Rahemtulla: “Secretive ‘Price-Fixing’ Ring Snatches Cash”

By Travis Johnson, Stock Gumshoe, March 9, 2008

When your stock recommendations are going down (along with everyone else’s, to be fair), and everyone seems terrified of the market crashing, you have to resort to selling a “system” — that appears to be what the folks at Oxford/Mt. Vernon Research are doing with Karim Rahemtulla’s Income Trader service.

This isn’t the first time that we’ve heard of these mysterious kinds of underground trading ideas, of course, from Karim or others — we looked at his “Dark Equities” teaser not long ago, and, as you’ll see in a moment, his basic strategy here is another one that is gaining in popularity during the current market turmoil.

And I hate to be the one to tell you (though, as a wise Gumshoe reader, you’ve undoubtedly already guessed), but this is, of course, no great secret.

Here’s the teaser headline:

“Confidential Report: Heads You Win, Tails You WIN! How This Secretive ‘Price-Fixing’ Ring Snatches CASH From Big-Name Stocks LEGALLY … And How YOU Can COPY Them!”

Man, how can you NOT want a piece of that? Let’s sniff our way through the flamboyant promises and take a quick look at what they’re actually selling.

They call it the “World of Win-Win” …

“Right now, you’re probably wondering how something so incredible is possible. But let me assure you IT IS! Why isn’t everyone doing it then? A few are: the lucky few in this legal ‘price-fixing’ ring. I’ll explain later why the big-boys probably can’t join in the fun because they would have a conflict of interest. No one else uses it because they don’t know they can.”

A price-fixing ring? It sounds so illicit … like the robber barons who have conspired over the years to fix the price of airline tickets, or DRAM memory, or beer … come on, you know you want to be a robber baron, too! You can tell me, my lips are sealed. We’re alone here on the internet, just you and I.

But of course, this is a different kind of “price-fixing” — and not as likely to get you in trouble with the Justice Department.

And they stab a knife into the heart of the Gumshoe:

“There’ll be no teasing here. I will explain exactly how this works and then you can decide if you want to play this game (though it’s hard to imagine how you wouldn’t want to!).”

No teasing! Say it isn’t so! The Gumshoe is melting, melting!

But OK, even if they’re not quite “teasing” and they do kind of explain how the process works (you can review the teaser here if you’re interested, I’m too heartbroken by the lack of teasing to excerpt much more of it), just the same they don’t come right out and say exactly what things are called or how to do it.

Rahemtulla essentially says that he lost a lot of money in trading options (as have most options buyers), but that he thought there must be a way to make money on them. And he “discovered” what most investors probably already know: options money, particularly the nice, steady income kind of money, is made by those who “offer” options, not those who invest in them.

So … OK, the Gumshoe isn’t revealing anything exciting here since they didn’t tease us (what do they think the Gumshoe’s going to do with all this free time if they stop teasing? This better not be a trend!) … but I can tell you specifically what he’s recommending, using the actual terms that he avoids.

“Offering” options to make money “instantly” and “price fixing” is all about selling covered call options.

“Covered” means that you own the stock itself — so you buy 100 shares of a stock, and you sell a call option contract on that stock (one contract is for 100 shares) and pocket the payment. A call option confers the right to the buyer to buy 100 shares of a particular stock, at a set price, anytime between the day it’s purchased and the expiration date. Then if the stock stays below the exercise price of the option until the option expiration date, you get to keep the money and the stock. Yay!
Sound familiar? Yes, it’s an old investing strategy — and one that services are cropping up all over to advise you about, including the pretty heavily marketed services from Stansberry & Associated (teased under “Transfer Dividends” and “California Overnight Dividends“)

And Rahemtulla even goes so far as to open up a little bit about his strategy, and he is a little bit more forthcoming than most when he explains the rewards and risks of the strategy:

“1) You make money if the stock goes up in value!
2) You make money if the stock stays the same!
3) You make money if the stock goes down!”

“So what’s the catch? The ‘catch,’ if you want to call it that, is that if the stock completely crashes and/or goes out of business you would lose money. But that’s why I use only big names for this strategy; what are the chances of the likes of McDonald’s and Starbucks going out of business?”

OK, so I said he was more forthcoming, not that he was transparent. As with all things in the investing world, it’s not quite as simple as that — having a binary “made money/didn’t make money” assessment of your investments wouldn’t help you to understand your portfolio very much, what really matters over the long run, as you’re well aware, is how much money you make.

So, with any strategy when you’re selling covered calls, here’s the Gumshoe’s (also simplified) description:

1. If the stock goes up, you make money — but your maximum profit is the money you got for selling the option plus any price appreciation up to the option contract price. If it goes up higher than that before the expiration date of the option, the person who bought the option from you profits at your expense. And if you don’t buy back the option contract to close it out, they can exercise it by buying that stock from you at the option contract price, possibly resulting in you having to incur a taxable capital gain (on top of the gain from selling the options contract).

