by Travis Johnson, Stock Gumshoe | September 26, 2019 1:20 pm
The allure of income is overwhelming, and one thing that many small or novice investors have in common is the certitude with which they believe that there’s a “secret” income source out there… a way to just “tap in” to the money that institutional investors are making. That’s why these kinds of “payday” and “weekly cash” teaser ads work so well, I imagine, and we’ve seen similar ads for as long as Stock Gumshoe has existed… but what’s the reality?
Today I’m looking into Matt McCall’s pitch for Cannabis Cash Weekly, which he says is the “boldest income project of my career”, and it sounds lovely… the pitch in the initial email I received started out with, “Imagine a stock that pays you a 100% dividend yield on your money every year…” which sure sounds like something I’d love to see in my brokerage account.
And here’s how he sums it up on the order form:
“It takes just four easy steps to begin collecting “Green Monday” cash today:
- Look over my private instructions on each and every ‘Green Monday.’
- Enter the details I show you into your broker account.
- Deposit cash instantly.
- Exit the trade for a potential ‘lump sum’ payout.”
Sounds easy peasy, right? So what’s the catch? We may be tempted by the notion of “free income,” but when we think rationally we know that it’s not actually free… right? Starting, of course, with the price of McCall’s service ($999/yr, nonrefundable).
Well, we are all far too smart to 1pay for a nonrefundable service before we understand what it actually does, right? Please say, “right!”
So let me share with you just a little more from the ad, then we’ll get into the details and some specific examples.
“How To Make $2,600 in 28 Seconds on ‘Green Monday’
“The cannabis markets’ best-kept secret can pay out 50-70 times per year. Here’s how to claim your cannabis cash EVERY week….
“Hundreds of thousands of dollars are literally up for grabs for ordinary Americans every ‘Green Monday.’Are you getting our free Daily Update
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“All you have to do is learn how to claim it.”
There’s a video that shows McCall demonstrating these “green monday” transactions to a non-expert, and plenty of chatter about how this is how hedge funds extract money from the market, how it’s super simple to do, and how this income has nothing to do with conventional stuff like dividends and bonds.
And apparently there’s a “secret” group of stocks that make this strategy possible….
“I mentioned the ‘Magic 9’ pot stocks?
“These are the nine ‘pipeline’ firms that make collecting “Green Monday” income streams possible in the first place.
“You can’t generate instant income the way I do without them.
“You already witnessed one of the Magic 9 — Cronos Group — during our live demonstration with Megan to make a quick upfront $500.
“Now I’m revealing the other eight names in my second report, The Magic 9 Pot Stocks.
“These ‘Magic 9’ stocks are the KEY to this entire strategy.
“Without them, it simply would not be possible to collect huge amounts of income week in and week out.
“Which is why it’s important you know as much as possible about them.
“After all, they are like a secret stepping stone to a $500 trillion pile of cash.
“Up until now, it’s a profit strategy that’s been dominated by large hedge funds and money managers for decades.
“But after you look over this report…and learn how to begin using the ‘Magic 9’ the way I recommend…
“You’ll have the ability to generate instant cash week after week… for however many payouts you desire.
“These nine firms are the ‘secret sauce’ behind my income approach.
“And with this report, you’ll fully understand how to use them to generate instant cash.
“Again, you can’t purchase The Magic 9 Pot Stocks on Amazon or in bookstores.”
So what’s the story?
Well, as the more experienced folks among you have realized already, this is all about options trading. And really, it’s not entirely crazy — he’s talking about what is probably the most conservative options income strategy that most people are familiar with, writing covered calls… the gimmick is really just that it’s only on cannabis stocks (so it’s a very small universe — depending on how you define a pot stock, less than a dozen “real” marijuana stocks offer options trading).
And McCall says that this is a two-part trade — he says you first get your “green monday” income and then, sometimes, you’ll also get a “lump sum” payout. That essentially just means that you sell your call options, pocket that income, and then if the stock soars above your strike price you also have your stock “called away” at that price and get some capital gains.
But what is not ever mentioned in the presentation, and what is not even really implied, is that this is not “free” income — this is income you receive in exchange for giving something up, and what you give up is the potential price appreciation.
But to give up the price appreciation you’d have to own something that might appreciate in price, right? That’s why it’s a “covered call” — you first buy the stock, which he never mentions in the ad and which would be a meaningful cash outlay, then you sell options against your stock position. Which makes it an entirely different income proposition, and dramatically changes how you would think of the “yield” of this strategy.
He does give an example, which is a little bit unclear in the video since he doesn’t use a conventional brokerage account order screen, but the example is based on trading options in Aurora Cannabis (ACB), one of those “Magic 9” stocks.
