Desperately Seeking Income

by Jeffrey Saut of Raymond James, 3/18/19

A long time ago in a galaxy far far away I began working on Wall Street. The year was 1971 and I had joined a small firm making markets in over-the-counter stocks and options. My salary was $100 a week and it was Camelot. Back then we were able to walk right off the American Stock Exchange trading floor, go down the stairs (there was no security) and into Harry’s at the Amex Bar and Grill. So every day, after the market closed, I would go to Harry’s, buy one drink (because that was all I could afford) and eat the steak frites for dinner, but I digress. In 1971 the markets opened at 10:00 a.m. and closed at 3:30 p.m. and every morning at 9:30 a.m. the traders would send me out for danish and coffee for the trading desk. So I walked by my boss’ office every morning at 9:30 a.m., but he was never in it because his own capital was at risk as the trade desk had inventories of stocks and options that needed to be watched closely. Interestingly, when I walked by his office, I noticed that there was a big red numerical 4 painted on his back wall above the credenza. After six months I finally summoned the courage to ask him what was the deal with the big red 4. He pushed his trading desk chair back from the trading desk, took a big long drag on an unfiltered Lucky Strike and said, in his heavy New York accent, “Kid, that’s the number of bear markets you will see in your career, don’t ever forget it!” And, I never forgot it, so let’s count; 1973 – 1974, 1980 – 1982, 2000 – 2002, and 2007 – 2009. How did he know in 1971 that I would see four bear markets in nearly 50 years in this business?

Making markets in OTC stocks was fun, but the real money was in options. In the early 1970s there were no option exchanges. There were only six option firms that made markets in “puts” and “calls.” It was a license to steal because you could find a call option writer who would buy 1,000 shares of IBM and sell us 10 call options struck at the current price that IBM shares were trading. Subsequently, we would find a buyer for those IBM call options and sell them for a $500 per option profit spread; poof, a $5,000 commission. My specialty was finding option writers. The most fertile ground was in Florida, where the retirees were “desperately seeking income.”

I revisit this option topic today because on my speaking tour last week in Fort Myers, Florida I spoke to the good folks at Capital Wealth Planning, LLC. The founder and president is Kevin Simpson, and over cocktails we disused his investment strategy. Said strategy is pretty simple. Capital Wealth Planning buys high-quality blue chip stocks with decent dividend yields, and then sells out of the money call options against those blue chip stocks. The objective is to attempt to provide their investors with a 6% - 7% cash flow return (the dividends plus the call option premiums) and any appreciation in the underlying stocks is just “gravy.” It is a pretty simple strategy, but it works. Indeed, it is one of the strategies I use to generate income as I move toward my retirement years. They are on the Raymond James platform and I have invested money with these folks. Verily, “desperately seeking income!”