What the Heck are “Turbo Caps?” I’m so glad you asked …

by Travis Johnson, Stock Gumshoe | February 25, 2010 2:47 pm

“Can you really make 6,800%… 12,300%… and 13,900%… all in ONE DAY?”
“WANTED
“Bold Investors to Test-Drive New ‘Turbo Cap’ Niche Market

“Help me prove it’s really possible to turn $5,000 into as much as $1.5 million in the next six months… and I’ll give you a FULL YEAR of our breakthrough new service, Taipan[1]’s Velocity Trader[2]… absolutely free!”

This teaser, from Zachary Scheidt[3] for his Velocity Trader service from Taipan, is clearly driving people crazy — at least, that’s how it seems from this end, I get a barrage of emails every time this or a similar ad is circulated. And I haven’t written about the teaser, since it doesn’t pitch a specific stock … but it seemed like high time to take a look.

This is the basic premise of the service, and the basic explanation of the “Turbo Cap” term that is the core “secret” they’re teasing:

“Thanks to an SEC rule change, a hot niche market is cranking out stunning returns of 3,400%… 5,100%… 7,100%… 12,300%… even 13,900% in a single day.

“Known as ‘Turbo Caps’… these explosive securities trade exactly like regular stocks. In fact, ‘Turbo Caps’ are regulated by the U.S. government and fall under the jurisdiction of the SEC.

“The difference between ‘Turbo Caps’ and regular stocks is simply this: Because of their unique structure, ‘Turbo Caps’ move at LIGHTNING SPEED… giving investors the chance to capture life-altering gains — as much as 13,900% — in a single day.

“Problem is… even though ‘Turbo Caps’ have been written about in The New York Times, The Wall Street Journal and USA Today…

“… most people have never heard of ‘Turbo Caps,’ let alone taken advantage of their wealth-building prowess.

“Because we want you to take advantage of the sizzling “Turbo Cap” niche market… Taipan Publishing Group has launched a brand-new service, Taipan’s Velocity Trader, with a single objective:

“To help 125 people turn $5,000 into as much as $1.5 million in the next 6 months…”

Man, that is so nice of them — what an awesome objective! And all they ask in return is $100,000 (that’s $795 each for those 125 people). Almost charitable, no? Of course, the free year is that second year, after you’ve paid for the first one, but I’m not one to sneeze at a discount, so that’s fine.

Well, the “secret” of these so-called “Turbo Caps” is really not particularly veiled — they’re really just talking about … options[4]. Of course, “call options” sounds far less sexy than “Turbo Caps,” so it’s hard to blame ’em for that.

So what they’re pitching is the Velociy Trader options trading service, which used to be called Death Cross Trader[5] — not sure why the name change, though from the generally negative sentiment of the few reviews we’ve received over at Stock Gumshoe Reviews [6]perhaps it was just a way to start fresh after a bad patch. And frankly, “Velocity” sounds like more fun than “Death Cross,” and certainly more accessible. (The “Death Cross” for traders, by the way, is when the short term moving average crosses under the long term moving average line on a chart, generally a bad sign — don’t know if the Death Cross Trader actually particularly searched for those opportunities to buy puts, or whether they just liked the name.)

This is a weekly service, and Scheidt apparently recommends a couple trades a week, on average, most of them quite short term — a month or so seems to be a typical holding period, according to the examples in the ad. He apparently tries to build the massive 13,900% returns that are teased in the ad by making a succession of trades that gain “only” 100-500% in a short period, calling them “precise, high-percentage” trades that could “turn $5,000 into $1.5 million in the next six months.”

The ad goes through the examples, too — showing us that this string of winners starts with big options wins in March, April and May of last year, which were, coincidentally, spectacular months for the market as it bounced off the lows in March. It starts with the “Turbo Cap” with ticker WRT5-65, which Scheidt apparently recommended buying at $1.25 and selling at $7.80 just a few weeks later. Given that this option root (WRT) is used by Forest Labs, I assume this is some kind of call option on that stock, but I don’t have the options data available to confirm whether or not such a trade was possible. Scheidt also apparently has “powerful risk control tactics” that limited the “potential loss” on this $5,000 bet to $500.

