Covered Calls and LEAPS--A Wealth Option + DVD: A Guide for Generating Extraordinary Monthly Income (Wiley Trading) [Englisch] [Gebundene Ausgabe]

For about a year, I actively traded two accounts using the methods taught in this book. These are the same techniques taught during the authors' two-day intensive seminar. Over the last two years, I have spoken with well over 100 graduates of the authors' two-day intensive seminar. Interestingly, all of us have a similar experience to share. If you purchase the book and try the technique, odds are that you will have the same experience as well. Here's how it will go:

1) The method appeals to your logic: Buy a stock and collect instant income by selling a covered call. If your stock goes down in value, don't sell the stock at a loss like the rest of the world, instead, continue to collect monthly income on the stock whether the stock goes down, up or sideways. One day, when the stock is back to break-even, then we sell the stock. In the meantime, we collected 3%-5% income per month by renting out the stock! Sounds so good that you plunk down $3,750 for the two-day intensive seminar just to make sure you learn the method properly. You also invest in the $1,200 per year toolbox and covered call selection service.

2) The first few months of trading are great! Sure enough, you buy a stock, sell a covered call and instantly have 3%-5% cash income from the selling the call. Secondary calls on stocks that fall a bit are easy too: "Look at me - just made another 4%!" Anyone who asks (and even if they don't) - "Yep, I'm making 3%-5% income per month, how about you?"

3) After the first few months, several of your positions are in "management." Things are getting a bit more difficult now. Fewer and fewer dollars are available to start new positions that generate the easy money. Further, the TSS - used to generate "rent" on fallen positions - just isn't as easy as it looked. The stocks for several TSS's have been going up instead of down like they were supposed to do. This leaves you upside down with a loss on these TSS's. Now, because you're a bit gun-shy about selling more TSS calls, you have a couple more positions for which you haven't done anything for the month. Total income for the month has dropped a bit - "but hey, I still made almost 2% for the month, that's as much as many people make in a year!"

4) Realizing you probably need some help with TSS'ing, you e-mail Joe with a question. In response, Joe berates you by calling you a moron for thinking too much, for missing an obvious "inverted V" where you should have sold a TSS, and missing another obvious "V" where you should have bought it back. Joe then publishes your whipping in the "Cow Report" for all to read. The seminar is in town next weekend, so you attend again to brush up on the TSS and to talk with other investors. As they go around the room, every alum states they are making 3%-5% per month - wait a minute - that person just admitted he's only making 1%-2% per month. Joe humiliates him, which convinces you to state you're making 3%-5% per month should they call on you.

5) After another couple of months, a substantial majority of your positions are now in management. Many TSS's are upside down. Several of your stocks have fallen substantially in value, but you haven't TSS'd them as often as you should have. You tried an SSR to rescue one of your TSS's, but it did not get called out. Now you have a LEAPS that just lost 60% of it's value during the last month when the stock fell just 10%. How did that happen? Why did this SSR "rescue" technique leave us in more trouble than when we started? You know we don't speculate on stock price movement (like the stupid people on Wall Street), but you've noticed that success with new positions, TSS, SSR, SSSR, CPR, etc., all require that you properly guess the future movement of the stock.

6) It's all about cash flow, not account value, but after nine months, you can't help but notice your account values are down over 25%. Astonishingly, even though your taxable account is down 28% in value, you're having to pay short term capital gain taxes on the $25,000 in cash flow "income" you generated! Frustrated with your lack of success, you decide to pay Joe and Aaron another $3,000 to attend the Master's seminar.

7) The Master's seminar was exciting and fun! Some good points were made and obviously the method works for some people. Look at all the people who claimed they were making 3%-5% per month on the survey forms. Actually, you claimed that as well - "Yes, my account dropped $28,000 in value, but I reported $25,000 in cash flow to the IRS. That's close enough to 3% per month."

8) It's been almost a year. At 3%-5% per month - with all income reinvested - your accounts should be up at least 40% in value. Instead, your accounts are still down over 25% in value. It's just really hard picking the right time to enter new positions and deciding when to sell and buy back those TSS's. This new advanced charting seminar should help. Let's give Joe and Aaron another $2,000.

