Porter's 'best, most consistent trading strategy'... Making 34% in three months... 68 winners in a row... Spain needs cash... Wait, no it doesn't... Gold shipments surge... Shorting Facebook...
Yesterday, we mentioned the pop in the Volatility Index (VIX) above 27, the highest point this year... and promised a follow-up to that brief bit of information.
The VIX serves as a sort of "fear gauge" for the stock market... The index measures the prices people are willing to pay for options that protect the value of their stock holdings. The higher the VIX, the more people will pay to insure their stocks... hence, the more scared they feel. And when investors and traders are scared, they also sell assets they deem risky... And as we know, when the herd is selling, bargains abound.
The chart below is a five-year chart of the S&P 500. Beneath that is a corresponding chart of the VIX for the same time period. As you can see... sharp rises in the VIX usually correspond with market bottoms...
In September 2008, the market fell off a cliff. That's the month investment bank Lehman Brothers went bust. Investors were selling indiscriminately. The financial markets were panicked. The VIX, as you can see, quadrupled to 80.
We're contrarians at heart. So when the investing herd was giving up on the market, we sought out the best way for our subscribers to make huge gains... As we explained, rising volatility reflects increasing option premiums. So during periods of high volatility, you can make a fortune selling put options on high-quality stocks.
So about one month after the Lehman collapse... to take advantage of the carnage... we launched one of the most successful newsletters in history (on a track record basis) – Porter's Put Strategy Report.
We knew we it would be hard to sell this newsletter – investors were terrified by the market losses they'd just watched... and the idea of trading options makes many individual investors nervous even in the best of times. But we knew the few people who tried it would see some of the greatest returns in their investment careers. Here is what Porter wrote in the first issue of Put Strategy Report in October 2008 (emphasis added)...
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The collapse in stocks this fall was historic in size. As I write this report, the Dow Jones Industrial Average is about to close with its worst weekly loss of all time, in percentage terms. |
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Most investors watching the carnage simply want to sell and never hear about stocks again... |
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But for those of us who understand how to value securities, there's simply never been a better time to buy stocks, not in 30 years and maybe not ever. |
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The panic in the markets leads to falling prices for securities – everyone knows this. What most people don't know, however, is that panic also leads to vastly higher prices on options. Investors buy put options as a form of insurance on the value of their stocks. But when investors are scared, they're willing to pay far higher premiums for put options. The insurance can get incredibly expensive. |
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This combination – incredibly cheap stock prices and incredibly high-risk premiums in the options market – combines to make a once-in-a-lifetime opportunity for smart investors. Right now, you can literally earn more than 50% on an annualized basis selling insurance on stocks that are trading near their liquidation value. You're selling insurance on a risk that doesn't exist. |
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You can imagine this strategy as selling hurricane insurance after the hurricane has already come. In the insurance market, you want to sell when people are scared. And right now, they're more scared than they've ever been. That should let us make about 50% a year without buying a single stock. – October 2008, Put Strategy Report |
Remember when someone buys a put option... he's buying the right (but not the obligation) to sell stock at a set price by an agreed-upon deadline. In other words, buying a put assures you that no matter how low a stock's price falls in the open market, you can still get at least that agreed-upon price (called the "strike price"). So rising volatility reflects investors' willingness to pay more in premium for that insurance.
And (for reasons we'll explain in a second)... we're happy to sell them that insurance... at a huge premium. Porter made Put Strategy Report subscribers close to 50% annualized gains doing just that...
Today, the market is scared... notably of a slowdown in China and a collapse in Europe. The S&P 500 has sold off 10% from its 2012 high in April. And the VIX has increased from around 15 then to above 27 yesterday. We're far from extreme panic of late 2008, but selling puts still offers opportunities for big, safe gains.
There's one other trick to successfully selling puts. It's the reason we're happy to sell stock insurance to nervous investors. You should only sell puts on stocks you want to own at strike prices that represent good bargains on the shares.
Porter calls selling puts on high-quality, blue-chip stocks "the best, most consistent trading strategy" he's ever used. And today, we see opportunity in blue-chip technology companies like Microsoft, Intel, and Cisco. These companies have more than $100 billion in combined cash. And they pay dividends between 2% and 3.3%.
They're among the safest and best companies in the world. And they've all sold off hard from their April highs. Right now, you can make double-digit returns selling puts on these companies... And there's virtually zero risk... because you are happy to own these shares at the price you've agreed to pay.
For example, in today's DailyWealth Trader, we showed you how to make 34% in three months selling puts on Intel. Take a look at the stock chart of the World Dominating maker of computer processor chips... It's sold off from more than $29 a share in May to around $25 today.
Here's what co-editors Brian Hunt and Amber Mason wrote in DailyWealth Trader today...
