Ask Doc Today, we're talking options.
Even for experienced traders, the term "options" is scary.
There's a long-standing belief among investors that options are risky. They can be, if you do it wrong...
But when you trade options the right way, they reduce your risk – giving you huge amounts of downside protection on blue-chip stocks. That's why I've written about the safety of trading options several times in Retirement Millionaire Daily.
Lately, lots of readers have e-mailed asking more about my option-trading strategy.
So today, I'm answering some of the most recent questions I've received...
Q: Doc... I am interested in how you "work" the weak or bear markets with this service. Do you recommend more puts? What is [the] range of the number of trades that you recommend each month? And how long are they in play? – M.T.
A: It doesn't change much whether we're in a bull market or a bear market...
If you can tell me exactly when bull and bear markets start and stop, please come over and we'll let you take over my newsletters. I can't – and don't – invest for catastrophic losses. It doesn't work... and it never will.
Instead, I recommend you keep plugging away, saving and investing your money, and diversifying your risk across many asset classes. Your wealth is nearly guaranteed to grow, and you can sleep well at night.
I've stuck to my strategy of selling puts and calls for more than six years. And it continues to work, trade after trade...
In fact, just this week we closed out a trade for a 10% return in less than a month. If you like to annualize figures to compare between track records, that's a triple-digit annualized gain... something that even the most volatile and risky trading strategies have a tough time finding. And we only trade the best and safest blue chips.
In Retirement Trader, I give recommendations for selling uncovered puts, and I also provide what I call "IRA Alternatives." These are covered-call trades for subscribers who can't, or don't feel comfortable, selling puts. Some months, I might recommend one trade, other months, I might recommend a half-dozen trades. It just depends on the opportunities I see that work for subscribers.
Typically, I recommend options that are about two months away from expiration. This is when you typically see options with the most value.
The ability to trade options for consistent income in retirement is a skill set that I sincerely believe every single investor should understand... In fact, I save every thankful e-mail from a reader who discovered how to successfully and safely trade options. It's a huge reason why I continue to write my research services.
If you'd like to try this strategy out for 30 days, risk-free, click here to learn more Retirement Trader.
A: Stop losses are an essential part of my options-trading strategy. In my options newsletter, Retirement Trader, I recommend that people set stop losses between 20% to 25%.
Let's take a look at an example... In this case, we'll use a 25% stop loss for a covered call.
Say you sold December $25 calls on stock XYZ. You had to buy shares of XYZ for $25 and, because you're selling calls, you collect a premium of $1. That means your total outlay – basically what you spend to open the trade – is $24 (the $25 stock price minus the $1 you received in call premium).
Remember, though, that you are buying 100 shares for every call option you sell against the stock. So the total cost of your trade is $2,400.
To figure out the stop limit, just take the combined value of the position and multiply it by 75%.
In this case, the combined value was $2,400 (cost of the shares minus the premium income)... $2,400 multiplied by 75% is $1,800. This gives you an $18 stop loss.
Now, because you'll have to buy the call back to close out the trade, you have to take that into your calculation.
Let's say that the option is trading for $0.25. You'd need to spend $0.25 to buy back the option. So you'd want to close the trade when shares hit $18.25 to account for that $0.25.
The most important thing to remember is to sell when you hit your stop.
I wrote a full report on how to use stop losses called, "The No. 1 Way to Protect Your Portfolio." Retirement Trader subscribers can click here to read it.
Have you started selling options? Let us know what your experience is by writing us at [email protected].
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Dr. David Eifrig and the Retirement Millionaire Daily Research Team
September 16, 2016
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