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Compounding and Risk

The two most important words in investing.

High-risk investments can bring instant riches, but compounded, ‘YOLO’ (You Only Live Once!!) strategies end in tears.  Casinos are built upon the concept – paying massive jackpots to those willing to risk a 100% loss on a series of small wagers.  The more you play, the more likely you lose.

The casino principle applies to option buyers as well – especially those seduced by short-duration contracts (the new hot thing in options), or YOLO’s and even worse acronyms like FDs.

Some win.  Some even win big.  But very few walk away at the top.  Over time, a steady stream of losses consumes even the largest jackpot.  And credit card limits.  And paychecks.  The worst part?  You don’t even get a free drink.

On the other end of the investing spectrum, the ‘Boomer’ strategy of building wealth through a lifetime of compounded returns has little room for risk:  Five years of 10% annual returns are wiped out by a single down 20% year (like 2022).  Fifty years of 10% annual returns are cut in half by just three years of 2022-like losses.

We understand that for YOLO traders, those aggressive buyers of options who are trying to make 100% with every trade–earning 1-2% per month doesn’t sound very exciting.

But letting time work for you is VERY exciting—it was Albert Einstein himself who said that compound interest is the “Eighth Wonder of the World”.  And of course, he is absolutely correct.

Earning a low-risk 2% per month in the options market puts the miraculous power of compound interest to work like nothing else. The chart below details what an initial investment of $10,000 turns into over just five years when a person earns 2% per month.

By the end of just five years a $10,000 initial stake upon which a person earns a steady 2% per month turns into $32,810.

You’ve tripled your money and you have done it without taking any homerun swings——just cashing low risk option trades month after month.

You see, twelve months of 2% would seem to equal 24% in a year—a return that smashes the return of the stock market and even the very best hedge fund managers in the world.

The stock market is the greatest wealth creation tool on earth and historically the S&P 500 has returned 9.71% per year.

So, 2% per month isn’t only good…… is incredibly good.

Not surprisingly, investors who rely on compounding to build wealth often hold large cap value stocks, dividend payers and even Treasuries – giving up return potential in order to reduce risk.

The problem is that by the time they get “In The Money”—they have to put their teeth in the cup holder.


What if there is middle ground?

What if you could embrace compounding while still trading options on interesting companies, and sometimes even YOLO—do a slightly higher risk trade for a 3-4x return vs regular options trades?

What if you could be the seller of risk rather than a buyer?  Or utilize options to ‘rent out’ stocks like an options landlord, earning one to three percent per month.

Consider another example:  A $10,000 portfolio compounding wins of 2.5% per month grows to $1.14 million over 16 years.  Yes, million.  Six zeros.  In sixteen years.

Nathan and Keith have more than fifty years of combined investment experience.  They know how to analyze company financials, fundamentals and determine valuations – yet they also understand the next generation of investors have changed the investing landscape.

And we know how to profit from it.

Each month, we will provide our single best options idea rather than pushing a portfolio including our 37thbest. Often, our best ideas can run for 2-4 months, offering a great, even lower-risk opportunity to re-load on a monthly options trade.

These ideas are centered around a small group of highly liquid stocks that we know intimately.  So you get fundamental commentary backing up all our ideas. Most importantly, we keep it SIMPLE.  Each month will have a more advanced, slightly higher risk trade to go along with the basic options trade.

Nathan Weiss & Keith Schaefer
Co-Founders, In The Money options trading service
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