Can you really earn “Cash from Gold?”

What was being teased as a way to make Income on Demand?

I’ve gotten quite a few questions about the “Cash from Gold” pitch out of Agora Financial that hints at how easy it is to get “instant income.” So that’s today’s focus for you, dear readers.

The big push at the end of the ad is “Yes, I want to collect at least $1,500 per month in instant income starting today.” Who wouldn’t want that?

So is it really possible? What’s the story?

Well, Zach Scheidt will tell you, for $1,500 — but let’s see if we can explain it for you without having to pay that much. His service is called Income on Demand, and he says he’s offering “Instant Income” recommendations every month.

The basic spiel is summed up pretty well in the intro to the ad, this is what Scheidt’s publisher, Joe Shriefer, says:

“LIVE: UNBELIEVABLE BEHIND-THE-SCENES FOOTAGE FROM OUR $100 MILLION FINANCIAL RESEARCH FIRM…THAT YOU MUST SEE… WATCH AS WE SHOW THOUSANDS OF READERS HOW TO INSTANTLY GENERATE

“CASH FROM GOLD”

“WITHOUT EVER TRADING A SINGLE SHARE OF STOCK
“WITHOUT BUYING AN OPTION
“AND WITHOUT EVER TOUCHING A MUTUAL FUND.

“WARNING: Because Of The PERSONAL and URGENT Nature Of This Video It Will Be Pulled From The Web At MIDNIGHT On Monday, May 22nd.”

Sorry, that ALL CAPS yelling is theirs.

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And I think the current offer has been pulled, actually, though I can’t see that there’s anything “personal” or “urgent” about the strategy they’re selling — it’s just that every offer needs a hard deadline that potential subscribers believe is real, otherwise they’ll dither and think it over… and if you think it over, you may well not decide to plunk down that $1,500.

If it worked to bring in subscribers it will probably be back — but we’ll explain it for you now.

Sooo… what’s the actual trading technique? Here’s a bit more from the ad:

“Today I’m going to show you a LIVE, 1 minute and 42 second demonstration of a mysterious and misunderstood financial transaction that could generate hundreds of dollars in INSTANT INCOME in three minutes or less…from the gold market.”

And they do show this live video as part of the presentation, so we can tell you exactly what it is they’re recommending — they’re selling put options on gold stocks.

The specific examples are a few months old,and the video they use is from October, but they were selling puts at that time on Royal Gold, Barrick Gold, and Silver Wheaton (which has since been renamed Wheaton Precious Metals).

So how does that work? Is it “income?” Well, kind of.

Put options are the flip side of call options — and options always provide the buyer with the right to do something and the seller with an obligation to do something. A put option gives the buyer the right to sell a particular stock at a particular strike price before a specific expiration date… so the seller of the put option takes on that obligation to buy a particular stock at a particular strike price anytime the option buyer wants to exercise that obligation (well, anytime before the expiration date).

Which will generate cash in your account, but it also creates a liability — you have promised to buy those stocks at a particular price, so you have to have some way of making good on your obligation. Your broker will, in all likelihood, either require you to have the money sitting in cash in your account to fulfill your obligation to buy the stock, or will require you to have some of the cash and use a margin account to provide the rest of the needed liquidity (“margin” is just money you borrow from your broker).

In the examples given in the ad, this meant selling put options on gold-related stocks at strike prices pretty close to where they were trading at the time of the trade, with expirations out anywhere from about a month to four months.

Here are the examples he ran through in the little two minute video, which was recorded on October 12 and was designed both to prove that the cash went into his account and that the trades are quick and easy.

First, he sold November $65 puts on Royal Gold (RGLD), which was then trading at $66.50. That left 37 days to expiration, and he earned $296 in cash for selling that put (the put was slightly over $3, so you multiply that by 100 because each option contract represents 100 shares, take out the commission, and the rest is cash that goes straight into your account).

So that’s pretty straightforward. You get $296 that you didn’t have before. What he does not emphasize in the video is that his “cash available for withdrawal” number in that account dropped by $6,500. That’s $6,500 that the broker will keep in reserve to fulfill the put seller’s obligation to buy 100 shares at $65 each until the option is either exercised (by the buyer), closed out (by you, the seller, by buying it back), or expires worthless.