McCall leads his guest through writing (which just means “selling”) 20 call option contracts on ACB at 21 cents, earning $420 (cute number, right?). These were Sept 20, 2019 calls with a $6 strike price, for what it’s worth, so they’re now expired. The price of $5.91 pops up on the screen as well, so presumably that’s the price that ACB was trading at at the time they recorded the video… which would mean that they made these trades within about a month of the expiration date, sometime from mid-August through early September when the stock ticked near that price.
So what does that actually mean? Well, a standard option contract covers 100 shares, even though the price is quoted on a per-share basis — so that means you’re selling someone the right to buy 2,000 Aurora Cannabis shares for $6 each for a set time period (the person who buys that option can “exercise” that right anytime before the expiration date). Which means, assuming we’re not using borrowed money or anything riskier (that would be selling a “naked” call instead of a “covered” one), that you have to own 2,000 shares.
If you did this all at once, you’re essentially buying 2,000 shares at $5.91 each (that would require $11,820 for your initial investment) and then selling those $6 calls for $420. That is indeed a nice short-term return, but it’s not free money and your $11,820 is at risk (since you own ACB shares, and those could be cut in half overnight if bad news or a scandal emerges).
In options, the general rule is that the seller takes on an obligation and the buyer buys a right — so if you’re selling an option, you’re committing yourself to either buy (have “put” to you) or sell (have “called” from you) a stock at a set price for a defined period of time regardless of what the market price is… and if you’re buying an option, you’re buying the right (but not the obligation) to either buy or sell the stock at that price.
The “right to buy” is a call option, the “right to sell” is a put option — so in this case, you’re selling someone the right to buy 100 shares of ACB from you at $6 a share anytime before option expiration (Sept. 20, in that case), and in exchange for taking on that obligation you are paid 21 cents a share… which for a standard 100-share options contract would be $21 (or, for 20 contracts and 2,000 shares, $420).
There are a few ways this trade can work out:
1. The stock goes up during those three or four weeks before expiration. If the share price is above $6 at expiration, your shares are called away from you, then you do get a lump sum — you get $12,000 as the contract is exercised and you sell your 2,000 shares for $6 each, and you also still have the $420 you received for selling that option. That’s a total profit of $600, which will be taxable as a short term gain (assuming you’re not using a tax-sheltered account), so that’s about a 5% pretax gain on your investment, not counting the commissions (which will eat up some of that, even low-cost brokers charge a small fee per contract). It doesn’t matter how high Aurora Cannabis shares go in that month, if the stock is at $10 at expiration or at $6 your return is the same — everything above $6 is profit for the person who bought the option from you, so you give up any chance at a quick windfall return if something exciting happens. Now you’ve got your capital back, and you can rinse and repeat with the next option expiration date and strike price that looks appealing to you.
2. The stock goes down. In fact, this is what happened — the shares closed at $5.02 on September 20, so the person who bought the options from you for 21 cents was out of luck and you still keep that $420 you got for selling the options… that provides some consolation, because your shares that you paid $11,820 for are only worth $10,040. So instead of losing 15%, the value of your overall position drops by only 11.5% (including the $420 cash you got for selling the option). You’ve still go the shares, so you can hold onto them and just sell another option contract at a different price a few weeks or month into the future to generate a little more cash income, assuming you’re willing to keep holding the underlying stock.
3. The stock stays about where it is. If the share price at expiration is still $5.91, like it was on the day you bought the shares and sold the options contracts, then your position is still worth $11,820 and you got that cash income of $420, which is a 3.5% return (before commissions and taxes) in a short period of time. Rinse and repeat to sell more call options.
Those are relatively high returns for short-term covered call sales that cover only a few weeks or a month, largely because cannabis stocks are more volatile than others (the measure of “volatility”, incidentally, comes from the options market — the Volatility Index (VIX) is just based on options prices, calculating how much people are willing to pay for out-of-the-money options because that implies how likely investors think those underlying stocks are to rise or fall)… but that’s not particularly different from how this works for other stocks — there’s nothing magical about cannabis stocks, other than, perhaps, the fact that they tend to move more and therefore the options prices are higher, so the income level can be higher. They’re not more volatile than all stocks, of course, but as a whole cannabis stocks are probably more volatile than the average stock and therefore offer more income potential (and more downside risk, since you’ve got capital tied up in the stock while you sell options against that holding).
There’s nothing wrong with a covered call option writing strategy, and it is repeatable so you can certainly turn it into an income stream — though it’s misleading to talk about it without discussing the risk factors or the fact that you have to have a fairly large amount of capital in this strategy for it to be reasonable. As with all meaningful income streams, you have to have some capital to generate any real returns. If you don’t own 2,000 shares of ACB, you can’t sell covered calls against those shares, so you can’t collect your $420.
This strategy will create a fair amount of churn, which means you’ll pay commissions and owe taxes, but it also is likely to generate a decent amount of income most of the time. It would not be surprising if you could pretty consistently get 10-20% annual returns from such a covered-call strategy, even counting some modest capital losses along the way, and perhaps that amount can be higher if you use only cannabis stocks because you’re operating in a more volatile and probably riskier sector.
