Never does this get boring.

Every time thing seem to run a little dry here at Gumshoe HQ, and the reservoir of hypetastic teasers dips a little bit below the intake pipe … well, the flood comes again, regular as the rains (if not quite as seasonal). That’s how it’s been for a thousand teaser tips now (yes, we hit our thousandth article here on the free site just yesterday — throw in another 250 or so articles on the paid Stock Gumshoe Irregulars site over the years and we could have probably wallpapered the Chrysler Building with our bloviating), and I imagine that’s how it will be in the months to come.

So while looking over some teasers that, frankly, had just started to get a little bit boring … I was delighted to get the latest one from Dr. David Eifrig that tell us about using a “Godfather Offer” to “force rich investors to pay you $720 in 24 hours” and “always get paid … no matter what.”

Ahhhhh …. for your friendly neighborhood Gumshoe, reading a pitch like that is like settling into a hot bath.

Of course, Eifrig goes out of his way to say that this little “secret” that he learned at Goldman Sachs is not illegal or violent like so many other “godfather offers” might be.

The ad is a pitch for his Retirement Trader newsletter, which is an active stock and option trading letter with probably a bit of an income focus — and, not coincidentally, a letter that gives his publisher an “upgrade” option to sell to subscribers of Eifrig’s lower cost Retirement Millionaire newsletter that serves as more of a “retirement lifestyle” resource.

And it’s actually one of two teasers going out for this letter right now, both of which are teasing the same basic idea of making $720 — the other ad pitches this as more of a “earn money from home with your computer” idea, but if you give me the choice of a “work from home” pitch and a “godfather offer mafia shakedown” pitch, well, the second one is obviously going to be the “offer I can’t refuse.”

Eifrig (OK, his copywriter — but still, he signs it) opens up with a spiel about how active the mafia is on Wall Street already … helping to draw the connection between his “godfather offer” and the actual organized crime figures. And that’s true, there have been plenty of mafia-controlled brokerage houses and boiler rooms, and investments that have been fronts for organized crime or that served to launder illicit cash.

But that’s not what Eifrig is really talking about — here’s how he describes his “godfather offer:”

“What I’m about to show you is a technique the mafia has used for several decades throughout the economy… not just on Wall Street.

“Traditionally, it’s been used by the mafia as a way of forcing payments of $100s to $1,000s at a time in a variety of sectors. Everything from restaurants and hotels… to utilities… grocery stores… barber shops… you name it.

“But what I’m talking about is a particular way to apply this technique to the equities market, allowing you to force $720 (or more) from some of the wealthiest investors – overnight.
You get paid no matter what… and it works on 3,500+ stocks.

“For example, I recently used the ‘Godfather Offer’ to force a $1,296.02 payment from a wealthy investor in Microsoft (MSFT) and $2,157 from a wealthy investor in Plum Creek Timber (PCL).

“The best part is, it’s all anonymous and done by computer. You don’t ever have to worry about the other person finding out who you are.”

Still sounds mysterious, right? I don’t have any idea where the $720 number comes from — it might be an average of recent payouts, or some number that they’ve just focus-grouped to determine that it “sounds right,” not so high that it seems unattainable, not so low that it’s not worth subscribing.

OK, so what on earth does he mean when he says you’re “forcing” money from wealthy investors?

“In short, I’m talking about protection money.

“In case you’ve never heard of this term before, it’s a form of payment collected by the mafia. They force their victims to pay it in exchange for receiving “protection” their victims don’t really need…

“Essentially – the money is forced from the victim. Or as The Washington Post put it, it’s way of using “threats to extract payments.”

“The good news is: You don’t ever have to physically force or threaten anyone to collect the protection money I’m describing here.”

Huh? OK, some of you have no doubt already connected the dots and guessed what Eifrig is talking about … but we do get some more teasing to help fill in those lines ….

“But the great thing is… the way it works allows you to FORCE hundreds of dollars in ‘protection money’ from the wealthiest investors in the market, obligating them to pay you immediately….

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“For example, even as you’re reading this, you can force a payment of:

“$850 from an investor in Amazon (AMZN)

“$920 from an investor in Intel (INTC)

“$870 from an investor in Coca-Cola (KO)

:As Peter Hues, who forced a payment from an investor in Budweiser recently told me, ‘Presto! Over $8,000 in my account.’

