Review on the Book ‘Generate Thousands in Cash on Your Stocks without Selling Them’: Third Edition by Dr Samir Elias
This book by Dr. Samir Elias tells us about his success in the Stock Market with an approach identified as ‘selling covered calls’.
The usual bullish approach is a sentiment that portrays that the market will go up and inadvertently prices of stocks too will rise.
The approach mentioned in the book is about anticipating a rise in the price of the stock, in a sort of a “bet” riding on the sentiment that the stock price will rise within a specified period of time.
In this sort of a trade, the anticipated price is termed as the “strike” price and the period is for a particular month, the transaction being carried out on the Third Friday as a standard.
To simplify the above, let us assume that the Stock we would like to choose is GOOGLE at $600 for the month of January 2013.
So, the stock we would bet that would reach a strike price of $600 is Google Inc. in the month of January 2013.
Logically, if Google Inc. is selling at $550 today, it needs to cover $50 and go up for the strike price to be realized.
If it does, on the third week of Jan 2013, the buyer will gain a profit and if not then there will be a loss.
The performance of a company can be analyzed through the internet or books and newsletters, subscriptions of which cost up to $2.
In the case of any stock, if it goes up then the price automatically rises.
The methodology of ‘selling covered calls’ is that if your chosen stock (in this case, Google) reached $600 and you have made the call at the current level of $550, you have the right to “call” the stock from its owner by paying him the call price which was fixed (i.e. $550) and then sell it in the open market at the strike price of $600, thereby making you a profit which is calculated as strike price minus call price or $50 in our example.
This is a great way to make money on stocks, but only provided that the price of the option increases.
An adverse or the lop side to this transaction is that if the price of the option goes down (instead of moving up) then you will have lost money due to the decline in the stock price.
Research has indicated that usually 80% – 90% of all stocks lose money, so the risk is greater and the claim that most people make about get rick quickly is one which is circumstantial and most often untrue as the odds have proved.
Dr. Samir Elias in this book shows us another approach, which can also make you money. It explains that in the same manner that we buy stocks, we can also sell them and make money off the sale.
An easy way to make a quick side income from your call buyer is to charge him a flat fee or a brokerage of upto $2 per option. This turns into a sort of a bonus, you get to keep this cash amount no matter what the transaction is.
For the stocks you own, if the stock reaches the strike price then you has to sell them at the call amount and if you don’t own stocks and have accepted a call, then you will need to buy them at present market prices and sell them forward.
This situation is termed as “going naked” and is mentioned in the book though it is not part of the subject.
In any case, when you have accepted the call you will have to pass the stocks to the buyer and you get the cash for the options you have sold. It all boils down to how long you have held the option and what was your buying price at the time you acquired the stock.
In this case, if you purchased a stock of Google for $500 and held on to it, you made $50 per option on the sale along with the flat fee which you charged as brokerage. So there is no drawback to this but being taxed for Capital Gains.
There is information on one more technique which is mentioned in the book. If you would like to buy the stock or want to hang on to them, you will need to pay the market price which is like a regular buy order which is placed in the open market.
A “buy write” is when you have purchased the option as soon as you sold the call, so you make a profit on the movement in the month which is not significant usually but still one which you will be liable to pay tax on capital gain.
The market fundamental in any stock market needs to be remembered, that any stock does not move in a single direction, it always moves in two directions which means if it goes up then it can go down as well and vice versa.
The book also explains that there is a way of losing money on this type of a transaction. Further explained that if you are acting as a broker and have accepted the selling call just to make the $2 in brokerage and if the price of the stock drops by $10 per stock, it can lead to a huge loss if the numbers are large. So you end up making the brokerage but losing money on the drop.
One such example is what happened to me as well as a huge number of investors; I lost a great deal of money (value) on stocks when the Dow Jones dropped 7,100 from November 2007 to 2009.
There is a great deal of information which is helpful in the book, but in certain areas there is information which can be misguiding to the reader or inaccurate. For starters, In his book, Elias mentions that you have to buy back the stocks at the market price so that you don’t lose the stock and maintain it as a part of your portfolio.
He further mentioned that this should be done even if the stock reaches it strike price, one can buy the call from the proceeds of selling another call at a higher price (even more bullish) which in a way makes the process of selling covered calls look very easy. Factually, I would seem to disagree with the author on this as there are two deterrent factors to this transaction:
The first deterrent being, that it is illegal to sell two calls on the same stock. You have to complete one transaction to begin a second one. And second being that the call would not be profitable as the strike price (assuming it to be higher) will not fetch any money as it will be equal to that of the market price.
Another critical evaluation of the case studies in the book reveals that the cases have been elucidated but does not result into any plan of action. In some cases, I would like to add that the scenarios and advice which the author has provided his readers is not necessarily sound.
Chapter 8 has been dedicated to charts and advice on timing of sale and buy of options in relation to moving averages and exponential moving averages. In my opinion, if such techniques were a sure shot way or an assurance to make profit on stocks, the large companies with bigger pockets and PH.Ds in finance would be controlling the market.
The big Unpredictability factor reduces the dependency on such charts and averages.
My conclusion based on personal experience and my knowledge is that this approach of covered call selling does not guarantee that the person who trades under such practices is sure to make money.
It could very well serve as a good way to make opportunity money but that’s momentarily.
Someday your buying call could go very wrong with the price of the stock going down to a great extent and you could also lose money on your selling call.
The prospect too does not seem to be very lucrative in a bull market, as due to the market sentiment (that the stocks will go up) there is not much of a chance to maximize on the profit as there is a gradual increase and not substantial, so the risk can sometimes be greater than the reward.
In the end, it is your personal judgment which will help you to make money and rather than spending money on such books which claim to help you to make quick money you’d rather save it in your bank account.