What is “Stansberry Alpha?”

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[what follows was originally published in 2012 and 2013, it has not been updated (the pitch for the service remains similar, presumably the strategy does as well) but is being brought up to the top of the page because so many readers are asking about it this week.]

It appears that Porter Stansberry is pushing for new subscribers to his Stansberry Alpha options trading service again, the first time he’s pushed very hard for this since the Winter. The spiel this time is that Porter is FURIOUS that brokers are making it tough for people to follow his strategy, and that therefore those people are angry at Porter, so he’s releasing a new special report on how to follow his strategy in more detail, and how to get broker permission.

I’ve written about Stansberry Alpha before, but it was only in the Friday File and that was way back in December — that previous ad of his gave more clues about the specific strategy, and I assume that hasn’t changed, but I thought folks might be interested in seeing how the logic of it works so I’m re-printing that Friday File piece from last December here for everyone.

Porter does not share any hints or clues about the next company that he will use as a “Stansberry Alpha” Trade, but I run through the example of Chicago Bridge & Iron below (using numbers from last December) and he has said that his focus is on companies with blue chip assets that he’s very comfortable with buying — stocks that he thinks have very limited downside, in his opinion, and by way of example (and proof of success) he mentions having recommended similar “Alpha” trades in Intel, Microsoft and Wal-Mart since the service began about eight months ago. So whatever he’s choosing next is likely to be a “blue chip” type company, and, as you’ll see in my comments below, he’s essentially taking the risk of the stock cratering and using the money he receives for taking that risk to make a bet on the stock climbing — in effect, a “double down” of a bet on one underlying stock.

What follows has not been updated in any way since it first appeared on December 12, 2012:

Here’s how Porter has been pitching this new trading service, which is priced at $2,500 a year:

Porter Stansberry’s ALPHA* Strategy

“A Little-Known Secret of the Options Market that’s so Profitable… We’ve Never Been Willing to Share It…

“*ALPHA has been called “The Single Greatest Investing Secret” in the world’s markets. It allows investors to earn far more than normal stock investments, while actually taking less risk. Most academics will tell you it’s impossible. But the proof is right here…”

You can see the whole presentation here if you’re interested, I won’t go into every detail because he’s not teasing a specific trade on a specific stock this time around, he’s teasing a strategy that he thinks he’ll be able to recommend monthly, over and over, to profit from an “anomaly” in the markets. I’ll just share a wee bit here to give you a taste:

“Alpha is a critical anomaly that could hand you 50% to 100% gains — over and over again — with less risk than almost any trade in the world.

“This anomaly cannot be explained by the “efficient market hypothesis” ….

“I love buying world-dominating, capital-efficient businesses at deep discounts… what I call “no risk” prices.

“I’m talking about companies like Intel, Johnson & Johnson, Exelon, and Hershey.

“These are the kinds of solid stocks you want to grab when the market irrationally sells off… which it does every so often….

“… what if there was a way you could make 50% to 100% gains — every 12 months or so — on safe, conservative stocks like Hershey?

“What’s more… What if you could make these big gains, while taking LESS risk than a regular shareholder?”

So you can see why people are asking — sounds pretty awesome, right?

He does go on to describe the strategy in very general terms, and to say that it’s best for those who already have a decent pile of capital to use (he says $25,000 is a decent minimum account balance) … and that you’ll need approval from your broker, and some brokers won’t let you use this strategy. It’s some kind of options trade on the big, “blue chip” stocks (though he doesn’t use that term, I don’t think) that Porter often recommends in his regular newsletter (and in some other relatively conservative letters, like Ferris’ 12% Letter), but it is apparently not just the selling of puts, which he has tried to build newsletters around before. Here’s a bit more:

“Selling puts is still a great strategy today. You can pile up lots of single- and double-digit returns. You can inch your way to a great year….

“But here’s the thing: You won’t hit home runs just selling puts right now.

“To make outsized gains on a single trade, you need something else… You need an edge in the market.”

That edge? Well, he hints at it with talk about his first recommendation, an “Alpha” trade on Chicago Bridge & Iron (CBI):

“As a shareholder, you could do well. I’d estimate the stock could climb 20% or so in the next year alone.

“But an anomaly in the options market allows us to literally grab 18.5% in guaranteed income right now… While potentially banking 100% gains on CBI in about 12 months….

“You see, like with selling any put or call option, the Alpha trade gives you upfront income.

“In this case, the CBI Alpha trade hands you 18.5% in guaranteed income up front… to do with as you wish. You never have to return this money.

“But in addition to this upfront income, the Alpha trade also offers you a potential 108.6% return on capital by January 2014.”

OK, so I can’t tell you exactly what Porter is recommending on this CBI options trade — CBI options are already pretty liquid, so there isn’t a single options contract that stands out as getting a vast amount of interest, but it sounds very much like he’s recommending you both sell puts and buy calls at the same expiration, with presumably different strike prices to create some income.

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And no, you’re not going to generate 20% returns (or 18.5%) in a year with this strategy unless you’re using margin to cover your put selling – you can’t consistently make that kind of money from a great company if your put selling is backed by cash, particularly not if you have to use some of the income to generate more upside potential.

But still, I think this is what he’s doing — he must be using some sort of margin calculation, figuring what your broker will require you to hold in cash to back up the puts you’re selling and then considering that amount (and not the margin that you have tied up in the puts) to be your investment. That’s fine if the margin doesn’t get called, but if the stock falls by 20% because the CEO is bribing the President of Mexico and stealing money for his drug habit (wild example, I suspect nothing of the sort from CBI) then there is a downside risk that has you using that margin account.

