Note: the first version of this article contained some errors in price and calculation in the examples given, now corrected. I wrote some about Michael Lewitt’s Zenith Trading Circle when it was launched last September, and there have been several discussion threads about it over the past six months as well. From what I hear, the first six months didn’t go that well — but, well, running a bearish trading service during a time when everything is going up is going to lead to a lot of unhappy campers… even bad stocks can go up in bull markets.

The ads now, under Gilani, are quite similar to Lewitt’s ads — they take a strident tone of revenge and anger, which helps you feel like you’re part of a fight against something corrupt or repugnant. The “I’m bold and I don’t care what you think about it” attitude they use is one adopted by a lot of newsletter pundits (well, probably more the copywriters than the actual newsletter writers) because it works — the best publishers, particularly those who are connected to the Agoraplex (as Money Map is) know that pushing the envelope is the way to get attention, and if you don’t get the reader’s attention you’re certainly not going to sell a newsletter.

So Shah Gilani’s “tough guy” speak is pretty much the same as Michael Lewitt’s, and it appears that his strategy is about the same as well — or, at least, the strategy he talks about in his ads. The basic goal is to profit from stocks that are in persistent decline, and the easy target for that kind of strategy right now is the retailing sector — so that’s how the ad opens:

“40 U.S. retailers are projected for TERMINATION

“And the all deserve it!

“They gouged Americans of their hard-earned money for too long. But their demise is music to my ears. Because every time one is blown to bits, you could deposit $1,000 into your bank account”

So, like Lewitt before him, Gilani is pitching this idea of profiting from dying companies, bankruptcies, and “businesses that DESERVE TO FAIL!” Lewitt said he was the best in the world at doing this, an assertion that reviewers of the service here might take some issue with (remember, bold assertions are what sell newsletters — not boring old facts and track records), and Gilani is slightly less self-congratulatory, but the basic idea is still to use what they call “Carbon Trades” to make these profits from dying businesses.

The horror stories are, of course, attention-getting: bankruptcies at a bunch of retailers, particularly the mall-based fashion shops… rue21 just filed for bankruptcy this week, so perhaps that will be in the next crop of ads, but there have been tons of examples over the past year… and everyone’s quite aware of the faltering sales at huge mall retailers like Macy’s and Sears (Sears persists against all odds, years after I would have issued last rites).

And Gilani lays it on pretty thick with photos of malls being demolished, and pricks the fear reflexes of his core readers (upper-middle-class folks in their 60s, the core demographic for any financial newsletter publisher) with scary pictures of malls riven with hooligans and gangsters, the very folks that malls were built to avoid as department stores followed the middle class out of American cities in the 1960s and 70s.

The eventual demise of the shopping mall has been well-covered, to be sure, as is the fact that the US has too much retail (we’re “over-stored”, the analysts will say), so how does one profit from that? Can small retail investors profit in an arena where all the best hedge fund short-sellers are already quite active?

Remember, this is not an area where there’s much optimism. Betting against retail is not at all a contrarian move, you’re really very much running with the herd if you’re predicting the demise of Best Buy or Kohl’s or whatever else. Online shopping continues to grow, dominated by Amazon as most traditional retailers have struggled to compete profitably online, and the cultural importance and appeal of shopping malls have been in decline for many years, and both of those trends seem to be pretty persistent even in an economy that continues to grow relatively well… and the smart money has been in agreement that “malls are dying” for years (though there are always some bucking the trend, like Stefan Kaluzny, who keeps trying to turn around faltering retailers, with some success, and there are still plenty of relative “winners” in retail, from Home Depot to TJ Maxx).

So what the heck is a “carbon trade?” How can you use this kind of trade to profit from “The Long-Awaited and Overdue Collapse of the Retail Sector?” Let’s see…

The strategy of “carbon trades” is introduced thusly in the ad:

“Overall, the number of defunct retailers in the U.S. is now longer than O.J. Simpson’s rap sheet…

“Alco, Caché, Delia’s, Furniture Brands, Hasbro, Sport Chalet, Zale, Bluefly, Hot Topic, Talbots.

“It’s like a pile of garbage that keeps on getting taller and taller.

“The problem is, only maybe one in a million people actually knows how to profit from their looming collapses.

“But by using carbon trades, I can show you how to repeatedly extract tens of thousands of dollars from these companies as they crawl into their own coffins.”

