What’s the “Hestla Heist?”

Checking out the Amber Hestla's Income Trader and her tease of "Heists" and "Funneled Income"

By Travis Johnson, Stock Gumshoe, September 16, 2014

This ad has been circulating for at least a few months in various iterations, and it’s not touting a single stock, but it looks like folks are still interested in learning what Amber Hestla is touting as the “Hestla Heist” for her Income Trader service.

This service has been around for about a year and a half, and was marketed much more clearly last year — but perhaps that relatively clear marketing that boasted of her 100% success rate in picking “winners” wasn’t successful enough, because they’ve now added on a big ol’ dollop of “cloak and dagger” … a dark video with Amber’s face obscured, talk about how you can legally “steal” from the big Wall Street Banks and the wealthy speculators. All very hush-hush, sounds just dirty and nasty enough to get you excited.

Here’s a little taste of it, just to give you an idea:

“How I legally got away with $37,000… and how you can do the same….

“Hello, please don’t think of this as a confession or admission of any wrongdoing. Because everything I did was 100% legal.

“And in this video I’m going to show a heist I pulled off to get away with $37,000… from some of the greediest investment banks on Wall Street.

“Now, I know it sounds illegal. But as you’ll see, it isn’t.

“It’s been legal since 1977. And for ordinary folks like you and me, it’s the easiest way to pocket a few hundred, or even a few thousand dollars without doing much work.”

So that’s enough to let many of you know just what Amber’s doing, but you’re pretty sophisticated — lots of individual investors who aren’t familiar with this kind of trading will think it’s cool, mysterious, and one of those “secret” ways of getting rich that they’re sure has been hidden from them by the fat cats. Which makes signing up for a $500 newsletter sound like a cheap entree into this “secret” world, right? (OK, OK, they say it’s $1,000 — but it’s been “on sale” at “50% off” or better ever time I’ve ever seen it promoted.)

Well, you can sign up if you want to — and there are at least a dozen other newsletters that focus on this same sort of “income trading” — but you don’t have to sign up just to learn what the “Hestla Heist” is… and, frankly, if this is the kind of thing you’re interested in and you’re an independent trader who likes to research stuff, you might do just as well without a newsletter.

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So what exactly is this heist? One more bit from the ad, then we’ll share the Gumshoe answer:

“… this tactic often lets me jump ahead of the big Wall Street firms and get away with a cut of their profits before they even know what happened. And that’s why I call it the Hestla Heist.

“It’s easy to do, and you don’t need any specialized training or skill to do it….

“It works through your online brokerage account by accessing money lying around in the financial markets….

“You see, the stock market is only a tiny portion of the whole financial system. And when it comes to Wall Street’s investment banks, hotshot traders and brokerage houses… stocks aren’t their main source of income.

“No, it’s another market that American economist, Webster Tarpley, reports, ‘has come to represent the principal business of Wall Street.’

“It’s a market that’s over 21 times bigger than the stock market. Some analysts estimate it’s worth over $790 trillion!

“In fact, The Economist calls it ‘the biggest financial exchange you have never heard of.'”

Well, that’s cobbling together a lot of different stuff under the broad heading of “derivatives” — that quote from The Economist is about the CME Group, which is mostly a collection of futures trading exchanges built to trade physical commodities (though they trade futures in lots of others stuff now, too, including stocks and indices), but what Amber Hestla is touting is options trading.

You undoubtedly know what options are — they are, essentially, time-constrained bets on where stock prices will trade for a defined period of time. Put options convey the right to sell a stock at a particular price before a specific date, call options convey the right to buy a stock at a particular price before a specific date.

And like stocks, they are both bought and sold — but unlike stocks, new options contracts are created and erased every day and investors have the opportunity to open options trades either by buying an option or by selling an option. Selling options is what Hestla is talking about as her “Hestla Heist”, and it’s where income-focused investors often go when they are looking for consistency and cash income and are willing to forego dreams of windfall profits (the folks who are speculating on big future windfalls are the ones who buy the options contracts — and they usually lose but occasionally luck into a huge 1,000%+ profit… which is why options sellers, on the flip side usually win but occasionally have a large loss).

Here’s an example of how she says it works in the ad:

“Many of the bets placed in this market are highly speculative. For instance, I recently saw bets being made that Google’s (NASDAQ:GOOG) stock price would drop from $1,145 per share to $285 per share within a week, a 75% drop!

“In other words, some people are using this market to wager that Google’s stock will collapse in the next few weeks.

