The Low-Risk Way to Make 21% a Year in the Market
Editor's note: This weekend, we're talking about options.
We can already hear the groans as people go to click off this page.
But if you're interested in growing your portfolio while also lowering your risk... this weekend's Masters Series is for you.
This weekend, we're featuring an exclusive two-part interview with Retirement Trader senior analyst Matt Weinschenk. In the first installment, Matt discusses the strategy he and Dr. David "Doc" Eifrig have used to amass one of the most impressive track records in the history of our industry...
The Low-Risk Way to Make 21% a Year in the Market
An interview with Matt Weinschenk, senior analyst, Retirement Trader
Sam Latter: I'm here today with Matt Weinschenk, senior analyst with Dr. David Eifrig's Retirement Trader newsletter.
Matt, I thought I'd pick your brain a little bit about the strategies that have gone into producing one of the most impressive track records in the history of our industry. Right now as it sits, Retirement Trader has a win percentage of 94%. That's 329 winners to only 21 losers, and a current win streak of 66 positions in a row closed for a win.
For the uninitiated, can you explain the strategy you guys use in Retirement Trader?
Matt Weinschenk: Sure. It's called a "covered call." It's a simple options strategy. We know that people get scared when they hear the word "options," so let me explain how it works.
Essentially, you own a stock, and someone offers to buy that stock from you for a certain price in the future... and you receive money up front for agreeing to sell your stock in the future.
Say you own a house worth $200,000 and someone knocks on your front door. He says to you, "I'm interested in buying your house for $220,000 in six months." You're interested, because you'll make a $20,000 profit off the sale. And then he says, "And I'll pay you $5,000 right now if you agree to that."
Covered calls are the same thing, except we're doing it with stocks. So someone is willing to buy a stock at a higher price in the future, and they'll pay you money right now to agree to do that.
It's an obvious trade. You'll generate more income and potentially higher returns than you would by simply owning the same stock.
Sam: That makes sense. Why don't you walk me through a real-life trade that you guys recently closed out?
Matt: Sure.
Last October, right after Hurricane Matthew, we saw there was a lot of damage, and we knew people were going to have to fix up their homes again. So we were interested in Owens Corning (OC), which makes roofing tiles and other construction materials.
We bought shares of Owens Corning for about $51.50. We sold a $50 covered call against it, and collected $4 up front. So now our cost was about $47.50 – the $51.50 minus the $4 we received. The company announced earnings and everything went pretty much just as we expected. Roofing sales were up, so the stock moved higher.
Come February when the option expired, someone bought our shares from us for $50. But remember, we had only paid $47.50 for them. We made about 5.5% in four months. It was a simple trade on a quality company. That's the sort of thing we try to do again and again.
Sam: It seems like Retirement Trader has shifted its focus a little bit lately. As longtime readers know, you recommend selling covered calls as well as selling put options. But you guys recently wrote that you're turning your focus more toward covered calls. Why do you prefer selling covered calls over selling puts right now?
Matt: What most people don't realize is that covered calls and selling puts end up with almost the exact same returns. But covered calls are much easier, because it's easier to get an options account for covered calls set up... you can do it in your IRA... you can do it on the stocks you already own... you don't have to worry about margin requirements... the list goes on and on. You end up with the same return, but you don't have to jump through as many hoops.
Another great thing about covered calls is because you already own the stock, you get to collect any dividends along the way. We might be making 2% or 3% every two months from the options, but you're also going to make another 2% or 3% per year on the dividends, depending on the stock. You get the benefits of being a shareholder, collecting those dividends, and getting even more of an income boost than you would from selling put options.
We've shifted more to looking at covered calls just because it has a lot of benefits for new options traders. Of course, we still provide both strategies for our Retirement Trader readers.
Sam: Every time I turn on CNBC or open up the Wall Street Journal, I read about how the bull market just turned eight years old, and how volatility is at historic lows. When volatility is low, options premiums – the money you receive for selling covered calls – are lower. Does all of this weigh down your returns?
Matt: It's true that when volatility is higher, people pay more for options, and with low volatility, options prices are a little lower.
That just means that instead of earning 5%, we're earning 4%. It's not a huge difference. Eventually, volatility is going to go back up, and we'll be ready when that happens. In the meantime, we're benefiting from stocks rising and the U.S. economy continuing to get better. If that means low volatility, that's OK. It works out for us either way.
Sam: So instead of 5% returns, you can make 4% returns... Last week, you guys recommended a trade that should return 3.5%. These gains you're talking about don't sound all that impressive...
Matt: When people start investing, they want 100% or 200% gains.
In Retirement Trader, we take the opposite approach. We've seen over the last seven years that the best way to consistently make money in the market is not by swinging for the fences for a home run, but by hitting singles again and again. A little gain here, a little gain there... When you have a 94% success rate, that really adds up.
The other thing that's important to note is that the recent trade you're referencing, it's going to make 3.5%, but it's only going to take two months. If you make 3.5% in two months and do that six times a year, you're going to be making 21% a year.
Over time, stocks have returned around 7% a year or so. By using our strategy, you're making three times the average return of the overall market. It might look like small gains, but it really adds up. And it's the best way to grow your portfolio without taking a lot of risk.
Editor's note: On Wednesday, March 22, Doc Eifrig will walk viewers through the simple steps to start collecting thousands of dollars per month in extra income... without buying a single new stock. Reserve your spot for this free online event right here.