[Caution] Don’t Take This Shortcut!

Karim Rahemtulla By Karim Rahemtulla
Options Strategist, The Oxford Club

Alternative Income

It’s all about risk and return…

The more risk you’re willing to take, the higher the return you should demand. But as you get older, you begin to view risk differently.

Just last week, I was reminded of that fact. The Oxford Club held another Private Wealth Seminar. This time it was at the fabulous Four Seasons Rancho Encantado in Santa Fe, New Mexico. The conference sold out early, as most of them do.

I headed to New Mexico early with my significant other and spent a few days enjoying the cool New Mexico autumn. It didn’t disappoint.

The highlight of the trip was visiting the beautiful Tent Rocks formation. It’s a formation of post-volcanic slot canyons, which are truly otherworldly. Leaving the area, we took a shortcut through the Bandelier-area national forest, passing Los Alamos and ending up at Taos.

It was raining. Google Maps showed a route that would save us two hours by using a road marked “NF.” Little did we know, it wasn’t much of a road at all. It was a national forest trail that took us on a white-knuckle climb on the side of a mountain with a steep drop-off. It took an hour to travel 5 miles in an all-wheel drive Durango. There was no turning around and no stopping on the slick surface.

As it turns out, I was older but not wiser. We spend so much time trying to minimize our risk… and yet dangerous situations appeared regardless.

Investing is very similar. We all want high returns and low risk. Achieving this goal means different things to different people. Some define a high return as 6% or 8%. Others would scoff at that and look at anything under 20% as abysmal.

That’s why I love put selling. It allows me to know my risk completely going into the trade. It also allows me to gauge my returns with a high degree of accuracy, depending on my input parameters.

To begin, you have to understand the various scenarios.

If you’re looking for mega returns in the 30% to 50% range, you have to be willing to live with insane amounts of volatility and be in sectors such as technology or biotechnology. Instead of looking to sell puts that give you the opportunity to buy shares at a huge discount, you will be selling “at the money” puts.

For example, as I write this, NVIDIA Corp. (Nasdaq: NVDA) is trading at around $175, and you could sell a January $175 put for $14 per contract. On a 10-contract trade, you would collect $14,000. Your margin requirement would be $26,250. Your return on margin would be 14,000/26,250, or about 52% in just more than three months. That’s more than 200% annualized.

Here’s the kicker though: Your probability of being put the shares is almost 50%. In addition, your discount to the market price if you get put is only 8% – way too high for my comfort zone.

But this is exactly what most investors – and my competitors – do. They chase the premium. To be fair, $14,000 is a nice haul in three months… until you have to fork out $161,000 because the trade went against you.

This is put selling for crazy people!

So here’s what I look for… I want the probability of being put the shares to be less than 20% and the discount to the market price to be between 20% and 50%.

This is what the readers of my Automatic Trading Millionaire service have been trading all year. So far, we’ve yet to get put! If we do get put, it means we just bought a blue chip stock at a huge discount.

Our average holding period has been 87 days. And our return on margin has been in the mid to high teens. All the while, we have taken a huge amount of risk off the table.

So stick to the well-marked trail… and stay off those national forest roads! It is possible to manage your risk if you stick to a disciplined strategy. The returns may not be obscene… but neither is the risk.

For more information on my put selling strategy – and to hear how my colleague paid for his wedding and honeymoon using it – click here now.

Good investing,

Karim

P.S. I can’t promise you that there will be another near-death, off-roading adventure, but I’ll be at the Club’s next big event this coming March… I’d love to see you there.

It’s The Oxford Club’s 20th Annual Investment U Conference, and it will be taking place next March 15 to 18 at the Four Seasons in Las Vegas.

Joining me will be my esteemed Oxford Club colleagues and more than two dozen experts from the investing world. We’ll be discussing our favorite wealth-building strategies and the hottest speculation plays for the year ahead.

To get all the details and reserve your spot today at a tremendous discount, click here.