An ‘infinite money cheat code’… A quick Options 101 lesson… Selling options can have less risk than just buying and holding stocks… The investing tip I give my friends… Doc’s winning options strategy…

Editor’s note: Over the weekend, we shared essays from Stansberry Research senior partner Dr. David “Doc” Eifrig in our Masters Series about his No. 1 options-trading strategy and his secrets to successful trading.

Today, I (Corey McLaughlin) want to share a related essay from my friend and Stansberry Research senior analyst, Jeff Havenstein, that was originally published back in 2019.

As you’ll see, the essay is still relevant today…

Jeff works closely with Doc and has unique insight into his options strategy. He writes about why you might want to give it a try, much like a PGA Tour professional golfer in search of “private-jet money” did when Doc gave him a hands-on demo…

If you had an ‘infinite money cheat code,’ would you use it?…

Say you could deposit $2,000 and turn it into $20,000, $50,000, or even $1 million in moments…

And then say you could put that money into a single stock – maybe your favorite is entertainment giant Disney (DIS) – and watch it grow into thousands of dollars in profits with one small move…

While this ‘cheat code’ might seem unrealistic, it did exist…

If you’ve never heard of the online message board WallStreetBets, it’s worth a visit…

The site, hosted on the popular news aggregator and discussion website Reddit, has become a home for investors who make risky bets and want to share information and opinions about them.

The message board is a collection of investment tips, bragging, quite a few memes, and, of course… overconfident young traders.

Let me (Jeff Havenstein) give you a quick example…

In 2018, a 24-year-old software engineer, Dennis Cao, boasted about a massive wager he’d made… He bet that a few Big Tech darlings would rise after they released quarterly earnings.

Unfortunately, the trade went against him. He lost about $185,000 in one day. And he posted a screenshot of his losses on WallStreetBets shortly after.

But no one called him reckless. Instead, other users sent positive notes, congratulating him for sharing the results of his loss. He behaved “like a man,” one reader said.

“Mad respect,” said another.

Trust me, you’ll be hard-pressed to find a larger collection of testosterone in one place…

A few WallStreetBets members posted about the ‘infinite money cheat code’…

One user wrote that he was able to deposit $2,000 in his brokerage account and magically turned it into $50,000. (He then proceeded to lose it all, as he used it to buy Apple (AAPL) put options.)

Other people used the same “cheat code” to greater extremes…

Two users turned their respective cash deposits of $4,000 and $15,000 into more than $1 million worth of stock. One trader used the method to end up more than 500 times leveraged and long more than $1.7 million in chipmaker Advanced Micro Devices (AMD).

Here’s the screenshot he posted to prove it…

Posts like these were hits on WallStreetBets. They were cheered.

As you can imagine, the message board grew in popularity during this period… (It eventually became the same place where the GameStop “meme stock” mania began.)

Now, you might not be the type of person to post about risky single-stock trades on an Internet message board…

But wouldn’t you like to know what this “cheat” investment was?

Here’s how this ‘cheat code’ existed in the first place…

In short, it was a glitch in the free stock-trading app Robinhood.

Robinhood was launched to the public in 2015. It allows you to trade stocks on your smartphone or tablet.

Its target audience is millennials, a generation perfect for WallStreetBets.

The “infinite cheat code” existed for Robinhood Gold members, paid subscribers who are allowed to trade “on margin” if they have at least $2,000 deposited in their accounts (which is swept into FDIC-insured banks).

Essentially, you’re given $2,000 (or more, depending on how much cash you deposit) of what the company calls “buying power” to buy stock if you pay monthly for a subscription.

Regular Digest readers know how risky margin can be, if used incorrectly…

Margin is a type of debt. Using margin allows you to buy shares of a stock with less upfront cash than you would otherwise need.

When successful, it can magnify your percentage gains. But it can also exacerbate your losses. And like any debt, it costs you interest, and you have to pay it off eventually.

Most brokerages allow margin debt to make up to 50% of an account’s total value.

But the trade in this case wasn’t the issue. It was Robinhood’s software. And a small group of astute users of the app noticed a loophole…

Traders used margin to borrow money and buy shares of a single company…

Then they sold something called “covered call options,” which paid them cash immediately…

And once the cash from the options sale was added to their account, it tricked Robinhood into thinking they had more cash than they actually did. That led to more buying power.

It was an “infinite money cheat code,” and they repeated this process over and over again. We’re talking tens or hundreds of thousands of dollars of more buying power.

