An answer for a 'disappointed' subscriber...
An answer for a 'disappointed' subscriber... An unbelievable fact about Doc's strategy... What the 2016 presidential election means for investors, business people, and the American economy...
Editor's note: Be sure to read to the bottom of today's Digest for a brand-new essay from Stansberry Research contributing editor, legendary satirist, and best-selling author P.J. O'Rourke. If you liked his earlier missives about this year's presidential candidates, you don't want to miss what he has to say today...
Today's Digest is a little different...
Last night, in his free educational webinar, Dr. David "Doc" Eifrig spent two hours explaining – in detail – the options-selling strategies he uses in his Retirement Trader service.
As we've explained over the past several days, these strategies are powerful tools that can be used to reduce risk and make more money in both bull markets and bear markets.
They're remarkably similar to the strategies professional Wall Street traders use to earn safe, consistent gains year after year, regardless of market conditions. In fact, that's where Doc learned them. He spent a decade as an options trader – even working directly with one of the men who created the options-pricing model we use today – at Goldman Sachs and other top investment banks.
Many of us here at Stansberry Research personally use these strategies in our own accounts. Some of the most advanced investors on our staff use them almost exclusively.
Regardless of where you believe the markets are headed this year, we believe every subscriber would benefit from knowing how to use these strategies in their own portfolios.
That's why we're thrilled to report that nearly 10,000 of you joined us last night for Doc's free webinar. And the feedback so far has been tremendous.
Still, that means the vast majority of you did NOT attend.
It can be intimidating. Most folks believe that options are risky (and the way most investors use them, they are) or that these strategies are too complicated for individual investors to learn.
But that's simply not true...
Yes, they require a little effort on your part. But over the past several years, Doc has taught thousands and thousands of everyday folks how to use these strategies for themselves. And the overwhelming majority of them tell us they aren't nearly as risky or complex as they believed... and they wish they had learned about them sooner.
So today, we're going to address one of the most common questions we get.
Last night, around the same time many folks were preparing for Doc's webinar, we received the following e-mail from subscriber R.V...
I'm writing in again with the hopes you will do the right thing. When I saw the title of the Digest on Tuesday (An answer to your 'bear market' question...), I was hopeful that you were going to take the time to explain the risks of selling a put option and having it go against you, but you didn't.
Example... What if come April, MSFT is trading for $35-$40 a share and you sold puts with a strike of $50!? You just lost a lot of money. You guys aren't explaining to people that they are going to have to pay $50 a share if this happens.
As we mentioned, we get this question (and others like it) frequently. But as you'll see, it's not because we're hiding anything or ignoring the risks...
First, as we explained in Monday's Digest (and as we have discussed many times before), when you sell a put, you're taking on the potential obligation to buy the underlying stock at the strike price.
Second, as we've explained many times, we recommend proper position sizing and trailing stop losses on all positions. This applies to the options trades Doc Eifrig recommends, as well.
Assuming you follow that advice, your risk when selling a put is no greater than if you were buying shares of the underlying stock directly. In fact, as you'll see, your risk is actually LOWER.
We'll use your example of software icon Microsoft (MSFT) to show how it works. It's not complicated, but it does involve a little math...
Let's imagine a scenario in which you simply buy 100 shares of Microsoft today. As we write, shares are trading around $50.50, so your total investment would be about $5,050.
Imagine you then set a simple trailing stop loss of 25%, meaning you're willing to lose no more than 25% of your total investment in MSFT, or $1,262.50 (25% of $5,050).
This means you would set your stop at $37.88 per share (75% of $50.50). If MSFT headed lower, you would sell your position if shares fell to that price.
Of course, this means you could potentially lose all of that $1,262.50 if shares fell 25% and you hit your stop. But assuming you followed our general advice to put no more than 4% of your portfolio in any one position, you would lose no more than 1% of your total portfolio.
Now, let's look at how it works with options...
Rather than buy those 100 shares, let's imagine you sell one MSFT April 15 $50 put option instead. (Remember, one option equals 100 shares of stock.) At today's prices, you would collect about $280 in option premium upfront.
In this example, you could be required to buy 100 shares of Microsoft at $50 per share (a $5,000 potential investment).
But your "capital at risk" on the trade – how much of your own money it would actually cost you if you had to buy the stock – isn't actually $5,000. Instead, it's just $4,720 ($5,000 minus the $280 in premium you received).
More on this in a moment...
For this example, we'll assume you use the same 25% trailing stop. Again, this means you're willing to risk just 25% of your investment.
But your capital at risk in this trade is just $4,720, not $5,000. So with the same 25% stop in this trade, you're willing to lose just $1,180 (25% of $4,720).
Using the same math as before, in this trade you would set your stop at $35.40 per share (75% of $47.20). And like before, if MSFT headed lower from here, you would simply close the trade – meaning you would buy back the put option you sold – if it fell to $35.40 per share.
