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.
Brian Hunt: 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...
If the shares never trade for more than the specified strike price, we keep the premium and the shares.
If 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 premium.
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 call.
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 premium.
BH: 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 trade.
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 call.
In 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 profits.
BH: 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.