This article originally appeared on June 3, it has not been updated.
“If you complete and return the 2-page form sampled above, your broker could pay you $2,100 in less than 2 weeks. What’s even more incredible is that soon after you could receive an additional check for about $1,200.”
That’s the latest “free money” tease from the folks at Stansberry & Associates — leading us into a letter that promises income without having to buy a single share of stock (or bonds, or anything else like that). Could it possibly be real?
Well, the short answer is, “sort of” — as long as you don’t believe that it’s really completely “Free.”
And the long answer? Well, for that let’s peruse our clues:
Apparently, if you fill out this two-page form before June 12 and send it to your broker, you could get $2,100 on that date after you give your broker “two instructions.”
All you have to add to the form are “name, address, phone number, and a few other basic details.”
Of course, we all know what’s in the details … that’s right, the devil. Eeek!
The example of Smith Barney is used …
“Like all brokerage firms, Smith Barney accumulates millions of dollars through buying and selling stocks, trading options, and charging annual maintenance fees.Are you getting our free Daily Update
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“But what you may not realize is that Smith Barney (like every other U.S. brokerage firm, whether online, discount or full service), is legally required to pass on a portion of this cash to anyone who wants it.
“For example, if you had filled out Smith Barney’s 2-page form at the beginning of last year, you could have since collected up to $6,500.
“You see… each month, brokerage firms offer payouts to those who fill out a 2-page form requesting what I call ‘unclaimed dividends’.
“I call these payouts ‘unclaimed dividends’, because most investors don’t know about them and, as a result, the money usually sits unclaimed.
“Naturally, you won’t collect this money unless you ask for it. There isn’t a single brokerage firm in America who will offer it to you upfront.
“But if you take the time to fill out a simple 2-page form (which I’ll explain below), you’re entitled to receive as much as $2,100, effective immediately.”
What on earth are they talking about? Smith Barney is required to pass on a portion of their cash to us? Really?
Again, “sort of” … but not really. Let’s continue.
There are some more clues.
There is an “approval process” after you submit this form (meaning, the broker has to approve you for this “dividend.”)
We get a few quotes: Kiplinger’s apparently noted in this article that this kind of trading was the “province of professional traders.”
And some Minnesota farmer named Jim Bracklin apparently invests exclusively in this, according to Barron’s. No, I don’t know who he is, either.
So what else do we know about collecting “unclaimed dividends” — aside from the fact that Jeff Clark thinks this is the “single best income generating strategy in the world?”
There are a few more quotes that help to illuminate the issue …
“You fill out a little-known 2-page form that allows you to collect the money that other people – those who trade options – send to their brokerage firm. One of the best things about this opportunity is that you can collect these payouts whether the markets go up or down. It sounds a little complicated – and that’s another reason why 99% of the investment public has no idea this opportunity even exists.”
And, more usefully,
“… as author Lee Lowell states: Collecting ‘unclaimed dividends’, ‘is not a secret, arcane system that only a physics scholar will understand… it is a time-tested, legitimate strategy and is an incredible way to earn passive income… ‘
OK, so no surprise — this has something to do with options trading (the “no surprise” is because we’ve written quite a bit about Jeff Clark before, for his California Overnight Dividends, Transfer Dividends, etc., and apparently all of his strategies are options-based)
And how can you get other peoples’ options trading money without buying stock yourself, or buying call or put options?
There’s really only one way — selling call or put options. And since you don’t own the stock, this would be what is usually called “naked” selling of options.
Selling a naked call option, for example, would mean that you sell someone else the right to buy a particular stock at a particular price before a particular date. If you’re “naked” then you don’t actually own the stock, so if the person exercises that option you’ll have to buy the stock in order to sell it to them. For that reason, your broker will probably require you to have a portion of that amount of cash needed to purchase those shares in your account, in case.
I’m not sure that this is what Clark typically recommends — it could certainly be true that he recommends more complex trades like straddles or strangles or various animalistic options trading strategies like Condors or Butterflies to manage risk and boost returns. But he clearly is recommending an options trading strategy that does not involve actually owning the stock, which would be the more conservative (in my opinion) “covered” puts or calls.
So this is an advanced type of options trading — much different than what the typical individual investor might do, which generally falls into three … OK, four … categories:
- Buying calls for leverage and speculation. This means buying the right to purchase a stock before a particular date at a particular price … you pay some premium over the current real value of the option (which is often zero), a premium that is usually called “time value.”
