The Palm Beach Letter folks are out with a teased “special report” about how to collect more income in “three minutes” using some kind of secret California “maneuver” …
… so naturally, Gumshoe readers are saying “huh?”
And “why do they always use California when they make up these names?”
And really, just “what are they talking about?”
Here’s a wee sample:
“If you’re interested in collecting more income, then you’ll want to pay attention to an important event taking place in California’s state capitol”
Golly, what is it?
He says it affects everyone planning for retirement. And the “he” in this case is Bob Irish, who has written for some Mark Ford-affiliated groups in the past and is now apparently putting his name to a publication called Retirement Insider at Palm Beach, though he’s more the “moderator” of the presentation — it’s really about Tom Dyson and his “3-minute maneuver” and the ad is hawking subsdriptions to Palm Beach Income.
Here’s how the video describes their income idea:
“We’ve dubbed it the ‘3-minute’ maneuver. By making one unconventional move, retirees have been boosting their investment income by up to 100% in just a few minutes…
“Some of California’s wealthiest institutions and investors have been using similar techniques with great success. Sacramento’s two laregst pension funds used this maneuver, and nearly doubled the cash flow for over 9,200 retirees”
Not sure what this “California” connection might be, other than the fact that California, as the most populous state, has a couple of the largest pension funds around (for public employees and teachers) and gets quite a bit of attention as a result… and pension funds tend to be huge, institutional investment pools that use dozens of different strategies. But let’s keep listening.
Tim Mittelstaedt of the Palm Beach Letter chimes in as well on the video, talking about how only 3% of Americans know about this technique, that it’s not restricted just to California, and that your broker probably wants you to think it’s reserved for the big money Wall Street folks.
And of course, we’re told that it’s nothing risky or crazy like day trading, but that it really does just take a few minutes once or twice a month and can be done through a regular brokerage account.
And then we get to Tom Dyson, a familiar name both from the Palm Beach Letter in recent years and from when he was touting income investment ideas for Stansberry at the 12% Letter several years ago. He says that this idea, which is becoming more popular, was something he first learned about a decade ago when he worked for Citigroup. Here’s what he says:
“I noticed one group of traders who seemed to be pulling bundles of money out of the markets almost automatically… they were taking advantage of an imbalance in the markets.”
It sounds terribly impressive. And Dyson has the charming British accent that makes us Yanks think he must be even smarter and more connected. Heck, he’s got to be royalty if he sounds like that, right? Isn’t that why all the fancy investment banks hire receptionists with English accents?
And Tom says his “track record for this overall strategy is over 97%”
Which, after the references to “collecting hundreds of dollars in just three minutes” in the video, means you can probably guess what the strategy is, too (hint, it rhymes with “belling choptions”). The ad gives a few more examples of money collected:
- “$290 from Proctoer & Gamble
- $520 from Disney
- $300 from GlaxoSmithKline
- $400 from Carnival
- $970 from American Express
- $1,150 from Conoco Phillips”
And he says that it works in all kinds of markets … but that…
“you can collect even more money when the economy is weak, and investors are afraid….
“The potential for big gains will be just as great if, and when, the market crashes again.”Are you getting our free Daily Update
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What they’re selling here is Palm Beach Income , which is one of thenew “upgrade” letters/services offered by Palm Beach Letter. The core Palm Beach Letter is pretty focused on income and safety too, including a lot of discussion of dividends (as with their “fifth payout” pitch from last month), but this new Palm Beach Income letter is likely trading some more illiquid stuff and the $1,500 price tag (which is, naturally, “on sale” from the “normal” $3,000 price) keeps the readership level low enough that they might actually be able to make a few of these trades without disrupting the market and making their readers mad (if you suggest an investment at $10 but the letter is so widely followed that the price spikes to $15 seconds after the letter comes out, grouchiness no doubt ensues).
And just to make sure we understand what they’re pitching, your intrepid Gumshoe listens to still more of the never-ending “presentation”… and we get a few examples.
One is Apple, which Tom Dyson apparently noted had just a 4.7% return for 2013 despite the fact that it’s one of the more popular and widely-covered stocks in the world. And he says that investors who held the stock would have “sweated through a 20% drop early in the year” and would have collected only $295 in dividend income for every $10,000 invested in the company in 2013. I assume that depends on exactly when you bought your shares, but it’s pretty close to my experience as an Apple shareholder in 2013.
And then the “Sacramento” maneuver:
“Instead of investing $10,000 in Apple and waiting a whole year to receive $295 in dividend payments, you could have made $360 in just 3 minutes off the same stock”
So what’s he pitching?
He even goes into the special rule change proposed by the SEC on October 25, 2012, implying that this kind of thing wasn’t allowed until this change… which is technically not true, but it certainly got simpler for Apple shareholders after that rule was passed, because that was the rule that allowed for the trading of mini options in a few select high-priced securities (just Apple, Amazon, Google and the SPY and GLD ETFs). Mini options are options contracts which provide options on a lot of ten shares instead of a standard lot of 100 shares, making them easier to handle for folks with only a few thousand dollars to commit to trades.
