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Collect An 8.6% Yield... Every 48 Days

12/2/2013

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Amber Hestla
MARKET CONDITIONS


"Always be in a position to trade another day."

Those were some words of advice John Bollinger gave Amber Hestla as they sat around the dinner table at Ted's Montana Grill in Denver two weeks ago.

John, like Amber, has made a career out of trading options. It was his initial work with options back in the 1980s that lead him to develop the Bollinger Band (R), a technical indicator used by analysts the world over to identify when an asset may be overbought or oversold.

Given his contributions to the profession and his accomplishments as a trader, it's safe to say John has had considerable success navigating the options market. So when Amber asked him what the key to that success has been, she wasn't surprised to hear his answer: "Always be in a position to trade another day."


As any good trader or investor knows, you should always have capital preservation in mind when taking a position -- especially when it comes to options.

According to our research, nearly 80% of people who buy options lose money in the process. With those kinds of statistics, it's not hard to see how some options traders can turn a large fortune into a small one in no time flat.

But just because the odds are against you, it doesn't mean you can't safely make money in the options market.

Since Amber launched her premium newsletter, all 25 of her closed trades have been profitable, giving her and her subscribers an average gain of 8.6% every 48 days. What's been the key to her success?

For one, Amber insists on selling options, not buying them. Since 80% of options buyers are losers, it stands to reason that 80% of options sellers must be winners. By limiting herself to selling options, she is significantly stacking the odds in her favor.

But Amber also has another defense mechanism, and it's similar to one that Bollinger has used throughout his 40-year investing career: "I only take trades that offer a high margin of safety."

If you have ever read anything published by Amber, you've likely heard that phrase before. That's because she puts safety at the forefront of every one of her recommendations. In fact, for her to even consider taking a position, it must have a "margin of safety" of at least 70%.

With her put selling strategy, Amber only sells put options with at least a 70% chance of expiring worthless. When a put expires worthless, the seller gets to keep the premium they collected from selling the option as pure profit.

Additionally, she only sells puts on stocks she thinks are undervalued. The more undervalued the stock is, the less likely shares are to descend below her recommended strike price, at which point the option is no longer profitable.

Let me show you an example.

In July, Amber recommended selling puts on Humana (NYSE:HUM), the nation's second-largest provider of Medicare benefits.

At the time, the stock was trading at $83 a share. Amber thought the company's fundamentals supported a higher price point. As she told her readers:

"Right now, [Humana's] price-to-earnings (P/E) ratio of 9.7 is well below the insurance industry average of 14.1.

"And in addition to the low P/E ratio, HUM has historically enjoyed a better-than-average return on equity and less debt as a percentage of equity than its competitors. These ratios indicate that HUM is a well-managed company that should be able to navigate upcoming changes in the industry.

"If the most pessimistic analyst is correct, HUM is still a buy. The average P/E ratio over the past seven years for insurance stocks is 12.2. Using that ratio and the lowest EPS estimate of $7.85 for 2014, HUM should be worth at least $95."

In other words, at $83 a share, Amber thought the company was undervalued by 14.5%. As a result, she told her Income Trader subscribers to sell August puts on Humana with a $75 strike for about $0.85 per share, or $85 per contract. Given the company's strong fundamentals and discounted valuation, Amber believed there was an 83% chance that the price of the stock would not trade below $75 by Aug. 16 -- the day the option expired -- and that the put would expire worthless.

Her assessment was spot on. In the two-month period the trade was open, Humana gained 10% -- closing above $91 a share on Aug. 16. As a result, Amber got to keep the $85 in Instant Income she collected from selling the puts as a pure profit.

But even if the stock had fallen below the strike price and Amber had been put the shares, she would only have to purchase them for $75 -- $20 below what she thought they were worth in the long run.

That's the benefit of selling puts on stocks that you think are undervalued. Even if the price of the underlying stock falls below the strike price and you have to buy the stock, you're simply buying shares of a great company that you already think is trading at a discounted valuation.

In my opinion, this conservative approach is the key to being a successful options trader. By limiting your trades to those with only the highest margin of safety, you're able to take advantage of the lucrative nature of the options market, while also reducing risk substantially.

Of course, restricting yourself to "high-probability" positions means you could miss out on big gains in other riskier corners of the market. But for Amber, that's not a problem. After all, her goal is to generate safe, reliable income. While that means she may miss out on some trades with "10-bagger" potential, at least she's comfortable knowing she'll be around to "trade another day."
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The Scoop On Penny Stocks

12/2/2013

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MARKET CONDITIONS

I have made money on penny stocks and currently am holding several in my portfolio. The trick is knowing when to get in and definitely when to get out.
I have learned the hard way of course that anything hyped up usually is nothing but just that... hype! It's the hidden gems that deliver stellar returns that hardly get noticed at least not by the investors who follow hyped up trends. Do your research and look down the road to see if the penny stock you're eyeing has a future longer than 6 months.

