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Possibly the Greatest Income-Producing Tool for RetireesBy
Saturday, July 30, 2011
In yesterday's essay, I explained how we've compiled a perfect track record in my Retirement Trader service.
As I showed you, traders should think like long-term investors: They should look at the fundamentals, buy shareholder-friendly companies, and wait for the right setup.
Those are great strategies for people who want to invest for years at a time. But the truth is, we're traders. We like getting a "quick fix" of income and capital gains. Our positions only last a few months at most. So how do you combine conservative habits with the instant gratification of trading?
It's simple. All it takes is one powerful tool. And once you get familiar with how it works, you'll find my kind of high-probability trading is as easy as clicking your mouse.
Let me show you what I'm talking about...
As I told you yesterday, health care giant Johnson & Johnson (JNJ) is one of my favorite stocks to trade. It's cheap, it treats its shareholders right, and it's got one of the market's strongest tailwinds at its back.
Back in April, JNJ's share price was languishing in the bad press surrounding some product recalls. But the problems were short term. And the company had released higher-than-expected earnings. The balance sheet was strong, JNJ was still churning out dividends, and the price was right.
So we put on a trade that could have turned out one of two ways: We were either going to make a quick 8% in three months (32% annualized) or we were going to buy JNJ stock at a 4% discount. We were going to win either way.
And we did it by selling puts.
Before you say, "Oh, it's an options trade. That's too complicated and risky," hear me out. I guarantee it'll be worth your time.
When you sell a put, you're agreeing to buy a stock below the market price within a set time. You get paid for making that agreement. If the stock never drops below that price, you get to keep the cash. If the stock does drop below that price, the cash ensures you get a discount to that price. It's like getting paid to offer $250,000 for a house the buyer is asking $300,000 for.
Here's the real beauty of this strategy: You don't have to be exactly right about how or when a stock will move up in price. Many factors work in your favor. So even if the shares stagnate, you still profit.
You're only agreeing to buy the stock below today's market prices, so you're safe as long as it doesn't completely tank. And you don't have to be right forever – just for two or three months (your obligation to buy expires with the option).
It is, of course, possible to lose money on the deal. Every investment carries risk, and no one can predict the future. But selling puts gives you huge odds in your favor. It generates income and hedges your risk by getting you much lower entry prices on any companies you end up buying... great companies like Intel and Coca-Cola.
This kind of trade is much safer than simply buying stocks outright.
If you do it right, you won't actually buy many stocks – you'll simply collect premiums and earn about 15%-30% a year on your capital. All you have to do is be prepared to buy if the time comes...
And if you do end up buying one or two stocks, that's fine, too. If you follow my simple rule and think like a long-term investor, your entry prices will be low, and you'll end up buying dividend-paying companies that treat their shareholders well.
If you've never sold puts before, ask your broker for help setting up your account for these sorts of trades. Spend time reading about the strategy, and make sure you're completely familiar and comfortable with it before you get started.
The effort you invest will pay off many times over. If you're looking for a conservative, high-income, retirement-friendly trading strategy, you can't find a better tool than this.
Here's to our health, wealth, and a great retirement,
Doc Eifrig
Further Reading:
Yesterday, Doc described three simple trading rules every retiree needs to learn. If you're ready to start safely doubling or tripling the trading gains you normally make in your retirement account – with much less risk – these are the kinds of trades you need to make.
Market NotesCHART OF THE WEEK: A WARNING ON GOLD This week's chart is both a "we told you so" piece and a "warning" piece. It displays the incredible strength in gold over the past year… and the new all-time high the metal reached this week.
Even before we published this 2005 letter to our brilliant friend Bill Bonner, your DailyWealth editors were gold bulls. The reason for our bullishness was simple: We knew that after decades of ignoring the metal, the world would wake up to the coming decline of U.S. and European paper currencies... and flock to the "anti-paper currency," gold. We've been so bullish on gold over the years, we even published a book on it. (DailyWealth Premium members can sign in and find The Gold Investor's Bible on our Reports page here.)
This week, gold confirmed our thesis again by breaking out to new highs around $1,625 per ounce. Every absurd statement coming out of Washington D.C. helps drive it higher and higher. But to the folks buying gold right now: Be ready for a dip.
Gold is one of the most volatile assets in the market... and it's had a heck of a run over the past four months. It's now overbought by almost every short-term indicator you can find. It could also get smacked lower if Congress passes a fix to the debt ceiling "crisis." In short, we're long-term bulls on gold, but expect a dip soon...
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Stat of the week
39%
Gain in fuel costs at major airline Delta in the second quarter. The increase contributed to a 58% drop in Delta's profit from last year.
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