by Travis Johnson, Stock Gumshoe | June 7, 2010 12:03 pm
Well, it’s been a long time since I’ve written about this particular investment newsletter from the Stansberry folks, so I thought I should take a look for all the new people we have on board here at Stock Gumshoe over the last six months … and to see if he’s changing up his strategy at all.
The new teaser is all about using special multi-digit teasers to implement the “Amsterdam secret” and pull in $1,667 or more per month … which they also call “Europe’s biggest retirement secret.”
And of course, the Europe/Amsterdam bit is not terribly relevant, but it does serve to draw you into the story and make this investment technique seem mysterious (and oh so terribly continental, don’t you know). The letter’s signed by Mike Palmer, who is the head honcho for the copywriters at Stansberry, and the pitch brings us in by talking about his years touring the globe for “William”, who must be Bill Bonner (founder of Agora, the granddaddy of modern financial newsletter marketing) … that globe-trotting led him through Amsterdam, where he said this special secret was born at Damrak 213.
Well, after listing dozens of names and examples, and telling us about several folks who grew wealthy using this secret, the ad starts to get into the details a bit more.
“… while most Americans simply buy stocks and wait for them to go up, this little-known investment vehicle that first originated in Amsterdam several hundred years ago, has created a way for investors to get paid today, upfront… in 24 hours or less.
“It’s not a dividend… an advance… or anything else you’ve likely heard of before.
“For those who know, it presents an extraordinary new way to potentially turn a small amount of cash into thousands of dollars… from an American brokerage account, thanks to an investment secret born overseas. ”
And the guy that’s one of the experts in this technique is called “Jeff” — they don’t give his last name, though he’s Jeff Clark, who also writes for their free Growth Stock Wire pretty frequently as a trading expert. And the newsletter they’d like you to pay for to learn more about the ways to profit from this “Amsterdam secret” is called Advanced Income.
Which, right away, will tell some of my longer-term readers exactly what it is they’re teasing today. And the rest of you might be clued in by this next bit:
“The 17 to 21 digit ticker symbol
“As I’m sure you know, most American stocks are identified by a ticker symbol, usually 1 to 3 letters long.
“For example, Wal-Mart’s ticker symbol is WMT.
“But this investment that first originated in Amsterdam (but is now prevalent in America) is identified by an unusual and much longer ticker, 17 to 21 digits long…
“And according to Jeff, that’s exactly what tens of thousands of ordinary Americans across the country are using to make a fortune…
$708 by tomorrow morning. Take Alcoa, for example… an aluminum company in Pittsburgh. There are 2 ways you could invest:
“You could simply buy the stock – by entering the American ticker AA into your brokerage account… and hope the stock goes up.
“OR… you can enter ticker AA100522C00010000 into your account – and receive $708 thanks to this company by 10 a.m. tomorrow morning, due to this remarkable secret birthed in Amsterdam.”
So that’s the basics — you enter this special ticker symbol and receive $708?
Well, sort of — what Jeff Clark does in Advanced Income is sell covered calls. And for those who haven’t been paying attention lately, the options industry has adopted the new user-friendly options tickers like that one above for Alcoa — the ticker (or sometimes designated root letter symbol for the ticker, in the case of some four-letter tickers), followed by the date (year, then month, then day — so 10 for 2010, and May 22 in the Alcoa case), then a letter for what kind of option it is (put option or call — this is a C for call), and the strike price (for some reason they leave three spots for decimals, so this is the $10.00 strike price).
So what Jeff’s subscribers would have done is sell the Alcoa call for May — I don’t have any way of knowing when exactly that recommendation might have been made, but if you received $708 that was probably either for one options contract at roughly $7 per share, or for 10 options contracts at seventy cents — and either would have theoretically been possible, with AA trading up to about $15 in March someone might have paid nearly $7 for the right to buy it in May at $10 … and as the shares fell considerably into expiration, dipping down near $10 in mid-May, you probably could have sold the right to buy AA at $10 for about 70 cents.
If you’re not familiar with options trading, I won’t go deep into the details but basically a typical options contract represents 100 shares of a stock — so a call option gives you the right (but not the obligation) to buy 100 shares of that stock at a set price anytime between now and the expiration date of the option contract. A put option does the same, but you buy the right to sell the stock at a set price.
And that’s what most individual investors do — they speculate in stocks by buying options, betting that the shares will either go up or down and let you get a nice big leveraged return.
But what most institutional investors and “smart money” folks do, we’re told is sell those options — that being more of the “bird in the hand is worth two in the bush” strategy, if you can sell away some of the potential advance of a stock, you don’t have to worry as much about whether or not the stock really goes up and you get a more predictable return.
And that, of course, is what Jeff Clark is pitching in Advanced Income … but yes, there is a “catch,” if you want to call it that. What the Advanced Income teaser ads consistently fail to emphasize is that those delightful income streams ($1,667 a month, or whatever) come at the cost of a substantial amount of tied-up capital. Not that there’s anything wrong with this, but you’re not getting that kind of monthly income unless you have something to sell.
And to have something to sell, first you start off by buying that something.
I’ll explain more using the example they provide in the P.S.:
“Take out a pen and write this down: RVBD100619C00017500. By using this overseas-based ticker – you could collect $1,070 by 10 a.m. tomorrow, no matter where you live… through any American brokerage account.”