You’d like it to expire worthless, of course, because that way you get $296 for risking $6,500 for a little over a month, which is a 4.5% return in a very short period of time, and then you get the $6,500 in liquidity back in your account after the option expires, and you can do it again… if you did that nine or ten times in a year you’d earn great returns.

The risk, of course, is that you really do have to be willing to buy the stock… and you have to have a fair degree of confidence that the stock isn’t going to collapse. If you did this kind of trade nine times in a year, earning an average of 3-4% per trade, you’d have a profit of something like $2,000 on the $6,500 that you put at risk. That’s a great return… but (and there’s always a “but”), you have to have the good fortune of being right nine times.

If, in this example, RGLD stock fell 10% in a month from October into November, then the stock would be at $60 or so, and you’d have to buy it for $65 — so if you want to own Royal Gold and think $65 is a fair price for a long-term holding and don’t get angry about that loss, perhaps that’s fine for you… but if you want that cash so you can use it as collateral to sell your next put option contract, then you have to close out the contract by buying it back at a loss. You’d have to pay at least $500 to close the contract (since a put to sell at $65 when the stock is at $60 is worth $5 per share, times 100 shares), or, if you just let it exercise, you buy RGLD shares at $65 and you could sell them at whatever the market price is at the time for roughly the same financial impact.

That’s not what happened, RGLD shares actually rose a little bit from October 12 into Options expiration in November, so that would have worked out OK — though that’s partly good fortune, if you had dome a similar trade a month or so earlier, when RGLD was in the $75-85 range, the outcome could have been far different. It was a bet that RGLD shares would not fall during that particular month, and it worked. Sometimes, it won’t work — selling puts generally does work quite well in flat or rising markets, and if you keep the expiration date pretty tight (only go out a month or two) you can usually get a pretty high “win rate” on these trades, it’s not that unusual to see traders claim 90% success in making these trades.

The danger, of course, comes when that 10% failure rate includes a real stinker. If RGLD, for example, had washed out that month — if gold fell by 10% and RGLD shares dropped by 25% for any reason, as was perhaps unlikely but certainly not impossible, then RGLD shares would have dropped to about $50 and you would have to pay $1,500 to close out the contract — since you only earned $300 to make the deal in the first place, you can do the math: One really bad result wipes out five trades worth of profit.

You can improve those odds by going with “further out of the money” options that give you more breathing room — but that also decreases the per-trade returns. You could have sold puts at $60 on RGLD instead of $65, for example (remember, the stock was at about $66 at the time, so that gives you 10% leeway in the underlying stock price, instead of about 2%)… but instead of earning $3 a share, you would have earned about $1.25. So instead of risking $6,500 to earn $296 in a month, you risk $6,000 to earn $125 in a month and you get better odds of success.

Selling puts works, on average, but it doesn’t work for every person or every trade, and, as with most things in life, the higher you aim for returns the more risk you’re taking on. You have to be willing to stomach the occasional losses, and build them into your expectations. And you have to be content with the general “odds in your favor” nature of these kinds of trades as long as there’s not a market crash — which also means you have to be wary of the fact that if the whole market falls 10% or 20% in a month or two or there’s some shock to the stock you’re trading in, you could lose a huge portion of that collateral cash your broker has set aside in your account.

If, God forbid, someone came out with a compelling case for accounting fraud at Royal Gold during that month and the stock got cut in half, as you’ve seen happen at other companies in the past, albeit rarely, you could have lost $3,000 or $4,000 in your attempt to earn $300. Would you then have the discipline or faith to stick with the “odds in your favor” trading strategy for long enough to make that money back and get back on track?

If you look at the options trades in RGLD right now, you can see that they’re not quite as lucrative — that’s because volatility has come back down a bit, so people are paying a little bit less for the protection of put options (back in October, Royal Gold had just fallen 20% or so from the recent peak, after a huge run, so there were probably lots of folks interested in protecting their gains by buying puts).

