The Secrets of Successful Options Trading

The Weekend Edition is pulled from the daily Stansberry Digest.

Pay attention to this one...

Today, I'm going to show you exactly how to make the types of options trades I recommend in my Retirement Trader advisory.

I'm letting you in on the secrets to the strategy that has delivered a 95% win rate since 2010.

After today's essay, you'll know all you really need to know to use it yourself... You'll see how I've been able to put together my current streak of 211 consecutive winning trades... and hopefully, you'll be compelled to use this strategy.

Since 2020 – covering the end of a bull market, a bear market, and an up, down, and up again market this year – this way of trading has generated around a 20% annualized return...

All with lower risk than simply owning stocks.

Here's how we use options – the right way...

One risk-reducing, return-boosting options trade is known as a "covered call." We can see how a covered call works using a simple example...

If you follow the entertainment business at all, you may have heard of a movie script or story being "optioned."

This means a studio has approached a screenwriter and expressed interest in turning his story into a movie. The studio pays the writer, say, $10,000 today to lock up the rights to the movie. And if it decides to move forward, it will buy the script from him for $100,000.

The screenwriter just sold the movie studio a covered call. He gets to keep the $10,000 he was paid up front, no matter what. If the studio makes the movie, he makes more money. If the studio decides not to make the movie, he keeps the option money and gets to sell his script again to another buyer after the first buyer decides not to exercise his option.

When you get an offer to have your script optioned, that's a day worth celebrating.

We can do something similar with the stocks we already own...

This example will involve walking through some math. But stick with me. It's the best way to see the benefits of this strategy in action.

Let's assume you already own some high-quality, capital-efficient companies like Microsoft (MSFT) or Hershey (HSY)...

If you limit yourself to traditional investments, you can't do better than stocks like these when it comes to building wealth.

But you can do even more with some options "frosting."

For example, as a Hershey shareholder, you can wait for shares to rise... however long it takes. But why not sell an option and collect cash early, just like the screenwriter?

Let's say you're sitting on 100 shares of Hershey for about $183.50 per share. Your total position would be worth about $18,350. In the next month or two, Hershey shares may rise or fall... and your wealth would do the same.

Instead, you could find someone to pay you cash today for the option to buy your stock at a later date. In the case of Hershey, you could have quickly entered an options contract to sell your shares on June 21 for $185. You could've sold this call for about $7.65 per share.

A standard options contract covers 100 shares. This means you'd collect $765, free and clear. It shows up in your brokerage account immediately. It's yours.

When the option expires in June, the call buyer – just like the movie studio from before – will decide if he wants to buy your shares of Hershey for $185.

If shares trade for more than $185, the buyer will take them from you... paying $1.50 more per share than you could have gotten by selling them on the open market. That's in addition to the $7.65 per share you received for agreeing to the deal.

Meanwhile, if Hershey shares trade below $185, the buyer won't want them. In that case, you could sell another call option and collect cash again. When that expires, you can do it again... and so on.

If you did this every two months, you could collect about $4,600 in a year on your shares of Hershey – and that's if the stock doesn't move a penny.

On an annualized basis, that's an extra 25% per year of income on your position in Hershey.

(Please note: This isn't a formal recommendation on HSY today. It's just an example of how we'd trade a covered call on a stock we own and love.)

Selling covered calls also lowers your risk relative to holding stocks the usual way. Let's see how...

Again, if you own 100 shares of Hershey at $183.50 per share, you have $18,350 at risk. The stock could theoretically go to $0. But if you collect $4,600 over the course of the year, you now have only $13,750 at risk ($18,350 minus $4,600).

On a per-share basis, if you paid $183.50 per share for Hershey but sell a single two-month call for $7.65, your "cost basis" is now down to $175.85. This reduces your risk if (and when) the stock falls.

On the upside, if shares stay at $183.50, you've made a profit of 4.2% ($7.65 on $183.50) without the stock even moving. And you made that in two months.

Think of a covered-call trade this way: You're getting a gambler to agree to pay you now for the right to pay you even more later. That's a winning move.

Now, you may still have no interest in options. That's OK...

After all, this strategy doesn't produce "home runs." In fact, selling covered calls can limit your upside if your stock makes a big move. (For example, if Hershey shoots up to $225 before expiration, you'll be stuck selling shares for only $185 apiece.)

So if you think building wealth comes from making wild speculations, then collecting cash payments from high-quality stocks over and over again may not appeal to you.

But if you've learned enough to understand that real wealth comes from limiting risk, you may never go back to investing the usual way again. In fact, we can make it even simpler...