“To me, that’s just ridiculous. But what’s even crazier is that these people have put $3,600 on this happening….

“Who are these people?

They are speculators. Maybe hotshot traders… or Wall Street’s wealthy clients. Some of them with perhaps more money than common sense.

“To them, this market is just a huge casino where they can place bets in the off chance of hitting some large jackpot. These people love taking risks and would feel equally at home in a casino.

“Losing on speculative bets like this is normal in their pursuit of that one lucky bet that may pay off. It comes with the territory, similar to losing your bet in a poker hand.

“Of course, Google’s stock price will go up and down over the next few weeks as it always does. But it’s virtually impossible for it to drop as much as those speculators are betting on.

“Too bad for them, because they’ll lose the $3,600 they’ve put on this wager. And in most cases, some Wall Street firm will pick up this money like a casino collecting bets from its gambling table.

“And this is where the Hestla Heist comes in. Because with the Hestla Heist, you can grab this money before Wall Street does.”

And I suppose that’s more or less true — but those are not the options that most people would sell for income, they would generate almost no money relative to the amount of capital you have to put at risk for that option.

That probably requires some explaining.

The basic strategy that Hestla calls the “Heist” is… selling put options. That means you sell someone the right to “put” the stock to you (force you to buy it at a set price) before the expiration date. Many folks think of buying put options as either a bearish bet (“I think this stock will go down, so I’m betting it will fall 40% before January and I’ll profit big if I’m right”) or as insurance (“I’m up 300% in this stock and I don’t want to sell, but I want to invest a little bit in peace of mind in case the stock tanks when I’m not paying attention”). But when it comes to income trading, selling put options is the most popular way — at least among newsletter writers — to generate cash in your brokerage account.

That’s because, at least on the surface, you get to collect “free” money without buying anything or putting up any capital. That would be selling a “naked” put option because you haven’t set aside the cash to fulfill your end of the option contract (if 2008 happens again and the tide washes out all stocks, you’ll be left standing naked in water you thought was plenty deep), but even that is not really without capital requirements. Even if your broker lets you sell puts “naked” he will at least make sure you have margin capacity to handle your end of the contract. Some brokers make you have 100% of the cash to settle the put contract in your account, some make you have 10% or 30% or whatever, depending on your margin account and your relationship with that broker and other factors — most newsletters who recommend these kinds of trades assume that you’ll have to put up 20% as collateral, which is probably a fair average. So even though you’re not technically buying a stock, you are putting capital at risk in the trade… even if the capital isn’t actually in your brokerage account, they will make sure you fulfill your end if the contract is exercised. The least risky way to sell put options is to sell cash-covered puts, which means you promise to buy a stock at a set price if it falls that far, and you have all the cash to make that stock purchase set aside in your account — but newsletter writers often prefer not to use that kind of calculation, because it makes the returns seem much less dramatic. Keep in mind, even if you only have to put up 20% of the potential option loss to make the trade you are personally on the hook for the whole 100% if the unthinkable happens and it turns out you sold puts on Enron a few months before it went bankrupt.

Options trading is pretty simple, if dangerously levered in some cases, but it uses a different lexicon so sometimes novice investors find it baffling. Here are the terms you probably need to know to understand options on the most basic level:

Strike price: The contracted price at which the stock can be bought (call option) or sold (put option), at the option buyer’s option
Exercise: The act of asserting your right on an option you bought — buying (call) or selling (put) the stock.(buyers are not obligated to exercise options, that’s why it’s called an “option”, they get to choose, sellers are obligated to exercise at the buyer’s behest — that would mean the seller has the obligation “assigned” to them)
Expiration date: The last day the option can be exercised, after this day it disappears and becomes worthless. Technically the standardized expiration dates are on Saturdays, when markets are closed, so the real expiration date is the Friday before.
Open Interest: The number of options contracts that exist for that particular combination of strike price and expiration date. Open interest drops when a contract is bought back to close it or exercised, it rises when a new contract is created by a “buy to open” or “sell to open” order.
Volume: The daily trading in a specific option contract — this number is wildly inconsistent across quote services and brokers, but you can usually tell if the contract is changing hands with any frequency if the bid and ask are relatively tight and the volume is at least in the 100s of contracts.
In the Money/At the Money/Out of the Money: Terms to describe whether an option has actual value (sometimes called “intrinsic value”) at any given time because of its relationship with the current price of the underlying stock. For a call option, if it’s an option to buy at less than the current price of the stock then it’s “in the money” because you could exercise the option and make money immediately… “At the money” would mean the option strike price is right at or very near the current stock price, “Out of the Money” means it could not be exercised at a profit at the current stock price and any value for the option is based on the uncertain future.
Time Value: This is one way people refer to the premium price of an option contract — a $15 call option with a January expiration for a stock that’s currently at $10 is all “time value” or premium because the option has no exercise or “intrinsic” value today, it’s the price the market (sometimes just you and the person taking the other end of your trade) puts on the risk or the potential (depending on which side you are) of the stock rising 50% in four months. Time value will be higher for stocks that tend to or are expected to move more or faster.

