Ignoring This Simple Strategy Could Be Costing You Thousands

Buy or sell dice

Check out this headline, "Study: Preschoolers Better at Figuring out How Gadgets Work than College Students."

At first, it had me scratching my head. How could this be possible?

But then I figured it out.

Preschoolers were more open-minded. They were willing to think outside of the box to solve problems.

The Wall Street Journal quoted the research team saying "the best and brightest college students acted as if the machine would always follow the common and obvious rule, even when we showed them how it might work."

That says a lot about human nature. Human beings build barriers to change. The older we get, the more close-minded we become.

It also provides a lesson for investing. The common and obvious rule is that buying stocks is a good way to build wealth.

But the unconventional rule says that there is an even better way.

You see, clinging to just one strategy and resisting evolution in a dynamic market can be costly, even downright risky. Imagine playing chess and sticking only to one strategy... it might work for a couple of games, but as your opponent evolves and realizes your one strategy, you may never win another game.

Yet, we're not talking about simply losing a pawn or a knight or even the entire game of chess. No, we're talking about your portfolio, your retirement, your daughter's wedding fund, your savings for that favorite vehicle or that vacation you have always wanted to take. That's the game you want to win.

Today, I want to tell you about a different strategy. One that can help you win, as it has done for so many readers of my premium newsletter, Income Multiplier .

I'm talking about investing with options.

Those who have never tried it may think it's "too risky" or "too hard." But those who know how to use it correctly will tell you it can actually be a very conservative way to rack up big returns over time.

You may have heard about a few different ways you can invest with options. And while things like buying calls or puts can be extremely risky, there's one strategy that's actually one of the lowest-risk strategies of the bunch -- selling puts. It's exactly for this reason that I use a put-selling strategy in Income Multiplier.

Some investors may be shocked to learn that in some cases selling puts can actually be much less risky than buying equities. And if you read this recent issue of StreetAuthority Daily , you know that even Warren Buffett, the greatest investor on Earth, has sold put options to profit from great companies.

Why? Selling a put provides several big benefits to investors:

Easier income generation. When an investor sells a put, income is immediately deposited into their brokerage account. That income is called the option premium. Premiums are affected by a number of factors, but none are more important than the expiration date of the option and the strike price. That makes put selling a powerful source of income for investors battling historically low interest rates.

Smaller initial investment. Selling an option lets investors avoid having to plunk down a large amount of cash all at once to invest. Normally, the cost of buying 100 shares of an S&P 500 stock could cost thousands of dollars. But selling a put enables investors to control those same 100 shares for a fraction of what it would cost to buy a stock while also generating income.

Limited downside risk. Selling puts is also a great way to hedge downside market and stock risk. That's because selling puts enables the put seller to control those same 100 shares through a small down payment, much like a down payment on a house, without having to actually purchase them. When you sell a put option, you're only required to buy the underlying stock if shares have fallen lower than the option's strike price on its expiration date.

Opportunity To Buy shares at a discount. If shares do fall below the option strike price on its expiration date, at that point the put seller has an opportunity to buy shares at a sharp discount to recent prices. Had the put seller simply purchased 100 shares outright, they could be sitting on big losses even if prices declined as little as 5%. Selling puts, however, enables investors to fully sidestep that downside move because they don't actually own shares, providing an opportunity to buy after a price decline.

Now that you've seen the benefits, let me show you how safe my strategy is by using a recent trade.

Back in March I told readers of Income Multiplier to sell May $49 puts on Reynold American Inc. (NYSE: RAI ) -- the second largest tobacco company in the U.S.

At the time the put options were trading for $0.75 each. By selling puts on RAI we generated immediate income for every contract we sold -- one contract is 100 shares of stock. If you sold only one contract, you would collect $75 in income ($0.75 x 100 shares).

When the trade expired on May 16, shares of RAI were trading higher than our $49 strike price, meaning our options expired and we got to keep the $75 income we got upfront as pure profit. The trade gave us a 7.6% return on capital in less than 60 days . If we made similar trades every 60 days for the year, that would amount to a 50% annualized return .

Had the shares traded below our $49 strike price we would have been required to buy 100 shares of Reynold American, allowing us to buy shares on a stock we wouldn't mind owning at a 10% discount.

Either way, it's a big win for put sellers.

When you add it all together, it's obvious that selling puts is a powerful strategy that can have a big impact on the success of your portfolio.

P.S. -- Multiplying your income from some of the world's most stable stocks is extremely easy. Just this month, my Income Multiplier readers and I just closed two profitable trades (out of two attempts), making a return on investment of 5.4% in 35 days and 7.6% in just 53 days. To prove how easy it is, I've put together a "Look Over My Shoulder" guide to show readers exactly how to start making immediate income. Just follow this link to start making money.

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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