Credit: Shutterstock photoNormally this kind of information is kept secret. But due to regulatory requirements for its initial public offering ( IPO ), this company was forced to reveal its shocking record.
From 2009 to 2013, a secretive high-frequency trading firm named Virtu managed to only have one losing day.
In 2014 it notched a perfect record.
On its worst day, the firm was making between $800,000 and $1 million a day.
It may sound too good to be true. But there it is, laid out in Virtu Financial's IPO prospectus for any and everyone to see. But Virtu isn't alone.
J.P. Morgan didn't have a single losing day in 2013. Bank of America notched a perfect performance of its own in the first quarter of 2013.
Clearly, Wall Street trades and invests its own money differently than the traditional buy-and-hold strategy its clients typically use.
I'll let you in on one of Wall Street's best-kept secrets: selling put options.
Does that sound scary? Intimidating?
If it does, there's a very good reason for that: That's exactly how Wall Street wants it.
As a former derivatives trader for a billion-dollar firm at the Chicago Board of Trade, I saw firsthand how secretive the best trading firms are. Wall Street works very hard to keep its most powerful income strategies out of the hands of regular investors.
That includes selling put options.
What most investors don't realize is that selling puts isn't just one of the most conservative options strategies. It's also one of the lowest-risk investment strategies in the entire market -- more conservative than owning individual stocks and bonds or even mutual funds and ETFs.
The conservative strategy of selling options is driven by a fact you might find shocking: About 80% of options expire worthless. That means whoever sold those options gets to keep the full premium collected as income from their sale four-out-of-five times.
And these aren't small premiums. They equate to annualized yields of 36%, 47%, even 87%. And you can do it with well-known, trusted companies like Microsoft (Nasdaq: MSFT ) and Verizon (NYSE: VZ ).
Despite Wall Street's best efforts, well-informed investors are embracing selling options as an important source of portfolio income. In fact, this is what I do every week in my premium newsletter service, Income Multiplier .
Much like the trading records of Virtue and JPMorgan in 2013, Income Multiplier has chalked up an amazing record -- one that any Wall Street bank would envy. And while nothing is guaranteed in investing, I think there will be plenty more on the way.
Today, I want to share five insider tips I learned during my time as a Wall Street insider that have helped my readers and I achieve this impressive track record.
1. Only sell options on stocks you want to own.
Selling a put offers two potential outcomes.
The first is that the options expire worthless and the put seller keeps the premium generated from the sale.
The second potential outcome is that shares of the underlying stock fall below the strike price on the date the option expires. This obligates the put seller to purchase 100 shares for every contract sold.
Although this is generally a low-probability outcome, it's the reason why it's important to sell options only on stocks you actually want to own. In the event that the put seller is required to purchase shares, you want to own a great company with plenty of long-term potential that will quickly rebound from a temporary pullback.
2. Avoid long-dated expirations.
All options contracts have an expiration date. Some options expire every week; other options expire after several years.
Focusing on short-dated options generally increases the probability of the puts you sell expiring worthless.
Long-dated options are more vulnerable to macro shifts in the economy or market. Conversely, options that expire in just a few weeks or months are much less susceptible to price fluctuations. The shorter-dated option will generate a smaller premium -- but it's a much higher-probability trade.
3. Only sell "out of the money" puts.
Every option contract has a probability of expiring worthless. Some options contracts have a 90% probability of expiring worthless; others have a 50% probability. It all depends on the variables of each individual contract.
One of the biggest factors impacting the probability of a worthless expiration is an option's strike price. Options with strike prices that are far away from the underlying stock's current share price have a lower probability of assignment than those with strike prices that are close to current prices.
Selling " out of the money " puts increases the probability that the puts you sell will expire worthless.
4. Diversify.
Regular stock investors should always diversify their portfolios. The same is true for using options. Just like a regularly diversified portfolio, option traders want diversified sector allocations.
5. Don't increase the size of positions too quickly.
Hopefully the early results of any new investment or trading strategy will be great. But don't let early confidence cloud your judgment.
The value of every trade should be calculated as a percentage of your overall account value. That makes the growth of your account the primary driver of position size as opposed to a bout of short-term confidence.
Think Like A Bank
The unprecedented track records that Wall Street trading firms are racking up are due in large part to successful strategies like this.
But I think it's time that regular investors got in on the wealth-building secrets that these traders are so set on hiding from the public.
In my premium newsletter Income Multiplier , I'm showing readers my research each and every time I sell a put option, and we're seeing annualized yields on our trades that make regular dividends look meager by comparison.
As I mentioned earlier, we're talking 36%, 47%, even 87%. To learn more about how easy it can be to multiply your income, I'd like to invite you to watch a special presentation I've prepared. Simply follow this link to learn more .
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.
