The Secrets of Successful Options Trading

More wisdom from Doc Eifrig... Boost returns and reduce risk with options... How to get paid over and over on stocks you love... Explaining covered calls and selling puts... 188 wins in a row... Doc's best offer in 13 years...

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Pay attention to this one...

Even if you've skipped my recent essays about options so far, you'll want to stick around for today's Digest.

Today is the day I (Dr. David "Doc" Eifrig) am going to show you exactly how to make the type of options trades I recommend in my Retirement Trader advisory. That's right – I'm letting you in on the secrets to the strategy that has delivered a 94% win rate since 2010.

After today's essay, you'll know all you really need to know to use my strategy yourself... You'll see how I've been able to put together my current streak of 188 consecutive winning trades... and hopefully, you'll be compelled to use this strategy.

After all, in the past three years – covering the end of a bull market, a bear market, and an up, down, and up again market this year – this strategy has generated around a 20% annualized return, with lower risk than simply owning stocks.

Here's how we use options – the right way – to do it...

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 last week was trading at about $181 per share. Your total position would be worth about $18,100. 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 on January 26, 2024, for $185. You could've sold this call for about $3 per share.

A standard options contract covers 100 shares. This means you'd collect $300, 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 January, the call buyer will decide if he wants to buy your shares of Hershey for $185.

If shares trade for more than $185, the buyer will take them from you... paying $4 per share more than you could have gotten by selling them on the open market at the time you opened the trade, in addition to the $3 per share you received for agreeing to the deal.

Meanwhile, if Hershey shares still trade below $185, 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 $3,600 in a year on your $18,100 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 at $181 per share, you have $18,100 at risk. The stock could theoretically go to $0. But if you collect $3,600 over the course of the year, you now have only $14,500 at risk ($18,100 minus $3,600).

On a per-share basis, if you paid $181 per share for Hershey but sell a single call for $3, your "cost basis" is now down to $178. This reduces your risk if (and when) the stock falls.

On the upside, if shares stay at $181, you've made a profit of 1.65% ($3 on $181) without the stock even moving. And you made that in about a month.

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 $225 before expiration, you'll be stuck selling shares for only $185 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.

Selling something you don't own sounds like an impossible arrangement. But it's just the vocabulary that makes it confusing.

Said another way, if you followed the covered-call example, you can definitely understand a put trade. For our Retirement Trader subscribers, 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 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 whether 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 2023 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 represented 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 remained unchanged and AXP traded 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.

(Note, again, I'm not recommending selling this particular put on AXP today, as we closed this trade a few months ago.)

Of course, if you did this trade and shares of AXP fell below $165 back on August 18, you would have kept the income payment but would have needed to buy the stock at $165 per share. If that happened, you'd own a blue chip – a stock that we would love to own – for less than you could have bought it for a couple months earlier.

You'd be buying shares for $165 each. But remember, you'd have collected $4.70 in premium. That means your true cost in the trade would be $160.30. You could then sell your shares anytime they traded 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.

This is what we did with this particular trade in August. Subscribers ended up walking away with a gain of 3.3%, or 14.7% annualized, in September.

I've been using these strategies in Retirement Trader since 2010... 

My team and I have recommended 715 different positions... and 675 of them have been closed for profits. That's a win rate of 94%, and we haven't lost a trade in more than three years... during a streak of 188 wins.

We returned average annualized gains of 19%, 20%, and 22% since 2021.

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% or more 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. And what do they all have in common? None had any prior experience with this approach or anything close to it.

But in my Retirement Trader service, they learned how to make the type of trades I described and followed my recommendations. Now, I often hear from subscribers who are confident enough to create their own trades using my strategy.

This is all to say that if you're interested at all in trading options to generate income – a strategy that comes with lower risk than simply owning shares of stocks – I urge you to give Retirement Trader a try.

Now is a perfect time to try...

I don't think there will be a more effective strategy on the planet over the next 12 months. Unlike for picking stocks, this is actually the best environment for income strategies we've seen in many years.

High interest rates are good for my approach. So is market volatility... and the hefty discounts we're seeing on some of the world's best blue-chip stocks. They all mean we get to collect more income, more often, with less risk using my No. 1 favorite strategy.

And for this holiday week only, we're offering access to Retirement Trader at the single-best offer price in the 13-year history of the service. You can try it out for less than half the usual price – and essentially risk-free – if you act today.

Click here for more details in a short video, and learn how to get started now.

New 52-week highs (as of 12/26/23): ABB (ABBNY), Autodesk (ADSK), Applied Materials (AMAT), Advanced Micro Devices (AMD), Ansys (ANSS), A.O. Smith (AOS), ASML (ASML), American Express (AXP), CBRE Group (CBRE), Canadian National Railway (CNI), Cintas (CTAS), CyberArk Software (CYBR), Dell Technologies (DELL), Dimensional International Small Cap Value Fund (DISV), iShares MSCI Emerging Markets ex China Fund (EMXC), Comfort Systems USA (FIX), Fidelity National Financial (FNF), Alphabet (GOOGL), Huntington Ingalls Industries (HII), Intercontinental Exchange (ICE), iShares Core S&P Small-Cap Fund (IJR), Intel (INTC), Ingersoll Rand (IR), Iron Mountain (IRM), iShares U.S. Aerospace & Defense Fund (ITA), London Stock Exchange Group (LNSTY), Micron Technology (MU), NVR (NVR), Oshkosh (OSK), Parker-Hannifin (PH), Phillips 66 (PSX), ProShares Ultra QQQ (QLD), Ryder System (R), Rithm Capital (RITM), Invesco S&P 500 Equal Weight Technology Fund (RSPT), SentinelOne (S), Sherwin-Williams (SHW), VanEck Semiconductor Fund (SMH), SPDR Portfolio S&P 500 Value Fund (SPYV), StoneCo (STNE), Cambria Shareholder Yield Fund (SYLD), Trane Technologies (TT), Textron (TXT), Global X Uranium Fund (URA), and Advanced Drainage Systems (WMS).

In today's mailbag, a question about Doc's track record with the options-trading strategy he has been writing about recently... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Doc's wins in Retirement Trader [are] fantastic. Very good win rate. Can you please tell me what [are] YTD, 1-year, 3-year [returns]?" – Subscriber Uppunda B.

Corey McLaughlin comment: As Doc just mentioned today, his Retirement Trader portfolio strategy has returned average annualized gains of 19%, 20%, and 22% in 2021, 2022, and 2023 (with just two trading days left this year), respectively.

Yes, that means about 20% annualized returns in wildly different market environments: the tail end of a bull market in 2021, a bear market in 2022, and a volatile 2023. Doc wrote more about this performance in his free Health & Wealth Bulletin newsletter the other day...

Unless we see something really wild in the market (like the quick COVID-19 drop), we expect about 20% annualized gains... even in bear markets.

Selling options is by far one of the best trading strategies you will ever find. In Retirement Trader, we sell options on only the best stocks in the world. That means we take very little risk.

For that reason, we see consistent results just about every year.

I believe our current winning streak of 188 trades is the longest in the history of our industry.

And as Doc also said, he doesn't see this streak stopping anytime soon and expects similar returns in 2024. If you're interested, be sure to check out his brief, new video presentation for more details.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig, MD, MBA
Baltimore, Maryland
December 27, 2023