The Weekend Edition is pulled from the daily Stansberry Digest.
I still remember the first stock I ever bought...
I was 22 years old and fresh out of college when I plopped a few hundred bucks into a brokerage account.
I was eager to buy my first stock, but also nervous. I'd heard about all the money you can make in the stock market... and the investing horror stories following the financial crisis.
When it came time to choose a stock to buy, I did what a lot of first investors do: I went to Google and searched "tech stock that will double." (Chances are, if you're reading this right now, you're probably guilty of this, too.)
That led me to a company called Himax Technologies (HIMX). If you've never heard of Himax, you're not alone. Today, the Taiwanese semiconductor company has a market cap of around $580 million. At the time, I knew nothing about the company... but I was caught up in the promise of a 100% gain in a few months.
"Easy gains," I thought. "Sign me up."
You won't be surprised to hear the stock didn't double. I sold my shares four months later for a huge profit of... $11 after fees.
I've made plenty more common investing mistakes, too...
I've sold great companies too early. (This mistake isn't limited to novice investors – even the most experienced investors do this all the time.) I'm still gritting my teeth about selling cloud-communications company Twilio (TWLO) too soon...
If you buy a stock whose business you understand and numbers you know, do yourself a favor and give it a chance to play out.
I've also made the mistake of not diversifying properly. A portfolio that consists entirely of a few tech stocks might sound like a good idea, but it's not.
I've bought companies where I didn't understand the risks. Watching the stock jump one day and plummet the next kept me up at night.
And I've even dug in my heels and doubled down on losing stocks... like my ill-fated experience with social media company Twitter (TWTR). In behavioral finance, this is known as the "backfire effect."
Everybody makes mistakes early in their investing careers. It's an expensive tuition, but it's how we all learn.
Fortunately, there's one rookie investing mistake I haven't made...
And I never will, thanks to my professional mentor, Dr. David "Doc" Eifrig.
Most investing careers start like mine. You buy a couple of "get rich quick" stocks and you either get bored or get burned. Then, you move to stocks you know and have researched, but you sell too soon. Finally, you experience some success and think you have it all figured out.
Then you hear about options...
Inexperienced investors usually do one of two things: They decide options sound too complicated and scary and never learn about them... Or the promises of outsized gains suck them in, and they dive right in without taking the time to learn the basics.
The second group typically gravitates to out-of-the-money ("OTM") call options. This simply means that they're purchasing the right to buy a stock at a higher price – sometimes much higher – than where it's currently trading.
If they're right, OTM call options offer a chance for investors to double, triple, or quadruple their money quickly. These options are cheap – you can buy one for just a couple hundred bucks – because they're essentially the stock market's version of a scratch-off lottery ticket.
Let's say you're bullish on shares of media giant Disney (DIS)...
You believe, like myself and many others at Stansberry Research, that Disney is a high-quality business. And you're confident that my colleague Steve Sjuggerud is right about the coming Melt Up in U.S. stocks.
So instead of shelling out around $1,400 to buy 10 measly shares of Disney, you buy one call option – which represents 100 shares. You pay about $350 for the call, which expires next January and has a strike price of $160. You've only paid one-fourth the price to control 10 times the number of Disney shares had you simply bought shares outright.
If Disney shares soar above your strike price of $160 to $180 by January 2020, for example, the call you bought for $350 would be worth $2,000. You'd make 471%, while regular shareholders would only make 29% (as shares rose from $140 to $180). And if Disney ended up even higher than $180, you'd make even more...
Although this sounds tempting, OTM call options are usually a terrible idea.
Here's what almost no one will tell you about options...
They lose value every day.
Regardless of whether the underlying stock rises, moves sideways, or falls, an option still loses what's called "time value." This is built into the structure of how options are priced.
You can see in the following chart how time value erodes over the life of a four-month option...
If an option is going to become less valuable every day, why on earth would you ever buy one?
To make a profit buying OTM call options, you have to be right about the share-price movement and the timing.