Here’s an example, with some guesses as to the kind of trades Porter could be suggesting:

CBI does have LEAP options trading for January 2014, and all of the ad language talks about returns in a year, so I assume he’s doing these kinds of long-term options with these trades — both to give you some real put selling income and to provide more time for a call option to play out and become profitable. So you could, for example, sell a put option on CBI at $35 and get income of about $2.20 for that … so that’s $220 for each options contract of 100 shares.

Then you could buy a call option on CBI for some upside exposure at that same expiration, but if you want net income to put in your pocket right now you have to spend less than $220 on it (we’re ignoring commissions to make it simple) — so let’s say you buy the $60 call options for $1.60. That’s $160 per contract, so your net income is $60 per paired contract.

What happens to the stock? It’s at $45 now, if Porter’s right and the stock goes up by 20% this year it would get to the mid-$50s, and both contracts would expire worthless, you keep your $60 and that’s it.

If the stock falls below $35, which would be a loss of more than 20%, you have to buy it (or buy back that put option you sold, and do so at a loss). If it falls below $34.40 at expiration, you’ve lost your net income of $60 and more.

So if I’m right about what Porter is suggesting, this is really just a bullish strategy to leverage your returns without committing your full capital to a position in the stock — and if you’re right about the stock doing really well you’ll make tons of money because of the leverage of those call options and the fact that you offset the cost of your call options by selling puts.

This is presuming that your broker will let you sell a put backed by margin and only set aside a portion of the cash to cover that margin, which, as Porter said, not all of them will do — and you can’t do it in a retirement account, because those accounts can’t use margin.

How much capital would it take to do this? Well, for each contract of CBI you would need the capacity to buy 100 shares of CBI at $35 to back up your sale of the put contract, so that’s $3,500. If your broker makes you set aside 50% of that you need $1,750 in cash, if he requires 20% it’s $700. I have not done this kind of trade, but I’ve seen margin quotes in that neighborhood from “regular” brokers so that’s a decent guess.

So that’s how the income numbers start to look impressive — if you start with the assumption that you’re only “investing” the $700, then $60 in income plus the potential upside from the call options (if the stock does well) sounds pretty awesome. And it’s probably a bit more than $60 in net income for the kinds of trades he’s suggesting, since he talked about 18.5% “up front” income … maybe because his recommendation has impacted the options prices, or because I guessed at the wrong contracts prices for my example.

Do keep in mind, though, that if CBI dropped to $20 for some reason (it probably won’t fall quickly by 50% or more, which is why you’d want to consider this … but “probably” is an important word) you’d have to buy it at $35, so even though your broker might have only made you commit $700 you’re still on the hook for an additional $800 from your margin account (total of $1,500, to cover buying 100 shares of the stock at $3,500 and selling it right away at $2,000). And if CBI turned out to be a scam and went bankrupt over a weekend — which, again, is extremely unlikely — then you’re on the hook for $3,500, which makes the $60 in income seem like little comfort. That’s why Porter talks a lot in the ad about doing this with the “world-dominating, capital-efficient businesses at deep discounts” that he thinks are at “‘no risk’ prices.”

And if you can get your head around that, sure, this might be an impressive strategy to juice your returns beyond basic put selling by using your put selling money to buy calls. So instead of buying the stock, you just promise to buy the stock at a lower price for a year … and then, with the money you get for that promise, you place a bet that the stock will go even higher that year. The “anomaly”, presumably, is that the put options for a stock going down by 10-20% will earn you more money than it will cost for the call options on a stock going up by 20% (or whatever the percentage is he’s using, that I don’t know). If you can indeed get a 20% margin requirement on those put sales you can certainly generate 10-20% income with this strategy with a lot of relatively volatile but strong companies — just look at the companies you are really, really confident in, see what you can earn by promising to buy the stock at a 10-20% “discount” to today’s price, and use maybe 1/2 or 1/3 of that income to buy a call option if you’re really excited about the prospects — you’ll get income and upside exposure, and you’ll also get a pretty solid chunk of somewhat hidden downside risk from your margin exposure (or a much smaller income number if you back up the put sale with cash, as you’d have to do in a retirement account).

Second example? OK, try Intel (INTC), another of the “world-dominating” stocks he mentions and one I happen to own personally. Say you’re absolutely certain that it won’t go back down below $18 again (it’s at $20.75 now) within the next year, and you’re willing to back that certainty up (and maybe would be buying the stock, no questions asked, if it fell to $18 anyway). You sell an $18 put on INTC for January 2014 for $1.40, or $140 for the contract of 100 shares. You have to have $1,800 to back up that sale, let’s say you get a pretty friendly margin requirement of 20% so you actually only have to set aside $360 in cash (20% of the $1,800). That’s a nice return of almost 40% if you ignore the fact that at least some of the margin commitment is real money at risk. Then use less than half of that to buy a call option, we’ll say the January 2014 $25 strike price for a bit under 60 cents. So that gets you a net income of 80 cents, or $80 per contract. A bit more than 20% of the $360 in cash that your broker will set aside.

If the stock falls to $17, you’re losing money … or, if you think of it philosophically, you’re spending $18 a share to buy Intel and it’s worth more than that and dammit, you don’t care that the stock market, for an irrational time, thinks it’s worth only $15 because Congress is fighting and Spain has defaulted and the whole market has crashed by 25%.

If the stock rises to $28, you don’t have to worry about that margin risk you took and you’ve booked profits of better than 100% of the cash your broker set aside (the original $80 of income, plus the $25 call option is now worth $3), and since the put option expires worthless that cash the broker set aside is just quietly returned to your regular balance. It is neat and tidy, and as long as you’re really comfortable with the margined put selling — and stick with companies where you can be 99% certain that you can get out of these trades if you want to trigger a stop loss, it certainly could be a decent way to generate both income and upside gains in a rising market. As long as you stick with companies that are big, that have a lot of options trading, are reasonably valued, and are stocks you understand and want to own…. and as long as you’re either willing to suffer heavy losses if the entire market falls by 20-30% over the coming year, or able to monitor these trades pretty closely and sell (buy back your put options) to take your lumps with stop losses on the way down.

