How to Get Paid Again and Again on the Same Stock
The most important day of Doc's series so far... Make money like a Hollywood screenwriter... How to get paid again and again on the same stock... And safely double your wealth every four-and-a-half years...
Today, Dr. David "Doc" Eifrig continues with the third part of his five-part series on options...
Even if you've skipped the series so far, today is the day you'll want to stick around. Today is the day I (Doc) am going to show you exactly how to make the type of options trade I recommend in my Retirement Trader advisory.
After today's Digest, you'll know all you really need to know to use this strategy yourself... or you can simply go back to your humdrum stock returns...
Our risk-reducing, return-boosting options trade is known as a "covered call"...
I can explain how it works using a simple example...
If you follow the entertainment business at all, you may have heard of a movie script or story being "optioned."
This means a studio has approached a writer and expressed interest in turning his story into a movie. The studio pays the writer, say, $10,000 today to lock up the rights to the movie, and if it decides to move forward, it will buy the script from him for $100,000.
The screenwriter just sold the movie studio a covered call. He gets to keep the $10,000 he was paid up front, no matter what. If the studio makes the movie, he makes more money. If the studio moves on, he keeps the option money and gets to sell his script again to another buyer after the first buyer decides not to exercise his option.
When the phone rings and you get an offer to have your script optioned, that's a day worthy of celebration.
We can do something similar with the stocks we already own...
As a paid-up subscriber of Stansberry Research, I'm going to assume you already own some high-quality, capital-efficient "World Dominators" like Microsoft (MSFT) or Hershey (HSY).
If you limit yourself to traditional investments, you simply can't do better than stocks like these when it comes to building wealth.
But you can do even more with some options "frosting."
For example, as a Microsoft shareholder, you can wait for earnings to rise and push the share price up. You can also wait for earnings expectations to increase – thereby leading the market to place a higher valuation on your shares.
But why not sell an option and collect cash early, just like the screenwriter?
Let's say you're sitting on 100 shares of Microsoft, currently trading at about $64 per share. Your total position is currently worth about $6,400. In the next two months, Microsoft shares may rise or fall... and your wealth will do the same.
Instead, you could find someone to pay you cash today for the option to buy your stock at a later date. In the case of Microsoft, you can quickly enter an option contract to sell your shares in June for $65. You can sell this call for about $2 per share.
This means you'll collect $200 today, free and clear. It shows up in your brokerage account immediately, and you can do whatever you'd like with it. It will never go away.
When the option expires in June, the call buyer will decide if he wants to buy your shares of Microsoft for $65.
If shares trade for more than $65, the buyer will take them from you.
If they still trade below $65, he won't want them, so he'll leave them for you. In that case, you could sell another call option and collect cash again. When that expires, you can do it again, and so on.
At today's prices, you could collect about $800 a year on your $6,400 investment in Microsoft if shares don't move a penny. That's an extra 12.5% a year...
I've also pointed out that selling covered calls lowers your risk relative to holding stocks the usual way...
Let's see how...
Again, if you've invested $6,400 in Microsoft, you have $6,400 at risk. But if you collect $800 over the course of the year, you now have only $5,600 at risk ($6,400 minus $800).
On a per-share basis, if you paid $64 for Microsoft but sell a single call for $2, your "cost basis" is now down to $62. This reduces your risk if (and when) the stock falls.
On the upside, if shares stay below $65, you've made a profit of 3.1% ($2 on $64) without the stock even moving.
Here's how to think of a covered-call trade: You're getting a gambler to agree to pay you now for the right to pay you even more later. That's a winning move.
Now, you may still have no interest in options. That's OK...
After all, this strategy doesn't produce "home runs." In fact, selling covered calls can limit your upside if your stock makes a big move. (For example, if Microsoft shoots up to $80 before expiration, you'll be stuck selling for only $65.)
So if you're still of the opinion that building wealth comes from making wild speculations to chase spectacular returns, then collecting cash payments from high-quality stocks over and over again may not appeal to you.