- Selling covered calls (“covered” means you own the stock in question) for income — this is the flip side of the above. You own a stock and want more income than you can get from dividends, so you sell someone the right to buy your shares at a particular price before a set date … if the stock never gets to that price, you just pocket that premium payment. This is what the “California Overnight Dividend” was all about when that was teased last year. There’s even a covered call index Exchange Traded Note now, the BuyWrite ETN, which buys the S&P 500 and sells covered calls against it to boost performance, and there are several closed end funds that follow a similar strategy.
- Buying puts to protect profits. If you have a big position with a large paper profit and don’t want to sell, you can spend some money to limit the downside if something catastrophic happens to the stock — just buy a put, which will give you the right to sell a stock at a set price before a set date, even if the shares have fallen below that point. People sometimes do this if they own too much of their company’s stock, for example, and are worried about what might happen if the shares collapse.
- And, occasionally, selling puts as a way to reduce your cost basis in shares — if you know you want to buy shares of a stock and are willing to pay a particular price regardless of what the market price ends up being, you could sell puts on those shares and just have your cash sitting there to buy the shares if the option is exercised.
And to do this kind of more complicated, advanced, or sometimes riskier options trading requires approval from your broker, just like basic put and call buying — it’s just another level of approval. That’s what the two page form is for, though some brokers do it online. And that’s the reason for the “requirements” for the service:
“You see brokerage firms value long term relationships with their customers and in order to allow you to collect ‘unclaimed dividends’, your broker requires that you have a cash reserve on hand. This way they know that you’re a serious investor who isn’t just going to collect these payouts once or twice and then hit the road.
“You should also have at least 5 years of investing experience.
Remember: Jeff will only apply ADVANCED income strategies. They are very easy to use once you learn how, but they are definitely not intended for novices.”
They’re not actually even available for novices, unless you lie on the forms — brokers will require a certain number of years of experience trading stocks and options before providing approval for this kind of advanced options trading. And you will have to have a cash reserve — so you can say that you “don’t have to buy” any stock, but you do have to have the cash available to do so. Having that cash available to buy the shares if the put is exercised, for example, is what covers a “naked put” if you bet incorrectly.
And no, you’re not getting free money from your broker, and they’re not “required” to share their wealth with you — that’s just a greed-inducing smokescreen. They are required to give you any money that you make by trading profitably, of course, but that’s no surprise. This is just another kind of trading, one most brokers will allow you to do, but which most of them don’t particularly market or encourage (some do, and there are certainly plenty of brokers who particularly focus on options, but most of the older ones will still probably consider it a sideline).
If you’re interested in options trading, anywhere along the spectrum of strategies from risky to risk-averse, there are lots of useful places to go to read up on them — OptionPundit.net is run by one of our Irregulars and has some interesting articles about his (or her, I don’t know) strategies, and you can always go in to the Chicago Board Options Exchange site for the official stuff. CBOE gives a nice list of worksheets for most of the common options strategies here. If you request permission to trade options, at any level (buying calls, selling covered calls, selling puts, doing fancier flim flammery, etc.), your broker will require you to read (OK, at least pretend to read) the CBOE booklet, “Characteristics and Risks of Standard Options.” I’d suggest actually reading it.
Jeff Clark has been getting a lot of promotion from Stansberry for the last six months or so as a great options trader, and the claim is that performance for his services has been spectacular — this particular one is Advanced Income, but he also has a more-highflying and expensive newsletter called the Short Report.
I don’t know whether his record is genuinely as good as promised, but certainly it is possible to make a good income from options trading, and particularly from selling options (you’ll usually hear about selling options as an income strategy, and buying options as a speculative leveraging strategy), but you do need to understand that these are fairly advanced techniques that often require quick and/or active trading, and if you don’t understand them well you can easily get fleeced — either by an advisor who sells you a service that doesn’t work for you, or by failing to manage your risks in actual trading.
I can’t tell you whether or not to try any particular service, and there were no specific clues about his next trade in this ad so I don’t know what he’ll be recommending you buy or sell on June 12 … but I can tell you that you’ll be better off in any options trading service if you have a pretty good understanding of options trading, and perhaps even paper trade some options to see how they perform, before you send anyone else your money.
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