Gilani runs down the littany of failures… Best Buy sales down 12% since 2013, Staples down 16%, Office Depot down 30%, Target sales down 21% this year, Walmart sales down 15% in two years… none of that will be a surprise anyone who reads the business press, this is a very well-covered story (there’s speculation here about some of the distressed retailers who might follow Rue21 into bankruptcy, for example)… and then he gets a little colorful again to make sure you don’t get bored and stop reading:

“I look at this and cry happy tears, because…

“These companies had it coming with a vengeance (and then some).

“They don’t deserve your pity…

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“They deserve to drown in their own filth.”

And he doesn’t get into quite as much detail as Michael Lewitt did last fall, but here’s what he says lets you make money:

“Once a company:

* Reaches its breaking point…
* Is no longer making money (if it ever did)…
* And has exhausted all ways to stay afloat…

“Its price is likely only going in one direction – and that’s DOWN.

“But by using carbon trades, I can show you how to repeatedly profit from these mutant stocks WELL before they bite the bullet…”

So what Gilani must be doing, just like Lewitt did, is buying put options on stocks he thinks will continue to fall — and the idea of “carbon trades” is that you just do the same thing over and over, so if you bought August put options on a stock you were convinced would fall, and it starts declining and you’re making some profits, take the profits on those and roll them over into more put options on the same stock for December or January, and, if the trend continues or the stock eventually goes bankrupt and goes to zero, you’ve had plenty of chances to profit.

If you’re not familiar with options trading, buying options is fairly similar to buying stocks — but each options contract gives you the right to either buy (that would be a “call” option — you can call the stock away from the person who sold you the option) or sell (a “put” option, you can “put” the stock to the person who sold you the option) a round lot of shares (every standard options contract is for 100 shares, though there are sometimes adjustments for mergers, splits, etc.) at a set price (the strike price) on or before a set date (the expiration date).

So for put options, if I want to bet that shares in Sears Holdings (SHLD) will fall sharply in the next few months, for example, I can look at the option chain and see that there’s a September exporation with a strike price at $4 trading for about 55 cents. The ticker for the option is SHLD170519P00004000, and that ticker includes all the data (ticker, expiration date, P or C for put or call, and price).

Option prices are quoted per share, but each actual contract will be for 100 shares, so you would spend $55 for the right to sell 100 SHLD shares for $400 anytime before September 15. Those are way “out of the money” now, because SHLD shares are currently at $8.35, so you’d be betting your $0.55 that the stock will fall by a bit over 50% over the next four months.

The excitement comes your way if SHLD really collapses and shares are at, say, $2 in early September, (that’s an example, not a prediction) — then you have the right to sell SHLD for $4 — and that right is going to be worth roughly two dollars (if that’s hard to get your head around, think of it as buying SHLD at the market price in September, $2, then selling it to the person who sold you the put option for $4, since each contract they sold was a promise to buy 100 shares from you for $4 a share).

So if that’s how things play out, the put contract you paid $55 for is now worth about $200 — in practice, you’d probably just “sell to close” the contract and get your fair profit, but you could technically buy SHLD at $2, exercise the options contract, and force someone to buy it from you at $4… it’s just that most people don’t bother exercising options, since it incurs more trading and cost and closing out the options contract usually offers effectively the same financial result.

Options are loved (and feared) because they generate a lot of leverage. In that example, if the stock goes down by 75% or so to $2, you get a return of almost 300%. But the leverage comes at a cost — if you’re wrong about the timing or the price, then you lose 100%. If SHLD falls to, say, $5 on the expiration day of September 15, and you were right about the stock falling, you were still wrong because it didn’t fall far enough, and your options contract is worthless. Likewise, if SHLD goes bankrupt and goes to zero in early September you get a windfall… but if it goes bankrupt in October and all still seems fine in September and the stock doesn’t start falling until after your options contract expires, your options contract likely expires worthless and you’ve lost 100%.

The only other way to bet against individual stocks is by selling them short, and that is both more frightening and more forgiving than buying put options — and rare is the newsletter that has thrived by actually recommending short sales, because many readers find it’s hard to stomach and hard to manage those trades. Indeed, even most hedge fund traders have trouble with short selling, particularly if they disclose their short positions publicly (they don’t have to, the SEC does not require disclosure of derivatives holdings or of short positions in 13F filings that most professional investors have to submit quarterly, but sometimes they share their ideas at conferences or in interviews, in an effort to convince others to join their side).

