What is an Insurance Agent Trade?

There are many ways to trade stock options. Each type of options trade has pros and cons. But when all is said and done, the best trade in most cases is a credit spread. Now I can just hear haters jump up and down and criticize the credit spread because the risk/reward isn’t stellar. But “Haters gonna hate…” What is a credit spread? A trade that can have outstanding probability. And while you may not make a zillion dollars next week with a credit spread, odds are you will show a consistent profit. And that’s the name of the game. The credit spread is the best trade there is.

Now a credit spread can sound pretty complicated, but I’ve developed an easy way to explain what’s going on. I have written a report that explains how I trade credit spreads. You can just click the link and grab it. It’s free.

My favorite way to use a credit spread is what I call the Insurance Agent Trade. It goes like this. Suppose you have 100 shares of Amazon stock, and you’re a bit concerned to have $38,000 in one bucket, so you decide to buy some insurance. If you own a house, you buy homeowners insurance to protect your investment. If you own AMZN stock, you can also protect your investment

Since I am an insurance agent, I happily sell you some insurance. The insurance policy for stock is called a Put option. So you buy a Put option from me, your insurance agent. You decide you want a $2000 deductible insurance policy, so I sell you an Oct 360 Put option for $2500.  By selling you that insurance, I have an obligation to buy your 100 shares of AMZN for $360, even if AMZN goes to zero. For you, the most you can possibly lose is $2000. Even if AMZN goes to zero, you can sell your shares to me for $360.

But I’m a little concerned that I might have to pay a bunch of money if AMZN goes way down, so I buy my own insurance. I buy an Oct 340 Put option that gives me the right to sell 100 shares of AMZN for $340. I pay $1800 for that insurance policy. The pair of option trades together is called a credit spread.

The net amount that I receive, the net credit, is $700 (2500-1800). How much can I lose? Well if AMZN goes to zero, I am obligated to buy your shares for $360/share, and I have the right to turn around and sell them for $340/share. I’ll lose $20/share or $2000. That’s the most that I could lose.

If I can potentially make $700 on a maximum risk of $2000, then the return on my risk is 35%. All I have to do is wait until the insurance policies (the pair of put options) expire in about eight months. That works out to about 5% per month. Not bad.

So that’s the Insurance Agent Trade: a Put credit spread placed well below the stock price with an expiration period of 60-90 days

As it turns out, I can usually exit this trade for almost all of the profit in perhaps six weeks. And as an added bonus, I will get all of my profit even if AMZN falls 5%.

Yes, you can make 5% per month with the Insurance Agent Trade, even if the stock that you are investing in falls.

If you want to learn more about this kind of trading, I’ve written a free report for you — How I Target 3-5% Per Month Even When My Stock Goes Down. You can download the report right now.

 

* The above is for educational purposes only; it is not a recommendation to buy or sell anything.

Rights And Obligations Of Stock Options

Whenever you trade stock options, it is important to understand what are the rights and obligations of stock options. Whether you are trading call options or put options, the rights that you have and the obligations that you incur are the same.

Let’s look at a quick example. Suppose I think that Amazon stock is going up. If Amazon is currently trading at $350, and I think it is going to go to $375 by next month, I could buy a Call option. I could buy an April 360 Call option. Buying this Call options gives me the right to buy 100 shares of AMZN any time before late April for $360 per share, regardless of the market price of AMZN. If AMZN goes to $400, and I have the right to buy stock at $360, I can potentially make $40/share instantly. However, if AMZN falls to $350, owning the right to buy stock at $360 is of little value at all.

Suppose I bought this April 360 Call option from you. You sold it to me. By selling a Call option, you incur an obligation. You have the obligation to sell 100 shares of AMZN to me for $360 per share any time before late April. If AMZN falls to $350 per share, you know that I’m not going to ask you to sell me stock for $360. The option would be worthless. However, if the stock rises to $375, I’m going to ask you for 100 shares at $360. You have the obligation to sell them to me. It would be nice if you already own the stock so that you don’t have to go buy the stock for $375 in order to fulfill your obligation to sell it to me for $360.

  • Whenever you buy a call option, you have a right to buy stock at a certain price before the option expires.
  • Whenever you sell a call option, you have the obligation to sell stock at a certain price before the option expires.
  • Whenever you buy a put option, you have the right to sell stock at a certain price before the option expires.
  • Whenever you sell a put option, you have the obligation to buy stock at a certain price before the option expires.

Get my favorite option trade in this free report — How I Target 3-5% Per Month Even If My Stock Goes Down.

The Real Unemployment

A lot of politicians are patting themselves on the back these days for getting the US Unemployment figures down to 5.7%. And there’s no denying that that is a whole lot better than when unemployment was at its peak in 2009 at 10%. That represents millions of Americans are back at work. All good– right? Hmmm… not really. The oft-quoted “Official” unemployment rate of 5.7% is called the U-3 rate. It covers people without work who are seeking full-time employment. What about all of the people who were employed before the recession, but can’t find a job, or have settled for a part-time job to keep food on the table, or pick up hours contracting when they can find those temporary jobs. How do you count those people? Well, there’s the U-6 unemployment rate.

The U-6 unemployment rate is the more inclusive number. It includes the “marginally attached workers”, those who want to work but have given up. That number, the “real” unemployment rate is 11.3%.

But is that a lot? Of course the U-6 number would be larger than the U-3 number. There will always be people who have given up on a job or are marginally attached in some way. But the key for me is to look at a little history.

In January, 2007, the official (U-3) unemployment rate was 4.6%. At that time, the U-6 rate was 8.4, for a difference of 3.8 percentage points. In January 2015, the difference is 5.6 percentage points.

That says that even though the official rate has fallen from 10% at its height to within a point of its recent low, we still are leaving behind about 9 Million unemployed people who aren’t counted in the official U-3 unemployment rate.

A few thoughts.

  • I can’t help but think we’re pretty much lying about the unemployment rate. When we celebrate 5.7% unemployment, we’re saying, “Pay no attention to those 9 Million people behind the curtain.”
  • Obamacare with its incentive to hire temporary workers for 29 hours/week or less, is probably impacting the unemployment rate.
  • Few workers with full time jobs means fewer consumers spending money. With the US economy heavily dependent on consumer spending, unemployment is a continual drag.
  • Unemployment tends to keep inflation in check. With fewer consumers spending, the money flowing in the economy doesn’t have enough “velocity” to fuel significant inflation.

Hopefully the trend will continue, and the U-6 Unemployment rate – the real unemployment will continue to come down and more of us can get back to work.

If you’re interested in a pretty interesting method to create an alternative income stream-to help protect against job loss-download my free report: How I Target 3-5% Per Month Even When My Stock Goes Down. It might be just what you need.