I’ve been seeing a new ad from Amber Mason for the DailyWealth Trader service in the last week or so — it’s all about a special way to earn dividends, but to do so much more quickly.
What’s she talking about? Well, I expect we’ll find that this is yet another option-selling pitch (several of the Stansberry letters, of which DailyWealth Trader is one, have touted income from options over the years — often by cloaking it in less-scary and more appealing terms like “unclaimed dividends” or “overnight dividends“). But I haven’t looked at this particular ad yet, so let’s dig in …
Here’s how it gets started …
“In March 2013 the SEC approved a brand new type of investment vehicle…
“One that you can use right now to collect the equivalent of a year’s worth of dividends from one of the most profitable companies in America, in just one month.”
Dividends are not a hugely sexy way to earn money — dividends from blue chip companies that you’re comfortable “buy and hold”ing are typically in the 2-4% neighborhood, so the idea that you could boost that return makes people sit up and take notice. Mason gives an example of one of those blue chippers in making her point that she can help you do better:
“Look at Johnson & Johnson (JNJ), for example…
“For the past 20 years this drug company’s stock has gone almost straight up, from $9 to $92 a share… a 1,000% gain. That’s pretty good for sure.
“The company also pays a little over a $2 dividend per year.
“So if you purchase 100 shares of JNJ stock costing $10,000, you would receive a $50 payment every quarter… totaling $200 a year.
“I don’t know about you, but I’d rather not wait a whole year for that.
“Fortunately, this new investment vehicle could allow you to collect hundreds of dollars in extra income EVERY month on some of the safest securities in the market.
“And you can do this even if you only have $5,000 to invest with.
“That’s why Barron’s says this might be ‘one of the most successful new financial products in the past five years.'”
So … “hundreds of dollars every month” certainly sounds like it’s someone doing covered call selling to boost their income — that’s where you hold the stock, but you sell call options on your stock to give someone the right to buy it from you at a higher price. If that prices is hit, your shares get called away (or you buy the option back at a loss) … if not, you get to keep whatever you were paid for that option. It’s a respected and successful way to increase income, though it can also cause you to underperform the market during times like these when you might not get the full price appreciation of your stock.
But this is certainly nothing new, nothing that the SEC just “allowed” to start in March this year. So what’s she talking about? It starts to become more clear as the ad proceeds:
“Consider Amazon (AMZN), for example…
“Three years ago you could have bought shares of Amazon for $120. Today shares are going for around $305.
“And forget about Google… if you missed out on their IPO at $100 back in 2004, you’ll have to pay $900 a share in today’s market.
“As a result of these massive price hikes, most investors can’t use some of the best companies in America to generate huge yields with this unique strategy.
“But recently a small handful of the largest and most profitable businesses in the U.S. joined forces with a handful of major brokerage firms in an effort to create a new investment vehicle that allows anyone with just a few thousand dollars to invest with… the ability to use this income strategy as well.
“And the reason I contacted you today is because right now you can use this new investment vehicle on one particular company…Are you getting our free Daily Update
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“And starting very soon, receive the equivalent of a year’s worth of dividends from a trade that lasts one month.”
Aha! The cloud is clearing. She is talking about selling options for income (could be covered calls or selling puts, though the terminology of accelerating your dividends sounds more like covered calls) … but she’s talking about a new class of stocks on which it was tough to use this strategy before March.
That’s because in March the SEC allowed a bunch of companies to begin trading “mini options” — more on that in a moment.
Mason puts it this way:
“… before now you had to be able to afford at least 100 shares of stock to use this strategy. But now, thanks to the SEC, that is no longer the case.
“I can’t say much more about this trade in this letter. But will say that this is one of the greatest income opportunities I’ve ever come across. It’s a simple low-risk way to own one of the greatest companies in America and collect the equivalent of a year’s worth of dividends every 30 days.”
OK, so now we’re certain of it — a standard options contract is for 100 shares, so once a share price gets very high the “options for income” trade is out of reach for most individual investors. You might have a hard time putting together $90,000 to buy 100 shares of Google at $900 each and using those 100 shares to sell covered calls. A covered call contract, selling one option, would earn you some nice cash using standard options — the $940 call option for October, for example, would get you $15 a share and $1,500 in income for your 100-share contract. Not bad if your portfolio can handle those kinds of large positions without losing diversification (mine can’t).
So in come mini options — these are designed for retail investors and are available only on a handful of very high-priced stocks to make options trading more feasible for you and I and Johnny Odd-Lot. Mini options are options contracts that cover 10 shares instead of 100 shares, but otherwise work just the same as regular options — so in the Google case, the price will probably be slightly different but the basic math is the same