If you were to do a similar trade today, betting that RGLD won’t fall by more than 2% or so over the next couple months, you could sell a $77.50 put in RGLD with a July 21 expiration for about $2.70 a share. So you’re putting $7,750 at risk for about two months to earn $270, which is a return of only about 3.4%. 3.4% over eight weeks is a lot less than the 4.5% over five weeks you might have earned for that similar bet back in October. If the stock stays about $77.50, your 3.4% profit stays in your account and you’re happy and you could rinse and repeat and probably do it again to earn another similar return on the October expiration… if RGLD shares drop back to $65, about where they were back in October, then you’ve got a $1,000 loss on your hands ($1,250 you’d have to pay to close the option contract out, minus the $270 you collected up front).

If you’re curious about those other trades he illustrated in the video, they were similarly “close to the money” puts (meaning the strike price was close to the price of the stock at the time of the trade), he sold December $23 puts in Silver Wheaton (SLW) for $1.78 when SLW was trading at $23.16.

Silver Wheaton changed its name and ticker, it’s now Wheaton Precious Metals (WPM), but otherwise the stock is the same, so we can go back and look at those prices — and see that SLW did indeed drop between the October 12 day when they sold that put and the December 16 expiration date.

The shares did trend up for a little while to $25 or so, but in mid-November they dropped from about $25 down to $17 in the course of just a couple days and if you just waited until the options expiration date the stock closed that day at $17.36. So that’s the day when you would have had to buy shares at $23 to fulfill your end of the contract, which means you’re no longer so excited about the $178 you earned for selling that put option contract because you’re now paying $564 to close out the contract, for a net loss of $386 on the $2,300 you put at risk for two months.

Now, it turned out that mid-December was awfully close to the low for the year for SLW/WPM — if you had actually held the stock instead of just closing the contract you might have made good as it rose to $23 in February (it has bounced around between $19-23 for the past six months), and maybe you’re delighted to own WPM at $20 today even though you paid $23 for it, I don’t know — but, of course, if you actually bought and held the shares then you couldn’t also use that $2,300 of capital as collateral for your next options sale and continue with your trading system.

The example with Barrick Gold would have worked out OK — in that case, ABX was at $15.96 and you sold January puts (so, going out four months now instead of one or two in the other examples) for about a dollar a share. You pocket $100, you take on the obligation to spend $1,500 for four months to buy the stock if it falls. And it did fall, down to $14 for a while, which would have wiped out your profit but not actually made you lose money, so if someone had exercised the put option before expiration you would have been out of luck… but if you were able to keep the option open through expiration you’d be happier, because the shares recovered to The $17 range in January around options expiration time, and you would have kept your $100 profit.

That’s the other thing with selling options — you don’t get to decide when they get exercised. You can decide whether or not to close out the contract early, by bidding to buy it back and close the contract (“buy to close” is the term), but the person who bought that option could have exercised their right to sell ABX to you at $15 when it was at $14 in mid-December. That doesn’t necessarily happen very often, but it can and does happen.

So you see the positive number in your cash account, it goes up from $0 to $559 after making those three trades in the examples they give, but you may not focus on the shrinking “cash available” number, which will drop by as much as it would take to buy the shares to fulfill those contracts (or some fraction of that number, often in the 20-30% range, if your broker lets you borrow on margin to back the obligation).

What they essentially did in that series of three trades was promise to do $10,000 worth of buying if the market turns even slightly against some gold stocks over the next one, two or four months, and in exchange you’ve received $559.

That’s actually not so bad, all things considered — for many stocks you would have received less, but people were a little worried about gold stocks last Fall when this ad was originally written and they were willing to pay up a bit for that “insurance” giving them the right to sell you their stock at a set price if it happens to decline.

Generally, I see people claiming returns on option selling that are in the 10-20% range per year, and that’s probably a reasonable goal — make 3-4% return with each trade, and roll that trade over four or five times a year, and then you’ve got something like a 15% return after commissions (before taxes). Not bad if you’re comfortable with the risk of those bad trades that come because the market turns sharply against you, or if you simply get unlucky with a specific disaster, poorly timed, for a specific stock. Those tend both to be low-probability events in any given 2-3 month period, of course, but if you do this over and over with dozens of companies you are not going to have a 100% success rate — and an 80% success rate may not be enough if 20% of the trades lose enough money to eat up three or four good trades apiece.