There are lots of other things that options traders follow very closely, including “Implied Volatility” (basically, what the option prices imply about how volatile the stock will be), the greeks (Gamma, Delta, etc.) and other measurements of volatility and volume and speed of price movement, but those — while useful for active traders — are not as important to understanding the basic concept.

Pretty much any investor can trade options, but you have to first get approval from your broker because they’re obligated to make sure you understand the basic idea and the risks before you get involved — with most brokers, that’s five minutes to fill out an online questionnaire and then they assign you to an approval level… generally brokers have several levels of approval, with the first step being that they will let you sell or buy options directly related to your stock holdings (sell a covered call, buy an “insurance” put) and the next step being the approval to “speculate” on buying calls or puts, then to doing more complex multi-legged options trades (spreads, straddles, strangles, butterflies, lots of odd-sounding combinations that can cap risk or bet on multiple outcomes). The highest level is reserved for those who want approval to sell uncovered or “naked” options, which is what most of the “options income” newsletters, apparently including Hestla’s, are recommending most of the time.

That basic concept with put selling, the main idea of the “Hestla Heist” (I almost called it the “Hestla Hustle” — Freudian slip of the fingers), is that you promise to buy 100 shares of a stock per contract (at a specific price, before a specific date), and in exchange you get a cash payment up front from the person who wants to have the right to sell under those terms.

You put your capital at risk, because if the stock falls below that price (or even to zero) you’re on the hook to buy it, and you’re paid for risking that capital. Most options are not exercised, they either expire or are bought back to close out the contract (either at a profit or a loss), and most experts say that the majority of options contracts expire worthless — which is obviously good, on average, for the seller of options.

Let’s talk about an example with Google, using numbers somewhat similar to what Hestla used.

Google has lots of options contracts trading under both their GOOG and GOOGL ticker symbols (there are also some lingering options that start with the symbol GOLG, those are tricky and represent the old “mini” options contracts that were based on 10 shares instead of 100 before GOOG split the shares, now they represent 10 shares each of GOOG and GOOGL but still trade on a 10 multiplier, so the pricing is wacky). We’ll assume we’re dealing with GOOG, just for simplicity, though GOOGL trades and prices almost identically.

These standard options contracts each represent 100 shares of GOOG, and there are now options contracts with strike prices as low as $260 if you go out to January 2015 (there are expiration dates available out to January 2016 now if you want to take on more time risk for more cash, too), you can see the “options chain” of available expiration dates and strike prices in any financial portal (Yahoo Finance, Marketwatch, etc.) or in almost any brokerage website. As you browse, note how few of them have even 1,000 contracts of “open interes” or trading volume of 100 contracts.

There aren’t any strike prices currently available in Google options that would let you bet on the stock falling by 75%, but there probably have been in the recent past — and you can at least bet (or sell someone a bet) that the stock will fall by more than half before January. Would that work?

Well, the open interest on the GOOG $260 puts is only seven — meaning seven contracts exist, representing 700 shares — so that’s completely silly. Their last price was ten cents, though no one is putting a bid in now, so that means there is currently $70 worth of “bet” on this contract that GOOG shares will be more than cut in half (that last price was probably quite a while ago). If we move quite a bit up the ladder on the January options and say we want to find something that has a real bid price we can sell to and a bit more open interest or volume, we can try the $400 puts — those have a bid of 40 cents and ask of 55 cents and open interest of about 300. So that means extant “bets” of $1,200 or so on Google falling by about 30% by January.

What would happen if you decided you were confident GOOG would remain well above $400 through January and were willing to take on that risk? You could sell those put options. Let’s even assume that you can get a pretty good price above the bid, 50 cents a share. That means in exchange for 50 cents a share, you promise to buy the share at $400 if a counterparty wants to sell (and if it’s at $399 or below, they will).