Now, this might sound complex if you’re unfamiliar with options jargon. So I’ll give a quick Options 101 lesson…

A “call option” is a contract that gives the buyer the right, but not the obligation, to buy shares of a stock at a specific price before a certain date. (If you memorize that sentence, you’ll sound very smart talking options at your next cocktail party.)

But, basically, options are like a side bet on a stock. (You might get along with more casual people at the cocktail party if you describe options this way.)

A “covered call” means you’re selling someone else in the market the right to purchase a stock that you already own.

In options trading, there are sellers and buyers, each making bets…

When you sell a covered call, the buyer gives you money immediately, known as the “options premium.” He’ll pay you up front and can decide whether he wants to buy your shares.

So when you sell a covered call, you can immediately end up with $300 or $700 or whatever the options premium is… right away.

And this is where the people posting on WallStreetBets about a “cheat code” were able to take advantage (at least temporarily)…

The problem was that Robinhood incorrectly added the entire value of the sold options (which could potentially reach into the tens of thousands of dollars) to the original cash that subscribers had on hand.

That allowed these traders to borrow a larger amount of money on margin than they were expecting…

And if you repeatedly sold covered calls and kept getting more cash from the options sale, you could borrow larger and larger amounts with each trade… with no limit.

As you might guess, this didn’t end well…

Robinhood became aware of the glitch through the posts on WallStreetBets and quickly fixed it.

But Robinhood’s “infinite leverage” came under regulatory scrutiny from the U.S. Securities and Exchange Commission (“SEC”).

And it wasn’t just a problem for Robinhood.

Many users of this hack lost a lot of money. One trader, who deposited $4,000 and had more than $1.2 million of leverage, lost $22,000 – more than five times his initial deposit. We all go through the lesson (and pain) of having too much leverage at some point… But for these traders, this lesson was excruciating.

Others had a bit of fun with the hack. One WallStreetBets member posted this screenshot, trying to get discount broker TD Ameritrade to offer him the same infinite leverage ability…

The accounts that were found to have exploited the error were suspended.

I’m not going to lie… I had a good laugh when I read about this story. But I also shook my head…

This will just scare more people away from options, I thought.

People who hear this story may want to stay away from options. Many investors already consider them a complex, risky financial instrument…

But the truth is, options just have a bad reputation.

There are all kinds of horror stories about traders losing big on options trades and getting into serious trouble. I’m sure some Digest readers came across this Wall Street Journal headline…

James Cordier, the founder of OptionSellers.com, created an emotional video apologizing to his clients about big losses from bad bets on energy prices. And what was he doing?… Selling options.

His YouTube apology video was kind of painful to watch. “You were my family,” he said, “and I’m sorry that this rogue wave capsized our boat.”

I could write a whole essay talking about the mistakes Cordier made… But in short, he was using too much leverage and betting on natural gas, a sector that can be extremely volatile.

There are more headlines all over the place suggesting that options are risky and dangerous…

But, again, that’s far from the truth.

Selling covered calls is a great strategy, if done correctly.

I’m an analyst for Stansberry Research senior partner Dr. David “Doc” Eifrig, and he has been telling his subscribers to use this method for more than a decade.

Some option strategies carry big risk, sure… But selling options is one of the safest things you could do in investing.

It just so happens that a few Robinhood Gold subscribers exploited a loophole in the software that otherwise could be used to consistently hand you a steady stream of income, with not a lot of risk.

There’s a reason why these exploiters thought to sell covered calls first…

Selling options, when done correctly, has less risk than just buying and holding stocks…

Here’s an example…

Let’s say you buy 100 shares of a stock – in this case, a video-game company.

You sell a covered call that has a strike price of $130, which means you’re agreeing to potentially sell your shares for $130, about 6% higher than what the stock is trading for now (around $123).

And because you agreed to do this – because you agree to potentially sell your shares – the buyer gives you $550 upfront… just for the privilege to sell your shares for a higher price than they’re trading for now. No other strings attached.

If it works out and the stock goes higher… you’ll sell your shares for 6% more than what they were trading for when you sold the call. Add that to the $550 you received up front, and you’ll pocket 10% in a matter of a few months.

Now, think about the worst-case scenario… Say the stock flops on a big game release. Investors are panicked. They sell their shares, and the stock crashes to $90 – a drop of 27%. That’s a big loss to take as a shareholder. And it’s one that we all want to avoid if we can.

