Last month, I had the chance to do something I love but rarely have time for...
I sat down one-on-one with someone and taught them my favorite strategy.
Teaching is a longtime passion of mine. In fact, it's one of the big reasons I started writing for Stansberry Research 13 years ago.
Porter Stansberry made the point that as a doctor, I could only help one person at a time. A patient would come in, I would try to fix him, and then send him on his way. But in the publishing business, I could reach hundreds of thousands of people at once through my writing.
But there's something about one-on-one teaching that's hard to beat. That's why I regularly hold impromptu classes on everything financial in our Baltimore office.
I love spending time walking new proofreaders or customer service folks through the basics. And I answer their questions on everything from paying down student debt to what kind of mortgage to get.
I wish I could sit down with each of my subscribers.
That's why I did the next best thing. Last month, I filmed a training session with a brand-new option trader (and retired New York police chief). He went from being skeptical to making $1,000 in just a few minutes.
Q: What do you do in an extended down market? For instance, if you're selling covered calls, the stock price might fall below the downside protection created by the covered call? How do you handle that? – N.F.
A: This is a great question because we're sure it's on everyone's minds, given the age of this bull market.
There are a few things we can do in down markets. First, we can "roll" our options. If a stock goes against us, the calls we sold will be worthless at expiration. We'll just be left holding the stock. What we can do next is sell another call option and collect another premium.
And if the stock falls further and the call we just sold expires worthless, we can sell another call and collect another premium.
We can do this over and over again, taking in big premium payments – even when the stock is falling. That adds up. And that's how we can work our way out of a losing position.
Second, and this is important when we roll options: The price of options premiums skyrockets when stocks are falling. Folks are willing to pay a lot for options protection during market corrections. That's great for us as sellers because the options premium we take in will be massive.
So when we do roll our position and sell additional call options, the big premium payments we receive will make up for a lot of the loss the stock is taking.
Third, we're selective about what stocks we trade this late in the economic cycle. We obviously only sell options on the safest blue-chip stocks, which are less volatile than the overall market. But selling options on things like gold or silver funds – which tend to move up when stocks go down – is always a good way to keep your income stream flowing during economic turmoil.
And finally, I have a few tricks up my sleeve. I've been trading options for decades... So I'm no stranger to down markets. I have multiple strategies I can deploy to profit when stocks fall.
For example, I recently shared an options strategy with my Retirement Trader subscribers about how to limit your downside to just a few percentage points, while still collecting income.
In that issue, we shared an example of a trade that – no matter what happened in the market – you'd know for certain that your return would be between -2.8% and 3.1%. Stocks could crash or stocks could boom, but you'll never lose more than 2.8% and can earn a profit up to 3.1%.
With that certainty, it will be difficult not to get a good night's sleep. Retirement Trader subscribers can read more about this strategy here.
Q: If you've bought call options and you have about a month before expiration and it's a winning position, but you think this stock has a lot more time before there are any headwinds to its profitability, is it a better strategy to roll your current options forward another month or two with a higher strike or just take profits and enter another position down the road with a strike that reflects the price at that point in time? – K.S.
A: When you sell covered calls, you're agreeing to sell your shares for a specific price. That means you sacrifice the upside, should the stock rise.
You could buy back the calls and remove your obligation to sell, but the price you pay for those calls will offset the gain you're trying to capture.
For this reason, it doesn't make sense to sell calls on high-growth stocks. For instance, you may consider Amazon (AMZN) to be a risky stock, but one with lots of growth potential. Were you to sell a covered call on Amazon, you'd have to hold a risky stock, but you'd give away the upside. And that doesn't make sense...
You don't sell covered calls because you want to capture big double-digit gains on each trade. You sell covered calls because you want to collect 3% or 4% every trade, every couple of months. It's about collecting consistent and safe income... And that's how you grow your wealth over time.
Q: I was wondering whether a non-U.S. citizen can trade options in the U.S. and what is the minimum amount required in order to participate? Do I have to find a brokerage firm in my country or in the U.S. only? – C.K.
A: For our trades, we sell options on some of the biggest stocks in the world. Blue-chips like Coca Cola (KO), Disney (DIS), and Starbucks (SBUX). From our experience, many of these blue-chip stocks trade on exchanges overseas.
Each broker is different, however. We recommend giving a few brokerage firms from your country a call and asking them if they can give you access to U.S. stock exchanges. But we do have many international Retirement Trader subscribers who are able to make our recommended trades.
As far as the minimum amount required, our average trade requires about $7,000 in capital and we suggest you diversify across at least five positions. To follow that plan, you would need to dedicate $35,000 to this strategy.
But you can make adjustments. Some trades require much less than $7,000 to trade. We've recently had trades that required as little as $1,500. If you're working with less capital and want to diversify, you can wait for some "low-priced" trades to come along. Our paramount concern is picking the right stocks at the right time, but we try to include low-priced ones when possible.
Similarly, you could reduce your diversification if you can't manage five positions, but we wouldn't go below three positions.
All told, at a minimum you should have $20,000 to dedicate to option trading.
Keep sending us your questions at [email protected].
What We're Reading...
- Did you miss it? Ignore the Pundits' Predictions... Here's How to Generate Steady Gains.
- Something different: The Quest for Clean Air.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
December 13, 2019