If you need a quick primer on that, this is short selling: You borrow some number of shares from a brokerage house and immediately sell them (you’ll pay some kind of ongoing fee to “lease” those shares), and you get both the cash from selling the stock (minus whatever the fee is from the broker) and the obligation to return the stock at some point in the future. There is no expiration date on a short position, so you could wait it out even if it takes you years to be correct, but there is an ongoing cost to borrow each year (sort of like paying interest), you have to pay the lender to make good for any dividends the company might pay to its shareholders, and you get a huge dollop of embedded risk.

If you’re really, really wrong about the stock — if, for example, Home Depot (very improbably) comes in and offers $30 a share to take over Sears Holdings and the stock surges from $8 to $28 — then you have a huge loss. You have to buy the shares in the market at $28 so that you can return the shares to the broker who lent them to you when it was at $8, so this is one of the few “normal” investment positions where the potential for loss is, at least theoretically, infinite (SHLD shares COULD go to $10,000 a share, theoretically).

That’s why you sometimes see a “short squeeze” in a stock that has a large short position — short sellers are very mindful of their risk exposure and may have brokers breathing down their neck to cover shorts if a stock surges higher, which would cause them to buy the shares at the market and help drive the share price higher still.

That’s why many folks will tell you to never short a stock if your only rationale for doing so is that it “looks expensive” — expensive stocks can always get more expensive, particularly if they’re expensive because they’re growing (Amazon, for example, has always looked expensive by most metrics, but has gone up 50,000% over time) … you need an actual catalyst that might cause the stock to fall — and usually, by the time most individual investors have noticed that a company is in its death throes, those catalysts are pretty well “priced in” to the stock and the stock is trading at very depressed levels. Which doesn’t mean the stock can’t fall further, of course, every stock holds within it the potential to fall by 100%, no matter what has happened in the past.

And, of course, betting against stocks that have foreseeable negative catalysts is going to be more expensive than betting against stocks that everyone loves — though right now options prices are unusually low in general (that’s what “low VIX” effectively means, people are not paying as much for option protection — the VIX is described as a “fear gauge,” but it’s really just a calculation based on how much people are paying for options to bet on big moves or protect themselves from big drops, and it has been persistently low for quite a while now)… so perhaps there are some bargains worth pursuing if you want to look for put option trades?

What, then are Shah Gilani and the Zenith Trading Circle folks recommending? We do get some hints about a few of the 40 retail stocks that they say are poised to collapse, so let’s see if we can name some of them for you.

Here’s the first example:

“Its projected termination date is August 2017. This is really no shock, because it’s nothing but a run-of-the-mill mass producer of overpriced polyester jackets for spoiled millennials…

“And that crap is about to go on a massive sale.

“The company is now slated to close more than 100 stores nationwide.

“The kiss of death?

“All of their stores are located in damn malls! Opening up a store in a mall is like pitching a hotdog stand at a slaughterhouse.

“If that isn’t bad enough…

“The company hasn’t made a penny in profits in the last four years.”

That’s bebe stores (BEBE), and the news is probably already in that one — they were on the verge of bankruptcy, but came to some kind of deal with their landlords and are planning a gigantic liquidation sale to close all of their stores (they have 173), with the hope that their ecommerce business can survive and they can avoid bankruptcy.

That news, that they had made deals to probably stave off bankruptcy, at least for now, actually popped the stock up a little bit — the shares fell from $6.50 or so when they started to talk about “exploring options” and laying off people in March, then drifted along at a little over $3.50 for six weeks or so, and popped back up to $5.25 on this news that they’ve made a deal with their landlords and might survive. And it’s teensy, with a market cap around $42 million, and is not an optionable stock (there are no options contracts on BEBE, which is not surprising — small cap stocks often don’t have options available), so if you wanted to bet against BEBE you’d have to short the stock. And I have no idea what the downside potential is, they already trade at about a third of book value and $60+ million of that is cash, so there’s some art in determining whether this stub of a company is worth $40 million or $80 million or $0 or something entirely different. A quarter of the shares are already sold short, so it might be difficult to short this even if you want to (in order to short a stock, the broker has to find shares for you to borrow, which becomes more difficult and expensive as the short position increases in size).