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Take the September $25 puts, for example, which are trading for about $1.70. All you have to put up to make the trade is a 20% "good faith" deposit, called "margin." In this case, that's $5 per share. So the $1.70 premium is actually an instant 34% return on margin. |
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If Intel holds its level or rises higher by option expiration in September, sellers of that option will get to keep the $1.70 payout and walk away. Annualized, your return would be more than 100%. |
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If the stock ends up below $25, put sellers would end up buying the stock for a total cost of $23.30 ($25 minus $1.70). That's a 7% discount to today's price. And you'd be collecting Intel's growing dividend as well. |
If Intel's stock goes up from here, you keep 100% of the premium and make a 34% return on margin in three months. If the stock goes down, you own shares in the world's No. 1 semiconductor company at a deeply discounted price... And you collect a huge dividend.
These put-selling trades are some of the best opportunities in today's market. And there are plenty of trades like the one we described above you can execute right now. If you're interested in selling puts and collecting double-digit income every few months, you should read Dr. David Eifrig's Retirement Trader.
"Doc" learned this technique working for Goldman Sachs and other Wall Street banks in the 1980s. In Retirement Trader, he uses that knowledge to recommend super-safe trades that can help subscribers generate huge income. Since launching his research service in April 2010, Doc has closed 68 consecutive series of winning trades. It's one of the greatest trading track records in newsletter history.
Even if you don't consider yourself a trader, we recommend you try Retirement Trader. As I said above, we believe selling puts on high-quality companies is probably the biggest opportunity in the market today. It's one of the few places you can safely collect double-digit income in a few months. So while the rest of the market is getting more and more nervous... you can take advantage of rising volatility to make easy gains.
Doc has recently published an "owner's manual" for put-selling. We're calling it his "Blue Book" (since he only recommends trading "blue-chip" stocks with this technique). In it, Doc walks readers step-by-step through the process of selling puts... and profiles the absolute best stocks to trade this way. It's the best guide we've seen to learning how to use this super-safe investing technique. To learn how to access Doc's Blue Book and subscribe to Retirement Trader (without watching a long promotional video), click here. And note... we're currently offering Doc's service at a generous discount.
"There is no financial crisis in Spain."
The above quote is from the chairman of a Spanish bank whose stock chart looks like this...
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Emilio Botin, chairman of Spain's biggest bank, Banco Santander, today told Reuters his country is not suffering a financial crisis. Experience has taught us that when a financial executive (or government official) says there's no problem, there's a problem.
Of course, Botin revealed himself in his next breath... he told Reuters that Spanish banks need 40 billion euros to stay afloat, adding those figures are "perfectly accessible." We're sure the cost to bail out the Spanish banking system will be much larger than 40 billion euros. It likely will cost hundreds of billions of euros... But 40 billion is a good start.
While Botin is trying to calm fears... Spain's Treasury Minister Cristobal Montoro basically told the world, in an interview on Spanish radio, that his country is shut out of global credit markets... "The risk premium says Spain doesn't have the market door open" he said. "The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt."
Spain is going to test the credit markets on Thursday by issuing 1 billion-2 billion euros of medium- and long-term debt. If we were the treasury minister of a country in crisis, we probably wouldn't be making announcements like this two days before an important bond auction...
With the imminent wave of liquidity about to hit Europe, it's no wonder global gold demand continues rising... Recent data show Hong Kong shipped 101,768 kilograms of gold to mainland China in April, up 62% in one month (and the second-highest monthly export in history). And Iran imported $1.2 billion of gold from Turkey in April (up from $7,500 a year earlier). In the U.S., sales of American Eagle gold coins more than doubled in May to 53,000 ounces, up from 20,000 in April.
New 52-week highs (as of 6/4/12): Wal-Mart (WMT).
It's great when our readers follow our advice and make money... It's even better when they e-mail us about it. Have you recently made some good trades? Tell us about them at feedback@stansberryresearch.com.
"Thanks so much for your advice on options. I have sold a few so far and think I am finally getting the hang of it. Gotta admit it seems complex and maybe a little scary at first but doing just those small trades Porter mentions really was the key. Mixing the WDDGs with a put strategy to open a position seems to make more and more sense. Also getting a dividend boost with covered calls also seems to be working well. Keep up the good work. I realize that I probably am not maxing out my options trades since volatility hasn't gone crazy yet, but this approach seems to make sense to me with WDDGs even with lower than optimal volatility." – Paid-up subscriber Wes
"I appreciate your advice about staying away from IPOs. With your comments about Facebook, I decided to go short and have seen a nice return thus far. This was not your specific advice but it seemed to fit your overall strategy of taking advantage of opportunities as they become known. Thanks." – Paid-up subscriber Bill Mast
"Just wanted to say how happy I am with my purchase of the private wealth alliance. I'm in my early 30s and will be leaving on an international assignment with my company. The perks of the job will allow me to put a lot aside to build my wealth... after purchasing your alliance membership I have immediately started to read your materials. I printed all 130 pages of the traders manual and read each and every bit of it. Your materials have a lot of education to offer. I can see a few things I was doing right and a lot that I have already done wrong, but thanks to you guys my mistakes will hopefully hurt a lot less! Thanks for the jump start to my wealth building and education in the financial sector! Keep doing what you do best!" – Anonymous
Regards,
Sean Goldsmith
New York, New York
June 5, 2012