A bear market 'lifeboat'...
A bear market 'lifeboat'... What to do if the market is keeping you up at night... A can't-miss educational opportunity... The two biggest questions we've heard...
Today, we were granted a reprieve from the selling...
U.S. markets were closed today for the Martin Luther King, Jr. holiday.
After the major stock indexes fell more than 2% on Friday – joined by oil falling to less than $30 per barrel for the first time since 2003 and new six-year lows in "junk" bonds – we're guessing many folks were relieved to get a break from the action.
If the market has been keeping you up at night, be sure to take a few minutes to read the latest from Porter...
In Friday's Digest, Porter reviewed all of his recent warnings and announced his latest effort to help subscribers who are not yet prepared for this market turmoil: our 2016 Bear Market Survival Program.
In short, over the next seven weeks, we'll be teaching folks, step-by-step, exactly how to position their portfolios for the coming bear market. As Porter explained...
The goal of these weekly lessons is to give you the knowledge you'll need to survive and prosper during this tough period. Reading this will be like sitting in a private room with my whole staff looking over your entire portfolio.
We are going to be publishing these modules once per week for the next seven weeks. We're doing so because we genuinely want to help as many subscribers as possible get up to speed, organized, and prepared. The bear market we've seen coming for a long time is here. It's happening right now. It isn't too late to get yourself positioned to survive and even prosper... but we believe you've got to take action now.
There will be nothing else to buy. All of the information you need... and all of the recommendations you need will be included in these modules. By the end of this seven-week period, your portfolio will be completely "sewn up" and ready for anything.
We'll publish the first of these lessons this Friday, January 22, titled "How to Raise Cash, How to Safeguard It, and How to Hedge It With Gold."
To learn more about our 2016 Bear Market Survival Program, click here.
Regular Digest readers know we've been featuring content from our colleague Dr. David "Doc" Eifrig in advance of his free educational webinar this week.
If you haven't heard, this Wednesday, January 20 at 8 p.m. Eastern time, Doc will explain the exact options-selling strategies he has used to rack up an incredible 93.2% win rate in his Retirement Trader service.
Even better, Doc has promised to show attendees everything you need to know to earn an extra $1,000 or more per month in safe, consistent income in the options markets this year... even if you've never traded options before. All he asks in return is that attendees sign a simple pledge to prove their interest before attending.
You can learn more and reserve your spot for Doc's free educational webinar right here.
In the meantime, we want to address a couple of the most important questions we've received about these strategies this month:
| 1. Do Doc's strategies work during periods of volatility and "sideways" markets like we've seen over the past several months? | |
| 2. Will these strategies work during a true bear market like the one Porter has predicted? |
Of course, Doc will be answering these questions on Wednesday night, but the short answer to both questions is "yes." Doc says his strategies can help subscribers do well in almost any market environment...
Now, before we look at these scenarios, let's quickly review the basics of selling options for income. And don't worry if you aren't familiar with these ideas yet. Doc will be covering all the fundamentals in detail on Wednesday night, as well.
A stock option is simply a contract between two parties that gives the buyer of the option the right – but not the obligation – to buy or sell a security at an agreed-upon price (the "strike price") within a set period of time.
Call options give the buyer of the option the right to buy a stock at an agreed-upon price in the future. In simple terms, when you buy a call option, you profit if the price of the underlying stock rises above that agreed-upon price within that set time period.
Put options give the buyer of the option the right to sell a stock at an agreed-upon price in the future. When you buy a put option, you profit if the price of the underlying stock falls below the agreed-upon price within that set time period.
When you sell an option, you're simply taking the other side of those trades.
When you sell a call option, you're obligated to sell the underlying stock at the agreed-upon price if the buyer chooses to "exercise" the option (and buys the underlying stock).
When you sell a put option, you're obligated to buy the underlying stock at the agreed-upon price if the buyer chooses to exercise the option (and sells the underlying stock).
