My research process continues to examine the rest of the financials to be sure that we have a solid company, and then I develop a valuation model for the stock to be sure we would pay the right price.
Could a seemingly solid company still release unexpected news that moves shares sharply lower? Absolutely.
But even if that does happen, it does not necessarily mean I’ll suffer a loss. In the past month, for example, the average strike price I recommended was 17.8% below the current price. This gives me a large margin of safety, especially compared to investors who buy shares outright and would instantly be in the red.
But let’s say shares suddenly plummet below my strike price. We’d still have time to act. Most puts are not bought by investors intending to exercise. Few will exercise the put when they can simply book a profit by selling their option when it expires.
In other words, we should be able to exit the trade without having to buy shares. If there’s a fundamental change in the company, and I no longer want to purchase shares when the options expire, I can “buy to close” the option. In that scenario, we might take a loss, but it likely would be less than what a buy-and-hold investor would suffer.
So David is correct — we could potentially have a losing trade if disaster strikes. But as options sellers, we have a margin of safety that most investors don’t. And I’m confident my system will continue to deliver winning trades, regardless of what the market does.
In fact, I just put together a presentation to explain exactly how selling options, even as we’re potentially facing a dreaded “Triple Top” in the market, can help not only protect you, but also help you generate more income. Click here for details.
Note from Bob: The message from David isn’t the only feedback we’ve had from Income Trader readers. In fact, the response has been overwhelmingly positive.
Just last week, Jim Q. wrote to say, “Your teachings have opened a whole new world of possibilities and I want to say thank you for that. Keep up the great work.”
Doug H. said: “You rock … have taken nearly every one of your trades and (I’m) up very well.”
It’s not hard to figure out why Amber’s readers are so enthusiastic about options. Since the inaugural weekly issue of Income Trader launched six months ago, every single closed trade has been a winner. To learn more about Amber’s strategy, click here.
– Bob Bogda
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