A Tough Conversation About High-Yield Investments

Nov. 4, 2024

My extreme hatred of losing has taken me down a deep rabbit hole.

For months.

What have I been researching?

High-yield investments.

The problem is that when you say those words, many people close their minds, put up their hands, and angrily stomp away.

They can’t possibly fathom a stock with over a 50% dividend.

It’s too good to be true! It’s a Wall Street sucker bet!  IT’S TRASH!

But is it, though?

I know it sounds crazy, but the facts say otherwise.

So I thought it was time we had a talk.

Let’s start with something outrageous: CONY. This is a super high-yield stock based on Coinbase (COIN). This is obviously a Bitcoin-related play. If that turns you off, I get it. There are others that pay what CONY pays. But let’s stick to this because it seems ridiculous.

I dislike it when YouTubers go into detailed explanations about the makeup of ETFs and how to trade options. It bores me to tears, so I’m not doing it.

But it is important that we understand that CONY essentially sells covered calls on Coinbase. And it’s important to know that CONY pays a 100% distribution (another word for dividend):

TRASH, TRASH, TRASH!

I hear you. Just give me a minute.

How is it possible to pay over a 100% distribution? It has to be a fraud, right?

Well, no.

If we wanted to get frisky and sell covered calls on COIN ourselves, could we get the same return?

Yes.

I’m outside of trading hours but here’s a covered call that could be taken by anyone. I pulled up COIN and picked a strike a little above the current price. Here’s what that looks like:

If you look where my arrow is at, you’ll see $7.55. That means we could sell a Call on COIN today and make about $755 ($7.55 x 100 shares).

And since this is a weekly Call, we theoretically could do this 4x per month. Which, of course, is about $3,000.

And if we did that for twelve months, we’d hypothetically pull in $36,000 a year.

How much did we spend to buy 100 shares of COIN? About $18,000.

You see what that means? Selling covered calls on COIN could hypothetically return 200%.

Of course, we know these factual numbers are extra high due to COIN being crazy right now. The amount we’d bring in every week changes constantly and we’d have to buy new shares if price rose and our shares were called away. And COIN could drop, which would change the amount of income we could bring in.

All of that is true.

But can you see why CONY’s 100% yield is not fake?

We could do the same thing ourselves. It would be pretty tough to stay on top of it all, but it could be done.

Now let’s talk about this.

I’ve recorded every distribution payment from CONY since it started trading. Here it is:

If I hypothetically bought 125 shares back in October 2023, that hypothetically cost me $2,460. See the Payout column on the far right? That’s how much CONY hypothetically paid me each month.

I would’ve received $151 the first month, $135 the second month, and so on.

All told, I would’ve received $2,710 in distributions. (These again are facts. The numbers are public information.)

Well, if I received $2,700 and only paid $2,460, that’s a 109% ROI.

Does our original investment go down over time? Almost certainly. But all of our money has been paid back and we still have an asset that’s distributing money every month.

Let’s go one step further.

What if we had a bill of $125 that we wanted CONY to pay every month? Going back to the spreadsheet, what would’ve happened?

After 13 months, our $125 bill would’ve been covered. And, because CONY paid more than $125 on average, we would have had some excess cash sitting in our account.

At the end of 13 months, our initial CONY value has dropped about $600 but we have cash sitting in our account totaling about $1,000. Our bills got paid and we have more money than when we started.

Trash?

One more thing. Even though CONY’s price has dropped, what if we reinvested our dividends and just tried to turbo boost our share count. How would we have done compared to the beloved SPY?

Trash CONY has doubled the best index funds in the world over the past 13 months.

Yikes.

So, what are the downsides?

One, CONY’s price will indeed go down over time. We don’t have to care about that but we’re hypnotized to want our stock price to go up. If we take ALL of the distributions, there’s a chance CONY could keep falling down and down. But everyone wants CONY to stay in business. No fund manager wants it to go to zero.

So how long would it take for CONY to go to $0? As long as Coinbase doesn’t go bankrupt, CONY will stay alive and keep paying indefinitely.

Two, Coinbase could go to zero! When we sell covered calls on any individual stock, the danger is that particular stock. If Bitcoin turns into empty air, then COIN will go out of business. Is Bitcoin hype dying? Not from what I see. It’s only getting frothier. But it could happen.

Three, the distributions change every month. No one knows how much they might receive from month to month. That scares some people to death.

Four, an income ETF can change its methodology at any time. CONY could suddenly start giving out less. That’s their prerogative.

Obviously, this is an emotional topic. Even the facts can’t change some people’s fearful feelings.

But I’m going to take a portion of my money and do something like this.

If you’re interested, I can develop a program for it and/or talk about my real-world results.

Talk to you soon.

 

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It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

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