Gone Without a Trace

This happened last year, too, about this same time of year. The markets had been pretty silent for a few months, so the blog looked pretty boring. Then, disaster began to strike.

Well, have no fear! The Village Id-Vestor is here once more!

Allow me to give a recap of what's been going on in the financial world.

UK? Voted to exit the European Union. The UK Pound dropped significantly in value, and there are lots of people predicting the end of the UK as we know it (I don't believe a word of it, personally).

US Stock market? All time highs.

Bond market? All time borings. Except junk bonds--corporate bonds with high default (bankruptcy) risk.

Gold and silver markets? The precious metals bottomed at the end of 2015 and have since been on a massive tear since January! I'll talk more about this later.

Oil market? Bottomed at decades-long low of around $26.03 in February, and has since nearly doubled, and is now around $45.

And that's the gist of things. There is uncertainty around every corner, with plenty of ways to lose money, but we're steering clear of all of them. So, what are we doing now with our money?

2016 Gains So Far

Well, as I mentioned above about the stock market hitting all-time highs, it's been a terrific year so far, and it's looking to be the best I've ever had, despite many analysts in finance not seeing much room for more upward momentum in stocks. The funny thing is, my success has hardly anything to do with these all-time highs. I've avoided these areas, because there are better places to put your money.

As I've mentioned before, when I see nearly all people piling into one end of the investing spectrum, it's a sure sign to run the other way. This time's no different. It's reason enough to exercise cautious optimism about markets in the short term... but ensuring that long-term, we're staying vested and not missing out on any huge upswings.

Because as we all know (or, as John Maynard Keynes put it), “The market can stay irrational longer than you can stay solvent.” In other words, things can seem like they're crazy, and we end up wanting to avoid crazy for the most part, but crazy can go on for far longer than we often think, and in the process of avoiding crazy, we miss out on huge opportunities.

This is one of the only pieces of wisdom I ever recommend you take from Mr. Keynes. And it's HUGE.

For the past several months, I've been in and out of many industries, locking in gains and banking as much coin as possible, while keeping my downside risk (risk of loss) to a minimum.

Keeping risk low involves investing in market bellweathers. I've done very well this year so far by gaining in solid companies like Cisco systems (4.7% in 37 days), Intel (2.3% in 28 days), and Whole Foods (.8% in 8 days--with much more on the way).

More speculative opportunities in other industries such as fertilizer (yum!), airlines, and tech, have produced gains of 2.4% in 30 days on Potash Corp, 7% in 6 days on JO, a coffee ETF, .6% in one day on Delta Airlines, and 3% in 38 days on Corning Glass--the company which makes the supposedly unbreakable glass for your smartphone (incidentally, my wife just broke the screen on her high-end cell phone a couple weeks ago, for what it's worth).

And lastly... making up the bulk of my gains so far this year, I've been speculating heavily in gold miners.

As I mentioned above, companies mining gold for business have had a tremendous bull market this year, and the average miner is showing gains over 80% since the market took off in February. Here's a cute little graph showing the change in value of this market index:

If you want to invest in a sector like this, but don't like the idea of taking the risk of putting money into individual companies, you can stick to the Market Vectors Gold Miners Index, which has ticker symbol GDX. Its chart is above. I've had six plays since January this year, netting about 9% over 120 days in shares of this ETF and its related call and put options.

I've also taken and closed several positions in individual companies. We earned 11% in thirty days on Silver Wheaton Corp, one of the stronger players in the precious metals mining industry. This is combined equity gains in addition to some call option premia.

As for a few miscellaneous precious metals miners, we earned 4.5% on Seabridge Gold in 22 days, 3.8% on Barrick Gold in 35 days, and 10.1% on Coeur Mining in 10 days.

Of course, there have been some losers along the way which have cut into my gains. I bought two VXX call options in April and March, which both expired worthless for a 100% loss, and sold two put options at a loss in April and Pay for 9% and 67% respective losses. Overall, these at into my gains my about $340, or 15%. However, I did book a gain of 49% on a VXX put option bought in June.

So far this year, the Village's overall portfolio percentage gain is sitting at 37%. If we can continue to replicate these gains throughout the rest of the year (why couldn't we?), we'll see annual gains this year close to 75% of our investable cash.

If you can remember, we booked annualized gains of about 16.39% last year. The quadruple those gains this year by keeping a solid asset base in safe investments, while also branching out into more speculative and lucrative investments, makes perfect sense right now.

Where am I headed now to invest?

That's simple. I go nowhere. I stick to the same simple strategy, in the same low-risk, high-reward sectors, with some minor adjustments.

First, I'll keep sticking with large caps stocks. There are plenty out there I'd like to own, but not at prices reflective of all-time market highs. I will probably end up selling puts on the shares I would be willing to own of some world-dominating businesses.

The reason I want to stick with this strategy is simple. My investing strategy doesn't include "swinging for the fences" or betting on huge gains in a short period of time. When it happens, that's great, but I don't ever count on it happening. My target is to increase my wealth by 1.5% every month, which will allow my money to compound enough for me to 100% quit my day job by the time my 40th birthday rolls around... which is quite a bit down the road.

As you can see, my conservative strategies are allowing me so far to beat that 1.5% per month requirement hand over fist. Six months into the year, and we're already up 37%.

How do I plan to hit that 18% per year to meet my investment objectives? I have spoken about this repeatedly on this blog, but I'll say it again.

I earn this income month after month by selling put options on stocks I'd like to own, and getting the premium for the option (have to pick the right stock at the right price of course), or by buying 100 shares of a company's stock, and selling a call option on the shares to get the premium.

The put option method is useful, because I can get high return with a low amount of capital. The bad thing about selling put options is leverage. If things move against me in a big way, I'll have to deposit a ton of money in my account to cover the stocks I end up having to own. For that reason, I keep things low-key in the put option department.

Rather, I prefer the second method. When I use the call option method, I guarantee myself the income from the option premium, I get any dividend paid over the period of ownership, and if the stock ends up going up in price, I also get paid capital gains.

Three ways to win. One is guaranteed. Two are likely. Three would be icing on the cake.

So, what else? I will be buying some smaller individual gold mining companies, this time without selling call options on the stocks, and plan to hold them through the end of the year at least.

The reason I'm going to forego the call options is to avoid the uncomfortable result of forfeiting potential gains. My small Village Portfolio would be up another 37% this year if I had simply held the stocks I mentioned above, instead of trying to get the guaranteed premium. The option forced me to sell the stocks at prices much lower than I could have sold them for, were it not for the obligation of the option.

Lastly... with any money I have left over, I'll likely study the charts on my Go-To list of stocks to see what is in buying range, where the volatility on these stocks is, and choose the best opportunities to buy shares and collect money selling call options.

If you don't know how to sell options on stocks you own, see what I've written on Short-Term Trading and Speculation elsewhere on this site.

How's Your Money Growing?

How are your investments? Are you learning all you can to make your money grow for you as quickly and efficiently as possible? If not, please take a look at the articles I've put out in the Investing section of the blog here. The worst thing you can do with your money is let it sit and do nothing for a long time. Your freedom is too important!

After all, the most important thing you can do with your money is learn to make it grow while you're sleeping.

Live long and invest,

Jeremiah

I wish I could sit here and tell you I have a "golden handcuff" problem with my current job.

You see, a "golden handcuff" is a situation where you have a job or a career which pays you obscene amounts of money or benefits, but at a price. That price you pay is usually your freedom--freedom to pursue other employment, freedom to spend your time as you wish, or freedom to move somewhere else to do that work.

You're chained, or "cuffed" down to the job by reason of the benefits and security it provides. Your handcuffs are very shiny, expensive, and valuable--but they're still handcuffs. They restrict your movement and limit your freedom. You can cut the handcuffs off (cut ties with your employer), but then they're worthless. The gold fades. And you can't sell broken, aluminum handcuffs at the pawn shop.

