I do miss the heady, fun days of the bull market, when you could get excited about a nice lil’ teaser about a growth stock that promised 1,000% returns … those were good times. Now, unfortunately, it seems that individual investors are getting a little smarter — they’ve seen that a promise of a 500% return in a few months more typically leads, as you can see from the Gumshoe Tracking Spreadsheets (just click “tracking” above), to a loss of as much as 90%. It’s a hard time to get people jazzed about growth stocks, though a few of them are quietly performing fairly well.
So we’re stuck with conservative strategies, and with income. That’s what gives people comfort now — and I can’t complain too much, I’m an individual investor, too, and I feel the same kinds of welling panic from time to time. That’s usually when I decide that I need to turn off CNBC.
Today, we’ve got a letter from Louis Basenese, who has been floating around and picking these kinds of income stocks, like MLPs and dividend growth companies, for the Oxford Club for a while now. Today, the ad I looked at announced the launch of his new “Income Tripler” newsletter service — you can be a “pre-launch” subscriber for about a thousand bucks if you like, but if you just want to learn a little bit more about what he’s teasing in his new ad … well, you know the drill, read on and the Gumshoe will provide.
Here’s how the ad starts:
“‘These SUCKERS are funding my retirement… and they don’t even know it!‘
“I’ve discovered how to receive instant “anonymous bank wires” from some of the richest gamblers on the planet – one right after another. It’s completely legal… and the perfect way to make extra income while the markets tank.”
He gives a bunch of examples, even showing a mockup of someone’s bank account statement to back up this idea that these are “bank wires” that let you secretly make money in some special way. But then he goes on to make clear, without using the words, that this is a strategy we’ve seen many, many times before:
“It’s easier than taking candy from a baby. Except…
“Even though this technique is a “secret” known only by elite investors, it’s totally legal. Because you aren’t actually taking anything from anyone. These people are literally giving their money to you. But who are they?
“Like I said, it’s an anonymous transaction. The way this strategy normally works, the “sender” doesn’t know who the recipient is and vice versa. But I can give you a fairly accurate description of the person on the other end of the deal…
“They like to think of themselves as hotshot “high rollers.” But nothing could be further from the truth. These jokers aren’t nearly as smart as they believe. They just keep throwing their money out there, knowing full well that they’ll never see it again.
“And even Forbes recently called them out for being “weak, greedy, foolish” and “totally clueless.”
“So I don’t feel the slightest twinge of guilt when these gamblers send me their money. If anything, they OWE it to me! And now I think it’s high time you get your share…”
Starting to sound a little familiar? Well, that Forbes quote is actually from a Crankonomics column about derivatives in general (see the full thing here if you want), but Louis is talking specifically about just one kind of derivative — the kind that’s most actively traded by (and familiar to) individual investors.
Here’s where he makes that clear:
“But make no mistake about it: You DO NOT have to buy any options. No shorting stocks… no day trading… nothing complicated or risky like that.
“In fact, this research service is based on a strategy that is so safe, the government even allows it in retirement accounts.
“You simply collect a payment (Wall Street likes to call it a “premium”) – up front – from a speculator betting that a stock you own will go up a certain amount within a specified period of time.
“If he’s right, you hand your stock over to him, collect some capital gains and keep the premium.
“If he’s wrong, you keep the stock AND the premium.
“Then you can turn around and do the same thing and collect more cash from the next sucker waiting in line!
“In other words, heads you win… tails you win.
“It’s like I told you before… it doesn’t matter if stocks are up or down – this strategy always works.
“The Wall Street Journal points out that this is ‘an attractive trade in a sluggish market’ to ‘generate income.’ And The Financial Times agrees that this strategy ‘works best… in falling markets.’
“And once you learn the secrets of exactly how it works, nothing could be easier or simpler.”
So yes, again we’re looking at yet another invented term for a conservative options trading strategy — namely, selling covered calls. I’ve written about at least a half dozen different of these kinds of ads before, and I don’t think even the most trenchant Gumshoe fans have the stomach to hear me explain covered call selling in that kind of detail yet again — just click here for a bunch of other articles I’ve written about this, or if you don’t want to go that far back you could just look at the most recent article I wrote on this, for the “Gibraltar Strategy” ad by Karim Rahemtulla.
