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, you put up $9,000 for ten shares of GOOG, you collect $150 for the sale of one mini call option at $940 in October. So if the stock goes above $955, you lose out on the further upside, if it stays below $940 you get to keep the $15 premium per share.
Likewise, there are mini put options — so if you wanted to generate your income by risking your cash instead of buy actually buying the stock, you could sell a put mini option on GOOG at $850 for October, and collect probably $175 for that sale. Then you’re committed to buy 10 shares of GOOG for $8,500 if it falls.
So it’s more or less the same as any other options transaction you might do with a stock that’s $20 or $30 or $75 a share, it’s just that we can do it now for the super high priced shares — this is available only for Amazon, Apple, Google, and two ETFs: The SPDR Gold Trust (GLD) and the S&P 500 (SPY), both of which are high-volume and well over $100 a share.
And which one?
She gets slightly specific …
“And the reason I contacted you today is because right now you can use this new investment vehicle on one particular company…
“And starting very soon, receive the equivalent of a year’s worth of dividends from a trade that lasts one month.”
Well, I’m betting that she isn’t bothering to tempt and tease us with selling options on the S&P ETF — there just isn’t that much premium, not like you see with individual stocks. And Google pays no dividend (even though they could easily do so), so we can’t earn the equivalent of a year’s dividend on that one. Nor does Amazon, which amazingly is at $300 even though they refuse to become profitable and doesn’t have the earnings to pay dividends.
So what are they suggesting? Well, I suspect they’re recommending a buy/write on Apple mini options, and ongoing covered call sales after that to earn that money every month. Or almost every month — AAPL has a very active string of options expirations, but every once in a while they skip a month.
How would that work? Well, when you look at the options chain for Apple (or any of the other several stocks and ETFs that offer the “mini” option contracts), look for the one with a “7” after the ticker in the options symbols.
So if you see an Apple options chain, for example, and you’re looking for the next month to sell a call option, we’ll assume that you’re trying to maximize your option in come and are very willing to have your stock be called away — so let’s guess that you’re going for the $470 strike price in September. That would allow for a bit more than a 1% rise in the stock to hit the strike price.
You’ll see two options tickers: AAPL130921C00470000 and AAPL7130921C00470000
The first part is the underlying ticker — AAPL is a regular options contract, for 100 shares, so you multiply the price quoted for the option by 100 to get the bid and offer price of the contract. AAPL7 is a mini options contract (it’s always 7 — so GOOG7, AMZN7, etc), so for the AAPL7 contract you’d multiply by 10 to get the price of the contract. The rest of the ticker is the same — the 130921 for the expiration date (September 21, 2013 in this case, “C” for a call option, 470 for the price. In theory the prices per share should be identical, minus a little slippage for higher commission for handling a larger number of shares, but in practice the AAPL7 options for this particular month are about ten cents cheaper, probably because there is much lower volume and open interest since these mini options are still quite new and AAPL options were already widely traded.
So you would buy ten shares of AAPL for $4,650 or so, if you haven’t already, and sell one September $470 call mini option contract. You’d get about $104.00 for selling the option, roughly $10.40 (prices have probably changed since I worked through this math, so check it yourself). AAPL’s annual dividend is just over $12, and you could actually get that for the almost-monthly covered call income as well if you’re willing to give up any real upside in the stock for that coming six weeks or so (the $465 option is currently about $12.50 per share).
Then you sit and wait. If the stock goes to $500 at the expiration date then you’re going to have to effectively sell a $500 stock for $470 next month (you might instead just buy back the call option you had sold, but the effect is close to the same depending on commissions). That’s not terrible if you remove the context, you’ve made $5 on selling the stock (paid $465, got $470) plus you get to keep the $10.40 per share for the option you sold … but if having your shares taken away at a below market price would make you angry, then covered call selling may not be for you.
The idea is to tinker with the expiration month and the strike price to try to get a reasonable amount of income from the shares and not worry so much about whether or not you have to give up your shares — if it’s a volatile stock like AAPL can often be, you might struggle to keep this pattern up with such a close-to-the-money option sale, but by keeping the expiration date close you increase your odds a bit. If the price spikes to $550 you might find it difficult to buy back in to AAPL and make that same option sale the next month, so if this is something you’re committed to doing make sure you’re prepared for what you plan to do in the eventuality that the price drops dramatically or climbs dramatically outside the sort of normal, reasonable and generally predictable move of several percent in any given month that you should already be accounting for in your covered call selling.
So that’s all — it’s just another teaser for covered call writing, with the twist that this is now a reasonable thing for small investors to do with very high per-share stocks like Amazon, Apple and Google … and I’m pretty sure, from the clues in the ad, that the DailyWealth Trader folks are probably recommending a near-month, near-the-money covered call strategy with AAPL. I sell covered calls on occasion, but haven’t tried it with AAPL or GOOG and the new “mini” options (or the old, traditional options, frankly — these haven’t struck me as “covered call” candidates … though AAPL is starting to develop the steadier, dividend-paying stance of a solid blue chip but you’d have to guess volatile it’s likely to be in this next product cycle to see what kind of fire you might be playing with in selling AAPL options.
And yes, with the exception that it took more capital to do this before with these higher priced stocks, this is exactly the kind of thing you’ve been able to do for years and years, and the kind of thing that many small investors do to maximize their income from stocks using a wide variety of optionable stocks — there are thousands of stocks that have options trading, and probably at least 100 or so that most people would consider to be in the “blue chip” neighborhood and that have enough options trading volume to make a strategy like this consistently viable. If you’ve got other favorite covered call candidates or similar strategies you’d like to share with the group, feel free to do so with a comment below.