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The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
Saturday, March 18, 2017
I have something important that I need to share...
Today, I'm going to share details of the strategy I learned 25 years ago at Goldman Sachs. It's the strategy I've used my entire career – decades long, now – to earn safe, steady income for myself and my readers.
But I know without a doubt that the bulk of you won't read past the next sentence... It's simply the way the world works.
That's because this entire essay will focus on options.
If you have a well-allocated portfolio and you're happy with your investment returns, learning how to use options may not be a priority for you. That's OK. I get it – I do.
But... you'll miss out on an easy investing lesson.
Other folks will want to read on. Because if you'd like to earn higher returns in the years ahead, options will help you do that. More important, options will actually help you reduce the risks of investing in the stock market.
In fact, I'm confident that options are the only strategy that regular investors can use to both reduce risk and boost returns by making a small change to the way they trade and invest.
If you don't like letting your wealth rise and fall with the whims of the market, I hope you'll pay close attention... because I can help you do much better and avoid the frustrations.
I'm going to share the three reasons investing in options can be safer and more profitable than the market as a whole... especially over the next five to 10 years.
I learned the world of derivatives when I was recruited by Goldman Sachs out of business school...
At that time, it was the most exciting place to be on Wall Street. The market for derivatives (a more wide-ranging term that includes options) had been around for a while, but it was just then maturing into a monster.
We'd march into the offices of CEOs and CFOs and show them how they could reduce their risk while still earning great returns. And we were paid crazy amounts of money to do it.
I thought we were playing the short game. Surely, once people found out how easy options were, the jig would be up. Our options techniques were too easy to keep secret. Soon, everyone would know about them.
Twenty-five years later and that never happened...
People still don't take the time to learn how to build wealth with options. Big corporations still go to Goldman and JPMorgan and pay millions to have someone else put these strategies to work.
And the way the markets look today, I think options will serve you richly in the years ahead. Because returns may be especially hard to come by.
Overall, I'm a market optimist...
Staying invested in stocks over the long haul is the best way to build wealth.
From 1950 to the end of 2016, stocks have returned 7.7% per year, according to data from Nobel Prize winner Robert Shiller. So when folks plan their financial future, that's roughly the return they expect to get over the next 10 or 20 years.
But I've always been skeptical that even 60-plus years of data are enough to really understand the markets.
And between the economy, technology, and politics, things are drastically different than they were in the past. What do stock market returns from the 1950s tell us about returns today? Or in the 2020s?
Again, I'm a bull. But the conventional wisdom that stocks will return 7% or 8% a year has big flaws.
For one, that average doesn't hold up over the very long term or over every period...
Take a wider look from 1871 to 2016, and stocks return just 4% a year (again, using Shiller's data). And we've seen long stretches where stocks have returned nothing...
From 1929 to 1954, stocks returned nothing. From 1973 to 1985, stocks returned nothing. From 2000 to 2013, stocks returned – you guessed it – nothing.
If you started saving for retirement in 1973 to retire in 1985, you were out of luck. Sorry, you were just born in the wrong decade for getting wealthy.
What if one day we look back and say the same thing about the coming decade?
What's more, folks certainly think stocks are expensive today...
The cyclically adjusted price-to-earnings ratio (or "CAPE" ratio) measures the valuation of stocks with a long-term view that spans the business cycle. It doesn't help predict the market in the short term, but does give a good idea of what may happen in the long term.
Today, it says stocks are expensive...
Depending on how you measure, historically, buying at a CAPE ratio of 28 means you can expect returns as low as 1.9% a year for the next five years.
Meanwhile, interest rates are rising off historic lows. That could spell the end of the 30-year bull market in bonds.
And we haven't even talked about the inevitable market pullbacks and corrections along the way... or the potential for bigger crashes.
In total, it's entirely possible that any investment assets just won't deliver returns to anyone for years.
Except for options, that is...
When used correctly, options reduce the risk of holding stocks...
That's right. Most folks think of options as a type of leverage or a way to make wild bets. But we love to use them to do the exact opposite.
Essentially, I see options as this sort of mathematical guarantee. And you can learn to understand why with just the most basic understanding of options.
Our strategy is simple...
We own a stock and we sell an option contract against it. When we sell that contract, we receive cash up front. (There's more to it, but that's all you need to know to understand how options reduce risk.)
For example, if we buy a stock for $20 and sell a $1 option against it, we've collected $1. The stock is still trading at $20, but our "cost basis" is now $19.
