Generate "Instant Income" Like a Wall Street Guru

Generate "Instant Income" Like a Wall Street Guru Amber Hestla-Barnhart February 23, 2013   Print | PDF A couple weeks ago, I told Trade of the Week readers how investors are using options to generate thousands of dollars in "Instant Income." Simply put, I think it's one of the best income strategies in the world. And Jeremy Grantham, noted value investor and Chief Investment Strategist of GMO, a private investment firm with $106 billion under management, agrees. Grantham and his firm have turned to selling put options to generate market-beating returns for his fund. Also In Today's Issue The 10%-Yielding 'Dividend Vault' That Could Save Your Retirement Warren Buffett, Bill Gates, and many other top business leaders have been collecting billions from the "Dividend Vault" for years. But now you can start receiving hundreds, thousands, possibly even tens of thousands from the "Dividend Vault" too. Even as early as next month. Click here for all the details. $7.5 Million From the Stock Market Without Buying Stocks? Yes, one man did it. And while you may not be able to match his payday, you could easily pull in $1,000 a month or more, month after month. And you can do it without buying or selling stocks, bonds, ETFs or any other strategy used by the vast majority of investors. For more on this income-generating technique, click here. In their latest letter to clients, the co-head of GMO's Asset Allocation team wrote about the firm's innovative strategy, saying: "Is there any kind of diversification you can get excited about? We believe there is. One clear example, which has made its way into our multi-asset portfolios, is equity put selling." Why is this a big deal? For starters, GMO is a value-based investing outfit -- not a flashy hedge fund using risky strategies to try and beat the market. And the fact that they're "excited" about it should be more than enough to get the attention of conservative investors. Since 1985, GMO's U.S. Core Equities Strategy has delivered an average annual gain of 10.82% a year while the S&P 500 has gained 7.77% a year over that time. GMO attributes their success to "discipline, value orientation, investment research, and constant innovation." Grantham may be best known (at least among investment geeks) for providing a detailed forecast of what he expects markets to do over the next seven years. His latest report shows that he expects large-cap U.S. stocks to provide an average real return of 0.1% a year for the next seven years. The outlook for small-cap stocks is even worse, with an expected average loss of 0.8% a year. But instead of telling their clients to simply expect lower returns, GMO says they will be selling put options to help them beat the market. And what's more, they're actually "excited" about it -- just like I am. To recap, "put" options give investors the right -- but not the obligation -- to sell a stock at a specified price before a specified date. Selling a put obligates us to purchase that stock from the put buyer if it falls below a specified price (the option's "strike price"). When we accept that obligation, we receive "Instant Income" upfront (known as a "premium"). You can be asked to buy the stock at any time between the moment you collect the premium and the expiration of the option contract. Now, one thing I do to lower the risks of trading is to only sell puts on stocks I would want in my portfolio anyway. So if I make a trade and the stock falls below the strike price, obligating me to buy the stock, I'm buying shares of a stock I wanted to own anyway, and for a better price than it once was. This is the same exact strategy Warren Buffett used to acquire his initial stake in Coca-Cola (NYSE: KO). The King of Buy-and-Hold first bought shares of Coke in 1988. At the time, Buffett said he expected to hang on to this "outstanding business" for "a long time." However, the world's greatest investor is also a bargain hunter. If Buffett likes a company, but believes its share price is too high, he'll wait until the market "cooperates" before he'll buy more shares. But the stock wasn't correcting, so Buffett decided to use the power of options. By April 1993, Buffett's beloved Coca-Cola was trading at about $39 a share (before two splits) -- a price he regarded as too expensive to buy more shares at the time. But did the self-made billionaire let his cash sit idle while