“Surety Income Certificates MUST Pay You Money!” Rahemtulla

By Travis Johnson, Stock Gumshoe, October 8, 2008

When the world looks bleak, the skies darken, and the locusts appear to be swarming on CNBC, we can always count on one thing: Newsletter editors will be trying whatever they can to convince you that they see the way forward, or that they have a safe haven for your money.

Karim Rahemtulla is no different than most — he’s teasing us today with an investment idea that will guarantee that you get paid, and who doesn’t want to see something like that these days? The newsletter he’s trying to sell is called Strategic Income, one of many letters from Rahemtulla, and from the vast Agora universe in which he toils.

Is it new? Innovative? Dramatic? Probably not for many of you … but there is a “there” there, even if it’s buried under a pile of marketing manure. I’ll try to explain it for you.

First, let’s see how Rahemtulla sells this. He has invented a new term for us, he’s calling this investment the “Surety Income Certificate” — no such thing exists, of course, but this is part of a long tradition, you have your copywriters devise a term that captures the essence of what people want, with some tenuous connection to reality … and then you charge subscribers to find out what the heck they mean when they say “Surety Income Certificates.”

I’ve written about this kind of “invented term” marketing dozens of times — whether you talk about California Overnight Dividends, or Secured Investment Contracts, or Dark Equities … there are real investment strategies buried under the hyperbole, but we, as customers of these newsletters, clearly respond better to mysterious sounding strategies.

And this strategy is somehow involved with income, and part of why Rahemtulla appends that “Surety” name to his invented term is that the income is “guaranteed.”

In his words:

“U.S. Gov’t Agency Declares: ‘This Investment Must Pay You $3,500 on October 16th.'”

And he pulls in some quotes from reputable sources to make it seem real:

“It’s a conservative strategy. You make money even if the market doesn’t rise.” -BusinessWeek

“Individual investors can benefit from this simple, effective strategy.” -Forbes

And like so many ads of this ilk, they make it seem like this is an odd strategy, one that you won’t have heard of because it’s not widely used or liked by brokers … and that only a really smart investor (like YOU) would be interested in this strategy:

“Just by reading this letter, you’re in a tiny minority…”

Rahemtulla tells the story of how he “discovered” these exciting “certificates” …

“I used to think the only way to pocket extra cash was with preferred stocks and bonds…

“But then I discovered a better, safer way to earn thousands in extra income each month…”

Is it just me, or does that sound a little bit like those “work from home” ads that want you to fill out medical forms or address envelopes from your couch? Don’t worry, that’s not what they’re talking about.

He also shares a quote from his mentor, some dude named “Henry” — “The key to making steady income in the markets is to forget about dividends.”

Henry went on to explain how using “Certificates” on blue chip stocks you could pull in much higher income than dividends …

“’You can trade them on thousands of blue chip stocks,’ he said. Fact is, instead of relying on stocks and bonds for income… you simply make a trade on underlying ‘Certificates’ to generate income.”

OK, so some of you probably already understand what these “Surety Income Certificates” are — for the rest of you, we’re just talking about …

Options.

Rahemtulla says as much later in the letter, without actually explaining what he means. Here’s what he passes off as an “explanation” …

“Actually, the trade you make – that puts cash in your account instantly – takes place in the options market. But with Certificates you do not have to buy risky call or put options.

“Long story short: a Certificate transaction MUST distribute the premium received directly to the consumer.

“In fact, brokerages are not allowed to keep this premium. But for years, only Wall Street’s elite has known how to take advantage of this mandatory payout.

“And even today, most brokers still keep these payouts a secret… and you certainly won’t hear about them in the mainstream media.

“That’s why I’ve created a research service to show you how to receive the biggest and best “Certificate” payouts available.

“You won’t need a new brokerage account or specialized knowledge. You can trade these certificates in your normal discount brokerage account in about five minutes a week. And what’s more, you’ll actually be reducing your portfolio risk by incorporating “Surety Income Certificates” into the mix!”

It is, of course, a little bit more complicated than that. If it’s an options trade that doesn’t involve buying “risky” call or put options, then it stands to reason that this must be a strategy for selling options.

