Editor’s Note: This week Bonner & Partners senior analyst Jim Nelson explains why the safest way to build lasting wealth is not to invest in stocks alone.
Instead, he combines investing in stocks with a special income boosting options strategy.
Most folks avoid the options market because they think it’s inherently “risky.” But as Jim reveals below, there’s a way to invest in options that drastically reduces your risk… while still boosting your returns.
The Surest Way to Build Lasting Wealth I Know
By Jim Nelson, Editor, Bonner & Partners Platinum
It has been five years since the S&P 500 hit a low of 666 in March 2009. Since then, the S&P 500 is up over 150%.
But nothing lasts forever – especially in a stock market rigged by the twin Fed polices of QE and ZIRP (zero-interest rate policy).
So, how do you protect yourself from downside market risk while profiting from opportunities available in the market?
The answer is a special class of stocks I call “legacy stocks.”
When you invest in legacy stocks you are buying into companies with true staying power. I’m talking about companies that have been thriving for decades. They are the biggest and best in their industries. And they’re recession-proof.
Every company that I and my co-editor, Kelly Green, recommend for readers of our newsletter, Bonner & Partners Platinum, has to meet three criteria.
1. Does its business make sense? (Or is it too complicated to understand?)
2. Does it reward its shareholders with stable, growing dividends?
3. Is it cheap?
You’d be surprised by how few stocks satisfy all three criteria.
But it’s critical that all of the stocks in the recommended Bonner & Partners Platinum portfolio do exactly that.
Turbocharging Your Profits
But we don’t stop there…
You see, once we have identified a stock that meets all three criteria… we then “turbocharge” readers’ returns. We do this by selling covered-call options on stocks we already own.
It’s a common misconception that the options market is only for speculators and gamblers. But that’s not true.
On the contrary, when used properly, options can be a safe way to generate significant income.
When a gambler goes into a casino, he’s entering into a transaction between two parties – himself and “the house.” The gambler puts money down upfront, hopefully for more money in the end.
But as we know, the house always wins. That’s why we always take the role of the “the house” in the options market.
If you’re not familiar with the options market, an options contract is simply an agreement between a contract writer (the house) and a speculator (a gambler). The speculator will put money down in exchange for a contract betting on the movement of a particular stock.
There are two basic types of options contracts – puts and calls. For our turbo-charging strategy, we’re going to be using covered calls.
Here’s how they work…
A call contract is an agreement where the speculator has a right to buy or “call away” your shares at any point during the agreement for a predetermined price. Those contracts are “covered” because you will own enough underlying shares in case the speculator calls them away.
A speculator approaches you saying he will give you money today. In exchange, he wants the option to buy your shares at a set price between now and some agreed time in the future. No matter what happens in the market, you will agree to this price at any point during the duration of the contract.
The speculator is gambling on the price of a stock. He wants the price to soar. If this happens, you will have to sell him your shares at a price lower than the market price.
If you accept his bet, you’ll collect a “premium” up front. You’ll get to keep this upfront income no matter which of these three outcomes occurs. If share prices don’t move at all, the speculator isn’t going to be interested in buying your shares. That means you’ll keep the upfront premium income as well as your shares.
If share prices move up, the speculator is going to want to buy your shares. And you’re going to have to oblige, parting with your shares for less than the market price. You’ll still keep your upfront income, and you’ll also collect a capital gain from the sale of the shares.
If share prices go down, the speculator isn’t going to want to buy your shares. Since you still keep the upfront premium income you collected at the beginning of the contract, you are down less than you would be if you were just holding the shares. And you can still write another contract to collect even more.
No matter which outcome, you still win.
I can’t think of a better way to build lasting wealth – first by buying shares in businesses that make sense… with stable, growing dividends… that are selling for a cheap price. And then by turbocharging your returns by picking up extra income in the options market.
Jim Nelson, Editor
Bonner & Partners Platinum