In both cases, the option seller is taking on the obligation to buy or sell the underlying stock if the buyer chooses to exercise that option. In exchange for taking on this obligation, the option seller collects money upfront, called the option "premium."
Now, this is an important point...
When you sell an option, there's always a chance you'll have to buy the stock. This is why Doc always recommends only selling options on the highest-quality stocks... stocks you want to own, at prices you're willing to pay.
Again, don't worry if you're not sure how to do this. Doc will be explaining exactly how to choose the right stocks on Wednesday night.
The amount of premium you receive for selling an option depends on several factors, but one of the biggest is related to volatility.
Volatility is measured by the Volatility Index (the "VIX"), which is considered the market's "fear gauge." The VIX tends to increase when investors are worried about stocks, and decrease when they're more confident.
In general, more volatility means higher options premiums, and this is one of the reasons options-selling strategies like Doc uses can be valuable tools in periods of market turmoil.
Let's take a look at "sideways" markets first...
Since the benchmark S&P 500 Index peaked last July, we've seen the broad market plunge more than 10% in August, rally 13% through November, and plunge another 8% to begin 2016.
This is the definition of a sideways market... and over that time, we've seen five different spikes in volatility.
When fear jumps higher, premiums move higher. You can get paid more upfront to sell options... meaning you can generate more income, and have a bigger "buffer" against market declines.
We'll use a recent example from Doc's Retirement Trader service to show you how it works...
In early September, just after the broad market had crashed more than 10%, Doc noticed blue-chip tech firm Oracle (ORCL) had gotten cheap...
In the recent crash, the company's stock had plunged even farther than the broad market... falling as much as 18%, from a high of $44 a share before settling around $37.
Again, Doc only recommends selling options on stocks you'd be willing to own, at prices you're willing to pay... As a "World Dominator" database-systems company trading for around 13 times free cash flow and paying a 1.5% dividend, ORCL fit the bill.
But while he was comfortable owning shares at that price, Doc was able to use options to give his subscribers an even better deal.
Instead of buying shares outright at more than $37 per share, he recommended selling the December $37 put option instead.
For each contract sold, Doc's subscribers collected about $188 in income upfront, with two potential outcomes...
If shares of ORCL traded for more than $37 on December 18 – meaning shares either moved higher or stayed about the same – the option would expire worthless. Subscribers would simply keep the premium.
If shares of ORCL closed below $37 on December 18, subscribers would be obligated to buy 100 shares of stock at $37 per share per each contract sold. (Remember, each option contract equals 100 shares of stock.) But because they collected $188 in income upfront ($1.88 per share), their true cost would be just $35.12 per share ($37 minus $1.88).
In other words, in the worst-case scenario, Doc's subscribers would own a World Dominator at a nearly 5% discount to the price they would've paid buying the stock outright. They would then begin to collect the stock's 1.5% annual dividend, and could sell covered calls on the stock to collect even more income.
ORCL shares rebounded quickly, as high-quality stocks often do when declines make them cheap. Shares closed above $37 in December, and Retirement Trader subscribers made a quick 4.4% gain in three months (16.8% annualized). They were then free to sell another option on ORCL – or another stock – and do it all over again.
Tomorrow, we'll take a look at how this strategy works in a true bear market, where many stocks suffer extended declines.
In the meantime, be sure to reserve your spot for Doc's webinar this Wednesday evening. Again, the education is free, and you have absolutely nothing to lose. Click here to sign up.
New 52-week highs (as of 1/15/16): short position in BOK Financial (BOKF), short position in Cullen/Frost Bankers (CFR), short position in Capital One Financial (COF), Lundin Gold (LUG.TO), short position in Santander Consumer USA (SC), short position in Suncor Energy (SU), short position in SPDR S&P Oil & Gas Exploration & Production Fund (XOP), and short position in Zions Bancorporation (ZION).
Do you have questions for Doc? Let us know at feedback@stansberryresearch.com. And please continue to send your experience with trading options for income.
Regards,
Justin Brill
Baltimore, Maryland
January 18, 2016
|