2. If the stock stays the same or moves just a little, you are the happiest little investor in all of Gumshoeland — if you sell call options against your stock holdings and the price never goes up to approach the exercise price, you just pocket that premium you got for selling the option and it’s all profit.

3. If the stock goes down, you lose money (at least on paper) since you own the stock. But at least you received the premium payment for selling the option, so you lose less than you would otherwise have lost.

So … in my experience, most advisers recommend the same basic kind of strategy — buying megacap or large cap, stable, profitable and growing companies as core holdings, and selling “out of the money” covered calls (meaning, the contract price is higher than the current share price) against those holdings to get some extra income. If you pick the right steady growers that don’t shoot quickly up or down before the expiration date, you can make money on most of your trades.

This can be a nice way to get steady returns if you are very disciplined, but the discipline can be key — as can the stock selection. If you would be angry about losing out when a stock that you thought would be a slow grower went on a sudden 70% run (and your profit was maxed out at 15% because you sold calls against your position), be extra careful about choosing which stocks you sell calls against. Being fairly conservative and only selling near-term call options (that expire in the next few months) can help protect you a little bit more, but it also generates less income.

Oh, and do note that you’ll pay taxes on all these transactions, so many folks recommend that if you’re pursuing a covered call selling strategy, that you do so in a tax-advantaged account like an IRA.

I’ve written about this several times since these strategies are really, really popular when people are terrified that they won’t make any money in the market, so I hate to be repetitive. I know that there are several readers out there who employ covered call strategies with some success, so if you’d like to share your techniques, or mention specific companies where you think the strategy would be particularly well applied, feel free … we’re listening.


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10 Comments on "Rahemtulla: “Secretive ‘Price-Fixing’ Ring Snatches Cash”"

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Roov In The Big J
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Roov In The Big J
March 9, 2008 9:07 am

Bottom line is,
no matter if it goes up or down or stays the same its the Newsletter mongers who always make the buck…

G IMBURG
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G IMBURG
March 9, 2008 1:05 pm

Just some thoughts on covered calls. If the stock you wrote the calls on issued a dividend, THE STOCK YOUR HOLDING NOT ONLY GATHERS THE PRICE OF THE CALL SALE,BUT THE DIVIDEND TOO.This requires high volume for liquidity,and good timing between option expiration and payment of the dividend.

Gravity Switch
Admin
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March 9, 2008 1:11 pm

Good point, G — options usually do not adjust for dividends (except big special dividends).

And Roov — that, of course, is the ultimate truth. Good salesmen outearn smart investors every time, I imagine.

Big Mo
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Big Mo
March 9, 2008 8:39 pm

Hey Gum,
A while back you said you figured out a way to block “Dcubling Stocks.com” and Marl the stock-trading robot from advertising on your site. I can tell you it’s definitely back. (And yes I’m one of the suckers out $47)

Myron Martintakeprofits@rogers.com
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Myron Martintakeprofits@rogers.com
March 9, 2008 8:51 pm
This particular promo is not the one from which I learned about covered calls, but I did clue into it from a previous promo by Karim, so he gets the credit. The very first coverd call i sold was after Bh Biliton I bought in the $40,s reached the $70,s and I realized $1200. on one contract at a $100. strike price at which i would have been quite happy to have my shares called away! Instead the share price retreated substantially but I was happy to hold such a great company with solid fundamentals, and it has come back… Read more »
trader9
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March 9, 2008 8:54 pm

Just a slight correction. You stated:

“Being fairly conservative and only selling near-term call options (that expire in the next few months) can help protect you a little bit more, but it also generates less income.”

Selling near-term call options actually generates more, not less, income (neglecting commissions). For example, selling a 1 month option 12 times yearly results in more income than selling a 3 month option 4 times yearly because of the more rapid decay in premium as the option approaches expiration.

Gravity Switch
Admin
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March 9, 2008 10:24 pm

Thanks trader9 — you’re right, of course. I meant to note that it would generate less income per contract, but yes, you would then have the opportunity (assuming you choose wisely and have some good fortune, as Myron smartly noted) you could potentially sell calls on the same holding as often as 6 or so times a year (depending on the expirations available for that particular option chain).

Gravity Switch
Admin
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March 10, 2008 8:51 am

Thanks Big Mo — I can only “block” by URL and they seem to keep changing addresses, but I’ll try to keep up.

DAVE
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DAVE
April 19, 2008 2:27 am

Another goodie is if the stock dips, you can buy back the call you sold for pennies and sell another one at the lower strike price! You can also buy a protective put many months out as cheap insurance (it’s cheap per month)

Marty
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Marty
June 28, 2008 11:12 am

Funny, Karim says in this ad that he has lost money in options and now figured out to sell covered calls – and yet he also markets at least two options trading newsletters The 400 Report and another I can’t recall. So is he saying his other recommendatinos lose money and this is the only one that makes money? I smell a big fat rat, and probably fat off newletter sales vs. trading results.

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