Healthcare, A Safe Options Strategy for Retired Investors
Companies / Options & Warrants Aug 07, 2010 - 07:41 AM GMTBy: DailyWealth
Dr. David Eifrig writes: Most people know stock options are a great way to get rich in America...
Take Stephen Hemsley, CEO of the big insurance firm United Health Group. His 2009 salary came in around $9 million. But a decade earlier, he received stock options as part of his compensation package. In 2009, he exercised 4.9 million of them for a total gain of $98.6 million.
These huge option payoffs are just business as usual on Wall Street... and most of the time, there's nothing wrong with them. Several of my good friends will never have to work again because they exercised options on thousands of shares of company stock.
These options allow people to buy a company's shares for a small amount of money, then eventually sell the shares for much higher prices. They can bring in hundreds of thousands of dollars of extra income.
Most people have to work for years to receive stock options from their employer – or use risky trading strategies to acquire in-the-money options. They have no idea there's a way to receive free stock options any time you want them.
Acquiring free stock options is one of the easiest, safest ways to invest in the stock market. It's a strategy I learned more than 20 years ago while trading derivatives on Wall Street. And I guarantee 99 out of 100 investors have never heard of it before.
Let me give you an example of what I mean...
One of my favorite companies in the medical and biotech stock sector is $100 billion British drug giant GlaxoSmithKline (GSK).
GSK is an innovative Big Pharma company with an exceptional research & development process. It constantly increases shareholder equity... and has a culture of treating investors well in the form of big dividend payments.
Right now, GSK pays an annual dividend of $1.84 per share. This annual dividend payment is important. It's the key to our "free stock option."
I love to own safe stocks that pay big dividends like GSK. But I also like the tremendous leveraging power stock options provide. That's why I often buy these sorts of stocks... then take the money I receive in dividends and buy call options with them. I fund the speculative portion of my position with the company's dividend.
Making these trades is like getting free stock options.
Let me show you how a trade like this can work...
Right now, GSK trades around $35 a share. The January 2012 call option on GSK with a strike price of $40 (which will appreciate tremendously if GSK rises a good deal) sells for just $1.90. So you can use your dividend to pay for the option. Essentially, you're getting the option free.
Now, let's say GSK absolutely soars, hitting $70 per share by January 2012. Your gain on the stock is a solid 100%. But your "free" option is now worth $30. Your gain on your whole position will be 186%. That's the kind of leverage an option can give you.
If GSK trades modestly higher, settling around $45 per share by January 2012, you've made about 25% on your stock. Still pretty good for 18 months. But your extra gain from the free option kicks your profits up to 43%. That's a terrific return on a super-safe stock.
The thing about this strategy is you're not taking on an ounce more risk than you are when you just buy the stock. So your downside is exactly the same (I recommend using a 25% trailing stop on most of my positions). But your upside is dramatically higher. And if you use the dividend to cover the cost of the option – you're getting all that upside free.
Now, there are a lot of moving parts to this trade that I don't have the space to cover here. But one thing to note is that this isn't a "covered call" trade, where you buy a stock and SELL a call option against your shares.
There's a time and place for covered calls... But in situations where you want full exposure to the upside, and you can pay for an option with a company's rich dividend, you want to buy a stock and BUY the calls. You'll get a lot more "juice" on conservative trades like GSK.
I recommended a version of this GSK trade for my Retirement Trader subscribers back in April (it's still an attractive idea). But even if you're not interested in putting on this trade today, here's what you need to understand: There are a lot of ways to use options SAFELY.
Many investors are afraid of options. They think they might as well toss their quarters in a slot machine. And given the way a lot of traders use options, they're right.
But if you're a conservative investor, especially if you're retired or nearing retirement, consider this "free option" strategy and others like it. There are many different ways to use options in order to make great gains... while risking less than you do in conventional stock positions.
Here's to our health, wealth, and a great retirement,
Doc Eifrig
P.S. I cover the "free option" strategy – and several other ways to safely increase your upside – in my Black Book of Retirement Trading Secrets. My Retirement Trader subscribers have used these techniques to safely book gains of 100% in May and 93% last month. We're already up 57% on our most recent trade... made two weeks ago. To learn more about my strategies, click here.
The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.
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