I’ve gotten a lot of questions about this latest ad for Lee Lowell’s new Instant Money Trader — he tells us that this is the “Safest Income Strategy on Earth,” and that it’s the “only strategy that pays you first — without you having to buy anything or pay out any cash whatsoever.”
Lowell is an options trader, so clearly this is an options trading exercise — and there’s nothing new under the sun, so it’s not likely to be some shocking new technique … though of course it will be unfamiliar to most of the amateur investors who see his ad, and therefore it will seem like magic. And who knows, perhaps the analysis and selection he does, or luck, will help his subscribers to execute the best trades of this type, only time will tell.
So what is this kind of trading that they call the “Virtual ATM?”
Here’s a bit from the ad:
“Punch in Today’s ‘P.I.N #’: UNY85 And Withdraw Your $750 Instantly
“Then, keep using this amazing “virtual ATM” strategy to average $219,600 a year income … without buying or owning anything….
“In fact, of the dozens of great options strategies I’ve mastered over the years, this is by far my favorite – simply because you get the money up front (no waiting for the market to move in your favor) and there’s virtually no risk at all.
“Why such little risk?
“Because when you use this strategy, you get paid instantly by those vast numbers of traders who do put themselves at the mercy of the market each and every day by buying options… people looking for that “big score” which more times than not never comes.
“And I promise you, once you see the fundamental logic behind this very simple, very safe strategy, you may never see the need to “buy” another investment in the traditional way ever again.
Why would you after all… when it’s possible to enter a simple code like the one I’m telling you about today and collect cash within a few minutes?
“Then another $600 or so tomorrow… followed by $1,150 the week after… or maybe $900 the week after that.
“My point is, you can use this strategy – and this strategy alone – to generate a steady stream in cash income… without buying a single stock, bond, option or anything.”
So what kind of cockamamie scheme is this?
“Let me be clear. This is not a strategy the average investor is likely to have ever heard about. Ask the typical investor on the street if he’s ever heard of getting cash from the market just for punching in a simple code and he’s apt to tell you you’re nuts.
“Understand also that this isn’t something I’ve just stumbled upon or discovered recently.
“It’s not new, risky or untested. Professional investors use it every day. (Warren Buffett happens to be one of them).”
So now we’re getting a little closer to understanding what he’s talking about in terms of options trading — though the symbols he throws out still don’t make much sense (UNY85, CKU68, UNE79, bla bla bla).
Sound too good to be true? Of course it does — but, in part, it is true. You just have to realize that a few key notes in the ad reveal the truth behind it, and the limitations …
“People who use this strategy aren’t buying stocks, options, bonds, treasury notes or any “investment” at all.
“They’re not selling a product or getting involved in any Internet-based business. There’s no effort or special knowledge involved. You don’t have to “convince” anyone to send you the cash…
“You don’t need any special software package or start-up kit either… just an active, adequately funded brokerage account.”
OK, so — enough? Lowell throws around a lot of “PIN Codes” that look very similar to options ticker symbols, but not quite — so I can’t tell you with 100% certainty exactly what he’s doing with those quotes, or what precisely they mean.
But I can tell you that the “adequately funded brokerage account” is significant — that’s because the strategy he’s espousing is some variation of selling options … and probably selling covered call options, and if you sell a put or call option you need to have the stock or cash (or margin, if in a non-retirement account) to back it up.
Selling options means you sell someone the right to either buy or sell a set number of shares, at a specific price, before a predetermined date. The right to buy shares is a call option, the right to sell shares is a put option.
And the world can get much more complicated than that — you could do straddles, or collars, or spreads, each of which is a way of getting more than one options contract into the mix to bracket your risk and try to achieve some upside gains.
I suspect that Lowell is simply talking about the most-teased form of options trading, selling covered calls — and I’ve written about that dozens of times … there are some Stansberry letters that routinely tease this (including, in the last year or so, their income-focused 12% letter, and, for years, Jeff Clark’s Advanced Income letter — most memorably with the “Screw you” ads of a few months ago).
