I love teaching.
In college, I started sharing my thoughts on wine during group tastings... And by my senior year, I was teaching ballroom-dance classes.
When I graduated and went to work at Goldman Sachs, my group went around the world teaching.
And I loved teaching when I entered the medical field as an eye surgeon. I could share my thoughts on the latest medical studies with other folks who were interested in research and help patients learn how to take care of their eyes.
It's one of the big reasons I started writing for Stansberry Research more than 15 years ago.
And I've never avoided teaching difficult or misunderstood topics. A clear example is options trading...
Lots of investors avoid options out of fear that they're too risky. And plenty of people who do use options use them incorrectly.
In my options service, Retirement Trader, I don't just want to share trades... I want to inform, teach, and empower.
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 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.
And right now, the stock market volatility is offering an incredible window of opportunity... While this window is open, everyday Americans just like you can use a fast, reliable, and low-risk investment strategy to collect hundreds and, in some cases, even thousands of dollars in extra income each month – with just a click of a mouse.
Keep your questions coming our way at [email protected]. We read every e-mail. Here are some of the things on your minds this week...
Q: Can I sell covered calls on a stock I already own? – A.T.
A: This is one of my favorite ways to use a covered-call strategy... earning extra income on stocks you already own.
Let's say you own at least 100 shares of a company's stock, enough to represent one option contract. You like the business, but you would be willing to sell your shares at a certain price...
Recall that if you sell a covered call, you're being paid to promise you'll hand over 100 shares of the stock you own by a particular day (the expiration date) and at a particular price (the strike price).
If the buyer exercises his option, you get the agreed-upon price for your shares plus the premium you made for selling the option. And if he doesn't exercise the option, you keep the premium and your shares.
Some option sellers like to have the option exercised and their shares "called away," which frees up their cash for fresh trades. Others prefer when they're left holding shares so they can continue selling more covered calls. You don't get to choose... That's the risk you take on when you sell an option. But unless you'd really hate to lose your shares, selling options is a win-win income-generating strategy.
Q: What do the tax implications look like for options? – R.S.
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 individual retirement account ("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.
Q: My broker said I can't sell naked puts in my IRA according to a federal law. Is this really the case or do some brokers allow this? – C.M.
A: The government does restrict what type of trading you can do in an IRA. You can't sell naked puts in an IRA, but you can sell puts if they're covered. For readers who don't know, that means you need to have 100% of the capital that's at risk in your account.
Let's say you want to sell a put on XYZ with a $10 strike. Because one option contract represents 100 shares of stock, you're at risk of buying $1,000 worth of XYZ shares if the put buyer exercises the option you sold him.
If you're using a margin account, you often only put up a fraction (typically 20%) of this amount – known as the margin requirement. So in this case, you'd need to have $200 in your account to open this trade.
But in an IRA, you have to have 100% of that amount in your account in case you want to sell put shares. So selling this put in your IRA means you'd need $1,000 in your account to open the trade. This is meant to keep you from leveraging your retirement too much.
What We're Reading...
- Did you miss it? How to operate the world's best business from anywhere.
- Something different: Netflix is having a bad year.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
April 22, 2022