These move in 100-share increments, so for each contract you actually would be promising to buy 100 shares at $400 each for a total of $40,000, and you receive $50 in exchange (50 cents times 100 shares). So although no one thinks Google goes to zero, and you broker would probably let you use margin (borrow money) to cover maybe even 80% of that commitment, if Google somehow goes bankrupt and goes to zero overnight you’re promising $40,000 in exchange for $50. You’re like an insurance company, selling risk and almost always winning — but insurance companies make sure to diversify their risk because catastrophes happen.

Even if you only have to put up 20% of the cash to cover that kind of naked put sale that would be very paltry income, $8,000 set aside for four months in exchange for $50. That’s income of a little more than half a percent, so if you did that every four months you’d annualize it to something like a 2% yield before commissions (which could easily be half of that $50 if you’re really only trading one contract — usually traders prefer to trade more contracts to cut per-contract commissions, commissions are structured generally as a flat rate plus a small fee per contract, maybe $15 plus $1.25 per contract). So that kind of “almost certainly going to win” trade generates very little income, as you would expect.

Taking a bit more risk, getting closer to the “in the money” options, is where traders go to get more like the 10-20% annualized income that many people say is easily possible with low-risk put selling, or far more if they’re skating closer to the edge.

So if you are working on the certainty that GOOG will continue to trade well above $500, you can make a lot more money from betting on that assertion. You can sell a January $500 put option on GOOG for about $5 a share, so you are theoretically risking $50,000 (buying 100 shares at $500 each) in exchange for an up-front cash payment of $500 ($5 per share times 100 shares).

That’s still not a huge return on your capital if you’re really setting $50,000 aside to cover that put, it’s a 1% yield on cash, but if you are able to do it on margin and only put up 20% of the capital then you can claim that you’re earning a 5% cash return for those four months ($10,000 put up as your 20% collateral, $500 earned from selling the put), which would annualize out to about 15% a year. Tighten it up still further and say you’re looking to sell the November $550 puts and you could make it far more dramatic, earning about $1000 on a $55,000 commitment (or $11,000 on margin) for a return of 9% in just two months, and you can do that six times a year for annualized gains of better than 50%.

You can certainly imagine the risk factors — $500 for Google would mean that the stock falls 13% from here, $550 would be about a 6% drop, and it’s certainly not unheard of for a stock to fall that amount, even a big and extremely successful mega-cap like GOOG (which I own shares of, incidentally). Heck, the whole market could fall 20% in a couple weeks if there’s a strong correction, as many folks expect, and if that happened Google would almost certainly fall at least 15%. It would also not be unheard of for even a large and successful stock like Google to fall 10% overnight on a bad earnings report — if GOOG released news tonight that dropped the stock by 10%, the January $500 put option tomorrow would probably be going for $15 (or maybe more) instead of $5, so if you’re a seller you then have to be prepared… do you buy back that put option contract and book a $1,000 loss (you sold it for $500, it would cost you $1,500 to buy it back and close the contract and take that risk off your plate), or do you maintain the argument that GOOG will certainly remain above $500 in January and just hold until (you hope) the contract expires worthless with GOOG at least at $500.01 in late January?

It’s the same question as you’d have with any stock you’re trading, it’s just magnified — you don’t want to see GOOG have a horrible few months and stay stubborn about your $500 price and see it at $425 when the option is nearing expiration, which would be unexpected but is certainly not impossible, because then it will cost you $7,500 to get out of the option contract.

That’s why many folks who run these kinds of newsletters say that the only real downside is that “you get to buy a stock you like at a fair price” — which I suppose is true, but if the stock is 20% lower in a few months because something about the stock or the story is changed, you’re not going to be happy buying it at well above the market price. Or at least, I wouldn’t be — if you can stomach that happening every now and again, you may be well suited to this kind of trading.

For that matter, you can sell puts as a way to intentionally buy a stock cheaper, too, sort of like a limit buy order with real teeth to it — you can cancel a limit buy order before the market opens if something happens, you can’t buy back a put option overnight. Bit I think most people sell puts as a way to generate trading income — Porter Stansberry, with his Stansberry Alpha service, even doubles down on that with the ultra-bullish move of selling puts and then using much of that option selling income to buy calls in the same stock, which will likely be super-successful in a strong bull market… with the only problem being that bull markets are easier to see through the rear view mirror than they are through the windshield.

There are other ridiculous examples of selling puts, like the assertion that some traders have bet $495 that AMZN will drop in half in the next six weeks (that would be the October $165 puts now, though the text is probably old because she says they’d be the $195 puts (Amazon has been both over $400 and under $300 in the last year) — but, really, there’s not a newsletter on earth that can sell subscriptions based on those huge outlier “stock won’t fall in half” bets.

