Dr. David Eifrig is one of the Stansberry writer/editors, and for a couple of years now he has put out the Retirement Millionaire newsletter that seems to be largely focused on ways to get special perqs and discounts as a retireee … as well as a bit of financial commentary and ideas, I’m told (I haven’t seen the letter).
But he’s also a former Wall Street guy, and a while back he launched one of the “upgrade” newsletters that publishers love so much: Retirement Trader, which is far more expensive than the “entry level” cost of Retirement Millionaire (the latter has mostly been sold for $49 or $99, the former is priced at $2,500 and currently “discounted” to $1,500). This letter apparently takes advantage of Eifrig’s trading expertise from his days at any number of big investment banks to give specific trade recommendations.
And one of those recommendations (this strategy seems to be the primary focus of the newsletter, though it’s a little hard to tell), is to “hack” the stock market by using a special 18-digit code and “unlock your brokerage account for instant cash.”
So what is it? This is how he describes it in the early stages of the long ad letter:
“In a nutshell… if you have a computer at home, there’s a very clever way for you to ‘hack’ Wall Street trading platforms. This enables you to sidestep buying conventional stocks… and pocket cash in just a few minutes.
“Implementing this ‘hack’ simply entails entering a short piece of computer ‘code’ into the system of an online brokerage account… and thus receiving IMMEDIATE cash. (It usually takes anywhere from 30 seconds to 3 minutes.)
“The best part is, you don’t have to know anything about computers or programming code to do this.
“That’s because I’ll show you how to use a piece of already–written ‘code’… All you have to do is cut and paste it into a brokerage firm’s website.”
Sounds kind of like what we’ve heard from other folks in the past, doesn’t it? Apparently it’s kind of tricky:
“You will need an online brokerage account to do this. But not all accounts work with this ‘hacking’ code.Are you getting our free Daily Update
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“So if you already have an account, you may have to request that your brokerage ‘unlock’ a certain feature which will enable you to do this. Or you may have to find a different brokerage firm altogether. “
And then this …
“I don’t want to get too technical here, but the point is, some people place orders for crazy investments they hope will make them a fortune. They put money into the system like a gambler going for the jackpot… When in fact, the trade doesn’t work most of the time.
“Instead, their dreams expire worthless. And the money they used for their gamble… never to be seen by them again. But I’ve found a way to ‘hack’ around the system and grab that money for ourselves. “
So yes, you’re probably getting the idea about what this is — and you’re right, it is a kind of options trading (the good Dr. is even good enough to use the word “options” in the ad a few times, so we can’t claim that he’s completely obfuscating the issue, though he doesn’t actually say what kind of options trading he recommends).
And he describes the risks:
“The good news is, when you follow my ‘hacking’ instructions EXACTLY… you’ll end up with one of two possible scenarios:
In the first scenario, you’ll get to keep the money, and spend it any way you like… and that’s the end of our ‘hack.’
“In the second scenario, you still get to keep the money… but you’ll also be required to buy the underlying stock. I’ll tell you more about this risk later. Because of the possibility of having to own the stock, we only do this ‘hack’ around solid stocks… to keep the risk to a minimum. And you’ll know the risk involved for each play at the start so there will be no surprises.)”
So … if you’re already a reasonably savvy investor and options trader you probably now know what this is: He’s recommending selling puts options. That is, you use either your margin account or a backstop of cash as your collateral, and you sell to someone the right to sell to you a stock at a certain price before a specific expiration date.
Even if you haven’t done options trading you probably know what a call option is — that’s an option to buy shares at a set price before a set expiration date (ie, an AAPL March $350 call option gives you the right to buy 100 shares of Apple for $350 per share before the options expiration date in March — and in exchange for that, right now you’d have to pay something in the neighborhood of $9.50 per share (so $950 per contract, since the contracts almost always cover a round lot of 100 shares). Incidentally, call options have 18 digit codes, too — that one happens to be AAPL110319C00350000, you can probably figure it out yourself but buried not-so-deep in that “code” are the stock ticker, the expiration date, the type of option, and the strike price.
Well, a put option is just the opposite (well, not really the opposite — the opposite would be the person who sold you that call option — but conceptually, we’ll call it the opposite). The put option gives you the right to sell the shares instead of to buy them, so people usually buy put options either as a bet that a stock will go down, or as a hedge against their position (ie, they own 1,000 shares of Apple and they’re nervous as hell that the stock might tank, but they don’t want to sell … so they buy some put options to protect themselves a bit in case the shares do collapse.
And I’ll use the same example — let’s say you want to make sure that you can sell Apple for close to today’s price of $320 to protect your profits … let’s say we’re a little cautious and we’ll round down to $300. You can buy the right to sell AAPL shares at $300 anytime between now and late March for about $11 per share (again, you can only do this with options contracts that represent 100 shares, so you’d pay $1,100 per contract). That contract is worth nothing if Apple stays above $300, because as long as the market keeps the price higher you’d be crazy to sell it for less than the market price … but if Apple falls to $250 for whatever reason, that put option quickly gets to be worth about $50 (you could theoretically buy shares for $250, then exercise your put option and sell them to someone for $300 … though in practice you’d probably just sell the put contract to close it for roughly the same profit, which is far simpler).
