The Prisoner-of-War's Secret to Outsized Gains By Dr. David Eifrig, editor, Retirement Trader
Even if they didn't smoke, the prisoners should have held onto those cigarettes... It was 1942. The British soldiers had been captured in Libya, then shipped off to an Italian transit camp as prisoners of war ("POWs"). When the POWs got their first weekly Red Cross food deliveries, they immediately began swapping items. Everyone wanted to trade some of their rations for someone else's... but no one had established their true value. For example, if a soldier didn't smoke, he was happy to give up his cigarettes for a bit more food. And the Sikh prisoners – whose faith promotes vegetarian diets – were eager to accept anything in exchange for their tins of beef. Before long, each soldier had a better idea of what everything in his Red Cross box was worth. But the system wasn't perfect – which meant some folks could come out with better bargains... It's one of the deepest truths about markets... Uncertainty leads to disagreement, and disagreement leads to varied prices. If you know what you're looking for, that gives you an opportunity to make outsized gains. We'll see how this is playing out today...
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One of the prisoners from back then, R.A. Radford – who studied economics before enlisting in the British Army – described their dynamic in his 1945 paper, "The Economic Organisation of a P.O.W. Camp." Within a week or two, trade grew, rough scales of exchange values came into existence... It was realized that a tin of jam was worth one-half pound of margarine plus something else; that a cigarette issue was worth several chocolate issues, and a tin of diced carrots was worth practically nothing. By the time Radford settled into a permanent POW camp in Germany, the values were so firmly established that the prisoners posted signs with each item's going rate. Cigarettes were the currency. A stable, predictable market ensures that each participant gets a fair deal. But experienced investors see their biggest gains in times of chaos. Radford gave this example... Stories circulated of a padre who started off round the camp with a tin of cheese and five cigarettes and returned to his bed with a complete parcel in addition to his original cheese and cigarettes. The priest exploited uncertainty in the POW camp. And if you're looking for uncertainty, look no further than the world today... Investors don't know what's going to happen with the war between Russia and Ukraine... They don't know what's going to happen with inflation... And they don't know what the government will do about it. In response, investors are clamoring to buy one particular thing right now. And you can make a lot of money selling it to them. Specifically, I'm talking about selling put options. Just like the first days in a POW camp, we can see that current prices aren't where they are supposed to be... and that means there's a tremendous opportunity to make money. Let me be clear: This strategy is not taking advantage of anyone. We are going to give them exactly what they want... and at the price they want. And we will end up richer because of it. Let me show you how... At any time, hundreds of thousands of options are available to sell. With such a vast market, you can always find a deal somewhere. You can understand options in a lot of different ways. I find it particularly helpful to think about them as insurance or portfolio protection... When you buy home insurance, you're paying for protection against loss of value to your home. You pay money to the insurance company each and every year. Most years, the house doesn't burn down. Most likely, it never will. The customer is happy to pay for peace of mind, and the insurance company is happy to earn healthy profits. But how much does the insurance cost each year? Well, that depends on the likelihood of a fire... If you have a home in a safe area, it may cost $500 per year. If there's an arsonist school nearby, maybe rates will double to $1,000. And if you build it near the base of an active volcano, maybe the rate jumps to $5,000. The difference is risk. The insurance company is raising its rates to protect its bottom line. And the customer is willing to pay more because he wants additional protection against a potential disaster. Today, investors want extra protection in the stock market. That can lead to surges in income for option sellers. One index essentially measures the price of this insurance. It's called the CBOE Volatility Index ("VIX"). The VIX takes the price of options and works backward to see how volatile option buyers think stocks will be in the future (what's called "implied volatility"). For the last 10 years, the VIX – or the expected volatility of the market – was roughly 15, sometimes getting as low as 9. During the worst of the coronavirus, expected volatility surged to more than 80. But even today, with markets appearing more stable, it still hovers around 22. Take a look... You can also see how frequently the VIX goes through sudden spikes in volatility. So, just how much more money can we make? Let's say you wanted to sell insurance on a stock like Microsoft (MSFT). Microsoft is a big, sturdy company that has been one of the best-performing stocks of the last couple decades. It should be a staple in any serious portfolio. Even though Microsoft is a stock most of us would love to own at today's prices (it's down roughly 15% in 2022), there are still nervous investors who want to buy insurance in case it falls more. In a normal market, like September of last year, an option seller could make $340 by selling Microsoft insurance. Not bad. But today, because of the fear in the market, the price of that insurance has shot up to $910. So that's a 167% increase for a nearly identical put option... The only thing that has changed is the level of fear in the market. You can make hundreds, even thousands in extra income per month by selling options. I truly believe there has never been a better time to learn how to do so... Here's to our health, wealth, and a great retirement, Dr. David Eifrig Editor's note: With a 94% win rate over the past 12 years, Doc's options strategy has helped subscribers earn regular cash payouts... up to thousands of dollars each month. And in volatile periods like we're seeing lately, this crisis-proof technique absolutely shines... Learn how you can start using it to earn instant income in 2022 right here. Further Reading The market is full of uncertainty right now. But it won't last forever. And that means we can profit from this environment by offering "portfolio protection" to other investors. Learn more about Doc's strategy here... Fear Reigns Supreme... Now's the Time to Profit. "The way most people use this strategy increases the risk to their capital," Doc says. But if you learn how to use options safely, you can limit your risk of losses and still profit... Get the full story here: How to Earn Low-Risk Income... With a Strategy Born From Mania. |
INSIDE TODAY'S
DailyWealth Premium How you can collect cash by selling puts... Options trading is one of the best ways to profit in any market. And understanding put options is simpler than you may think... Click here to get immediate access. Market Notes HIGHS AND LOWS NEW HIGHS OF NOTE LAST WEEK Raytheon Technologies (RTX)... "offense" contractor
Lockheed Martin (LMT)... "offense" contractor
Altria (MO)... cigarettes and alternatives
Hershey (HSY)... "Global Elite" chocolatier
Coca-Cola (KO)... soft drinks
General Mills (GIS)... food products
Weis Markets (WMK)... grocery stores
Dollar General (DG)... discount retail
Rayonier (RYN)... timberland
Mosaic (MOS)... fertilizer
Wheaton Precious Metals (WPM)... precious metals
Franco-Nevada (FNV)... gold royalties
Black Stone Minerals (BSM)... natural gas
Enterprise Products Partners (EPD)... natural gas
Cameco (CCJ)... uranium NEW LOWS OF NOTE LAST WEEK JPMorgan Chase (JPM)... financial giant
MarketAxess (MKTX)... electronic trading
Applied Materials (AMAT)... semiconductors
Lam Research (LRCX)... semiconductor "picks and shovels"
MSA Safety (MSA)... safety equipment
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