How to Get Paid Over and Over on Stocks You Love
The conclusion of Doc Eifrig's guest series... Boost returns and reduce risk with options... How to get paid over and over on stocks you love... Explaining covered calls and selling puts... A real-money demo with a pro golfer...
Today, Dr. David 'Doc' Eifrig concludes his special series on options...
Even if you've skipped the series so far, you'll want to stick around this time.
Today is the day I (Doc Eifrig) am going to show you exactly how to make the type of options trades I recommend in my Retirement Trader advisory.
After today's Digest, you'll know all you really need to know to use my strategy yourself... or you can simply go back to your humdrum stock returns...
One risk-reducing, return-boosting options trade is known as a 'covered call'...
I can explain how a covered call 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 subscriber of Stansberry Research, I'm going to assume you already own some high-quality, capital-efficient companies 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 Hershey 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 Hershey, which yesterday was trading at about $234 per share. Your total position would be worth about $23,400. In the next month, Hershey shares may rise or fall... and your wealth would 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 Hershey, you could have quickly entered an option contract to sell your shares in September for $235. You could've sold this call for about $4 per share.
A standard options contract covers 100 shares. This means you'd collect $400, 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 September, the call buyer will decide if he wants to buy your shares of Hershey for $235.
If shares trade for more than $235, the buyer will take them from you... paying $1 per share more than you could have gotten by selling them on the open market today, in addition to the $4 per share you received for agreeing to the deal.
Meanwhile, if Hershey shares still trade below $235, the buyer 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.
If you did this each month, you could collect about $4,800 in a year on your $23,400 investment in Hershey if shares don't move a penny. On an annualized basis, that's an extra 20% per year of income on your position in Hershey...
(Please note: This isn't a formal recommendation on HSY today, but an example of how we'd trade a covered call on a stock we own and love.)
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 own 100 shares of Hershey, you have $23,400 at risk. The stock could theoretically go to $0. But if you collect $4,800 over the course of the year, you now have only $18,600 at risk ($23,400 minus $4,800).
On a per-share basis, if you paid $234 per share for Hershey but sell a single call for $4, your "cost basis" is now down to $230. This reduces your risk if (and when) the stock falls.
On the upside, if shares stay at $234, you've made a profit of 1.7% ($4 on $234) without the stock even moving. And you made that in less than two months.
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 Hershey shoots up to $300 before expiration, you'll be stuck selling shares for only $235 apiece.)
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...
In fact, we can make it even simpler...
We can actually trade two ways... We sell covered calls as we described here. And we also like to sell "puts" – to option buyers in the market who are betting on shares of a particular stock to fall over a set period of time.
Selling covered calls and puts may sound like opposite trades, but they actually make nearly identical returns on your money with similarly low risk.
And if you decide to sell puts, then it's an even easier strategy... You only have to make one trade, and you don't need to own any stock up front. As I wrote yesterday...
That's the key to our strategy. Selling something you don't own sounds like an impossible arrangement. But it's just the vocabulary that makes it confusing.
Put another way, if you followed the covered-call example, you can definitely understand a put trade. For our readers, it's arranged as a "choose your own adventure." Whichever one works for you can create the same income.
Like when selling covered calls, when you sell a put, you are selling an options contract to a buyer who is making a leveraged bet... which can pay off massively for them if they're right. We're just betting that they most likely won't be correct... and that we'll come out all right even if they are.
In an environment where there's so much fear in the market, selling puts can work incredibly well. It thrives as folks get afraid, using their anxiety to help us make more money up front, much like selling insurance.
The main difference is selling puts requires a surplus of ready cash, as opposed to owning shares of a stock up front with a covered call. While covered calls might leave you holding shares you already own, if you sell puts, you may be obligated to buy those shares at an agreed-upon price at a later date.
That's why we only recommend trades on businesses that we fully understand and blue-chip stocks that we would want to own anyway. But no matter the route, the end goal is the same... generating safe, steady income without touching a share of stock.
Here's an example of a recent put-sell recommendation...
In June, I recommended Retirement Trader subscribers sell put options on American Express (AXP), one of the largest and best credit-card companies in the world.
You may remember that not long before, everyone thought that banks were going to collapse and we were headed straight into a financial calamity. Yes, a few banks that did dumb things went under. That's the way it should work.
We didn't buy the fear of a widespread banking collapse. In June, though, folks were still skeptical about if the banking "crisis" was behind us, yet the financial sector was recovering in our view...
