When put selling 'goes wrong'...

When put selling 'goes wrong'... How to generate even more income from your trade… Doc's exclusive video...

 Today… we continue examining Dr. David "Doc" Eifrig's extraordinary success recommending options trades and how he has accumulated such a remarkable track record by selling put options…

If you missed what we wrote last week… we described how put selling works and why it's critical to focus your trading on blue-chip stocks. We also dedicated our weekend Masters Series to Doc's writings on blue chips – how to identify them and one surprising reason to invest in them.

 Today, we tackle the last big question out there… How can we say Doc has never closed a losing position in Retirement Trader since it launched in April 2010, when several positions resulted in stocks being "put" to subscribers? Let us explain…

 As we've said many times… selling puts is one of the greatest trading strategies out there. It generates super-safe income. And if done properly, your odds of losing money are very, very slim.

Last Friday, we told you there's a right way and a wrong way to sell puts... As long as you sell puts the "right way," you too can enjoy the kind of phenomenal success Doc has had. And it's not difficult. To sell puts the "right way," only sell them on the world's safest blue-chip companies when they're trading at bargain prices. As we described it on Friday…

 As we said… sometimes the stock will trade for less than the put option's strike price on option-expiration day. In that case, you will have to buy 100 shares at the strike price. (Remember… for every put-option contract you sell, you are responsible for 100 shares of stock.)

That's called being "put" the stock. Many people think if they're put a stock, they lose...

But we're only selling puts on stocks we want to own – the world's best companies... So having to buy the stock isn't a bad thing. In fact, it can be a great thing. We get to name the price we're happy paying to own the stock. And we keep the initial premium.

Plus, once we are put the stock, we can immediately start generating more income.

 To date, about 79% of Doc's put sales result in the option expiring worthless. In those cases, Retirement Trader subscribers did not have shares put to them... They simply kept the premium free and clear. But what about the other 21% of the time?

 As we said, in those cases, they ended up buying shares. But because Doc has only recommended trades around blue-chip stocks, subscribers wound up holding shares of some of the greatest companies in the world (which, in most cases, pay a healthy dividend).

They also used the stock positions to generate an extra 12%-20% a year in income... To do that, we use another trading strategy called "selling covered calls."

 Like a put, a call 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.

When someone buys a call option, he's buying the right (but not the obligation) to buy a stock at a set price by an agreed-upon future date.

 We're not interested in buying calls in this example... We're only interested in selling them. So we're selling someone else the right to buy our stock at a set price in the future... In short, we're taking cash up front and agreeing to sell the stock we own for more than we've paid for it.

"Covered" simply means we own enough shares to cover the liability should the call option be exercised and we're forced to sell our shares. (That's known as having our shares "called away.")

 There are two basic outcomes when selling covered calls. The first is that the stock closes below the strike price at expiration. In this case, you keep your stock and the premium... And you can sell another round of calls to generate more income.

The second outcome is that your shares are called away... The stock closes above the strike price at expiration. You keep the premium and sell your shares for the strike price. So your profit is equal to the premium plus the difference between the prices at which you bought and sold shares (the "capital gains").

 To better help you grasp the concept, we're going to walk through an actual trade where Doc was put the stock and started selling covered calls...

 On March 23, Doc recommended subscribers sell the May $33 puts on Wells Fargo. At the time, shares of Wells Fargo were trading for $33.53. And Retirement Trader subscribers collected about $1.25 in premium for each contract they sold.

 In this example, $33 is the strike price. As long as shares of Wells Fargo traded for more than $33 by the expiration date (in this case, May 18), subscribers who followed the recommendation would book the entire premium with no obligation to buy shares.

But when the options expired, shares of Wells Fargo were trading for $30.94 – below the strike price. So we were "put" shares of Wells Fargo. On the morning of May 21 (the Monday following the expiration date), Retirement Trader subscribers purchased shares of Wells Fargo for the strike price, $33 a share. Meanwhile, Wells Fargo traded as high as $31.47 in the market.

Even if you take the highest possible price you could have gotten that day for Wells Fargo shares – $31.47 – and add the $1.25 premium collected for selling the puts, you have "just" $32.72. That's still $0.28 below the strike price… meaning readers were at best down $0.28 on the position.

That's why many people consider being put shares a loss. And it would be… if you sold your Wells Fargo shares that Monday and closed the position.

But Doc didn't do that…

 On the same day readers purchased the stock (May 21), Doc recommended selling the July $33 call options on Wells Fargo. Retirement Trader readers collected $0.86 for every contract they sold.

When the calls expired on July 20, Wells Fargo was trading at $33.81. Because the stock was above the strike price, the July calls were exercised and subscribers' shares were "called away." In other words, they sold their stock for $33 a share… The same price they paid for it.

And because they collected the extra $0.86 in premium from selling covered calls, they turned what could have been a $0.28-per-share loss into a gain. By following Doc's recommendation to the end… subscribers could have booked a 6.6% gain on this trade in less than four months. That's an annualized gain of 20.4%.

 And that's how Doc has achieved his incredible track record.

Thanks to selling covered calls, even when you are put a stock, the trade can end up a winner. That's why it's so important to only sell puts on high-quality companies you want to own.

 There are many other examples of situations where Retirement Trader subscribers made a profit by selling calls after being put a stock...

