Goldsmith comment: Today, we're continuing editor in chief Brian Hunt's interview with Doc Eifrig, the guy behind an incredible 12-trade string of wins in our Retirement Trader service.
Yesterday, we showed you a few of Doc's successful trades. Below, you'll find details on exactly how he does it... and how to get started in your own account.
: Can you highlight the
strategies you and your subscribers are using to make faster, safer gains than outright stock purchases? Dr. David Eifrig
: Sure. We use one of the
most powerful and most misunderstood investment tools in the
world: We use stock options. But we don't use options the
way most folks do. Most folks use options to increase their risk. We use them to reduce our risk.
I shake my head when I hear how most investors use options. They use them to make extremely low-probability bets on stocks and commodities.
You see, most traders are gamblers... which is good for those of us who prefer to act as the
"house" in the
markets. That's what we're doing in Retirement Trader
One of my goals in Retirement Trader
is to help folks generate large amounts of income without taking large amounts of risk. To do this, we combine the
"great companies on sale
" idea with selling puts or covered calls. We're essentially taking the
other side of the
trade from the
market's gamblers. BH
: Can you walk us through how this works when you sell a covered call? DE
: When we put on a covered call trade, we buy shares of stock and then sell a call on those shares.
Selling that call simply gives someone else the
right to buy our shares at a specific price (the
"strike price") during some agreed-on period of time (up until the
"expiration date"). In exchange for that right, the
call buyer pays us a "premium" upfront.
A trade like this can work out a couple ways...
shares never trade for more than the
specified strike price, we keep the
premium and the
share price exceeds the
strike price on or before the
agreed-on expiration date, we will sell the
shares, book gains up to the
strike price, and still keep the
It might sound complicated. But once you get the
hang of it, you'll see how much this strategy can reduce your risk and increase your income versus an ordinary stock trade.
A perfect example is our August Microsoft trade. We sold a covered call basically betting that shares of Microsoft would go up to at least $24 by option expiration. If the
shares were selling for more than $24 on option expiration day, we'd sell our shares at $24 and keep the
premium we collected from selling the
On expiration day in October, shares were trading for more than $25. Our shares were "called away," and we kept the
premium. This gave my Retirement Trader
readers a gain of 10% in just a couple months.
Our trades on Intel and Exelon worked out pretty much the
same way. Shares were trading for more than the
strike price on expiration day, so we sold them and kept the
: You mentioned another strategy your readers use selling puts. Can you give us a brief explanation of how that works? DE
: Selling a covered call is mathematically identical to selling a put. It's just a different way to put on the
same trade. The
only major difference is a put requires less "margin," or the
amount you're required to have in your account, to execute the
With a covered call, you have to buy shares in the
stock. When you sell a "naked" put, your only initial requirement is the
margin, which is usually about 20% of the
amount you'd pay if you bought the
stock outright. You'll see a difference in gains between puts and calls, but this only reflects the
initial capital outlay.
Let me use our August Intel trade as an example...
We sold a put for around $0.47. The
stock was trading for $19.33. The
strike price was $19.
What that means is we were agreeing to buy the
stock for a net cost basis of $18.55 per share ($19.33 minus $0.47) if the
stock dropped below $19.
For readers who don't or can't sell puts, I provided an alternative covered call position. In that case, we bought the
stock for $19.47 and sold a call for $0.98. The
strike price was still $19.
So in both cases, we were betting Intel would trade for more than $19 by option expiration in September. The
covered call position required an initial outlay of $1,849 the
cost of 100 shares of stock minus the
premium we received for selling the
put trade, the
initial capital outlay was $380 a margin requirement of 20% of what we would have to pay to buy 100 shares at $19 apiece. But if we were forced to buy the
stock, our capital outlay would jump to $1,855... virtually the
same as our call strategy.
Again it's just a different way to put on the
same trade. And in both cases, you're collecting more income and taking on less risk than you would with an outright stock purchase. BH
: Has the
fear in the
market, resulting from the
European bailouts and the
Fed's easy-money policy, changed the
way you trade? DE
Nope, not at all. The
strategies we use in Retirement Trader
actually capitalize on the
fear in the
markets. We're taking advantage of investor fear to trade great companies that have fallen out of favor. The
companies I recommend will make money no matter what. They'll thrive through another recession, a slog through a slow recovery, or even runaway inflation (as many of the
pundits fear). These businesses have pricing power and broad, diversified businesses that will thrive under all conditions. I just happen to find these companies when they are temporarily out of favor and cheap... which shows up as that chart pattern we talked about. Then, we safely juice the
returns with options.
Most people believe options increase your risk in the
marketplace. And for many people, they do. In Retirement Trader
, we're actually improving our risk-reward ratio. We use options to reduce risk.
We're getting a chance to buy some of the
world's safest companies at discounts to current market prices. And my readers are reaping the
: Thanks, Doc. DE
: My pleasure. Brian's note
: Retirement Trader
subscribers are pulling thousands of dollars out of the
markets with techniques like the
one Doc just described... in ways that are safer than they ever thought possible. If you're interested in doing the
same, click here