.50 (or $9,750). In this case, we'd deposit $1,950 (20% of $9,750). Because we collected $213 in premiums and only had to deposit $1,950, we made 10.9% on the trade in about two months... That's a 71.2% annualized return.
We'll end today's discussion of selling puts here. I encourage you to read and re-read today's essay. Once you understand how to sell puts – and how profitable this strategy is – you'll have a hard time doing anything else in the market.
Date Range:10/30/2014 to 11/6/2014
Date Range:10/30/2014 to 11/6/2014