I’m guessing that he’s keeping the price of the newsletter high because it’s an options strategy, so once you get more than a couple hundred people following this kind of strategy closely you get to impact the market enough that none of your subscribers would be able to get the prices you recommend on the options … at least not in that week following the new recommendation when most people are likely to be excited about it. And that’s really all I can do, so do keep in mind that ALL OF THE STUFF ABOVE IS MY GUESSING — I don’t know for sure that this is Porter’s strategy, nor do I have any personal experience using this kind of strategy.

P.S. We also had a long discussion about this following a reader question over the winter, you can see that long thread here if you’re curious.

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54 Responses to What is “Stansberry Alpha?”


  1. Excellent explanation of a complex strategy Travis; but it is hardly a safe strategy for the average small retail investor. Maybe that is why some investors who got “burned” at some point by some S & A recommendation are so down on them. Sometimes what isn’t said or disclosed would provide a more balanced picture. In 2 decades of investing I have never found an analyst who is 100% correct at all times and in all markets. Investors need to be defensive against their own GREED and not get taken in by cleverly written ads that may not be appropriate for their level of experience or portfolio size.

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  2. You are correct, his strategy is a buy a call and sell a put. His “amazing” high % return, as you mentioned, is because he is using 20% as collateral so his returns are based on the premium amount rather than full amount at risk…

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  3. I have been using that strategy for year. I already made 27% gain of my total portfolio this year. It call Synthetic long stock (assume at same strike price). However you could adjust strike price of each pair of call or put to suit your need. It works 95% of the time and 100% of the time during bulls market. I do not need SB to pick stocks for me. I could pick and pair I want. I agree go with the Blue ship stock where chance to stock crash is minimum. If stock do move lower, I could use vertical put to lower my strike price down and probably sell call option out instead of letting it expire worthless. However for the price of $2500 less $1000 = $1500 per year. I can do it alone without they (StanBerry) telling me which stocks. Example of my stocks. Brk/b, COST, CVS, GTLS, CBI, WFC, NOV. etc.. Chance of those company to drop 5% or more is very minimum. Good luck trading.
    BTW: Thanks for the tip from Stock gumshoes : ALNY is doing quite well.

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    • I have used all those strategy for a long time. It do work and you do not need SA to show you.
      Synthetic long is great (like buy house with no money down or getting cash back). I think it would work with experience option trader that know how to work around it. I did make a fortune selling PUTs. Synthetic option ( same strike price or even different strike price between long call/short put). Chance to lose money is very low as long as price movement is not too drastic down ward. Even you are losing on naked put. You could minimize losing by buy vertical PUT to lower strike price of PUT down or diagonal calender to extend strike date out. I did double my money last year. However event such as 2008 could bankrupt puts seller like me. I did reduce my exposure down to minimum. I do have same stock like you such as Brk/b, cost, wag, etc.. These stock have low beta so premium is not great but it is good income. My most profitable is LNG and Z. Stock price keep going up and collecting high premium every months. Those 2, I won’t mind having it in my real stock holding.
      I do not need SA to tell me.

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  4. I’ve read through the “Alpha” teaser and newsletter info that Porter and his people advise AGAINST using margins for trades. With a put sell, the broker is to set aside enough cash from the account to cover 100% of buying the stock should it drop to the put price, and this is done with stocks you either want to own anyway or would not mind owning — so you get a good stock at a good, low price. Also, the put sell and call buy prices are NOT the same, and the time frame is 1-3 months so as not to set cash aside for too long. Finally, more than one put and call (combination) contract is purchased at a t time. It sounds like a possibly good way to generate cash up front while waiting for a “world-dominator” (blue-chip) stock to fall to a good stock-purchase price.

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    • I think their strategy would work most of the time. The only time it would be really hurt if the whole market crash like 2008. However you need to prepare how to get out when market going against you. Sample I expect Dominion (D) trade~$60 at this time to get it approve for LNG export soon. So I bought combination of Jan 14 60 CALL / Sell Jan 55 PUT cost $.90 If it got approve for LNG export by year end, it may go much higher.
      If not it may drop 10% to $54. So I lost about $1.90 but I would sell off my call position instead of get it expire even I may get a few cents for it.
      At that time I may Buy PUT$55 and sell PUT$50 to minimize that $1.90 lost. With D have good EPS I won’t mind own it if it do come down below $50. That is chance I won’t mind taking it. I been playing option game more than 15 years and know how to increase my odd of winning.

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      • Sounds very Savvy. As Travis mentions in the article – if you have a ‘service’ like Stansberry telling you which puts/calls to sell/buy – then those particular puts/calls are often priced out of the price range recommended. I tried Options Hotline once – had that issue…so I asked for a refund.

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      • Kevin,
        You are exposed to a lot of risk with that strategy if D collapses below the 55 put.
        You could theoretically lose $5500 per contract (albeit the stock needs to go to zero).
        I’m not sure I follow what the advantage is to buying a call and selling a put at the same strike versus just buying the call? The naked put carries the same risk as buying the stock.
        Looks like excess commissions to me…

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        • As I understand it, the put and call use different strike prices: the call buy well above current stock price and the put sell well below the current price. The risk is minimal if the company is a solid one that you want to own anyway (at a lower than current price). As I understand it, the options usually expire unused after the short 1-3 month time frame freeing up the set-aside money for re-use, giving you the difference between put sells (income) and call buys (expense), less commissions. I believe the real purpose and benefit of “alpha” is in the stock selected, option choices recommended, and time frame recommended by Porter.

