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.

Questions & Answers

From time to time, I get questions about Stock Market Insurance Trader. I will answer them in blog posts like this. If you have questions, feel free to send in an email, or add a comment to this blog post. I’m always happy to help.

I’m new to your website and just looking around. Where can I find out more about your book and the Insurance Agent Trade?

Well, you could buy Stock Market Insurance Trader. It’s available on Amazon/Kindle. If you just want to read a summary of the book, I’ve prepared a free report that will give you the highlights. If you have some experience with trading stock and stock options, it may be all you need to start profiting right away.

Much of the book deals with selling Put spreads below the stock, counting on the stock to rise (or at least not fall too far). You also mention selling Call spreads above the stock, counting on the stock to fall. Can you do both at the same time, counting on the stock to stay in the range in between?

Yes. If the Put spread and the Call spread are done in the same month, it is called an Iron Condor. It’s a great trade that can boost your return, but trade carefully, and get out of one side quickly if the stock takes off.

I love the book, and I wondered if there was further training that expanded on what was in the book.

Yes. Absolutely. Look at the Courses page and you’ll find a recording of a SMIT Live! training session. Also, if you’d like Personal Coaching, that is available as well. Contact me if you are interested.

I noticed that your book is primarily about selling Put spreads underneath a stock betting that the stock will go up, or at least not go down much. Do you ever use Call spreads above the stock, betting that the stock will go down?

Yes, that’s a good strategy too, but I find that Call spreads need to be of a shorter duration and are a bit less likely to work out. If you see a stock falling, you can give it a try. But particularly in an uptrending market, I like Put spreads better.

Stock Market Insurance Trader focuses only on trading individual stocks. Do you ever use this strategy on ETFs?

Yes, absolutely. My favorite universe of ETFs is called the Sector Spiders. You can learn more about them at http://SectorSPDRS.com. Basically it divides the S&P500 stocks into 9 buckets and gives you an ETF on each of them. I like to find which part of the S&P500 is doing the best and open an Insurance Agent Trade on that fund.

Can you use the strategy from Stock Market Insurance Trader in a Roth IRA?

Yes. You can do Insurance Agent Trades in Roth or regular IRAs, as long as your broker allows it. Some do, some don’t. First, you’ll need a self-directed IRA, an account where you get to pick the investments. Second, you’ll need to be able to trade options. In order to trade option spreads, you need what is called Options Level 2. Not all brokers allow this for IRAs. But many do. Find one that will allow you to “trade Options Level 2 in self-directed IRA.” That’s the magic phrase.

What stock brokers do you recommend for trading Insurance Agent Trades?

I use Schwab and thinkorswim. I have also used TradeStation and OptionsXpress. All have their good points. Schwab does not allow spread trades in an IRA, so I have my IRA at thinkorswim. OptionsXpress and TradeStation do allow spread trades in IRAs. There are many other good brokerages that will work just fine. thinkorswim is my favorite.