But you own shares and sold the covered call, so you’re only down 23%. That’s because you received $550 up front, which lowers your cost basis.

By selling options, you actually have more downside protection than a regular shareholder…

And most of the time when you sell a covered call, the stock doesn’t move too much from where it was when you bought it. The buyer of the call options doesn’t make you sell your shares, and you get to keep the $550 premium. And that’s the end of the trade.

You earn $550 for pretty much doing nothing.

That doesn’t sound too bad, right? Or is it too good to be true?

When used correctly, selling options is one of the safest and most consistent moneymaking strategies out there.

In fact, Doc’s longest “win streak” from selling options is more than 200 consecutive winning trades. And he has won 94% of the time for more than a decade…

When my friends ask for investing tips and ways to get started, I always point them in the direction of selling options…

If you own stock, you should learn about selling options. Period. And that applies to both selling call options and put options.

So don’t believe everything you hear… or read on sites like WallStreetBets.

Trading options is only dangerous if you let it be. And it’s simple to learn when you have a great guide… Doc, a former Goldman Sachs trader, as you may know, has shown all kinds of people with no prior experience how to trade options over the years.

Most recently, Doc sat down with a PGA Tour golfer, Kevin Kisner, to teach him how to sell options…

And you can watch the hands-on tutorial that Doc gave Kisner, a Stansberry Research-sponsored professional golfer, down at his home course in South Carolina.

Kevin said he wanted “private-jet money,” and Doc walked him through how he could collect “income from nowhere” immediately in his brokerage account in a real-money demo.

Kevin was afraid at first and had zero experience with this strategy. But Doc walked him through the strategy step by step, showing just how easy it is and exactly how much income he could collect.

I’ve worked with Doc and Stansberry Research Director of Research Matt Weinschenk for several years now, and I can tell you that we take our options services very seriously…

For starters, Doc has put together a collection of educational resources about options trading that you won’t find anywhere else. If you can’t learn how to trade options the right way from him, there’s a good chance you can’t learn from anyone.

Plus, we then follow up with a large number of trades throughout the entire year, no matter the market conditions… usually at least one about every two weeks or so.

Like I said, this is the strategy I recommend to my friends. And we take sincere pleasure when we hear all the great feedback that we get from our subscribers.

Click here to watch Doc teach Kevin and learn more about Doc’s option strategy.

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Recommended Links:

Can Kevin Kisner Collect $4,000 in 60 Seconds? This morning, we aired a Real Money Demo. A professional athlete attempted to collect $4,000 in 60 seconds by selling put options. Did he succeed? Or did he lose money? Watch his transaction on Costco Wholesale (COST) and find out – including how to begin using this strategy yourself. MAJOR BUY SIGNAL: Move Fast, Washington… His system has found stocks that soared 1,174%, 2,123%, and 11,422%. But one investment he just uncovered in Washington could be his biggest discovery yet. It involves President Biden, Nancy Pelosi, trillions of dollars – and the biggest economic shift since 1958. See for yourself.

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New 52-week highs (as of 6/14/24): Alpha Architect 1-3 Month Box Fund (BOXX), Costco Wholesale (COST), Commvault Systems (CVLT), Microsoft (MSFT), ProShares Ultra QQQ (QLD), Regeneron Pharmaceuticals (REGN), VanEck Semiconductor Fund (SMH), ProShares Ultra S&P 500 (SSO), ProShares Ultra Semiconductors (USD), Vanguard S&P 500 Fund (VOO), and the short position in Cracker Barrel (CBRL).

In today’s mailbag, feedback on Dan Ferris’ latest Friday essay… Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

“Dan, Thank you! Finally someone else (you!) said what I’ve been thinking for a long time! Why is anyone paying so much attention to the Fed!? We’ve seen interest rates higher than this and the stock market still excelled. I’m old enough to recall when interest rates were in the 22% range and [certificate of deposit] rates were 16%.

“The economy is doing well, and like you said, unemployment is lower than it’s been in decades. And yet, everyone is hanging from the windows of their Wall Street office buildings on what the Fed might report or what this or that report might tell. Meanwhile, my 401(k) is going up and down like a roller coaster with only marginal net gains when it should be soaring. Infuriating.

“Thanks for the reality check.” – Subscriber Peter J.

Good investing,

Jeff Havenstein
Baltimore, Maryland
June 17, 2024