The 2nd Crucial Key To Making 63 Profitable Trades In A Row

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Last week, we told you about one of the key investing tools Amber uses in her conservative options strategy to earn average returns of 7.4% in just 56 days.

Since her premium newsletter, Income Trader , launched 17 months ago, Amber and her readers have closed 63 straight winners, generating an average annualized return of 48.2%.

(For proof, you can see her first 52 profitable trades by following this link. )

In other words, we're not simply telling you about these investing tools because we say they work... We're telling you about them because they are working.

In case you missed last Wednesday's issue of StreetAuthorityDaily , we talked about the first tool Amber uses to fuel her perfect track record -- volatility. Amber looks for stocks with the right amount of volatility, which helps her maximize income and limit risk.

Amber's second key investment tool takes risk management one step further. It's a safeguard that helps ensure that every trade she makes has a chance to be profitable -- no matter what direction the stock moves.

Amber's rule is this: Only sell puts on stocks you wouldn't mind owning.

This means finding high-value, high-quality companies and be happy to buy them when they're "on sale."

There are many different ways to find value stocks (i.e. companies on sale). Many investors compare a stock's price to the company's earnings, using the price-to-earnings (P/E) ratio.

But Amber stresses that this method is flawed. As she mentioned in one of her articles last year:

Many investors look at P/E ratios and consider low P/E stocks to be buys. This approach ignores the growth rate of earnings...[Let's assume two] companies are trading with a P/E ratio of 15... If a company is growing earnings at 40% a year, that stock should be worth more than the stock of a company growing earnings at 10% a year.[So instead of using the P/E ratio] to find value, I look at the PEG ratio [which incorporates growth] . I believe this indicator is the best way to determine which stocks are truly undervalued. To find the PEG ratio, you divide the P/E ratio by the earnings growth rate. A stock is considered to be trading at fair value when the PEG ratio is 1.

Here's an example of how she used the PEG ratio to find her 25th profitable trade.

In last August's issue of Income Trader , Amber analyzed the biotech company Questcor ( Nasdaq: QCOR) .

Events at the time caused Questcor's stock to jump from $52 per share on July 30 to nearly $70 within a week. This high volatility caused it to pop up on Amber's radar.

But before any trade would be made, the stock had to pass Amber's quality control test -- it had to be a high-quality company trading at a big discount.

At a price of $67.38 per share, Questcor was trading at 14.3 times earnings. But with analysts expecting excellent long-term earnings growth of 26% per year for the next five years, the stock had a PEG ratio of 0.55 (14.3/26). And since any PEG ratio below 1 is considered "good value," Amber knew she was on the right track.

After further research, Amber determined Questcor was indeed undervalued. In fact, she set a price target of $93 -- 38% above recent prices.

From there, Amber recommended that her subscribers sell QCOR Sept 55 Puts. The "55" means the trade has a "strike price" of $55 per share (you'll see how that's used in a moment.)

To initiate the trade, readers would deposit $1,100 and would immediately receive $80 in "Instant Income" for every put contract sold. (This is scalable, too -- if readers sold 10 contracts, they would receive $800 in Instant Income for the trade.)

After the trade began, the next step was to wait for the trade to end 37 days later on September 20. As with any put-selling trade, readers expected one of two scenarios to happen:

1.) If Questcor's stock price (trading at $67.38) stayed roughly the same or rose by the time September 20 rolled around, the options would expire "worthless" -- and readers would get back their initial deposit plus what they received in Instant Income as a bonus.

2.) But if the stock price fell below the stock's $55 strike price by June 20, traders would be required to buy 100 shares of the stock (per contract sold) at $55 per share.

Let's look at the second scenario. This is exactly why Amber only sells puts on stocks she wants to own -- because if the stock does fall below the strike price, it allows her to buy undervalued stocks with substantial upside.

Remember, Amber already determined that at a price of $67.38 per share, Questcor was a stock she'd want to own. And since she set a price target on the shares at $93, she thought the stock had an upside of 38%. Had she been required to buy shares of Questcor at $55 per share, she'd be picking up the stock at an even bigger discount... with potential upside of 69%.

So what ended up happening with this trade?

On September 20, as with the majority of Amber's trades, the options expired "worthless" and readers received their $1,100 initial deposit back plus the $80 in Instant Income per contract sold as pure profit, giving her Income Trader subscribers a 7.3% return on their investment in just 37 days. That comes out to an annualized gain of 71.7%.

That was winning trade #25 among 63 other profitable trades. You can imagine how the returns just keep on piling up...

Put simply, that's exactly why Amber's strategy presents investors with a strong "win-win" possibility. You either get to pocket Instant Income for every trade if the options expire worthless, or you have a chance to buy excellent companies at a deep discount.

When you approach options trading in this manner, it's easy to see how Amber has managed to compile one of the greatest trading track records I've ever seen. To see her closed trades and learn even more about Income Trader's strategy, follow this link.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Founded in 2001 by industry veterans, StreetAuthority is a financial research and publishing division of Investing Daily. Our mission is to help individual investors earn above-average profits by providing a source of independent, unbiased — and most of all, profitable — investing ideas. Unlike traditional publishers, StreetAuthority doesn’t simply regurgitate the latest stock market news. Instead, we provide in-depth research, plus specific investment ideas and immediate action to take based on the latest market events.

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