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          • If the service is still the same as it was when he launched it in December or January, then the time frame is much, much longer than 1-3 months — typically he was talking about 10-15 month time frames with the examples he gave back then, though that may have changed and he may be flexible. If he’s not using margin and your “initial investment” is the cash you’re putting aside to cover the put, than the promises of 100%+ gains on that cash that are implied are, well, poppycock.

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    • Selling PUTS can be rewarding and great fun. Some of these may even be sold for a gain of 5-8% for 30-60 days. Here is some wisdom from previous painfull experiences: don’t hold short puts during earnings reporting time, and regardless of how much “Fun” it is, always be sure that you can afford the worst case scenario. Bad news may come at any time, but on the quarterly earnings report day, there is always the chance of bad news. A high beta, high volatility stock can easily crash 20% – 50% on worse than expected earnings, or heaven forbid, a loss. Say you loved the $60 stock that had an option 75 days out and had a great $55 put price of $2.95. It’s such a good “reward” that you buy 10 contracts. That puts $2,950 in your pocket, less ~ $20 commission. All is good after the first month, the premium goes down just a bit and you see a paper profit, oh how cool. The next week earnings report the revenues are down, earnings per share are down, and the company warns about this getting even worse the next quarter. This happens after hours of course. The next morning, you get up and that $60 stock is now worth $32. You are forced to buy those 1000 shares at $55. each. Even after adding back the cash principle, you have lost at least $20,000, and may end up losing more if the stock doesn’t bounce back up. This happened to me with an education company lost its accreditation a couple of years ago. Some of you may have heard of that. This fiasco wasn’t announced at the quarterly reporting, it was announced some other time. I didn’t have 10 contracts of BPI, but I had more than needed to feel the pain. Some of you may have heard of this company or what happened. They finally got the accreditation back recently, but they lost tens of thousands of students and the accompanying tuition revenue and cash flows.

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      • I can understand your pain and have been there myself. When I have had several rather large losers, it has generally because I failed to follow one of the cardinal rules in writing puts: I wrote them for the large premium alone, rather than that they were first rate companies that I would be happy to own at the strike price, if put to me. I have also failed at times to consider the quarterly earnings date, which, as you note, can cause a big swing in the option’s price. I have been more consistent in observing the above of late and it has shown in my results. I have written covered calls for years with relatively good results, and only began writing puts about 18 months ago. I have had my losers (I generally hold them until the price recovers and then write calls) and the results on them is still unclear, since it won’t be known until they are sold or called away. On average, writing puts and calls has been very good for me and I netted around 24,000 last year for 6 months and should at least double that this complete year. One last point: margin can amplify your gains, but also your loses. Stay with no margin only and sleep better at night.

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      • I’ve been trading options for about 3 years, including covered calls, selling puts, and many other option strategies. I’ve also bought and sold many stocks. I can’t say that I have been all that successful since I took advice from many gurus, but I recently started following the advice of Tom Sosnoff. Tom has been trading for 30 years, many of them as a market maker before being one of the founder/developers of Think or Swim (TOS), one of the best if not best trading platforms available. He sold it to TDAmeritrade for $600 million. He now has a website at tastytrade.com where he has a live show before and during market hours with different segments.

        One of the most interesting ones is called Market Measure where he has his research staff do analysis to determine the truth about many common beliefs about the market. This week he had one about how insane many analysts price targets are. Another one was statistics on the most volatile months and what days during expiration week were up or down the most. The site is free if you have an account at TDAmeritrade. I don’t know what it costs if you don’t but there may be a free trial period. It has recently become the largest online financial network in the country (maybe world). So here are some of his principles.

        He is a contrarian at heart which means he sells rich and buys poor. His goal is to sell premium if possible, but only where the probability of profit is 65% or better. So for example if you are selling a put, you would sell the one that has a probablility of expiring in the money of 35% or lower. If you were selliing a put or call vertical spread you would be looking to make at least $35 (1/3 the rosk) on a dollar wide spread. That is only possible if IV is fairly high. The TOS platform has some great option statistics that show the IV%, i. e. where it is in the last year’s range. So if the IV% is 10% you aren’t doing yourself a favor selling premium and your best bet is to buy a credit spread, put or call depending on your direction for that stock but at a price where you have better than a 50% chance of break even, or something like a calendar. If IV is greater than 50% then you have a better chance of selling some premium. He is a believer in IV reversion to the mean and has shown that IV is the biggest factor in the Black Shoals model. Of course market direction is the biggest factor.

        You must lower cost basis. Covered calls and selling puts do this. You can’t do that buy buying a call, put, or stock outright.

        Except for earnings or special binary events take positions with 30-50 days DTE. (He does take some very short futures trades because he’s very good at market awareness so he often takes a pre-market futures position and close it after the open). Since he wants to be a seller of premium the optimum time for theta decay is at 40 days. The other reason is to give the trade time to work giving the trader time to manage the winners. He rarely manages losers and lets them run their course to expiration. The reason he can do that is related to the end of this long post.

        Bet small and bet often, the opposite of what I and many others tend(ed) to do. The reason for that is that if you only take trades that have a probablility of profit > 50% (long vertical spreads), covered calls (1 strike OTM when IV is rich), and 65% or > for short vertical spreads then your chances of being profitable is greater the more trades you make. He doesn’t state what small is because that is up to the individual. Personally I am now allocating 3% of capital (not 3% risk, a whole different allocation method) for stock covered calls and puts and .5% for pure option plays. I’m a lot happier with smaller but more consistent wins and smaller and fewer losses which means less drawdown. I currently have 27 open September trades and will add more this coming week.

        I have no financial interest in tasytrade and am recommending it in hopes of preventing some of you from making dumb mistakes and give you something to think about.

