The Weekend Edition is pulled from the daily Stansberry Digest.
I know without a doubt that most of you won't read past the next sentence...
That's because this entire article will focus on options.
It's simply the way the world works... As soon as I say "options," folks click away.
If you have a well-allocated portfolio and you're happy with your investment returns, learning how to use options may not be a priority for you. That's OK. I get it, I do. But... you'll miss out on an easy investing lesson.
Other folks will want to read on. Because if you'd like to earn higher returns in the years ahead, options will help you do that. More important, options will actually help you reduce the risks of investing in the stock market.
They can both reduce risk and boost returns. It just requires making a small change to the way you trade and invest.
If you don't like letting your wealth rise and fall with the whims of the market, I hope you'll pay close attention... because I can help you do much better and avoid the frustrations.
Today, I'll talk about why investing in options can be safer and more profitable than the market as a whole... especially over the next five to 10 years.
I learned the world of derivatives when I was recruited by Goldman Sachs out of business school...
At that time, it was the most exciting place to be on Wall Street. The market for derivatives (a more wide-ranging term that includes options) had been around for a while, but it was just then maturing into a monster.
We'd march into the offices of CEOs and CFOs and show them how they could reduce their risk while still earning great returns. And we were paid crazy amounts of money to do it.
I thought we were playing the short game. Surely, once people found out how easy options were, the jig would be up. Our options techniques were too easy to use to remain a secret. Soon, everyone would know about them.
Thirty years later, that has never happened...
People still don't take the time to learn how to build wealth with options. Big corporations still go to Goldman and JPMorgan Chase and pay millions to have someone else put these strategies to work.
And the way the markets look today, I think options will serve you richly in the years ahead... because returns may be especially hard to come by through most other trading strategies.
Overall, I'm a market optimist...
Investing in stocks over the long haul is the best way to build wealth.
From 1950 to the end of 2022, stocks have returned 7.9% per year, according to data from Nobel Prize winner Robert Shiller. So when folks plan their financial future, that's roughly the annual return they expect to get over the next 10 or 20 years.
But I've always been skeptical that even 70-plus years of data are enough to really understand the markets.
And between the economy, technology, and politics, things are drastically different than they were in the past. What do stock market returns from the 1950s tell us about returns in the 2020s?
Again, I'm a bull. But the conventional wisdom that stocks will return 7% or 8% a year has big flaws.
For one, that average doesn't hold up over the very long term or over every period...
Take a wider look from 1871 to 2022, and stocks returned just 4.6% a year (again, using Shiller's data). And we've seen long stretches where stocks have stayed flat...
From 1929 to 1954, stocks returned nothing. From 1973 to 1985, stocks returned nothing. From 2000 to 2013, stocks returned – you guessed it – nothing.
And if you want to look at the past five years – which included a mega-pandemic bust, a speculative boom, a year-long crash, and a return to a bull market – well, that just proves that you can't depend on consistency from the stock market.
If you were saving and eyeing up growing your money to retire, well, depending on the timing, you just might have been out of luck. Your dreams of getting wealthy and living a comfortable retirement could have been dashed.
What if one day we look back and say the same thing about the coming decade?
What's more, folks certainly think stocks are expensive today...
The cyclically adjusted price-to-earnings (or "CAPE") ratio measures the valuation of stocks with a long-term view that spans the business cycle. It doesn't help predict the market in the short term, but it does give a good idea of what may happen over a longer period of time.
Today, it says stocks are expensive...
Depending on how you measure, historically, buying at a CAPE ratio of 30 means you can expect returns as low as 1.9% a year for the next five years.
Meanwhile, interest rates are rising off historic lows. That could spell the end of the 30-year bull market in bonds.
And we haven't even talked about the inevitable market pullbacks and corrections along the way... or the potential for bigger crashes.
In total, it's entirely possible that no investment assets will deliver returns to anyone for years.
Except for options, that is...
When used correctly, options reduce the risk of holding stocks...
That's right. Most folks think of options as a type of leverage or a way to make wild bets. But we love to use them to do the exact opposite.
Essentially, I see options as this sort of mathematical guarantee. And you can learn why with even the most basic understanding of options.
Our strategies are simple...
One of our favorite ways to use options is to own a stock, and then sell an option contract against it. When we sell that contract, we receive cash up front. (There's more to it, but that's all you need to know to understand how options reduce risk.)