[Note: according to one of the commenters below, he’s actually doing the reverse, selling put options — that means you set the cash aside to buy a stock and promise to buy it at a lower price, and get paid for that promise. Other than that, it works similarly, though instead of owning the stock to begin with you have the cash, and are ready and willing to buy the stock if the price falls to your strike price.]
This strategy, considered by most folks to be the least risky form of options trading, entails first owning a decent block of stock, and then selling off your rights to some of the upside potential of that stock. I say “decent block” because options contracts represent 100 shares, so you need 100 shares to sell one call option against your holdings, and more if you want to maximize income and minimize the impact of commissions — Lowell’s tease relies on 10-contract blocks, which would mean you’d have to own 1,000 shares).
An example would be this: you buy 1,000 shares of Microsoft for $22,760 (or better yet, you already own the shares at a lower price). You then sell 10 call option contracts against your position — let’s say you want to keep it tight, so you sell the August calls (they expire on Aug. 21) at a strike price of $24. Those options are currently trading for about .63 per share, or $63 per contract, so you would take in $630 for selling ten contracts.
In exchange, the buyer has the right (but not the obligation) to buy your MSFT shares for $24,000 anytime before August 21. So your maximum potential on those MSFT shares if is the shares go up well above $24 and the option gets exercised, in which case you would have to sell the shares for $24 each, and you’d also keep your extra 63 cents per share from the option premium. Of course, that doesn’t take into account taxes, which you’ll owe for selling those shares if you made money, or the fact that many folks would rather see MSFT shares tread water while they’re short calls, so they can just easily sell those calls again once the August batch expires and keep the income rolling in. It is, at least, far stronger an income stream than you’d see from MSFT’s dividend, which will pay you 13 cents a quarter (and of course, you still get that dividend on top of the options contract income, as long as you hold the shares).
Lowell may well be trying something slightly trickier here, of course — he is clearly selling options, but he might be doing so in a more complex manner. He could be selling put options, but doing that provides a bit more risk because you’ve got to have the backing in cash — either real cash or a margin account that could be used to buy the shares to back up your end of the option (again, that “adequate” brokerage account).
Using Microsoft as the example, again, you could sell a put to someone at $21, also for August, for about .55 — that means you’re obligating yourself to buy Microsoft shares for $21, regardless of where the market prices them. That’s probably fine, but if they happen to make a deal to buy Yahoo, for example, and the Street panics and thinks they overpaid and drops MSFT back to its lows of near $15, you’ve still got to buy the shares for $21 — in which case, your .55 of option premium won’t be that much consolation against the $6 premium you’ll pay to own the shares (though in reality you’d probably back that contract with cash, buy it back, and not actually buy the shares, which is what I think most people do).
And there are many variations that limit risk — you could, for example, simultaneously sell a call option and buy a put option against stock that you own, which helps to avoid getting into a situation where you’ve sold a call option and gotten your premium, but you want to stop out of the stock because it’s plummeting for some reason. You could sell that MSFT $24 call and, as a bit of insurance, also buy a $19 put option for 19 cents, that obviously reduces the income but also brackets the risk you’re willing to take by holding the shares until August, and, if the stock does happen to drop to $15 suddenly, you do just fine.
Lowell uses odd ticker codes for his “PIN Code” numbers — they look almost like options tickers, but not quite, and it looks to me like he just swapped the last two letters for numbers.
Options tickers consist of a root three letter code (usually) for each chain, followed by two letters that designate the month and the strike price. They’re actually in the process of testing a switch over to a much more standardized and explicit system of options quoting that uses the actual data (ticker, type of option, strike, and date) instead of these odd tickers, but that hasn’t happened yet.
So for now, we could use the basic logic of options tickers to interpret what options Lowell might be talking about (assuming that the tickers don’t represent some more complex trade than just the sale of a call or put option).
