Friday, October 8, 2010

We've Moved!

I'm happy to announce we just launched our website...

If you wondered why we dropped off the blog-sphere it's because I had to stop new content on this blog so the webmaster could catchup to launch We are now back to work generating monthly income!

Please come join the conversation and follow us to learn how to use the stock market to generate passive income month after month! While your on our new website don't forget to signup for our free email trade alert service!

Happy trading!

Blaine Watkins
Mr. Option Income

Tuesday, July 27, 2010

While GDX Fundamentals Decay - Time Decay Saves the Day

Fundamentals count!

In fact one of our top rules (#2 to be exact) states: "Only trade options on stocks that you have qualified through fundamental analysis." Today the fundamentals for GDX took a turn for the worst. What a difference a day makes! I post this months trade last night and the next morning while commuting to work I hear on a talk radio show that new EPA government regulations came out (oh great what this time) many of which negatively effect the gold mining industry.

Apparently the news or rather the uncertainty of it caused GDX to drop from $48.89 to $46.82 (low) closing at $47.09 per share. Down 3.7% for the day on heavy volume.

This means that until all of the hub-bub of what the new regulation means to the bottom line of the gold mining industry; GDX breaks rule #2 and is no longer fundamentally qualified as a trade candidate. Oh yeah it happens. This is why with all of the unknown policies to yet be defined "by regulators" within the recent health care and financial regulation bills passed by congress I don't have any health care or financial companies in my watch list. Our rules help prevent unnecessary risk and keep us on track to only use the best trade candidates.

GDX held at the recent $47 support level and is still well above our $44 Put strike price. It could very well stay above $44 on August 20th; however, the risk of the unknown could also drive GDX well below our strike price. With our #2 rule now breached we must exit the trade to protect our capital and move on to qualified trades that meet our rules.

Now here's the good news! The option income system still made money; whereas, buying stock we would have lost money. If we had purchased stock in GDX at the time when I entered and exited my option trades the GDX stock trades would have looked like this:

July 19 - Buy $47.10
July 27 - Sell $46.97
Not a big loss (13 cents per share) or $130 on 10 option contracts

Compare that to selling cash-secured Put options:
July 19 - Sell-to-Open $0.83
July 27 - Buy-to-Close $0.56
A gain of 27 cents per share or $270 on 10 option contracts

During the 8 days that we owned the contracts the time decay value of options was working for us and allowed us to buy back our option at a lower price than we sold it. This turned a potential $130 loss into a $270 gain!

Monday, July 26, 2010

August Trade Generates 22.6% Annualized Return!

The August trade is on...

On July 19th we placed the following cash flow trade: Sell-to-Open GDX Aug 21 '10 $44 Put at $0.83. For every option sold you pocket $83 cash straight into your account! This conservative cash-secured Put trade generated 1.9% monthly income (22.6% annualized).

At the time we placed the trade GDX (the underlying asset) was selling at $47.10 per share. The Option Income indicators at the time were as follows:

  • Williams %R = -90 "Extreme oversold"
  • Trade Probability = 77.2% Success
  • Profit = 1.9% (26.6% Annualized)

More about this trade and why I like it:
Our $44 Put strike price is well under the recent $47 support level. If the price of GDX moves up, goes sideways, or trends lower but stays above $44 by the end of trading on August 20th (option expiration day) the option expires worthless and we keep the option premium!

On the other hand, if the price of GDX is below $44 on August 20th the option will be exercised and we'll be assigned GDX stock at $44 even if the price is lower at the time. Currently with the price of GDX moving up to $48.89 we have a 90.4% probability of success! If you think about it even if we get assigned the stock we just purchased an ETF that we would like to own at a great price!

So far I like our chances!

Friday, July 23, 2010

Is This What You Need?


Over the years as I was searching for the right system for me (and hopefully you), I developed the following list of twelve requirements to develop a successful investment system that would allow me to achieve financial freedom and retire on my terms.

So check this investment system out and let me know if it will meet your needs?

The system shall...

1. Produce positive returns every year
I don’t like losing money. Who does? If you invest directly in stocks or mutual funds your portfolio will have up years and down years as the market fluctuates through bull markets and recessions. In order to build wealth through compounding you cannot have losing years.

2. Generate income monthly in order to utilize the power of compounding
Monthly income allows us to reinvest our profits to grow our capital faster! Earning 2% each month and reinvesting it monthly has a compounded return of 26.8% instead of 24% annually. Now that doesn’t sound like much but over 5 years your monthly compounding return is 228%! Compare that to a buy and hold strategy which would return 120% over the same 5 year period.

3. Consistently produce 20%+ annual returns
When reinvested this allows our money to double every 2 to 4 years which builds incredible wealth over a relatively short period of time. For example, if you start with $20,000 to invest compounded monthly at a 20% rate in 14 years you will have amassed $321,390. At which point you could earn a nice living still implementing this system and making 2-3% a month, in this case earning 2% each month from your capital would produce $64,277 a year. If you did a little better and averaged 23% a year, after 14 years you would have $485,540, which could generate $111,674 a year from earning 2% each month without being reinvested to retire on.

4. Give you control over your investment
Traditional investing of buying and holding stock affords you very little control of your investments, as you are left to the up and down whims of the market. You also have no idea how much money you are going to make (or lose) and when you will realize that profit or loss. With the Option Income System before you enter a trade you know how much money you are going to make, when you will make it, and the probability of your success!