9) Advanced charting helps, but you're still certainly not growing your account at 3%-5% per month. Many acquaintances who started at the same time as you have given up on the method. Frankly, several of them have really good points as to why this technique isn't working. Maybe they're right. It's been over a year, you've given Joe and Aaron over $10,000 of your hard earned money, you're accounts are down in value by 30%, and to add insult to injury you've had to pay the IRS income tax anyway. Oh my God! What have I done??...

Original review December 30, 2006

I have taken the CSE 2-day Intensive Seminar based on this book and have been investing with covered calls for the past year. I like the empowerment of the trading system for me to take investment control of my own retirement funds. I value learning the price channel principles in the book that help me find patterns to "buy low and sell high".

Something that makes me feel uneasy about covered call returns is how the book authors have administered an educational "CSE Fund" account. The data shows how it is possible to earn high returns from call sales while the account value rises slowly or can actually decline.

The following four slides appeared in the recorded 2-hour Introductory Seminar that I archived on September 13 2005 from the CSE website.

Slide #1:
Practicing what we preach
* The CSE Covered Call Fund is a covered call investment
fund managed by Compound Stock Earnings
* It began with a deposit of $40,000 of our own money into a
brokerage account
* Our objective is to generate 5% cash return per month
from the fund
* 8 year time horizon (we are long term investors)
- 5% per month end value will be $4,327,456
- 6% per month end value will be $10,750,361
* We are achieving 4.9% cash return per month

Slide #2:
Leading by example
* Clients are given access to the Fund
through an email service
* We email EVERY single transaction to
subscribers as it happens in our own
account
* This is an educational service, WE DO
NOT manage client's own money
- Client's learn by example
* Many clients do, however, choose to
mirror the fund's activities in their own
account
- They can do this as we email each
transaction to them as it happens
* We also send the brokerage statement to
clients -- it is totally transparent

Slide #3:
Putting our reputation on the line
* Why do we put our reputation on the line like this?
* We do this because we KNOW our techniques work
* We KNOW our techniques allow cash generation regardless of
market direction
* You will not find anyone else in the marketplace who does this
* Why? They are not confident enough in their ability or technique
to WALK THE TALK
* We put our ability and techniques against the market and allow
the world to see our results

Slide #4:
CSE Fund Brokerage Statement
* $5959.87 realized cash return in 4 months
* $5959.87 in 4 months = $17,879.61 in 12 months
* $17,879.61 represents annual cash return of 45%
- At the current return rate the fund will make 45% this year
* 45% cash return IGNORES the effect of compounding
* We are on target to reach our 60% return objective for the year
* The numbers are there in black and white

The "CSE Fund" was a great idea to demonstrate to clients how the CSE masters can apply the rules of the CSE Covered Call technique to dramatically grow an investment account value over several years.

The daily brokerage statement was emailed from April 2005 until June 13 2006 to clients who subscribed at $100 per month. The account value had decreased from $40K to $35K where it remains today. An email to clients explained that the "CSE Fund" returns have been impaired by large commissions. "In fact, had the commissions been equivalent to a deep discount broker, the original return objectives of the Fund would have been achieved." I estimated commissions less than $2K for the "CSE Fund" transactions. For example, 50 positions x $33 = $1650. If these commissions were reduced to zero, the account value would still be only $37K. Slides #1 and #4 state that the "CSE Fund" was meeting its objectives (even with the larger commissions). CSE stated a plan to move the "CSE Fund" to a deep discount broker before continuing with new trades, and to stay tuned for the new brokerage statement. Six months later, no further announcements have appeared. The "CSE Fund" has been quietly discontinued. There is no reference to the "CSE Fund" that is supposed to run for 8 years in the current version of the recorded 2-hour Introductory Seminar on the CSE website.

The "CSE Fund" with an actual brokerage statement evolved to a new "CSE Managed Covered Call Selections" service, beginning November 2005, that similarly teaches clients to enter and manage covered call positions. It is similar to the "CSE Fund". However no funds are actually invested by CSE for clients to view a brokerage statement. CSE publishes a summary of open and closed positions with percentage return data. However, the "CSE Fund" profitably-closed positions from April through November 2005 are included in the list, while the remaining "CSE Fund" open positions with large unrealized losses are excluded. This has the effect of exaggerating the returns of the "CSE Managed Covered Call Selections".

I have attempted to model the "CSE Managed Covered Call Selections" returns of a diversified account over one year with the results: account value growth = closed position realized gain + open position call sales - unrealized loss = 22% + 8% - 20% = 10%. The stock market has also gained about 10% during the same period.

