The Storm Is Coming
Editor's note: The cracks are starting to appear in the markets... and nobody is paying any attention.
That's setting early speculators up for windfall gains. But you must know how to speculate correctly.
In today's Masters Series – the conclusion of a two-part interview with Stansberry's Big Trade senior analyst Brett Aitken – he discusses how this strategy works... and how you can use it to easily make 500% to 1,000% gains...
The Storm Is Coming
Sam Latter: So the strategy in Stansberry's Big Trade is to buy long-dated put options on the troubled companies that your team has identified. How has that worked out with stocks hitting new highs and with volatility near all-time lows?
Brett Aitken: Actually, we love that volatility is so low right now.
You see, investors have never been more complacent in history. As I mentioned earlier, put options are a form of "portfolio insurance." And when people aren't worried about a hurricane hitting the stock market, they don't want to pay high premiums to insure their portfolios. Buying put options has never been cheaper than it is today. Because of that, our upside will be even larger when the market finally starts to roll over.
Sam: Stansberry Research has often explained that buying call and put options is a high-risk strategy, one that's not right for many investors...
Brett: It is risky. It's a speculation. Because of that, we're likely going to be wrong more often than we're right. But speculation for us has a very precise meaning. Speculation is an attempt to profit from temporary market extremes.
In every mania, speculators have identified how government actions have distorted the markets... and then positioned themselves to earn massive profits when market forces inevitably overwhelm the government's intervention.
Consider what happened during the 2008-2009 financial crisis. Politicians beat the drum in the early to mid-2000s that every American should own a home. They practically gave unlimited support to the idea. At one point, Freddie Mac and Fannie Mae held around 45% of all U.S. mortgages.
Guys like John Paulson and Michael Burry saw what was happening and knew an epic crash was in the making. They made huge asymmetrical bets on the real estate sector using highly leveraged instruments like credit default swaps ("CDSs") and put options. These securities cost little money, but offered tremendous upside if mortgages defaulted. When the real estate bubble finally burst, defaults hit somewhere around 10% annually and more than $1 trillion in mortgages defaulted. Paulson and Burry made a killing on those speculations.
Of course, readers will recognize that story if they read Michael Lewis' book, The Big Short. Those speculators correctly identified a huge market distortion and made billions of dollars as their thesis played out correctly.
Sam: But wouldn't it be easier – and less risky – to simply short the stocks you've identified as troubled?
Brett: We could short the stocks, sure. But if you sell a stock short, your maximum upside is capped at 100%. By buying long-dated put options, our upside is much, much bigger.
In last week's Masters Series, we shared a way to potentially make 32 times your money on heavily indebted energy firm Cheniere Energy (LNG). The share price has pulled back some, so the specific option we highlighted has soared. But the trade still has huge potential. The company is trading around $45 a share, down from $48 last week. Again, if you sell $1,000 worth of LNG shares short and they go to $0, you've made 100%. Your $1,000 has turned into $2,000. That's great.
Instead, you can buy a put option with a $20 strike price that expires in January 2019 for about $1 right now, up from $0.60 last week. Based on these prices, you could buy five put options for just $500. (Remember, each option contract controls 100 shares.) If the stock falls from $45 to $10 by January 2019, you can sell your shares for $20. That's a 900% return on your investment, AND you've risked less than you would have by shorting the stock outright. If the stock goes to zero, you would make 1,900% on your investment.
And another thing I want to point out is that Cheniere shares fell about 6% this week, but the put option rose more than 66%. That's what we're talking about when we say these are leveraged bets, and that's why our upside is so huge. If the stocks we've identified in the "Dirty Thirty" start to pull back, the prices of their put options will explode higher.
Remember, this is a speculation, not an investment. It's not for your rent money.
Sam: So what percentage of a portfolio should readers be putting to work in this strategy?
Brett: We recommend allocating no more than 5% to 10% of your portfolio to this strategy. And we want readers to spread the allocation over at least a dozen positions, if not more.
We've identified 30 troubled businesses. We see these as opportunities in Stansberry's Big Trade. By allocating no more than 0.5% of your portfolio to each of our put-option recommendations, you can purchase 10 different positions while allocating just 5% of your overall portfolio to this strategy.
The point is, don't try to "cherry pick" these trades. This is important. As I mentioned earlier, many of these put options will expire worthless, meaning you will lose your entire investment. But when we're right, we're going to be really right. We expect to see our winners return 500% to 1,000%. You MUST diversify. Anyone should be able to handle a 0.5% loss. To do that, you must spread your risk across several different positions.
We're going to have more losers than winners. That's the reality. But if we hit on just one or two out of every 10 trades, we're still going to end up making huge returns for our readers.
And consider this: Back in May, the market dropped by almost 2% in a single trading session. Before that drop, we were sitting on a modest 6% average gain in our portfolio. After the drop, our portfolio soared to an average of almost 20%. Think about that... The market declined a minuscule 2%. Imagine what can happen when the overall market falls 10% or 20%. That's the power of this strategy.
Most investors will simply watch their portfolios deteriorate. But folks who follow our advice in Stansberry's Big Trade and remain disciplined are not only going to be hedged against losses from other investments in their portfolio, they also stand to make huge gains as well.
Sam: Have there been any recent developments with the Dirty Thirty?
Brett: The Dirty Thirty is a list of names we identified across various sectors that have the biggest problems. They have some of the weakest credits in America, and many of them have broken business models.
Naturally, the list will evolve. Some companies may be able to hang on longer than we expected, or their financial outlooks may improve. As longtime readers know, when the facts change, so do our opinions. If we see better opportunities elsewhere, we'll add new names to the list. Likewise, if we can't get favorable prices on the options we're eyeing, we'll look around for better opportunities to recommend.
Sam: Before I let you go, is there anything else you wanted to add?
Brett: Yes. And this is an important one: Don't lose your nerve, and be patient.
We tell readers this all the time. Patience is critical to your success as an investor, even more so with trading options. We cannot emphasize this enough with the approach we're taking in Stansberry's Big Trade.
As I mentioned earlier, the market is up more than 10% so far this year. Many readers are skeptical. They think it's a terrible time to bet against stocks – even the ones we've identified as having weak balance sheets and lofty valuations.
But again, conditions are ideal for implementing this strategy today. Despite a rising stock market, the problems bubbling beneath the surface aren't going away. And with investors so complacent right now, volatility is at or near all-time lows. It's never been cheaper to insure your portfolio.
We told subscribers the story of Prem Watsa when we launched Stansberry's Big Trade. Watsa is the CEO of financial holding company Fairfax Financial. He's famous for his well-timed calls on big market moves. Watsa started buying CDSs in 2005 to bet against America's housing boom. At one point, he was down 74% – about $87 million. But he was patient. He knew the storm was coming.
So he continued to buy over the next two years, while investor confidence remained sky-high, and he waited patiently. His final payout came in 2009 – four years after he began speculating. His gain was nearly 500% – worth billions of dollars.
We see the same opportunity today. A crash is coming. We need to slowly build our portfolio. And we need to exercise patience.
The companies we've identified face huge headwinds. Many of them will fail. But today, their equity values remain bloated. The rising market is giving us a fantastic opportunity that will pay off tremendously when the downfall arrives.
Sam: Thanks for taking the time to speak with us today, Brett.
Brett: My pleasure. Anytime.
Editor's note: Porter is disgusted by what he sees in the market today. So he put together a brief presentation explaining exactly what's happening... how to prepare for it... and how to make huge profits when the bear market arrives. You may find Porter's message to be offensive. But we urge you to stay calm and watch to the end. Check out his free presentation right here.