So, no big surprise there — it’s a tiny stock, and everyone has already pretty much given up on them on the long side… the strategy of “close all your stores and try to just compete online” is not one that’s necessarily very comforting even if you have a really strong brand and loyal customers. I don’t know what Gilani might be talking about with “carbon trades” for BEBE, since there are no options available and I think Zenith Trading Circle has been positioned to not recommend actual short sales (though that may have changed)… perhaps it’s just a general bet on declining retail or on falling values for malls, like a bet against one of the shopping mall REITs, but that, too, is what you’d call a “crowded trade.”

What else is on Gilani’s chopping block?

“… here’s another laughable company that is set to be terminated in March 2018

“It’s laughable because it’s a retailer that basically sells cotton at a 1,600% markup…

“And it’s ALSO laughable because I’ll be laughing all the way to the bank as this stupid retailer shoots itself in the foot. Oh wait, it already did…

“Because judging by their investor presentations, I think their CEO’s brain is ALSO full of fluffy cotton…

“Bragging about how their products have a…

* 96% “appeal rate”…
* 86% “brand advocacy” rate…
* And a 47% gross margin…..

“Over the last 12 months, the company’s net income is DOWN an embarrassing 95%.”

That’s almost certainly Build-A-Bear Workshop (BBW), the “make your own teddy bear” company that has been trying to refurbish its brand over the past year or two by sprucing up their mall stores. They don’t have a lot of debt on the books, though perhaps they have obligations off the books that I haven’t seen (and they do have lease obligations, for sure, and there are preferred shares outstanding — I don’t know how many or what terms), so I don’t know where the March 2018 prediction comes from. But they did make about $1.3 million last year from continuing operations after making about $27 million in 2015, though a third of that 2015 number was from a tax benefit.

They have been around for a long time, and they are certainly not thriving now but they have gone through periods of both profit and loss in the past and their last few years have been profitable (and it appears they’ve also bought back some shares). It’s not my favorite business, but I have no idea whether or not they’re going to collapse next year — certainly they have seen faltering revenue numbers for a long time, and they will not do well if mall traffic disappears, but that impact is hard to predict with any level of accuracy.

BBW does have options trading, but none of them have a meaningful amount of open interest or trading volume so it seems unlikely that this is an active recommendation for any newsletter. If even a dozen people all bought a few options contracts in this stock it would show up quickly in the trading volume, so perhaps this is a position that they’ve closed out or just another example of a stock they think is going to collapse but not an actual recommendation.

By way of example, you can see that the September $10 puts currently trade around 75 cents, which means you need the stock to fall to at least $9.25 in four months for your trade to be profitable. The stock is at $10.70 today, so that would be a drop of just under 15%. Beats me whether that would work or not, companies that are in trouble can release good news or bad news, and sometimes even bad news is not as bad as short-sellers or the market anticipate — the stock was at $15 at the beginning of the year and fell to the $8s in March, but it also bounced back to $11 last week, so be careful about turning your certainty about “things getting bad pretty soon” into “the stock will fall to this price by this date.”

Still, you could do “carbon trades” in this — if the stock falls to $3 or something in September and you’re sitting on that $10 put option, the option contract you paid 75 dollars for for is now worth $700 for a gain of over 800%. Not bad if you get lucky enough to time it that way. (Yes, I said luck intentionally — it might be that skill comes into play if you make 1000 trades like this based on your assessment of balance sheet risk or business prospects, but rest assured that any single trade that’s this short-term is, to a large degree, a roll of the dice).

Any other specific ones we could ferret out?

“I’m projecting another retailer will be sentenced to termination in May 2018.

“Why?

“Well, it’s wasting LITERALLY billions of dollars a year to stay open.

“Maybe that’s why the CEO is hiding away on an island protected by a private police force.

“If I were one of the 178,000 employees about to lose my job, I’d want to kill him too.

“Investors who haven’t dumped their shares yet should probably think about checking themselves into a mental hospital pretty soon….

“I’m going to show you how to use three carbon trades to potentially make over 2,300% from now until the company’s termination date.

“That means you’ll be set to pocket $60,000 in profit.”