If you feel like these kinds of high likelihood/low reward bets like the examples in the ad of Google and Amazon are great for earning a few percent on your capital, annualized, then you can probably find a dozen such opportunities a day to bet against a stock dropping in half in a couple months… just keep an eye on your overall real risk, not just the amount of margin you have committed, and don’t get to the point where a market crash would make you insolvent.

But for a newsletter or trading service, there just isn’t enough volume or potential open interest in those option contracts to get even a few hundred subscribers into them without the prices going crazy, and they probably need to generate at least 15-20% annualized returns to be taken seriously by subscribers (maybe 50-100% returns if they’re using margin). Most option contracts have daily volume of just a few or a few dozen contracts, or don’t even trade on most days, so telling 500 of your closest friends to all go and sell the January GOOG $500 puts when there’s only trading volume of a few contracts and a wide spread is going to make the contract price change dramatically. (Right now there’s a bid for 50 contracts at $4.70 a share and an ask for 140 contracts at $5.00 a share… if that suddenly changes to an ask for 5,000 contracts at $5 the bid is probably going to drop, and you might have to go down to $4 to get someone to bite on your offer — just an example, these things aren’t terribly predictable).

So yes, you can certainly make income by selling put options — keep track of the calculations and think about what kind of annualized return you are making, either on your actual capital set aside or on the amount of collateral the broker requires you to put up, and be mindful of diversification, risk, including the risk that your margin gets wiped out, and what happens if the market turns sour or even has a sharp 10% (or more) correction. You can also manage risk with lots of options trading strategies, with the most basic being a simple put spread (which would mean selling a put and simultaneously buying a put with a lower strike price — so, for example, selling that GOOG $500 put for $5 and also buying the GOOG $450 put for $1.50, that cuts your income to $3.50 but reduces the potential catastrophic risk considerably, from $50,000 to $5,000).

And this is all completely basic, just intended as a simple explanation of what this “Hestla Heist” maneuver is — I don’t know whether Amber is suggesting more complex options trades, but the likelihood is that she’s just suggesting contracts on “blue chip” type stocks that are good candidates for naked put selling — more complex option trading gets quickly too ridiculous to manage if you’re trying to recommend trades in and out for hundreds or thousands of subscribers, there’s just no easy way to get many people in and out of most options contracts without impacting the price. This is a weekly trading service, so presumably she’s suggesting a couple put sells a week in order to provide enough liquidity for her subscribers to make at least a trade every month or two — and you have to commit a fair amount of capital to this kind of strategy to make this kind of newsletter worthwhile, since even a relatively inexpensive short-term put sale on a mid-priced stock locks up a fair amount of capital. Selling MSFT $42 puts for November, for example, (which would be exercised if there’s a 10% drop in the share price), would be committing $4,200 of capital for two months ($840 at 20% collateral on margin) in exchange for $30. So the numbers work OK for relatively low-risk returns, and if volatility increases the potential returns will be higher (options sellers want higher volatility, which means people are paying higher option premiums for the time value), but they work better if you have a sizable chunk of capital committed to the strategy and can minimize commissions and diversify.

I just went back and checked on some of Hestla’s older ads from late last year, and it looks like she’s using the 20% margin number as your “capital” that’s committed to a put sale — here’s an example she gave in an older ad, which I think ran in December of 2013.

“A 12% return in just five weeks… over 120% annualized returns

“On January 12, I recommended readers sell Phillips 66 (PSX) Feb $48 puts at $1.15.

“That’s a put that expired in February and paid sellers $1.15 per-share in Instant Income, or $115 per contract.

“And remember, we can scale that Instant Income up as much as we want by selling more than one contract.

“In this example, the $115 Instant Income is ours to keep no matter what.

“In exchange, we believe PSX will not fall to $48 a share.

“Because shares stayed above $48 during the five weeks of the contract, we didn’t need to buy one share of PSX.

“Most brokers will require a small margin deposit of about $960 when you make a similar trade.

“And since were correct, we pocketed a 12% return on that deposit…in five weeks.

“If we could repeat a similar trade every five weeks, we’d generate more than 120% on our capital in a year.

“Phillips 66 is one of my favorite companies — and as you saw in the chart earlier, I sold another put option on it in March for another 7.9% return in Instant Income, or 131.4% annualized.”