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        • Thanks Bob,

          That was a succinct and enlightening letter. I just started with selling puts and covered calls and the concept is interesting and thus, easy to overlook the risks. Can you tell me what would happen with your current trades if the market swooned 15-20%? Can you monitor your array of plays such that you are not too exposed to such a macro- event? WIth the puts, you’ll end up owning lots of stocks at lower than the prices, you thought at the time, were reasonable however, unless you have some kind of balancing mechanism, it may take years to get back to even. I”m looking here for some kind of strategy with options writing to limit the downside in a substantial market correction. (We are certainly due one of those between now and nirvana.) Maybe a strategy that does not have your expiration dates grouped together or shorter terms or a balance of put writing and other option tactics that would protect you on the downside?
          Mike

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          • Michael, I only gave a brief overview of some principles that Sosnoff espouses and I’m far out of his league, but I’ll try and answer your question about my current trades and what would happen if the market swoons. Actually though I’d prefer to see a 20% or more swoon since I’m about 80% in cash. The reason is that with IV so low and many stocks so high I don’t want to buy or sell most of them because the premium is not that great. Also I closed out a lot of trades this week that freed up some cash.

            First of all I try and keep my risk balanced somewhat and buy only (or mostly) good solid stocks that have very little chance of going kaput overnight. What Sosnoff recommends and I’m gravitating towards is having a watchlist of 30-50 stocks that have tight bid-ask spreads. I really like $1 wide options with only a few cents between the bid-ask and that way you get filled much easier at the mid-price or very close to it. It doesn’t seem like a big deal in any one trade but it really adds up over time.
            I usually only sell puts on a stock I wouldn’t mind owning at a lower price and I don’t want to sell them at the top of their range unless I have a strong bullish opinion about that stock. I’d rather look for a stock/etf that looks like it is topping but still has a fairly high IV so there is worthwhile premium to sell but I’d rather wait until it fell and the IV increased. Whether I sell a covered call or a put is determined by the return on risk and if close I may do the covered call to capture a dividend if it is worthwhile. I also try and spread the risk around so that I’m not overly exposed to any one group such as MLPs and REITs. Since I trade in an IRA I mostly stay away from MLPs.

            Overall I keep my portfolio fairly close to delta neutral although currently I’m leaning short since that’s the way the market is looking. I beta weight my portfolio to SPY and although I am long 700 deltas, I am currently about -100 SPY weighted deltas. I was about -300 SPY weighted deltas before this week’s expiration and plan to get back some more -delta’s this week.

            You may think it’s risky, but one of my covered positions is FAZ, 3 x bear ETF. When you can’t short a stock or ETF in an IRA that is one way to do it. My position size is the same as any stock so even if it should fall a lot, it will always come back sooner or later to sell some more calls on.

            My favorite positions though are vertical spreads and calendars, mainly because they are defined risk trades. With the currentl low IV it is hard to find good credit spreads. Because of the current market, I have 6 covered calls or puts and some of them are -deltas. I don’t try and be delta neutral but having an opinion about what I think is going on in the market. So even though 75% of stocks follow the direction of the S&P 500, the other 25% don’t. So currently I have positions in BP, GDX, GLD and some others as well as having short positions in FAZ, SPY, TZA, VXX, and some bear put spreads as well as some bullish verticals.

            To answer your question, if the market went down 20% overnight, I’d be down about 12%, and love it because I can put some of that cash back to work getting a lot more premium on all trades. However, the market never goes down 20% in one night and when it does it doesn’t stay down forever. I used to worry about that but not anymore because I no longer risk that much/trade.

            If you are familiar with Investors Business Daily, they recommend trading about 6 positions with an 8% stop loss from entry. So that sounds better than a 12% overnight loss. However, they are usually invested in high growth stocks and when the market crashes over night you are long many deltas and those high flying growth stocks get hammered and you will lose more than 8% before you can get out. Been there, done that. I have lost > 10% overnight when I was trading etfs and didn’t sleep that well that night. I like sleeping at night.

            Finally, the key is not to be greedy and think you can beat the S&P 500 year end and year out by a large margin. It’s also important to trade a consistent size and resist the temptation to double down to recover a bad trade(s).

            If you have the time and can get access I suggest you go to tastytrade.com and watch the segments he does with his daughter as he teaches her how to trade options with a small account.

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        • Bob… thanks for the great info. I’ve had a TD Ameritrade account for almost 20 yrs (back went it was Waterhouse, then TD Wat., then TD Amer). I always freely admit I’ve lost a lot more money with options than I’ve made. The one consistent money maker has been selling options instead of buying. My horror story was selling YHOO puts during the dot com bubble, and having them put to me PRIOR to expiration. That can be done with options. My question is how to utilize tasty trade? IV is not a concept I’ve bothered to study and learn. I want to return to more selling strategies and have more positions. Last year, I tried Option Monster and Dan Nathan’s risk reversal. Both subscription services, and both focused on buying options, and both lost me more money than I made. I’m much more confident that selling options is a better strategy for me, and I’m looking for more guidance. More tips, please. Thanks!

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          • Thane, see my latest post to Michael. Although selling puts is a good strategy, I think it is better to diversify your strategies since selling puts as well as covered calls is not the only way to make money in options and they are unlimited risk trades. If you don’t understand IV and Theta you shouldn’t be trading options until you do.

            Since you have a TDA account and have free access to Tasty trade I suggest you start watching his shows. They are all archived and he has a youtube channel as well. Almost every one of the show segments are about 15 minutes so you can watch at your leisure. So if you go to tasytrade and select shows you can see all the previous shows. They all have a topic and you can select whatever you are interested in. Also, if you subscribe to tastytrade, you get a suggested trade almost every day that has a high probability of success. He also has an app called Bob the Trader that is, I think, $150/month. I has made 153 trades so far this month.

            The shows I usually watch are Market Measures, Best Practices, Tasty Bytes for small accounts but has a lot of good info, as well as others as time permits. I just wish I had found tastytrade much sooner and saved myself a lot of money.

