“The Gibraltar Strategy: A Better Way to Generate Extra Income” — Karim Rahemtulla

I’m sure a number of you have seen the email ad for Karim Rahemtulla’s Strategic Income newsletter … here’s what he promises in exchange for your subscription fee of $1,250:

“‘Gibraltar Strategy’ Cranks Out 10-Times More Cash From Stocks Than Dividends”

Sounds good, no? It gets better!

“On October 16, a handful of income-seekers had the opportunity to pocket $5,500.

“They placed one simple transaction and BAM!

“The cash appeared in their accounts in less than 4 minutes.

“It wasn’t complicated. They’ve done it dozens of times over the past year alone.

“They simply make a transaction on U.S. corporations that reduces their overall portfolio risk, and sends money directly into their brokerage accounts each month they choose – even in the most volatile markets.”

So what is it? Well, sometimes it’s hard for a letter to make sense when they’re trying this hard to obscure the truth behind what they’re selling — “make a transaction on U.S. corporations?” Really?

Well, sort of — but you needn’t shell out $1,250 to figure out what on Earth he’s talking about … the Gumshoe is on the case for you, gratis.

Karim them goes on to explain that many investors have never heard of this story, and tell us that it can make money and reduce risk in your portfolio, and supply much greater income than most dividend-paying stocks can provide … he calls this income “Gibraltar Payments.”

I’ll explain more in just a moment, but first, what do you picture when you think of a Gibraltar strategy? Gibraltar, for anyone who doesn’t know, is the rocky outcrop near the Southern end of the Iberian peninsula — it was ceded by Spain to the UK about 300 years ago, and has remained a British territory ever since, and, for much of that time, a naval base. It has been a strategic outpost and a miltarily significant piece of land for as long as people have sailed the seas, since it represents an extremely defensible outpost that oversees the Strait of Gibraltar, the only natural outlet for the Mediterranean Sea

And of course, the Rock of Gibraltar, the actual mountainous bit that is the geologically famous part of Gibraltar, has been seen in the popular consciousness as an unyielding monument to stability and strength. That’s why the Rock is the logo for Prudential Financial, which, unfortunately, has not prevented the shares of that firm from falling by 70% or so in the last couple months.

So what on earth would a “Gibraltar Strategy” be? Some kind of strong and stable rock? Or, if you look at more modern history, one of the final, defensible outposts of a once-global colonial power?

Well, in the case of Karim Rahemtulla’s “Gibraltar Strategy” for his Strategic Income newsletter, it’s simply … another tease for the idea of selling covered call options.

Yes, this is nothing new — and in fact, an extremely similar letter was sent out a month or two ago by Rahemtulla for this service, though back then he called this investment a “Surety Income Certificate.” Which means that I need to make more room on the Gumshoe list of invented names for covered call options selling strategies.

Yoiu can see the list of all the invented terms for options trading strategies that I’ve covered here as of August — most of them are similar to Rahemtulla’s ad here, in that they are for fairly conservative call-selling strategies.

Probably the best thing to do, if you’re interested in this concept or trading strategy, is look a the article I wrote about Surety Income Certificates — click here for that.

If you don’t want to visit that page, suffice to say that covered call selling involves buying round lots of stock (a lot is 100 shares) and selling covered calls on those holdings (one call option would be attached to each 100 shares). You can consider the premium you get from selling those calls to be income, but it comes with an obligation — you have to sell your shares at the price agreed if the buyer of the call wants to exercise the call option before the expiration date. And of course, since the shares of actual stock are the way you meet that obligation, you have to buy back the call option if you want to sell your shares before the option expires. If the stock goes down, your losses are softened by the fact that you get to keep the money from selling the call option. If the stock goes up, your gains are limited because you’ve sold upside to the purchaser of the call option. If the stock stays where it is, you keep the premium money and are probably pretty happy.

This strategy has been teased for years, and it is, if executed with care and discipline, a reasonable way to generate a steady, if limited, stream of income if you don’t mind being a fairly active manager of your options positions and portfolio. The only thing that has changed significantly in the last several months is that option premiums for most stocks have gone up dramatically — which means that investors are assuming a much higher level of volatility, bigger swings up or down in the price of stock. In effect, that means that everything is amplified — bigger and faster moves in stocks mean larger premiums for options, which means you could lock in some pretty nice payments for selling options, and that you need to have a strategy for what to do with a stock that you hold and have sold options against if those shares fall hard and fast.

I’ll leave it there, since this topic has been broached so many times here by me and others, but suffice to say that the “Gibraltrar Strategy” is just Karim Rahemtulla trying to sell you a fairly capital-intensive (you have to buy a lot of shares if you want significant income from selling covered calls) but usually conservative and historically successful strategy — buying stock and selling call options against that stock. And yes, I did just use “fairly,” “usually,” and “historically,” all words which provide slim succor for investors these days, but which might represent opportunity if you believe this is something other than the end of days.

If you’ve got something to say about this strategy, or about your own options trading ideas, feel free to share — or if you want to review all those other options trading terms, click here for some of my other articles.

The author will always disclose any direct long or short equity, debt or option position in any stocks written about as of the day of publication, and will not trade in any stocks mentioned for three days (72 hours) after publication. Full disclaimer is at the bottom of the page.