That kind of return on an options trade is certainly possible, it happens all the time — but betting $5,000 on an options trade and limiting your risk to $500 is quite a bit trickier, you can’t count on getting “stopped out” on a call option trade like you usually can for a reasonably liquid stock, because the dramatic leverage[7] means your investment could easily go from $5,000 to $0 overnight if the stock falls significantly, and there usually isn’t a huge group of traders moving in and out of a particular options contract to keep the bid predictable. So limiting your risk would usually mean trying to stop out of bad trades as soon as they start to go down, though that can mean that you stack up a lot of 20-30% losses, which add up … or that you also hedge your bets. More on that in a moment.

And, perhaps more importantly, Scheidt in that example does something that most risk-averse investors would have a lot of trouble doing — after making a huge profit on this first trade, turning $5,000 into $30,000+, the example has him taking the initial investment out but then putting the entire $25,000+ profit into the next trade, which apparently would have turned that $25,000 into $63,750, and so on, pulling out some cash at each point but making progressively larger bets on each subsequent trade.

So that means by the fourth uber-successful short-term options trade (of course, you’ve yet to make a losing trade), you’re making a single options trade for $200,000 — you’ve been so incredibly successful that you also have even more than that in profits that you’re setting aside, true … but still, going from someone who’s comfortable putting $5,000 into an options trade — which already rules out most individual investors — to someone who’s willing to make a similar trade for $200,000 in a matter of a couple months, well, it’s hard to imagine.

Still, every ad for a newsletter posts hypothetical results like this — perhaps attainable if you’re able to buy and sell as the editor advises, and sometimes cherry picking to improve the results (I have no idea if this ad does that — but if “trade 3” lost $50,000, the results end up being a lot different). The point is that we’re dealing with a short-term options-trading service, where the goal is to make quick strikes in a month or two and roll profits into the next trade.

To their credit, they do also say that making these huge profits would be “aggressive” — here’s how they couch it, once they’ve already got the drool dripping down your chin:

“There you have it. Using “Turbo Caps,” you could have turned $5,000 into over $1.5 million in about three months.

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“And if you had taken a more aggressive route than we recommend for most investors… and rolled your principal and winnings over on each trade… you could have grown your initial $5,000 into $5.6 million in three months.

“At the same time, with risk management, you can literally keep potential losses under control while you amass a fortune.

“Now, let’s step back to reality for a moment so I don’t get your hopes up too high.

“You will NOT get every trade right. And not every winning recommendation will deliver big profits.

“And besides, even with proper risk-control tactics, it would be unadvisable to roll all your money AND all your winnings over and over…”

So can it work? Sure, it’s theoretically possible. If you don’t know much about options trading I can tell you the basics — I’m not an expert, but I know there are plenty of options traders out there in Gumshoeland if you feel like chiming in.

Options are derivatives[8], which means they get their value from the movement of another security — in this case, I expect we’re largely dealing with individual stock options, which are available for trading on hundreds of stocks (and many ETFs).

Stock options give their holder the right (the “option”) to buy or sell a specific stock at a specific price on or before a specific date. When you trade an option you’re trading a “contract” which represents that option, standard contracts are for 100 shares of stock (there are occasionally some nonstandard options around, usually as a result of stock splits, acquisitions, or big one-time dividends[9]), but the price that’s used for trading the stock is the individual stock cost, which means you need to multiply the quoted price by 100 to get the actual current price of one contract.

For example, if we stick with that Forest Labs example, this is how it might work out:

Forest Labs (ticker FRX) is currently trading for about $29.50. You’re convinced that they’re going to announce some great results over the next couple months, and that the stock will shoot higher — let’s say you’ve got a price target in mind of $37, for whatever reason.

If you buy the stock and it goes to $37 in the next few months, you could quite happily cash in a profit of $7.50 per share, or a gain of almost exactly 25%. Not bad at all!