So that’s what a put option is — and whether you buy a put option or a call option you’re speculating that the stock will move in your direction, with the likelihood of that happening (as interpreted by the market) being the primary driver of how much that option costs. Most of the time speculators and traders do this with “out of the money” options — like either of those Apple options above, meaning contracts that are valued purely on “time value” or “premium,” they wouldn’t be worth anything if you had to exercise the contract today. Like the Apple put option above, the right to sell AAPL for $300 today is worth nothing (or almost nothing, the same put option with an expiration in three days is selling for about ten cents), but the right to sell it anytime between now and March is worth, sez the market, $11 a share — that $11 can be called the time value or the premium for that option, and it naturally erodes over time unless the stock is moving quickly in the right direction (you’d pay a couple dollars less for the same put option expiring in February, just because you have less time to be “right,” and there is no way to stop the calendar from moving inexorably forward).
So that’s where Dr. Eifrig’s strategy comes in — it’s clear from his teasing commentary that he wants to bet against these speculators who are making wild and unlikely bets (most options expire worthless) … which means he would take the other side and sell you your put option. That’s what he means by the line that in one of the scenarios “you still get to keep the money… but you’ll also be required to buy the underlying stock.”
So if instead of buying those AAPL options, you could sell the AAPL put option contract for March (again, this is just an example — Eifrig says that he does this only with “solid stocks” but doesn’t hint as to which ones he’s trading right now), and you would get to pocket that $1,100 per contract. If the stock stays above $300 for three months or so, the option expires worthless, as most of them reportedly do, and you just pocket the money. If it drops to $250 and someone exercises the contract on the other end (it will be automatically exercised by most brokers right before expiration if it’s “in the money”, though it could be exercised earlier at the buyers option), you have to then spend $30,000 to buy 100 shares of AAPL for each contract (or put up $5,000+ to buy back the option and close the contract.
So that’s the big obligation that backstops the $1,100 you got in “free” cash — which means, you’ll be unsurprised to hear, that if you want to sell that option contract you’ll have to have enough liquidity in your account to make your broker comfortable with you holding this obligation (ie, enough cash or margin to actually buy 100 shares of AAPL at $300 for each contract you sell) — different brokers use different calculations to determine how much actual cash you have to have available and “locked up” against that contract, it might be half or a quarter of the total, for example, depending on your approval level and your margin account and your broker’s policies, or if you’re restricted to using cash-secured puts you’d have to have the full amount in cash (so for this expensive stock, that’s $300 X 100, or $30,000 in cash to back up each contract). Still, tying up $30,000 in cash for three months and earning $1,100 for doing so is a pretty strong annualized income stream — if you do something similar over and over that’s $4,000 a year, so income of well over 10% on your money. Of course, the risk is that if you wake up one morning and AAPL shares have fallen 30% overnight because Steve Jobs was seen naked dancing in a fountain with Bill Gates, you wipe out four years of these kinds of modest returns in an instant.
That’s an exaggeration of the life of a put seller, of course — much of the time you might be making closer-in bets, or bets that are further “out of the money”, and you’d hope to have enough capital that you can do this with some diversification and let the odds work for you … and choose the stocks that are almost surely not going to collapse overnight. Of course, if you sell puts against stocks that have low volatility your earnings would also be lower, but most stocks aren’t nearly as expensive (in terms of just the share price) as AAPL so you wouldn’t necessarily be exposing such a big sum to just one contract. There are also other ways to limit your risks, though doing so always cuts down on your income a bit — you could, for example, buy a $280 put option at the same time that you’re selling the $300 one … you’d cut your income in half, but you’d also put a fairly tight limit on the amount of loss you could potentially take.
It’s often said that the “smart money” are the options sellers, since they know that the odds are with them and they can just harvest the time value from options contracts over and over … but that “smart money” also tends to be institutional investor money, and they have massive accounts and a far easier time being very diversified and rolling with it if they turn out to be wrong. There are several advisory services and newsletters that offer similar strategies to this, with the most widely advertised probably being Lee Lowell’s Instant Money Trader — though lots of folks also use the more familiar and comfortable but conceptually similar covered call options selling strategy (meaning instead of holding cash or margin and selling puts to give someone the right to sell to you, you hold the stock and sell calls against it to give someone the right to buy from you).
And it’s true, if you’re an active trader you can probably generate far more consistent returns by selling options than by buying them, just make sure you research the strategy well and understand what you’re doing, and what your risk exposure is for any particular trade.
I don’t sell options myself, and I can’t tell you which stocks to try it on — I know that a lot of my readers sell covered calls, and probably a great many of you are far more accomplished options traders than I am, so feel free to chime in with a comment below if you have particular strategies or ideas that you find valuable (or, of course, if I made a mistake above … though people rarely need encouragement to point those out!)
If you’re completely new to this and haven’t traded options before, your broker will ask you to fill out a form and sign it to apply for the right to trade options in your account (even if you can buy options now, you may need a higher level of clearance to sell options), and they should send you the standard options book from the CBOE … by all means read it even though you probably won’t want to, then do your research, be careful, and enjoy!