So yes, this is yet another example of a newsletter that’s advocating a strategy of selling covered call options for income. Not much different than Jeff Clark’s various ads for his Advanced Income service (California Overnight Dividends, Transfer Dividends, Market Commissions) or Rahemtulla’s earlier ads for his “Secret Price Fixing Ring.

What does that mean?

I’ve tried to explain this in my words a few times before — you can click on any of those articles above for my more extended thoughts on covered call selling, but it is, at the heart, a fairly simple exercise.

The authors of that “Forbes” article that Rahemtulla quotes (it’s actually an Investopedia entry, though it was published on Forbes.com) actually do a pretty good job of explaining covered calls — you can see that article here if you’re interested. Essentially, they explain it by saying that as an owner of a stock you have several rights, including the right to sell your shares. Selling covered calls against stock that you own means that you’re selling some of those rights, in a way that has been standardized by the options market.

The stuff about the “U.S. Government Guarantee” and the $3,500 payouts you should be getting from this? That’s entirely misleading. The ad tells you that your broker is not allowed to keep this money from you, and of course that’s true — just like no one else is allowed to steal your money, either, and just as selling a stock means you’re “guaranteed” to get the cash for selling those shares. If you sell something, of course it’s “guaranteed” that you get the money from that sale. All this language does is capitalize on your fear that everything is uncertain — if you sell an option, the money shows up in your account immediately and is cleared by the next day.

Here’s how Rahemtulla explains it:

“Making money with Certificates is as easy as one, two… That’s it, there’s no step three. It works like this:

1.You buy a stock. (Or you may be able to use one that you already own).
2. You perform a simple Certificate transaction that’s associated with the stock to claim your payout.

“That’s it. One, two… done!

“I guess technically you could say step three is the sound of money hitting your trading account. But that’s the fun part.

“And it’s the easy part. Because the money is sent directly to your trading account. You don’t have to do anything except wait a couple of minutes for it to arrive.”

So that’s all true, too — and he gives some examples of when you could have gotten — or may soon get — big payouts by selling covered calls against stocks like Sprint, Apple, IBM, Cameco, US Bancorp, and many more. He throws in some nice big numbers, payouts in the thousands of dollars, and then puts down in the small print that his figures are based on owning 1,000 shares.

So if you’re interested in getting $3,500, remember that you might have to own stock with a market value of $30-50,000 to sell calls for that much money (just an example, every stock and option price is different).

Selling a call option means you’re selling someone else the right to sell 100 shares of your stock before a set date in the future, and for a set price. What makes it “covered” is that you own the 100 shares and therefore are ready to meet your obligation (a “naked” call would be selling someone the right to sell stock that you don’t own, which usually means that your broker will require you to have cash on hand, or margin, to cover the cost of “covering” your end of the trade).

Rahemtulla says that he’s going to recommend his next pick for this service next week, on October 16, and that it will put $3,500 in your pocket. He gives no clues about which stock this might be, but here’s an example of what it could possibly be:

We’ll assume, just for fun, that the stock he’s thinking of is Wells Fargo. You can buy shares of WFC for about $31.50 at the moment. You buy 1,000 shares per his examples, so it will cost you $31,500.

Rahemtulla’s examples indicate that you can do this several times a year, so that means we’re dealing with near term options — options that expire within the next few months. You can buy and sell options that go out as much as two years or so in the form of LEAP long term options that expire in January 2010 or 2011, but most options volume is in contracts that expire within the next several months.

So let’s assume that we’re dealing with November calls in the case of WFC. You can sell calls on Wells Fargo at a strike price of $34 and an expiration date in November (it’s always the third Friday, so November 21 is the last day this option will trade or get exercised, though it technically expires the next day, on Saturday).

Yesterday those options traded at $3.50, and the price represents the per share price but options trade in lots of 100 shares, so the actual price of each options contract would be $350, and selling ten options contracts would get you income of $3,500 minus commissions (commissions for options are often a little higher than common stocks, and include a small per-contract fee, check with your broker).

