After wrapping up 2019 with an incredible 97% win rate — readers saw the chance to make money on 35 out of 36 recommendations — I admitted I was looking for an even better number in 2020. Before 2020 began, I was confident that one of my top strategies would continue to thrive in the next 12 months.
I wanted a 100% win rate. Yes, it’s unheard of to make dozens of trade recommendations a year and walk away without a single loss. But that’s exactly what I planned to do.
I said it on December 3, months before anyone knew the COVID-19 pandemic would wreck the stock market.
The sharp volatility has created one of the most challenging years we have seen yet for trading in the stock market.
It hasn’t deterred me though. I still believe I can finish 2020 with a 100% win rate. And we’re off to a great start.
Today I will talk about why I still think we’ll finish the year perfect, and what tools we can use to get there.
Everyone Should Be Using This Strategy
When I first considered shooting for a 100% win rate, I knew it was a stretch.
But the successful 2019 performance had me even more confident. And we came out strong.
Already in 2020, we have pocketed a string of seven quick gains, averaging a return of 10% per trade recommendation.
And that’s during the current crisis.
It hasn’t been this pretty for every recommendation, but we are on track to deliver another excellent record for the year.
And I want you to see success like this too. So, today I’ll peel back the curtain to give you the details on my No. 1 strategy in 2020. It also is one of the most straightforward concepts I use: selling put options.
If you haven’t done it yet, it may sound complicated at first. But once you boil down the approach to my simple three-step formula, it doesn’t get any easier.
First, you identify stocks that you already want to own. This can be any type of company — tech, health care, consumer-based — it doesn’t matter. Just find great companies you want exposure to.
I say that because when we sell put options, our biggest risk is that we’ll end up buying shares of the company.
That’s it. That’s the biggest risk.
So, if you are only implementing this strategy on stocks you would already love to own, then it’s a win-win scenario — you either grab a quick gain or end up getting paid to buy shares of the company.
On the surface, it sounds like everyone should be doing this.
Making Put Options Work for You
My second step is about the price you pick, also known as the strike price.
Remember earlier how we said the risk was that you’d have to buy the stock? That means that if the stock falls, you end up paying the price you selected — not where it is currently trading.
That means if shares fall to $0, you would still end up paying a certain price for it. But the best part is that purchase price is something you pick. So, you can control your risk.
I recommend selecting a price that you would want to own the stock at, that is at least 3% below where the stock is currently trading. That way you’re aiming for a discount.
And you want to get paid for taking that risk. When you sell a put option, you collect a premium — it’s your income for agreeing to possibly buy the stock.
My goal is to generate at least a 3% immediate return on the cash I’m risking for the trade.
While a 3% return may not sound like much, it’s the minimum I look for. And it comes in as little as one month. I also have some opportunities that return upward of 10% from a single trade recommendation.
This premium is what selling put options is all about.
We are getting paid to possibly own a stock we already want to own today, at a discount to the price at the time of the trade.
It doesn’t get any better than that.
These are short-term opportunities to collect steady income, over and over again.
Now, the last step of choosing an options contract is to determine how long you want to keep this contract open. There are different time frames that you can pick, but I like to go out three months or less.
This maximizes the income we collect, while keeping our market risk to a minimum, thanks to what’s called the “time value” price that makes up the option price.
The further out you go, the more “time value” you can collect on an option. But, beyond three months, it doesn’t increase as rapidly. Sooner than three months, and we simply don’t collect enough income.
Three months is the sweet spot for maximum income.
No other approach will deliver a near-100% win rate with dozens of recommendations. This one does. Each and every year.
I know I went through all this a little fast, but it’s one of the most profitable investing strategies that exists.
If you want to learn more, my colleague Matt Badiali put together a special presentation to share the details with you. Click here to see why this is such a great strategy.
Chad Shoop, CMT
Editor, Pure Income