            Bottom line is you need to learn how to manage your own money successfully and not listen to all the market gurus. For whatever reason Tom’s motives seems to be to want to dispel all the bs fed to the retail trader and help them learn how to make money in the markets. He pretty much puts analysts, mutual fund managers, and newsletter writers in the same scrap pile and has shown statistics to prove it. His research in Market Measures is often contrary with what he has believed his whole career.

            Check it out.

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        • For thr record its Black-Scholes which has been around for forty years. IMHO you’re a newbie whose been having fun in a rising market. My advice is to quit while you’re ahead because much smarter guys have lost lots trying to make easy money. You’d be better off buying high quality dividend paying stocks at times of market weakness. Just my educated opinion.

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  5. I tried his ploy with Intel, and it sank. Probably I shall be put the stock. Yes, I get it for a lower price than if I had just bought it, back then when I sold the put option. But the call I bought will expire worthless, which is $ I lost. Simply selling puts would have worked better in this case at least.

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    • James.
      You could minimize to loss or even come out gain buy close out your PUT position and sell lower strike price PUT. The price you get from selling lower strike put may be higher than current lost of on intel put option. I did have INTC option also. That what I did earlier. However later on I close it out since there are more other fish (different stock) in the pond and on the up trend. I rather use my margin power on other stock.

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  6. James put it correctly. If you are put, then you lose on the call also! By the way, it is hard to get the trade you want easily even if you try to get in as soon as the advisory hit your box. Some trades end in 2015. If the majority of the trades work out, it is still OK.
    As someone above said you can pick your own trades, why pay $1000? It is your choice!

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  7. Travis – thanks so much for exposing this latest ruse from the WalMart of Wall St info brokers. SIA in this case. Mark Ford and the PBL have been doing the exact same thing for a “special price” of $900. I wanted to learn options so I bit. Luckily I was able to back out and get my $ back. Then PBL starts another round of the same program trying to sell me before I even complete the training course. Now I see this from SIA this week and I call “BS” on both of them. I wrote you before that I think they are in cahoots and are really one big shop. At any rate, it is better to learn options through an honest course or other means, rather than pay these guys and get slammed daily with their long boring info videos. I really want to improve my performance in retirement but think I am done with these scammers. Oh, btw, the PBL recos are nearly worthless in my opinion, by the time you get them. Hey, why don’t you start an options training course Travis? I think I will be joining the irregulars soon. Thanks.

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  8. This strategy sounds like a calendar spread.
    Sell the front month and buy a back month at the same strike.
    If you sell an OTM front month call let’s say the SEP (assuming a long bias) and buy a back month, say NOV; then you have the probability of the front month (short option) expiring or at least dropping in price due to theta, while the back month (long option) has time for the underlying to appreciate and the option price to rise.

    Depending on the prices and volatility spreads, the position can be placed for a credit or debit. Either way the short option helps (or completely) pay for the long option, thus the greater return on risk capital.

    The risk is minimal due to the protection of the short option by the long one at the same strike.

    A calendar credit spread would theoretically entail limited risk and unlimited profit potential should the short option expire worthless and the stock appreciate into the money on youur long option.

    Another alternative is to go against the bias… i.e. for a long bias one could sell the front month ATM PUT and buy a back month PUT for the same stike. Thus you win if the stock moves up, stalls, or even collapses below your long put, so long as it doesn’t collapse before your short put expired.

    Dave

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    • If you’re talking about the CBI option, It’s not a Calendar (expiration months are not different) “Then you could buy a call option on CBI for some upside exposure at that same expiration”

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  9. Travis… I enjoy reading the Stock Gumshoe and will soon be coming into some money. I appreciate your research and due diligence on other companies selling information. I bought some “stock buying” advice from what I thought to be a reputable company. Could you please contact me via e-mail and tell me what I need to do for you to expose these people? They sold me a service in December of last year that had been sold at least 6 months prior and all the positions they were recommending were already purchased and the prices went up. Had I purchased these stocks when they sold me my “subscription,” I would have lost my backside. Please contact me via e-mail and leave a number so I can contact you.

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  10. You are right on Travis and the risk is really not there plenty of time. LIKE the 2 big players on the oslo market with SDRL LEAP FOR 2015 ALMOST 3 MIL OPTIONS NOT SHARES THEY PLAYEd ON April 18 under FARMINTON NAME , THAT IS A LOT OF SHARES WHEN YOU DO THE MATH THEY ALREADY CLEANED THE CLOCK ONCE WITH IT AND NOW THEY ARE CLEANING THE OTHER HALF I BET THEY DO IT AGAIN BUT FARMINTON IS OUT OF THE BAG THEY WILL USE SOME S. AMERICAN TO TAKE THE PUBLICITY, THEY ARE STRONG WITH THE NEWEST UPDATED FLEET BUT WHAT IS FUNNY THEY ARE LOADED ALREADY. ALL GOVT. PAPER FILED WHILE EVERYONE ELSE SLEPT. HELL OF A PREMIUM BACK IN APRIL FOLLOW THEM HEY ARE TIGHT, 3TO 4 AM ON THERE MARKET THEY ALWAYS RELEASE THE NEWS LIKE A CODE. BUT THEY DON’T FLAUNT IT OR ACT GREEDY, LIKE THERE BIG MAN SAID LOOSE LIPS SINK SHIPS WE JUST DRILL. ALL LEGIT TO!

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  11. I purchased a stock option subscription from the Motley Fool and if you want to make extra money on your stocks and learn options at the same time, this is the way to go. Their service is excellent. I would much rather have MF in my corner than Stansberry, however, as mentioned getting the premiums they suggest are available is difficult. For example, today MF recommended we sell a put and get a $4 premium. 29 minutes after receiving the alert, the premium was down to $3.20. An hour later it was down to $2.25. This is what happens when lots of people are sharing the information. That doesn’t make it a bad service since the principles are the same. PS my broker requires a 30% margin cushion which is pretty much standard.

