A safer alternative to stocks… Why pigs get slaughtered… Three golden rules for long-term trading success… In the mailbag: “There is no way EVERYONE can have their rights”…
When we left off yesterday, we were showing you how master trader Jeff Clark gave his subscribers the chance to book average returns of 31% in 2008.
That was the same year the S&P 500 plunged 38%.
And it wasn’t just a few big wins balancing out a bunch of losses for Jeff’s readers.
In 2008, Jeff made 52 short-term trading recommendations – an average of one per week. And 42 of those trades were profitable.
That’s an astonishing win rate of more than 80%. And 10 of his recommended trades returned more than 100%.
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As we covered in yesterday’s Daily Cut, Jeff says bear markets are the best hunting ground for explosive short-term gains.
Today, he shares the three simple rules he uses to not only maximize his gains but also sleep soundly at night.
You probably think of traders as adrenaline junkies and high-wire risk-takers. That’s how they’re depicted on TV and in the movies.
But Jeff is just the opposite of a stereotypical trader.
In fact, he’s probably one of the most conservative guys at Legacy Research. (You’ll see just how conservative when we get to rule No. 3.)
For a conservative guy like Jeff, owning stocks is way too risky.
Instead, he uses options contracts.
Now, if you’re not familiar with options, your gut is probably saying, “They sound risky.” But options were developed to manage risk. And that’s why Jeff loves them so much.
Don’t worry if you don’t know much about options trading. Here are the basics…
There are two types of options contracts – “calls” and “puts.”
Calls give you the right, but not the obligation, to buy a stock at a specified price for a fixed period of time.
As the stock rises in price, so does the value of your call.
Puts give the you the right, but not the obligation, to sell a stock at a specified price for a fixed period of time.
Since puts are bets on falling prices, they rise in value as the price of the underlying stock falls.
Why does Jeff use options instead of buying stocks? Here’s how he explained it to us…
Options allow you to have the same upside exposure to stocks but with an extremely limited amount of downside risk.
For example, IBM shares are trading at $125 right now. If I want to buy 1,000 shares in IBM I have to fork out $125,000. But I can get the exact same exposure to the stock by buying 10 call options. And maybe those call options cost me, I don’t know, $3 a share. So for $3,000, I can basically control $125,000 worth of stock.
That means the most I’m ever going to lose on that trade is $3,000. Compare that with someone who pays $125,000 to own IBM stock directly… and decides to sell if his position drops by 20%. For the same potential upside, that investor has put at risk $25,000 [20% of $125,000]. That’s more than eight times the risk of the options trade. That’s just something I’m not interested in.
This is the opposite of how most folks think of options trading.
Options, when used right, aren’t risky. They cut the amount of risk you take for each trade.
Which leads to Jeff’s second rule…
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You may have heard the old Wall Street saying, “Bulls make money. Bears make money. Pigs get slaughtered.”
Well, Jeff takes it to heart. Here he is with more…
Getting greedy as a trader is never a good idea. But if you get greedy in a bear market, the market will humble you. It will make sure that you know you shouldn’t be getting greedy anymore.
That’s why I always take some risk off the table when I’m up on a trade. I did this myself this morning. I bought 10 put options on Procter & Gamble shares for $1.30. That’s $1,300 bucks.
Then they shot up to $2 a contract. So I sold eight of them for $1,600. I was able to make a nice little $300 profit. I now still have two contracts that stand to make a lot more money if that trade works out. And if it doesn’t I don’t lose a penny.
If you want to be a successful trader like Jeff, your first order of business is to make sure you never lose your shirt. Jeff again…
Even though I’m short-term trading, I’m playing this game long-term. I’ve been doing this for 36 years. And I’ll do it for another 20 or 30 – or however long God lets me live on this planet.
I’m not looking to make 1,000% overnight. I’m looking for the doubles and the triples that keep me in the game… and keep me profitable… over the long run.
That brings us to Jeff’s third golden rule of trading…
You may be thinking, “If Jeff is so sure about his strategy, why doesn’t he put all of his money into it?”
It’s a question he gets all the time from subscribers of his Delta Report advisory. But the 10% rule is non-negotiable. And for good reason. Jeff…
I’m actually a very conservative guy. With my own money… and this will probably surprise a lot of folks… I keep 90% of it locked up in rock-solid stuff that doesn’t earn much of a return. It’s in gold and silver. It’s in Treasury bills. It’s in bank accounts.
But then I’ll aim to shoot the lights out with the other 10%. I’ll look for really big wins, knowing that even if I have the worst year in my life, the most I stand to lose is 10% of my overall wealth.
I’m not going to sacrifice my family. I’m not going to sacrifice my standard of living. Nothing gets harmed because I lost 10% of my net worth. In the meantime, if I can put that 10% into a handful of option trades that double over time… and if I can double it 10 times a year… I can generate phenomenal returns.
The world is full of aggressive, no-holds-barred traders. They can score impressive wins. But unless they pay obsessive attention to risk – as Jeff does – they always blow themselves up in the end.
If you follow Jeff’s three golden rules, you’ll avoid being one of them. And you’ll still be able to enjoy the kind of upside Jeff’s strategy has to offer.
Last Wednesday, we asked you: Is the War on Drugs unwinnable? Should the feds legalize ALL drugs like Legacy Research cofounder Doug Casey says?
And we’ve been getting some mixed opinions…
There is no way EVERYONE can have their rights. Your right may be to smoke or take a drug, but my right is to breathe smoke-free air and a reasonable expectation of safety in public because people are not impaired. Due to their right to use drugs that cause them to do dangerous things not only for themselves, but to me and my loved ones, the innocent people pay the price for our injuries or death. Because these people many times are irresponsible and don’t have insurance, we the taxpayers pay for their injuries as well as our own.
Many adults no longer make rational decisions about anything. No, I don’t trust most people because we are raising self-centered humans. I was raised to trust until they did something that made them untrustworthy. Because of the change in society, I had to raise my sons to be very careful and make people prove themselves trustworthy. Sad, but true.
– Jacki R.
In my experience, the people that most vehemently oppose the legalization of pot or “some drugs” are those whose families have been decimated by the actions of an addict in or close to the family. I understand the anguish all too well. But seeking the answer in government action never, ever works.
The reality is, anyone that wants to smoke pot or buy and use a drug illegally, does it. The laws don’t stop kids from trying them, they don’t stop adults from partying with them, and they don’t stop addicts from abusing them. The laws only serve to create a market for criminals that are ruthless enough to take advantage of the demand and supply the product. All along the way the system profits. Casey is 100% correct.
– Pat P.
Government was assigned the duty of regulating commerce, not people. When they operate outside of their assigned duties, they are outlaws. The war on drugs was waged for the profit of mercenaries that are too lazy to work, too nervous to steal, and too jealous to pimp. It is greed-driven and everyone loses.
Owning drugs is a property right. Purchasing drugs in commerce is regulated. Both legal and “illegal” drugs cause problems. They both feed on people’s weakness just as the war on drugs feeds the greedy at the expense of the government, the victims, and the public. There is no moral high ground for either the greedy warrior or the mendicant addict. Legalizing all drugs seems the lesser of the two evils. Granted it is taking the easy way out, but it is a way out of this ridiculous, endless war on the actions of the people.
– Ernst A.
Is Doug right that all drugs should be legalized? Or, as reader Ernst A. said, is it just taking the easy way out? Send your comments – or any questions you might have – to [email protected].
Regards,
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Chris Lowe
January 24, 2019
Berlin, Germany