You can do this exercise with any stock, just click on the “options” tab or link in any finance website and they’ll give you the current expiration dates and contract prices that are available for trade in the stock you’re interested in, along with current quotes — note that often unpopular options contracts might trade only a few times a week or less, so there’s no guarantee that you’ll get the price quoted. Thousands of stocks have options contracts available (people call those stocks “optionable”), but many, particularly smaller companies or newer stocks, do not.

So in our example, what happens between now and November 21? If the shares of Wells Fargo stay where they are, right around $31, you’re in great shape — you get to keep your shares, and the option would expire worthless so you keep that $3,500, too.

If the shares drop, you have to keep the shares because you’ve sold someone else the right to buy your shares for $34 before November 21. If the stock craters and you want to sell, you’ll have to buy back the options contract first — since the stock would be lower, you’ll probably still be able to make money on the options contract because you’ll probably buy it back for less than you were paid for the option originally, but then you don’t get to keep the whole $3,500. If the stock craters but you wish to hold for the long term anyway, at least you’re cushioned a little bit by the extra $3,500 you got for the option. Basically, if the shares don’t fall under $28 you can consider that you broke even (since you got $3.50 per share for the options contract).

In exchange for that, you give up some upside. I know, it doesn’t seem like we hear that word “upside” very often these days, but stocks can still go up. If Wells Fargo goes up to $33 you’re doing great, the options still won’t be exercised (exercised means the person who bought your option “exercises” their right to buy the shares from you at the contract price). But if suddenly all becomes right with the world and people start looking forward to a day when Wells Fargo will rule the economy, and the shares go up to $40, you still have to sell them for $34. Since you got $3,500 for your option, or $3.50 per share, you can think of it as still a profitable trade for you as long as WFC stays below $37.50 between now and November 21 ($34 for the cash you get when you sell your shares if they’re exercised + $3.50 for the options premium you’ve already pocketed).

So this is a real strategy, it is a nice way to make income in a relatively flat market, though when things are swinging dramatically up and down it can be a little crazy — as you can imagine, options are priced very differently now, when some individual stocks routinely move up or down 20% in day, then they were last year.

And perhaps most importantly, if you want to pursue this strategy you need to have a handle on your emotions and stick with the script — if it would drive you crazy to see Wells Fargo go to $50 when you have to sell it at $34, this might be a tough strategy to stick with … if, alternatively, you could ignore the market prices and just accept that you can average out to some pretty solid if unspectacular returns by selling calls every few months, it might work great for you.

Do keep in mind, however, that someone who sends you anywhere from 10-25 picks a year in this vein is going to be suggesting a lot of pretty big stock buys and call option sells. You’re probably not going to already own those stocks, so you’ll have to buy a fair amount of stock to make selling the calls worthwhile — if you trade single options contracts it can still work, but generally you reduce the commission friction by buying or selling larger amounts, which is why the examples used 1,000 shares and 10 offsetting options contracts, and you always have to own at least 100 shares of a stock to sell a call against your holdings. That means these strategies usually don’t work all that well if you’re just starting out and your portfolio is very small and you buy in odd lots of a few shares at a time.

If you like the idea but don’t want to do it yourself, you can also get what is essentially an index version of this by buying the S&P 500 Buy/Write ETF (the index is the CBOE Buy/Write Index, the ETF I’m aware of is from PowerShares, ticker PBP). This ETF simulates buying the S&P 500 and selling calls against the index to smooth returns a bit. It has been around for less than a year and I have no idea how it will perform, but it is an interesting product — over the last six months, it has done slightly better than the plain vanilla S&P ETF, down 20% instead of 27% or so for the index. There’s a similar ETF that started just this summer for the Nasdaq 100, ticker PQBW if you want to check it out.

There are also, if you like the active management approach, any number of closed end funds that use covered call and buy/write strategies, most of which trade at a pretty significant discount to Net Asset Value right now — if you want to review those, go to the Closed End Funds Association website here to search (choose the “options arbitrage/opt strategies” classification, it also includes other stuff but has several funds that use these kinds of strategies). Note that if you get into closed end funds you need to be careful about expense ratios and leverage as well as actual performance and premium/discount to net asset value — there are some fine ideas in that universe, but also some really wacky funds that are extremely expensive or that use lots of borrowed money to boost their returns.

So … are you just dying to buy some “Surety Income Certificates?”