We can actually trade two ways... We sell covered calls as we described here. And we also like to sell "puts" – to options buyers in the market who are betting on shares of a particular stock to fall.

Selling covered calls and puts may sound like opposite trades. But they actually make nearly identical returns on your money with similarly low risk.

And if you decide to sell puts, it's an even easier strategy... You only have to make one trade, and you don't need to own any stock up front.

Selling something you don't own might sound impossible. But it's just the vocabulary that makes it confusing.

Here's how it works...

Like selling covered calls, when you sell a put, you're selling an options contract to a buyer who's making a leveraged bet... which can pay off massively for them if they're right. We're just betting that they're wrong... and that we'll come out all right even if they are.

When there's fear in the market, selling puts can work incredibly well. We can use investors' anxiety to help us make more money up front – much like selling insurance.

The main difference is selling puts requires a surplus of ready cash, as opposed to owning shares of a stock up front with a covered call. While covered calls might leave you holding shares you already own, if you sell puts, you may be obligated to buy those shares at an agreed-upon price at a later date.

That's why we only recommend trades on blue-chip stocks that we'd want to own anyway. But no matter the route, the end goal is the same... generating safe, steady income without touching a single share of stock.

Let's walk through an example of a put-sell recommendation...

Last June, I recommended Retirement Trader subscribers sell put options on American Express (AXP), one of the largest and best credit-card companies in the world.

Not long before, everyone was worried about a widespread banking-system collapse.

We didn't buy the fear. In June, folks were still skeptical about whether the banking "crisis" was behind us. But in our view, the financial sector was recovering...

This made it a good time to take advantage of the fear and sell put options on a solid financial company like American Express. Given its strong customer base, the company was forecasting 15% to 17% revenue growth even with the potential for a slowing economy. And based on our analysis, the company was right to be optimistic.

Subscribers who followed our advice sold puts expiring in August 2023 with a strike price of $165 and collected $470 in income up front.

That obligated the put sellers to buy AXP at $165 a share if the stock fell below that price near the August 18 option-expiration day.

Buying 100 shares at $165 each represented a potential obligation of $16,500. (Remember, one options contract equals 100 shares.) I always tell folks to keep this potential cash obligation in mind when using this strategy.

But as we explained in our recommendation, if the fearful investors were wrong – and AXP traded for more than $165 on August 18 – subscribers wouldn't have to buy the stock. They'd just get to keep the $470 "premium." That's a simple 3% return in about two months based on the $16,500 potential obligation.

Maybe that doesn't sound like a lot. But if we put this trade on every two months – assuming all prices remain the same – this could return 19% a year.

(Again, I'm not recommending selling this particular put on AXP today, as we closed this trade last year.)

Of course, if shares of AXP fell below $165 back on August 18, you would have kept the income payment, but you'd have needed to buy the stock at $165 per share. If that happened, you'd own a blue chip – a stock that we'd love to own in any portfolio – for a discount.

You'd be buying shares for $165 each... But remember, you'd have collected $4.70 in premium. That means your true cost in the trade would be $160.30. You could then sell your shares anytime they traded above $160.30... or just sit back and let the share price rise, collecting $2.80 in dividend payments each year.

It's hard to lose with this strategy if you only sell options on stocks you'd love to own.

I've been using these strategies in Retirement Trader since 2010...

My team and I have recommended 736 different positions... and 696 of them have been closed for profits. That's a win rate of 95%, and we haven't lost a trade in more than three years... during a streak of 211 wins.

We returned average annualized gains of 19%, 20%, and 22% since 2021.

At the same time, our covered calls have posted returns that consistently beat the market. Over the years, this strategy has produced an average annualized return of 12.1%.

When you post gains with a win rate above 90%, it's easy to stay in the market and keep trading. And when you can earn 12% or more a year, your wealth compounds at an astounding rate.

The great thing about learning how to trade options is that you'll find you can do it in any market environment and collect hundreds – or even thousands – of dollars in income each month. And the opportunity only gets better when volatility strikes.

We get to collect more income, more often, with less risk using my No. 1 favorite strategy. So if you want to learn more – and understand how you can put this moneymaking secret to work – click here.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

Editor's note: This year, the CBOE Volatility Index – known as the market's "fear gauge" – is marching higher. We're heading deeper into a tumultuous election year... And that means 2024 could be the best year yet for Doc's options-trading strategy. That's why right now, he's revealing the powerful "instant cash secret" behind his 200-plus-trade win streak (with more wins piling up)...

Find out how it could help you add thousands of dollars to your income each month – regardless of the twists and turns on Wall Street or in the White House. Get the full details here.