So that’s probably much more typical of the kinds of things such a newsletter would recommend — much higher percentage gains from near-term put options with only 6-8 weeks to expiration that are very near the money (the stock was around $50 when she made the recommendation to sell the $48 put), and counting your gains against the broker’s margin requirement instead of covering the put sale with cash (which is pretty standard among the options newsletters, I gather). That short time frame cuts the time during which a nasty surprise could happen (keep an eye on quarterly earnings dates, when stocks often move substantially), and the “near the money” strike price gives a higher return.

That works great when stocks are moving up or when they’re flat — if stocks are collapsing, people suddenly want to buy puts and so the income gets much better but, of course, you also pretty dramatically increase the likelihood that you’re going to be “put” the shares at a substantial loss if you misstep or stocks keep falling. I don’t know of many options selling newsletters that are around now that were also around in 2008 or 2009, the last time the market was terrible, Lee Lowell’s Instant Money Trader is the only focused put-seller I can think of who was publishing his letter back then, or even in 2010 or 2011 when there were several rough 10-20% corrections.

So while most “options income” letters like this will, probably honestly, say they’ve had huge success over the last year or two, keep in mind that when almost all stocks are moving up as they have for the past couple years, almost every put seller is making a profit almost every time. If you are booking 5-15% gains once every couple months, there’s a big difference between being right 100% of the time and being right 95% of the time… it might only take one big loss to wipe out a year or two of gains.

Hestla also says she’s got another strategy she uses which she calls “Funneled Income” … here’s how she puts it:

“Many investors are happy to just hold stocks in their investment accounts. Either for equity growth or to collect dividends.

“But you can do better than that. Much better, actually. Did you know that you can let other people place bets on the shares you own… and receive money for doing so?

“I call this tactic ‘Funneled Income,’ because it funnels more income from the stocks you already own.

“Just like the Hestla Heist, this is another tactic you can use to exploit the derivatives market. It works by permitting other people to bet on how much your shares will be worth in a few weeks or a few months down the road.”

So that’s a very similar bet to the cash-backed put sale, at least in terms of the potential returns, the “covered call sale” — covered calls are probably the most popular income-generating option strategy for individual investors because the risk seems a lot less scary than selling puts (even if it isn’t necessarily less risky in the big picture). Investors sell covered calls against stocks that are in their portfolio — so you might own 100 shares of Microsoft, for example, and you’re enjoying the 2.5% yield, and you think it will be a nice stock to hold for a long time… but you’d rather boost your yield to 5 or 6% or even a bit more.

You can do that with covered calls — if you have 100 shares you can sell one covered call contract, so, for example, you could sell a contract at $50 for December, thinking that if the stock jumps by 8% in a few months you’d be happy to sell at $50 anyway, and you’d get about 50 cents for selling someone else the right to buy your MSFT shares for $50 before the December expiration. If you can do that three times a year, keep rolling over for similar amounts each time the option expires, then you can earn another 3-4% a year in cash returns.

Or, of course, the stock could hit the strike price or go far higher, and you sell it at $50. Selling covered calls means you’re capping your gains in exchange for relatively small upfront cash payments (with more volatile stocks, or smaller growth stocks, the options premium can be far larger as a percentage — but that’s because investors think those stocks could also conceivably double in a few months). This strategy also works quite nicely for many people, though it’s harder to get decent premiums now with volatility relatively low for the large cap, blue chip type stocks, and you have to be willing to sell the stock without too much remorse. If Microsoft makes some giant deal that transforms the company over a weekend, and the stock opens at $55 and climbs to $65 or $70 by the time the option nears expiration, you have to be the kind of person who can handle selling it at $50 without smashing your laptop into pieces. You can always back out of a covered call sale by buying the call back at the market price to close the contract, but that obviously eats into or can destroy that income you had generated (you would also have to “buy to close” your covered call if you wanted to sell your shares of the underlying stock before the expiration date for any reason).

Have a headache yet? Sorry, me too. And if you want to add to the trading and to the nickel-and-diming you do to boost your annual returns, you can always take it to the next level and trade around your portfolio positions over and over. Sell puts against a stock you like over and over every few months until the stock is put to you, then, once you’ve bought that stock, sell covered calls against that holding every few months until the stock is called away. Repeat. For a small investor in search of a hobby, that may well keep you as busy as your collection of vintage toasters — whether it brings you as much satisfaction and income is, of course, an open question. Oh, and keep track of your trades — all this short term in-and-out trading generates a lot of small short-term capital gains, which the tax man would like to know about (or you can do it all in your IRA — but you can’t use margin to sell puts in your retirement account, so be prepared for less-sexy returns).