That’s the basic idea, and the essential risk/reward gamble you’re taking with selling short-term near-the-money put options. Yes, it can generate cash income in your account — but the obligation you’re taking on in exchange for that cash is very real, you’re not getting “cash from gold,” you’re making a collateralized bet that particular stocks (gold stocks, in this case) won’t fall below a set price before a set day.

These kinds of options trading systems are fairly common — there are lots of “options for income” traders who take various kinds of net credit trades to generate returns from their cash or margin capacity. Selling naked puts (meaning you use margin to cover the obligation, you don’t have the cash in your account) or cash-covered puts (meaning you have the cash sitting there to buy the stock if needed) are two of the very basic kinds of “options for income” trades — the other common one, which involves essentially the same risk, is selling covered calls… though selling calls feels a little less risque because there’s no margin, and no one uses the term “naked”. And once you get into the thick of things, you can dive into different analytical and technical tools and indicators, and lots of different trading systems that involve spreads or straddles of various sorts — I won’t get into that complexity here (check out the CBOE’s Education Center for some great online learning tools, seminars, and classes, including lots of really introductory-level material).

In the case of covered calls, you just buy the stock first — so, 100 shares of RGLD — and then sell someone a call option, selling them the right to buy the stock from you at a set price in the future. Royal Gold is at $79 now, so you could buy the stock at $79 and sell an $82.50 call with a July expiration for $2.10. That effectively means you’re reducing your cost basis to $77 or so (after commission), and will have to sell at $82.50 if the stock is at that price over the next two months, so even if the call gets exercised you earn $5.50 a share, a $550 profit on your $7,700 investment over two months, which is a nice 7% return.

You do have all the downside risk of owning the stock, of course, so if the stock falls below $77 you’re still losing money, at least on paper… but the real risk that most investors fear is the “I’ll miss out” panic… if someone swoops in and offers to buy RGLD at a huge premium of $110 a share in June, for example, or the stock otherwise soars because gold goes up dramatically or something like that, you’re still going to have to sell your shares for $82.50.

So, just like selling covered puts, you need to be focused on the system and on a consistent gain and not be someone who gets so flustered by the occasional loss (or lost potential) that it ruins your week — you have to be happy trying to earn 10-15% a year, or something in that neighborhood, and know that there’s a decent chance that you’ll have some years when it blows up and you lose money… though usually the losses, too, would not be terribly dramatic unless there’s something huge like a 30-50% market crash or a stock that completely collapses in relatively short order (bankruptcy, scandal, lawsuit, etc. — not always predictable, but thankfully rare).

Managing the psychology is probably the toughest part for any fledgling options seller. The first time that a company really collapses on your watch and your $200 gain turns into a $1,500 loss, it will feel horrible. This might not ever happen to you, of course, and I don’t know if it has happened to any of the recommendations of this particular newsletter, but sometimes stuff happens.

So… there’s no magic, but yes, you can earn “cash from gold” or “cash from whatever other stocks” if you’re willing to risk your capital to make options bets on gold stocks or other investments. The more risk you take in giving the option buyer more time to be right, or setting your strike price really close to the current price, the higher the returns you should earn by selling those options — and the greater the probability that you’ll have to pony up some cash to make good on your obligation.

And, of course, if you happen to do this kind of trading as part of an options newsletter or service, you’re setting yourself up for returns that are probably a little lower — if only because telling 500 or 1,000 subscribers all to sell the same put option at the same time means you’re going to tend to substantially depress the price of that option contract. Options are not liquid enough, except for the most widely-traded stocks and ETFs, to absorb hundreds of new traders all hitting one contract at the same time (the RGLD $77.50 puts for this July, for example, have trading volume of only 11 contracts today, and only 125 contracts exist right now (that’s the “open interest”), so the price of $2.70 won’t hold if there are suddenly new offers to sell 1,000 contracts all hitting the market when the newsletter issue comes out).