UNY85 is the “PIN” code given at the top of the letter, and UNY is one of the roots for call options in UNG, the United States Natural Gas Fund, which many people use as a sort of ETF to track natural gas futures. The 8 is the expiration date, so August, which is H in ticker form (the eighth letter) and the five would generally be the fifth dollar amount available as a strike price, usually $25 in the case of standard $5 increment options (and denoted using letter E), but in this case UNG options trade in $1 increments, so the fifth available option for August is a strike price of $13 (and it’s designated by an M — this kind of hassle is why they’re trying to revamp the quoting logic). So if I’m right, this is actually UNYHM.
Selling UNYHM now would get you actually more than $750, assuming 1,000 shares held and ten contracts sold, it would actually get you $1,100, per the last sale, though the spread is wide as I type this ($75 bid, $145 ask) … of course, UNG prices and trader sentiment about nat gas have probably changed since this teaser ad was written — the underlying stock is now at $12.62, so you’re effectively selling almost all of your potential two-month upside. Still, it’s a nice profit from a relatively low priced stock — you might regret it if a hurricane strikes the Gulf and natural gas doubles unexpectedly, but if you sold at $13 in August that’s effectively buying something for $12.62 now and selling it in seven weeks for $14.10, minus commissions, a gain of better than 11%.
You can do the same basic calculus for any of the tickers he teases in the lists — CKU68 is teased as one he got instant cash on recently, and CKU is the root for options for Capital One, so that would be the June Capital One calls at probably either $21 or $22, I don’t have access to the historical quotes — COF is right at $21 now, and a July option at those strike levels would similarly get you between 50 cents and a dollar per share, the kind of trade he seems to target.
So, this is certainly a legitimate strategy, selling covered calls, as is selling cash-covered puts, though selling puts is probably less common — I can’t guarantee that this is exactly what Lowell is doing, but from the logic of the ticker symbols he throws around it seems likely to me. This kind of trading gets much more profitable, by definition, when the VIX is high — the VIX is an indicator of volatility that measures expected stock price movements by tracking the premiums that people are willing to pay for options, so, if you work through the logic, of course you make more money if you sell things when they are expensive — and options premiums, as measured by the VIX, were very expensive during the frightening VIX peak last year, and they’re still awfully high when compared to historical norms.
Of course, when the VIX is high that’s also the time when investors are most skittish, and with many stocks doubling off the lows (or more), there would have been plenty of options sellers that were shouting at their computers as the upside they sold away made the options buyers rich. Generally, I’ve often heard it said that the people who consistently make money in options are the sellers, not the buyers — but of course, those who make the sudden windfalls are the options buyers.
So, as I’ve said many times, selling covered calls is often best for those who like a “steady Eddie” approach and who are happy to use a fairly large portfolio to consistently generate steady income. Lowell bases all the numbers he throws out on the profit potential of “10 units” — which would mean 10 options contracts, with each option contract representing (usually) 100 shares. So this is the equivalent of 1,000 shares we’re throwing around here, which means it’s hard for small investors to use this strategy very effectively to make the amounts of money he teases — at least, not if you want to hold a diversified portfolio.
If we consider that most of the quotes he teases are real picks of his, then it seems likely that he consistently chooses expiration dates within a month or two, and strike prices that are very close to the current price, which is consistent with strategies that I’ve heard from many successful covered call sellers — they don’t worry about missing out on huge move, they just sit tight and collect their 10% (or something in the neighborhood) every couple months, take the losses in stride or buy puts to cover any huge downside risk, and think about that money compounding at a nice rate year after year. It takes discipline, and diversification, and a good mind for choosing the stocks to target.
If you’re curious about these kinds of basic, cash-backed or share-backed options transactions, which are mostly used for steady income generation, there’s a good writeup from CBOE that explains them in some more detail, particularly with reference to IRA accounts (since you can’t usually use margin in an retirement account, options sales can’t be “naked,” they have to be backed by cash or shares).
And I know there are lots of folks out there in Gumshoe Land who practice the arcane arts of covered call selling, so if you’d care to share your strategy with the world, or some stocks that you think look like good targets for this strategy, feel free to share with a comment below.
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.