Messages like this one are why I write my letters…
I think I have discovered a new hobby… one that can make me some money instead of costing money. I am enjoying this whole thing immensely… soaking up the webinars, the online education, the books. It all makes great sense to me. I don’t think it will make me a gazillionaire like you guys, but it will get me closer to my $2 million retirement goal.
Doc, you said you read all the emails, so if you’re reading this then THANK YOU for doing it. I hope you enjoy researching and recommending as much as I enjoy reading and following. – P.J.
Thanks for writing in, P.J. You and investors like you are why I write Retirement Trader…
It’s possible to run an options service by providing no more than a symbol and a recommended price. Each note could be a few short sentences that take about five minutes to write. Then, they’re out the door… (The research, of course, would still take much longer.)
Many other “options-trading services” do just that… a few trades a week, with little to no recognition of the how. How they chose the companies they did… the particular option expiration or strike price… or what to do if the trade goes against them.
So why do I let each issue of Retirement Trader run on to often longer than 10 pages?
Because I don’t just want you to trade… I want to inform, teach, and empower.
When you add successful options trading to your investing toolbox, it can have a profound effect on your wealth. It won’t make you instantly rich. But it will provide access to an income stream – extra regular payments on stocks that you already own – that you may have never known was possible.
I use our Retirement Trader issues to explain as much about our thought process as I can. I hold very little back. I want you to know what I’m thinking about every trade we make.
That means analysis of the market and the economy… profiles of the companies we’re investing in… as well as constant updates to our educational materials.
And at the end of each issue, I answer specific subscriber questions in our question-and-answer section. The details of the questions are important. And I often find bigger issues within the questions – ones that involve the state of the market, how we deal with losses, or our basic trading philosophy.
I’d like if you thought about my Retirement Trader service like “tuition” to a powerful new strategy. Eventually, I hope you’ll know what to do and no longer need to subscribe to my service. At that point, I’ll have empowered you to use options and make money all on your own. When that happens, I can retire for a third time.
For now, I’ll continue making recommendations and teaching. If you’d like to learn more about my strategy, I’ve put together a full presentation on the “how” behind our Retirement Trader average gain of 16.4%… with a win percentage of 94%… and why many of these trades can boost your income on stocks that you likely already own. Click here to learn the complete details.
And today, I’m dedicating this issue of Retirement Millionaire Daily to answering your questions on options…
Q: I’m interested in trading options. But I’m not sure where to even start. – S.C.
A: There’s lots of educational materials on our website to help you get started, including a report on getting your brokerage account set up, my Master Course video series, and a list of 25 of my favorite companies to sell options on.
Once you’re ready to make your first trade, we let you know what to do throughout the trade.
When we first recommend a trade, we’ll tell you exactly which option to trade and at what prices you should enter the trade.
And we’ll keep you updated on any changes, say for example if we need to roll the trade or close it early. We can’t sit with you while you’re trading… But we do our best to make sure you know everything you need to. And we give you the education to eventually start making your own trades.
In last week’s training session, I walked through a real trade to show exactly what you’d need to do.
Q: I have an account with Charles Schwab and have Level 1 option approval. I have been buying/selling naked options for three months and doing well at it, making great money!
I found out today when I couldn’t do a sale, because I didn’t “have enough in your account for this purchase” – that they “hold” more than two-thirds of my account balance. Why can they do that? – S.B.
A: Congrats on your success selling options!
The amount that your broker is putting on “hold” is likely the margin requirement. Here’s essentially how margin works…
Your broker acts like a bank. He’ll tell you the interest rate and the cost to borrow. When you’re trading on margin you’re essentially borrowing from the broker. You’re getting a line of credit against the money you’ve deposited with them.
How much margin you’re required to put up varies depending on the broker, your experience, and your account size.
This is why we love selling covered calls on companies we already own. You already own the shares, so you’re fully aware of your capital at risk and, if you follow my strategy, collecting dividends. And you’re simply selling covered calls to boost your income on a stock that’s already in your portfolio.
Q: I use limit, [good-til-canceled] orders and then just wait. I strongly recommend using GTC Orders and suggest that you recommend them. – J.L.
A: I’ll occasionally use a limit order and a good-til-canceled (GTC) order. For readers unfamiliar with these terms, a limit order tells your broker the lowest (or highest) price at which you’re willing to sell (or buy)… And if you also use a good-til-canceled order, your order sits in the market until it fills at the price you want or until you cancel it.
This can be useful for people who aren’t able to sit at their computers all day or are in a different time zone that limits their ability to follow U.S. stock exchanges in real time.
The downside of a limit order is you could miss a trade over a few pennies if the security (your put option, in this case) never trades at your limit price. So you’ll need to weigh the risks against the benefits.
But bottom line, I love GTC orders. Thanks for reminding us to share the wealth!
Q: How do you calculate the annualized return on a covered call trade, and can you give an example? Why don’t you pick a strike price higher than the current stock price when selling to open a covered call trade? What is the advantage of picking a strike price lower than the current stock price? – W.Y.
A: To calculate annualized gains, we estimate how many times you could complete the same trade in one year. We assume the returns are the same each time. Finally, we multiply that by the absolute return received on the first trade.
For example, consider if you sell a covered call that’s three months from expiration with an estimated return of 5%. Theoretically, you could sell a similar position four times in a year, earning the same 5% return each time. That gives you an annualized return of 20%.
In our Retirement Trader portfolio, we calculate annualized returns down to the exact number of days we held a position. To do this, just divide 365 (days in the year) by the number of days you held the position, and then multiply that by your absolute return. It’s more accurate from a financial perspective, but a little less practical.
As for choosing strike prices… I prefer the stock prices to be at, or near, the strike price – what’s known as “at-the-money.” A stock that’s just below the strike price negligibly increases the risk.
For our Retirement Trader positions, we’ve had 350 closed trades. Of those, 329 were winners – that’s a 94% win rate. And on the “income from nowhere” trades like I showed in my recent presentation, we have averaged an annualized gain of 16.4% on each. That’s since 2010, so we’ve been doing this for more than six years now.
What We’re Reading…
- Something different: Our solar system might get 102 more planets.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig and the Retirement Millionaire Daily Research Team
March 24, 2017