On Monday, members of the Small-Cap Rocket Alert family kicked off 2014 with a bang when one of our recommendations, a small-cap biotech company, rocketed ahead 90% in a single day's trading.
An 90% gain in a single day is fantastic, but some of my subscribers reported amplifying those returns by way of options - pulling single-day gains of 700%, 776%, 1,042%, and even 1,500%.
Typically those kinds of returns are relegated to professional traders using proprietary computer programs to maximize gains while keeping risk at a razor-thin level - but they don't have to be.
I'm going to talk today about my favorite way in 2014 to buy income-producing stocks using one of Wall Street's favorite strategies: other people's money...
How Traders Boost Returns and Manage Risk
Specifically, I'm talking about short-selling one asset (that's where other people's money [OPM] comes in) and collecting cash into your account in order to buy another, non-correlated asset.
You might be asking yourself, why I'm concerned - at all - with buying income-producing assets with the potential of single-day returns of 90%, 700%, or even 1,500% on the table.
The answer is quite simple: risk management.
Historical data, and my own research is very clear on this, shows that quality income-producing assets have the ability to significantly reduce your overall portfolio risk, while at the same time offering you great upside potential.
It's important to remember that professional traders measure every trade through the metric of risk management, and so should we.
So what is one of my favorite low-risk trades for 2014? Shorting the Japanese yen...
This Short Looks Certain to Free Up Your Money
After more than two decades of slumping economic growth, the newly elected Prime Minister of Japan, Shinzō Abe, advocated what amounts to a desperation play to kick-start the Japanese economy with a stimulus program that we, in the West, refer to as Abenomics.
On the outside, Abenomics was designed to inject liquidity into the Japanese economy - but many analysts (myself included) think the real motive was to devalue the yen in order to gain an edge for Japanese exports.
No matter what the motive, the end result was a boost in exports and a massive 50% gain in the Nikkei - and for the purpose of today's discussion, a 21% decline against the U.S. dollar in 2013.
In order to maintain the effect of Abenomics, the Bank of Japan is going to have to keep the value of the yen depressed because any strength in the yen will likely torpedo the Nikkei's ascent, stifle exports, and put Japan back into recession.
That's why I'm shorting the yen in 2014, because from the 30,000-foot level, it looks like a very solid play.
The next obvious question is, what do I recommend buying if I'm short the yen?
A Simple Trade to Leverage Your Gains
My favorite income-producing asset is Alerian Mlp (NYSEArca: AMLP), which is an exchange-traded fund (ETF) that holds a basket of U.S.-based oil and gas pipeline master limited partnerships (MLPs). Shares of AMLP are currently yielding 6.01%.
Shorting the yen directly is going to be difficult because it requires using a Forex account and then shorting the yen on margin.
That's probably too risky for most people, but I have another way to accomplish basically the same thing - a simple "pairs trade."
In a pairs trade, we want to buy two different assets designed to operate as a single holding.
Here's a way to assemble a pairs trade to "short" the yen and go "long" Alerian using simple ETFs.
Split your capital in two halves. With one half, buy ProShares UltraShort Yen (NYSE Arca: YCS), and with other half, buy shares of AMLP, simple and clean.
With this trade, you're effectively "short" the yen by way of YCS and you're "long" Alerian. If the yen falls, YCS shares will increase - which will offset the purchase price of your Alerian position.
The risk in this trade is that the market pulls back and there is a flight to safety into the yen and the U.S. dollar. That will make YCS shares pull back - but only in the short term.
The Bank of Japan (BoJ) has to keep the yen weak in order to maintain its recent economic advances. Any short-term increase in value (of the yen against the dollar) will likely be followed by more yen-weakening from the Bank of Japan.
Think of the Bank of Japan as a sort of backstop to the YCS portion of the trade.
More sophisticated traders may choose to buy put options on CurrencyShares Japanese Yen Trust (NYSE Arca: FXY), or call options on YCS to pair with shares of AMLP, but that's just a matter of preference.
The main point I'm trying to make today is that, as investors, we don't have to be limited to simple "long-only" strategies. With the advent of ETFs, we now have the ability to craft specialized trades. Similar to how the big boys do it. All it takes is a little creative thinking and a view from the 30,000-foot level.
Judging by the mail I received the other day, I know that my readers have some fantastic ideas of their own. If you have your own ideas about pairs trades, please let me hear from you in the Comments section below.