One of the introductions to this ad reads thus:
“Use this code: CKUCU.
“If you go to your brokerage account today… type in stock ticker COF… and enter the code’s 5 letters – you’ll receive $920 within 5 minutes.”
But the more fun introduction, the one that’s probably really getting peoples’ attention, is this:
“Use Code CKUCU
“to ‘scam’ $920 in the next 5 minutes
“I’m sick of being screwed… so now I’m paying myself – with other people’s money.”
This letter is a wash of vitriol — a test from the Stansberry & Associates marketing folks to find out if we are as angry as they think we are, I guess, and to see if we bite on a promise that we can “scam the system” for ourselves and say “Screw you” to the worthless CEOs. Probably a good bet, but we’ll only know if it’s working if we see it a few hundred more times in the weeks to come.
I’ve seen several different variations just today — from “Screw AIG” to “Ken Lewis is a Jerk” — and probably most folks will click on those ads just out of frustration at Bank of America or at the ridiculous AIG bonus scandal.
This is a long letter, and I suspect many of you have already seen it, and read at least a few lines, so I won’t go deep into the pitch … I’ll just share with you a few key points, and let you know what it is that they’re really talking about.
My readers have been emailing me this one like mad, asking if it’s “real” or if it’s “legal,” or to see how whether they can really pull a “scam” like this.
And the short answer is yes, of course it’s legal, and it’s real … but that means you have to understand what “it” is. The “real” strategy hidden deep in this sales pitch is in no way a “scam,” and any vicarious feeling of revenge you get from following this strategy would, I hope, be quite fleeting, since it’s hard to see how this is really going to “screw” the corporate fat cats. It might or might not get you some income, but they probably don’t care.
Here’s what the ad promises:
“in this letter – I’m going to show you how to “scam” $920 a day or more from the corporate accounts of over 3,500 public companies.
“Under SEC law… you won’t ever be fined, reprimanded, or arrested for doing this. It’s completely legal. But the fact is: By using this secret… you can wire thousands in corporate money to your personal stock account, on a 5-minute transaction.
“Believe me… I’m not a crook. I work a regular 9-to-5 job… pay my taxes… and I rarely even pay a bill late. I certainly don’t believe in stealing.
“But I’m sick of being screwed… so now I’m paying myself.
“‘Scam’ $350 from Dell (DELL)
“‘Scam’ $235 from Coca-Cola (KO)
“‘Scam’ $215 from Intel (INTL)… ALL IN 5 MINUTES”
And then they go on to tell us about that featured “code” in the head of the letter, CKUCU — it’s related to Capital One Financial …
“Chances are – you got screwed by Richard Fairbanks last year.
“He’s the CEO of Capital One Financial (COF)… ranked by Forbes as the highest-paid executive in America, with a recent annual salary of $250 million.
“But if you own shares of his company – you’ve lost 84% of your money since last fall… and not ONLY that, but as CEO of a multibillion-dollar bank, it’s thanks to idiots like Fairbanks that our entire economy is now in the toilet.
“I can show you how to “scam” $920 from Richard Fairbanks’s corporate account right now if you want… and legally keep every last penny. Screw him!”
OK, so now, after reading this far into the ad, I’m starting to feel a little bit greasy ….
What’s being teased here is Jeff Clark (he’s called JC in most of the ad copy) and his Advanced Income newsletter — they’d like you to subscribe to this letter for the special discount price of $750, and learn how to “scam” American corporations.
But of course, this is in no way a scam — and it’s not even a direct transaction with a company, except to the limited extent that some of these strategies involve regular corporate dividends as part of their timing strategy, or in their income calculations.
There is quite a bit in the teaser about how you can take advantage of this “scam” strategy, and they start to get a bit more specific.
“Quite simply: He noticed one of the options for Ellison’s stock came with a 5-letter code… which would enable him to receive several hundred dollars from the exact same pool of cash paid out to the CEO in stock options.”
So here’s what’s not particularly real — you’re not going to be taking money from a company’s account, except sometimes for their regular dividends, or skimming it off of a CEO’s compensation package as some parts of the ad begin to imply …
This “scamming” is simply selling call options. And if you want to, as the ad says, say “Screw You” to Ken Lewis when you sell a call option on Bank of America shares, well, go ahead — but he will have no reason to care, it won’t impact him or his company in any real way.
If you’re familiar with Jeff Clark, or have been walking in circles around Gumshoe Island with me for more than a few months, this may all ring a bell — Clark has had some very heavily publicized email ad campaigns for his Advanced Income service, which is essentially (he may do some other stuff too, for all I know) a service that recommends covered call trades for income.
