Building Wealth Doc's note: Today, we're continuing our series on wealth myths with an issue you might want to stop reading. We're talking about a widely misunderstood investment that could change the way you invest for the better…
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Most of you won't finish reading today's issue...
I'd bet that roughly half of subscribers will stop about halfway through this issue and go on with their day, without giving a second thought to what I'm writing about.
Today's topic gets a nasty reputation. It scares most people. And folks just don't want to take the time to understand it.
So it's OK if you don't finish today's Health & Wealth Bulletin. You won't hurt my feelings.
But if you're one of the few who sticks with me to the end and gives it a chance, I'm sure you'll gain an appreciation for them... And that's because you'll learn about one of the best ways to consistently earn hundreds of extra dollars every month.
I'm talking about options.
You still with me?
If you are, I'll be the first to admit that the financial media does a terrible job of talking about options.
If you're trying to learn the basics of options, most sites on the Internet and free courses give explanations that are too technical and dry. And if you hear about options on the news, all you'll hear is how dangerous they are.
But I'm here to tell you that options aren't all that complicated to learn... if you give them a chance. And I'll also tell you that they don't have to be risky.
In fact, you can use options to have significantly less risk than a regular buy-and-hold stock investor.
So rather than start by giving you some definition of what an option is that will make your brain hurt, I want you to think about them as insurance...
You see, insurance is a beautiful business.
Most folks agree that if you're paying insurance, whether on your house, your car, or your wife's diamond ring, you're getting the raw end of the deal.
You pay a premium month after month and you likely never use your policy. Your house never burns down. Your car doesn't get wrecked. And your wife never loses her ring. So the money you pay in premiums is essentially just money down the drain.
But you're happy to pay for peace of mind.
Insurance companies make their living by cashing in on people's fears. Folks fear burglary. They fear natural disasters and even their own carelessness. And because they're fearful of all these things, they're willing to pay for insurance.
While insurance companies sometimes have to pay out claims to policyholders, most of the time they collect your premiums and just walk away. It's a fantastic business... when done correctly.
It's done correctly when they don't sell home insurance to former arsonists, car insurance to teenagers who just crashed their parent's car, and jewelry insurance to someone with a history of losing expensive rings and necklaces.
Insurance companies need to be selective about who they offer their services to. They need to do their homework or charge higher premiums to offset some of the risk for certain individuals.
When they do that, insurance can be extremely profitable. Premium checks flow in each and every month. And companies with reliable income streams are the ones that last.
Selling insurance is something I do every month. And it's the greatest source of income I've ever come across.
Now, I'm not talking about selling insurance for things like homes or cars.
I'm talking about selling insurance to folks who are scared of stocks falling.
And trust me, there's no shortage of investors who are fearful of stocks crashing. Especially today, with the market at an all-time high.
If you could convince worried investors to pay you a premium for market protection every month and – the majority of the time – keep their premiums and just walk away... sign me up.
Well, it's possible. Let me explain...
The cheapest and one of the most common forms of protection is a "put option."
Puts options are just like home insurance. The buyer pays a premium and hopes that he never has to use it. And in most situations, the buyer of a put option does not need to use the insurance policy.
If stocks don't crash, that means the seller of the put keeps the premium and walks away.
There's no such thing as a free lunch, but this is as good as it gets.
Now I know many of you are probably wondering what happens when the put buyer, or the person who bought the insurance, needs to use his policy. Let's say stocks do fall. Won't the seller of the put be in big trouble?
They could be, sure... But like I mentioned earlier, you don't want to sell insurance to former arsonists. And you don't want to sell put options on risky stocks.
The best thing to do is sell insurance on big, sturdy blue-chip companies. These are giants like JPMorgan Chase (JPM), Coca-Cola (KO), and Microsoft (MSFT). These stocks rarely have wild price swings.
And even though these are fantastic businesses that generate massive amounts of cash, there are still investors who want to buy insurance against them.
The likelihood of Coca-Cola falling 20% in a short time is pretty slim, but people want to sleep well at night... so they buy a cheap put option.
I'm willing to take the other end of that trade all day long. And here's the thing... If you only sell put options on stocks you want to own, you can't lose.
Let's think about the worst-case scenario where Coca-Cola falls 10% in a matter of days. The put buyer will use his insurance to sell his Coca-Cola shares to us for the price we agreed upon at the beginning of the trade.
So everything went wrong in this trade... but we end up owning shares of a world-class business for less than it was trading for when we entered the trade (since we get to keep the premium he paid us).
If you sell insurance against low-risk, blue-chip stocks, you'll collect safe income each month. That extra income can help you grow your retirement fund, pay bills, and even pay for a trip to the Bahamas.
And again, worst-case scenario, you end up owning shares of a great business for a cheaper price. It's a win-win.
Selling options is what we do in my Retirement Trader service. Our strategy is so safe that we have a 94% win rate over the past decade. And we're currently on a 148-trade winning streak.
In our most recent issue, we detail the "Biden put." If things get bad enough in the markets, we know the government will step in to prop prices higher. Combine this safety net of the Biden put with solid fundamentals of one particular sector, and we want to be buyers today...
For Retirement Trader subscribers, you can read that issue here if you haven't already.
And if you're interested in a subscription to Retirement Trader, we're offering a more than 60% discount for our loyal readers (you!). You can learn more by clicking here.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
December 21, 2022