In order for a covered call investment account to grow by 3-5% per month, the covered call returns would need to increase significantly faster than the unrealized losses. So far, I have not observed this to happen with either the "CSE Fund" or the "CSE Managed Covered Call Selections".

Update January 19, 2007

The "comments" at the end of this review provide additional info.

1. Authors respond to the book review to clarify inaccuracies, and I reply. The authors state that the "CSE Fund" is closed and has been inactive for almost a year so it technically has no current account value, instead of acknowledging the $35K closing account value. I replied with contradictory evidence showing dates and statements to several client emails in CSE Weekly Cow Reports that the "CSE Fund" was open as recently as October 7, 2006. To the best of my knowledge, CSE has not officially notified clients of the true status of this 8-year project that has lost money despite earning 5% per month cash returns. You read it here first.

2. Posted the audio transcript for the four slides of the recorded 2-hour Introductory Seminar archived on September 13 2005 from the CSE website. You can also view the video excerpt and the final "CSE Fund" brokerage statement via the YouTube website; search for "CSE Fund". The authors enthusiastically promote the 8-year "CSE Fund". Why would they want to discontinue this compelling demonstration of the CSE covered call techniques?

Update January 16, 2009

Posted the monthly results of a model of a "CSE Managed Covered Call Selections" Statement that computes the "Account Value Growth" in order to measure the rate that we can expect our Covered Call accounts to increase in value over time. CSE discontinued creating new positions in November 2006 and claimed to be managing the remaining open positions to a profitable close. CSE has abandoned these positions, just like it did the "CSE Fund".

At -7% total account value loss over three years, the result contrasts with CSE's claim for these positions to generate cash flow of 3% per month and double the asset base through compounding every three years. The data demonstrates that CSE income has failed to keep pace with open position losses. The stock market has declined by 29% during this period.

CSE has reacted. The latest "CSE Fund" YouTube video shows that CSE has removed posted videos promoting the defunct "CSE Fund" with the message, "This video is no longer available due to a copyright claim by Compound Stock Earnings Seminars, Inc." Why does CSE not want you to view the videos? You have another chance to view them.

CSE started another managed program August 27 2007 which shows the same pattern of losing money and abandonment. See separate Amazon Customer Review titled "What Are Returns of CSE Covered Call / LEAPS Selections?"

Summary of CSE trading services process:
1) CSE promotes new service and sells to clients.
2) Trading performance gradually degrades to mediocre.
3) Service is eventually abandoned or morphed without a final report to clients in such a way that new clients are unaware of the previous service and trading performance.

There is a Yahoo Finance "compoundstockearnings" discussion forum with over 900 members, many of whom are current or former CSE clients. You can locate and join the forum by googling "compoundstockearnings". It's free. You can view the daily "CSE Fund Statements" folder in the Files area. You can view the actual trade data of the "CSE Managed Covered Call" positions in "CSE Managed CC Trades.xls". You can also read messages from current and former CSE clients about their experiences, and you can ask questions.

This book is basically the same material that Joe used to sell on his website a few years ago. Not much has been added. As already stated in previous reviews, most of the techniques have been around forever. The CSE fund was one of the big selling points on his website at one time and many people mirrored that account, as did I. It was his "show piece" to prove that his technique worked. Then one day the fund was mysteriously removed from the website, never to return. In my opinion, it was discontinued because it had lost so much value. You can sell calls, but if the value of the underlying stock decreases by 90%, then you still have nothing. I spoke with Joe's broker at OptionsXpress (for the CSE fund) and was told basically the same thing - that the account had just lost too much money. He told me that Joe was "just a good salesman". I traded with Joe for over 2 years. Most of his trades generated income, but the percentage that did not do well really lost huge amounts, more than enough to wipe out the gains. However, those losses were never documented on his site because he never closed them out. He just quietly forgot about them. I personally talked to both Joe and Aaron on the telephone about several of their positions that had "gotten in trouble" and neither one could offer any technique to correct the situation. For those of you who read the book and are thinking about the seminar - been there, done that, feel like a sucker. In short, the book does explain covered call techniques adequately - however, fails to point out the potential pitfalls and risks involved. Earning 5%+ in your investment account every month sounds too good to be true and it is.