This is a mysterious kind of trading for many people, which is why the ads often get away with using creative names to drive interest — they’ve called similar strategies California Overnight Dividends, Transfer Dividends, Unclaimed Dividends, Tier-Two Equities, and more — I published a list of the names I had written about as of last Summer, and I’m sure we’ve seen a few since then.
And there’s nothing terribly secret or complex or mysterious about those odd five-letter codes (like CKUCU) that are scattered throughout the letter — those are just the tickers/symbols for specific options contracts, and there is a logic to them (all the Capital One options start CKU or COF and the last two letters are the amount and the expiration date, for example), but you don’t need to know the logic — just check any major financial info website and they’ll show you the “options chain” that includes all the tickers for the various strike prices and expiration dates. It’s not as complicated as it might at first glance appear.
The basic strategy is a very simple one, though the variations are nearly endless — it’s a way of generating what are usually fairly stable returns by buying a stock and selling off some of your potential upside — here’s how it works …
You buy a stock in round lots (you need to own at least 100 shares), and sell call options against that stock.
A standard call option is the right to purchase 100 shares of stock (this would be called “exercising” the option) at a set price anytime before the expiration date of the option. If the stock is currently trading above that price the option is “in the money,” if it’s below the price the option is “out of the money.”
So you own a stock, and you’re selling someone the right to buy your shares from you at a set price, before the option contract’s expiration date. Whether they choose to do so is up to them, and you can get out of the contract in one of three ways: having it expire worthless; having it exercised (meaning you actually sell the shares at the “strike price” of the option), or buying the option back at the market price to “close” the contract.
Investors will usually pay a premium for an option — meaning, if the option is “in the money” they’ll pay a bit more than it could be exercised for today. That premium is often referred to as “time value” because it’s what an investor will pay for the potential that the stock has to rise between now and the expiration date of the option, which could be next month or, for LEAP options, in a year or two. Most options are never exercised, they either expire worthless or they are bought back (or sold, depending on which side you’re on) to close the option contract.
If you own the stock, as most examples of Jeff Clark’s strategy usually imply, it’s called a “covered” call option that you sell, because you’re essentially putting up your stock as collateral for the option that you’re selling. If you don’t own the stock, it’s a “naked” option, and those require a more advanced clearance from your brokerage, and usually a fair amount of cash or margin debt put up as collateral in case the trade goes against you, since if someone decides to exercise their option you’d have to buy those shares to make good on the option contract.
Let’s look at one of the examples they tease, just to clarify.
Oooops … actually, I can’t — they list a dozen or so examples in the ad, including CKUCU, QAACS and QEBCD, to name just a few, and they are real options ticker symbols (or “secret codes”, if you prefer), but all the ones I checked are for expired options contracts, contracts that closed last Friday on the March expiration date (the last day to trade standard options before they expire is the third Friday of the expiration month).
So let’s move those examples forward a month just to be “real” and show you live prices:
They say that the code for Apple Computer’s “corporate account” is QAACS — that was the options ticker (each options contract has a unique ticker, just like stocks) for AAPL March $95 calls.
So let’s push it forward to April — I have no idea when the copywriter put this together, but this will at least serve to explain:
If you want to sell covered call options on AAPL for April at a $95 strike price, the ticker is QAADS. Since AAPL has had a nice run in its share price, this option is now “in the money” because AAPL currently goes for about $107. So we can do the math and say that if we bought the option now, then exercised our right to buy AAPL for $95 immediately, we could then sell our AAPL shares at the market price of $107 for a $12 gain (roughly). The current bid on that option contract, as I type this, is $13.90, so that extra $1.90 ($13.90 minus $12) is the “time premium” — what someone is willing to pay for the chance that AAPL shares will go up (and not down, of course) between now and the April 17 expiration date. Premiums for solidly “in the money” options like this are generally lower than for “out of the money” options, because the option has some intrinsic value right now and the buyer is putting up more capital for that relative safety.
So, taken one way, this is an easy way to essentially skim a bit of income. If you sell an in the money call, and it’s deep enough “in the money” that there’s a good chance it will be exercised in the next few weeks, as this one might be, then you’re really just hoping to clear that small piece of monthly income and you’re probably happy to give up your shares to make that possible.
So in this case, if we assume that AAPL shares stay at $107 for the next month and the option you have sold is exercised, you will have netted $1.90 a share, minus commissions of probably anywhere from 10 to 25 cents per share, depending on how many options contracts you sell and what your options commission rates are from your broker. You put up $107 a share to buy AAPL, then immediately netted $13.90 per share to sell the option, lowering your cost basis to $93.10, then sold your shares at $95 in a month. That’s almost exactly a 2% gain in one month.
