We're Not Wild Speculators... But We're Still Generating Profits
When people hear "options trading," many immediately think you're speculating and taking wild risks...
But if you're a longtime reader, you know that's the opposite of how I like to invest. I don't want to spend my days in front of a computer screen watching my brokerage account. I don't want to invest in something that keeps me awake at night worried about losing my nest egg.
When I started my options-trading newsletter – I wanted to share a strategy that I would feel comfortable with my mother using. (She learned how to trade options in her retirement.)
Instead of making huge, risky bets, I show readers how to get paid a few hundred dollars to agree to possibly buy shares of a world-class company sometime in the future. If the stock rises, we get to just keep that cash. If the stock falls enough by an agreed-upon date, we buy the stock. Considering the cash we collected at the beginning of the trade, we're actually buying this blue-chip stock at a discount.
(We also have ways to make sure we never buy the stock at all.)
It's really that simple. And it's why I consider it to be the best income-collecting strategy there is.
I've taught thousands of folks how to use options to safely generate income. In fact, yesterday, I finalized my Retirement Trader Master Course. I take subscribers step-by-step through how I pick trades to show folks exactly how to place those trades in their brokerage account.
To prove that anyone can sell options, I flew all the way down to South Carolina to teach professional golfer Kevin Kisner all about this strategy.
In a special video, I walked Kevin through the basics of how to make these types of trades. And I even got him to put his money to work with his very first trade. (It's off to a great start already.)
Kisner can drive the golf ball a mile. You've probably seen him in contention at PGA Tour tournaments. And now, with the tools I gave him, he can collect hundreds and thousands of dollars of income each month.
Click here to watch my sit-down with Kevin Kisner.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
June 15, 2024
Reader question of the week...
Q: What's the worst thing that can happen to an investor in a covered call? – J.G.
A: Theoretically, the worst thing that can happen is that the stock falls to zero. (In the case of Retirement Trader, the worst would be shares falling so far, so fast that they trigger our stop loss.)
But you also have to remember... that's the exact same risk you'd have just buying and owning the shares. And by selling covered calls, we also have extra downside protection from the option premium collected.
For example, let's say you sell an at-the-money $10 call and receive $1 in premium. That's like paying $9 for the stock instead of $10. Because of the premium you collected, you won't lose money unless the stock price falls below $9. If you had bought shares at $10 instead, you'd lose money as soon as the share price dipped lower.
And if shares fell to zero, a stockholder who held on would take a 100% loss, while an equivalent covered-call seller would still have the $1 he collected in premium.
Here's the most realistic, real-world example of our worst-case scenario as covered-call traders... the COVID-19 crash that sent stocks down 34% in a matter of weeks.
Of course, volatility shot up as well during that period... As our stocks were falling, we were rolling our trades, collecting large amounts of premium by selling calls with a strike price closer to the price of the stock. By doing this, we were able to stay in many trades – though we got stopped out of a handful as well and had to take on a few losses during that period. The stocks just fell too fast.
But then, at the end of March 2020, we saw signs of a blistering recovery. Stocks began to rally... and continued into April and May. During the market crash, we'd rolled our strike prices down, but now our stocks were shooting well above their new strikes.
We were in the hole once again and had to roll our strikes higher so our shares wouldn't be called away for a loss.
The pandemic was truly a Black Swan event. And it was as close to the worst-possible scenario that could happen to option sellers.
And in the four-plus years since the COVID crash, the worst thing that has happened to our covered-call trades has been a few rolls before each and every one of them closed for profits.
Keep sending your questions, comments, and suggestions our way. We read every e-mail... feedback@healthandwealthbulletin.com.
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