Doc recommended selling December $25 puts on dominating computer-chip maker Intel on October 28, 2011. Subscribers who followed his recommendation were put the stock on December 19 at $23.82. (That accounts for the $1.18 in premium they received at the outset of the trade.)

The same day, Doc recommended selling the February $24 calls. Subscribers collected an additional $0.65 in premium. And they received $0.21 a share in dividends. The shares were called away in February for an 8.6% gain in about four months... That's a 27.9% annualized return.

 Last July, Doc recommended selling September $65 puts on the health care products giant Johnson & Johnson for a $0.95 premium.

Subscribers were put the stock $64.05 a share. (Again, that accounts for the put premium we received up front.) And Doc immediately recommended selling the November $65 calls for an additional $1.60 in premium. The November calls expired worthless, and subscribers were able to sell another set of calls – the January 2012 $65 calls – for $1.22. They also received $0.57 a share in dividends while holding the stock.

Readers' Johnson & Johnson position was called away in January for a 6.7% profit in six months.

 Staying in the medical sector, Doc recommended selling August $50 puts on pharmaceutical company Abbott Laboratories on June 24, 2011. Subscribers collected $0.90 in premium.

Come expiration day, Abbott shares were just below the strike price. So subscribers who sold the option were put shares. Then Doc recommended they sell the November $50 calls for $2.13 in premium. Subscribers also received $0.48 a share in dividends while they held the stock.

Like in the two examples above, subscribers' Abbott Labs shares were called away in November for a 5.1% gain in less than six months... a 12.6% annualized gain.

 It doesn't happen often... But if you sell puts, sometimes you will have to buy shares. (In Retirement Trader, about 21% of Doc's recommended put sales have resulted in subscribers being put shares.)

If you sell puts on risky stocks (in hopes of capturing larger premiums), that can cause losses. But if you only sell puts on blue-chip companies (all of today's examples qualify), you can still end up booking a profit on the position. It's no wonder Doc has produced such an incredible track record.

Doc has said his winning streak can't last forever... At some point, one of his recommended positions will close at a loss... But even then, it's likely to be a small percentage loss. Most trading strategies have the potential to produce losses of 25%... 50%... even 75% on positions. But Doc's approach of using options to generate large income streams ends up producing "losing" situations where investors are losing tiny amounts... or even making 4%... 8%... or 10%. Again, when you use a strategy that offers so many ways to win, it's hard to lose.

 If you want more information on selling puts, you should watch a video Doc recorded describing the basics of this trading style. The video is part of a series of educational pieces normally available only to paid subscribers to Retirement Trader.

But because we believe so strongly that this strategy is something all our subscribers should learn about… Doc has agreed to make this one video available to Digest readers. You can watch the video completely free here...

 New 52-week highs (as of 9/21/12): Berkshire Hathaway (BRK), Franco-Nevada (FNV), Fidelity Select Medical Equipment & Systems Fund (FSMEX), Western Asset High Income Opportunity Fund (HIO), iShares Nasdaq Biotechnology Fund (IBB), iShares Dow Jones U.S. Home Construction Fund (ITB), ProShares Ultra Health Care Fund (RXL), Sandstorm Gold (SSL.V), Eli Lilly (LLY), First Majestic Silver (AG), Royal Gold (RGLD), Silver Wheaton (SLW), Medtronic (MDT), BLADEX (BLX), Hatteras Financial (HTS), Target (TGT), Home Federal Bancorp (HOME), and GenMark Diagnostics (GNMK).

 In today's mailbag, more glowing feedback from Retirement Trader subscribers. I don't think we've ever received more positive feedback about any single service. If you've had success selling puts with Doc, let us know here: feedback@stansberryresearch.com.

 "I started following Doc's trades in Retirement Trader just about a year ago. I sell covered calls in an IRA account. I have had 40-plus straight winners, and NO losers. My average annualized return for all trades is 25%-plus. I started with ZERO knowledge in these trades, but following the good Doctor's instructions is a snap. I would encourage anyone who has not tried this to get on board, subscribe to Retirement Trader, and start making some serious money." – Paid-up subscriber Mike M.

 "I have been meaning to write earlier, but after the last two Digests about put options, just had to write and share my experiences. Prior to signing up for Doc's Retirement Trader, I subscribed to another put selling service for about 1/3 the cost. But this service, instead of selling puts only on great companies, had us sell puts on risky companies as well. It liked to sell puts for 3-6 months out, with strike prices five dollars of so below the current price of the stock, with the options priced around $0.30.

"So in order to make your trade worthwhile, you had to sell too many contracts for the risk taken. It worked OK for a while until they suggested selling puts on [two stocks] right after both had terrible earnings reports. We sold puts on these risky companies, the stock prices continued their freefall, our $0.35 options took off like a rocket, and we took a catastrophic loss on both positions.

"I was already a subscriber to several Stansberry services, so I bit the bullet and signed up for Retirement Trader, knowing I could cancel if I didn't like it. But I DID like it. Unlike the other service that took pride in saying they had never been 'put' a stock, I learned that in Retirement Trader, getting shares of great companies at a reduced price was a GOOD thing. Then you collected dividends and collected money selling call options. It has given me the confidence to sell put option myself on great companies (keeping position sizing in mind). Thanks for the splendid results." – Paid-up subscriber John Roberson

Regards,

Sean Goldsmith

New York, New York

September 24, 2012