I just made one of the biggest calls of my career.
The first came in 2010, when I realized we were in the early stages of a meaningful bull market. But money was being left on the table.
So in early 2010, we began publishing my trading service, Retirement Trader.
The goal of the service was simple: Teach regular folks how to safely create income in retirement by using the same investment techniques of Wall Street banks and traders.
The strategy I’ve taught to thousands of people is how to sell options.
As the bull market continues to age, some investors wonder if there are still ways to make money trading options.
Longtime readers know we don’t like to make predictions. We won’t tell you how much higher this bull market go could… or how bad the next big crash will be. That’s because no one knows.
Your best bet is to take advantage of the bull market while you can and prepare your portfolio for the next bear market.
That’s why, earlier this week, I made one of the biggest calls of my career. I released a crash course detailing my new strategy. This strategy can create a “guardrail” for your portfolio against a market shock and simultaneously position yourself for more upside from this market…
If you want to earn income while protecting your portfolio from a crash, click here.
Q: If I sell a covered call for November Intel (INTC) for $37 and hope to collect the dividend, how can I be certain that the buyer will not call it away early thereby getting the dividend for themselves? – R.B.
A: It’s true that your shares could be called away before the ex-dividend date (the last day you need to hold shares to be eligible for the dividend). It doesn’t happen often, but the holder of the option can choose to exercise early (before the expiration date). And when he does, we don’t mind. We’re happy to take our money early.
You come out the winner. The loser in this situation is the person exercising the option early to capture the dividend. These types of traders think they’re making more money… But in fact, it’s the opposite.
First, they are paying transaction costs on something that is already priced correctly. Secondly, they have to pay regular income tax on the dividend and not the lower tax rate dividends normally allow. This is because the lower tax rate has a holding requirement they’re not meeting. So say he is in the 35% tax bracket… He has to pay that 35% on the dividend, instead of just 15%.
Q: Let’s assume I own a stock I purchased at $55 and want to sell a covered call for 100 shares at a premium of $1 that has a strike price of $57 expiring Nov. 17. Assume on Nov. 17, the market value is $60 and, therefore, my buyer exercises his option and buys my stock for $57 (let’s leave out of these questions the effect of commissions and dividends).
Even though I am compelled to sell a stock on Nov. 17 worth $60 for a below market price of $57, do you consider that a win because I earned a $1 premium and the sell price exceeds my purchase price.
If the stock drops substantially before the expiration date because the market is making a major correction let’s say as of Oct. 15 its value has dropped to $45 (18% drop) and I would like to sell, or perhaps I have a stop loss order at that price, I assume I cannot sell my stock because it is locked-in by the option since it could go back up by Nov. 17 unless I pay a buy-out penalty of some kind. Is that correct and how much of a penalty is likely.
Can the buyer of the covered call exercise his option prior to the Nov. 17 expiration date any time the market price exceeds my strike price or must the buyer wait until the expiration date.
Am I correct that ideally I would like the market price on Nov. 17 to be below my strike price or even below my purchase price by a small amount so the option is not exercised and I would still want to own the stock? – N.G.
A: Let’s use your example to explain the possible outcomes…
The ideal scenario (following our Retirement Trader strategy) is that the stock trades for more than $57 when the option contract expires on November 17. In this case, we’d sell our shares for $57 and pocket the $1 premium. Thus, we make 1.6% in about two months.
If shares aren’t trading above $57 by November 17, the buyer won’t exercise his right to buy our shares, since he can get them cheaper on the open market. So the contract expires worthless. We keep the shares, the premium we received up front, and any dividends we collected.
Because we trade “American style” options, the buyer can choose to exercise his right any time.
If you don’t want your shares to be called away, you’d have to “buy to close” your current call position. There’s no “buy-out penalty” as you describe it, but you’ll have to pay to buy the options back at the open market price. Keep in mind that this could be a higher price than what you sold it for to begin with.
I go into more detail into how all of this works, how to use stop losses to protect your portfolio, exactly how to complete trades, and more in Retirement Trader. Click here to join.
Q: I saw something about your conference in Vegas. What about those of us who can’t make it? – M.L.
A: Next week, from September 27 to 28, we have a lineup of guest speakers that includes Stansberry Research analysts – including myself – several New York Times bestselling authors, a Tony Award winning producer, the son of a former president, and many more.
If you can’t make it to Vegas, there’s an easy way to still see the presentations… You can stream the whole thing online instead. Click here to learn more.
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What We’re Reading…
- Something different: The place where you couldn’t say ‘grilled cheese.’
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig and the Retirement Millionaire Daily Research Team
September 22, 2017
P.S. In this week’s Retirement Millionaire Daily Weekly Update, research writer Amanda Cuocci and senior research analyst Matt Weinschenk answer reader’s questions and concerns about the recent Federal Reserve market decision. They discuss what the Federal Reserve means for your portfolio going forward and what you should and shouldn’t do after this decision. Watch it here.