Even if you're right about both, you could still lose because the option will have $0 worth of time value at expiration.
In our Disney example, even if the stock ended up right at your strike price of $160 by January 2020, that option would be worth $0. You'd lose 100% of your money even though you were right about the stock. You wouldn't make money until Disney is trading for more than $163.50 a share, since the option cost you $3.50 – or $350 per contract.
Buying OTM call options is a losing strategy for the vast majority of investors. But rookie investors get suckered into it every single day because they're blinded by potential 1,000% gains.
Thankfully, Doc made sure I never made this mistake...
He showed me the way and explained why I should forget about buying options. Instead, he talked about the benefits of selling options.
Whereas time value costs the option buyer money every day, the option seller is making pure profits.
For my first-ever options trade, I bought 100 shares of mining company Freeport-McMoRan (FCX) and sold a two-month call against my shares.
I made about 10% from that trade. The return wasn't anything to brag about at the next family cookout. It didn't make me rich. But I quickly learned that selling options is one of the greatest – and if done right, the safest – income-producing strategies available to investors.
Later, Doc taught me about a new way to trade options...
It was a way to combine the benefits of selling options with the upside of buying OTM calls. Essentially, it was a shot at high-double-digit and triple-digit profits, but smarter.
I was quickly hooked.
The best part is, I was able to make these trades with a small portfolio. When you trade covered calls, you have to buy 100 shares of a stock for each options contract. If you buy that many shares of Disney, that means tying up roughly $14,000. A lot of folks don't have that kind of cash lying around to put in a single position.
Doc's new strategy only required that I put down $100 or so per trade. That meant I could diversify among multiple trades.
The other great thing about this strategy was that it counteracted the negative effects from time-value erosion. You could still produce gigantic winners, but the odds of winning were significantly higher than buying OTM calls.
In fact, with my own trading, I just recently went on a run of five closed winning trades in a row – with an average gain of 83% per trade... or 2,188% annualized (excluding commissions). As you can see, it's a powerful strategy...
Doc has been recommending these kinds of trades since December...
It's fun. It doesn't require a huge portfolio. It doesn't require you to stare at your computer screen all day. It works in any market environment – bull, bear, or even flat. And it already has a proven track record of big winners...
Doc has already booked a 77% gain on cigarette-giant Altria (MO) in just 14 days. Almost everyone could have participated, too. It only cost a minimum investment of $90 to enter this trade.
Doc also earned a 71% gain on coffee-shop giant Starbucks (SBUX) in just 25 days. That trade only cost folks a minimum investment of $140.
Doc currently has his readers in a trade on a private-equity firm in which they're already up 100%. If Doc is correct about this company's direction (and it certainly looks like he is so far), his readers will end up with a 167% gain on that position.
And the thing is, this stock has already hit Doc's target price. His readers will earn that 167% gain as long as the stock doesn't fall too much from its current price... It doesn't even need to go up. That's the power of this strategy.
The feedback since Doc launched this new service in December has been overwhelming...
So Doc recently decided to "pull back the curtain" on his strategy...
On Wednesday, June 19, he will share his first-ever Trading Master Class for interested readers. He'll explain how they can use his strategy to boost their gains on regular stocks – recommendations from across the Stansberry Research universe – by as much as 10 times or more and with limited downside.
This event is unlike anything else in our firm's 20-year history. You see, for the first time ever, we've invited regular readers to our Baltimore headquarters to take part in a hands-on training session.
Doc will walk these folks through all the details of his strategy, step by step. He'll also share his thoughts on the market and give away one of his highest-conviction buy recommendations.
And best of all, you can join us for this free online event from the comfort of your own home. We just ask that you sign up to reserve your seat right here.
Editor's note: Doc's newest strategy allows you to trade almost any stock with just a couple hundred dollars... And it's designed to boost your gains by 10 times or more. He's hosting a free event Wednesday night at 8 p.m. Eastern time to go over all the details. And just for tuning in, you'll learn one of Doc's highest-conviction buy recommendations. Click here to save your spot.