And since he’s talking about enhancing the income with this “Sacramento Maneuver” that means they must be focusing on the most basic and probably most widespread options income strategy: Selling covered calls.
That means you buy (or already own) shares, and sell a call option contract against that holding. So in the case of Apple, for example, today you could buy ten shares at $648 or so and sell someone the option (a call option) to buy your stock at $655 anytime in the next six weeks (before July 19). That call option you’d be selling would have the ticker AAPL7140719C00655000 — and today you could have sold it for about $16.50 per share ($165 per contract).
Buying ten shares of Apple today would cost you about $6,480. For those ten shares you could today collect about $165 in that “extra” income to promise to sell someone else those shares if they go up by about 1% between now and July 19. If the stock stays below $655 in late July, you just keep the $165 and you could sell another call option a little bit above the share price for August (AAPL is so widely traded that it actually has weekly options with lots of choice of expiration date, that “0719” in the ticker above is the expiration date I pulled up, most optionable stocks have options contracts available at just 4-6 expiration dates per year, bigger ones have monthly or weekly options).
There are no dividend payments for Apple between now and July (they paid last month), but if there are options payments you also still earn those if you’ve sold your call option — as long as your shares haven’t been called away by the counterparty who wants to buy them at $655.
If the stock goes down to $600 and you were going to hold anyway, no big deal — you still keep the extra $165. If it goes to $700, you’d probably be a little angry because you’d miss the last $30 per share of that move (you collected $16.50 per share plus sold it at $655, so effectively you still come out ahead as long as the stock is below $671, not including commissions).
That’s the basic mechanics of how it works — I do it on occasion, and sometimes it comes back to bite me a bit (as with Intel, I sold options several months ago against most of my Intel shares and the price jumped up quickly and they got called away… and I didn’t want to pay the higher price, so I didn’t buy back in and have mostly missed the last $2 or so of INTC’s rise in the months since), but it’s still profitable even if it’s not always the most profitable outcome from any particular stock’s move. This kind of trading is more profitable when uncertainty is higher, because that drives options premiums higher (that’s what volatility is as measured by the widely followed VIX index, really a measure of sentiment about expected volatility). Right now, that example trade from AAPl would give you a 2.5% cash return in six weeks — so if you do that eight times a year and get similar pricing you could have close to a 20% return before commissions.
Commissions bite much more for small holdings, so if you hold 5,000 shares of AAPL and sell 50 standard options the commissions are pretty insignificant … if you hold 20 shares of AAPL and sell two mini options, the commissions would eat up a noticeable amount of the income at most brokerages.
To be comfortable with this strategy, you really need to be comfortable with not always being right or “winning” but with simply generating a fairly predictable stream of steady income and missing out on big spikes … for example, the big surge Apple has had in the last couple months would have forced you to sell your shares if you had sold options recently. Sold at a profit, booking a decent gain no doubt, but still not doing as well as folks who just held the stock for those months. Investors who sell covered calls need to stop thinking about relative returns and think just about their absolute returns in these transactions — you’re not trying to beat the market, you’re trying to harvest a pretty safe (usually) 10-20% annualized return.
The goal, generally, is to pick a solid, preferably dividend-paying stock that you think should do well and be a great long-term holding… something you’d ideally want to buy and hold for years. Sell the options against it, maybe going out up to 2-3 months to get enough income to make it worthwhile or stick to one month out if you are really satisfied with a 10-15% annualized return, and hope that the stock stays flat or rises slightly and you end up just barely not having your stock called away, then you sell another call option a couple more months out. If the stock falls so far that you want to sell it for a stop loss, you’ll also have to buy back the call options… but at that point it would be cheaper to do so.
Dyson also talks about another strategy that he used that’s a variation of this “Sacramento Maneuver” to make money when everyone else is suffering through a down market — he describes an example of trading Cisco in the ad presentation, essentially noting that investors overreacted to Cisco’s bad earnings quarter last Summer and drove the stock down in what he said was an “irrational” moment, and he then helped his readers to harvest $380 from that without buying the stock.
So that particular variation is likely the cousin of the covered call sale — the cash-covered put sale. That’s when you sell a put option on a stock, effectively promising to buy it at a lower price than the current price in exchange for the option premium (some folks describe it as making a “firm lowball offer” that you can’t back out of).
In the case of Cisco, I presume that the put option premiums rose dramatically last Summer after their 10% drop in mid-August, so with the stock falling to $24 I guess it might have been possible to earn $3.80 per share by selling a put option somewhere near the then-current $24 share price. I don’t know what the option pricing was like for Cisco back then, but that would be a huge premium for a large cap stock in a short time period. To get $380 in income from Cisco now, with CSCO at roughly the same price it was after it fell last August, you’d have to sell 10 July contracts at $24, not one. (Selling ten contracts would mean you’re obligated to buy 1,000 shares of Cisco at $24… so the potential “at risk” cash you’d have to have at hand if CSCO suddenly went to $0 overnight would be $24,000).
