I recently told you about one of the key investing tools Amber Hestla uses in her conservative options strategy that led to her perfect track record. Since her premium newsletter, Income Trader, launched 17 months ago, Amber and her readers have closed 63 straight winners, generating an average annualized return of 56%. (You can see her first 52 profitable trades here.)

In other words, we’re not simply telling you about these investing tools because we say they work. We’re telling you about them because they are working.

We’ve already covered the first tool Amber uses to fuel her perfect track record — the Income Trader Volatility (ITV) Indicator. Amber looks for stocks with the right amount of volatility, which helps her maximize income and limit risk.

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Amber’s second key investment tool takes risk management one step further. It’s a safeguard that helps ensure that every trade she makes has a chance to be profitable — no matter what direction the stock moves.

Amber’s rule is this: Only sell puts on stocks you wouldn’t mind owning.

This means finding high-value, high-quality companies that she’d be happy to buy when they’re “on sale.”

There are many different ways to find value stocks. Many investors compare a stock’s price to the company’s earnings, using the price-to-earnings (P/E) ratio. But Amber stresses that this method is flawed. As she mentioned in one of her articles last year:

Many investors look at P/E ratios and consider low P/E stocks to be buys. This approach ignores the growth rate of earnings… 

[Let’s assume two] companies are trading with a P/E ratio of 15… If a company is growing earnings at 40% a year, that stock should be worth more than the stock of a company growing earnings at 10% a year.

[So instead of using the P/E ratio] to find value, I look at the PEG ratio [which incorporates growth]. I believe this indicator is the best way to determine which stocks are truly undervalued. To find the PEG ratio, you divide the P/E ratio by the earnings growth rate. A stock is considered to be trading at fair value when the PEG ratio is 1.

Here’s an example of how she used the PEG ratio to find her 25th profitable trade, which was in biotech company Questcor Pharmaceuticals (NASDAQ: QCOR) in August of last year.

Events at the time caused Questcor’s stock to jump from $52 per share on July 30, 2013, to nearly $70 within a week. This high volatility caused it to pop up on Amber’s radar. But before any trade would be made, the stock had to pass Amber’s quality control test — it had to be a high-quality company trading at a big discount.

At a price of $67.38 per share, QCOR was trading at 14.3 times earnings. But with analysts expecting excellent long-term earnings growth of 26% per year for the next five years, the stock had a PEG ratio of 0.55 (14.3/26). And since any PEG ratio below 1 is considered a “good value,” Amber knew she was on the right track.

After further research, Amber determined QCOR was indeed undervalued. In fact, she set a price target of $93 — 38% above its price then.

From there, Amber recommended that her subscribers sell QCOR Sept 55 Puts. To initiate the trade, readers would deposit $1,100 and would immediately receive $80 in “Instant Income” for every put option contract sold. (This is scalable, too — if readers sold 10 contracts, they would receive $800 in Instant Income for the trade.)

After the trade was opened, the next step was to wait for expiration, which was 37 days later on Sept. 20. As with any put selling trade, readers expected one of two scenarios to happen:

1. If QCOR (trading at $67.38) stayed above the $55 strike price through Sept. 20, the options would expire “worthless” and readers would get back their initial deposit, plus what they received in Instant Income as a bonus. 

2. If the stock price was below the $55 strike price on Sept. 20, traders would be required to buy 100 shares of the stock per contract sold at $55 per share. 

Let’s look at the second scenario. This is exactly why Amber only sells puts on stocks she wants to own — because if the stock does fall below the strike price, it allows her to buy undervalued stocks with substantial upside.

Remember, Amber already determined that at a price of $67.38 per share, QCOR was a stock she’d want to own. And since she set a price target on the shares at $93, she thought the stock had 38% potential upside. Had she been required to buy shares of QCOR at $55 per share, she’d be picking up the stock at an even bigger discount — with potential upside of 69%. 

So what ended up happening with this trade? 

On Sept. 20, as with the majority of Amber’s trades, the options expired “worthless” and readers received their $1,100 initial deposit back plus the $80 in Instant Income per contract sold as pure profit, giving her Income Trader subscribers a 7.3% return on their investment in just 37 days. That comes out to an annualized gain of 71.7%.

That was winning trade No. 25 among 63 other profitable trades. You can imagine how the returns just keep on piling up.

Put simply, that’s exactly why Amber’s strategy presents investors with a “win-win” possibility. You either get to pocket Instant Income for every trade if the options expire worthless, or you have a chance to buy excellent companies at a deep discount. 

When you approach options trading in this manner, it’s easy to see how Amber has managed to compile one of the greatest trading track records I’ve ever seen. To see her closed trades and learn even more about Income Trader’s strategy, follow this link.