waiting for a downturn? Not a chance. Buffett employed an options strategy that earned him $7.5 million in income -- all without buying or selling a single additional share of stock. And now other mega-investors like Grantham are taking a page from Buffett's playbook by using puts to earn extra income. But it's not just billionaire investors who can use this strategy -- everyday investors like you and me can use it, too. Selling puts, GMO notes, is no more risky than owning stocks. The advantage of selling puts is that you get paid to accept market risks. The folks at GMO believe that selling puts is especially attractive right now, when the market appears to be overvalued. That's especially true with the S&P 500 at five-year highs and average dividend yields near record lows at 2.1%. By selling puts, we can generate steady income and ensure we never overpay for stocks. GMO confirms what I have always believed. Writing options is a conservative investment strategy that should be used by more individual investors. That's why I started my Income Trader investment service. Each week, I walk investors through a trade, showing them how to use simple strategies like selling puts to generate "Instant Income." To learn more about my "Instant Income" strategy and how it works, click here to view this special presentation. Note from the editor: Amber's new weekly advisory, Income Trader, has been available less than a month, but the subscriber feedback is already positive. L. Smith said he collected $1,000 from selling puts on Phillips 66, $700 from selling puts on PetSmart and $1,800 on Joy Global. Smith said he's found Amber to be "detailed and conservative," not to mention successful. You have until Wednesday to take advantage of a special charter subscription rate for Income Trader. For the details, click here.   Dr. Melvin Pasternak's Trades & Updates Company (symbol) Trade Type Buy/Sell Date Buy/Sell Price Stop-Loss Current Price Total Return SPDR High Yield Bond ETF (NYSE: JNK) Long 01/30/12 $39.94 $34.98 $40.83 +2.2% Michael Kors (NYSE: KORS) Long 10/08/12 $53.33 $57.31 CLOSED +21.9% Costco (NASDAQ: COST) Long 12/03/12 $104.82 $93.56 $101.16 -3.5% Dendreon (NASDAQ: DNDN) Long 1/28/13 $6.31 $5.68 CLOSED -10.0% View all closed trades here. Stock prices in this issue are as of the close of trading on February 22. SPDR Barclays Capital High Yield Bond ETF (NYSE: JNK) held relatively flat throughout the week. The fund is resting just above resistance marked by the middle Bollinger Band. Support, marked by the rising 50-day moving average is nearby. Daily RSI is holding just above the key 50 juncture and is flat. Daily MACD appears to be giving a tentative buy signal. I'm currently ahead around 2% on the trade. My stop-loss of $34.98 and target of $48.01 remain. Michael Kors (NYSE: KORS) exceeded my target of $64.98, hitting an intraday high of $65.10 on Tuesday. Over the time I held the stock, I made 22% returns. Costco (NASDAQ: COST) vacillated during the week. Shares went as high at $103.13 and as low as $100.23. The stock is currently resting just above the intersection of the rising 50-day moving average and the lower Bollinger band near $100.69. Daily RSI is sitting just below the key 50 juncture and is flat. My stop-loss of $93.56 and target of $114.69 hold. Dendreon (NASDAQ: DNDN)  hit my stop-loss of $5.68 on Friday. The trade is now closed. To read my most recent article, Iconic Stock on the Verge of Completing a Pattern That Projects 20% Returns, visit ProfitableTrading.com. -- Dr. Melvin Pasternak Co-Editor, Trade of the Week   This 'Sell' Signal May be Warning of a Once-in-a-Generation Shift Chart Pattern Predicts Double-Digit Sell-off in the Next 3 Weeks 2 Restaurant Stocks That Look Ready to Plunge as Much as 25%         Disclosure: None. You are receiving this newsletter because you visited us at ProfitableTrading.com and registered to receive our free trading service -- Trade of the Week. If you feel you have received this issue in error, please contact us by visiting our web site. We sincerely hope that you benefit from your subscription to this free newsletter, and we're willing to do whatever it takes to keep you as a satisfied customer. You may contact our customer service department by visiting this link or writing us at ProfitableTrading.com, LLC, 839-K Quince Orchard Blvd., Gaithersburg, MD 20878. 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