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  12. This strategy is good if you’re very bullish on the stock; you get exposure without cash drain.
    You’ve got to keep tight stops on the stock however. I made good money on IAG, INTC and BAC but lost a big deal on CLF playing this game.

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  13. For Jeff Tatus:
    Options trading can be learned by hiring a mentor/coach, or buying a service that lets you trade with them real time (CBOE, Better Trades, etc) so you can see the trades and learn the rules concurrently. When you feel confident in a particular type of option trade, you can start to select your own stocks or use a stock screener (Finviz, Yahoo, etc) that suits your type of trade. You can learn the language of options using free education videos, webinars, and text which are available on stockcharts.com and cboe.com, to name two. Once you know the fundamentals, test your skills and results by paper trading before committing any $$$ to your trades. Pick a broker like Options Express or Options First (or Google Options Online Brokers to see which ones have competitive commissions), open a virtual account, and see the results of your trades on paper to gain confidence in the type of option trade you want to specialize in. Hope this helps. Good luck!

    Like(2)

    • Do You think this stratagy will work on a smaller scale or do you need the leverage to make it ? If I could see it on paper maybe I would understand better. Can you join a group of investors and invest say 10,000 ?

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      • The process is the same no matter how much $$$ you start with:
        1. Educate yourself by going to free websites above and read tutorials, watch webinars.
        2. Pick an options oriented website as listed above and open a free virtual account.
        3. They will give you “monopoly” money to play with so you can make trades as if it was real.
        4. When you are ready, fund your account and start trading.
        Generally speaking, the more expensive the stock, the more expensive the option. If you are comfortable buying $25 stocks, you will probably be comfortable trading options on those same stocks. If you need more information, have Stock Gumshoe give you my email and ask away.

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  14. Hi, I appreciated the above very informative and helpful information.
    Anyone has an opinion / experience with Chuck Hughes option trading service?

    Thanks in advance for your feedback,
    Eucharist

    Like(0)

  15. I think you will learn more with Motley Fool Options service. They go slow and explain every trade in excruciating detail, but you rarely

    You will probably earn more with real time traders like Markay Latimer or Bill Corcoran of Better Trades. These folks go live for 2 hours twice a week, but your subscription is more expensive than Hughes. I traded live with Bill in a seminar two weeks ago and watched him close a trade on AAPL that he bought the previous week for $7,000 and closed in the seminar for $39,000. Once you learn the rules of the trades you can go it alone. As an example, one of the members reported that she just followed along without fully understanding what Bill was doing and doubled her account in 3 months. Now she understands!

    Like(1)

    • Thanks Ron,
      Can you give me the site link for Markay Latimer or Bill Concoran of Better Trades to check more on their subcription?

      Thanks once again, Eucharist

      Like(0)

  16. Options trading is not a game for the uninformed neophyte. It is a very sophisticated market ploy where you can make good $$ or lose your a** if not well versed in it. Options are basically derivatives. For the average Joe, better to stick to market trading with an honest broker, or if on your own, be guided by a service like Gumshoe`s highly informative bulletins.

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  17. No argument with AllanRob. Options trading is not for the uninformed neophyte.

    That is exactly what I was when I started learning about options about 10 years ago. I also have a trusted broker who buys his company’s preferred mutual funds for my account. I am satisfied with his very conservative approach to risk management and investing for the long run in that part of my portfolio. But I am a lifetime student, and enjoy learning new things, so I take a small amount of my earnings to use in other ventures, one of which is options, and find that something as simple as covered calls can be a low-risk option investment vehicle, and can compound reasonably well over the long run. I am also growing this part of my portfolio as I learn.

    If you are an average Joe, and don’t have the time or inclination to learn how to manage trading risk on your own, I heartily endorse, AllanRob’s recommendations.

    Like(0)

  18. If any of the stockgumshoe brigade can give me some advice. I got caught up in the exuberance of the covered call strategy and now find my stock is about to be called away. the stock price and hence call value is well above the strike price. What to do? Amateurs like me should have an exit strategy but alas not me.

    Like(0)

    • Hi Carolyn,

      I”m relatively new at options but I believe I know the answer to your question. You sold a call on your stock and received a premium. The way to unwind that position is to buy a call back again. It could cost you more money to buy it back (now that the stock has risen) but if you feel confident you can overcome that loss by holding the rapidly appreciating stock, then do so. If it costs too much, you can sell another call on your stocks, further out in expiration to help pay for the net credit. Then if that one also get s called away (in 3,4 or more months) you simple repeat.

      I’m learning options with Motley Fool and I highly recommend that you consider subscribing. They are the best and walk you through each trade plus they have an Options University and a community board where all questions are answered.
      Good luck,
      Mike

      Like(0)

  19. I have done quite well with covered calls and expect to experiment with small commitments to PUTS on more expensive stocks I want to own, but it is certainly not a strategy for amateurs. Some good examples have been given about how much it can cost you if you hit a bad streak, even professionals consider a 75% to 90% win rate as exceptional, so the first thing you need to know is that chances are high you will have some losses. If you are lucky you may have several winners to start, which may embolden you to take risks you should not be taking. Not to pick on Michael, but he illustrates the danger, he says in opening, “I am fairly new at options” and then further on says that, “Motley Fool are the BEST” indicating to me his experience SO FAR has been good under their tutelage, which is fine, however my question to Michael is, how MANY options services have you tried? My point is, how can you say “Motley Fool is the best” unless you have tried at least half a dozen for comparison? There are dozens of relative amateurs out there that can lose you a lot of money. Even the best in the business have occasional losers
    and this includes well known names like Ken Trestor (40 yrs. experience) Bernie Schaeffer, Steve Sarnoff (2nd generation) Adam Lass and Brian Bottarelli, Karim Rahemtulla, Alex Green and the list goes on and after 10 years it would be difficult for me to hang a “best” label on any them. Paying a thousand or better for guidance and then investing more thousands in a few losing positions can be a painful learning experience for a newbie.