So, which is better--going without the handcuff, and having complete freedom... or living with the entanglement, and getting all the perks at the cost of that freedom?

I can't answer that for you... but I can for me.

The Golden Handcuffs of Investing

I am a lover of liberty. If you ask me whether I'd take a moderately high salary and little freedom, or a normal salary and lots of autonomy, I'll take the lower salary in a second.

The only time I'd opt for the golden handcuffs is in investing.

The way I invest is much more unique than what most of you probably do. 99% of the people I interact with have their wealth invested in 401ks and other retirement accounts via mutual funds, not in individual stocks. A mutual fund is basically a huge mix of tiny fractional shares of sometimes thousands of different companies, industries, or sectors of the economy. Investing in this way, even if you buy just one mutual fund and put 100% of your money into it, supposedly diversifies risk... and I would probably agree with that.

Except that when the entirety of the financial markets is going haywire, nothing is spared. There's this little thing called "systematic risk"... which is, risk that can't be avoided, no matter what (unless you step out of the markets entirely and put 100% of your money into so-called "risk-free" investments, like US Treasury Bonds).

Even during the financial crisis, investors who parked their wealth in mutual funds lost 40% of it, along with everyone else. If you hadn't diversified, you may have lost even more.

But what if you invested in the one thing which behaved in a manner opposite to the general market? What if there was a type of "stock market insurance", so to speak?

As it turns out, there is.

I wrote about it last month. Today I'll expand on this concept, and give you a few more notes about where the Village is parking its money for the next little while.

Monthly Dividends, No Matter the Market Direction

The golden handcuff of investing is a covered call option. I write about call options all the time. If you need some references, go here, and read my last 10 or so articles.

To review, the purpose of investing is to make money. If you know the methods, you can make money when the market is going up, when it's going down, or when it's going nowhere.

Lately, that last things is what the markets have been doing--going nowhere. And that bodes well for those of us who like to make safe, predictable amounts of money in excess of general market returns, which for 2015 approached zero.

How do call options help us do this? By giving us a cash payment up front on an investment, before we've even booked a gain--almost like a dividend.

When we sell a covered call option, we already own at least 100 shares of some underlying company's stock. We agree to sell those shares at some point in the future if the price of those shares is above a certain point, which we choose, and we get paid money for that agreement.

The buyer of the call option (who generally takes the opposite side of the trade we are proposing) has the right, but not the obligation, to buy a certain number of shares (100 per contract) of a company up until a certain date (the expiry date), at a price he or she agrees to in advance (called the "strike" price), as long as the price of that underlying share is above their strike price. The buyer of this option thinks the price of the underlying security is going to go up in price by the time the expiry date rolls around, so they can either sell this option for more than they bought it for, or, if the price of the shares is above the strike they have chose, they will have the option "exercised" after expiry, getting shares at a lower price than what the market currently offers.

We, as the seller of a call option, don't think the price of the underlying stock is going to continue increasing. We sell the option, which obligates us to sell 100 shares per contract, for the strike price we agreed to.

In selling the option, we're speculating that we'll never have to sell our shares... but even if we do, that's fine, because we earns the premium for the option, any dividend paid while we own the shares, and earn capital gains on the shares if we ends up having to sell them.

Why is the covered call option a Golden Handcuff?

Just like the golden handcuff in the regular world, the golden handcuff (call option) of investing has several benefits, and some drawbacks.

The benefits are the guaranteed dividend, the guaranteed option premium, and the potential for capital gains.

The drawback is simply LIMITATION OF UPSIDE. The covered call forces you to give up any gains which occur on the stock above the strike price of your option. Your gains are capped at a certain point.

Here's an example.

You buy 100 shares of Microsoft for $50, and sell a call option with a strike of $52, this option expiring on next May 20. You get paid $1 for every share you own to make this agreement.

In the next month, you will earn the quarterly dividend of 36 cents per share ($36), you get the $1 in options premium, and if the shares are above $52 on May 20, you sell them for $52 even, and pocket the $2 differnce, for a total of $1 + $2 + $.36 = $3.36, or 6.72% in one month. ONE MONTH.

If the stock price is actually $52.50 on expiry though, you give up that extra $.50. You can see that gain, but you can't get it. Much like a glass ceiling.

The handcuff of covered call options forces you to forego some potential gains. That's it. That's why we should only sell calls on shares we own, which we think aren't going to move a whole lot, so there's less risk of giving up a lot. Or better yet, if we think there's a good chance that shares prices could decrease over the next month, we sell the call, and collect free income at low risk.

This happened to me several months back. I owned 100 shares of Intel Corp, and the price increased (on a fluke) by over 10% in a single month. I forfeited about $3.54 per share that I owned.

As usually happens when the market does irrational things, like sending a value stock up 10% in a matter of days, the price of that stock subsequently normalized, and is now back around the same price it was when I sold the option last year.

Why don't I care about this? Because of the fact that I'm more happy with guaranteed income, via the options premiums, than I am about "shoulda, could, woulda" gains on my investments. If I had simply owned the stock outright without the option for long-term gains, I never would have locked in a gain on that stock, even at the elevated level it was. I'd be no better off today than I was six months ago. I'm much better off selling the option.

How I am Using the Golden Handcuff Now

I initiated "golden handcuff" trades this month on two of my active positions.

The first was Silver Wheaton Corp (SLW).This is a precious metals stock I bought just a month ago. Last month, I was able to pick up 100 shares for $17.79 apiece, and sold a $18 call option on those shares for $.65. The stock was below the strike  on expiry 4/18/16, so the $65 was basically free money, which I kept, and it offset the cost basis of my shares to $17.14.

I got a $5 dividend on 4/14 (whoopee!) since I still held the shares, and just sold another call option on those shares at a strike of $18.50, collecting $.79. Now, my cost basis on the shares is actually $16.35.

Selling the $18.50 option for May expiry means that if the price of SLW is above $18.50 on May 20, I'll have to sell my shares for that price, and I'll pocket the difference between that price and $16.35. It would be a $2.15 per share gain on $16.35, or 13% in two months, or 78% on an annualized basis.

If the price isn't above $18.50, I'll just continue selling the calls until the shares are called away, then watch for another opportunity.

Secondly, I hold some shares of a company called Ceour Mining (CDE). I have for a while, in fact, and I've been waiting for the price to come back to where it was feasible to collect some call option income on the position without risking having to sell my shares for less than I bought them for.

The premium I got for CDE was a bit less than SLW--just $29. But, that's on just a $715 investment. It's better than nothing, and I'm going to continue holding those shares, and selling covered calls, until those shares get called away, and I can better leverage this cash into some larger positions for better and more safe gains going forward.

The $29 gives me about a return of about 4.05% in thirty-two days. If I don't end up selling the shares, I'll make just 4%. If I do, I'll have to sell the shares for $8, a total gain of 15.6% in thirty-two days, or 177% annualized.

That sounds high, but it's not unusual for precious metals mining investors to see gains this like. Gold miners have seen a tremendous gain so far this year, up more than 30%. They were coming off a four-year low, and due for a good rise, especially considering the rout in the general market so far this year.

I sold the option because I expect a temporary rout in gold mining stocks after their meteoric rise so far in 2016.

I'm Punny

You can now see that the golden handcuff pun is a fitting way to frame this article. I'm talking about new gold stock positions, and also referencing the critical aspect investors of covered call options should understand. That is:

• Covered calls reduce risk on stocks by helping to lower cost basis. But they limit the upside  on the potential investment. They handcuff potential gains to the floor. That's why it's best to only sell them if you think the underlying investment isn't going much higher, is going nowhere, or is going lower

I hope this concept makes sense. If it doesn't I'd be happy to explain more. Send me a message, and I'll find time to respond.