Well whaddya know, this one is good ol’ Sears Holdings (SHLD), and anyone who’s been in a Sears can probably tell you how depressing it is these days… though that’s been true for a decade or more now. If you told me in 2012 that Sears would still have all these giant department stores still operating around the country in 2017, I would have laughed at you, but it has been a strange survivor under the continuing leadership of Eddie Lampert (who does split his time between his hedge fund community in Greenwich, CT and his palatial island estate in Florida).

And yes, I would agree that SHLD is in perpetual decline, and that the real estate that was the one real hope for value in the whole enterprise is also losing a lot of value as malls become less populated, but I don’t know when it might all come to an end — or if there will be some further financial engineering to keep things moving forward somehow. The stock has been in gradual decline for ten years, but there have also been times when it has posted short-term pops of 40, 50 or even 100% during those years. Just this year, the stock has dropped to $5, rebounded to $14, and fallen again to $8… so any precise bet on where it will be within a period of a few months is pretty hard to make.

I guess I could get behind doing a “carbon trade” in Sears if you just bet on the stock falling 20% or so in a three month period and kept making that bet every three months, assuming that the bet isn’t too expensive, because it will probably work at some point… but it could, if your timing is unlucky, easily not work for several quarters in a row, and those 100% losses pile up. It’s hard to keep throwing money at an unprofitable idea, so it takes a certain amount of discipline (or foolhardiness, as the case may be).

And in the case of Sears, it’s not particularly cheap to bet against them — every single person on Wall Street knows the company is in trouble, so a $7 put for September would cost you $1.75 or so, meaning that you need the stock to drop to $5.25 in order to make a profit… that’s a steep drop of about 35% from the current $8.30. Certainly it’s possible that Sears will fall that far, but there are lots of ways for that to turn into a 100% loss for you.

That’s the contract that looks most popular in the near term for SHLD puts, with open interest of about 11,000, so perhaps that’s even the one Gilani is recommending. There are plenty of further-out puts that have even higher open interest, in 2018 and 2019 options, but those require an even larger capital outlay to buy that additional time — which takes some of the leverage away, and gets rid of those fun 500% or 2,000% returns… if you pay $4 for an $8 put, like you’d have to do for the June 2018 expiration, then your maximum profit is 100%, and that’s if the stock goes to zero.

Those are just examples, you can run the numbers on any of the available option strikes… though keep in mind that the options contracts that have fewer than 1,000 or so contracts in open interest (that means that’s the number of contracts that exist — when you buy an option to open you’re creating a new contract, when you sell to close you’re erasing a contract) or little to no daily trading volume may well be difficult to sell if you’re ever in any hurry to get out of the deal — often the bid/ask spread is extremely large, particularly for options that are “out of the money” (meaning the stock price is above the strike price for puts, or below the strike price for calls).

And, of course, newsletter recommendations have a massive impact on options contract pricing — if Gilani comes out and tells all of his subscribers (maybe there are 1,000? I don’t know) to buy September puts on Build-A-Bear and the open interest is only 100 or 200 contracts, the market makers will lick their chops and raise the ask like crazy as the swarm of 20,000 bids comes in, making it probably impossible for anyone to actually get whatever price the newsletter is recommending for a particular contract.

This is a common irritation of options newsletter subscribers in general, if the feedback I’ve seen over the years is representative — options contracts on all but the most widely traded stocks and ETFs are just too illiquid to handle a big load of newsletter subscribers all bidding on the same contract at the same time. And, of course, the other complaints about options trading services tend to be pretty universal: The burden of 100% losses when you’re wrong is high enough that it’s very hard to make up if you have more losers than winners… when you’re buying options to speculate, which is what we’re talking about here, my experience is that it’s very hard to make money consistently… but that the lure of those occasional 2,000% gains is exciting enough that you keep coming back for more. Hopefully, you get a winner often enough to pay for all of those losers that our brains really try to help us forget. (If you’re an option seller, that’s a whole different kettle of fish — then the odds are much more on your side, but the returns per trade tend to be much lower… so the complaint I most often hear about those types of services is that it’s the one bad trade blowing up that wipes out your year of steady and conservative gains).

So there you have it – a few of those 40 retailers that are predicted to die… have any others you want to throw on the fire? Any predictions about whether this new iteration of Zenith Trading Circle will turn things around? Let us know with a comment below.