    Like(1)

    • Hi Myron,
      I’ve tried 3 options services and you are correct, I can’t say Motley Fool is best, only that from what I have learned by spending $5,000 with others, which included education, hand holding, recommendations and detailed alternatives should you not like or be able to effect their original recommendation, I consider them the best and I can’t imagine what any other service could do better. That is not to say there aren’t others but after my experience with the others, I’m hard put to see how MF could improve or meet my needs better (and my needs are almost overwhelming).

      Much of option trading is controllable and you can choose your level of risk by the tactics you sue and I might add, not use. Anyone that can get it right 75% to 90% of the time will be a rich man if he controls his portfolio and positioning. MF also shows you how to do that. Probably the best thing about MF is they can be trusted, at least the Option and MF Pro services that I subscribe to.

      Hope this helps.
      Mike

      Like(0)

  20. As others have said, the “alpha strategy” is to sell a put at one strike and buy a call at a higher strike. Hardly an original idea. That often works fine in a bull market like we’ve been having. But wait until the next crash (there’s always another crash). Suddenly the calls will be worthless and people with 20% margin will start getting assigned on their puts. You’ll hear the cries of anguish from a state away.

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  21. A fun game until you are naked puts in a stock that melts down. Have made pretty good money overall, but roasted a few times such as once on a sharp Tesla correction and recent bad news from Cree. Key is diversification and position sizing, not too much on any one bet. One additional point – on an option two months out, the premium you are collecting erodes painfully slowly, so you are sitting under guillotine a long time to collect your premium. There is decent premium on options a month out and even on some weeklies.

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    • Perhaps the following may help: they are my personal rules, and work for me. They may not work for you.
      A. Treat options trading as a business, not a hobby;
      B. Create your own spreadsheet with which to calculate for example the break-even points, net cost of the stock if it is assigned to you and maximum profit possible on a spread trade, and check each trade before you trade.
      C. Never trade on margin.
      D. I prefer to write options because then time decay works in my favour. I buy options only if the stock has fallen a lot and appears to be making a bottom (buying a call) and mutatis mutandis for buying a put.
      E. Trade in the options of stocks you would be happy to own outright. Often this means the premiums may be small.
      F. Option prices can be very volatile and illustrate very clearly that the market is anything but rational, so don’t be fazed by the apparent profit or loss ( hence why to use your own spreadsheet to maintain perspective).
      G. Aim to make income not capital gain
      H . I calculate my annual return not by calendar days but by the number of times I can make that return per year. So if I write one month out I can do that 12 times a year. If three months out then 4 times a year.
      I. Expect to lose one third of the time.
      J. Aim for consistency in small trades, and the income will come.
      Someone asked what to do if their covered call went against them (I.e. the stock rose). As long as the strike price of the call was higher than the cost of the stock , the stock will be called away at a profit, and will also have kept the call premium.
      Above all be careful, and realise that writing options is a bull market or sideways market strategy. Spreads can work in both bull and bear mkts but you risk losing the entire cost of the spread premium. Hope this helps. Happy to discuss more.
      E

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      • One error in my previous text re the covered call. Should read: ” the stock will be called away at a profit to you and you will also have kept the premiun on the covered call you sold”. MQ

        Like(0)

  22. To me the key question with a service like Stansberry Alpha is whether you pay a service a very high fee or whether to do it on your own. I have concluded that you can do it on your own and learn from your mistakes. I am relatively happy from my results in writing puts and covered calls. My put win rate is about 75%, and I would like to improve it. As mentioned by others, I have been burned by earnings announcements, even when they were good but the CEO decided to temper expectations.

    Would anyone recommend a good forum to intelligently talk about options? Seeking alpha used to be such a forum but the editors decided they did not want options articles per sa.

    I do not think anyone addressed the advantages of writing puts in a market meltdown. With puts you are going long, just as if you bought the underlying security. The premium is not much defense for a market meltdown. The advantage in writing puts is that you have to risk a lot less to generate the same level of income. Since option premiums can generate 3-5 times what good companies pay in dividends for a comparable time period, you do not have to have as much money at risk to generate the same level of income.

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  23. All this options stuff is way beyond me, but I got interested in CBI because of the anticipated 20% gain this year. So … I bought some on August 8th and am up 17% already. Thank you Travis.

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  24. Porter stansberrys average services performance has consistently underperformed the market. Discussion closed. He is not even rated by Hulberts Financial digest which rates more than 150 newsleters. the best consistent one has been Navellier,s newsletters. navellier has outferformed the market on average of 300% of market performance over long periods. my only issue has been his drawdown in a Bear market like in 2008.

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  25. Yes, Stansberry Alpha buys calls and sells puts. He’s done reasonably well in this bull market. When the next big crash comes, and those puts are in the money and the calls are worthless, there will be a lot of tears.

    As with all put sellers Stansberry blows hot and cold on margin. He uses margin when calculating his unreal returns. But then of course he tells you to make sure you have enough cash to buy the stocks at the strike price of the puts, so when the crash comes he can tell you it was your own fault if you got wiped out.

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  26. I should add that Stansberry likes to sell close to the money puts and buy well out of the money calls so that the put sales more than pay for the calls. This of course means that if the stock doesn’t go up quickly the calls quickly wither away in time value while the stock only needs to go down a modest amount to have the puts in the money and in danger of being assigned.

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