Here we are with the second part of your special income training.
Go here right now to confirm your spot. My LIVE webinar will show you everything . . . including three live trades.
Today’s training is focused on the #1 problem: managing trades and reducing risks. So, I’ll start by addressing this key issue that limits most people’s success.
QUESTION: “What is the best way to protect my returns in case of a bad earnings release?”
I have received this question in droves lately, so I want to discuss one of my favorite ways to protect your hard-earned gains.
For most individual investors, buying put options is the answer. Unfortunately, this strategy is one of the worst ways to protect stocks in your portfolio.
However, coupling a long put with a covered call provides the ultimate protective strategy.
Why? Because unlike buying a put for protection, you can insure a stock against a decline without the need to spend much, if any, capital. The strategy is known as a collar and I’m going to show you how to use it on one of the best-performing stocks. But, this strategy can be applied to almost any stock in our portfolio.
To build a collar, you must own at least 100 shares of stock and buy an out-of-the-money put option. This gives you the right to sell those shares at the put’s strike price. At the same time, you sell an out-of-the-money call option, which grants the buyer the right to buy those same shares at the call’s strike price.
Poor Man’s Covered Call Collar = (LEAPS contract + out-of-the-money short call + out-of-the-money long put [with different strikes])
Because you are paying and receiving premium, the collar can often be established for zero out-of-pocket cash, depending on the call and put strike prices. That means you are accepting a limit on potential profits in exchange for a floor on the value of your holdings. This is an ideal tradeoff for a truly conservative investor.
I’ve recently earned 59.4% profits in the SPDR S&P Oil $ Gas Explorer $ Production ETF (XOP) in the last 18 months. It’s my goal to try to keep some of my gains by implementing a collar strategy.
If you owned XOP, you might want to consider the following:
Step 1: So, with XOP currently trading for $32.32, you need to sell an out-of-the-money call as the first step to protecting your profits. XOP’s $35 September 2017 call options are paying roughly $0.95 per share, or $95 per 100 shares. You could sell call option contracts on your 100 shares, be paid $95, and then use the money to buy the put contracts you need to fully protect your stock.
Step 2: You can then buy the out-of-the-money put contracts at the September 29 strike for roughly $0.87 per share, or $87 per 100 shares. In this case, since you want to “insure” 100 shares, you would purchase one put contract for a cost of just $87.
In this case, as well as many others, you will end up ahead, with cash in your pocket from the call options, while buying put options for insurance. We will make a paltry $8 from this collar. But that’s not really the point of using the strategy.
Here’s the catch: your upside is now limited. If XOP advances above $35 per share, at options expiration in September the ETF would be called away from you. In other words, it would be sold for you at $35 per share. So, even if XOP advances to $40 or higher, as long as you have these open call options, you are forced to sell at $35. You keep the premium of $95, plus your capital gains from selling at $35.
But remember, with this strategy you’re insured against a disaster, and limited upside is the only shortcoming.
Therefore, you can use this strategy when you’re on the defensive, concerned about protecting your stocks from potential losses, and don’t see tremendous upside in the near term. In this case, any move below $29, roughly 6% lower than the current price of the stock and the position will be fully covered.
The use of collars, particularly in volatile markets, has become more and more widespread. Don’t allow yourself to miss out on what is the future of investing.
Be SURE to check your email tomorrow: I’ll be sending Training #3 directly to your inbox.
Tomorrow I will sit down to a conversation with my colleague – Ian Wyatt. We’ll be recording our conversation from the Wyatt Research conference room, and sending you an access link.
Ian will be asking me TOP QUESTIONS from Strike Price readers. You won’t want to miss the conversation.
One Important Reminder: My live training is going to reveal everything.
I’ll show you my top 3 Poor Man’s Covered Call trades. Plus, I’ll answer your questions. And even explain how you could trade YOUR favorite stocks.