“He went on to say: ‘I don’t buy stocks anymore.’

“I don’t blame him. To me – this is a much easier way to make money in the stock market than trying to guess which stocks will go up or down.”

Well, on the off chance that you didn’t run out and subscribe to his newsletter after this point in the “presentation,” he does then get into more reasonable descriptions of his strategy … eventually. So we learn this about how he targets rich folks in this way:

“You see, if you’ve ever met someone who’s truly wealthy, then you probably know that when it comes to spending money… the rich are willing to blow thousands of dollars on things they don’t ever really need…

“Or to put it differently… they buy insurance. Lots of it…. some rich people insure their investments.

“And as you’re about to see – there’s a little-known way for you to target these rich investors in 3,500 stocks… and collect a small portion of that “protection money” overnight. Often, $720 or more.

“Then… you just walk away. The money is yours to keep.”

And then, still later on as we near the end of the “presentation,” Eifrig actually tells us a bit more about it … he doesn’t use the actual precise words that you’d give to your broker, but he walks right up to the edge. So anyone who’s familiar with options trading will know right away what he’s talking about … but of course, lots of folks on the megabazillion name mailing lists they use have no idea what options trading is. Here’s the last bit where he gets into some more detail about what this actual “racket” that he calls “the perfect transaction” is:

“You see, there are 2 things that can happen when you use this transaction…

“1. Investors buy protection for ridiculous scenarios that have little chance of ever taking place… like Apple’s share price falling from $300 to $15.

“These are the opportunities I look for, where you simply pull the trigger… and collect hundreds of dollars overnight. The ridiculous scenario doesn’t take place and the “protection” soon expires worthless.

“Then… you just walk away.

“Of the 8 times I’ve shared this transaction with other people in 2010… this is what ALWAYS happened, 100% of the time.

“2. Of course, theoretically… the ridiculous scenario could actually take place. But even if it does – it’s no big deal. All it means is that you’re obligated to buy the underlying stock.

“You still get to keep the money you collect, no matter what.

“Not to mention, we only use the “Godfather Offer” on stocks we’d be happy to buy regardless… because they’re outstanding companies.

“Yet the simple truth is that my success rate finding the perfect transactions in the space of 2010 alone was 100%.”

So there you have it — the “godfather offer” is … selling put options.

And Eifrig’s description above is more or less accurate — if you choose the right stocks and don’t make a mistake, this can be an extremely easy way to generate steady cash income. It’s generally a strategy that generates a high probability of successful trades, each of which brings in a small amount of money — there aren’t any “shoot out the lights” wins in selling put options, and the very occasional big loss can quickly eat months of incremental gains if you choose poorly or get unlucky.

So what is it? Well, if you’re unfamiliar with the basics of options trading there are two kinds of options — call options give their holder the right to buy a specific stock at a specific price, and put options, on the flip side, give their holder the right to sell a specific stock at a specific price, both before the expiration date of that options contract. Options trading exists for most S&P stocks and for a few thousand others, and for many ETFs.

And like any other transaction there’s both a buyer and a seller — the buyer of the option gets the right, the seller of the option takes on the obligation. So in the case of put options, which is what we’re talking about here, if you sell a put option to someone you are promising them that you’ll buy the underlying stock at the determined price (called the strike price) before the expiration date.

The idea in selling put options is generally either to generate some income, or to “pre-order” a stock that you like at a lower price. In this case it’s the former — as Eifrig’s strategy would have it, you sell put options that are “out of the money” and hopefully stay out of the money (meaning the stock doesn’t fall very far), which means that no one would ever ask you to uphold your side of the bargain and you get to keep the cash you earned by selling that put option, with your contractual obligation expiring worthless.

There are several newsletters that follow this strategy — the one that I’ve noticed being most prominently teased in the past was Lee Lowell’s Instant Money Trader, but there are undoubtedly lots of small letters and trading services and plenty of widely-distributed options income newsletters that will pitch this strategy from time to time as well, along with the somewhat similar strategy of selling covered calls (buying a stock and selling a call option against your holdings, generating income but cutting off some of your potential short-term capital gain).