But Forest Labs has options contracts available, and you’re super-confident that you’ll be right about this move — and that it will happen soon. So you decide that instead of putting the cash into the stock, you’ll buy call options. There’s a call option available with a $30 strike price that expires in May (the expiration date for May options is May 21). This would have formerly had some kind of letter ticker similar to the ones they use in the teaser, but the options ticker symbols have been altered to give more information, so the ticker now is FRX100522C0003000. Doesn’t exactly roll off the tongue.

This options contract currently trades for about $1.30 (that’s the midpoint between the $1.25 bid and the $1.35 ask), which means that one contract would cost you $130 plus commissions (often a bit higher for options trading than for stock trading, depending on your broker). If the stock does go to $37 before May 21 your option would be expected to be worth at least $7 now — because the option gives you the right to buy the stock for $30, and it’s worth $37. So with that you get a profit of roughly 440%.

There’s always a catch, though — the value of an options contract is made up of both the intrinsic value and the time value. The intrinsic value is the actual worth of the contract right now — so for a $30 contract on a stock that’s trading at $29.50, the intrinsic value is zero, which means that the “time value” you’re buying is $1.30 per share, that’s what you’re paying for the three months of potential in Forest Labs’ stock.

The intrinsic value of an option can go up if the stock goes up — ie, if the shares go up to $30.50 the real value of the option goes up to 50 cents, since that’s what it would be worth to exercise your option today — but the time value should always trend down because time is passing. Of course, in practice it doesn’t always happen that way — options contracts trade up at a big premium to their intrinsic value if interest in the stock’s future heats up, or if an options newsletter recommends a contract, or just if optimism in general lifts, and the time value can go up faster than the intrinsic value when everyone’s feeling great … but the time value is going to go to zero on the expiration date, so if the stock hasn’t climbed above the exercise price, or above your cost (the exercise price plus the cost of your option contract, so in this case $31.30), then you’re going to lose money on the trade. Almost no traders actually exercise options contracts, and there’s nut usually much reason to do so — they usually either expire worthless or an option owner would sell the contract back to close it, hopefully at a profit.

So in this case, if the stock dips to $25 on the day after you buy the contract, you’re going to probably lose the whole $1.30 if it doesn’t bounce back really nicely and quickly. It doesn’t sound like a lot, since each contract is only $130, but if you want huge amplified returns you need to make amplified bets — if the choice had been between investing $5,000 in the stock or $5,000 in this options contract, here are some potential scenarios:

1. The stock stays still at $29.50: Your stock investment stays steady at $5,000, your options contract expires worthless for a 100% loss (or, if you were prescient, you sold it at some point along the way at a loss — the longer you waited the larger the loss).

2. The stock drops 20% and stays lower for months: Your $5,000 investment in FRX shares drops to $4,000, maybe you stop out and sell the shares at that loss — your options contract, however, immediately loses 90% of its value (roughly — the $35 strike price in May trades for 10 cents, which indicates how much investors are willing to pay for a strike price more than $5 above the current price, which is what your option would become if the stock dropped 20%ish) and eventually expires worthless.

3. The stock rises — since we’re very close to the strike price, it doesn’t have to go up much, a rising stock price would give you decent gains on your shares, but the premium for the option should increase more quickly if the stock’s heading up. Any sustained share price above $31.30 means your option is in the money, so if you wait it out until near expiration anything above that price is profit — and, of course if the shares get to $37 the option contract should get you that 440% return, roughly $22,000, while the stock investment would have appreciated only 25%, returning you roughly $6,250 if you sold your shares at that point.

So that’s the basics — almost any investor can trade options through almost any stockbroker, but you do have to get approved for options trading in your account. This is similar to getting approval for margin trading, you essentially just have to tell your broker that you have the investing experience necessary to understand options, you’ve read the options rules, and you have the net worth to handle making a mistake — I don’t know if they ever turn people down, I assume they must, but they certainly approved me for options trading in a hurry, many years ago when I was certainly still quite green behind the ears.