Thanks

Jeremiah

Everyone's a Genius In a Bull Market

When the stock market's doing great, everyone's a genius. Everyone and their dog is making money with their wealth, simply because they clicked the "buy" button in the midst of a booming market.

In times like these, you love your wealth adviser. He's the financial "Ghandi" of financial gurus. You're a genius for choosing him, and your second cousin's a genius for recommending his services. You show your account balance to your significant other, and suddenly there are additional unforeseen benefits to having such genius. Your future looks bright, and your prosperity seems assured.

In good times, you don't mind the 1% of total assets you're paying the guru, and you don't mind paying him the additional fees for executing trades on your account. Why? Because you're making money hand over fist! It's the cost of doing business.

But what about when the market's... not doing so hot?

Suddenly, you're not such a genius, are you? Your dog's back out in the doghouse, you're cussing out your second cousin, and you're sleeping on the couch.

And yet... your financial "guru" still gets his 1% cut. He still gets his fees when he has to close out investments on your account which are losing you money. And at the end of the day, he's still his wife's greatest hero, and he has a fat paycheck.

What if that were you?

What if you could always be the hero, even if everyone else is a loser in the markets? What if you knew of a way to make money when the market wasn't going anywhere, or when it was in the gutter? What if you could still grow your wealth without having to pay exorbitant fees to a wealth adviser?

Let's talk about this.

Making Money in Any Market

The average person makes money investing in these two ways:

#1. Capital gains. You buy an investment, and sell it when it's worth more than you bought it for. The gains are the difference between your buy and sell price, minus commissions paid to your broker. If you buy an investment and the price goes nowhere, you make no money. If you buy and the prices goes down, you lose money when you sell.

#2. Dividends. You buy an investment, pay a fee or commission, and that investment pays you a set amount of money (a % of your total investment) on an annual basis.

What many people don't know is, there are additional, SIMPLE ways to make money when #1 above isn't likely to play out, or when you buy an investment which doesn't pay a dividend:

#3. Short selling. You "borrow" an investment from your broker when it's at a set price, and "sell" it to someone else, and when the price goes lower, you then actually "buy" it, and pocket the difference. Yes, this is legal, encouraged, and there's nothing immoral about it. You do this when you think an investment's price is going lower.

#4. Stock Options--Covered Calls. You buy shares of stock in increments of 100. You agree to sell these shares at a price called the "strike" if the price is above the strike on the date you choose. You are paid an amount upfront for making this agreement, called an option premium. If you have to sell the shares on that date, you make some more money. Your gain is Option Premium + Capital Gains - Commission.

I use #1, #2, and #4 regularly. I have never explicitly used #3. 

What is my preference? And what should yours be?

Ask yourself this question: For any given investment, would I like to make money in just one way, in two ways, or in three ways?

And, would you prefer a guaranteed payout on the investment, or just to hope for a payout?

Unless you're completely not following what I'm saying, you should choose the three-way option. By the way, it includes a guaranteed payout as a bonus. Why make money in only one way when you can make it in three ways, with one or two of them guaranteed?

My obvious preference is #4, because it combines the elements of #1 and #2, and adds in the additional gains encapsulated in concept #4, while also addressing the nuance of #3 (potentially lower stock prices).

Let me show you how I used this method earlier this week in three ways to lock in guaranteed gains of at least 4.3% over the next month.

What Investment Goes Up When the Stock Market Goes Down?

Understand this one thing: Not everything in the financial markets move in tandem. When one thing goes up, something else goes down, and vice-versa.

This year, the markets have been swinging wildly. At present the general market is up only about half a percent year to date, but it was down as much as 9% in February. That's a HUGE swing.

When the stock market's freaking out, there's one industry that generally does very well: gold mining. 

Gold stocks have been roaring this year, basically doing the opposite of what the broader market has. If we think the stock market's not going to do well, we can invest in gold stocks to make sure that if much of our value-based and market-correlated portfolio isn't doing so well, we can at least be making some good money somewhere.

The long-term prospects for gold mining stocks are very good. The industry is coming off of a 5-year low, and has potential to run much higher, even if in the short-term (the next month or so) it might cool off, or go slightly lower.

If you're looking to hold a company's stock longer-term (a few months to a year), but short-term you think you could see a collapse (sometimes in the next month), the best thing to do is use a covered-call option strategy.

You buy 100 shares of a company's stock, so you can collect the company's dividend, and you sell a covered call. Doing this gives you some dividend income and some premium income. Also, if the stock does happen to increase in value in the short term above a certain point instead of decline like we think, we'll also make money on capital gains. We have a guaranteed win in two ways, and possibly a third.

Three companies I like in this industry are Barrick Gold Corp (ABX), Seabridge Gold (SA), and Silver Wheaton Corp (SLW). These are three companies in the precious-metals industry with solid financials (good fundamentals) and promising technical formations (good short-term chart setups).

This week, I bought 100 shares of each company, and sold 1 call option with and April 15 expiry for each of the sets of 100 shares. 

The call options I sold obligate me to sell the shares at a price higher than I bought them for on April 15 if the market price of the shares is above the strike price I agreed to. I got paid $60, $65, and $65 respectively for each of the options on these stocks, $190, or 4.3% of the price I paid for all of these shares.

As I alluded to, if the shares I bought are above the strike price, I'll earn even more. I could earn an additional $32 in capital gains on ABX, $11 on SA, and $20 on SLW, for a potential total of $253, or 5.8% in just 26 days. That's a minimum of 61.4% annualized, 81.8% maximum. Plus, I'll get $5 in dividends on SLW.  Thank you, stock market, for the lunch money!

Departing from the Norm

The trades I made will only remain open for about 25 days. A guaranteed profit of 61.4% in such a short time is amazing. If you don't think so, just ask your bank what it will pay you in the same amount during the next 25 days.

You wealth adviser will also never give you gains like this. He probably doesn't even know how a stock option works. If you want more information on how to execute this strategy, send me an email and I'll be glad to answer any general questions you have about the process. But I can't give individualized investment advice.

In the past, I've mostly written about doing call options on value stocks like Cisco and Intel. However, since I already have some positions in those stocks, and like the setup for gold this year, I'm willing to put some money into these gold stocks as a hedge against the market experiencing a downturn this year, especially this spring.

What could cause that downturn? The biggest threat we have to the stock market is the burgeoning issues which commodities producers are experiencing in the face of low oil and other commodity prices. The bust in prices is going to wreak havoc in the coming months as we see smaller oil-related companies begin to declare bankruptcy as they're unable to service their debts owed to banks in the face of the devaluation of their assets and credit ratings.

In my opinion, this will lead to a "contagion" of sorts in junk bonds--which are bonds issued by companies with lower credit ratings. This contagion will lead to a semi-serious rout in other corporate bonds, and certainly the stock prices of these companies which have investment in or exposure to these industries. Great news, right?

Happy sailing in these crazy markets!

Jeremiah 

To Beat the Market, Be the Minority

It's ironic that while many of my friends call me up for advice during times of market pandemonium like we've seen so far this year, none of them ever lift a finger to do the things I claim will give them success in investing. Why is that?

I know for a fact, it's their mindset. They aren't willing to wrap their minds around any new concept or strategy which changes their worldview about they way they rest of the world has told them investing should be done.

Their financial advisers (who have a principal-agent dilemma), college professors (who have experience only in theory, not real world practice), and their favorite talking heads on TV (who are paid to talk and sell commercials) have all told them the same thing about investing, which is:

"That stuff is too risky. You don't know enough. You'll get burned."

Let me tell you, it's a lot easier than it sounds.

Let me show you what I mean.

Lessons Learned From Wall Streeters

I worked for one of the big Wall Street banks for a little over two years before jumping ship. During that time, I got to rub shoulders with a lot of experienced people, gaining valuable insights into strategies which the big banks use to make money without taking huge risks.

