My years in the military have allowed me to see the world in a totally different way.
While deployed overseas I tracked IED locations, went on convoy missions and gathered intelligence from local villages. I learned the importance of analyzing data to forecast what was likely to happen, and I used this information to determine the level of risk our soldiers were dealing with.
Today, there are myriad investing techniques and strategies. And when I was first introduced to them, like most I found myself overwhelmed.
That's where my training came in handy because I was able to look at the market from a different angle.
As I put my years of service analyzing data and forecasting and assessing risk to work, I was instantly drawn to one particular strategy... selling put options.
Options can be powerful income-generating tools -- safe enough even for retirees -- when used correctly.
Here's an easy way to understand how it works. Imagine your dream house in your hometown (a good stock). It's in a great neighborhood with great schools -- everything you ever wanted in a home. You know you would love to own this house at almost any price, but you want to get a good deal on it.
Let's say this home is worth $500,000 (like a stock's share price). You walk over to the owner of your dream house and offer to buy it if the value drops below $450,000 (your strike price) in the next 30 days. In return, the homeowner gives you $1,000 (your premium) for the right, but not the obligation to sell you the house at this predetermined price of $450,000.
Why would he do this?
For the same reason we buy insurance on a home or vehicle -- the assurance that we will get some value out of our property in case something unfortunate happens.
In this case, the owner of this dream home is willing to fork over $1,000 for the assurance that he can sell his home for $450,000 even if suddenly the market says it's worth only $400,000.
And you're willing to take the risk of buying this home for $450,000 because this is a beautiful, structurally sound house that you've done your research on.
When the 30 days go by, the deal with your neighbor expires. If the house is worth $450,000.01 or more, you don't get to buy it for $450,000, but you do get to keep that $1,000 (the premium you collected) as pure profit. And if the house's value has dropped under $450,000, then you get to purchase your dream home at an incredible discount.
This is as close to a win-win strategy as it gets. You either get to buy your dream home for a discount, or you get to pocket the $1,000 premium you collected upfront as pure profit.
How to Choose the Right Put Options to Sell
Just like finding your dream home, finding the right stocks and the right options to use requires research.
The companies I sell puts on must pass my fitness test. They must have strong financials and great management, reward their shareholders and provide a product or service that will be used for decades to come.
For example, I recently recommended selling puts on petroleum refiner Tesoro (NYSE: TSO) -- our "dream house" in this example. Despite the downturn in oil, my research showed shares were undervalued and a great long-term buy. TSO's management expected earnings per shares (EPS) to grow from $4.29 last year to $5.71 this year and $6.86 in 2018. The company is also expected to increase its dividend from $0.67 a share in 2012 to $2.20 in the coming year – a massive 228% jump.
In other words, this was a stock that I would be happy to buy shares of -- and that is the key to successfully selling put options.
I told followers my system to sell put options with a strike price of $76 that expire in April. For every contract sold -- one contract controls 100 shares -- we generated $70 in instant income (our premium).
At the time we sold the puts, TSO was trading around $81. If shares fall below $76 (our strike price), then we will buy 100 shares of a company we wanted to own anyway, at a discount -- for $76 instead of $81.
The position is still open, but so far, things are looking good. TSO shares are trading at $81.50 as I write this, so unless the stock falls 6.7% to $76 in the next week, the option will expire "worthless." That simply means we get to keep our original $70 premium.
This is a fairly typical trade you'd see in my premium Income Trader advisory. Since February 2013, we've closed 140 trades, and 134 have made a profit -- an astonishing 96% win rate.
If you've ever worried about whether you will have enough money in retirement, my put selling system may be exactly what you're looking for.
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