If you’ve a favorite “options for income” strategy, or have any input on Zach Scheidt’s teased “cash for gold” ideas here, please let us know with a comment below… and if you’ve ever specifically tried out the Income On Demand newsletter, please let your fellow readers know what you thought by clicking here. Thanks for reading!

P.S. How about that “$1,500 per month” income promise? What would you need to get that kind of return, assuming that the trades work out? Well, if you’re doing just cash-secured put selling (not using margin), and your typical option sale is for a 4% return on the value of the cash collateral over two months, which is slightly higher than most of the examples I looked at but seems roughly “reasonable”, then that means a possibility of 24% over the course of a year (you use the collateral for two months, the trade is over, you roll it into the next trade). That’s pretty high, in my experience, so I’ll arbitrarily cut it down to 18% with the assumption that at least one of those trades washes out and loses a little money (that’s still quite high, but we’re trying to be charitable).

If you’re making $1,500 a month, that’s $18,000 a year. And if you’re making 18% returns on the year to get that $18,000, then the math works out pretty nicely — that means you are usually putting at risk about $100,000 in terms of the notional value of the puts you’ve sold, on average, throughout the year, so that’s roughly the amount of cash you’d need to have to some reasonable probability (assuming my 18% return assessment is fair) of generating that kind of monthly income. If volatility stays low, as it has been, and options premiums are low, or you take fewer chances, it could easily take twice that much capital to earn $1,500 a month.

So… given that you you probably shouldn’t be paying $1,500 for a newsletter if you don’t have at least $100,000 to allocate to that strategy anyway (that’s 1.5%, in case you’re not keeping track, which is more than many investment managers would charge you to make all those decisions on your behalf — spending any more than 1-2% of your portfolio every year on newsletter subscriptions and “advice” is probably overdoing it), the logic works out reasonably well. That doesn’t mean you should rush out and subscribe to that newsletter, of course, or that the strategy would work, there’s just a bit of logic underlying the newsletter price and the “promised” returns.


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Sturgis
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Sturgis
May 24, 2017 4:05 pm

Thanks for the in depth analysis, Travis. I certainly did not expect it!! I have also wondered about the steady attrition rate of this ETF, but thought that the relatively high monthly payout might compensate for this. It might, but I would like to know for sure just how much value is lost through attrition over time. It would be nice if managers of ETF would provide a statement something along the line of ” Due to attrition, this security will lose value over time at the rate of approximately 3 % per year” I am not implying this, just citing it as an example. Perhaps a better way to own this one, and help alleviate the rate of attrition, would be to have an automatic re investment of monthly dividends into purchasing more shares of HEP ? But this would have to be done on a commission free basis of course. And if monthly income is the investor’s main goal, then this would make it unsuitable for this purpose.

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lozmel413
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lozmel413
May 24, 2017 4:42 pm

The whole idea is to make money on stocks you would like to own but can sell puts and collect a premium. If you have to buy the stock you can sell calls for more premiums , collect dividends and keep the stock for the long term. I haven’t seen a company on here yet that was recommended. I will keep you updated with my results

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lozmel413
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lozmel413
May 24, 2017 4:44 pm

And i don’t know Travis.

thinairmony
Member
May 24, 2017 6:52 pm
Reply to  lozmel413

Your a GUMIE (IR)

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lozmel413
Member
lozmel413
May 24, 2017 10:27 pm

No i am a retired firefighter that was looking to add income to my pension.

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Charlie
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Charlie
May 25, 2017 11:45 am

I am 72. My grampa told me when I didn’t really want to know, that the only sure way to make and keep money, and keep up with inflation was to collect taxes and keep the money, and don’t spend it except on real estate.

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Fabian
Fabian
May 28, 2017 7:25 pm

Golden rule when you short puts; cover if the strike is reached, no discussion. Because don’t forget that the guy who sold you the put thinks that the stock is a dud and he’s not dumber than you. I took a beating on GDX end of 2015 with this kind of transaction and had to do revenge trading on GDXJ to get my money back. Another way to do it is with so called bull put spreads. You sell a put close to the money and buy another put farther down the money that will limit your risk but also reduce your gain. But you must have a broker that can manage these spreads as one transaction otherwise commissions will kill you.

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