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41 Comments on "“Surety Income Certificates MUST Pay You Money!” Rahemtulla"

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William Blomquist
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William Blomquist
Gumshoe .. About 2 years ago my wife and I made the decision that I would stay home and she would continue to work in her family business. I am a retired executive now trying to build a high end furniture business along with being more domestic than I care to admit. I have to laugh when I tune into mothers talking about tips to keep their house clean and find myself owning Steam Vacs and more kitchen appliances than I can imagine. Do I miss the boardroom?? NO, Never, Nada but have come to the conclusion that executive men… Read more »
Maryann Cabrera
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Maryann Cabrera

I just want to say THANK YOU so much for your articles. The way you break it down to the readers is awesome. I use to waste so much time with those e-mails and now I just delete and await your article. Keep up the great work!!!!

Hans
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Hans

Nice work on this one! Again!

I too am royally fed up with the incessant marketing babble from Agora…they make you feel like a little squirrel in some jungle, being relentlessly carpet bombed day in and day out…the marketing napalm just keeps raining down on you…

Simon
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I really don’t like marketers who mislead people. I think this Karim guy needs a swift kick. I’ve seen a few of his other teasers and it’s the same type of nonsence. The sad part about it is under the right circumstances the covered call strategy can work great… but if a marketer will mislead so greatly in their ad copy, I immediatley don’t trust that the quality of information will be very good. I’ll pass.
Thank you Stock Gumshoe… you are doing an incredible service here! 🙂

Pelican71
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Pelican71

Gumshoe, an excellent write up on covered calls. You’ve homed right in on all the plus points, pitfalls and frustrations. I find the advisors love percentages but 80% of not much is, well, not much. So I think it is important to look at absolute gains as well as percentage gains especially if one is dealing with only one or two contracts.
However, covered call is in general a safe strategy that does generate the income but requires sufficient funds to get started as you pointed out.

Cindy Schermerhorn
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Cindy Schermerhorn

Hello Gumshoe, Do you think it will make any difference (in the stock market) who wins the presidential election? Who do you think would make the better president – in the long run? You don’t have to tell me who you are voting for (laughing).

richard0826
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richard0826
Another excellent write-up GumShoe. You are decently objective with your observations. I have learned so much from your articles and like other GumShoe readers are very grateful and appreciative of your efforts. Yes, I am fed up with all the hype that a lot of these greedy marketeers are writing about and end up misleading their clients; and as you had put it: …a pile of marketing manure. So as I browsed my emails…I delete almost 99% of the marketing ads and articles that are sent on daily basis. GumShoe is the only email that I read daily since I… Read more »
Sunnie Ford
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How about this one? Bulletin Board Elite & so-called Jumper Stocks. Agora’s Greg Guenthner known as”Gunner”…want to invite me as a priveleged one to sign up for $1495 a year. Ain’t I amazed to be selected for this great opportunity?
Gumshoe, tell your subscribers about this one, please.

Contraryan
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Contraryan

Yes, I agree these JUMPER STOCKS pumped by Agora have been pushed for quite some time with little notice in the forums. Have you any wisdom mighty Gumshoe?? The concept is regarding stocks that will hit a major exchange soon, not IPO’s but movement from OTC to Nasdaq

LSU
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LSU

Great work Gumshoe! I agree with all above comments regarding your work.

I heard recently that the market historically moves very favorably the first 4 hours after open on election day.

I’m researching but haven’t come across any info that will validate this. Have you heard of this?

Jimmy

Bud
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Bud
I can ALWAYS tell when a marketing pitch is going to be mostly B.S because they begin to make me feel like I’m sitting through a “Timeshare” presentation (pause here to flash back to the 1980’s). As in most of mankind’s myths and legends, there is a kernel of truth behind it all, but the stories they tell you run into the hundreds of paragraphs. My rule of thumb is that if someone can’t explain the “Wonderful Opportunity” they are trying to sell you in five paragraphs or less, it’s time to put on your wading boots, ’cause it’s gonna… Read more »
Reuben
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Reuben

Several years ago Karim Rahemtulla and his Agora cronies held a seminar–the video of which I have–about selling covered calls. They made such a big deal out of this “brand new super-secret strategy” one would have thought they had found and deciphered the Da Vinci code. Looks as if they are still at it.
What Karim neglects to say, and Gumshoe doesn’t point out, is that a covered call, which is touted as a low-risk strategy, has exactly the same risk profile as selling a naked put, which is perceived as a high-risk strategy.

bob zimmerman
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Candor and humor. Two important qualities I find with this website. On top of it all, there is a continuing refresher course on the market.

