The Weekend Edition is pulled from the daily Stansberry Digest.
Today's new investor is not like those of past generations...
Far from it.
You see, for decades, the most widely accepted asset-allocation plan for retirement was a simple math equation: Subtract your age from 100, then invest that percentage in stocks. The rest should be in safe bonds.
In essence, it's the same idea behind the conventional 60-40 stock-bond portfolio or "target date" retirement funds offered in 401(k) plans, which have been losing money this year.
Many folks have known nothing else. And because stocks and bonds have largely traded higher over the last several decades – albeit with crises and crashes along the way – the strategy has worked for many, too.
But the new generation of investors is behaving differently...
Many are young – millennials and Gen Zers – and know nothing more than what they've read or been told about the markets. This makes them less inclined to use a buy-and-hold strategy like previous generations did.
And they're certainly not interested in any kind of bond fund.
Instead, these new investors want to be in and out of risk assets. They want fast gains... all the time. Their pursuit of instant gratification is a defining feature of their lives... including their investing style.
This new generation of investors was born on December 11, 2014...
The day Robinhood hit the Apple App Store.
More important, it was the day commission-free trading was finally introduced to the world... and the day that anyone with a smartphone could be an investor.
It was a radical notion at the time... And it changed "how things used to be" forever.
Robinhood's success set a precedent for modern investing. It was only a matter of time before the big-name brokerages followed suit to stay alive.
Charles Schwab (SCHW) was the first to go commission-free. Shortly after were rivals TD Ameritrade and E-Trade. Now, just about every major broker offers commission-free trading.
Put simply, what Robinhood did was a game changer for anyone with money in the markets...
And because of how easy it became for anyone to place a "free" trade – free, except for the inherent risk you take of course – the old adage of "trading less is more" was thrown out the window.
With no more commission fees, the floodgates were open to folks who wanted to buy in the morning and sell by late afternoon.
We saw this in spades during the start of the pandemic. It seemed like everyone with an Internet connection and a stimulus check at least considered speculating in the markets.
But here's the thing – this influx of inexperienced, greedy investors in an unforgiving market presents an opportunity for strategic, smart investors to make a lot of money.
Let me show you how and why...
The "meme stock" crowd has turned to the options market...
The options market is notorious for attracting young, eager, and greedy traders.
After all, trading options – a way to bet on the price of a particular stock to go up or down by a specific dollar amount over a specific period of time – provides leverage...
As I'll explain, there is a smart way to trade options. But for most new traders looking for quick, easy gains, there is more risk (and potentially reward) involved with, say, buying a "call option," compared to simply buying or selling "regular" shares of a company.
An options contract represents 100 shares of a company. Using speculative options, you can quickly turn $200 into $2,000 in a matter of days or weeks – if things go well...
For example, if you buy a stock worth $50 and it goes up $5, you'll make 10%. But if you bought a speculative option on that same stock, your gain would be around 300% if the stock goes up 10%.
There has been a boom in options trading...
And it hasn't gotten enough attention. In fact, I certainly haven't seen it in the financial media.
The chart below shows how single-stock options volumes are now bigger than regular stock volumes for the first time ever. Options volume, as a percentage of stock volume, is now close to 120%...
In other words, more people are trading options on a stock than buying shares "the old unleveraged way"... And more money, in nominal terms, is being traded this way.
The explanation for this is simple...
Before commission-free trading, options were used mainly by big banks and hedge funds. Options trading was much more difficult for everyday investors to access... And it was basically reserved for the elite who could afford to pay the commissions.
Commissions hurt the little guy too much when they were trading just one or two contracts, compared to the hundreds of contracts Wall Street firms typically trade.
Banks and hedge funds used options as market hedges, as a way to speculate on certain stocks and to generate ultra-safe income. Basically, options gave professionals an advantage over regular buy-and-hold investors.
But today, the everyday investor is getting involved. According to data from market-intelligence company Alphacution Research Conservatory, retail investors now account for more than 25% of option-trading activity.
And here's what I find unfortunate – but also see as an opportunity...
Today's new generation of investors is using options wrong...
I was reminded of this again while playing golf a few weeks ago.
Retirement Trader editor Dr. David "Doc" Eifrig has said for years that you can gauge market sentiment by talking to folks at cocktail parties and in taxis or Ubers. I'd add conversations on golf courses to that indicator as well.
On the 14th-tee box at a beautiful course in Scottsdale, Arizona, the banter between my golfing buddies turned from missed par putts to investing.
One guy in my group – let's call him Brad – couldn't hit a fairway to save his life. But that didn't dampen his hubris... or stop him from boasting about how much money he was making in the markets by "selling covered calls" – a basic options strategy.
If you're not familiar with covered calls, it is one of the safest strategies you could ever use as an investor. I would recommend every investor to start doing it immediately...
I won't get into the nitty-gritty of every detail about this strategy, but I can summarize the key points you should know...
By selling covered call options, you actually take on less risk than a buy-and-hold investor...
One of the biggest myths about options is that they're dangerous. But that's simply not true... as long as you know what you are doing.
I outlined the very good reasons for selling covered calls in a Digest essay back in April 2020, at the start of the pandemic when market "fear" was at extreme levels...
When investors are fearful, they are willing to pay for portfolio "protection." Specifically, they pay up for option protection.
Right now, options are extremely expensive... And that makes it the perfect time to sell them...
By selling options, we get to collect massive payments up front and the only risk we take is the potential obligation to buy stocks we want to own for much less than they are worth.
We basically take advantage of the extreme amounts of fear in the market.
At its most basic level, I'm talking about making income – up front, as if you were running an insurance company yourself – from trading options on stocks that you like.
That's what we've been showing people how to do in Retirement Trader for years.
There's palpable fear in the markets today, just like two years ago. Even those clueless new investors on Robinhood are concerned about a bear market or a recession.
After all, we have historic inflation and the Russia-Ukraine war injecting uncertainty into the markets.
Many people are scared, but I'm not...
I see today as a great time for someone to sell options... but only if you know what you're doing.
A lot of people are scared of the word "options." But it doesn't take a lot of time to learn how to trade them, frankly, if you have the right teacher.
Unfortunately, Brad did not know what he was doing.
He's the "new kind of investor" I was talking about earlier...
He was selling covered calls on popular meme stocks – which is exactly what you shouldn't do. The one key to this simple and safe strategy is to only use it on stocks you want to own for the long-term, even if your trade doesn't work out as planned.
Over the next few holes, I tried to reason with Brad and teach him the proper way to use options – and the proper stocks to use them on. But I realized my message was falling on deaf ears. All he could see was the potential dollar signs.
The new generation of investors today is the same way. They're addicted to the potential of winning big... without knowing the proper way to use the trading strategies they employ.
They're blindsided by greed.
Now to be clear, it's perfectly fine to use options to speculate... But you should be selling options and reducing your risk.
Most folks don't even know this route exists. And if they do, they don't take the time to learn it. Selling options is one of the greatest income-collecting strategies of all time.
And here's another lesson I want to make sure I leave you with... There is easy money to be had when the person you are betting against has no clue what he is doing.
Bottom line: The flood of new options traders and the "meme stock" crowd are a boon for those who take the time to learn how to use options the smart way...
Regards,
Jeff Havenstein
Editor's note: Doc recently went on camera to explain why today's market environment presents us with an incredible opportunity to trade options – the right way. It's an ultra-safe strategy he has taught to thousands of investors over the years. And the best part is, it's simple to learn... and has the potential to make you a lot of money in a market like today's. Click here to learn more now.