My work was in foreign exchange (FX) options--a type of financial derivative. And derivatives, used incorrectly, are, in the words of Warren Buffet, "weapons of financial mass destruction."

They did, after all, cause the financial crisis. But savvy investors don't use them recklessly. They use them prudently. I'll explain.

The FX traders I worked with would make huge bets--billions per day--speculating on the future exchange rates of the major world currencies. Sometimes their positions would pay off, and they'd make money... sometimes they wouldn't, and they'd get creamed. Sometimes they'd make out with pennies (times a million), and some days they'd get lucky, making more than their annual salary (including bonuses) for the bank.

During this time, as I watched the traders do their magic, I started to notice something about the highly-misunderstood products (options) they were using.

They wouldn't call up their friends at the other banks John-Wayne style, with guns blazing, trash-talking, shooting at the hip, hoping to make it big on some risky trade with the guy on the other end of the line.

They were only hoping to make a little bit here, and a little bit there, taking as little risk as possible, trying to get a near-guaranteed payout.

Let me repeat that. The successful traders made money for the banks, not by making billions of dollars' worth of risky trades, but by banking small, guaranteed payouts upfront... not by worrying about having to bank a huge upside which was only slightly probable, and which more often than not required the correct reading of a Magic 8-Ball.

Banks like Goldman Sachs use these same strategies to make money no matter what the market is doing: going up, going down, or going nowhere. In fact, they use these strategies to maintain a near 94% winning streak over the course of an average year.

By using the same strategies, we can do the same.

Here's How The Average Investor Can Do This

If we want the same kind of winning streaks as Goldman Sachs, we have to adopt the same strategies. It's not only possible, but probable. And easy.

We use stock options to do this, just like the big banks.

Before you turn off and tell yourself, "that's too risky," hear me out.

Typical investors using options John Wayne-style, are taking on a lot of risk. They buy stock options, hoping for a huge payout where the value of their options go through the roof. While that is actually possible, it's often difficult to do because so many factors are working against them.

Whey you buy stock options, you have to be correct on three things:

• Timing of the price movement. Your hypothesis has to work out within a specific time frame
• Magnitude of the underlying stock movement. The stock has to move to a certain point before you begin to make any amount of money
• Direction of the underlying stock movement. The stock has to move in the direction you think it will

If any one of these things doesn't work out how you think, you're not going to make any money. In fact, you'll likely lose 100% of your total investment.

Wouldn't you like to be the guy on the other side of that trade? To bank 100% on your investment every time some financial John Wayne decides he's the world's next biggest, baddest, trader in the land?

Well, guess what.... we can be that other guy. We do it by being the seller of stock options, not the buyer. When selling options, you make money if the stock goes up. You make it if it stays the same, and you even make money if the stock goes down a little... to a point. As an option seller, time is working for you, not against you.

How I banked 15.1% In Three Short Months While the General Market Lost 9%

I can understand the allure most investors have for investing using index funds. They're well-diversified and require little maintenance and fees, so any potential losses are supposedly mitigated.

The problem is, when the entire market is turning down, index funds do no better. A massive, rising flood-tide eventually sinks all ships, to paraphrase the popular expression. It pays, therefore, to have individual positions which offset (or "hedge") general market losses---which ensure that if one part of your portfolio is losing money hand over fist, you at least have something that's making money for you.

The gold sector is good at helping to hedge general market selloffs.

Gold is a crisis hedge. It holds its intrinsic value over time much better than say, paper money. And people flee to its proxies when there are market crises. Just pull up a chart of the Market Vectors Gold Miner ETF (ticker symbol GDX), and compare it with the events of the financial crisis, and you'll understand what I mean. Alternatively, see how gold has performed since about mid-2011, as market volatility (which I liken unto the market "fear") waned, and you'll see a similar correlation.

I've been watching the gold mining sector for a while. It' s nearly 72% off it's five-year high, sliding off its highs as the gold price has gone into seemingly perpetual decline. There are tremendous deals to be had if you look in the right place.

Here's a short outline about how I've been using this sector to make money in gold while the general market's been sliding ever further into the gutter these past few months.

GDX, the market proxy for the gold mining companies, hit an all-time low of $12.47 in January. A couple of months before that, with GDX trading around $14, I decided that it was highly unlikely that gold miners could get cheaper than they were. I sold two put option contracts, agreeing to buy 200 shares of GDX if the ETF was trading below $14.50 on November 23. I was paid $96 for making this agreement. 

This meant that if I ended up buying the shares at $14.50, my actual cost basis on the stock would be just$14.02, because I got $.48 for share for the option contract. 

On November 23, the stock was actually trading at $13.33--well below the price $14.02. I ended up having to buy the shares, and wanted to turn that current "loser" trade into a winner. I waited about ten days until December 4 for the price of GDX to recover a bit (which I knew it would), which would inflate the call option premiums, and sold two call options contracts for $68 total, agreeing to sell the shares I bought at $14.02, for $15 if the price of GDX was above $15 on December 18, two weeks later.

The price wasn't above $15 on the 23rd, so I kept the premium of $68 free and clear, and agreed once again to sell my shares for $15 if GDX was trading above $15 one month later on January 22 (by selling another two call options). I was paid $54 for that agreement. Since I held my shares at that time, I collected $23.20 in dividends on those 200 shares a week later.

January 22 rolled around, and again, GDX was not trading above $15. So, I made another deal (using two call options) to sell those shares at $15, and was paid $52 for it.

At this point, you can see that a bit of cash has been piling up--without me ever even selling shares of stock. Since November, I was paid $96, $68, $54, $23.20, and $52, for a total of $293.20 in about three months so far.

How do things look right now? GDX is currently trading well above $15, so I'll likely be forced to sell these shares for $15 on February 19. 

Taking all these premiums I've received into account, I've lowered my cost basis to $13.034 on the shares of stock over the past three months. If I have to sell them at $15, per the obligation of the two call options I sold, I will make a total of $393.92 in gains, on a total outlay of just $2606 (the 200 shares at cost of $13.03).

That's a 15.1% return in 117 days, or 47% in annualized gains. Imagine if I could do this with my whole investment portfolio, year after year.

Guess what? I can!

When we sell put options, like I did above when I first started owning shares of GDX, we only agree to do it on stocks we are happy owning at the strike price (the price at which we agree to buy the shares). We never do it on stocks which could potentially lose a lot of their value. 

I regularly sell put options only on stocks which are unlikely to move very much, both up or down. This ensures that I'm not stuck owning something that has to recover 20-30% before I make a profit on it. Similarly, I only sell call options on stock that aren't likely to go up a whole lot. It also ensures that I'm not locking myself into selling something that somehow gained 30% in a month, which would force me to give up some huge upside. That leads me to this thought...

Currently, GDX is trading about $18. By having sold the call options on the shares I own, I am forfeiting over $600 in total gains on these shares. My returns could have been three times what they are.

That's the catch of call options. Sometimes, you end up forfeiting a good amount of potential upside when flukes happen--or if you sell options on the wrong kinds of stocks. It's definitely a fluke for GDX to rise 36% in a matter of two weeks.

This is an opportunity cost you have to accept when using options. But in the long term, I'm not going to care about giving up a few percent on the value stocks I typically use to sell options (stocks like INTC, CSCO, ORCL, and MSFT), if I generate returns in excess of 18% (or higher, as in the case of GDX) year, after year, after year. I say 18% because, typically I generate about 1.5% a month in cash flow for my portfolio by selling call or put options.

My long-term wealth gains will far outweigh the opportunity costs.

The Greedy Dice Game

No one invests this way, because they don't understand that smaller, repetitive wins over the long run, even if it's just once a month per position they own, add up very quickly, and far outweigh the average historical market return.

