Masters Series: How to Collect Money Like a Vegas Casino
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Editor's note: Trading stock options can drastically lower your investment risk – while drastically increasing your returns.
Some people think of options trading as "gambling." But it's really one of the most misunderstood financial vehicles around…
Over the last four years, Dr. David Eifrig has built one of the best trading track records in the industry. From April 2010 to October 2013, "Doc" closed 136 consecutive positions for a profit in his options-trading advisory, Retirement Trader. (His win rate is still 99%.)
Doc recently released a book called High Income Retirement, which describes in detail the options strategies he used to build that track record and – more important – to help subscribers generate thousands of dollars in safe, steady income.
We published the following excerpt from High Income Retirement in the November 17 edition of our weekend Masters Series. But the lessons it teaches on how to earn safe, consistently profitable returns using options is so valuable… we want to share it with you again today…
How to Collect Money Like a Vegas Casino
By Dr. David Eifrig, Jr., editor, Retirement Trader
Humans are hopelessly ignorant gamblers.
And that's a good thing.
Before we get into the specifics of safely making huge income streams, it's important to know why the opportunity exists...
It all comes down to gambling.
I know that sounds crazy. After all, how can you safely earn double-digit annual yields on your money by "gambling"?
A share of stock represents a slice of ownership of a company. As you probably know, these ownership stakes in thousands of businesses trade on stock exchanges.
You might have heard news stories that mention the price of Google stock... or ExxonMobil stock... or Apple stock. And it's likely that you've bought such a stock... or own some in your retirement account through various investment vehicles.
The stock market is full of gamblers... people who attempt to trade short-term price movements. They jump into and out of positions in a matter of days or weeks.
These gamblers don't pay much attention to the quality of the businesses they are buying. They're simply looking to make a quick buck on (often random) price movements.
These people treat the stock market as a giant casino... where they can gamble with thousands (even millions) of dollars for a shot of "hitting it big."
These gamblers love to trade "stock options."
Stock options are one of the most misunderstood financial vehicles. The mainstream press – and even your broker – will tell you options are inherently risky and virtually guaranteed to lead to financial ruin.
This is just not true. It's a crude and unsophisticated view of the markets. The real story is that when used properly, stock options can drastically lower your investment risk... while dramatically increasing your returns.
I know this statement probably goes against what you've heard about options. For most folks, it's like someone telling you that regularly eating burgers and fries is good for your health.
But in the case of stock options, what I've said is 100% true. Believing otherwise prevents people from making extraordinary returns... while taking little risk.
So let's repeat it again:
Counter to what most people believe, stock options can drastically lower your investment risk... while drastically increasing your returns.
The key is, we can use stock options to become "the house" that collects on bets that gamblers make on short-term market movements.
You see, the way most people use stock options increases the risk to their capital. But the strategy I'll show you uses stock options to decrease the risk to your capital.
Used in [a] conservative manner, options can allow you to safely generate double-digit income streams in a retirement account.
We do it by collecting the money others gamble away...
In addition to the big market for stocks, there is also a big market for stock options. Each day the market is open, millions of stock options are bought and sold. And a huge number of the participants in the stock-options market are hopeless gamblers.
We can use this market and its participants to produce steady income streams from the stocks we own in retirement accounts (and any other brokerage account).
Here's an example of how it works in the stock market...
Let's say you own 300 shares of stock in the hypothetical publicly traded company Magnum Enterprises.
A few years ago, you bought the stock for $20 per share. Its current market value is $40 per share. Your holdings are worth $12,000.
One day, you look at the market and see that a group of stock market gamblers believe Magnum is about to experience a price rally. They believe shares could hit at least $44 per share within six months (a 10% gain).
They are willing to enter into contracts that give them the right, but not the obligation, to purchase shares of Magnum for $44 within six months. They will pay $1 per share for the right to enter into these contracts...
These contracts, which allow people to buy an asset (in this case, a stock) for a certain price at a certain time in the future, are named "call options."
The standard size of an options contract covers 100 shares. However, these contracts are quoted and priced in terms of just one share.
For example, if the quoted price of a call option contract is $4 per share, the call-buyer would pay a total of $400 to acquire the contract.
If the quoted price of an options contract is $6, the call-buyer would pay a total of $600 to acquire it...
In the case of the stock market gamblers and Magnum Enterprises, the gamblers are paying $1 per share for the right, but not the obligation, to buy Magnum for $44 a share within six months.
If Magnum experiences a big rally, it could rise to $50 per share.
In this case, the gamblers win. They can use their call-option contract to buy Magnum shares for $44. They can then turn around and sell the same shares in the general market for $50 per share. They would make $5 for every $1 invested.
Why just a $5 profit and not a $6 profit?
Remember... in this case, the gambler paid $1 for the right to buy Magnum Enterprises for $44 per share. Thus, his "all in" cost for the stock purchase is $45 per share. When he sells his shares for $50, he makes a $5 profit, rather than a $6 profit.
Turning every $1 invested into $5 is an incredible gain in just six months. This type of gain would turn a $10,000 investment into $50,000.
It's this type of gain that attracts thousands and thousands of gamblers to the options market every day.
But just like big hits at a Las Vegas casino, big hits in the options market are extremely rare.
Most stock-option gamblers lose their money... just like most casino gamblers lose their money in Las Vegas.
Still, the allure of "one big hit" draws huge amounts of people into the market... just like it draws them to Las Vegas.
No matter how many times people lose, they keep coming back. They keep gambling.
It's just a quirk of human nature.
Thus, the vast majority of "call option" contracts that gamblers buy end up worthless. The sellers of these contracts almost always keep the money the gamblers paid them.
In Las Vegas, casinos occasionally have to pay out money to gamblers. But the odds are so stacked against the gamblers that casinos make billions of dollars a year.
The casinos make so much money that they can afford to build stupendous, lavish hotels. Their owners become millionaires and billionaires.
They make that money by taking the other side of foolish bets.
You can probably see where I'm going with this... and why my advice to investors is...
TAKE THE OTHER SIDE OF THE FOOLISH BETS... AND SELL CALL OPTIONS!
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig Jr., MD, MBA
Editor's note: Participants at a live training session Thursday night with Retirement Trader editor Dr. David Eifrig got an exceptional offer for Doc's service – at a steep discount. You can still sign up for a similar version of the special offer for a limited time. If you take advantage today, you can get Retirement Trader for 63% of the regular retail price... with a six-month 100% money-back guarantee. But that's only part of the offer… For more details, click here.
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