That doesn’t mean it necessarily grows your account, that depends on the prices of the underlying stocks… if pot stocks all fall by 50% over the next year and you’re routinely selling covered calls against them, you’ll be able to smooth that impact by quite a bit because of the option income but you might easily still lose a lot of money, and if pot stocks rise by more than 5-10% in any given month, as has been known to happen, you’ll also likely miss a lot of that impact. There’s no such thing as a free lunch — either you take the risk of holding a stock and get all the returns, good or bad, or you sell off some of those future potential returns in order to reduce your risk a little and generate some cash income.
As with many things, whether or not a covered call strategy makes sense for you probably depends on your ability to be disciplined, and on your emotional response to this kind of mechanical trading strategy that means you are very active but are not ever getting huge returns. It requires a different mindset than just speculating on stocks or looking for long-term stock market returns.
One good test is to ask yourself this: If you sell short-term covered calls on Aurora Cannabis, for example, and that stock rises 40% the next week because of a takeover bid, will you happily accept your 5% gain as your shares are called away, or will you gnash your teeth and annoy your spouse and go on a bender because you missed out on the other 35% of those possible gains? If the latter, maybe don’t sell covered calls — it’s probably not lucrative enough to be worth the occasional misery.
And, of course, steadiness does not mean a lack of risk — if you’re continually buying these stocks and selling the calls, you do still have most of that downside exposure to these individual stocks. You can ameliorate that a little bit by using some of the covered call money to buy put options, or otherwise hedge yourself a bit with options spreads or more complex strategies, but that costs money, too, and the more you spend on protection the less income you make. In the end, you’re trying to shave off some relatively safe income from an inherently unsafe sector, and it will probably work most of the time… but you do still take on almost as much risk as people who just hold the stock.
Selling options, in general, is the safer side of the options trade — it’s not generally as appealing to individual investors, because speculating on huge potential gains is more fun, but it should generally have a much higher probability of success because most options expire worthless.
So what are those nine “magic” stocks on which you can make “green monday” paydays? Well, that would just be the marijuana-related stocks that offer options trading — which is a pretty small list. I don’t know which nine he’s referring to, but I’ll bet you that at least six or seven of these eight are on his list:
Canopy Growth (CGC)
Aurora Cannabis (ACB)
Innovative Industrial Properties (IIPR)
GW Pharmaceuticals (GWPH)
Village Farms (VFF)
Why so sure? Well, mostly just because there aren’t many US-listed marijuana stocks. There are no options on over the counter stocks, and not much of a market in options trading in Canada, so you’re really talking just about marijuana-related stocks of some substantial size that are traded on the NYSE or the NASDAQ, and even then not all of them have options trading. You could add a few other smaller players in there, like 22nd Century Group (XXII) or Cara Therapeutics (CARA), or go a bit more tangential to the pot industry with ancillary stocks like Scotts Miracle Gro (SMG), but even the widest possible list of pot-related optionable stocks would be quite small. And yes, you could certainly come up with 50 different options contracts to trade in a year from that group if you wished — they all have at least three or four options expirations “live” at any given time, and some of them even have weekly options expirations.
The ad also features the urgency that every ad must have (after all, the enemy of the ad copywriter is time — if you slow down to think it over, the odds that you’ll pull out your credit card decrease substantially)…
“Cannabis Cash Weekly will NOT be around forever.
“I’m only running this income research service for as long as our “Green Monday” paydays are substantial.
“As cannabis goes mainstream… and the paydays begin to shrink… I will shut down Cannabis Cash Weekly for good.
“But until then, there are massive piles of cash up for grabs.
“You must join us soon if you want to learn how to take advantage of them.”
I don’t know whether that’s true or not. Volatile stocks will always offer relatively high options prices, so perhaps the pot stocks will calm down and the options prices will moderate a little bit… but I wouldn’t worry about the “massive piles of cash” disappearing in a week or a month, mostly because they’re not so massive. There will always be volatile stocks that offer decent short-term returns for folks who are willing to sell their upside rights, and I’d guess there will be more volatile marijuana stocks trading in a few years than there are today.
So don’t rush. You can buy covered call selling advice if you want, but think first about whether that’s something you want to commit a lot of capital to, and whether you feel confident that you’ll want to put enough capital at risk in big marijuana stocks over the next year to generate a meaningful call option-selling income from those positions.