Play this dice game with a friend. You're the house, and you offer your friend 6 rolls of the die. He gets $3 for every time he can roll a 6. He gets 50 cents for forfeiting a dice roll (i.e., doing nothing), and for every time he rolls and doesn't get a 6, he owes you $1.  What does he choose?

The least likely outcome is the six.... he has five ways to lose, and only one way to win if he chooses to roll. He has six ways to win--and a guaranteed payout--if he does nothing, and has the same probably outcome as if he's rolled once and gotten a six. But he doesn't realize that.

The average investor is greedy. He only sees that he can make up to $18 if he gets all sixes--he's a GREAT roller, after all. He can do it. He doesn't even consider the downside.

He will lose $6 if he gets no sixes. But he can gain $3 by playing it completely safe.

Rolling six times, the sucker playing this game is likely to come out losing $2 overall, according to the odds.

Don't be like these losers... always take the guaranteed payout. Call options offer you this. Don't just buy stocks and hope they go up--or put all your eggs into one basket, counting on the huge payout which won't arrive. Collect income using call options while you wait for this to happen.

Why No One Invests Like This

Honestly, it does take a bit of study to understand the nuances and mechanics of how stock options work. But, it can be done by reading just a few short articles, which I have over here, here, and here.

If I would wager, I'd say that only 1 in 1000 use stock options in their investments because either they don't understand them, they've been told they're too risky (and they are, if used incorrectly), or because they've used them wrong in the past and been irreparably burned.

I would never subject you to something like that here. I only give advice that I'd want my grandma to hear.

Selling put options on safe value stocks actually lowers your risk, compared to buying a stock outright. The premium you receive for selling the put lowers your potential cost basis if you're put the stock.

But, a concept like that isn't something a lot of people can understand for some reason. They prefer the "buy and hope" strategy of buying stocks, and hoping the price goes up from there. There's no thought to decreasing downside risks, or using alternative methods to magnify the upside in the long term.

But, that's the average investor for you. Good luck to him.

Live long and invest,

Jeremiah

Investing Isn’t Complicated, No Matter What Wall Street Tells You

I do a lot of reading—books, articles, news stories, financial statements, market hype, clickbait—you name it. If it’s being published along the lines of finance and investing, I’ve probably at least skimmed it. Most of it would bore you to death, I’m sure.

I do it because I’m always looking for something new that will make me more successful in life. I’m like a dredger—pulling a ton of mud out of a mucky riverbed, and filtering and sifting until I’ve come up with tiny flecks of gold, which I can add to my bag 'o gold dust.

There’s a ton of information out there, to be sure. And when it comes to investing, it can seem complicated to separate the good information from the bad. Even the professionals on Wall Street and Main Street want you to think it's complicated, so you'll pay them to do all the work.

But it's not.

If your financial adviser isn't smart enough to boil down supposedly sophisticated topics into terms that a 5th grader can understand, you need to find a new adviser.

Today, I’ll show you how this "boiling down" is done--for buying stocks. This is an all-in-one article which elucidates the key points to look for in a solid, safe investment. They are the tenets of Value Investing, a strategy which should make up the bulk of all investors’ portfolios.

Buying Stock is Like Buying or Renting a Home

Even if you’ve never bought a single share of stock personally before, you’ve probably invested. You just don’t realize it. In fact, you probably own one of the most risky and hassle-prone investments available right now: a home.

How is buying a home and buying stocks similar? That’s easy. The vetting process you go through is similar for both types of investments. The only difference is, the buying process is MUCH easier for a share of stock than for a home. This is in stark contrast to what you're told about investing by wealth advisers--but none of them have ever advised you not to buy a home because the process is too complicated... have they?

I didn't think so.

You’ve got a general idea of what you’re looking for when you consider a place to live. Here are some basic thoughts.

• If you’re buying a house, you know it needs to hold up to all kinds of weather, rain, shine, hurricane—and hopefully even earthquakes. It needs to have solid siding, a good foundation, and a good roof.
• You want a home that will withstand changes in style or fashion—no gimmicky houses that no one else wants to buy after you decide to move. 
• Even in recessions, people have to move and buy houses. Make sure yours is one that is appealing to a broad array of audiences
• You want unique features in architecture, design, or landscaping which will make the home more valuable when compared to the neighbors.
• You want a home that’s in good condition, with low maintenance costs.
• You should look into the past ownership of the home, to make sure there are no liens against the home, or ownership disputes on the title
• You want a home that you don’t have to pour a bunch of money into initially in order for it to be worth something
• Ideally, you want to buy the home for less than it books for on the market, so you can have instant equity
• You want a home which, when/if you sell someday, will actually have risen in value, at least along with inflation
• You want to make sure the previous owners have taken care of the property, and that the home is something you’ll have the skills to take care of yourself
• You’ll want to make sure your property lines are accurate, and that the taxes aren’t too high for you to afford
• Perhaps you’ll retire someday, and want to own a place where you can rent out the basement to earn passive income

There are a hundred other factors you could consider when buying a home, and these are just the basics. Honestly, home-buying is a pretty nerve-racking experience... especially compared to buying a share of stock.

But how do these basic ideas about home-buying apply to investing in the stock market?

Buying a Home vs Buying Shares of Stock

The principles of buying stocks are tantamount to buying a home. Consider the following:

• The best stock investments are in solid, well-established companies which have been around and been profitable forever
• Solid stock investment opportunities aren’t faddish or hyped up. Good investments are in businesses or products that have been around forever, and aren’t going away anytime soon
• The best stocks to invest in are recession-proof. People still need and buy the company’s goods or services, even if there’s an economic recession
• Companies with products you want to invest in can raise the prices of their products along with inflation, without any risk of turning off consumers
• The best investments are low-maintenance. You buy once, and don’t have to sit around watching your computer monitor all day, hoping the value doesn’t drop, or buying and selling back and forth every other day
• The best investments are selling for at or near “book” value—the value of the company’s assets
• Great investments pay you money while you sleep, in the form of dividends, and don’t dilute your holdings by issuing new shares to the market
• Stocks you buy should increase in value over time, far above inflation
• Good investments should provide you with income to eventually sustain your standard of living in retirement

These are the basics to consider when buying shares of a company's stock. Let's go into a few reasons for why buying stocks might be an even better investment than your home.

Stocks May Even Be a Better Investment Than Your Home

Ever since the housing crisis, many experts have begun telling people that housing is a terrible investment—for good reason. There are many reasons to hate buying a house versus investing in stocks. Off the top of my head:

• Buying stock is a lower nominal investment, with greater liquidity (liquidity is the ability to quickly get out an investment), lower overhead, and potentially quicker return on investment
• There is less upfront risk when buying shares of stock, and less upfront costs, overhead, and regular maintenance costs
• Home ownership has hidden costs—maintenance, taxes, damages, insurance--which stock market investments don't. When buying stocks, your only costs are the upfront commission of usually a few dollars
• The average return for owning stocks has historically been above 12% over the past 80 years, whereas the average "return" on a home purchase from 1890 through 2005 was less than 1% annually

What I'm saying is this: Buying a home is easy.... but buying stocks is easier. Buying a home is not necessarily a great investment (and you should never think of it as one) ... but learning to grow your money using stocks and stock options is a GREAT, low-risk, high-liquidity investment.

So, how do we take this information and put it into action? That's up next.

Apply the Principles of Value Investing

We’ll use a specific example for how to simply approach investing in specific companies.

Let’s say you’ve never invested a dime in buying stock your whole life. How do you get started? The major discount brokers—TDAmeritrade, Fidelity, Charles Schwab, E-Trade, Scottrade—all have a website, where you can be set up to invest in mere minutes. Google any of the above companies, visit their sites, and check it out.

After getting an account set up, you transfer money from your bank account, and you’re good to go within 24 hours.

But what are you planning to buy or invest in? And how do you approach making the decision?