Related Articles:

“Anonymous Bank Wires” from Income Tripler

Rahemtulla: “Secretive ‘Price-Fixing’ Ring Snatches Cash”

“Dark Equities: Secret of the Wealthy 1%”

“Profit from Al Capone’s Legacy” Xcelerated Profits

“Surety Income Certificates MUST Pay You Money!” Rahemtulla

1. I love these miracle promising guys…
   By the way: did you notice that InvestorsPlace’s Jeff Manera closed his newsletter after a -60% disaster?

   http://investorcrap.blogspot.com/2008/11/goodbye-jeff.html

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   StockGumshoe Reply:
   November 17th, 2008 at 12:07 pm

   Nope, had never even written about him — though losing 60% doesn’t sound so bad compared to some …

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   Posted by Carlo | November 17, 2008, 11:20 am

2. Just judging by the events of the past few months, I am glad I am where I am – Long on IDXX and MSFT,,, but my mutual funds are the pits,,, Still, compared to some of the highly touted offerings, I figure I’ll come back,,, and if I don’t, then my heirs will have something, without having to pay for it!
   PTPE, however,,, don’t ask,,, you really don’t want to know,,, RHGP the same way,,,

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   farley 5 Reply:
   November 17th, 2008 at 3:04 pm

   IDXX & MSFT – I have some land in FL I’d like to show you. Above water twice a day. I took a swing at MSFT a month ago when it looked like it bottomed but was stopped out. You should try stop loss orders. It will help you sleep at night.

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   Posted by EYoung | November 17, 2008, 2:50 pm

3. If you already own shares, selling covered calls makes sense, if you want to keep the stocks you own.
   I think what makes better sense in this market is to sell puts on the stocks you are considering for purchase.
   If you sell an out-of-the-money put on a stock you wish to own, you end up with a credit in your account for the puts you sold and if the stock price falls to the exercise price of the put you sold, you end up with the stock at a discount to the price you were originally going to buy.
   In an environment where stocks are trending rather than moving up or down, this is an excellent strategy that preserves your money and ‘pays dividends’ without putting all your money at risk.
   I’m currently looking at this strategy for a number of stocks that have been hammered down severely and I think have found a bottom (RIMM, POT, AAPL are three on my radar screen). As soon as I see an indication that we’ve hit bottom, I’ll be selling some long dated puts on these three and some others that I was going to purchase anyways.

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   StockGumshoe Reply:
   November 17th, 2008 at 3:21 pm

   Good point, Marco — I’ve seen several newsletters touting this strategy of late, too, including Porter Stansberry’s. Good luck finding that bottom!

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   Al Reply:
   November 17th, 2008 at 11:24 pm

   Marco, please let us all know when you have seen an indication that we have hit bottom. Thanks

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   Posted by marco | November 17, 2008, 3:13 pm

4. While you are speaking about Agora, Gumshoe, I would really like to see something that included a commentary about Closed End Funds. I sold most of my individual stocks with only small losses, but kept the Oxford Club CEF’s. If they never come back up, I need the tax deduction this year! If you have something in the archives I missed, please point it out. Also, I hope anyone else reading this with commentary will drop a line!

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   StockGumshoe Reply:
   November 17th, 2008 at 3:31 pm

   Thanks Dusty — I haven’t written a lot about Closed End Funds, though they come up from time to time. Be careful with the ones that use a significant amount of leverage, I see notices from time to time about funds that are coming up close to their debt covenants and may have to cut dividends. There sure are a lot of these funds trading at big discounts now.

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   Posted by Dusty | November 17, 2008, 3:22 pm

5. Hi there Thanks for your work; I would like to know how to find out ahead of time when a shell co. is going to be taken over (reverse merger);

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   StockGumshoe Reply:
   November 17th, 2008 at 9:58 pm

   I dunno. There are thousands and thousands of OTC-listed potential shell companies that could possibly be used for a reverse merger, I suppose some of them are marketing themselves as such so you could try to find them, but with lots of really successful, growing companies available at great prices I’d hesitate to go out of my way to look for a company that is small or weak enough that it prefers not to go through the rigors of an IPO process. There are always a few stories of glorious returns that come out of these kinds of companies, but most of them, reverse merger or no, probably disappear into the mist.

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   Posted by clairmont | November 17, 2008, 9:18 pm

6. Not quite as seductive as “dark equities”, but peaks your interest none the less. This guy reminds me of a used car salesman! lol

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   Posted by Simon | November 18, 2008, 12:22 am

7. Marco (and others who are looking at the strategy to “sell puts.”)… I would suggest performing this strategy “on paper” (e.g. without using funds from your account) prior to initiating a trade.
   This will not only allow for time to spot that “bottom” that you are searching for — it will give you practice in the “art” of put selling. As someone who has used this strategy in the past, the learning curve is fairly steep when a stock blows through your put price to a level below that you never thought was possible. At that point, you might want to pick up some additional shares! Some of the newsletters that touted financial shares may have suggested selling a put on Citigroup @ $15 or more a share a few months back. Few would believe that the stock would now be less than 9 dollars in November, just in time for option expiration this week!
   The high alpha names that you are considering might offer some juicy premiums for put options. Take a look at what the market did to BIDU today before you get too excited about selling a put on AAPL,POT or RIMM. I have to admit, since the news media suggested that Obama is a Blackberry user, I thought that RIMM might be a good candidate to sell an out of the money put. What strike price were you looking for? Somewhere between 20 and 30!
   Good Luck! Let us know!

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   Posted by Advantedge | November 18, 2008, 1:36 am

8. Travis, I’ve been getting email from ‘bestdamnpennystocks.com’….. who are these people? There is never a name included in their little sessions. I suspect they are somewhere between not knowing what they are talking about and hoping a large influx of buyers will push up one these beauties so they can take a quick, small profit. I’m learning something new everyday.

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   Posted by Jim from Terrell | November 18, 2008, 9:10 am