A few weeks ago, I wrote about Hetty Green and how her advice to "act with thrift and shrewdness and be persistent" has paid off for us. I've been applying the exact same method to trading for years now, through several market pullbacks, and that persistence has resulted in a mountain of income and a nice track record of winners.
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But there's another important piece to maintaining a persistent approach...
You have to make sure that approach still works!
Now, that doesn't mean you should second-guess yourself or constantly tinker with your strategy; just check in from time to time to make sure you're still seeing the results you want.
So today, I'm taking a look at the additional Income Trader Volatility (ITV) trades I provide to my Income Trader subscribers. Back in 2015, my research behind this indicator won the Charles H. Dow Award. Even I was impressed by the results from the first two years:
|Win Rate (%)||89.5%||90.1%|
|% Return (Margin)||5.0%||7.0%|
These trades are selected by a fully defined system that I created. I set my computer program loose, and it returns the best trades based on my preprogrammed criteria.
1) Options that are trading at a price below their fair value (which gives us a larger margin of safety).
2) Options that expire within the next 90 days. (Preference is given to the options expiring the soonest.)
3) A minimum return on investment of at least 0.5% until expiration.
4) A "buy" signal on my ITV indicator, which means the indicator is below its 20-week moving average.
The options that pass the screens end up as our ITV trades. Even I was impressed by the results from the first two years...
And I'm proud to say that they've continued to do quite well.
|Win Rate (%)||89.5%||90.1%||87.5%||93.1%||94.8%||91.3%|
|% Return (Margin)||5.0%||7.0%||0.2%||9.6%||12.4%|
Overall, the win rate over the past five years is 91.3%... which is significantly better than just randomly selling options and letting them expire.
Now, another factor to consider is that a high win rate doesn't guarantee a profit. When selling options, it's possible to win small amounts on a high percentage of trades but suffer extraordinary losses on the remaining trades. My test results account for that; the profits from winning trades exceeded the expense of closing losing trades in every single year.
The Trade My System Found This Week
Now, turning to this week's trade, I have an opportunity in a software company you may not have heard of.
Red Hat (NYSE: RHT) is the world's leading provider of open source software solutions, primarily using Linux (an open source operating system), and is a pioneer of the open source development model. The company uses the collective input, resources and knowledge of a global community of contributors in developing its technologies. The company distributes software offerings under open source licenses that permit access to the software's human-readable source code. It also provides services for companies that are too small to afford their own IT specialists.
The company's products include Red Hat Enterprise Linux (RHEL), Red Hat Satellite system management software and Red Hat Enterprise Virtualization software. Application Development-related and Other Emerging Technology offerings include Red Hat JBoss Middleware, Red Hat cloud offerings, Red Hat Mobile software development platform and Red Hat Storage.
Further, the company's end-markets are quite varied, and include financial services, consumer products, IT services, health care, government, education and technology. This is one factor that resulted in total revenue jumping 21% last year, reaching $2.9 billion for the company's fiscal year (ended Feb. 28).
Rather than licensing its products and services to clients for one large payment upfront, Red Hat's core business uses a subscription model, which provides clients continued access to its latest software (including updates), security and support services for an annual fee. In 2017, these subscriptions brought in more than $2.5 billion for the company -- the lion's share (88%) of its revenue for the year. The other 12% of sales came from training and services, which generated $346 million in 2017.
Earlier this year, an analyst for Nomura Group said that Red Hat's total addressable market could be valued at more than $66 billion by 2020, with significant exposure to middleware (multipurpose software that helps data flow from one app to another), operating system and cloud management.
Red Hat has been building its portfolio of services through strategic acquisitions, which are generating incremental revenues and strengthening its technology leadership position. This strategy has allowed it to quickly expand its product portfolio into higher growth segments, such as cloud management and storage.
In addition to making acquisitions that immediately improve its income statement, Red Hat has a number of collaborations with established IT players that you have heard of, like IBM, Microsoft, Oracle, Cisco and Dell, among others. Then there's the company's collaborations with cloud providers like Amazon, Google and Alibaba, which have also helped put it in a position for significant top-line growth.
The company has about $2.5 billion in cash and cash equivalents and no long-term debt, which makes it well positioned to continue using this winning strategy.
I believe this is an ideal company for a short-term trading opportunity like the one we have today.
How I'm Trading This Stock -- Without Buying A Single Share
If you're interested in catching some of the potential upside, you can always buy shares of RHT and wait for the market to catch up to this well-positioned company.
But I found a better trade... One that will guarantee I collect 2% in income in just three weeks. That's a respectable 30% annualized. And all without buying a single share of the stock. This trade uses a high-income, short-term put option on RHT.
Now, I understand not everyone is comfortable selling options, but you shouldn't let that fear or nervousness keep you from taking advantage of this tool. Because that's what options are -- a tool for traders. They can be as risky or conservative as you want them to be. It all depends on the strategy you're using.
Like I mentioned above, my strategy is one of the safest around. In fact, I'm making a guarantee to new subscribers to show how low-risk options can be:
If you follow along with my trades and don't make money at least 90% of the time... I'll work for you for free. That's how confident I am.
I recently released a special report that will tell you everything you need to know, including how my readers are making about $568 a week from selling options. There's even a list of three questions to ask yourself to help determine if you're ready to trade options. Simply follow this link to check it out.