For example, if we buy a stock for $20 and sell a $1 option against it, we've collected $1. The stock is still trading at $20, but our "cost basis" is now $19.
Of course, the risk when you hold a stock is always the same. In theory, any stock can go to zero, but let's assume you're using a stop loss and you'll sell if it falls to $15.
Without the option, you hold a $20 stock that cost you $20... and you can lose up to $5 per share if it falls to $15. With the option, you still own a $20 stock, but it only cost you $19. You only have $4 at risk if it falls to $15. In this example, by taking in the extra $1 as income, you just cut your risk by 20%.
Earning option income lowers your cost basis, making it less risky than holding the exact same stock.
There is no other way to reduce your downside in the market like this simple options strategy – one where you get paid up front.
If you hated watching your stocks drop in 2001, 2008, or 2022, options make those times much less painful.
And options can satisfy the desire for returns as well...
Options deliver better returns when markets are down or anemic. At times when markets rise quickly, this options strategy can lag on total returns – but still provide better risk-adjusted returns.
We can prove this unequivocally...
Like I said, the basic idea of my options strategy isn't a secret. I learned it on Wall Street three decades ago. As such, finance guys and academics have studied it in all sorts of ways. I even hired someone whose specialty is econometrics (which looks at economics through statistical methods).
My team and I spend weeks putting together research to find the most promising opportunities for our Retirement Trader advisory. That strategy has rewarded our subscribers handsomely.
But you can make a "For Dummies" version of the strategy. You don't have to think about the economy, or the businesses behind the stocks you own, or the value they possess.
You just take the "market return" and use a few simple rules to set up the options strategy. This isolates the pure returns that the options themselves generate.
From the end of June 1986 through the end of last month, this options strategy has returned 8.2% a year, while the S&P 500 Index (with dividends reinvested) has returned 10.5%.
Meanwhile, the standard deviation on the options strategy was 12%. The same number for the market is 17%. In other words, this strategy requires roughly one-third less risk.
Put another way, when the tech bubble burst in 2002, stocks fell 22%. A portfolio built from this options strategy would have dropped only 7%.
During the financial crisis of 2008, stocks fell 37%. The options strategy fell just 28%. Again, that's a 25% reduction in volatility and angst.
In 2022, when the stock market fell 19%, the options strategy fell just 11.3%.
In short, this strategy performs better in down or flat markets, and it performs just about as well when the market rises. It can protect you during the scary times, while providing good returns during all others.
Again, these quoted returns assume no thought, no research, no insight. These are just the returns that a pure, dumb, option-trading robot could create out of thin air.
In the meantime, it's important to realize we can do much better than this "For Dummies" version. Our option trades regularly target annualized gains of greater than 20%. And it's far simpler than you might expect.
Unfortunately, most investors won't take the time to figure this stuff out...
I can't think of a bigger missed opportunity.
Investors don't want to learn about options because it requires learning some new terms and using some basic math. Busy folks just aren't willing to sit down and learn something new.
To me, that's a boring and poor way to live.
But more important, what if I told you that you can learn the basics of options in an afternoon? Then you can make a trade or two, and you'll completely understand this simple strategy.
Considering that these few hours of work can help you earn tens of thousands of dollars over the years to come, it has to be the highest "hourly rate" you can make.
Others learn the basics but still get overwhelmed. For example, when you log in to your broker's platform and open an "option chain" that displays all the available options on a stock, you suddenly see hundreds of choices.
But once you've learned our strategy, you can narrow that down to only a few potential choices, and you can decide which one works best for you in less than two minutes.
Most "traders" jump into options and do it wrong, lose money, and never try it again. Don't be like them.
My strategy fixes every one of those problems...
It's simple, quick, and has an extraordinarily high win rate. (For the record, since we launched my option-selling service in 2010, we've earned and published the profits on 663 of 703 positions, a win rate of 94%.)
If you need to keep earning returns to secure your financial future, this strategy is for you.
If you prefer less risk and smaller drawdowns, this strategy is for you.
And if you like higher returns – and who doesn't? – this strategy is for you.
Don't be afraid of options. Now is precisely the time to learn to use them... the right way.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor's note: Doc has booked a 94% win rate in Retirement Trader since 2010. It's our most successful research product... And we recently held a demo to show off the secret behind it. In it, a professional athlete puts his own money on the line and attempts to collect $4,000 in 60 seconds using one of Doc's favorite options strategies. As you'll see, learning this technique is easier than you think... Watch the Real Money Demo here.