Depending on your risk tolerance, the type of account you have, and your options trading approval level, there are two basic ways to sell put options — you can sell naked puts, or you can sell cash-secured puts. They’re the same basic contract, but in one case you have enough cash in your account to fulfill your potential obligation (ie, to buy 100 shares of the stock at the strike price for each contract you sell — each options contract generally represent 100 shares of stock), or you use your margin account to cover the potential obligation and put up only the amount your broker requires in cash, often something like 20% (though it can vary widely).

So how does it actually work?

First, you figure out which stock to sell this “insurance” on. As Eifrig says, it should be a stock that you would ordinarily be willing to buy at a somewhat lower price, and, if you’re aiming for the high probability of success that he refers to, it should be a stock that you consider to be something of a “blue chip,” the large-cap, fairly valued stocks we’ve all heard of. If you sell puts on highflying tech stocks or volatile energy stocks that you could easily see dropping by 20% on bad news, you make more money with a higher insurance payment (you can sell each put option for more money) … but you also dramatically increase your chances of losing.

He lists a couple examples in the ad, well-known stocks with fortress balance sheets like Microsoft, Intel, Cisco and the like, so I’ll use one of those as an example — since I own shares of Intel, I might as well use that one.

Here’s how you could “force” a payout from an Intel owner.

First, decide which strike price and expiration date gives you the best chance of success. Usually, in my limited experience, folks who do this and try to keep risks low and wins steady will stick with closer expiration dates, somewhere from 2-5 months or so, though strategies can vary widely. So in this case, let’s go with the October expiration (that’s about four months away).

INTC is priced right now at about $21.75. You want to give the stock some room to roam without triggering your option, but you also want to make enough money for this sale to be worth tying up your cash and/or your margin liquidity (though I don’t think you usually have to pay interest on that margin access unless you actually have the stock put to you and have to buy it on margin) — you could sell a far out of the money put on INTC at a strike price of $15 per share, for example, but that 25%+ fall in the share price before October seems so unlikely to most investors that you’d only get 10 cents per share for providing this “insurance.”

In other words, for risking $1,500 (the amount you’d have to use to buy 100 INTC shares at $15 for each contract, and the amount you’re theoretically risking if Intel happens to go to zero before October — which is admittedly an absurdly remote possibiliity), you’d earn $10 (ten cents X 100 shares). Even in this low interest rate environment, that’s not very much money for four months, especially after you include the commissions.

We want to generate a bit more money than that — so let’s say we’re pretty sure that Intel shares won’t fall even 10% over the next four months. To sell this “godfather offer” on that you might sell the October $20 put. That generates substantially more cash for you, roughly 72 cents per share is the going rate at the moment, so that means for each contract (which now means you’re theoretically risking $2,000 at the $20 per share strike) you earn $72 over four months.

If you rolled over similar types of trades and did it three times a year for similar payouts, that would mean your annual income from this block of $2,000 that you’re using for this strategy (assuming you sell cash-protected puts) would be $216 before commissions ($72 X 3), which works out to about 10% annual return. Call it 8%, maybe, if you’re using such a small pile of money, since your commissions eat that up quickly, but if you started with $20,000 and generated $2,000+ per year your commissions would be a much smaller drag. All assuming, of course, that the premiums (the amount options go for) remain in a similar range, the pricing of options is all based on what investors presume will be the near-term volatility of the market — as you might expect, when fears of a crash are high, you can earn more from selling puts. That’s where the “fear guage” of the market, the VIX index, comes from — that index, oversimplified, is just a measure of the premium being paid by investors for options contracts.

Oh, and yes, that example does get us the $720 Eifrig teases — as long as you start with about $20,000 in cash to sell cash-protected puts (or roughly $4,000 in cash and plenty of margin availability to sell naked puts). And yes, you can get your hands on it in 24 hours, which is how long options trades take to clear to your account. If you want to get a higher payout, more like the $920 that he mentions above as being available for “godfather offers” on INTC, you could take on slightly more risk by raising your strike price or by extending the expiration another month or two, though all of these prices fluctuate significantly as investor expectations and stock prices fluctuate.

There are more complicated trades you can do along these lines, of course (there’s always something more complicated available), so you could trade put spreads instead and, for example, buy that $15 put to cover your $20 put and therefore reduce the amount of capital theoretically at risk to $500 per contract, and cut your income to $62 per contract (72 cents for the $20 put minus 10 cents to buy the $15 put), and there are a gazillion options strategies you can consider if you want to be an options trader — but at the most basic level, selling covered calls or selling cash-protected puts are both very reasonable, steady eddie strategies as long as you don’t hit a bad trade.