The gains can be substantially more if you sell covered calls that have more “premium” to them, of course — for a similar example, you could sell a covered call that’s a little bit “out of the money” in AAPL, (which is probably what they were thinking if they put together this copy a couple weeks back when AAPL’s share price was closer to $90) and get numbers like this:
Sell the AAPL April $110 calls for a current bid of $3.70. You’re still buying your AAPL shares to “cover” this call option at $107, so now you lower your cost basis to $103.30 ($107 minus the $3.70 you get for selling the option). If the shares go higher and your option gets exercised at $110, you’d get $6.70 per share minus whatever commissions you pay. From an initial investment of $103.30, that $6.70 means a return, again in the course of about a month, of close to 6.5%. If the shares fall lower and stay through the expiration date, you at least still keep the $3.70, since the option will expire worthless … but of course, if you wake up one morning and AAPL shares have suddenly fallen by 50% because Steve Jobs announced he’s entering a monastery or because it’s announced that the iPhone causes leprosy, you’ve still lost a lot of money, just like any other shareholder, and the $3.70 in premium you pocketed will only provide some small cushion to that loss.
This second example is more typical of most covered call sellers I know — people who do this for a steady income tend to sell their calls a month or two or three out, sometimes a bit further to increase the premium amount, and sell “out of the money” calls, though still, like this example, “close to the money” so they can get a reasonable premium (selling the AAPL April $140 call, for example, would only earn you about five cents a share because it’s so far “out of the money” that it is extremely speculative). Ideally, it would be nice if you could pick stocks that had reasonably high options premiums but never quite got exercised, so you could just hold those shares (and even collect regular dividends, if they happen to have a dividend) and sell a new options contract each time the current one expires worthless, and not have to keep buying and selling the underlying stock. Easier said than done, but some people say they manage to pull it off.
This strategy is getting a bit of extra attention these days, thanks to the many folks who depend on dividend income but who are seeing some of their big, long-held positions cut their dividends (like GE, for example, or pretty much any bank). There was a quick column on this in Barron’s over the weekend using the example of US Bancorp — essentially, it discusses one way that a shareholder who depends on dividend income and doesn’t want to sell a big share position (either because it’s “too low to sell” or for tax reasons or otherwise), can “sort of” replace a slashed dividend with some call options sales.
The downside? Well, there are a few things that discourage some folks, particularly small investors, from implementing this strategy:
First, if you’re selling covered calls you have to buy the shares. So the outlay for this AAPL example would mean buying a hundred shares of AAPL for $10,700 — you can only sell options against round lots of 100 shares, since each options contract represents 100 shares (just to make it more complicated, the quoted price is for a single share — so for the QAADS call, for example, the quoted price is $13.90 but you’d actually make $1,390 from selling one option contract, because you multiply by 100 for the 100 shares represented).
And as with many things in investing, small investors can get eaten alive by commissions — commission rates for options and equities are not nearly as high as they were 20 years ago, but they are still significant, particularly if you’re talking about eking out 3-6% gains each month, so if you can sell 10 options contracts instead of one, you’ll do better … which means that having $300,000 to use in this strategy is a lot easier, and more efficient, than having $10,000 to use. And do be careful if you tread into these waters for the first time, brokers often have options commissions that are quite different from their regular stock trade commissions, and typically include also per-contract fees. Again, most of them are still pretty reasonable, but be aware.
Another possible downside is that these are covered calls, so you own all that stock — and you’ve already sold someone else the right to buy it from you, so if you become afraid that AAPL is going to drop by 30% and more than wipe out your 4% in options income, your broker will usually make you close the options contract first if you want to sell the shares. So, if you like to have stop losses in place for your stocks to close positions, that becomes a bit more complex. Still doable, but complex and perhaps more costly, since there’s now another party in the transaction.
And there is, for some people, a “mental downside” — you have to go into this with a focus on following a system, getting your reasonably predictable returns, and being happy to have your shares called from you every now and then. If you’re investing in a stock that you’re convinced will do great in the long term, and just want to sell options against your holdings on a whim to pick up a few bucks, be prepared that you might miss a sharp gain — particularly for a stock like AAPL that can be volatile and news-driven. If you sold those $110 calls for April, and the stock shot up to $150 next week for whatever reason, you might end up kicking yourself because you’ll get none of that $40 gain between $110 and $150. If you’re the kind of person who will punch a hole in the wall if that ever happens, think twice about this strategy, or at least use less volatile names to better your chances (volatility brings higher options premiums, of course, so you’ll also make less income from selling options in more stable stocks).
