How to Collect 50% a Year on Stocks You Don't Own

The collapse in stocks this fall was historic. Last week, the Dow Jones Industrial Average broke through its October lows. It's down 36% this year.

Most investors watching the carnage simply want to sell and never hear about stocks again... 

But for those of us who understand how to value securities, there's simply never been a better time to buy stocks, not in 30 years and maybe not ever.

The panic in the markets leads to falling prices for securities – everyone knows this. What most people don't know, however, is that panic also leads to vastly higher prices on options. 

Investors buy put options as a form of insurance on the value of their stocks. But when investors are scared, they're willing to pay far higher premiums for put options. The insurance can get incredibly expensive.

This combination – incredibly cheap stock prices and incredibly high premiums in the options market – creates a once-in-a-lifetime opportunity for smart investors. Right now, you can literally earn more than 50% on an annualized basis selling insurance on stocks that are trading near their liquidation value. You're selling insurance on a risk that doesn't exist.

You can imagine this strategy as selling hurricane insurance after the hurricane has already come. In the insurance market, you want to sell when people are scared. And right now, they're more scared than they've ever been.

Take a look at this chart of the Volatility Index (VIX). The VIX measures fear in the market, as judged by the premiums available in put and call options (insurance). As you can see, the fear gauge is off the charts.

So rather than buying stocks right now, you should consider simply selling insurance, via selling put options. You can capitalize on the fear in the market right now, without having to buy any stocks at all.

Other investors are willing to pay you – at annualized rates between 40% and 60% – to be ready to buy stocks at a discount to their current prices. If these are stocks you'd be buying at their current price anyway, it's like getting free money. Lots of it.

The process is simple. Let me show you how it works with a pick from my Put Strategy Report...

Last month, my subscribers sold insurance on ratings giant Moody's. Public scrutiny is hurting Moody's stock price, but I don't believe it will damage the business or the quality of its brand going forward. And Moody's is in no danger of going out of business.

Meanwhile, thanks to the negative publicity, we could sell January 2009 puts on Moody's with a strike price of $15 for more than $2. In other words, we agreed to buy Moody's stock if it sells below $15 in January. In that case, we would have an entry price of $13 ($15 minus the $2 we collected), which was 36% below the current share price and 74% below my estimate of the company's true value.

On the other hand, if the stock holds above $15, we keep the whole premium. That's a 13% return on the capital we have at risk... or about 52% annualized.

The key to this strategy is knowing what the real risks are in owning the stocks. You don't want to insure just any stock. Identify stocks you like and would want to own. Then insure them at a price they are unlikely to fall below. No matter what happens, you win. If the stock falls, you buy a stock you wanted to own at a great price. If the stock doesn't fall into your lap, you keep the insurance premium free and clear.

Selling puts gives you huge odds in your favor. Is it possible to lose money on this deal? Yes, of course. No one can predict the future. Every investment carries risk. But selling puts generates income and, at the same time, hedges your investments by getting you much lower entry prices on the stocks you end up buying. There's no better way to invest right now.

Good investing,

Porter Stansberry