In the past, I’ve written about a variety of great companies to use as starting points for putting together a winning long-term investment strategy. I’ll take one of them today.

One of the most solid investment opportunities in the market today is a company I’ve mentioned numerous times in the past, a company both loved and hated around the world— Wal-Mart Stores (ticker symbol WMT). Here is some information about it:

• Wal-Mart has been around for decades, carving its way into being the world’s low-cost leader in supermarkets and consumer goods. While it has its competitors, such as Target, Amazon, Dollar General, etc, Wal-Mart maintains its status as the world leader in retail. It has a competitive and sustainable advantage
• WMT isn’t going anywhere anytime soon. Its business model of supply chain efficiency and low prices is emulated, but not easily replicated. Its profit margins are thin, but unbeatable
• Wal-Mart doesn’t have a boom-and-bust business. It’s not heavily reliant on things like swings in commodities
• Everyone shops at Wal-Mart, in both good times and bad—and especially in bad times. During economic recessions, consumers shift their spending habits from higher-end stores, to discount retail such as WMT
• Wal-Mart doesn’t have to spend billions every year to develop new technology or products to remain profitable or relevant, like other companies might (i.e., Apple). Its sales and revenue can grow without expensive capital expenditures (spending)
• Have you ever noticed Wal-Mart raising its prices on goods? Neither have I. That’s because it can do so almost imperceptibly, by a few cents here and there, and no one notices or cares, because its stuff is already so cheap, and its pricing strategies are sneaky. It remains profitable even in the face of rising prices and inflation
• WMT is low maintenance—it isn’t the kind of company you have to constantly monitor. As long as you buy at a good price, you can just sit back, collect the dividends, and reinvest them to take advantage of compound interest. While the company has suffered recent share declines, it’s just now approaching appropriate buying levels again
• Wal-Mart has been paying a dividend for years, and the rate increases by an average of over 10% per year. Even if the share price goes nowhere, you still get paid as an investor through dividends and share buybacks

Getting More Technical

Going a step further than what I’ve mentioned above, there are other, more technical factors to consider when deciding whether to invest. And you can get all of this information by simply going to Yahoo Finance’shomepage, entering Wal-Mart’s Ticker symbol (WMT) in the top search bar (then click Search), and clicking on Key Statistics on the left sidebar. Here are some of the factors you should look at:

• Price to Book Value. Book Value is the value of what the company owns compared with what it owes, on a per-share basis. Compare the company’s book value with that of its competitors to determine in part whether the current share price warrants purchase
• Free Cash Flow. This is the amount of cash a company has after making investments in its business. Preferably, get a hold of a graph showing this FCF over time, and make sure it’s either flat or increasing
• Dividend History—dividends should be increasing over time, and have at least a 10-year history of nonstop payouts. Again, get a graph showing this over time
• Consistent Profit Margins. Make sure the company is not making less and less profit per item is sells over time. This graph is a great example. Diminishing profits margins over time is a bad sign

Qualitative Factors

Furthermore, it’s not a bad idea to do some cursory research on a few other miscellaneous things about a company’s history and management. Open up Google, and look up the following:

• Does the company have a solid management team? And are they incentivized to increase the profitability of the business (this is good), or increase their share price artificially (bad), and is management’s compensation tied to this?
• Is the company issuing and new shares of stock, or are they buying shares back? The company should have a net amount of shares bought back every year, instead of share issuances. In other words, its number of outstanding shares should be decreasing. Here's an example. A company typically issues shares if it’s having trouble financing operations, and doesn’t have good enough credit with banks to get loans for expansions. This is a bad sign
• If the company has a net amount of shares bought back, are they buying when their stock is cheap, or when it’s at all-time highs? It should be when the stock is cheap
• If the company acquires other businesses, does it do so efficiently, and when those businesses are cheap?

Pulling Out the Charts

Lastly, before we decide to buy, we need to make sure the timing is right. In other words, the company is in good shape, but should we buy right away, or wait for the price to move around into a more advantageous position in the short term?

We use charts to determine this. I look at a few things:

• 52-Week Chart—helps me determine where the stock has been over the past year, and whether  the price appears to have any floors or ceilings anywhere. Wal-Mart's chart is shown below. You can see that the stock has a solid price floor around the mid-50's, and it hasn't been suffering along with the general market in recent weeks, which is a good sign
• If there are any price floors or ceilings, where are they, and is the price closer to the floor, or the ceiling? We want to buy lower, not higher
• Bollinger Bands. Using Stockcharts.com, I can look up the immediately short-term price envelopes the stock is trading within. If it’s about to bump down against its price floor, that’s a good indication that we’re ready to buy. In the second chart below, the lower green line is the lower Bollinger Band. Wait for the price to decline a bit and approach the line to buy Wal-Mart

Do We Buy?

Don’t ever consider making a long-term investment (2-5 years) without looking into all of these factors. It seems like a lot, but really only takes a few minutes, and your due diligence will pay off. After all, you wouldn’t lay down $3000 on a crap shoot in a casino, so why would you lay down $3000 on a crap-shoot in the stock market, and not do any research?

WMT seems like a really good buy right now. Business-wise, the company is in great shape, and great hands. The financials are sound, and the company is trading at a discount in virtually all accounts compared with its competitors.

Furthermore, the charts on WMT look good. WMT was trading at an all-time-high of around $88 just one year ago, and is now down near $62, after hitting a bottom of $56 last November.

What happened with the shares? Some bigtime bank, Goldman Sachs, downgraded the stock to a “Sell,” based on political pressure Wal-Mart has been facing recently to raise wages to its workers in stores, which would cause its bottom line to take a hit.

Well, I disagree with Goldman’s, AKA, the Devil’s, assessment. I’ll believe that Wal-Mart is at risk for a major decline from here when the company can no longer cover its interest payments, when we stop seeing free cash flow, as profit margins begin to shrink, and it dividend no longer rises. I just don’t see any of that happening any time soon, so I’m confident that an investment in WMT is smart, especially at this price point.

The Short-Term Setup Could Be Better, So Please Wait

The setup in the super short-term isn’t incredibly great. It’s trading near its upper Bollinger Band, meaning the price is at risk for a short-term decline. I’d prefer to see the price back around $58 before feeling completely safe jumping in here. I think once that happens, we’re taking on very little risk buying.

On the bright side, with the recent decline in share price over the past year, WMT is almost within acceptable range to add to our Options Trading Short List. I’d feel better if it were around $40, but I think that’s a bit too much to ask for. If you have only one option position open in your portfolio at a time, making a $5800 capital at risk investment in order to generate 1.2% per month on a 100 shares of WMT may not be a bad idea.

Watch for a decline down to $58 to buy WMT.

That’s All There Is To It

As I mentioned at the beginning, investing is not nearly as sophisticated or complicated as it’s made out to be by Wall Street, and investment or wealth advisers. And why is that? They want you to pay them for advice, and not for you to DIY.

For the most part, investing is common sense. If your adviser can’t boil down a simple concept like how to identify a good investment into understandable terms for the average lay person, it’s time to fire them and become your own adviser.

Investing is as simple as making a checklist for what your criteria are for what constitutes acceptable, and quickly working through the checklist to make sure everything is there. Like a simple grocery or to-do list.

I’ve included quite a few links in this article to the sources of information you need to place your first trade after doing your investing due diligence. If you have any questions about this, give me a holler at thevillageid-vestor@gmail.com

Live long and invest,

Jeremiah

Double This Penny 38 times

It's a fascinating social experiment to play with people who are bad at math...

Sit the average grade-schooler down, and ask him this question:

"If I were to offer you a penny today, two pennies tomorrow, four pennies the next day, and so on, doubling the amount every day for the next thirty days, or $1 million dollars right now, today, which one would you take?"

Invariably, the choice the unwitting kid will make is for the $1 million today. Easy money, right?

