“They Scoffed When I Said You Can Collect Instant Cash Just By Punching in My Simple “Money Codes”…
“But After 18 Months of Watching the Money Pile Up…”
That’s how the ad opens for Lee Lowell’s Instant Money Trader, a trading newsletter that gets pushed pretty heavily from time to time. It’s all about some kind of special codes that you can use to extract “instant cash” from the market every month. he goes on:
“To this day, I’ve never found a way to make money easier or quicker…
“I just do a little research, find the right code, punch it in and within seconds, the cash shows up in my trading account.
“Cash that’s mine to keep… and spend as I please.
“So, quite frankly, I was a little surprised to hear more regular investors weren’t using it.
“Why, after all, wouldn’t you want to pick up a few hundred dollars here… a few thousand there… when the money’s sitting right there for the taking?”
The ad goes on to describe the strategy some more, reassuring one and all that this isn’t some internet scam:
“Just exactly what are these people doing where they can go to their brokerage account, punch in a few numbers and have money show up in their account – within a minute?
“It’s important to know that people using this strategy aren’t buying stocks. Nor are they buying options, bonds, treasury notes, or actively buying any ‘investment’ at all.
“They’re not selling a product or service or getting involved in any Internet business.
“There’s no effort or special knowledge needed (though I’ll teach you everything I know)….
“Now I know what you might be thinking: ‘Lee, it can’t be that easy. Nobody just “gives away” cash.’
“Amazingly, they do.
“No ‘one’ person in particular, mind you.
“The money you get from punching in these codes comes from a big pool of people – everyone from ordinary investors to big institutional traders.
“And they’re happy to pay out the cash because they’re looking to make money on the deal too. (More on that later…)
“The big difference is: The folks who are paying you may or may not get their money back…
“But you keep the money regardless. In fact regulations require:
“Once you type in your code and the cash reaches your account – the money you get is yours to keep.”
I won’t bore you too much by sharing more details today — you can go read the ad here if they still have it online — but this is essentially just what he says it is: a relatively low risk, steady way to generate cash in your brokerage account. There’s no secret to it, though, and no free lunch — the strategy is selling options, and in this case selling put options.
If you’re unfamiliar with the basic concept, options are derivatives — they derive their value from the price of something else, in this case from a stock or ETF. A call option is a contract that you can buy or sell, giving the seller the right to buy 100 shares of a specific stock (or ETF) at a specific price (the strike price) on or before a specific date (the expiration date, usually the third Friday of the month of expiry). A put option, which is, I think, what Lee Lowell is talking about here, is the opposite — it represents the right to sell a stock at a set price on or before a specific date.
Most small investors (myself included) tend to be buyers of options rather than sellers — we buy put options for downside protection if you have a big position in some stock that you don’t want to sell, for example, or we buy call options to speculate on a stock moving higher. The advantage of options for buyers is that they can bring huge leverage to your portfolio — you can buy exposure to a fast moving stock for far less than it would cost to actually buy the stock.
Of course, the disadvantage for buyers is that most options buyers lose money (or at least, this is what I’m told — I have no way of telling if that’s really true). It stands to reason — many options contracts expire worthless, so if you want to speculate on Apple stock continuing its huge run and think AAPL will be over $350 by January it will only cost you $3 per share to buy a $340 Jan. call option … but you probably really know, in the “book learnin'” part of your brain, that the odds are good that AAPL won’t go up 50% in the next nine months, and that you’ll lose that $3.
So that’s where folks like Lee Lowell come in — they sell options to cater to those who want to speculate or buy downside protection. And from what I hear, Lowell and his compatriots, like Keith Fitz-Gerald with his Geiger Index, sell put options that are pretty far out of the money, for close-in months. So in the case of Apple, for example, they might sell the May $200 put option. This would mean that you’re betting on Apple either staying near the current price (it’s at $235 right now) or going up, which would mean that the put option should expire worthless and you’d get to pocket the money you got from selling that put.
Of course, when you sell a put that the market believes is pretty unlikely to be “exercised” like this (that’s what it’s called when the buyer of an option “exercises” their right to buy — or sell, for puts — the underlying stock from — or to — the option seller), you don’t get paid that much. For that particular AAPL option, for example, you’d only get $1.38 per share for promising to buy the stock at $200 anytime before the May expiration. Options generally trade on blocks of 100 shares of stock, so for one options contract you’d get $138 (minus commissions) and take on the obligation to buy 100 shares of AAPL at $200 each if the shares happen to fall below that point before options expiration.
There is a cost, of course — your broker needs to know that you’re “good for it” and can in fact buy those 100 shares of AAPL (meaning, you have the purchasing power in your account to spend $20,000 for each options contract you sell. In some cases this can be done with margin, in which case you effectively put up other stock that you hold in your account as collateral, and in some cases the put options you sell will be cash-backed, meaning you actually have that $20,000 in your account.
So in one way of looking at it, you’re taking relatively little risk and in exchange you’re being paid $138. Nice, “free” income. But of course, if some horrid news about Apple comes out in the next two months, or if the market crashes and the stock gets clobbered, you’re on the hook — if the stock falls to $150 you still have to buy it from someone for $200, so in that case you’ve taken in $138 and effectively lost $5,000 ($50 per share difference for those 100 shares). That’s the underlying risk.
Selling put options as a way to buy stock is also something that a lot of folks do — and there are certainly cases where it makes a lot more sense than just posting a limit order in your brokerage account. If you were going to put a limit order in for 100 AAPL shares at $200 and leave it there, hoping to buy the shares at a price you think is a bargain, you might as well just sell the put option instead and get paid for your “limit order.” Of course, it gets a little more complicated if something awful happens — if you notice one night that Steve Jobs is looking extra sickly again and you no longer feel confident in the stock, you can just cancel your limit order, but if you wanted to back out of a put option you had sold you would have to buy it back to cancel it out, and if lots of other folks are also starting to feel sickly about the stock at that time you might have to pay more to buy back the option than you received when you sold it.
That’s the five-cent explanation — selling put options, whether “naked” puts that are sold on margin, or cash-protected puts that are sold with your cash balance ready to buy the shares if need be is not a way to get rich quick, but it can certainly be a way to steadily build up your cash … unless you happen upon a terrible stock that collapses overnight, as some have been known to do, and your year’s gains from selling puts may be wiped out (and more). You can read more of Lowell explaining this process (without as much of a sales pitch) here in an older series of articles, and this guy at TradeKing also does a nice job of succinctly explaining put sales (and the synthetic version of call options trading that gives you similar exposure).
And, of course, if you’ve got a way with words (or not) and want to throw out your two cents (or five, or ten), that’s why we have the friendly little comments box below — let us know what you think about selling options for steady income (and yes, if you’d like to chat about the more conservative covered call-selling strategy, where you own a stock and sell calls against it, that’s A-OK with me, too).
Personal Capital is an advertiser with Stock Gumshoe, but Travis also uses it every day for his personal accounts and finds it invaluable. Here's what he said: "They offer a great (and genuinely FREE) 'second opinion' for your financial plan, but what I love most is their automated financial dashboard -- it will look at all your assets and debts, tally up your asset allocation, project where you'll be at retirement, and suggest ways to manage risk or improve returns. It's free, I think their free tools are great, and I think it's worth checking out -- you can do so here.