But if you've learned enough to understand that real wealth comes from limiting risk, you may never go back to investing the usual way again...
I've been using this strategy in my Retirement Trader advisory since 2010...
We've recommended 171 different covered-call positions... and 162 of them have been closed for profits. That's a win rate of 94.7%.
At the same time, our covered calls have posted returns that consistently beat the market. Over the years, this strategy has produced an average annualized return of 16.4%.
When you post gains with a win rate above 90%, it's easy to stay in the market and keep trading. And when you can earn 15% to 20% a year, your wealth compounds at an astounding rate.
At 16.4%, you'll double your wealth every four-and-a-half years. I doubt the gamblers and speculators can claim anywhere close to these returns.
You may still be asking how this is possible.
We've been taught that markets are efficient... that you can't beat the market average... and that you certainly can't boost your returns while reducing your risk at the same time. But that's where conventional wisdom is wrong.
This simply isn't true... We've shown that we can. But just where do these returns come from?
I'll share the answer to that question in tomorrow's Digest.
In the meantime, be sure to sign up for Wednesday's free webinar...
We've never held an event focused on selling covered calls like this before. And we may never do it again. (I'm actually concerned we're giving too much away "for free" in this webinar.)
Just for signing up, we're providing you with a ton of free educational materials, including a report on how to use covered calls to earn income from certain gold investments. And during the webinar, I'm going to walk you through a real-life trade you can make immediately.
Again, it's free to join us, so don't delay in reserving your spot right now. Just click here to sign up.
New 52-week highs (as of 3/17/17): Tencent Holdings (0700.HK), Automatic Data Processing (ADP), WisdomTree Emerging Markets High Dividend Fund (DEM), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), National Beverage (FIZZ), Alphabet (GOOGL), PureFunds ISE Mobile Payments Fund (IPAY), 3M (MMM), Shopify (SHOP), Stanley Black & Decker (SWK), Tencent Holdings (TCEHY), Two Harbors Investment (TWO), and U.S. Concrete (USCR).
Responses to three more reader questions in today's mailbag. Be sure to send yours to feedback@stansberryresearch.com.
"Do I need to speak to a broker when [making covered call trades] or can they be purchased on line?" – Paid-up subscriber Andrew W.
Doc comment: Once you take a few simple steps to set your account up for basic options trading, you can make these trades online as easily as buying or selling a stock. I'll be walking you through this and much more during my free educational webinar this Wednesday, March 22, at 1 p.m. Eastern time. If you haven't already reserved your spot, you can do so now right here.
"Hello, you proudly state that in your options strategy, that 93% of the trades are profitable. Thats great; but what is the size of the average loss to the average win?" – Paid-up subscriber Tom G.
Doc comment: As I mentioned in today's essay, our average annualized return since inception has been 16.4%... this includes both our 162 winners and our nine losing positions, for a 94.7% win rate.
"Hello, nice article. Once covered calls are sold, how does one set a stop loss? My brokerage Charles Schwab does not have that option unless I [buy, to close] my covered call and 'free up' the stock. It's an IRA account so I don't have an option with brokerages. Thanks." – Paid-up Stansberry Alliance member Nitin
Doc comment: As a rule, we advise folks to never enter their stops in the market using brokerage orders. It might seem convenient, but it could leave you vulnerable... Investors or brokers who see your stop could be tempted to move the share price to push you out of the position.
And even the so-called "trade triggers" some brokers offer aren't ideal. Remember, we recommend using closing prices rather than intraday prices to calculate your stops. This means these stop orders won't be "triggered" until after the market closes, so you'll likely have to update your limit orders the next day, anyway.
Instead, we recommend tracking your stops manually or with software like our friend Richard Smith's TradeStops program. Fortunately, figuring out your stop loss limits for options isn't as hard as you might think. Again, I'll be walking you through this and much more this Wednesday, March 22, at 1 p.m. Eastern time. Sign up here.
Regards,
Dr. David Eifrig Jr. MD, MBA
Baltimore, Maryland
March 20, 2017