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Friday, February 27, 2015
You can make a lot of money in the options market.
Every day, people make millions of dollars in profit from options. Even people with full-time jobs, like nurses, teachers, and plumbers, can make thousands of dollars in extra income from the options market.
But to make the surest, safest, money in options, you have to use options in a totally different way than most people use them.
Today I'm going to share a little-known way to pocket a lot of extra income with options. I first learned about it in the 1980s when I was working at Goldman Sachs, the top investment bank.
Even better, I'm going to show you a "one-click" investment you can make today that allows you to profit from this strategy. And if you're an investor looking for high-income and low volatility, you'll want to know this strategy.
Before I go any further, let me point out that today's idea does not require you to trade options. But it does give investors the benefits of a time-tested options strategy – reduced risk, lower volatility – without any of the hassle.
To start, remember... options are simply contracts that allow two parties to buy or sell an asset at an agreed-upon price by a specific date in the future. Stock options – known as "puts" and "calls" – allow investors to make targeted bets on stocks.
A stock trader can only bet whether a stock will rise or fall. But an option trader can make almost any bet imaginable. If you know how... you can bet a stock will stay the same price. You can bet a stock will rise, but only to a certain level. You can bet that a stock will rise until a certain date and then fall.
Options can turn risky stocks into safe bets, or safe stocks into risky gambles. Options can also be used as leverage to increase your risk and returns. Or they can be used to do the opposite – lower your risks.
In other words, options allow investors to custom-tailor their levels of risk and reward to fit their needs and goals.
The possibilities are endless.
One of my favorite conservative options strategies is known as a covered-call strategy. And if you're not familiar with this idea, it's simple...
You simply buy stocks and SELL call options against those stocks.
Regular readers may recognize that we have used covered calls to great success in my Retirement Trader service. (In Retirement Trader, we call them "IRA Alternatives.") We have closed 98 out of the last 99 IRA Alternative positions for a gain, booking an average annualized profit of 26.6%.
But actively trading options isn't for everyone. Instead, with the click of a few buttons, you can buy what's called a "buy-write" fund. The fund essentially performs all the trading for you.
One of my favorite examples is the PowerShares S&P 500 Buy-Write Fund (PBP)...
The covered-call strategy takes the stock market's return and smooths out its volatility. Professional investors would say the PBP fund has a "beta" of 0.54. That simply means if the S&P 500 drops 1%, we'd only expect PBP to drop 0.54%.
Since the fund makes income from selling call options, it returns a much higher dividend yield of 5% (compared with 2% on the S&P 500 itself).
And remember, the strategy isn't some sort of black-box secret. We're not banking on the skills of any investment managers. Funds like PBP are set up to track the performance of the CBOE S&P 500 Buy-Write Index.
The index was developed by the Chicago Board Option Exchange with Standard & Poor's and Professor Robert Whaley to measure the returns of a simple covered-call strategy. You can read the exact methodology at cboe.com. In fact, if you were so inclined, you could fully enact this strategy on your own. The information is entirely public.
While the funds like PBP have only been running for a few years, the index has a track record going back to 1988. As promised, it beats or matches the stock market while reducing the ups and downs during volatile times. Take a look:
According to a study by the investment consulting firm Callan Associates, the buy-write strategy produced superior risk-adjusted returns for 18 years, earning about the same as the S&P 500 with one-third less risk.
Also keep in mind, this strategy works over the long term. There will be times when it does better or worse than the market.
In particular, it tends to underperform the S&P 500 during rising stock markets. But it makes up for that by consistently outperforming the market during falling periods.
That makes now the ideal time to invest. While I still think the market is bound to keep rising in the near future, we're closer to the end of the rally than the beginning.
Every day the market ticks higher, we need to think more about getting cautious.
A buy-write strategy allows us to stay invested and benefit from the rising economy and stock market, while securing some protection against whatever may come. And funds like PBP are the easiest way to implement it.
Combine that safety with higher income and, for most investors, that sort of arrangement makes good sense.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
P.S. If you'd like to learn more little-known ways to earn safe income, spend less money, and live a more healthy and rich life, I urge you to check out my latest project. I call it my Big Book of Retirement Secrets, and it features roughly 250 of my favorite life "hacks"... things like how to earn double-digit income from the government... or even how to get free games of golf. You can get all the details about my brand-new book and how to claim your FREE copy today right here. (This does not link to a long video.)
If you're ready to take personal control of your wealth, Doc just shared five simple ways to start today. "If you don't do this," he writes, "you will likely never, ever be wealthy." Find his five simple ways to increase your wealth here.
Doc also recently shared what he calls the "perfect income investment." It's a way to earn a 7.3% income stream... and you've likely never considered it. "This investment has the safety of a bond. It pays regular income. But it's better than a bond... because it has the upside of stocks. And right now, it's on sale..." Find out what it is right here.
UPDATE: THE NEXT LEG UP IN HOUSING IS HERE
Homebuilders have "broken the box"... And it's a sign the next leg of the housing bull market is here.
In early 2011, Steve Sjuggerud told DailyWealth readers, "Right now is the best time in history to buy a house in America." He encouraged readers on the fence to go ahead and buy a house... And he recommended readers of his True Wealth newsletter buy the iShares U.S. Home Construction Fund (ITB). The fund holds shares in big homebuilders like PulteGroup. It also owns companies that do well in a good housing market, like Home Depot.
Shares of ITB shot higher from October 2011 through May 2013. Last year, we explained shares had been stuck in what traders call a "box"... But we told you that with home prices and existing home sales rising, and a limited supply of homes on the market, that "box" would soon be broken to the upside.
Earlier this month, a survey of homebuilders indicated that orders for new homes had risen 32% in January compared with a year ago... and median prices were up 9.1% over 2014.
And as you can see below, the news helped push shares of ITB to more than $27 per share... its highest level since 2007. As expected, ITB "broke the box" to the upside. The bull market in housing is still on.