After all, you’re not getting your money back form Mr. McCall even if you decide the strategy doesn’t work for you, and if you’re thinking of committing to a $1,000 trading service do try to think about the cost of that service as something like an “expense ratio” for that part of your trading portfolio — maybe if you’re ready to commit $50,000 to selling covered calls on marijuana stocks then a $1,000 annual fee for advice on which ones to buy would be rational (that’s a 2% expense ratio), but it would be a little crazy to spend that much if you’re only looking for advice about how to manage $10,000 (a 10% annual fee, then) in a marijuana covered call portfolio. I don’t know if McCall is better at option trading than anyone else, but if you want to spend $1,000 just to get an education on covered call selling, maybe think about just buying a book or using the many free resources online to teach yourself (I like the educational info offered up by the CBOE, but there are lots of options resources out there).
But wait, Mr. Gumshoe, the ad says it is guaranteed! They say we can get our money back!
Not so fast, young grasshopper… here’s the text of the “guarantee” on the order form:
“If you join Cannabis Cash Weekly today, I guarantee you’ll see at least 52 “Green Monday” payout opportunities over the next 12 months.
“This means you’ll see one cannabis income opportunity every week on average.
“And if you only see 51 ‘Green Monday’ payout opportunities over the next year…
“Because 51 payout opportunities are less than 52.
“You’re entitled to receive a 100% refund.
“But you must give Cannabis Cash Weekly a try for a full 12 months to be eligible for this money-back guarantee.”
Notice what they guarantee? That you will get 52 recommendations in a year. Not that they will be successful, or that you’ll make any money, or that you’ll be satisfied… just that they’ll present 52 “opportunities.” Which will be easy to do, it’s not like the options market is going to disappear… the hard thing is not coming up with an option trade recommendation, the hard thing is coming up with a long string of them that are successful enough that they make up for the occasional catastrophic failure (if you’re holding a stock that loses 50% of its value in a few weeks and never recovers, you’ll have to book a lot of 5% gains on selling other covered calls to make up for that loss of capital).
How about that initial promise? Can you really generate 100% income each year with this kind of strategy? Well, maybe. If you really get all the timing perfect and the pot stocks don’t fall much.
How would that work? Well, let me look at a different example — the most well-known cannabis stock, Canopy Growth (CGC). Canopy has pretty liquid options trading (meaning there’s probably enough volume to get you a reasonable price and a fairly small spread between bid and ask prices), and it also has weekly options expirations trading (most stocks only trade with about 5-6 strike prices per year). That gives you a lot of short-term income potential… so today you could buy 100 shares of Canopy at $24.24 (so, $2,424) and sell call options at $25.50 that expire in two weeks (October 15) for 51 cents ($51). If options prices remain similar throughout the year, then yes, you could do that over and over, and if you sold similar contracts every two weeks on CGC, either selling a new contract each time one expires or buying back the stock and starting over when the calls are exercised and your shares are called away, that could be a gain of about 50% on the year (before taxes and commissions). Theoretically, you could do similar trades each week rotating among CGC and Aphria (APHA) and Aurora (ACB), all of which also offer weekly options, and have the potential to get roughly a 100% gross income from selling options.
But it’s not easy or simple, of course, and if it were high-probability then the machines would all be doing it. I’d think of the potential of relatively low-risk covered-call selling being more in the 20% range for annual income, and that would be an impressive year… with the odds being substantially better if you can put a lot of capital at risk and are therefore able both to diversify and to do fairly large covered call sales (diversification is important because you’re risking your capital in these stocks, so you want to avoid betting it all on one or two names that could implode… and commissions take a smaller percent of the return if you can buy $50,000 of stock and sell 100 options contracts than if you just buy $3,000 of stock and sell one options contract).
So… sound appealing? Covered call selling does work, and there are now quite a few marijuana stocks on which covered call selling is possible. Options trading systems like this generally have a high-probability of success but a low return — though if you’re restricting yourself to just a dozen or so stocks on which you’ll make options trade recommendations, and you’re only working within the high-volatility marijuana sector, my guess is that the average returns will be higher and the probability of success lower.
And I’ll leave it there. Think this sounds like a good way to build up a little income stream? Have other strategies that you think make more sense? Let us know with a comment below.
P.S. Yes, I have also gotten many questions about Tom Gentile’s “Cannabis Lots” … and that’s essentially the same thing, cannabis lots are just options trades on cannabis-related stocks. He may do different options trades, most of what he hints at in his ads are either put spreads or speculative call options — selling put spreads means you put up cash and promise to buy a stock if it falls (sell a put, backed by cash in your account or by money you borrow from your broker), then also buy a lower-priced put to protect yourself from true calamity if the trade goes wildly against you… speculative call options are just taking the other side of that covered call trade above, you bet that the stock will rise and you can profit hugely if you’re right but lose 100% of your “bet” if you’re wrong (and as you might guess, the probabilities and returns flip from what McCall is offering — if you’re on the other side of that trade, buying the option instead of selling it, you have a lower probability of success, but also a higher return if you’re right).
Disclosure: I own shares of Innovative Industrial Properties among the stocks mentioned above. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.
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