Most people, when given the choice, will take the huge chunk of money and run with it, not giving it a second thought. That's because humans, especially the generation of today, are so adverse to waiting... they're used to having everything handed to them. Knowledge, entertainment, and gratification is available at your fingertips, why would you falter to reach out and take it?

Well, here's the big reason.

I've outlined this neat little chart which gives the cumulative earnings of adding up all those pennies and dollars over the course of 30 days.

As you can see, on day 27, the wise, patient fifth-grader is handed just over $600,000, for a cumulative amount of $1.42 million.

Fulfilling the rest of the deal, the 30th day gives a total amount over $10.737 million.

By day 38, if you've been patient, you've cumulatively surpassed the payout of the largest Powerball Lottery pool in U.S. history--and won $2.68 billion.

Such is the power of small, successive winnings over time, and of compound interest.

That's what I try to teach people to make here at the Village... small, successive, repetitive winnings which add up over time. And I OFFER IT FOR FREE.

I teach you how to safely invest in the markets, using stocks and options, to net 20% or more over the course of any given year. These kinds of returns spank the general market like a disobedient child.

This is fascinating stuff....

A Pitiful 1.2% Per Month For 10 Years Equals..... HOW MUCH???

Let's say you've been wise enough to save up $3,000, so that you can start investing, and give the strategies I talk about a little bit of testing.

My strategies usually bring in about 1.2% per month, give or take a small amount, adjusting for the general volatility of the market--sometimes, much, much more, but generally, not any less.

The first month, taking my advice you make just $36. Sure, it doesn't seem like much. But reinvested in another opportunity, the next month, you'd make $36.43.

By Month 12, you're making an additional $41 and some change. By the end of year three, that has become $54, and by the end of year 10, it's $148 in income per month... and it only "costs" you 5 minutes a month to execute. That's an "hourly" wage of $1786 per hour. Your $3,000 became $12,554 over ten years--which is the amount of time I believe it should take the average person to become financially independent.

This is how you create wealth: little by little over time, using safe strategies where it's almost impossible to lose money. I've written several articles in the past, demonstrating how this is not a dream--but a reality. Read about a few of them here, here, here, and here. 

And get a recap of all my 2015 trades here.

Heck, while you're at it, why not just read everything I have?

How is this going to make you financially free? Well, you don't just slap down $3,000 every month and sit and wait... you add to the investment fund every month, and invest that money as well.

By taking that initial $3,000, and committing to add just $400 a month into your investment account (check this article or my section on personal finance if you need help finding the money to do this), and investing those same funds, you'll have $118,710 in wealth over 10 years. The more you commit to your investment fund each month, the quicker your wealth grows.

It's Just Simple Math

Let me reiterate: this isn't fantasy. It's just simple math. Everyone out there buying lottery tickets, hoping to win it big, is going to be disappointed. But we won't be.

Investing is a game where more than one person can win the Big Powerball in the long run. Are you going to be one of them?

If you want to be, check out what I've written on the subject of using options to pad your investment returns. This is all found in my Short-Term Trading and Speculation section.

Let's do this.

Live long and invest,

Jeremiah

We're Doing It Again

This might be the shortest post I've ever made, and that's because I want to get it out there before the opportunity disappears.

If you're the average investor involved in the markets, you're probably clamoring for a solution for all the red in your portfolio, appearing just after the beginning of the year, and so far, not yet abated.

Boo-hoo! So, your investments aren't performing as well as you want them to? Well, maybe it's time to shift course. Time to do something different. Time to do something you've never done before, maybe because your financial adviser (erroneously) told you to stay away.

It's time to sell some put options. It's time to cash in on the volatility dividends waiting to pad the lining of your account, if only you'd break out of your comfort shell, and do what I'm begging you to do.

It's times like these when we have the lowest-risk, highest-reward setup possible to sell put options, because the premiums are so high due to increased volatility. As volatility increases, put option prices go through the roof.

Remember the mantra, "buy low, sell high?" That applies here as well. Only, its order is reversed since we're selling initially instead of buying.

Here's what you need to do along with me.

Load 'Em Up Boys!

I'm backing up the truck on one of my old stand-by's, Cisco. CSCO is on my short list of stocks, and I'm comfortable owning the shares at any reasonable price in the low- to mid-twenties. The company's balance sheet is rock solid, and it's at the top of its industry. Read more about it here if you wish.

The stock has suffered a big selloff right alongside the rest of the market, and all the technical indicators are screaming for a market reversal over the next couple of weeks. That means, I'm expecting that over the next couple of weeks, the market should see a lot of good days. CSCO should move up right along with it.

What we're doing when we sell the put is agreeing to buy 100 shares of CSCO if the price of the stock is below a certain threshold (the "strike" price) on a future date. We get paid, upfront, to make this agreement.

The best setup right now is the February 19, $26 CSCO put option. It's offering us an instant payout of $130 per contract ($1.30 per share, which is deposited instantly into our investment account), in exchange for the obligation to buy CSCO for $26 per share if the stock is trading below $26 on February 19.

That $130 represents a fat, juicy 5% of our total purchase obligation, or 49.3% in annualized gains. To put this in perspective, we usually get around 1-2% over the same length of time (37 days) selling options.

How is this low risk, if I have to potentially buy something for more than it's trading for on the open market? Simple.

We get paid upfront for the agreement, so our cost basis on the stock is actually lowered to $24.70. Therefore, we're taking on less risk with this method than if we were to buy the stock outright. If we are obligated to buy the stock at $26, we're actually buying it at the strike price, minus the premium per share of $1.30. Make sense?

So, we make money on this trade over the next 37 days as long as CSCO is trading above $24.70 on the expiration date of the option. The stock can reverse another 1.8% from here before we even begin to lose money. If things don't start reversing, we can always chicken out and buy back the option to avoid losing money.

Since I'm confident this little decline is not the end of the world, and that the market will go up, the value of this put option will lose much of its value as CSCO increases in price, and as time ebbs closer to February 19.

These two factors are highly in our favor.

The higher CSCO goes, the cheaper the value of the put option I sell will become. This is what we want to happen. If this reversal happens quickly, the option premium will also decline quickly, and I may even be able to buy it back much cheaper than I sold it, and close the trade in a short period of time for a gain.

What If the Market Doesn't Go Up From Here? Does the Plan Fall Apart?

Of course, the market could head lower. But swings like this, which cause the price of valuable companies to just keep going down, down, down, and which don't subsequently reverse, have happened literally only less than a handful of times in the past couple of decades. There's nothing happening now to be a catalyst for that sort of cataclysm.

And even if I do end up being assigned the shares (buying them), like I said.... I'm comfortable owning this business, which is the best of its kind. And, all owning the shares will do for me is give me more income in the form of dividends, capital gains, and call options sold against the shares, to the tune of yet still 1-2% per month.

Who would complain about that?

So here we are. I've opened the February 19 $26 put option for $1.30 per share. Short and sweet. Let's see how this turns out.

Live long and invest,

Jeremiah

Winning At Money Feels Great

It's that time of year when you sit back, and begin reflecting on your successes and failures of the past year--especially your financial ones. As you do this, I want to congratulate you on your wins. On your failures, I exhort you:

Do better next time. And don't get creamed ever again, starting now.

What needs to change for you to win? Do you know where every dollar of your money is going? Do you know how much you're spending each month, and what's left over? And how well the "leftovers" are growing?

If you answered "no" to anything above, you need to change. RIGHT NOW. Getting your personal finances straight is the first step. Saving comes next. Investing comes last, since you won't have any money to invest at all unless you can manage and save money well. This the fun part. It's the part where you get to cream the market, instead of it creaming you.

It's been a fantastically successful year in my household money-wise, by almost any standard. I didn't win the lottery, but I got the next best thing:  I started an awesome new job early in the year, which gave me a higher income, lower expenses, less travel time, less stress, a better work-life balance, and greater potential for personal and professional growth.

