Earlier this week, I got to do one of my favorite things at the office...
I spent a couple hours with our customer service and sales teams teaching them my favorite income-earning strategy – options selling.
I explained some of the basics of options, why I love selling them (not buying), and how rising interest rates increase the value of options.
I love sitting down with folks to help them learn more. I also answered their questions on everything from paying down student debt to what kind of mortgage to get.
It's something I wish I could do with each of my subscribers. But that's why, twice a month, I use my Retirement Trader advisory as a teaching tool. I explain how my options-trading strategy lets folks safely earn more income no matter what's going on in the market.
In Retirement Trader, I don't just send out trade recommendations and leave you on your own. I also give you all the resources you need to start – including a report on setting up your brokerage account, my Master Course video series to help you go from options beginner to expert, and details about 25 of my favorite companies to sell options on.
If you're not already a Retirement Trader subscriber, you're missing out on what I believe is by far the safest and most profitable way to make money in the market.
I recently released a video where I explain how my strategy has led to nearly 600 winning positions – with a current streak of 116 winners in a row.
In addition to my options training that I gave at the office, I've gotten some questions that I can answer below. Keep your questions coming our way at [email protected]. We read every e-mail...
Q: What's the difference between selling puts and calls? – R.C.
A: Whether you sell a covered call, naked put, or a cash-secured put, the return of each trade is essentially the same, based on the amount of capital at risk (your potential obligation to put on the trade). It's just a different way to put on the same trade.
A put is an obligation to buy shares of a stock at a given price. A call is an obligation to sell shares of a stock at a given price. As sellers, we're in a similar position either way: If a put is exercised, we'd buy shares. If a covered call is exercised, we'd sell shares we've already bought.
The main difference is that the different strategies can require different amounts of cash up front. If you sell a naked put, you have to put up "margin," usually about 20% of the money you'd be obligated to pay if the option is exercised against you. A cash-secured put requires 100% of the money you would be obligated to pay. With a covered call, you buy shares first and then sell a call option.
When you see a difference in gains between naked puts and cash-secured puts and calls, this reflects the initial capital outlay. But remember... the put requires you to pay the other 80% if the stock is put to you. That's a real obligation... and when you factor that in, your gains are roughly the same.
Q: I have applied twice to get type 4 approval for option trading and have been turned down. I trade with TD Ameritrade. Do you have any recommendations? – B.S.
A: 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.
I can't say for sure why TD Ameritrade didn't approve you for its top-tier option trading. But you don't need that 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: Thank you so much for all the teachings, knowledge, and recommendations you provide every day. Your simple and effective way of writing makes it possible for someone like me that doesn't know much about trading to implement your strategies.
This week you wrote about trading covered calls inside an IRA [individual retirement account] to avoid worrying about the short- and long-term capital gains implications.
Do brokerage investments firms allow you to trade call and put options in an IRA account? If so, could you recommend a couple brokerage investment firms that do so? – B.C.
A: The government only prohibits selling naked puts in an IRA. You can, however, sell cash-secured puts – puts that are 100% backed by cash – or covered calls in an IRA. But not every broker has this option. We can't recommend specific brokers, but some that do allow options in an IRA include TD Ameritrade, Merrill Edge, and Ally Invest.
As I mentioned in an earlier question, whichever type of trade you choose – selling a naked put, a cash-secured put, or a covered call – the difference between the returns is minuscule. So for folks who feel like they might be missing out because they can't sell naked puts in their IRA, don't worry.
What We're Reading...
- Did you miss it? Our interview with investing legend Jim Rogers.
- Something different: The return of meme stocks.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
May 13, 2022