We've Traded This Stock 11 Times For Income. Let's Do It Again...

Francisco Bermea's picture

Friday, July 1, 2016 - 10:30am

by Francisco Bermea

Just when things seemed calm, investors found reason to panic. In a historic referendum vote, citizens of the United Kingdom narrowly voted to exit the European Union.

The fallout was immediate, as markets around the world plummeted.

The UK's blue-chip FTSE 100 index declined about 2.5% Friday, while its currency, the pound, fell to levels not seen since 1985.

Other European exchanges fared even worse. The Stoxx Europe 600 tumbled 7%, while the German DAX fell 6.8% and the French CAC 40 dropped 7%. Even the Japanese Nikkei index closed down 7.9%. U.S. markets felt the pain, too, with the Dow falling more than 600 points, or 3.4%, while the S&P 500 lost 3.6%.

But it was fear that had the biggest day of all.

As I've discussed before, the Volatility S&P 500 (VIX) index is a measure of how much volatility premium is factored into the price of options, but it's also commonly used as a gauge of investors' level of fear. A low VIX signals traders expect a slow, steady rise in stocks. A high VIX means investors expect rough waters ahead.

If there's one thing I've learned after years of following the stock market, it's that investors hate uncertainty. And the questions we now face regarding trade, immigration, travel, etc. thanks to the Brexit are unprecedented. The "fear indicator" responded accordingly by jumping nearly 50% after the vote.
 

But for my colleague Amber Hestla and readers of her Income Trader service, this spike in volatility is welcome news. It means they'll earn bigger income checks from the options they sell.

Let me explain...

Generally speaking, more volatility means more selling in stocks -- which is bad news for anyone who is bullish. But in the investing world, what's bad for some is often good for others.

You see, option prices depend on many variables. One of the most important is volatility. When volatility goes up, so do option prices. When it goes down, options become cheaper. With the VIX shooting up more than 50% in a month, now is a great time to be an options seller.

Why Selling Puts Is The Perfect Strategy For This Market
For situations like the one we find ourselves in now, Amber recommends selling put options.

A put option gives the buyer the right -- but not the obligation -- to sell a stock at a specified price before a specified date. Selling a put requires us to purchase that stock from the put buyer if it falls below a specified price (the option's "strike price") before a specific date. When we accept that contract, we receive instant income upfront, known as a "premium." As I mentioned before, the higher volatility is, the more premium we can make on each trade.

By selling put options, we're essentially making a bet that a stock won't fall below the option's strike price before the expiration date. If it does, then we must buy 100 shares of that stock for every contract we sold. This is why Amber only recommends selling put options on stocks you wouldn't mind owning for a discounted price.

One stock Amber has had great success using this strategy with in the past is Gilead Sciences (Nasdaq: GILD).

Why GILD Is The Perfect Stock To Sell Puts On
With a market cap of over $100 billion, Gilead is one of the largest biopharmaceutical companies in the world. It develops drugs used to treat a variety of major diseases, but it is best known for its successful -- and expensive -- hepatitis C treatments.

Gilead's Sovaldi and Harvoni drugs cost $84,000 to $94,500 (before discounts) for a course of treatment. They command such a high price tag because they cure the disease rather than simply manage symptoms.

These drugs are the No. 1 choice for providers treating hepatitis, with a 90% market share. Gilead also makes the top three most-prescribed drugs for HIV, commanding 74% of the market in the United States.

Its dominance in these key areas has helped the company increase revenue at an average rate of 30% a year since 2008. Gilead also has $8.3 billion in cash on hand.

Not only does the biotech company consistently offer steady revenues, it's also significantly undervalued at current prices.

With shares trading around $82.50, GILD has a forward price-to-earnings (P/E) ratio of less than 7, which is a bargain considering other large biotech companies with stable earnings -- like Amgen (Nasdaq: AMGN) and Celgene (Nasdaq: CELG) -- trade with average forward multiples that are about twice as high.

Analysts are bullish on the stock with 17 "buys" and no "sells." The average target price for shares is $112.74 -- more than 35% above recent prices.

Undervalued stocks like GILD are perfect for a put selling strategy. If we wind up having to purchase shares, we will own them at a significant discount to what they are worth, meaning the upside potential is substantial.

In fact, GILD is one of Amber's favorite stocks to sell puts on. She's successfully traded it 11 times since starting her Income Trader advisory in 2013, making an average annualized return of 33.1% -- without ever doling out a cent to purchase the shares.

I'd be happy to own GILD, especially at a deep discount. But I'm also happy to let heightened levels of volatility earn me a double-digit return without even having to touch shares. It's a win-win.

We just recommended selling another put option on GILD, which I'm confident will make it a 12-time winner for us. I can't share the specific trade recommendation with you today, out of fairness to our premium subscribers. But if you'd like to get more trades like this in your inbox each week, then I recommend giving Amber's Income Trader service a try.

We'll send you everything you need to get started, including a handful of reports and Amber's latest recommendations. To learn more, simply follow this link.

Francisco Bermea does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.