How to Make 25.9% a Year, Even on Stocks That Go Nowhere

Editor's note: Dr. David "Doc" Eifrig has been quietly leading his Retirement Trader subscribers to 44% annualized gains...

And he has done it while taking less risk than simply buying stocks outright.

Sound too good to be true? As you'll read in today's Masters Series, it's not.

Today, we're featuring the conclusion of an exclusive interview with Retirement Trader senior analyst Matt Weinschenk. In it, he shares a real-life trade that subscribers used to make 25.9% annualized returns... explains how to protect your downside... and warns of a mistake you could be making in your brokerage account right now...

How to Make 25.9% a Year, Even on Stocks That Go Nowhere
An interview with Matt Weinschenk, senior analyst, Retirement Trader

Sam Latter: What types of options do you and Doc trade in Retirement Trader?

Matt Weinschenk: We focus on selling call and put options that expire on the third Friday of the month. This is known as a "standard" option, and most – but not all – brokerage platforms will highlight in some way which expiration is standard. (As option markets have grown, investors have wanted more flexibility. Now, you can trade weekly options on many stocks that expire throughout the month every Friday.)

We look for trades that expire about two months down the line. That's because the best rate of time decay (or "theta") in options occurs between six and eight weeks before expiration.

Sam: Can you walk us through a real-life trade you've put on recently?

Matt: Back in December, we told Retirement Trader readers about a high-quality company that investors had given up on. It was railroad operator CSX (CSX). Railroad stocks perform well when the economy is humming along, because more economic activity means more "stuff" gets shipped. However, the CEO had unexpectedly passed away... and the stock tanked.

We thought the market was overreacting. So we made a trade on it. At the time, you could buy CSX for $55.66 per share. Let's say you bought 100 shares at the time for a total of $5,566.

Right after buying your shares, you were able to sell someone the right to buy your shares from you for $55 per share any time over the next two months. You collected $2.84 per share ($284 per contract) for selling that right. That gave us an initial outlay of $52.82 (the $55.66 stock price minus the $2.84 we received from the call premium).

By February, CSX was trading for more than $55. So you would have sold at $55 and kept the $284 you got for selling the call.

Because we sold covered calls with a strike price below the share price, we lost $0.66 per share when they were called away from us. So our net gain was $2.18 (the $2.84 premium minus $0.66 per share), or $218 with our 100 shares. That's a safe return of 4.1% ($2.18 divided by the $52.82 cost) in less than two months.

And if CSX had been trading below $55 in February, we would have been able to do pretty much the same trade all over again.

Do this "4.1% in two months" trade six times in a year and you can make 25.9%. You'd also collect CSX's 1.5% dividend along the way. On a $25,000 stake, that would generate almost $7,000 a year.

Remember, this wasn't just a hypothetical. In February, our Retirement Trader readers closed this exact trade.

Sam: We've talked about the upside... But how do you and Doc protect your portfolio in Retirement Trader?

Matt: Stop losses are an essential part of the Retirement Trader strategy. We typically recommend setting stop losses between 20% and 25%.

Let's take a look at an example... In this case, we'll use a 25% stop loss.

Say you bought 100 shares of Company XYZ for $25 and sold the December $25 calls for $1. That means your total outlay – or what you spent to open the trade – is $24 (the $25 share price minus the $1 you received in premiums). The total cost of your trade is $2,400.

That means that if the combined value of your position falls 25%, you would sell. In this case, 25% of $2,400 is $600. So you would close the position if it fell to $1,800. This gives us a stop loss of $18 per share.

You'll also have to buy, to close, the call if you want to close the trade, so you'll have to factor that into your calculation. But for the sake of keeping the numbers simple, that's how you can calculate it. The most important thing to remember is to sell when you hit your stop.

Sam: Why is it important not to enter your stop losses with your broker?

Matt: Entering your stop with your broker is like playing poker with your cards facing up. It lets professional, high-volume traders (or "market makers") know exactly when you will sell. These traders can move the market and trigger your stop losses.

Instead, we recommend using price alerts – either from our corporate affiliate TradeStops or from your broker – to notify you once a position has hit your stop. This is a safer way to maximize your profits and limit your losses. And it keeps you in control of your investments.

Sam: One last question before I let you go... Can you make these types of trades in a retirement account?

Matt: The short answer is, yes.

Almost anybody can trade covered calls in an IRA. In tax-deferred accounts, you don't have to keep track of the trade's gains and losses for IRS reporting. And you don't need to worry about short- and long-term capital-gains differences, either.

We also recommend selling put options in Retirement Trader. Doing that in an IRA can be trickier, since you can't use margin to boost your returns.

Sam: Do you have anything else to add?

Matt: We don't have a crystal ball, and we can't know what the market is going to do tomorrow, next month, or next year. But with the strategy we use in Retirement Trader, we don't have to. We can make money if stocks are going up, down, or sideways. And because we trade stocks we're happy to own, we can sleep well at night. This is a strategy every investor should be using to make a little extra income, whether you're a young investor or a retiree.

A lot of people are sitting on huge gains from this bull market and don't want to watch them vanish. So you can sell covered calls and get paid to sell your stock to someone else at a higher price. That's real money going right into your pockets on the stocks you already own in your portfolio.

We love teaching people about options. Our goal is to show them the best ways to improve their finances and enjoy the freedom it gives them. I hope more folks will give it a try.

Sam: Thanks for taking the time to sit down with us today, Matt.

Matt: Sure, anytime.

Editor's note: Earlier this week, Doc walked one of our colleagues – a complete novice when it comes to investing – through the Retirement Trader strategy live on camera. She used it to collect $210 in just three minutes on her first try. Learn more about this incredibly powerful strategy – which Doc has used to generate an incredible 95% win rate over the last eight-plus years – right here.