Most refreshing – keep up the good work.

Reuben
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Reuben

Here is a particularly good discussion.

I’ve converted the long url to a tiny one:
http://tinyurl.com/3u4x2u

He does cover one point which I will admit I didn’t mention. Quoting from this article:

The bottom line is that short put is very much a high-maintenance creature compared to an equivalent covered call.
[snip]
Aside from the risk-management differences, the covered call and the “naked” put are interchangeable strategies.

Here is one more:
http://tinyurl.com/4lpqdc
This one calls the naked put a “synthetic covered call” and once again demonstrates that they are equivalent

spreadtrader
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spreadtrader
The first URL takes me to a “Page Not Found” website. Perhaps you typed it incorrectly? HOWEVER, I really don’t need to read it do I? I mean, you concede that “aside from the risk-management differences, the covered call and the ‘naked’ put are interchangeable strategies”. In the context of our discussion isn’t the qualifier “aside from the risk management differences” somewhat like saying that but for the rain clouds it would be a bright, shiny day? I mean what are we talking about here? Risk management differences are DIFFERENCES, and part of my point; and they are exactly how… Read more »
Larry P
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Larry P
With the collapse of the Icelandic currency (Kroner) – wouldn’t buying Kroner be a good bet today? At this writing it’s around 100 Kroner/US$. Their government is advising citizens to get back into the marine industry and I read where they’ve built a new aluminum plant. Combining aluminum packaging, oily fish and the latest news of how scientists claim children and old people need more vitamin D (to promote stronger bones, improve immune system protection & forestall nurological disease ie: Parkinsons & Alzheimers) it seems to me their economy is due for a quick rebound. When that rebound happens –… Read more »
Reuben
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Reuben
Here is the entire first reference stockmythsandfacts.blogspot.com/2008/08/covered-call-vs-naked-put-dilemma.html [I’ve left off the beginning because I hope this message won’t be held for approval] Your preferred strategy of combining a short call and a long protective put is definitely low risk–I am not disputing this. Collaring your stock is an excellent way to protect yourself against loss. What I initially wrote is that a covered call [by itself WITHOUT THE PROTECTIVE PUT] has the same risk profile at expiration as a naked put. One strategy is neither more nor less risky than the other. I apologize if this was misleading to anyone.… Read more »
Reuben
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Reuben

Thanks for your compliments, StockGumshoe.

Spreadtrader and I do have an honest difference of opinion, which obviously no amount of discussion is going to resolve. I would prefer to end this thread rather than continue. As I wrote, I am far from an expert, and still have much to learn. There is a wealth of information on the web from many whose knowledge and experience far exceeds mine. I hope our exchange will lead others to learn more for themselves.

spreadtrader
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spreadtrader
Hi there. We have been talking about two different kinds of “covered calls”. I have read that article and wish I could have seen it before. I’m incredulous, but apparently Alexei Bocharov does simultaneously buy stock and sell ATM calls. IMHO that has to be the most difficult and time consuming way to make money selling options that there could be. That is the very last way (meaning that I would never do it) that I would attempt to apply the “covered call” strategy. You might as well buy bonds as an interest rate play….much less risky. One thing that… Read more »
Reuben
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Reuben

As you know, there are any number of software packages to analyze and compare option strategies. The problem is most of them are all too expensive. There is one for which the price is right–free. Take a look at OptionsOracle at SamoaSky.com
You can download real time data, or enter your own assumptions and compare results. I think it’s a program anyone serious about trading options should have.

GP
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GP

Thank you very much, keep up the good work

andrew
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HI i tried to access the first page and got page not found does this mean it is longer around or is it just techicial issues

great review mind

andy

thanks
andy
thanks
andy

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