In a world of increasingly low and now even negative interest rates, it’s almost unbelievable to hear of an investment technique that could yield 1% to 3% a month with any degree of safety.
But this week, I’m hosting a live event focused on put selling – a strategy that can conservatively hand you that kind of yield with consistency.
(Click here for more information on how to register.)
1% to 3% per month probably doesn’t measure up for most investors. But consider that you can’t even find a junk bond with that kind of yield.
We have to remember though: this lack of yield in the investment world is, as you probably know, anything but normal. We’re living and investing in strange times.
Some things never change, however.
So I wanted to take a step back and look at put selling. It’s an investment strategy my High Yield Trader subscribers have been using for the past three years or so to create regular income.
And I want to focus even further on selling puts on gold stocks.
In a sense, I am cherry-picking this investment ̶ but not in the normal way you might think. In the investment research world, many people point out that it’s easy to launch 100 different strategies and then, after the fact, tout the ten that worked the best, ignoring the other 90 that didn’t work…
But I’m doing something different with today’s example.
I’m going to talk about an income strategy my readers have used on gold stocks: one of the WORST-performing sectors of the past five years.
I’m talking specifically about the Van Eck Gold Miners ETF (NYSE: GDX).
In short, we’ve been selling puts on GDX since May 22, 2013. That was when GDX was about nine months into a 3.5-year correction. If you owned gold stocks at any point in the past five years, you know how challenging it was in this space.
It was truly ugly.
After a huge run-up starting in January 2016, GDX is just now breaking even from when we started selling puts more than three years ago.
In other words, had you bought GDX in May of 2013, you’d be back to breakeven.
But we sold puts, and brought in about 33% in premium, cash secured.
Even more impressive, selling puts is supposed to be a bullish strategy, but the last three years were anything but bullish for gold stocks. If you had to pick a bad time to sell puts on GDX, you could scarcely find a worse time to do so than the last three years.
So that’s what I mean when I say I’m cherry-picking. Gold stocks were probably the worst asset class to sell puts against. The market dropped off a cliff from 2012 to 2016. And my put selling portfolio still made money!
I am hosting a free put-selling event this week. If you’re interested, I hope you’ll register. My boss, Ian Wyatt, is putting up $10,000 of his own money, and we’re going to see if we can earn $120 in just five minutes, selling puts.
As you may know, selling a put obligates you to buy shares of a stock or ETF at your chosen short strike price if the underlying asset closes below that strike price at options expiration.
And that happened to us four times. For some investors, getting put shares is the worst-case scenario.
But even after getting put shares, we still ended up collecting 33% in put premium.
As a side note, we also sold covered calls after we were put, and collected even more income – but I’m not including those contracts in my 33% calculation.
Today, we’re still selling puts on GDX. I personally believe we’re going to see gold stocks move much higher over the coming months and years, but my put-selling track record tells me it doesn’t matter if I’m wrong: we can still make great income (between 1% and 3% each month) even if GDX moves lower.
For example, let’s say you wanted to buy GDX but not at the current price of $27.64. You prefer to pay $25, a 9.5% discount to the current price of the oil ETF.
By selling the September 25 puts you can bring in approximately $0.75, or $77 per contract. In this instance, you are selling the put with the intent of buying the stock (100 shares per options contract sold) for $25 if, at expiration in roughly 52 days, the stock is trading at or below $75.
Selling the 75 put on a cash-secured basis requires you to have $2,500 of cash in your trading account.
In many cases, selling puts only requires 20% of the $2,500, or $500, of the cash needed to purchase 100 shares of GDX at $25. But retirement accounts and certain brokers require the puts to be cash-secured. And in this case, that would be the $2,500.
The return on the trade is 3% over roughly 52 days, or 21% annually. And if the puts were not cash-secured, the return would be significantly higher.
As you can see from the options chain above, you have other levels where you can sell puts. If you choose to sell a strike closer to the current price of the stock ̶ say, $26 ̶ you could bring in even more premium, but the probability of success goes from 69.62% for the 25 puts to 61.37% for the $26 puts. So, you do have to make a few decisions as to how much risk you are willing to take based on the strike you choose.
Back to our example. We decided to sell the September puts for $0.75. The $75 is ours to keep regardless of what occurs with GDX.
If the stock closes at September expiration above $25, we keep the $75 of premium and oftentimes repeat the process by selling more puts, maybe at the 25 strike or possibly at a different strike price. It truly depends on where the stock is trading at the time we sell the puts and how much premium we wish to bring in.
If the stock trades for less than $25 at September expiration we are assigned the stock for a cost of $2,500, 100 shares per put contract sold.
GDX has been a part of our Selling Puts Portfolio in the High Yield Trader service for over three years. At the time we added GDX, the ETF was trading for $27.31; now it trades for $27.64. However, over that three-year period we have sold puts 25 times for a total premium of $9.14. Subscribers have the ability to either use the premium to lower the cost basis of the ETF or to use as income.
To learn more about how I buy stocks for lower prices and generate a steady, conservative income stream by selling puts, I invite you to check out my upcoming webinar for my High Yield Trader service. Just click here for more details and to get registered for the event.