Most stock option contracts trade in extremely small volume, at most a couple thousand contracts a day for really popular options, and usually a tiny fraction of that. The current outstanding options are quoted as the “open interest”. For our example that I used above, the FRX May $30 options, the open interest is about 3,700, (meaning that 3,700 contracts exist), and the volume today was just 15 contracts. That’s fairly typical, in my experience — the number of contracts that can be created is theoretically close to unlimited, but to get more people to sell you a contract and ramp up the volume significantly you’d probably have to bid up the price.

Which is the main problem with most options trading services, and the reason that they tend to be expensive — they can’t afford to have too many subscribers, or their universe of available options to buy gets extremely tiny because a bunch of traders all jumping on one options contract can distort the price dramatically. If Scheidt recommended that particular options contract and 500 of his subscribers each wanted to put $5,000 into the trade, the price would probably explode — that would be 2,000 more contracts created and traded in one day, or almost 100 times the current daily volume. That might even be enough to get options-focused traders interested in the stock, since the assumption would be that a lot of money suddenly came in looking for a catalyst for a quick gain, and the herd instinct can take over and drive the shares higher.

And what about those ways to limit your risk in options trades? Well, as I said, you can try to use stop losses for options, but it’s a lot harder than with stocks given the huge leverage offered by most options contracts. The other main way to hedge your risk is essentially to bet against yourself — so if you stick with our example above and buy the $1.30 call option contract at $30 for May, you might also buy the put option contract at $27.50, for example, giving you some protection if the bottom falls out of the shares.

That put option would cost you 70 cents at the current price, meaning your overall investment is $200 and, if you hold the contracts until expiration (to keep the example simple), the stock has to either fall below $25.50 or rise above $32 for you to make money — if it stays between $27.50 and $30 you lose it all, if it’s slightly above or below you’d salvage some portion of your cash. You lose some potential leverage, since you’re putting more money in, and your bias is still toward positive movement, but you get a bit of downside protection — this is called a strangle trade, you could also do something similar called a straddle which essentially just means you buy a put and a call option with the same strike price, meaning you profit roughly the same in either direction, you’re just betting that the stock will make a big move one way or the other.

And the other common way to hedge an options trade (there are thousands of options strategies, I’m just mentioning a couple that are reasonably simple and frequently used) is to use a spread — for the call option in our example this might mean buying the $30 strike price contract and selling the $35 strike, which limits your upside potential if the stock moves dramatically but also cuts your cost basis by perhaps 10% or so, reducing the possible loss if you’re wrong. That would be called a vertical spread — if you did something similar with the same strike price across different months, meaning that you think the stock will go up but not until after May 1 you might sell the April $30 contract and buy the May $30 contract, which would cut your investment by more than half in this case but also mean that you have to have the expected move in the stock timed very well somehow (the April $30s are at 80 cents, if you want to give yourself more time you could sell the March $30s for 50 cents, which would still cut your cost basis by a lot).

So that’s about all I can tell you today — as I said, I’m not a particularly active options trader and not necessarily an expert on this stuff, but I’ve had a lot of folks ask so I wanted to explain the basic “magic” behind the numbers that are possible with “Turbo Caps” if you happen to be a very lucky and successful options trader. Whether Scheidt is someone who can get you there or not, I don’t know, and I can’t explain what all of his “secrets” are for trading options, but if you’ve got some options strategies that work for you I’d be delighted to hear about them. The last time I wrote about Scheidt, I think, was for his “silver[10]-shots-poised-to-skyrocket-12785.html">Silver Shots” teaser back when it was called the Death Cross Trader (this was in May of 2009), so if you’re curious about some more discussion of his strategies and other options trading chatter you can see that article here[11].

And just to be clear, that Forest Labs stuff was all just an example — I haven’t looked at the stock, I have no idea whether it’s a good investment right now, and I don’t know if it’s one that Scheidt is currently trading.

Boy, that was a lot of long-winded blather just to say “Turbo Caps are options,” eh? Sometimes I just can’t help myself.

And, of course, if you’d like to add to our base of knowledge about Scheidt’s Velocity Trader, please click here to share your experience as a subscriber[12]. Thanks!

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