Two of the biggest motivating factors in the world are the emotions of fear and greed. Fear can keep investors from investing at all or cloud their judgment and cause them to panic and sell a stock at the wrong time.

Greed, on the other hand, causes investors to take undue risks. They margin their stocks heavily or they chase lofty stocks that are already trading at insane valuations because it seems that "everyone" is in the stock and they don't want to get left behind.

But then there's another common mistake that investors make that is due to greed. It's investing in penny stocks. These are stocks that are generally priced under $1 per share.

Penny stocks initially seem so enticing. You can get a gazillion shares even with a small amount of money. So you feel like you own a lot of it. Secondly, a small move higher is a huge percentage move upward and can cause a huge gain, profit-wise.

So what's the problem with that? There are a few major reasons why penny stocks rarely pan out and produce the great gains that people tout.

For starters, penny stocks have wide spreads and tend to have low volume. The spread is the difference between the price at which you can buy the stock and the price at which you can sell the stock. The buy price is always much higher than the sell price is. So even with a large gain, much of the gain consists of just getting the selling price of the stock up to the buy price level or better. And this doesn't even factor in your commission costs.

So the selling price of the stock has to climb a long ways to get above the buy price and high enough to overcome the commission costs too in order to become profitable.

With the typical stock out there, these spread costs are fairly low and the price doesn't have to move much to put the sell price greater than your buy price is. But that's not generally the case with penny stocks.

Additionally, these tend to be lower-volume stocks. So your fills can be slow and at various price points that are unfavorable to you.

The low-volume nature of penny stocks also makes penny stocks a favorite of scammers who love to "pump and dump" the stock. By that, I mean that they get up a huge following through email lists or some other communication venue (Twitter, etc.). They buy the stock, then tell their ton of followers to do the same. These other investors end up pushing up the stock price for the scammer and the scammer gets out with a nice profit while your price generally never made it up high enough to produce a nice profit. In other words, they used you for a profit. They "pumped up the stock" and then "dumped" it.

A penny stock is more easily controlled due to its low trading volume. You see, if someone buys 10,000 shares of a 50 cent stock that trades 20,000 shares in a day, they're going to move that stock price considerably and be able to manipulate the price for their advantage.

Had they been in a stock that trades millions of shares a day at a higher price point, they'd not likely be able to do this. So that's why the scammers love penny stocks. And that's one reason why you should not love them. You're typically on the late end of the trade they tell you about.

The next great reason to stay away from penny stocks is because most large institutions are barred from investing in stocks under $5 per share and some are even stricter and won't allow investing in a stock under $10 per share.

The problem is that all of the "big money" can't get into the stock and, therefore, a larger sustainable push higher in the stock is not likely to happen with the "big boys" being out of the game.

In other words, imagine telling most every mutual fund, pension fund, etc. out there that they can't invest in a stock. That's what you have when you have penny stock investing. There isn't the proper volume in a penny stock for these funds to invest. Yet it's these huge funds investing over time that is needed to cause a real, sustainable rise in a stock. That element is totally absent in penny stock investing. Yet it's totally present in stocks above $5 to $10 per share.

A prime example of this is a stock that I invested in some months back. Then a month or so ago, a billionaire investor invested $1.5 billion into the stock. Well, what did it do? It pushed my shares up quite a bit upon this huge investor investing and upon others hearing that he invested and they invested as a result. So the huge volume of buying that came propelled the shares that I owned much higher. This is what you want to have happen. You want large institutions to have the ability to invest their money in stocks that you are in. The penny stock investor doesn't have that luxury.

So I hope what you get out of this is that the penny stock investor has a ton of things going against them that the typical stock investor doesn't have going against them. I hope you see penny stocks aren't as glorious and as much "easy money" as people make them out to be.

Therefore, the next time your buddy tries to get you to buy a penny stock or you get an email that is pushing a penny stock, I hope you'll remember what I'm teaching you today and you'll avoid a huge pitfall.
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Upgrades and Downgrades

