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.

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).

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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 po