Monday, April 27, 2015
If you're like most investors, you've been led to believe that it's impossible to earn large amounts of investment income without taking big risks.
This idea – which you'll hear from many financial advisors and brokers – is simply wrong.
As I've shown you in these pages before, it's possible to earn double-digit annual yields on your money – safely – by selling options.
So why doesn't everyone use this strategy to earn consistent income streams? Below, you'll find the five common objections I've heard from readers or that I've found on the Internet... and my responses to them.
REASON NO. 1: Option-selling strategies like covered calls are too risky. You'll earn 5% in premiums, but if the stock falls 25%, you're still down big!
This objection is 100% valid. The way most people approach covered calls is risky. (If you're unfamiliar with covered calls, I encourage you to read this essay.) They buy risky stocks because risky, volatile stocks typically offer larger cash premiums than safe, stable blue chips, like Intel. But most people end up losing on risky covered-call positions because the stocks fall in value.
A risky mining stock or fad retailer can fall 20% in one day. That's why we avoid them. It's too much risk in our retirement account. You can mitigate this risk by only buying and selling covered calls on the world's safest blue-chip companies.
But by sticking with dominant, stable stocks like Coke, Intel, and Johnson & Johnson, the covered-call seller enjoys a tremendous layer of safety. These stocks generate big cash flows, pay steady dividends, and have strong balance sheets and great brands. You'd be happy to own these stocks for many, many years.
Reaching for extra premium in risky, volatile names is a loser's game. Leave the risky names for the "gamblers."
REASON NO. 2: Selling options is too costly. It generates too many brokerage fees.
Selling options does generate more brokerage commissions than conventional stock ownership. But if you sell covered calls about six times a year on any given position, it's not a big problem.
For example, if you have a $25,000 portfolio, you might perform 20-30 covered-call transactions per year. This many transactions would cost about $200 to $300 with an average low-cost online broker. The income generated by an intelligent covered-call program more than makes up for the increased brokerage fees.
If you have a tiny portfolio (like $1,000-$2,000), excessive brokerage fees are a danger. Your account is also too small to buy 100 shares of most blue-chip stocks. If you have a small amount of capital, you'll need to accumulate more capital in order to make selling covered calls a viable plan for you.
REASON NO. 3: Selling options is too much work.
I always laugh at this one. Why? Because most good things in life require work!
Investing is like anything else... If you're willing to learn and put in a little extra work, you'll be far more successful than people who are ignorant and lazy.
If you're not willing to learn something new and do just a little bit more work to generate much higher returns, then investing your money on your own is probably not for you. You're better off giving your money to a broker or a mutual-fund manager.
So to the objectors out there, yes, selling options is a little more work than conventional stock investing. But I've found that to achieve great results in any walk of life, you have to do some work (often a great deal of it). To get a high-paying job, you have to learn a useful skill. To start a great business, you have to learn how to provide customers with useful services or products. In order to achieve better results in anything, you have to learn... and you have to do extra work.
This work – of selling a few options each quarter and monitoring your portfolio – will take about 30 minutes a month. I think it is well worth spending that extra time to generate safe, double-digit yields on a nest egg.
REASON NO. 4: Selling covered calls is too hard to understand.
I know the world of stocks and stock options can be intimidating. But I learned this stuff just out of high school years ago. The finer points I learned at Goldman and on Wall Street. If I could learn it at 17, anyone can learn it.
By selling a covered call, you are doing two simple things:
Don't worry if the smaller details sound confusing at first. Learning how to do most things requires some work... and multiple reads of how-to guides.
Once you get the hang of things, selling options is as easy as managing a checkbook. The only math involved is on the fourth-grade level.
REASON NO. 5: I can't trade options in my IRA.
This is not true. You can sell covered calls in an IRA. You just need to contact your broker and tell him you want to be approved for selling covered calls in your IRA.
It's natural when starting something new to feel nervous and a little unsure of what you're doing... I urge you to push through those feelings. Stansberry Research subscriber K.C., a registered nurse, did. And here's what she told us...
In short, if you're willing to take a little time to learn something new and you follow a strategy of only selling options on dominant, stable stocks, you CAN safely earn annual double-digit income streams in the market.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig, Jr.
"Most people say option trading is risky," Jeff Clark writes. "But it's not the option that's risky. It's the strategy. And when used the right way, options are far less risky than trading stocks." Learn how to reduce your risk in the market with options right here.
Jeff says there's one thing you should NEVER do when trading options. It's a common mistake, but it could cost you a lot of money. Find out what it is right here.
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