One of my investing mentors is one of the most interesting people I’ve ever met.
In a former life, she had a front-row seat at the professional poker circuit. Remember when you began to see it on TV about 20 years ago? I remember in college, I had friends who would stay up at night watching guys like Phil Hellmeuth and Doyle Brunson play Texas Hold ‘Em like they would any other mainstream sport. And in between classes, they’d log on to their computers and play against other people around the world — hoping to score enough to buy a keg, pay for books, or even take a trip for spring break.
Anyway, my investing mentor was right there for it all. She knew a lot of these guys personally, and had had enough juice in these circles to be able to hold her own across the table from Texas billionaire businessmen and guys with multiple World Series of Poker Championship bracelets.
Now, you might think it strange that a person like this would be an investing mentor for me. But she knows her stuff. In fact, she told me one of the most valuable lessons I’ll never forget. She said, whether it came to poker or investing, “You have to have enough chips to stay in the game.”
This couldn’t have been better advice for a young guy just starting out. And it’s still important all these years later.
Or course, in investing parlance, we call it “capital preservation.” But the point is, staying alive is fundamental. Avoiding losses — especially ones that could end your portfolio — is step number one.
That’s why today I’d like feature this discussion from an analyst that’s done a better job at this than just about anyone: Amber Hestla, Chief Investment Strategist of Income Trader. In the exchange below, we talk about her unconventional background, how she approaches the market, how she’s managed to avoid big losses trades, and more…
A lot of our readers are already familiar with your background. You spent a good bit of time in the military before becoming a self-taught, award-winning trader. Does this affect how you approach the market?
Without question. When I was in the Army, my job was to “analyze strategic and tactical intelligence about enemy forces and potential battle areas.” In plain English, I spent 14 hours a day trying to make our soldiers were safe from things like roadside bombs.
It’s an experience you’ll never forget. So the idea of “risk” is always on your mind. The stakes are a lot less, of course, when you’re trading. But I think taking an analytical approach to risk carried over to my trading career.
By the time I left the military, I was reading everything I could get my hands on about the market. I sought out the industry’s best trading experts for guidance. Soon, I was trading on my own, using tools I developed from the knowledge I had gained, and earning way more than I ever did in the Army.
People may be surprised to know that a “risk-averse” trader like you is trading options every week. What do they need to know about this that might surprise them?
Amber: It all goes back to risk. For starters, the put-selling strategy we use in Income Trader is one of the most conservative options strategies around.
Studies show that 80% of options buyers lose money. So we want to be in the business of selling options, not buying them.
At Income Trader, that means we sell put options.
A put option potentially obligates you to buy a particular stock at a specified price (known as the “strike price”) for a limited time period. For taking on this obligation, the option seller receives an upfront payment. This is what’s called a “premium”.
Best case scenario would be for the underlying stock to remain above the strike price. This means we get to keep the income we receive, walk away, and make a new trade. Rinse and repeat. Worst case, the stock declines to the strike price and your put options are exercised. Now, most times, we get out of the trade before then. But the best way to reduce risk further is to only sell puts on solid companies you wouldn’t mind owning. If you follow this one rule, you’re ahead of 99% of options traders.
And what makes this approach superior?
When you sell a put on a solid performer, you’re basically betting that a great company won’t fall to what you would consider a “discount” in a short period of time.
Yes, once in a while, you may have to buy the shares. But that’s not necessarily a bad thing — after all, you’ll be getting a great deal on a stock you’d want to own anyway. The premium you received when you sold the put lowers your cost basis even further. Plus, as you get more comfortable with options, you can then turn around and collect even more income from the stock using a different options strategy (like a covered call).
My goal is to create “no-lose” situations. Of course, there’s no such thing in the financial world, but I think selling puts on stocks you want to own is as close as it gets. It’s like getting paid to set limit-orders on your favorite stocks.
The numbers you’ve put up over the years are impressive. Since the first issue of Income Trader, you’ve posted a 90.5% win-rate. What’s been the key?
The beauty of this strategy — and why it’s worked so sell for us over the years — is because of the indicator I developed to help identify the best time to make a trade on any given stock.
A lot of people are familiar with the Volatility Index (VIX). And a lot of our readers may even know that when the VIX spikes, it usually means stocks are falling (markets are usually more volatile when they’re falling, not rising). That also means options premiums are higher (which means more income for us).
My indicator — the Income Trader Volatility (ITV) indicator — works basically the same way, but for individual stocks and ETFs. Without getting into the nitty gritty details, it basically tells us the optimal time to sell puts for the most income while taking on the least amount of risk.
So while our overall strategy remains unchanged, it’s also important to adapt to market changes. I always keep my finger on the pulse of ITV (as well as other indicators) to tell my readers whether it’s time to “go big” or play it safe.
For example, going all the way back to March 26 of last year (right during the Covid selloff), we went on a streak of winning trades for over a year without a single loss. That streak finally ended on June 16th of this year. That’s 57 trades with no losers.
Of course, it won’t always be like that. But the point is options selling works in any environment, and the best options to use will always be determined by the math.
Any final thoughts? What’s an of the market where you’re finding opportunities right now?
A few days ago over at Income Trader, I found myself looking at the housing market again. The S&P/Case-Shiller U.S. National Home Price Index is posting record gains. In the past 12 months, the Index is up 16.6%. That’s a new record, besting the 14.5% annual rate of change recorded at the height of the real estate bubble.
Source: Federal Reserve
This has led many to wonder if home prices are in a bubble. That question largely stems from the housing bubble we saw in the mid-2000s. Back then, home prices soared (similar to what we’re seeing now)… and then collapsed.
Rapid gains in prices are a sign of a bubble. But this time, fundamentals are bullish. Incomes are rising, but the trend is distorted by the pandemic. Construction has lagged and supply is low. Demographics point to continued demand for homes. There’s currently a large number of individuals aged 25 to 34, which indicates a number of new households are being formed and the demand for homes will rise.
These are bullish factors for homeowners and for homebuilders like my recent trade recommendation, D.R. Horton, Inc. (NYSE: DHI).
It’s a great long-term investment, but my focus is on the short-term income opportunity. Technicals confirm my bullish outlook for the sector. And the chart above shows DHI is on an Income Trader Volatility (ITV) “buy” signal, which means we can use our put-selling strategy to best take advantage of it.
Thanks again, Amber. Of course, we can’t release the exact details of Amber’s trade on DHI out of fairness to her premium subscribers. But there’s never been a better time to try this strategy…
As she mentioned, Amber’s options-for-income strategy works in any kind of market — and it’s easy to implement once you set up your brokerage account and acquaint yourself with some basic terminology.
To read a full report on Amber’s strategy and get started, go here.