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Editor's note: Today, we're kicking off a special three-part series from our colleague Dr. David "Doc" Eifrig. Doc is hosting a free webinar on Wednesday night, in which he'll explain how you can earn consistent, safe income... with less risk than buying stocks. It's the greatest income-producing tool for retirees. In this series, you'll learn more about this proven strategy and how you can use it today...
How to Become a Stock Market LandlordBy
Monday, January 18, 2016
If you can understand real estate, you can understand the greatest income-producing tool for retirees.
Right now, my Retirement Trader readers understand this tool... These are regular investors (just like you). And they're using this tool to pull thousands of dollars out of the market every month.
You can do the same...
It all starts with the familiar real estate idea of offering owners a lower price than what they are asking...
This strategy involves one of the most powerful – and most misunderstood – financial tools ever created: stock options.
When most folks hear the words "stock options," they think of risky bets on volatile moves in the stock market. Nothing could be further from the truth.
A stock option is simply a contract between two people. One type of option is called a "put option." The person who buys a put has the right – but not the obligation – to sell a stock at a given price, in a given time period. The person who sells a put has the obligation to buy a stock at a given price, in a given time period.
Done properly, selling put options is one of the greatest money-making strategies ever created. And it's simple, once you get the hang of it.
By selling puts, you can collect regular cash payments by offering to buy stocks at a discount.
Most of the time, these "discount" offers are not accepted. Most of the trades work out so that my readers get to keep the cash payments and walk away. But my service's history shows that around 20% of the time, our discount offers are accepted... and we are obligated to buy the shares.
When that happens, we turn into "stock market landlords."
Conventional landlords collect regular income on properties they own. It's a time-tested plan for getting a good, double-digit annual yield on your money. You also collect income on properties you own. Except these properties are in the stock market.
That means that unlike conventional real estate investing, this type of investing doesn't involve bank loans, fixing toilets, or dealing with tenants at 2 a.m.
Here's how it works...
After you buy a stock, you can then enter the options market and sell someone the right to buy your stock at a higher price in the future. In return for agreeing to sell your stock, you collect cash upfront.
No... using options in this way has nothing to do with the risky, "all or nothing" options strategies many people use. This is a very safe strategy. It's called "selling covered calls."
Again, this amounts to buying shares, then selling someone else the right to buy the shares from you at a higher price. I know it might sound like a strange transaction. But it happens millions of times a day...
Let me walk you through some numbers, so you can see how useful a tool it is if you're looking for safe income...
Back in September, I told my readers about an opportunity to become a "stock market landlord" with shares of the insurance giant MetLife. At the time, you could buy MET for $47.95 per share. Let's say you bought 100 shares at the time, for a total of $4,795.
Right after buying your shares, you were able to sell someone the right to buy your shares from you for $47.50 per share any time over the next two months. You collected $2.95 per share ($295 per contract) for selling that right. This $295 payment represented an instant 6.2% yield on your investment ($295 / $4,795 = 6.2%).
In December, MET was trading over $47.50. So you would have sold at $47.50 and kept the $295 you got for selling the call... like a landlord selling the property to his tenant.
Now... if MET wasn't trading above $47.50, you would have been able to do pretty much the same trade all over again.
Do this "6.2% in three months" trade four times in one year, and you can make 24.6% (while collecting MET's safe 3.5% regular dividend). On a $50,000 stake, that would generate more than $12,000 a year. That's a lot better than you'll get with most rental properties...
And you need to understand... this MetLife trade isn't just theory. In December, my readers closed their sold covered calls on MetLife for a 4.4% gain in about three months.
We're collecting cash by making discount offers that are rarely accepted... And when they are accepted, we're able to use the covered-call strategy to generate even more cash.
Of course, this strategy takes a little bit more work than what you might be used to... But as many of my readers have discovered, it's simple to learn... and simple to use once you get the hang of it.
And becoming a "stock market landlord" is well worth the extra effort.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Further Reading:
"It's perfectly rational to think that 2016 could be a sideways or slightly down year," Doc says. "To prepare for that, it's important to up your defensive positions." He says there's one group of stocks that should be at the top of your list. Learn more in this essay from last week: It's the Best Time in Nearly a Decade to Buy This Sector.
Extreme Value editor Dan Ferris says the easiest way to reduce risk in an equity portfolio is to hold plenty of cash. Bullish or bearish, it's what you should be doing today. Dan explains why right here.
Market NotesNEW HIGHS OF NOTE LAST WEEK
Not many... the S&P 500 is down more than 8% in 2016.
NEW LOWS OF NOTE LAST WEEK
United States Oil Fund (USO)... oil stocks
Market Vectors Coal Fund (KOL)... coal stocks
SPDR S&P Metals & Mining Fund (XME)... metals stocks
iShares DJ Home Construction Fund (ITB)... homebuilder stocks
iShares DJ Transportation Average Fund (IYT)... transportation stocks
SPDR S&P Retail Fund (XRT)... retail stocks
SPDR S&P Health Care Services Fund (XHS)... health care stocks
iShares High Yield Corporate Bond Fund (HYG)... high-yield bonds
SPDR S&P Bank Fund (KBE)... bank stocks
iShares MSCI Emerging Markets Fund (EEM)... emerging-market stocks
CurrencyShares Australian Trust (FXA)... Australian dollar
CurrencyShares Canadian Dollar Trust (FXC)... Canadian dollar
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