Of course, the risk when you hold a stock is always the same. In theory, any stock can go to zero, but let's assume you're using a stop loss and you'll sell if it falls to $15.
Without the option, you hold a $20 stock that cost you $20... and you can lose up to $5 per share if it falls to $15. With the option, you still own a $20 stock, but it only cost you $19. You only have $4 at risk if it falls to $15. In this example, by taking the extra $1 in as income, you just cut your risk by 20%.
Earning option income lowers your cost basis, making it less risky than holding the exact same stock...
There is no other way to reduce your downside in the market like my simple options strategy – one where you get paid up front.
If you hated watching your stocks drop in 2001 or 2008 (I know I did), options make those times much less painful.
While the best investors obsess over risk, we know that most investors tend to focus on returns...
Options can satisfy that desire as well...
Simply put, options provide the same – or better – returns, with less risk.
Everybody wants better returns. Options deliver them when markets are down or anemic. At times when markets rise quickly, my favorite options strategy can lag on total returns – but still provide better risk-adjusted returns.
We can prove this unequivocally...
Like I said, the basic idea of my options strategy isn't a secret. I learned it on Wall Street more than two decades ago. As such, finance guys and academics have studied it in all sorts of ways. I even hired a guy whose specialty is econometrics.
My research team and I spent weeks putting together research to find the most promising opportunities. That strategy has rewarded our readers handsomely.
But you can make a "For Dummies" version of the strategy. You don't have to think about the economy, or the businesses behind the stocks you own, or the value they possess.
You just take the "market return" and use a few simple rules to set up the options strategy. This isolates the pure returns that the options themselves generate.
From 1988 through 2016, the options strategy has returned 9% a year, while the S&P 500 (with dividends reinvested) has returned 10%. Most of that extra percentage point comes from the fast gains in the last year.
Meanwhile, the standard deviation on the options strategy was 12%. The same number for the market is 17%. In other words, this strategy requires roughly one-third less risk.
Put another way, when the tech bubble burst in 2002, stocks fell 22%. This options-strategy portfolio fell only 7%.
During the financial crisis of 2008, stocks fell 37%... the options strategy just 28%. Again, a 25% reduction in volatility and angst.
In short, this strategy performs better in down or flat markets, and it performs just about as well when the market rises. It can protect you during the scary times, while providing good returns during all others.
Again, these quoted returns assume no thought, no research, no insight. These are just the returns that a pure, dumb, options-trading robot could create out of thin air. I call this "income from nowhere"...
In the meantime, it's important to realize we can do much better than this "For Dummies" version. In fact, our options trades regularly target gains greater than 20% per year. And it's far simpler than you might expect.
Unfortunately, most investors won't take the time to figure this stuff out...
I can't think of a bigger missed opportunity.
Investors don't want to learn about options because it requires learning some new terms and using some basic math. Busy folks just aren't willing to sit down and learn something new.
To me, that's a boring and poor way to live.
But more important, what if I told you that you can learn the basics of options in an afternoon? Then you can make a trade or two and you'll completely understand this simple strategy.
Considering that these few hours of work will earn you tens of thousands of dollars over the years to come, it has to be the highest "hourly rate" you can make.
Others learn the basics but still get overwhelmed. For example, log into your broker's platform and open an "option chain" that displays all the available options on a stock. You'll suddenly see hundreds of choices.
But once you've learned our strategy, you can narrow that down to only a few potential choices, and you can decide which one works best for your personal strategy in less than two minutes.
Most "traders" jump into options and do it wrong, lose money, and never try it again. Don't be like them.
My strategy fixes every one of those problems...
It's simple, quick, and has an extraordinarily high win rate. (For the record, since we launched Retirement Trader in 2010, we've earned and published the profits on 329 of 350 positions, a win rate of 94%.)
If you need to keep earning returns to secure your financial future, this strategy is for you.
If you prefer less risk and smaller drawdowns, this strategy is for you.
And if you like higher returns – and who doesn't? – this strategy is for you.
Options can improve your financial future with little fuss...
I've been helping thousands of readers do just that for more than six years... And now, I'd like to share the method with you.
I'm preparing an educational webinar to clear up any lingering questions you might have... On Wednesday, March 22 at 1 p.m. Eastern time, I'll walk you through a real trade you can make in your own account to collect "income from nowhere" immediately. I'll also show you exactly how much income you could be collecting on some of your favorite stocks.
It's going to be a lot of fun for me (I love teaching)... and profitable for anyone who takes the initiative to join in.
Just click here to reserve your spot, and submit up to 10 of the stocks you're most interested in collecting income on today.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig