(Before It's News)
Steve’s note: For the next few days, I’m handing DailyWealth over to my friend and colleague Dave Eifrig. On Wednesday, Dave is hosting a free training event to show viewers how to collect thousands of dollars per month in extra income. Today, he explains why this strategy may be simpler than you think…
If you’re like most investors, you’ve been led to believe that it’s impossible to earn large amounts of investment income without taking big risks.
This idea – which you’ll hear from many financial advisors and brokers – is simply wrong.
It is possible to earn double-digit annual yields on your money – safely – by selling options.
So why doesn’t everyone use this strategy to earn consistent income streams? Below, you’ll find the five common objections I’ve heard from readers or that I’ve found on the Internet… and my responses to them.
REASON NO. 1: Option-selling strategies like covered calls are too risky. You’ll earn 5% in premiums, but if the stock falls 25%, you’re still down big!
This objection is 100% valid. The way most people approach covered calls is risky. (If you’re unfamiliar with covered calls, I encourage you to read this essay
.) These folks buy risky stocks because risky, volatile stocks typically offer larger cash premiums than safe, stable blue chips. But most people end up losing on risky covered-call positions because their stocks fall in value.
A risky mining stock or fad retailer can fall 20% in one day. That’s why we avoid them… It’s too much risk in our retirement accounts.
By sticking with dominant, stable stocks like Coca-Cola (KO), Intel (INTC), and Johnson & Johnson (JNJ), you can enjoy a tremendous layer of safety. These stocks generate big cash flows, pay steady dividends, and have strong balance sheets and great brands. You’d be happy to own these stocks for many, many years.
Reaching for extra premium in risky, volatile names is a loser’s game. Leave the risky names for the “gamblers.”
REASON NO. 2: Selling options is too costly. It generates too many brokerage fees.
Selling options does generate more brokerage commissions than conventional stock ownership. But if you sell covered calls about six times a year on any given position, it’s not a big problem.
For example, if you have a $25,000 portfolio, you might perform 20-30 covered-call transactions per year. This many transactions would cost about $200-$300 with an average low-cost online broker. The income you generate by using an intelligent covered-call strategy more than makes up for the increased brokerage fees.
If you have a small portfolio (like $1,000-$2,000), excessive brokerage fees are a danger. Your account is also too small to buy 100 shares of most blue-chip stocks (which is necessary for trading options – 100 shares covers one option contract). If you have a small amount of capital, you’ll need to accumulate more to make selling covered calls a viable plan for you.
REASON NO. 3: Selling options is too much work.
I always laugh at this one. Why? Because most good things in life require work!
If you’re not willing to learn something new and do just a little bit more work to generate much higher returns, then investing your money on your own is probably not for you. You’re better off giving your money to a broker or a mutual-fund manager.
To achieve great results in any walk of life, you have to do some work (often a great deal of it). To get a high-paying job, you have to learn a useful skill. To start a great business, you have to learn how to provide customers with useful services or products. In order to achieve better results in anything, you have to learn… And you have to do extra work.
This work – of selling a few options each quarter and monitoring your portfolio – will take about 30 minutes a month. It is well worth spending that extra time to generate safe, double-digit yields on a nest egg.
REASON NO. 4: Selling covered calls is too hard to understand.
I know the world of stocks and stock options can be intimidating. But I learned this stuff just out of high school years ago. The finer points, I learned at Goldman Sachs and on Wall Street. If I could get started selling options at 17, anyone can learn it.
By selling a covered call, you are doing two simple things:
||You are buying a valuable asset (in this case, a stock).
||You are selling someone the right, but not the obligation, to buy that asset from you. You collect instant cash for doing this.
That’s it. Don’t worry if the smaller details sound confusing at first. Learning how to do most things requires some work… and multiple reads of how-to guides.
Once you get the hang of things, selling options is as easy as managing a checkbook. The only math involved is on the fourth-grade level.
REASON NO. 5: I can’t trade options in my IRA.
This is not true. You can sell covered calls in an IRA. You just need to contact your broker and tell him you want to be approved for selling covered calls in your IRA.
If you’ve ever had any of these five misconceptions about selling options, I hope you’ll reconsider them today…
It’s natural when starting something new to feel nervous and a little unsure of what you’re doing… I urge you to push through those feelings. Stansberry Research subscriber K.C., a registered nurse, did. And here’s what she told us…
I just started option trading last Jan. (2012) and it wasn’t until May (2012) that I had enough nerve to sell any puts… and wouldn’t you just know it, I sold 3 puts last May and ALL 3 got “put” to me. But I did NOT panic, I sold covered calls on all 3 of them at least twice and 2 of the stocks eventually got “called” and I made over $10,000 in capital gains! I totally understand that Doc’s trades are STILL WINNERS even when you end up buying the stock… you’re just not done making money yet. I feel much more confident making trades that Doc suggests over my own!
In short, if you’re willing to take a little time to learn something new and you follow a strategy of only selling options on dominant, stable stocks, you CAN safely earn annual double-digit income streams in the market.
Here’s to our health, wealth, and a great retirement, Dr. David Eifrig, Jr.
: If you’d like to learn more about Dave’s options-trading strategy, he is broadcasting a free, online training event on Wednesday. You’ll get an insider’s look into how selling covered calls can help you safely collect thousands in extra income, every single month. Click here to reserve your spot