Canadian Moneysaver is monthly investment advice magazine. It's not easy to find and does not have well know appeal. Yesterday, I picked up a few back issues from the library to browse through, and the first article I read shocked me in it irresponsibility.
It was the October 2008 issue and Derek Foster (he of the retire at 30 fame) penned an article on how you can earn more than 10% from your bank account. To summarize, Derek took $28k of his money and deposited into a savings account earning 3.85%. He then sold two put options on Bank of America with strike prices of $35 and $30 expiring in January 2010 for 500 shares each (no mention if it is American or European). Now, this was done before last year's market turmoil when BoA was selling in the $40-45 range.
Derek's theory was that buy selling the options he would pocket $4k from the sale of the options and added to his saving account, would earn over 10% on his deposit. His feeling was that even if the stock fell down to below $30 he would be buying BoA at "a very cheap price".
He ends off the article with "lowering risk, while increasing returns, will allow anyone to ammulate wealth more quickly". Well, I don't see how this strategy lowers risk at all. In fact, this is a risky strategy, and looking at BoA's stock price today, it is worth under $10. If they were American options, the buyers could trigger them today, with Derek losing $22k from his $28 investment, a -80% return for a "low risk" strategy.
I have not gone through any of the other articles since I am still in shock at this one. This is a dangerous strategy, and I hope the rest of the advice this magazine offers is not in the same vein.