Ask Doc "Options" is a word that scares a lot of investors.
I get it. Trading options seems like a risky strategy... an easy way to lose your hard-earned money. That's because too many folks go about trading options the wrong way.
When you add successful options trading to your investing toolbox, it can have a profound effect on your wealth. It won't make you instantly rich. But it will provide access to an income stream – extra regular payments on stocks that you already own – that you may have never known possible.
You don't have to be rich or experienced to use my options strategy. You don't need to sit in front of a computer screen watching the market all day. And you can use this strategy to make money in any kind of market.
For nearly 15 years, I've shown thousands of everyday people how to earn safe, steady income through selling options. In fact, right now, we're on an incredible winning streak. Last week, I released a video where I explained how you can safely sell options to add to your nest egg and why this year is set to be an especially good year for us.
At the time I recorded the video, we had closed 208 consecutive winners in my Retirement Trader newsletter. Now, we're adding three more – 211 wins in a row. If you haven't watched it already, click here to do that before it goes offline.
In today's issue, I want to take some time answer some questions readers have asked about my Retirement Trader strategy...
Q: How does your [Retirement Trader] strategy change in different markets? – S.Z.
A: The simplest environment for Retirement Trader is a rising market. When the markets rise, our holdings tend to rise... and we get to collect our option income without drama.
Bear markets can be tough for any trader, but Retirement Trader has some advantages...
First, we start with high-quality, blue-chip stocks. They tend to hold their value better than risky stocks in bear markets.
Second, our option income means we effectively buy stocks at lower prices. This gives us a cushion for stocks to fall before we take losses.
Third, because of the way options are priced, we can earn higher payments when there's fear in the markets.
Lastly, we sometimes "roll" a struggling position, which means we collect more income from the same stock while giving shares more time to recover.
We do sometimes alter our strategy in severe downturns, as well. But most of the time, these factors are enough to keep us consistently profitable in any market.
Q: Can I trade options in my IRA? – G.M.
A: In Retirement Trader, we collect upfront cash by selling other investors the right to buy our shares (calls) or sell us their shares (puts).
All of the trades I officially recommend in Retirement Trader are allowed in an individual retirement account ("IRA")... both cash-secured puts and covered calls. With a cash-secured put, you maintain enough cash on hand that you can buy shares if your puts' buyer exercises their option. With a covered call, you buy the shares in advance so that you're ready if the call buyer decides to buy them from you. These strategies have nearly identical returns.
The only restriction is selling naked puts in an IRA. A naked put is sold on margin, in which you don't have all the cash on hand to buy shares. That's a popular way to juice your returns... But it's also riskier because you're less prepared if the trade doesn't go your way. That's why I only recommend selling on margin to experienced option sellers. But if you're trading in an IRA, you still must back up your puts' obligations with cash.
Another caveat: Not every broker will let you trade options in an IRA. We can't recommend specific brokers, but some that do allow options in an IRA include TD Ameritrade, Merrill Edge, and Ally Invest.
Q: Is there a trick to getting my broker to approve me to sell options? – T.C.
A: For folks who don't know, when you want to sell options, you need to apply for a trading level with your broker. (The levels vary slightly depending on the broker.)
When you apply for options approval, brokers will ask you a few questions. They want to figure out if you have any clue about what you're doing. For example, they might ask about your income, how often you plan to trade, and what you'd consider your level of knowledge.
If they think you're competent, you'll get approved. But if you describe yourself as an amateur who doesn't know the difference between a call and a put, you probably won't get approval. It's that simple.
You don't need the top-tier trading level to follow my options strategy. I've rarely seen anyone with some trading experience and a good investment knowledge base get denied Level 1 or 2 with online brokers. And as long as you can sell covered calls, you'll have no problem following the strategies in Retirement Trader.
And, of course, as you learn and earn more, you can always apply for a higher trading level with your broker down the road.
Q: How are options taxed? – A.M.
A: Profits from options are taxed like capital gains. If you're selling a call and receive a dividend, that would be taxed as any dividend would. With options held for less than a year, you'd be taxed for short-term capital gains. Anything longer than a year would be taxed as long-term capital gains. (For people making 1,000 or more short-term trades a year, the tax rules are different. But you'd include the trades you closed on your taxes at the end of the year.)
That's why I like trading covered calls in an IRA or a self-directed 401(k). In fact, there are two big benefits that make retirement accounts ideal for trading options... In tax-deferred accounts, you don't have to keep track of the trade's gains and losses for IRS reporting. And you don't need to worry about short- and long-term capital-gain differences, either.
Of course, if you haven't contributed much to your IRA, you'll be limited to what stocks on which you can trade options. With a regular account, you can add cash at any time. Plus, as we'll discuss below, you usually can't use margins to boost your returns in an IRA or 401(k). So if you're using a retirement account, we'd recommend focusing on covered-call trades anyway. The returns of the two trades are essentially identical.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
April 23, 2024