Nick’s Note: Our mission at the Daily is to show you how to get a little bit richer every day. Our colleague Jeff Clark has mastered the trading game and knows how to generate money from the markets. If you’re looking for an extra source of income, Jeff has some valuable insights for you today…
It’s fun to profit on a trade when you’re right. But it is even more enjoyable to make money when you’re wrong.
Smart traders know how to set up a position to profit no matter what the outcome. Let me give you an example…
I recommended several trades a while back on AMAG Pharmaceuticals (AMAG). One trade made 19% in just five days. Another trade earned 29% in a little less than two months. But the most profitable outcome was a gain of 42% in four months… and I was wrong on the trade.
In early April 2016, I recommended a position in AMAG at about $27 per share. It was a fundamentally cheap stock. And the technical pattern looked bullish. So I was willing to bet the stock would be higher in a few months.
I was wrong.
We held the position for just under four months. By the time we closed the trade, AMAG was trading about 3% lower than it was when I recommended it. But the trade I recommended still made money.
When looking for a stock to move higher, most traders are either going to buy the stock outright or buy speculative call options on the shares—which go up in value as the stock rallies. Neither of those strategies will profit, though, if you’re wrong and the stock actually drops.
In fact, in the case of buying call options, you might lose money even if you’re right and the stock goes up—because the stock has to go up at least enough to cover your cost of the call options.
That’s why the best way to ensure a profit on a trade—even if you’re wrong—is to craft a position that gives you some room for error… which is the magnificent benefit of selling uncovered put options. You can be wrong on the direction of a stock and still make money off it.
By selling uncovered puts, you actually get paid just for agreeing to buy a stock at a specified price. If the stock never drops to that price, you never have to buy it… But you still get to keep the money you collected for making the agreement.
If the stock does fall to that price, you’ll buy the shares at the price you were willing to pay anyway… and you’ll still get to keep the money you collected for making the agreement. So you get a discount.
Here’s how it worked with the AMAG trade…
AMAG was trading for $27 per share in mid-April 2016. The AMAG August $24 puts were trading for $2.55. So rather than buying the stock at $27, traders could sell the uncovered put option and collect $2.55 per share in exchange for the obligation to buy AMAG at $24 if the stock was trading below that level on option expiration day in August—just about four months later.
Since we collected $2.55 per share upfront for selling the put option, it gave us lots of room for error on the trade. As long as AMAG closed at more than $21.45 (the $24 purchase obligation minus the $2.55 received for selling the put option) on option expiration day in August, traders would be profitable on the position.
In other words, we didn’t need AMAG to go up in order to make money. We just needed it to not fall to less than $21.45 per share.
AMAG closed at $25.92 per share on option expiration day in August. The AMAG August $24 uncovered put options expired worthless. Traders who sold the options and held the trade through expiration earned $2.55 per share—even though the stock fell in value.
On a percentage basis… the $2.55-per-share profit works out to a 9.4% gain on the $27 stock price in just four months. That’s a pretty good return. But because the margin requirement (a good-faith deposit) for uncovered put options is only 20% of the value of the stock, traders could have recorded a 47% gain on the trade—in just four months!
That’s a terrific result—especially since I was wrong on the trade.
So the next time you’re looking at buying a stock, or buying speculative call options on a position, think about selling uncovered put options instead.
This strategy will pay off if you’re right. But it can also pay off if you’re wrong.
Best regards and good trading,
Editor, Delta Report
P.S. For over five years, I’ve been working on a new trading system involving “profit windows” for my subscribers. Some have already used these “windows” to book huge gains in a short amount of time, like 100% in under 24 hours… exactly what the system was designed for.
I’ve spent the last year personally testing this idea with my own money and have made 400% in 18 hours, 188% in 24 hours, 200% in eight days, 185% in 24 hours… and more.
But most importantly, a new “profit window” is slated to open on June 30. You can learn more right here…
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