This made it a good time to take advantage of other investors' fear and sell put options on a financial company we like, such as American Express. Given its strong customer base, the company was forecasting 15% to 17% revenue growth even with the potential for a slowing economy. And based on our analysis, the company was right to be optimistic.
Subscribers who followed the advice sold puts expiring in August with a strike price of $165 and collected $470 in income up front. As I shared in the trade instructions...
The puts obligate you to buy AXP at $165 a share if the stock trades for less than that near the August 18 option-expiration day.
Buying 100 shares at $165 each represents a potential obligation of $16,500. (Remember, one options contract equals 100 shares.) I always tell folks to keep this potential cash obligation in mind when using this strategy.
But we explained that if the markets remain unchanged and AXP trades for more than $165 on August 18, subscribers wouldn't have to buy the stock. They'd just get to keep the $470 "premium." That's a simple 3% return in about two months based on the $16,500 potential obligation.
Maybe that doesn't sound like a lot, but...
If we put this trade on every two months – assuming all prices remain the same – this could return 19% a year. As of today, AXP shares are trading around $166 and this trade is on track to close for profits. I'll update my Retirement Trader subscribers on guidance this month.
(Note, again, I'm not recommending selling this particular put on AXP today, as prices have changed since we first recommended it a few months ago. But I will share momentarily how you can hear a free recommendation from me that you can make right now.)
Of course, if you did this trade and shares of AXP fall below $165 on August 18, you'll keep the income payment but need to buy the stock at $165 per share. If this happens, you'll own a blue chip – a stock that we would love to own – for less than you could have bought it for a couple months ago.
You're buying shares for $165 each. But remember, you collected $4.70 in premium. That means your true cost in the trade is $160.30. You could then sell your shares anytime they trade above $160.30, or just sit back and let the share price rise, collecting $2.40 in dividend payments each year.
It's hard to lose using this strategy if you only sell options on stocks you would love to own.
(We also have a strategy in Retirement Trader called rolling an option, which limits the likelihood of either put sellers being forced to buy shares or our trades closing prematurely for a loss.)
I've been using these strategies in my Retirement Trader advisory since 2010...
We've recommended 703 different positions... and 663 of them have been closed for profits. That's a win rate of 94%, and we haven't lost a trade in more than two years...
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 12.1%.
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 12% a year, your wealth compounds at an astounding rate.
The great thing about really learning how to trade options is that you'll find you can do it in any market environment and collect hundreds – or even thousands – of dollars in income each month.
I've heard from so many happy subscribers who've done this for themselves, either through covered calls or selling puts using my strategy. To see what I mean, check out the hands-on real-money trading demo I just recorded...
You'll hear testimonials from several subscribers... and can follow along as I show an options novice, Stansberry Research-sponsored professional golfer Kevin Kisner, how to make $4,000 in just 60 seconds.
In the video, I also offer all viewers a free options trade you can put to work for yourself today... right down to how to make it in your brokerage account, just like I showed Kevin how to do...
I also share details about how you can get started with my Retirement Trader service right now – and get six months free – if you don't already subscribe or have access as a Stansberry Alliance member.
If nothing else, I hope over the past few days I've helped you understand that the word "options" doesn't need to scare you. There's a right way to trade options, and done in the correct manner, they can generate safe, steady, life-changing income. You just need a good guide to show you the way...
Click here to check out my latest real-money demo to learn more and get started today.
New 52-week highs (as of 8/2/23): Booz Allen Hamilton (BAH), Dice Therapeutics (DICE), Comfort Systems USA (FIX), MSA Safety (MSA), MasTec (MTZ), Procter & Gamble (PG), and Trane Technologies (TT).
In today's mailbag, a subscriber's vote of confidence for Doc's Retirement Trader advisory. If this style of options trading sounds at all interesting to you, do give it a try. Learn more here, including instructions on a free trade recommendation and how to get six months of the publication for free... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"I signed up for Retirement Trader about 6 months ago, watched the training videos about 5 times till I fully understood what I was doing and how to execute an options trade in my account.
"I started slow until I built my confidence, made a couple of small mistakes along the way. But now I have the confidence to make the trades and look forward to having the $ dropped in my account.
"I almost feel guilty over this. I'm in my mid 50's and plan on retiring earlier than I originally had planned. I wish I would have learned this 30 years ago.
"I look forward to teaching my kids about this to help them with their financial future.
"Kudos to Doc, keep up the great work." – Subscriber R.D.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig, MD, MBA
Baltimore, Maryland
August 3, 2023