5. Not take more than a few hours per month to perform
Once you have developed your prospect list you only need to spend a few hours each month to determine the best qualified candidate for your trade. After the third Friday of the month (options expiration day) you simply repeat the process to generate income for the next month.

6. Not require constant monitoring
After my order has been executed I like to take a few minutes each evening to check on the status of my trade. However, if you wanted to take a one week Caribbean cruise with no internet access you could do so without any problem.

7. Trade only high quality fundamentally sound companies or strong sector ETF’s as the underlying asset
This system not only works with stocks of great, fundamentally sound companies, but it should only be performed with the best, most fundamentally sound companies or ETF’s that you would be willing and interested in purchasing! Unlike other books that contain selling put strategies I actually show you how to determine and find these strong performers.

8. Put time decay value on your side
We must have time working for us and not against us. As the seller of the option, your probability of success increases each day as you move closer to the options expiration date due to the time decay value of options.

9. Have a 70%+ statistical success rate for each trade using mathematical probability models before entering the trade
You only enter a trade when you have a minimum of 70% chance of success at the beginning of the option month. Sometimes you start with even a higher success rate -- upwards of 80%. With each passing day your probability of success rate increases due to time decay of the option.

10. Have less exposure to market risk than traditional buy and sell stock for capital gain investment methods
Due to the thorough qualification process of what, when and how you sell cash-secured Puts you rarely have your options exercised requiring you to buy stock, (on average two times a year) so you are technically at most only in the market a total of 8-10 weeks a year. Being out of the market most of the year greatly reduces your exposure to the nasty down swings that can wipe out large portions of your portfolios worth. Granted you don’t participate in the upswings either, but year-after-year you consistently generate income that produces positive returns in up, down or sideways markets!

11. Be simple enough to be learned by anyone with a basic understanding of stock options
The option income system is really quite simple. Monthly income is generated by selling stock options on the strongest companies when we meet our risk to reward and success rate rules. In this book we go over the mechanics of selling a Put option, but do not cover the fundamentals of how stock options work. There are many excellent books that cover this topic that you can study.

12. Be repeatable, others can learn this system and produce the same results This is the acid test that determines if it’s really a system. My hope is that others can learn my system and profit as I have from its success. Doing so will validate that what I have created is much more than an investment philosophy or trading strategy; but a system that others can repeat and produce consistently to benefit their families and their retirement.

Does this sounds like an investing system that you would like to pursue? If so, dig in and read the 'Getting Started' page to learn more!

Tuesday, July 20, 2010

July 2010 Trade Results - 15.6% Profit!

Another successful month generating positive cash flow! Our July GDX Put options expired out-of-the-money last Friday when GDX closed well above our $46 strike price at $48.54. Yes!

As the seller (or writer) of the option we get to keep the 60 cents per share premium ($60 per option contract) for a 1.3% monthly profit that's a 15.6% annualized return. With the contract expiring we are back in all cash ready to repeat the process and generate more income!

Sunday, July 18, 2010

Here Come the Q2 Earning Reports!

image: Paul Antonson at invisibleman<br />A Look at the Week Ahead...

With 25% of the S&P 500 companies reporting Q2 earning next week it will likely make for a very volatile week in the stock market. It's not so much the movement of the actual Q2 results, yes they do play a role in market direction, but they are mostly priced in. The bigger factor is the changes in Q3 guidance. If most companies' Q3 forecasts are lowered (and by how much) will really be the big downward driver next week. If on the other hand guidance is raised or even maintained the market should react favorably to the upside.

Here's a short list of big names reporting next week: IBM, Microsoft, AT&T, Coca-Cola, American Express, Apple, Wells Fargo, Ford Motor, and UPS.

We'll want to keep our eyes on the Williams %R on the S&P500 to flash oversold (below -80) for good opportunities to sell out-of-the-money Puts when the market is down and/or pushing down against the most recent support level or 1020.

Steady on the trigger boys!

Bear vs Bull image by: Paul Antonson at invisibleman

Wednesday, July 14, 2010

July Trade Update - Looking Good!

With three days left until July's option expiry the probability of our trade succeeding is now up to 99.5%! last week it was at 84% and two weeks ago when I placed the trade it was well above our 70% threshold starting off at 78.7%. Remember the profit on our trade this month is a 15.6% annualized return. This is a typical example of a how the Option Income System works by consistently producing low risk to high reward ratio trades that generate monthly cash flow!

Here's what the probability stats look like in my option probability calculator:

As a 'seller' of cash-secured Puts we have time on our side. From the moment we place our trade, time decay of the option contract is working for us. Each passing day it chips away at the contract lowering the price of our option so we could buy it back for less and take an early profit (of course the price movement of the underlying asset (GDX) moves the option price up and down as well). Time decay also improves the probability of our success if we let the option expire. Which with only 3 days left and these great odds we might as well let this puppy expire.

The image below illustrates what option time decay looks like. Notice that the curve is exponential so by trading just the last month of the option we capture the steepest drop in decay to work for us.

There's also an added benefit to letting the contract expire because you do not have to pay a closing commission cost! We'll be back all in cash next week to compound our profits into the next months high probability trade.

And here's what the GDX chart currently looks like:

As you can see we have a very nice margin of safety (4 points) above our $46 strike price. Now I realize that the odds are slim that GDX will close this Friday BELOW $46, but if is does what's the down side? Well our option contract will be assigned to us and we will end up owning shares of an excellent ETF of Gold Mining companies at a great price!