There's something we have to talk about... and you aren't going to like it.
Some of you will recoil at the very topic. Others will welcome it but hate the takeaway I'll present.
But it's something we have to consider for our investing today, no matter whether or how you like to consider it...
Politics.
I learned long ago that political talk doesn't have a place in my newsletters. The fastest way to cut engagement would be to bring up my own political views.
But the 2024 presidential election is just months away. It would be irresponsible of me to pretend otherwise.
You see, pundits love to explore whether stock markets do better under Democratic or Republican leadership. You may have had this debate with friends or family as well.
You may not want to hear this, but the truth is... it doesn't matter.
Depending on your leanings and how you count or how far back you look, you could get different answers. Not to mention, each president inherits a different economy from his predecessor. Shouldn't you adjust for that? And by how much?
Here's my favorite stat... Since 1926, the U.S. has had 13 years of unified Republican government (with the GOP simultaneously holding the House, Senate, and presidency). In those years, the market returned an average of 14.52% per year. There have also been 34 years of unified Democratic government. In those years, the market returned an average of... 14.52%.
The machinations of the Federal Reserve, the economy, and the thousands of businesses and millions of individuals wash out most of the effects a president might have on the stock market. Sometimes, something like a big tax cut can boost stocks, but that's a rarity.
We will forgive you if this election feels more important than others... The world feels more polarized, and the parties seem further apart than they have been in a long time – even more than they did back in 2020.
While we wish the country would be unified and rally together on many topics like less government and more freedom, we know turmoil will continue in the months to come. Republicans are worried about what will happen if Joe Biden is reelected. Democrats are worried about Donald Trump returning to the White House. And projections tell us that this race will be as tight as it gets.
Uncertainty and fear are everywhere... But if you've been following my Retirement Trader strategy, you couldn't be more excited. The upcoming election is giving us a tremendous opportunity for profits in the months to come.
Now, I know what you might be thinking... Options are too complicated and too risky. But I've taught thousands of folks how to use options to safely generate income.
To prove that anyone can sell options, I flew all the way down to South Carolina to teach professional golfer Kevin Kisner all about this strategy.
In a special video, I walked Kevin through the basics of how to make these types of trades. And I even got him to put his money to work with his very first trade. (It's off to a great start already.)
Kisner can drive the golf ball a mile. You've probably seen him in contention at PGA Tour tournaments. And now, with the tools I gave him, he can collect hundreds and thousands of dollars of income each month.
Click here to watch my sit-down with Kevin Kisner.
Now, let's dig into the Q&A... As always, keep sending your comments, questions, and topic suggestions to [email protected]. My team and I really do read every e-mail.
Q: What's the worst thing that can happen to an investor in a covered call? – J.G.
A: Theoretically, the worst thing that can happen is that the stock falls to zero. (In the case of Retirement Trader, the worst would be shares falling so far, so fast that they trigger our stop loss.)
But you also have to remember... that's the exact same risk you'd have just buying and owning the shares. And by selling covered calls, we also have extra downside protection from the option premium collected.
For example, let's say you sell an at-the-money $10 call and receive $1 in premium. That's like paying $9 for the stock instead of $10. Because of the premium you collected, you won't lose money unless the stock price falls below $9. If you had bought shares at $10 instead, you'd lose money as soon as the share price dipped lower.
And if shares fell to zero, a stockholder who held on would take a 100% loss, while an equivalent covered-call seller would still have the $1 he collected in premium.
Here's the most realistic, real-world example of our worst-case scenario as covered-call traders... the COVID-19 crash that sent stocks down 34% in a matter of weeks.
Of course, volatility shot up as well during that period... As our stocks were falling, we were rolling our trades, collecting large amounts of premium by selling calls with a strike price closer to the price of the stock. By doing this, we were able to stay in many trades – though we got stopped out of a handful as well and had to take on a few losses during that period. The stocks just fell too fast.
But then, at the end of March 2020, we saw signs of a blistering recovery. Stocks began to rally... and continued into April and May. During the market crash, we'd rolled our strike prices down, but now our stocks were shooting well above their new strikes.
We were in the hole once again and had to roll our strikes higher so our shares wouldn't be called away for a loss.
The pandemic was truly a Black Swan event. And it was as close to the worst-possible scenario that could happen to option sellers.
And in the four-plus years since the COVID crash, the worst thing that has happened to our covered-call trades has been a few rolls before each and every one of them closed for profits.
What We're Reading...
- Did you miss it? Things don't feel great in America.
- Something different: How to see a new star in the sky.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
June 14, 2024