Our Expert Weighs In On Options, The Fed, And More…
One of my investing mentors, in a former life, was an insider deep in the professional poker circuit around the time it started getting more popular online and on television. We’re talking about a player with enough talent and experience to hold their own at the table at private games in Texas with billionaire businessmen as well as with multiple World Series of Poker bracelet winners in Vegas.
This person told me, whether it came to poker or investing, “You have to have enough chips to stay in the game.”
It makes sense, right? In investing parlance, we call it “capital preservation.”
Staying alive is fundamental. Avoiding losses — especially ones that could end your portfolio — is step number one.
Today, I’d like to hone in on one of our analysts that’s done a better job at this than just about anyone: Amber Hestla, Chief Investment Strategist of Income Trader. In the exchange below, we talk about how she trades options for income (without suffering big losses), the Fed, and more…
A lot of our readers are already familiar with your background. You were in the military in a previous life, and today you’re a self-taught, award winning trader. Do you think this had any influence on your job today?
Amber: Without question. In military jargon, my job was to “analyze strategic and tactical intelligence about enemy forces and potential battle areas.” In plain English, I spent 14 hours a day trying to make sure other soldiers didn’t get blown apart by roadside bombs. So the idea of “risk” is always on your mind.
The stakes are a lot less when you’re trading. But I think taking an analytical approach to risk carried over to my trading career.
By the time I left the military, I was reading everything I could get my hands on about the market. I sought out the industry’s best trading experts for guidance. Soon, I was trading on my own, using tools I developed from the knowledge I had gained, and earning way more than I ever did in the Army.
The numbers you’ve put up over the years are impressive. Since the first issue of Income Trader, you’ve posted a 91% win-rate. What’s been the key?
Amber: It all goes back to risk. For starters, the put-selling strategy we use in Income Trader is one of the most conservative options strategies around.
Studies show that 80% of options buyers lose money. So we want to be in the business of selling options, not buying them.
At Income Trader, that means we sell put options. And the best way to reduce risk further is to only sell puts on solid companies you want to own. If you follow this one rule, you’re ahead of 99% of options traders.
When you sell a put on a solid performer, you’re basically betting that a great company won’t fall to fire-sale prices in a short period of time. You receive instant income (known as a premium) from the buyer of the option in return. If the shares remain above what you determine is your dirt-cheap level, you’ll keep the premium as 100% profit and never buy one share.
And what if you’re wrong?
Amber: Once in a while, you may have to buy the shares. But that’s not necessarily a bad thing — after all, you’ll be getting a great deal on a stock you’d want to own anyway. The premium you received when you sold the put lowers your cost basis even further. Plus, as you get more comfortable with options, you can then turn around and collect even more income from the stock using a different options strategy (like a covered call).
My goal is to create “no-lose” situations. Of course, there’s no such thing in the financial world, but I think selling puts on stocks you want to own is as close as it gets. It’s like getting paid to set limit-orders on your favorite stocks.
What would you say to someone who might be worried about using this strategy in a “down” market?
Amber: My basic strategy remains unchanged even in a falling market, but there are some different tactics I use.
Option prices adapt to the market environment, and the premiums on most options should be higher if the market is falling. This is due to the fact that volatility, an important factor in options pricing, should rise in falling markets. And when volatility rises, so do premiums. That means more income for us.
That said, my primary objective is to safely deliver income, and that will require adapting as the market changes. The strategy will remain consistent, but how it’s executed it will be determined by the market. Options selling works in any environment, but the best options to use will always be determined by the math.
Any final thoughts? What are you telling your readers about the market right now?
Amber: I recently spent some time reading through Fed Governor Lael Brainard’s speech about what she expects the policy to look like in the coming months. It contained a lot of the usual “Fedspeak” (which is as difficult as ever to parse), but here’s what I learned…
Bottom line, the Fed is concerned about downside risks. Short-term interest rates will remain near zero for at least another year. That’s going to help consumers finance cars, refinance homes, or make other large purchases.
And if you think there are no more tools in the proverbial toolbox, think again. The Fed is looking at new potential ways of addressing the crisis, such as influencing longer-term interest rates. Either way you slice it, though, Fed officials are very worried.
From my perspective, this only validates the importance of alternative income strategies like what we use over at Income Trader.
Thanks again to Amber. On a final note, I’d like to add that there’s never been a better time to try a new strategy like the one Amber uses in Income Trader.
As she mentioned, Amber’s options-for-income strategy works in any kind of market — and it’s easy to implement once you set up your brokerage account and acquaint yourself with some basic terminology.