When the world looks bleak, the skies darken, and the locusts appear to be swarming on CNBC, we can always count on one thing: Newsletter editors will be trying whatever they can to convince you that they see the way forward, or that they have a safe haven for your money.
Karim Rahemtulla is no different than most — he’s teasing us today with an investment idea that will guarantee that you get paid, and who doesn’t want to see something like that these days? The newsletter he’s trying to sell is called Strategic Income, one of many letters from Rahemtulla, and from the vast Agora universe in which he toils.
Is it new? Innovative? Dramatic? Probably not for many of you … but there is a “there” there, even if it’s buried under a pile of marketing manure. I’ll try to explain it for you.
First, let’s see how Rahemtulla sells this. He has invented a new term for us, he’s calling this investment the “Surety Income Certificate” — no such thing exists, of course, but this is part of a long tradition, you have your copywriters devise a term that captures the essence of what people want, with some tenuous connection to reality … and then you charge subscribers to find out what the heck they mean when they say “Surety Income Certificates.”
I’ve written about this kind of “invented term” marketing dozens of times — whether you talk about California Overnight Dividends, or Secured Investment Contracts, or Dark Equities … there are real investment strategies buried under the hyperbole, but we, as customers of these newsletters, clearly respond better to mysterious sounding strategies.
And this strategy is somehow involved with income, and part of why Rahemtulla appends that “Surety” name to his invented term is that the income is “guaranteed.”
In his words:
“U.S. Gov’t Agency Declares: ‘This Investment Must Pay You $3,500 on October 16th.'”
And he pulls in some quotes from reputable sources to make it seem real:
“It’s a conservative strategy. You make money even if the market doesn’t rise.” -BusinessWeek
“Individual investors can benefit from this simple, effective strategy.” -Forbes
And like so many ads of this ilk, they make it seem like this is an odd strategy, one that you won’t have heard of because it’s not widely used or liked by brokers … and that only a really smart investor (like YOU) would be interested in this strategy:
“Just by reading this letter, you’re in a tiny minority…”
Rahemtulla tells the story of how he “discovered” these exciting “certificates” …
“I used to think the only way to pocket extra cash was with preferred stocks and bonds…
“But then I discovered a better, safer way to earn thousands in extra income each month…”
Is it just me, or does that sound a little bit like those “work from home” ads that want you to fill out medical forms or address envelopes from your couch? Don’t worry, that’s not what they’re talking about.
He also shares a quote from his mentor, some dude named “Henry” — “The key to making steady income in the markets is to forget about dividends.”
Henry went on to explain how using “Certificates” on blue chip stocks you could pull in much higher income than dividends …
“’You can trade them on thousands of blue chip stocks,’ he said. Fact is, instead of relying on stocks and bonds for income… you simply make a trade on underlying ‘Certificates’ to generate income.”
OK, so some of you probably already understand what these “Surety Income Certificates” are — for the rest of you, we’re just talking about …
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Rahemtulla says as much later in the letter, without actually explaining what he means. Here’s what he passes off as an “explanation” …
“Actually, the trade you make – that puts cash in your account instantly – takes place in the options market. But with Certificates you do not have to buy risky call or put options.
“Long story short: a Certificate transaction MUST distribute the premium received directly to the consumer.
“In fact, brokerages are not allowed to keep this premium. But for years, only Wall Street’s elite has known how to take advantage of this mandatory payout.
“And even today, most brokers still keep these payouts a secret… and you certainly won’t hear about them in the mainstream media.
“That’s why I’ve created a research service to show you how to receive the biggest and best “Certificate” payouts available.
“You won’t need a new brokerage account or specialized knowledge. You can trade these certificates in your normal discount brokerage account in about five minutes a week. And what’s more, you’ll actually be reducing your portfolio risk by incorporating “Surety Income Certificates” into the mix!”
It is, of course, a little bit more complicated than that. If it’s an options trade that doesn’t involve buying “risky” call or put options, then it stands to reason that this must be a strategy for selling options.
So yes, this is yet another example of a newsletter that’s advocating a strategy of selling covered call options for income. Not much different than Jeff Clark’s various ads for his Advanced Income service (California Overnight Dividends, Transfer Dividends, Market Commissions) or Rahemtulla’s earlier ads for his “Secret Price Fixing Ring.”
What does that mean?
I’ve tried to explain this in my words a few times before — you can click on any of those articles above for my more extended thoughts on covered call selling, but it is, at the heart, a fairly simple exercise.
The authors of that “Forbes” article that Rahemtulla quotes (it’s actually an Investopedia entry, though it was published on Forbes.com) actually do a pretty good job of explaining covered calls — you can see that article here if you’re interested. Essentially, they explain it by saying that as an owner of a stock you have several rights, including the right to sell your shares. Selling covered calls against stock that you own means that you’re selling some of those rights, in a way that has been standardized by the options market.
The stuff about the “U.S. Government Guarantee” and the $3,500 payouts you should be getting from this? That’s entirely misleading. The ad tells you that your broker is not allowed to keep this money from you, and of course that’s true — just like no one else is allowed to steal your money, either, and just as selling a stock means you’re “guaranteed” to get the cash for selling those shares. If you sell something, of course it’s “guaranteed” that you get the money from that sale. All this language does is capitalize on your fear that everything is uncertain — if you sell an option, the money shows up in your account immediately and is cleared by the next day.
Here’s how Rahemtulla explains it:
“Making money with Certificates is as easy as one, two… That’s it, there’s no step three. It works like this:
1.You buy a stock. (Or you may be able to use one that you already own).
2. You perform a simple Certificate transaction that’s associated with the stock to claim your payout.
“That’s it. One, two… done!
“I guess technically you could say step three is the sound of money hitting your trading account. But that’s the fun part.
“And it’s the easy part. Because the money is sent directly to your trading account. You don’t have to do anything except wait a couple of minutes for it to arrive.”
So that’s all true, too — and he gives some examples of when you could have gotten — or may soon get — big payouts by selling covered calls against stocks like Sprint, Apple, IBM, Cameco, US Bancorp, and many more. He throws in some nice big numbers, payouts in the thousands of dollars, and then puts down in the small print that his figures are based on owning 1,000 shares.
So if you’re interested in getting $3,500, remember that you might have to own stock with a market value of $30-50,000 to sell ca