And that really is the point. Most options, at least 75% of them depending on who you ask, expire worthless, so obviously people who buy call options to speculate on stocks are swinging for the fences and losing most of the time, and people who buy put options are either just making a short bet with the odds against them or buying some insurance for themselves (and we all know that people who sell insurance do much better, on average, than the folks who buy it).
The people who sell these options to the speculators don’t get any home runs, but they win most of the time… and they do it over and over again, so once you start annualizing the returns they can look pretty decent. The risk is that markets collapse while you’re holding a lot of stocks against which you’ve sold covered calls, because you still have essentially the same downside stock market risk as any other stockholder or, worse, if you’ve sold puts using margin (ie, using cash borrowed from your broker to back it up instead of using your own cash), you could be quickly in a world of hurt if stocks collapse.
Dyson keeps referring to “full cycle” trades and to building these trades off of the strongest companies that have great valuations, so it could also easily be that he’s doing both puts and calls with these kinds of companies — selling cash-covered puts to promise to buy the stock and perhaps just re-selling those puts for a few months if the stock doesn’t fall and you just get to pocket the option income, then buying that stock when you’re finally forced to do so as it falls under your strike price, and turning around and selling covered calls against that new stock position. That’s certainly one way to turn a pretty flat market into gains of one or two percent a month as long as your portfolio is big enough to absorb the commissions (which is a lot easier in these days of extremely low-cost brokers).
You have to be happy with that 1-2% a month or so, though, and with having cash committed to the put sales or long stock positions committed to the call sales. The more you’re tempted to use margin (borrowed money) for any of this, the quicker that goal to earn 1-2% a month turns into shooting for a 5% return on the month and walking gradually into much bigger downside risks.
He gave the example of Teva late in the presentation (just as an example, not as a current recommendation), and perhaps that’s an interesting stock to sell puts against if you think you’d be happy to own it at the current price — but if you sell a July $50 put in TEVA (it’s at $51 now), you’re earning about $1,200 in cash without technically buying anything… but it is $50,000 that you’re putting “at risk” to earn that $1,200, so it’s a 2.4% return in six weeks. Yes, you can do that or a very similar trade with that same capital over and over, assuming the stock isn’t put to you, but if you can do that six times a year that’s still a 15% annual return before commissions. If there’s some accounting scandal and TEVA drops 30% overnight one day and doesn’t instantly recover, it will take you two years of a similar strategy to make back that day’s loss — so it is very important to pick the right stocks, to know the downside risks, and to think of it as a system of generating income and not a system for beating the market or greedily trying to edge out and try for riskier and riskier stocks to get higher returns. It’s also still important, I’d argue, to be diversified — which makes starting with at least a pretty decent-sized portfolio of $50-100,000 a lot more comfortable for this kind of income trading.
So there may be some technique like the rolling of puts and calls around favorite “blue chip” type positions — but really, what Dyson is selling is not necessarily the mechanical idea of this secret “Sacramento Money Maneuver,” which you can probably understand and learn about just fine from any of a number of books or online tutorials in options selling (I like the CBOE tutorials, but most brokerages do a pretty good job with this stuff too) — it’s the research they say they’re doing to pinpoint which stocks are safe and steady enough to build such trades around, and to give guidance for returns that really are very limited to limit risk. I suspect that even with a relatively small subscriber base they might have trouble making recommendations without causing the options prices to jump around a bit, but they are probably big S&P 100 names and Dow-type stocks they’re using for this so there is usually a fair amount of options liquidity in those.
I don’t know if that’s your cup of tea, or if the strategy the way the Palm Beach Income folks are doing it will perform well, but selling options certainly can be a profitable and steady gig and there are several letters that are based on this strategy now. I would’t be at all surprised if they really are able to have a 97% success record over the few years they say they’ve been doing this… but that’s because they must only be shooting for 10-20% annualized returns, and because the market has been very amenable to this strategy for three years because there hasn’t been a 10-20% market fall during that time.
A sharp correction in the market, that kind of 10-20% downside move that brings all stocks down, could easily have wiped out a year of income returns from this kind of strategy — so if those 3% of the suggestions are losers it might not be a big deal because each one brought a 5% loss… but if any of them turned into real stinkers that brought a 20-40% loss, then the performance is dramatically impacted by just a tiny number of bad calls.
Of course, 20-40% losses in regular stocks would clobber a regular portfolio, too, but with a regular portfolio you’d hope to have the 30-40% upside years to make it average out over time. You won’t get dramatically big upside years with options selling, though if options premiums rise with uncertainty you could certainly do better than the 10-15% or so that’s most likely in the current environment.
I don’t do this very often, and I certainly can’t make specific suggestions, but I know there are a lot of options sellers out there in Gumshoedom — it has become an even more important income-generation tool now that interest rates are failing income investors — so if you’ve got some put selling, call selling suggestions for the great Gumshoe Universe, feel free to shout them out with a comment below.
Oh, and no, it has nothing really to do with Sacramento or anything else in California… other than the fact that California has a lot of institutional investors and institutional investors like to sell options.
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