Eifrig says that his picks for this “godfather strategy” were all profitable last year, and that he never had his put sales exercised (ie, he never had to buy the underlying stock). That’s not surprising, the market did quite well in 2010 and the S&P 500, which represents the kinds of stocks he’s generally talking about, had a little more than a 10% fall from the peak (in April) to the trough (July) but was, overall, up about 13% for the year. So unless you had sold your put option in April for a June or July expiration, you would have been unlucky to lose money on these kinds of put option sales last year (ie, you would have had to pick a stock that was worse than average).

Of course, the downside to this kind of trading is that each individual trade generates a relatively small percentage gain — maybe something like 5%, if you’re counting all the cash that you’re tying up in the trade as your principal. So if you bet wrong, either by being a little more aggressive or by choosing the wrong stock, you can easily lose the gains of several trades in just one trade. As an example we don’t have to look further than another tech “fortress” bellwether, Cisco (CSCO) — the shares were flying high early this year, so you could certainly have been forgiven for looking at CSCO in late January and saying that it was a fairly valued blue chip that wasn’t going to collapse.

The shares were over $21 at the time, so you could have sold a put contract (I don’t know what the pricing was, but let’s assume for now that it was a bit higher than Intel’s is now) with a four month expiration (April) and a strike price of $19. I’ll assume you got a dollar for that put contract, though it could have been more or less. So you risked your $1,900 and got $100 back. The stock then fell abruptly in February to just over $18, so you might have been nervous and bought back the put contract for probably substantially more than you paid … or you could have ridden it out, thinking that the shares would rebound. They didn’t, and if you held on through expiration the stock would have been at about $17.

That means you would either have to buy CSCO shares at $19 when the market says they’re worth $17, or you’d have to buy back your put contract to close it out at roughly the same loss. You did pocket that $100 for selling the contract, so your “break even” was $18 a share and you ended up losing $100 (or, if you let your contract get exercised and bought the shares at $19, you’ve lost still more with the stock down here at $15, at least for now). That doesn’t sound that bad, but now you’ve got to do another four-month-long trade with a similar expected profit in order to break even, and then even if that works you’re 8 months down and have made no money for the year.

And of course, CSCO is a special case — but luck plays into this, as does choosing solid companies — if it had been a stock that was more volatile and it dropped by a quick 30% one day, you could lose several years worth of these small gains … so it’s a good idea both to have a diversified portfolio of these kinds of trades, and to avoid “reaching” for stocks that are more volatile or news driven in hopes of generating maybe 10-15% or more per trade instead of 5-10% — the extra risk can wipe out your capital pretty quickly if things turn against you.

As with any trade you do, keep in mind the amount of money that you’re investing or putting “at risk” as you daydream about your cash return — this can sometimes be an odd mindset change for investors who are new to option selling. In the case of cash-secured puts, you’re just holding the cash to back it up in your brokerage account so it “feels” like it’s still your cash, and like you’re earning free money when you sell an option … but remember that you lose control of that cash for the period of the option contract, and the capital is at risk just like it is if you buy a stock (it’s a little different if you use margin and sell a naked put, but you’re still putting money at risk to back up the cash you earn in option premium).

So that’s what it means to make a “godfather offer” to a “wealthy investor” — if you want a steady if relatively low income and a high likelihood of success you’re far better off selling options than you are buying them, but it is not risk-free or guaranteed, and it’s not “free money.”

And no, you’re not shaking anyone down or making an offer they “can’t refuse” — the people who buy put options get something out of it, too, either because they’re speculating on the fall of a stock or because they just want to make sure they “lock in” their profits if the stock they hold should fall precipitously. So at the least, you’re helping them to sleep better at night, like any nice little Godfather.

I don’t do a lot of options trading — I’m more likely to use options to control my losses when speculating on risky ideas (ie, buy a call option instead of the stock), and I rarely sell options, but I know there are a whole passel of options income-focused investors out there in Gumshoedom … if your’e one of ’em and have a favorite strategy, feel free to shout it out with a comment below.

Full disclosure: I own shares of Intel and LEAP options on Microsoft. I am not invested in any other company mentioned above, and will not trade on any of these names for at least three days.