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95% of all investors are making a huge mistake. They fail to take a few easy steps to insure their investments and protect their wealth.
Consider it this way: you buy homeowner’s insurance to protect the value of your home. You buy car insurance to protect you from a crash. You use insurance for just about every valuable asset you own – because it’s simply too risky to do without it.
Today, I want you to just consider a simple way you can protect your portfolio with a form of insurance – and even better – get paid along the way.
If a safe, steady income is your goal, you should strongly consider using this special form of insurance. I’m talking about options – but for a minute, forget that I even mentioned the word. That’s because, at a basic level, options are just another form of insurance.
For instance, take covered calls, the safest and most recognized of all options selling strategies. The strategy is the only options selling strategy allowed in retirement accounts.
But why?
Selling a naked put is the same as selling a covered call. They have identical profit and loss profiles. So why can’t investors use them in retirement accounts?
Before I go any further, let me explain a little about naked puts. A “naked put” is an uncovered put option that you have sold. It is “uncovered” (or “naked”) if you have not shorted an equivalent number of shares of the underlying stock. If the put option is assigned to you, then you will have the shares put to you at a price equal to the strike price per share.
How to Use Naked Puts
Green Mountain (NASDAQ: GMCR) shares are trading for roughly $122.
You aren’t necessarily pleased with buying the single-cup coffee manufacturer at current prices. But at $95, you would be willing to take the plunge. So you decide to sell one naked put at the $95 strike price.
As a result, you immediately receive $150 in options premium. You’re essentially being paid to agree that if GMCR drops below $95, you will buy 100 shares at your desired price of $95. Since it cost you $9,500, and you earned a $150 premium, your total cost for 100 shares is $9,350. Or $93.50 per share…28.5% lower than the current price.
The most you can make with a naked put is the amount you sold it for, in this case $150. As long as GMCR doesn’t move over 28.5% lower (below the short strike of $95) at the time the put option expires in August you keep the entire premium.
How a Covered Call Would Work in the Same Case
Same scenario: GMCR is selling for $122 a share. You buy 100 shares and sell a 155 call for $1.50.
So, the most options premium you can make is if GMCR stays below $150 at the end of August expiration. You will make the amount of premium per share or $150. Same profit as in the naked put case.
In both strategies, you are exposed to the same limited upside and unlimited loss potential. However, again that is why we only use blue-chip stocks…we don’t want to run the risk of losing all our capital holding a risky stock.
Both are conservative, yet highly profitable, strategies for earning extra and instant payouts from the safest blue chip stocks.
I’ve been using these same techniques to make safe, consistent income in the High Yield Trader portfolio. In fact, I’ve managed to bring in a monthly income of 3% selling puts in GMCR. I added the coffee roaster/single cup manufacturer to the portfolio ten months ago and have brought in roughly 30% in total income.
If you would like to learn more about how to sell puts or covered calls for safe monthly income click here.
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