12/2/2013

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MARKET CONDITIONS


Upgrades
  • Pearson (PSO) upgraded by BofA/Merrill from Neutral to Buy
  • easyJet (ESYJY) upgraded by HSBC from Underweight to Neutral
  • Best Buy (BBY) upgraded by Citigroup from Neutral to Buy
  • ONEOK Partners (OKS) upgraded by Goldman from Sell to Neutral
  • Layne Christensen (LAYN) upgraded by UBS from Sell to Neutral
  • priceline.com (PCLN) upgraded by Goldman from Buy to Conviction Buy
  • Cabot Oil & Gas (COG) upgraded by Bernstein from Market Perform to Outperform
  • Teva (TEVA) upgraded by Susquehanna from Neutral to Positive
  • Layne Christensen (LAYN) upgraded by UBS from Sell to Neutral
Downgrades
  • Danske Bank (DNSKY) downgraded by Societe Generale from Hold to Sell
  • Deutsche Post (DPSGY) downgraded by BofA/Merrill from Buy to Neutral
  • C.H. Robinson (CHRW) downgraded by Deutsche Bank from Buy to Hold
  • ANA Holdings (ALNPY) downgraded by Citigroup from Buy to Neutral
  • Patterson Companies (PDCO) downgraded by UBS from Buy to Neutral
  • Dick’s Sporting (DKS) downgraded by BMO Capital from Market Perform to Underperform
  • Boeing (BA) downgraded by Oppenheimer from Outperform to Perform
  • WhiteHorse Finance (WHF) downgraded by Wunderlich from Buy to Hold
  • Twitter (TWTR,FB) downgraded by Cantor from Buy to Hold
  • Medtronic (MDT) downgraded by Argus from Buy to Hold
  • Consolidated Edison (ED) downgraded by Argus from Buy to Hold
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The Toll Road To Success

12/2/2013

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MARKET CONDITIONS



PROFILED: Brookfield Infrastructure (NYSE:BIP)

Hoover Dam (originally called Boulder Dam) was finished in 1936, at which point it began damming the Colorado River to create Lake Mead -- the United States' largest reservoir.

The project was massive. At its peak, more than 5,000 people worked on it at the same time. And the dam contains enough concrete to pave a two-lane highway from San Francisco to New York City.

In total, construction costs came to $49 million.

That $49 million investment is the sole reason why millions of people are able to live in the Las Vegas area today. And it has generated billions of dollars of wealth in the process.

But Hoover Dam didn't just create a massive reservoir to provide water to the middle of the desert. It also created one of the most lucrative electricity generation plants ever built.

Located in the base of the dam are 17 hydroelectric turbines that make up the Hoover Powerplant. These turbines generate roughly 4.2 billion kilowatt hours (kWh) of electricity per year, making it one of the largest hydroelectric plants in the United States.

Electric providers love hydroelectric power because it's among the cheapest power sources on the planet. Hoover Powerplant sells its electricity on the wholesale market at just 1.6 cents per kilowatt hour. In comparison, Las Vegas residents pay an average of 11.6 cents per kWh for electricity -- seven times as much.

But even at that low cost, Hoover Dam generates and sells about $63 million in electricity every year (1.6 cents x 4.2 billion kWh) -- that's nearly 130% of what it cost to build the dam in the first place.

Of course, there are a number of other costs such as maintenance and upkeep that figure into the equation, but the point remains -- Hoover Dam has become one of the greatest individual investments ever made by the U.S. government. And it continues to increase its return year after year.

So how can this help us as investors? After all, as I mentioned earlier, you can't invest directly in Hoover Dam.

You simply have to understand why Hoover Dam has been such a success...

Hoover Dam is what I like to call an "irreplaceable asset."

No one can come along and build a competing dam. And the world isn't going to run out of a need for electricity. If anything, we'll need more electricity in the future.

That's why even 76 years after it was built, the dam is more important today than ever.

And while you can't invest in Hoover Dam, there are dozens of irreplaceable assets around the world -- including many hydroelectric dams -- that you can invest in.

And as you would expect, investing in these irreplaceable assets has proven to be extremely profitable.

Take oil and gas pipelines, for example. Pipelines are the ultimate irreplaceable assets. Another company can't simply build a pipeline next to an existing one. And the pipelines that carry fuel, natural gas, oil, and other commodities across the country aren't about to be replaced by some new technology.

That's why I've loaded up on pipeline operators, which are typically structured as master limited partnerships (MLPs), in my Top 10 Stocks portfolio.

In fact, pipelines have been one of the strongest corners of the market for years. The benchmark for master limited partnerships -- the Alerian MLP Index -- has returned 328%, including dividends, during the past decade... or almost 16% a year. That's over three times the S&P 500's 10-year performance.

But there are more irreplaceable assets than just pipelines.

Take my investment in Brookfield Infrastructure (NYSE:BIP). Brookfield owns toll roads, electricity transmission grids, ports, and railroads all over the globe. All of these are irreplaceable assets. And they continue to earn a steady stream of cash for BIP and its investors.

This is exactly why I added the shares to my portfolio more than two years ago. And it's why the stock is one of my biggest winners -- up 67% in just over two years while paying a yield of 4.4%.

Don't get me wrong, there are no guaranteed winners in the investing world. Any investment can fall in value. But when you find the sort of securities that give you access to irreplaceable assets, they often end up being some of the most lucrative investments to own for the long term.
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