OK, the type of ticker that this is might have an overseas base, if you’re buying the Amsterdam connection (that address in Amsterdam is for the original Amsterdam Beurs, the stock exchange, and the Dutch did pioneer not only the modern concept of the stock market, starting with the Dutch East India Company, but also short selling and options, so there is some truth behind the tale) … but the actual company behind this ticker is an American one, Riverbed Technologies (RVBD) … and if you were going to collect $1,070 from this particular ticker you’d be selling the June $17.50 calls on RVBD that expire at the end of next week.
But of course, first you have to own the shares. Your broker probably won’t let you sell “naked” calls, meaning you don’t own the underlying stock that you’d use to back up your obligation to sell the shares in the future … so here’s how that would work:
RVBD closed on Friday last week at $26.59. You buy 100 shares, which will cost you $2,659 (plus commission). Then you turn around and sell the $17.50 call options that expire in just under two weeks — that option has gone down slightly in price, but the last trade was at $10.70 on Friday, so we’ll assume that’s the price you got. Each options contract is for 100 shares of the underlying stock, so although the contract is priced at $10.70 you do indeed get $1,070 back in your brokerage account (again, minus commissions).
Since this option is deep in the money (meaning, it’s for a strike price that’s far below the actual current price of the shares), you’re really just planning on selling your stock — there’s no hope that you can keep both the 100 shares of stock and the $1,070 you got from selling the call option contract (unless the shares fall by more than 60% in two weeks, of course — which is not impossible, but obviously not something you’d be counting on).
So conceptually, you’re basically buying the stock today at $26.59 and selling it at $27.50. Add in 20-30 bucks for the round trip commissions (that’s just an average guess), and you net about $75. That doesn’t sound like much, especially compared to the $1070 that’s teased, but it’s worth noting that this is your return for tying up this capital (the original $2,659 that you used to buy the shares) for only two weeks. If you could do something like this consistently you’d actually have an extraordinary return of about 75% a year before taxes, assuming no compounding (ie, you just invest that same $2,659 over and over, you don’t reinvest your income). There are only 12 options expiration dates per year, of course, so if you wanted to do exactly this strategy (assuming you could find a good candidate stock each time — a growth stock that people are willing to pay a small premium for in “in the money calls” even just a couple weeks before expiration), you’d be limited to just a dozen times a year (once per options expiration) instead of 26 (once every two weeks) … still, if you could consistently find similar deals that could still work out to a 30-35% annualized return. Also not shabby.
I don’t often see folks using this covered call strategy for deep-in-the-money options like this, since it does generate quite a bit of churn (you’re buying and selling the underlying stock a lot, assuming you don’t buy back the options before they’re exercised) … but I do know lots of people who use the covered call strategy, often selling at strike prices just a tick above where the stock currently trades, and then maybe half the time they actually get to keep the underlying stock as the option expires worthless, and sell that option again for the next expiration. The stock holder, not the option holder, also gets to keep the dividend (as long as it’s not a big one-time dividend or anything like that), so there are several folks who often write to me about high dividend stocks that work well for them in this covered call strategy and further maximize their income.
So … no shocking windfalls here, since if they’re selling in the money calls that $1,667 per month will often just be a down payment for “pre-selling” the shares you just bought … but this can be a way to generate consistent small payouts that start to look pretty great when you annualize the returns.
Do be careful with all options newsletters, of course, since almost all options contracts trade in far lower volume than do most stocks, and many newsletters claim paper performance that is much higher than their average readers might be able to achieve given the newsletters’ impact on the options prices … after all, even a few hundred folks piling in and trying to sell the same options contract at once could significantly depress the price and immediately get it out of the range “picked” by the newsletter.
And the example noted in their P.S. is certainly a good one to illustrate that point: I have no idea exactly how or if this newsletter might recommend this particular trade, but the RVBD option contract above has an open interest (the number of contracts that are currently outstanding) of only 31, and has not traded today, so even if the price quoted appeals to you that doesn’t necessarily mean there’s a buyer who will really pay it. The last trade really was at $10.70, but the current bid is just $8.80 … which would lose you money if you took it. That would be like selling the shares for $26.30 after buying them for $26.59, you lose money even before considering commissions (the math? It’s still the $17.50 strike, the contract is sold at $8.80 … add those together and you get $26.30). Options contracts at strike prices much closer to the current price usually have much higher volume and open interest and more premium built in (the high premium is what you want if you’re selling the calls) — but it still pales next to the stock trading volume. There are 11,000+ RVBD calls at $30 for next Friday’s expiration, for example, and volume as of about Noon today is just 185 contracts).
Which is why what Jeff Clark is selling with his Advanced Income is not just the teased concept of selling covered calls, or the other options trades he apparently sometimes uses … what he’s selling is his ability to pick the right trades within this concept to consistently make money for you. If you’d like to see what other Stock Gumshoe readers have thought of his service, and about whether it can deliver on that promise, you can click here to see the reviews — they’re a bit mixed, but that’s not unusual following an extremely volatile year, and there definitely aren’t enough reviews to get a definitive picture yet. If you’ve ever subscribed, we’d love to know how your experience was, just click here to share today — thanks!
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