And that’s about all I’ve got to share with you — no, I don’t have any particular stocks that I like for put and call selling, I’ve done some covered call selling over the last year with both relatively stable stocks (like Intel) and relatively jumpy ones (like Ligand), and it works fine and generates some decent income … though a side effect of selling calls against part of my INTC position is that some of my shares were assigned quite a while ago, so my position is much smaller with INTC now at $35 then it was when INTC was at $20, but, well, that’s the game. If you have stocks that you think work well for selling puts or selling calls, or other criteria that you look for when making these kinds of trades, feel free to share your ideas and opinions in the friendly little comment box below.


Irregulars Quick Take

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AZngelo
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AZngelo

I’ve been selling puts for the past couple of years and quite happy with it , however I always hedge by usually buying a lower $5 strike .

Jim Hasak
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Jim Hasak

Most stocks with options are potentially good candidates for selling options for income, something I’ve been doing for about 15 years. About the only ones I’d shy away from are companies with pending market-moving news, such as a small biotech firm awaiting word from FDA on a major product they’ve been developing. In such a case, the option premium will be big and look tempting, but the risk is that the stock may easily move well outside of the range in a very short period of time, and if it’s in the wrong direction you may have to deal with… Read More ยป

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jonomalley
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๐Ÿ‘88

I think I understand what you’re saying, but just in case can your repeat everything because I didn’t hear anything you just said.

larry
Guest
larry

Brilliant explanation.

Allen Besen
Guest

Travis, as usual, that was a brilliantly concise analysis. But I can’t agree that understanding options is simple. No matter how much I study them, there doesn’t seem to be an easy way to make money in the market. If it was simple, we’d all be multi-millionaires.

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Anthony Vlamis
Guest

Ater all hese year, and several tims tyingon my own, and with advice using Optioins Expresss, i finally conlude that opions are just not for me. I have seen, more than once, hat over 90 percent of the peole who trade opions loe their shirt. i lost a few, too, but I’m not turning over my whole wardobe. Now i just read ab ouat he windfalls the so-called experts make, dayin and day ousat, and I think, Fine; it’s jut not for me. At lest if you are a younger investor and get bagged in a stock, unless the company… Read More ยป

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Allen Besen
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Thanks for your quick response, Travis. But despite my feelings about options, I responded to your article last May or so and bought all the call options on Yahoo that I could afford. They’re doing well now but I wonder what will happen to Yahoo’s share price when Alibaba goes public, probably this Friday?

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Don Longava
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Don Longava

Travis,

Thx for the excellent summary on options. It was an excellent refresher.

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cw99
Irregular
๐Ÿ‘1235

Excellent explanation Travis, but I’m with Allen. No matter how many times I “study” options, I just don’t get it. It seems a lot of people do it successfully though. In my dream world, I would just give someone 100k, and have them do all this option crap for me

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Brad Young
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Brad Young

Thanks for giving an informative, balanced, appraisal of the whole selling naked puts thing.

jan
Guest
jan

I have been doing put spreads for about a year now. Yes you can make upwards of 50% per year, but you have to be right for TEN TIMES for every time you are wrong, just to break even. Up markets are nice but that seems to be ending and the lack of volatility has eroded premiums, requiring more risk, either by going further out in time, or closer in price. With the premiums so low now, it might be time to buy options instead of selling them.

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quincy adams
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quincy adams

Looks to me like the real real “heist” is the money Ms. Hestla wants to take from our wallets by selling us the information you just provided for free.

caulker
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caulker

I subscribed not being sure that it was as clarified by Travis. They promptly and courteously refunded my payment. I have been doing these options since Stansberry got me into it.

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zcott
Member
๐Ÿ‘1
zcott

I subscribed to Amber’s service a few months after it was launched in 2013. It wasn’t bad. I work FT on the west coast so I can only do live markets from 6:30 – 7:15. With little time, and less knowledge, I trusted and executed a few of her picks and made money on each. I don’t know what happened, but I had green pixels on the screen as opposed to the red that I often see. Then I crashed my bike, was laid up for months, the subscription ran out. Only one irritation: you have to log on to… Read More ยป