Other than that? Well, there are tax consequences — If you’re doing this in a taxable account, this will all be taxed as short term capital gains (or losses, should you be so unfortunate), which may cut into your returns.
This past year or so, including the current environment, does provide a nice boost to strategies like this because of options premiums that are historically pretty high. When people talk about the “VIX” (volatility index) being high, that measure of volatility is actually taken from options pricing — so when the VIX is high, that means premiums on options are generally high, which means it’s a good time to be selling options, all else being equal (sell high, right? — of course, they could go higher).
If you’re wary of digging into this yourself, or if you don’t have enough cash to build a diversified portfolio using this strategy, but you still like the idea, there are also ways to do this with mutual funds and with ETFs, ETNs and closed end funds.
There is a covered call index ETN from iPath (the iShares cousin that does ETNs) on the S&P 500 that essentially covers a near-month buy write strategy on the index (buy the shares, write a call option for the next month, repeat) … ticker is BWV and it has outperformed the S&P 500 over the past year (still down, but down quite a bit less). If we happen to have a big up year, of course, it’s quite possible that it will underperform the index, since it will be capping each month’s potential return. Since I’ve mentioned this, I should note that this is an ETN, not an ETF, so be aware that you’re taking credit risk with this investment (ETNs are backed by the bank that issues them — Barclays, I guess, if they haven’t sold iShares yet — and a promise by that issuer that they’ll match a particular index, they don’t actually have a portfolio that belongs to the shareholders).
This ETN also doesn’t get you that steady income stream that selling covered calls yourself might do, but there are some closed end funds that try to turn this strategy into a yield-producer for you …
There are several closed end funds (CEFs) that you can also easily buy on the exchanges which use buy/write strategies or similar options strategies, sometimes also buying puts or using leverage to increase their income, etc. One way to browse through such funds is by using the Closed End Fund Association’s search function here — just choose Options Arbitrage/Opt Strategies Funds under the “Classification” box and hit search to see them, or use other criteria to filter out the ones that might interest you. I haven’t looked at many of these, but I know there are some Gumshoe regulars who have favorites, so perhaps they’d like to share their thoughts in the comments below (I won’t put words in their mouths).
And on that note, I know there are plenty of folks here on Gumshoe Island who have used this strategy successfully — there are all kinds of variations, and all sorts of ways to make income from options trading or selling, so feel free to share if you like.
These “scam” codes are no great secret — most financial websites will publish what’s called the “option chain” of all the expiration dates and prices so you can see what the possibilities are, and most reasonably large companies have options trading in their stock. You won’t be taking any money from Steve Jobs’ pocket — or, for that Capital One example, from Richard Fairbanks’ “corporate account” … but it is a real, legitimate way to make some income.
I’m sure I haven’t gone over all the possibilities and pitfalls in selling covered call options here, but hopefully it will give you a taste (and more active optionistas than I are welcome to chime in). I do have just one more thing to add about options, and it applies to pretty much all options trading services …
Be wary of paper profits that these services report, and be especially wary of services that recommend trades in relatively small cap or speculative options that trade in low volume (that’s not apparently the case with Advanced Income). Options almost always trade in far lower volume than even the smallest speculative listed stocks, so the recommendation of a fairly big newsletter like Advanced Income can easily move the price of an option — if there are suddenly 1,000 new people who want to sell a call option on a given day when the recommendation is released, the option premium for that option is likely to go way down and depress what the returns “could” have been.
Sometimes it’s not so bad — those AAPL “near the money” options I noted might have daily volume of 5,000 or 10,000 contracts, so your five contract sell might not move anything — but there are many options that trade in far lower volume. Just to pull a random example from the “A’s”, Amgen, also a large cap technology stock and a well known company — the call options that are a few dollars out of the money for them traded less than a thousand contracts today, and it is not at all unusual to find options contracts that do not trade at all in a given day.
This is less of a concern with the big, high option volume “blue chip” stocks that are mostly given as examples in this letter, so Jeff Clark is probably cognizant of the fact that he has to pick relatively high volume, liquid options contracts to give his subscribers a fighting chance — but odds are still pretty good that many of them might have a hard time replicating his published returns. That’s not so much a specific complaint about Advanced Income as it is a general complaint about almost all options trading newsletters and services.
We do have a nice little placeholder for possible subscriber reviews of Advanced Income here, but no reviews yet — if you’ve tried it out, let us know what you think. We do have several reviews in for Jeff Clark’s more expensive and aggressive trading service (S&A Short Report, $4,000 a year), you can see those Short Report reviews here if you like.