We've paid off lots of debt, saved up large chunks of change, ramped up our debt-payoff plans for the near future, and staked our claims for financial freedom in the coming years. The future is bright indeed.

But you probably don't care much about what I did personally--you're here on this blog for you. You're here to glean a little bit of knowledge, sharpen up the old financial noggin, and you're looking forward to the shiny veneer of a financial household and life that's strong, steady, and impregnable to any financial Moby Dicks ready to belly flop onto your ship's deck. A life where money works for you, instead of the other way around.

I've published quite a few articles this year about how to best grow your wealth safely, incrementally, and intelligently. Today, I want to review some of the recommendations I've made, and some I haven't, and look at how much closer to financial freedom you might be in the future if you stick with me.

Trade Recaps - A Few Things to Consider

By browsing through my list of all past articles, you can pick out a handful of times I wrote about ways the Village would cream the market by investing with stocks and stock options.

I've long said that the safest investing strategy is to marry the concepts of investing in stocks, and speculating with options, to capture the long-term benefit of capital appreciation and compound interest, while also taking advantage of short-term market moves, and volatility, to juice investing returns by double digits every year.

This is what I've been doing, and you should do it, too. You'll see the proof of "why" in a minute.

What I'll do today is outline the "speculation" side of things.... ways I've used options to give me returns far above and beyond what the general market gave us in 2015--which was -.7%.

Each of these position gains I list below include adjustments for trade commissions paid to my broker, so nothing is inflated at all.

Portfolio Returns

I don't always have time to write a new article for each and every new investment or speculation I make on my own accounts. For that reason, if you look over the below list of positions and see some which you don't remember reading about on the blog, don't fret... it simply means that I didn't write about it. But I still made the trade. On some I made money, others I lost it.

I calculate the gains based on the principal of "annualized returns." This helps me to compare any investment to another "apples to apples." For questions in detail on how this is done, see this article I wrote. 

Here are the positions I took this year in energy, tech, gold, oil, volatility, and inverse leveraged funds over the course of this year:

• PHX (Panhandle Oil & Gas)
• 5/27/15 - 6/15/15, Equity only, 5.1%, $104.2
• INTC (Intel Corp)
• 7/20/15 - 8/21/15, Covered Call option, 2.04%, $60.28 
• 8/24/25 - 8/28/15, Long Call option, 21.04%, $19.82
• 8/28/15 - 9/25/15, Covered Call option, .72%, $21.28
• 9/28/15 - 10/16/15, Covered Call option, 2.07%, $61.29
• GDX (Market Vectors Gold Miners Index)
• 9/25/15 - 10/16/15, Covered Call option, 3.69%, $53.29
• 11/4/15 - 11/20/15, Naked Put Option, .59%, $30.72 
• 12/28/15 - 1/22/16, Covered Call option, 1.14%, $33.28
• CSCO (Cisco Systems, Inc)
• 6/15/15 - 7/27/15, Naked Put Option, 1.25%, $35.27
• USO (U.S. Oil Fund)
• 11/4/15 - 11/19/15, Naked Put Option, $-168.46
• 11/19/15 - 12/18/15, Naked Put Option, $181.28
• Combined = $12.82 gain
• 12/18/15 - Shares were assigned, still open, cost basis = $13.88
• VXX (iPath S&P 500 VIX ST Futures ETN)
• 9/17/15 - 9/17/15, Long Call option, 8.79%, $5.82
• 10/9/15 - 10/14/15, Long Call option, 15.27%, $27.82
• SDS (Proshares UltraShort S&P 500)
• 10/16/15 - 11/20/15, Long Call option, -100%, -$72.59

Total Gains: $393.30

The returns don't seem like much, but I wasn't using a lot of capital to do this. In any case, it's better than you made over the past decade in your savings account.

These gains required about $3000 in available capital at any given moment. So, if I would have had $50,000 to invest instead of $3000, I'd have done much better dollar-wise.

To determine my gain for the year, I take the $393.40 I made, and divide it by the amount of cash I needed in my portfolio in order to initiate these trades. I've over-estimated that amount at $4000 in order to be conservative, since some of the positions overlap, and more cash was needed at times, but most of the time, we needed about $3000. But if I put the number at $3000, the gains would be exaggerated, and I don't want to do that.

Here's the math:

$393.30 / $4000 = 9.83%.

Remember, we only had trades opened for about 219 days out of the year, or 60% of the time. We calculate what our annualized gains would be (the amount we would have made if we replicated these trades over the course of the whole year) by doing the following:

= 1 / (219/365) * 9.83%

= 16.39%

So, from May 27 through December 31, we grew our money by 16.39% annualized.

That's not bad. In fact, it's GREAT, considering the loss I would have incurred simply by placing my money into the S&P 500 Index for the year (OK, with dividends, I would have made 1.1% last year, but that's no better than a savings account, really. By that comparison, I might as well not be investing at all, since my savings is guaranteed).

Also, the historical return over the past 80 years in the market is about 12%. So, I consider myself not only lucky, but somewhat skilled at executing these market-creaming strategies.

Look What Happened When I Broke My Cardinal Rules

In short, I got creamed.

You'll notice there are a couple of losses sitting in my portfolio. I hate to admit it, but yes, EVEN I LOSE SOMETIMES.

I only lost money doing the things I recommend no one do: selling naked put options and buying call options on volatile securities. In this case, they were USO put options, and an SDS call option, a leveraged S&P 500 index fund.

I don't generally recommend anyone without several year's trading experience and discipline undertake speculation by buying call options, or by selling naked put options on anything that's not rock-solid.

The reason I entered these trades is, I thought I had the market on those securities figured out. "Prices on oil just can't go lower," I thought. Well, oil did get creamed. Things can get a lot worse than we often think they can.

I held the USO options far longer than I had originally planned, and lost my shirt. I had to enter a new position to cover the old one, trying to turn it into a winner. I succeeded a little, but I'm still underwater a bit, but in the coming months as things roll forward, I am confident I'll realize the gain.

As for SDS, well, I expected the market to drop in the short term, but it ran up much higher than I thought within the time frame where the option was live.

Had I not been so stupid, I would have made $453 on $4000 in capital, 11% in 219 days, or 19% annualized.

Replicating These Gains

If you're crafting an investment strategy which involves the use of options, I BEG you: Do not undertake this with your life savings, or if you have just $4000 total to invest as it seems like I've indicated here. The market will CREAM you. How so?

Position sizing is the concept of making sure no single investment in your portfolio exceeds a certain percentage of the total amount of money you have available for trading. Following this rule ensures you don't have all your eggs in one basket when you drop it.

Taking a $3000 position in options trading, when you only have $3000-$5000, is foolhardy. Anyone doing that is bound to get burned. I wouldn't recommend doing it with anything less than $20,000-$30,000 in total investable funds. Having more capital would allow you to take 8-10 medium-sized positions across several sectors of the economy, which is enough for a small portfolio to be sufficiently diversified, avoiding risk.

So, if you don't have $20,000, save up until you do, then attempt options. Park your cash in some solid stocks I've written about elsewhere until you've saved/grown your money enough, and take the meantime to learn as much as you can about how all of this works.

The best way to learn is to read, read, read as much as you can to learn about how the general market and individual commodities and sectors function. Once you'd like to whet your feet, open a "paper" account with your broker, which most brokers such as E-Trade, TDAmeritrade, and Scottrade all offer. Paper accounts allow you to simulate trading strategies without actually putting capital at risk in things you don't understand.

As we move into the new year, I look forward to booking even more impressive gains.

The outlook for the market isn't exactly "rosy", as I've noted in a previous post, and I feel like there are going to be many opportunities this year for us to grow our money in unbelievable ways.

It's going to be a great year, so follow along.

Live long and invest,

Jeremiah