Boost Your Trading Margins With This Simple Technique

Amber Hestla's picture

Wednesday, August 5, 2015 - 7:30am

by Amber Hestla

One of the proven ways to become a great investor is to study great investors.

Every time an investing legend makes a successful trade, a clue is left behind. For instance, every buy and sell decision Warren Buffett makes tells us more about his process, and those insights can help us create our own success.

Today, I'm going to focus on an important lesson from a lesser-known, but wildly successful investor.

While I'm sure you're familiar with Buffett, Peter Lynch and other well-known investors, you might not be familiar with Lynn Tilton.

Tilton is the CEO of the $8 billion private equity firm Patriarch Partners and one of the more obscure money managers I follow. She has a number of critics and has seen her fair share of controversy. But many of her investments have been successful and uncontroversial, and we can learn a great deal from them.

Tilton is known for her ability to turn around struggling companies in basic industries, and she's credited with saving 700,000 jobs at the roughly 75 companies Patriarch invests in, including MD Helicopters, Stila Cosmetics and Gorham Paper and Tissue.

Tilton has often pointed out that one of the "universal lies" companies tell is:

"Margins are weak, but we'll make it up on volume."

Margins are the profits a company reports expressed as a percentage of sales. Weak margins indicate a company is only earning a small amount of profit on each sale.

If you're a big-box retailer like Wal-Mart (NYSE: WMT) with giant sales volume, weak margins aren't such a big deal. A small profit percentage isn't much of a concern when your sales are gargantuan.

But that's not the case in all industries. The math shows manufacturers like the companies Tilton focuses on cannot become profitable by simply increasing sales.

They must first focus on margins.

Readers of my premium newsletter Income Trader and I face the same problem as these manufacturers.

You see, we have closed 85 straight winning trades by selling options. If you're a regular reader of StreetAuthority Daily, then you've likely heard me talk about how options work before. (And if you haven't, here's a link to a free eight-minute webinar I put together.)

We only make trades on undervalued stocks that we would like to own. So, the two outcomes of every trade we make are:

1. The undervalued stock's price doesn't fall, and we collect instant income. We've collected annualized "instant income" on these trades of 157.8%... 168.7%... even 212.2%.

2. The undervalued stock's price falls to an even better bargain, and we get the opportunity to buy that company at a sizeable discount.

But here's the thing... The kind of track record my readers and I have put together wouldn't be nearly as impressive as it is without factoring in the cost it takes to place these trades.

Each trade we make requires the use of capital, which is a limited resource for all of us. Since our money is limited, we cannot create great wealth with weak margins. This is why it's important that we maximize our profit margins in each trade.

And so far, we have.

For instance, just two months ago, we closed a trade with a profit of 4.9%. Now, that's not bad. In fact, many investors would be pretty satisfied if they could lock in a 4.9% return for their portfolios.

But here's the thing: We didn't have to use our entire portfolio to make this trade. And it didn't take us a whole year.

We locked in that 4.9% return in just 37 days. That's an annualized gain of 47.9%.

Talk about maximizing margins.

You see, we can try to increase our profits by increasing our volume, but because money is a limited resource, every trade we make locks up some of that capital, and we cannot create great wealth with weak margins.

So, how does an option trader improve margins?

In our "business model," a primary cost is the commission we pay on each trade. It's also a factor some investors don't realize they have control over.

High commissions can prevent us from trading opportunities in hundreds of stocks.

But finding a low-cost broker to make your trades is one of the easiest ways you can increase your personal profit margin on each trade.

After some research, I have included a list of several brokers that provide great service at extremely low costs in the table below.

If you're just starting out with options (or are thinking about it), I strongly urge you to look into a lower-cost broker for your trades if you don't already have one. That way, you'll be able to capitalize on these win-win situations to increase your trading "margins."

Also, please keep in mind that in addition to commissions, some brokers charge exchange fees and other fees. It's extremely important that you fully research a broker to understand all costs. While I cannot recommend a specific broker, this can serve as a starting point for your own research.

To learn more about how options work and how exactly my readers and I have been able to close a spotless track record of 85 winning trades so far, I encourage you to check out the free eight-minute webinar I just put together.

If you'd like to earn extra income and have the chance to buy some great companies at extreme discounts, then I advise you to watch this video by clicking here.

Good investing,

Amber Hestla
Options & Income Strategist
Income Trader

Amber Hestla does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.