As you can see in this example, selling a put option on Microsoft is less risky than buying an equivalent number of shares. Using the same 25% stop loss, you stand to lose only a maximum of $1,180 selling the put, compared with a maximum of $1,262.50 buying the stock.
Even better, because of the premium you'd collect upfront, you'll have a bigger "cushion" from losses. Selling the put means you won't be stopped out unless shares fall all the way to $35.40, instead of $37.88 if you had bought the stock. That's nearly 7% more "wiggle room," which could mean the difference between staying in the trade and being stopped out for a loss.
And of course, as always, there are two other potential outcomes from selling the put...
Shares could rally (or stay about the same) and trade above $50 on April 15. In this case, the put would expire worthless and you would simply keep the $280 in premium, a 5.6% gain in less than three months. That's more than 22% on an annualized basis – far more than you can reasonably expect to earn in a mature, blue-chip stock like Microsoft – and you would then be free to redeploy your capital in another investment.
Or...
Shares could fall less than 25% and trade somewhere between $50 and $35.40 on April 15. In this case, you wouldn't hit your stop loss. If you kept the trade open through expiration, the put option would be "exercised" and you would be obligated to buy 100 shares of Microsoft at $50 per share, as you said.
But remember... you received $280 (or $2.80 per share) in premium upfront. Your cost basis would be just $47.20 per share ($50 minus $2.80). Again, that's nearly 7% lower than it would've been if you had simply bought the shares today at $50.50.
From there, you could simply keep your trailing stop loss where it was, and sell the stock if it fell to $35.40. Your maximum loss would still be $1,180 on the position. (You also could begin selling covered calls on the stock to collect more income and lower your cost basis even further – but that's a different discussion for a different day.)
In other words, no matter what happened to the stock from that point forward, your risk would be less than if you had bought the shares today.
This is the real "magic" of selling options...
In all these scenarios – whether the stock rallies, stays the same, falls a little, or falls a lot – selling the put option is less risky than simply buying the stock. It may sound unbelievable, but as you just saw, it's true.
We hope you joined us for Doc's webinar last night. But if not, it's not too late to learn these strategies for yourself.
You can learn everything Doc covered last night and much more with a subscription to Retirement Trader. If you're not already a subscriber, Doc is offering a special deal that includes lifetime access to both his Retirement Trader and his Retirement Millionaire advisories. Click here for all the details.
New 52-week highs (as of 1/20/16): short position in BOK Financial (BOKF), short position in Cullen/Frost Bankers (CFR), short position in Capital One Financial (COF), short position in iShares MSCI Canada Index Fund (EWC), short position in Suncor Energy (SU), short position in SPDR S&P Oil & Gas Exploration & Production Fund (XOP), and short position in Zions Bancorporation (ZION).
More praise for Doc and his Retirement Trader service in the mailbag today. Send your questions, comments, or criticisms to feedback@stansberryresearch.com. As always, we can't provide individual investment advice, but we read every e-mail.
"Hi Doc, You are altruistic. Consider the huge amount of free, authoritative and useful financial and health advice you give to your readers via Retirement Millionaire Daily. For that, bless you. To be such a generous dispenser of advice and knowledge (given that you know what you're talking about) is a high human achievement summed up in the one word, kindness. Your missives are always one of my first reads because, in a way, I know they have something of personal value behind them that's not just a pitch.
"I cannot join you in America selling puts as I'm Australian and have brokerage limitations. But I can do it, and do, in Australia with very good results. (Always read your excellent stuff on options and munis.) Thank you for your generous guidance and advice to so many people." – Paid-up subscriber John Thompson
"My Alliance membership becomes a better value every year. I'm listening to Dr. Eifrig's put-selling strategy and the normal cost of his publications that are free to me as part of Alliance. Thank you for continuing to add value for your long-timers! You consistently under-promise and over-deliver." – Paid-up subscriber LAF
Regards,
Justin Brill
Baltimore, Maryland
January 21, 2016
What Will the 2016 Presidential Election Mean to Business, Investors, and the American Economy?
By P.J. O'Rourke
As if we didn't have enough to worry about...
With international markets in turmoil, it's time to start worrying about who will be the next president. Primary season is here. The real decision process has begun. Will the next president improve investment and income-growth opportunities – or destroy them?
Bernie Sanders is the scariest of the front-runners. Bernie is a socialist. These days, of course, all Democratic politicians are socialists. They promise to take money and property from people who earn money and have property and give them to people who don't earn money and have a feeling of entitlement.
However, for most Democrats, this is just politics as usual. They're promising more giveaways in return for more votes. The great political satirist H.L. Mencken called elections an "auction sale of stolen goods."
But Bernie is a real socialist. Bernie believes in stealing.
