Wall Street Sure Knows How to Screw Things Up
Leave it up to Wall Street to take something that I love – something that's as close to bulletproof as you will find – and turn it into toxic sludge.
I'm talking about options selling. Regular readers know it's one of my favorite ways to consistently make money. I first honed my options-selling strategy many decades ago during my time at Goldman Sachs' trading desk.
Since then, I've sold options for reliable income most of my life. And I've taught thousands of everyday folks how to do it over the past decade-plus – including one subscriber who has made nearly $118,000 with my strategy.
Conversely, regular readers know my disdain for the AI hype story that is Nvidia (NVDA).
While it's a great company, it's priced at more than perfection. No reasonable investor should expect its returns to remain sky-high given its extreme valuation.
Well, Wall Street – in all its wisdom – has decided it's a good idea to combine options selling with this overhyped market darling...
Meet the YieldMax NVDA Option Income Strategy Fund (NVDY).
This covered-call exchange-traded fund ("ETF") wants to generate massive yields by selling NVDA options. (Please note: The strategy that NVDY uses is a little more complex than a traditional covered call, as it requires a few different options. But for today's purposes, we'll treat it like a covered-call fund because they act similar.)
Despite Nvidia being the poster child for the market today, there's one thing investors don't like about it... It only pays a tiny dividend.
So YieldMax is trying to allure the growth-crazed investor who also wants to earn a yield.
NVDY currently touts an astounding yield of nearly 50%. Since Nvidia is such a volatile stock, you can earn a lot of premium by selling NVDA options.
However, there's one problem with this covered-call-like strategy... You're giving up the upside from NVDA.
Anytime you sell a covered call, you take in income from the options you sell. But you agree to sell shares for a certain price if the stock finishes above that price at expiration. So even if a stock doubles during your time in the trade, you'll still sell your shares at the previously agreed-upon price.
NVDY sets its options for NVDA in a similar way, where investors get paid a premium. But the downside is that investors in NVDY won't see the same gains as they would in NVDA if shares blast higher...
For example, NVDA is up 188% over the past 12 months. Yet NVDY is only up 100% in that time span.
Of course, Nvidia is in a bubble. I don't see how you can be a rational investor and not come to that conclusion – regardless of what eye-popping numbers the company posts for its third-quarter earnings later today.
The bubble will eventually burst, wiping out NVDA shareholders. But what will happen to NVDY when it does?
Folks often sign up for these covered-call funds because they want income. They also want more downside protection than regular buy-and-hold investors. And that's often what you get from covered calls when you do them right.
But covered calls can't save you if the underlying stock gets cut in half. Even though you'll do better than regular shareholders thanks to the income you collected, you're still going to get burned.
So when NVDA inevitably breaks down, NVDY will fall with it.
In conclusion, selling options on the riskiest stocks in the market is a terrible idea.
Instead, follow my simple advice...
Only sell options on stocks you love and would be willing to own for a long time.
That way, you get to earn income and have peace of mind if things go wrong. Your worst-case scenario is owning a stock that you'd be happy to own anyway. That's not too bad.
If you ever find yourself interested in selling options, please don't get tempted by all these new covered-call funds that keep popping up... And especially stay away from funds that only sell options on one stock.
There's a wrong way to sell options and a right way.
The wrong way could hand you your shirt. But the right way could change your life... and potentially add hundreds or even thousands of extra dollars to your income every month.
If you want to learn how to sell options my way – the right way – then click here to learn more. I've achieved a 95% win rate over the past 14 years using this strategy. And best of all, it's easy to learn... no prior options experience required.
But hurry, this special offer closes soon.
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Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
November 20, 2024