CAPT. CARROLE
Member
๐Ÿ‘5

I STARTED TRADING OPTIONS WITH OPTIONS XPRESS-FOLLOWED STANSBERRY-THEN STOPPED BECAUSE MOST OF THE ADVICE WAS COVERED CALLS AND YOU HAVE TO OWN THE STOCK TO DO A C.C. – THEN TRIED SLINGSHOT AND POWER OPTIONS – THE ONLY PEOPLE WHO MADE MONEY ON THEIR SERVICE WAS THEM!!!I LOST RIGHT AT 2k. WHICH WAS A LOT FOR ME. IN THE MEANTIME I FOLLOWED AGORA FINANCIAL-MADE SOME MONEY ON TAKING PROFITS ON A RECOMMENDED STOCK-WHICH I BUY AND SELL AND BUY AND SELL. I LOVE THE VIRTUAL TRADE SITE AT OX AND I AM NOW LOOKING AT ANOTHER SERVICE – BUT HAVE… Read More ยป

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Regularly wrong, Taito Peura
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Regularly wrong, Taito Peura

Great job again Tarvis! My 20 cents about options. I have been trading options for a while. Couple things I have learned. Options are strategy instruments therefore you need to be flexible. With option you can be wrong and still make money. Only way to be flexible and stay above water is to stay small. I trade only options which are liquid, have enough volume. I only sell premium when high IV, better still when IV Rank is high. Implied Volatility is forward looking and mean reverting. Means that I’m “selling IV” when selling premium my bet is that IV… Read More ยป

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greggo
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greggo

You sound like a Tastytrade watcher Taito.

greggo

scott
Guest
scott

sounds like you hqve listen to Sosnoff at Tasty Trade? Do you trade double diagonals? Do you trade weeklys?

mary
Member
๐Ÿ‘792
mary

Thank you Travis for explaining options so clearly. I have read of them but never really understood. Can’t say I really understand now, so will just stay away from them. I will stick with your recommendations for serious investing and Kss’s small biotech ideas to assuage my gambling tendencies!

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John Bronson
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I went back to buying individual stocks after doing well in options the getting hit hard. I have since recovered. Recently I purchased First Niagara Financial Group FNFG but didn’t buy options for good reason, while options havecgreat potential it also has great risk. When I own the shares I have control. I have a super method making 300% profit in the last 9 years. I do a ton of research and watch what the 10Q says in detail. I look at insiders, then I read the charts using methodology. I then watch the potential for a Bear market. I… Read More ยป

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Joe
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Joe

I have been using Amber Hestla Income trader for almost a year now, and have made just under $3,200. cost of membership was $299.00. Yes, it may require a good quantity of cash on hand, my Fidelity account is set up not to use “margin”, so all “put” options are covered by “cash on hand”. I use the strategy to keep the cash on hand “working” instead of just earning interest. I upgraded to the “pro” which gives two e-mails a week. One e-mail has one recommendation with all the information and her research needed to make the trade. Includes… Read More ยป

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Sandy
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Sandy

Well done Travis for an excellent article which helped me clarify what this as all about and prevented me from taking yet another leap in the dark.

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pauleth
Irregular
๐Ÿ‘13
pauleth

For a novice to intermediate investor, such as myself, this all sounds too complicated. Also, by reading the readers’ comments, i did not see mention of trading costs- broker commissions. When talking of the relatively low return on many of these trades- see Travis’ comments- wouldn’t these trading costs greatly affect your returns?

Wim van der Loo
Guest
Wim van der Loo

The reasoning that the writer (seller) of options more often profits than the buyer because the majority of options expire worthless, is misleading. If an option is in the money both buyers and sellers usualy don’t want to buy or sell the stock and so they will close their trade before the options expire. That why most of the options that are left, are out of the money wich at expiration day means worthless. You can also put it this way: buyers take their gain and seller their loss before expiration; sellers take there gain and buyers their loss at… Read More ยป

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Wim van der Loo
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Wim van der Loo

Sorry, the last part of the tekst doesn’t belong there. It’s a copy of the relevant part of the tekst, wich I had forgotten to remove.

NeilH
Guest
NeilH

If you are prepared to be PATIENT here is another way to play stocks and options. Let’s take GTAT as an example. The price has been hammered down to $11.60 after the recent Apple launch as too much had been expected of the company. They are only providing Saphire glass for the iwatch and not screens for iphones as many thought, In my opinion the company has now been oversold (do your own DD) and the option premiums are high. As a result one could buy 100 shares of stock for around 11.60 and sell the Jan16 12 Puts for… Read More ยป

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RandyR
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RandyR

I hope nobody followed this advice on GTAT. From what I have read, the bankruptcy was a surprise to everyone. I wond