Bernie thinks that if he snatches an iPhone from an old lady, he's doing a good deed. (I mean that metaphorically. If Bernie actually tried to snatch an iPhone from an old lady, she'd beat him to a pulp with her handbag.)
It's easy to laugh at Bernie and his prospects of even being nominated for president. He's such a 1960s throwback that he sounds like the late Abbie Hoffman, if Abbie had had an operation to remove his sense of humor. But...
Although Hillary Clinton is the most likely Democratic nominee – with money, organization, and the backing of the Democratic National Convention powers that be – numerous pitfalls lie between Hillary and the nomination.
Hillary's State Department e-mail misdeeds could end in indictments of her aides, or possibly, of Hillary herself. The Benghazi catastrophe is now on screen at the local Cineplex. The Clinton Foundation exhibits conflicts of interest so large that they have to be weighed on a global political scale. And her rogue husband might, at any moment, slip his leash and get up to his old tricks.
As a candidate, Hillary is crossing the floor of a dark room full of bear traps. One misstep and Bernie is the Democratic candidate.
And the Republicans could nominate someone who infuriates so many Americans that all the people who voted for Barack Obama will "Feel the Bern."
Mitt Romney got only 47.2% of the popular vote in 2012. And Mitt was everybody's favorite uncle compared with some candidates in the current GOP race.
What would Bernie Sanders do as president – especially if, like Obama in 2008, he has a Democratic majority in Congress?
To really frighten yourself, visit Bernie's campaign website, go to "Issues," and click on "Income and Wealth Inequality." Here are 13 terrifying campaign planks. And the scariest thing about Bernie is that he means what he says...
1. Make the wealthy "pay their fair share in taxes." Americans earning $100,000 or more pay almost 78% of the federal income tax. Bernie's idea of taking a fair share of your income is like a shark's idea of taking a fair share of a surfer.
2. Increase the federal minimum wage from $7.25 to $15 an hour. There are 3.3 million U.S. jobs paying at or below the minimum wage. Multiply a $7.75 raise by 40 hours by 52 weeks by 3.3 million jobs. Bernie will add billions and billions of dollars to the cost of providing jobs for unskilled workers. Assuming those jobs continue to exist. (They won't.)
3. Invest $1 trillion in transportation infrastructure. Never mind the inevitable huge government construction project cost overruns like with Boston's "Big Dig." The notorious 16-year-long highway-construction project was estimated to cost $2.8 billion. The final bill: $14.6 billion. How about a Big Dig for every city?
4. Reverse free trade agreements. The one thing Bernie and Trump agree on, because they're both talking out of their... Under the North American Free Trade Agreement (NAFTA) alone, intraregional trade has gone from $290 billion in 1993 to $1.1 trillion in 2012. But Bernie wants that trillion dollars to excavate an enormous trench through the middle of Fort Wayne, Indiana. (See point No. 3.)
5. "Invest" $5.5 billion in a "youth job program." America has plenty of savvy investors. They've already invested in creating 3.3 million jobs (see point No. 2) of the "youth job" variety – jobs Bernie will destroy.
6. Enforce "pay equity" because "women earn just 78 cents for every dollar a man earns." Give every woman a federally subsidized 22% raise? Will this be retroactive and include Carly Fiorina's stint as CEO of Hewlett-Packard while HP's stock fell more than 60%?
7. Make college tuition free. And worth it.
8. Lift the $250,000 Social Security tax income cap. Social Security's annual deficit is $39 billion. About 2.5 million American households have income over $250,000. To put Social Security in the black, we'd have to tax each high-income household $15,600 a year.
9. Single-payer government health care. In 1993, when Hillary proposed this, I wrote an op-ed in the Wall Street Journal saying, "If you think health care is expensive now, wait and see what it costs when it's free."
10. Mandate a total of 15 weeks a year of paid family leave, sick days, and vacation. In most workplaces, nothing gets done between Memorial Day and Labor Day, or from the beginning of the Christmas shopping season until the New Year's Eve hangover has abated in mid-January. Then there's winter doldrums and March Madness devoted to filling out basketball brackets, followed by lackadaisical spring fever. Add Bernie's time-offs and you would have just one workday in 2016... and only because it's a leap year.
11. Universal childcare for all children ages 0-5. Between this and free tuition, we'll wave goodbye to our children in the delivery room and say hello to them again at college graduation. (Although we'll see a lot of them later because they'll be broke and living in our basements.)
12. "Make it easier for workers to join unions." Except everyone will be unemployed.
13. And let's not even think about what Bernie means by, "Breaking up huge financial institutions." Welcome to your new mortgage lender, 155th National Bank of Vermont, motto: "Cord Wood Delivered, Snowmobile 4 Sale."
My advice on Bernie Sanders: Take all the money you can scrape together and donate it to anybody else running for president.
Regards,
P.J. O'Rourke
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