And as to specifics for this particular service from the “Income Tripler” — is there anything else we can learn from the ad? Louis tells us that one of his strategies is using these “wire transfers” on dividend paying stocks, which can mean you can hold a dividend-paying stock, get those dividend payments, and also sell out-of-the-money calls to effectively bring in even more income — he calls this the “Income Maximizer Strategy”, which probably sounds like sweet music to investors right now.
The example he provides is Altria, and certainly you could have sold calls and pocketed dividends for a very nice yield over the past year — enough to cushion the blow from the drop in the share price, though probably not enough to totally make up for the stock’s 50%+ fall, so far.
Other than that, we don’t get a huge amount of detail about what might be worth considering right now — if you distill his ideas, you get the possible conclusion that you should consider buying shares of solid companies that pay good dividends, and then boost your income (and protect your downside a little) by selling covered calls against those holdings. I can’t resist the urge to keep typing, so let me just give one example of how this might work — this one happens to be for a stock I’ve been considering lately, Verizon (VZ).
To be clear, this is definitely not a stock mentioned or teased by Basenese in his ad, it’s just a high dividend stock with actively traded options, so it’s a useful illustration:
You could buy shares in VZ today for about $27, and the indicated annual dividend is $1.84. That means you could expect, if they don’t raise or cut their dividend, to earn a 6.8% yield on your money. Not bad for a telecom stock, since folks don’t usually cancel their phone service during a bad economy, and most experts don’t think people will be throwing away their cell phones or doing less text messaging. Plus, they’re selling that cool new Blackberry Storm touchscreen iPhone competitor, so maybe you feel good about the stock for whatever reason.
But the 6.8% yield isn’t enough, because you’re afraid that the stock could still go down, so you’d like to get some more cash back. So you decide to sell some of your potential upside — you sell a call against your stock, choosing a January expiration and a $30 strike price, an option contract that you could probably sell today for about $1.75.
You can look at this a couple ways — you might consider that you’ve reduced your cost basis by $1.75 (minus commissions), so you can think of the stock as costing you only $25.25 instead of $27.
Or you could think of it as income, which would mean you get an instant 6%+ payback. The risk? There are two main risks — first, that the stock falls precipitously from here, in which case you’d still keep your $1.75 but, depending on whether and when you bought back that option you sold and whether you sold the shares, you might still lose money (since this is a “covered call” sale, most brokers will require you to buy back the option first if you want to sell your shares). So that risk is fairly similar to the risk of just owning the stock, with a bit of a cushion.
The other risk, if you want to call it that, is that you’re limiting your potential upside. If, for whatever reason, we get a massive snap-back rally or a v-shaped rapid recovery in the stock market, it’s certainly possible (I’ll leave it to you to decide how likely) that the market could go up dramatically in a couple months. If VZ shares go up to $40, you still are obligated to sell your shares at $30, so your return between now and the options expiration date in January (which happens to be January 16) would be capped. How much could you make? In the best scenario, you would get the regular quarterly dividend that’s usually paid in early January, so that’s 46 cents, plus the $30 that you’re paid when someone exercises the option (assuming the shares are over $30), plus the $1.75 that you pocketed for selling that option — so a total of $32.21. That’s a $5.21 gain for your initial investment of $27, so a hair under a 20% gain (ignoring commissions and taxes) for a two month investment. And if the shares just waver around between $25 and $30 for a couple months, you could wait for your options to expire, and then sell a new options contract against the shares that you still hold and bring in some more cash.
The possible downside is however much VZ shares fall between now and January 16, minus the $1.75 you received for selling the option — so theoretically the company could go bankrupt in an instant and your $27 would go to zero and you’d be sitting there with just $1.75. That seem seriously extreme, of course, since Verizon isn’t a massively over-leveraged company, and shouldn’t be as subject to crowd panic as a bank, but these days one never knows what will happen.
So is this right for you? It’s hard to argue with the strategy of selling covered calls, especially for companies that you think are fairly valued or cheap and that you’d be willing to hold through a decline anyway. Of course, if you believe the market is going to rocket forward in a big hurry, then you’ll have maybe partially missed an opportunity to make up some of the massive losses your portfolio has probably taken over the past year. Not many folks are looking for a huge rally right now — but of course, “folks” are usually wrong, myself included.
So are you ready to sell some upside? Risk some money in the market if you can cover yourself with some options income? Are you just sick of seeing these covered call teasers? Let us know what you think.
And have a great weekend!