I was at my local library doing my regular walk through of the personal finance section and the new Derek Foster book, Money for Nothing, caught my eye.  As I was a fan of his previous books, I anticipated great things from this edition, so I quickly checked it out to be read later that evening.

About the Author

For those of you who are unfamiliar with Mr. Foster, he is the self proclaimed Canada’s Youngest Retiree.  He is the author of 3 books, 2 of which I have reviewed already, Stop Working! Here’s How You Can along with The Lazy Investor.  As you can see from my recommended book list, stop working is among my favorite personal finance books.

About the Book

Derek Foster’s newest book, Money for Nothing: And Your Stocks for Free covers a diversity of topics, but the main theme being to sell put options to generate cash flow.  For those of you unfamiliar with options, here is a primer on how options work.   When you buy a put option of an underlying security/stock, it gives you the “option” to sell the security for a specified “strike” price.  Of course, for the privilege of selling your security/stock at the specified price, you’ll have to pay an option premium.

On the other side of the coin, if you sell a put option at a chosen strike price to an put option buyer, you collect the option premium and only have to buy the underlying stock if the option is exercised (most likely when the stock price goes below the strike price).

Money for Nothing emphasizes the strategy to sell put options on strong dividend paying stocks at a strike prices that are attractive.  That is, the strike price where you would consider buying the stock anyways and collect the option premium.  The key is to have enough cash in your account to cover the stock purchase should the option be exercised.

Along with explaining a put option strategy, Derek Foster also dives into explaining the pros and cons of leveraged investing.  He gets into his personal story of using massive amounts of leverage to buy Philip Morris which, lucky for him, turned out in his favor.

Out of the three books, I enjoyed Stop Working: Here’s How You Can the most, but this one does provide a few new ideas that I will be looking into deeper.

Have you read this book yet?  What are your thoughts?

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Thanks a lot for the link!

Derek Foster is well known for selling all his stocks in February 2009 and completely abandoning his strategy of buying and holding dividend growth stocks. Instead he is going to sell cash secured puts against dividend paying stocks, earning some premium in the process while missing on any gains in the stocks themselves.

Sooner or later however he would realize that his put options would be exercised and he would have no cash but only stocks in his portfolio. Unless he sells those stocks or raises more cash by writing another book, Derek Foster would not be able to get any more” money for nothing”.

Thanks for the link! What are your thoughts on the book? Did you like it?

Thanks for the mention. Many people ridicule Foster for “flip-flopping” on his buy-and-hold strategy. I respect people who can change their minds, if they go from wrong to right. However, Foster went in the wrong direction.

I didn’t really read this book – I agree “Stop Working” was a pretty good book, especially for the living within your means lessons.

Derek should have stayed with the investing ideas from Stop working and not gotten into income trusts so heavily. He might have been able to stay the course and not gotten out of the market at the absolute worst possible time.

I didn’t read this book, and probably won’t based on all the reviews. Sounds like he is focusing in on one specific option strategy – I don’t need to read a book on that – it can be summed up in one page. Further, if you are going to trade options, you should have an understanding of all the options strategies (you don’t have to use them) – to get a better understanding of options in general. It would be like giving someone a car and showing them how the gear shift works, but not explaining anything else. Why stop there? Doesn’t seem appealing to me…

I’m still convinved that Foster does little to educate vulnerable investors on any fundamentals of investing. This latest book throws risk completely out the window and makes little to no sense from a rational perspective. He is advocating taking 100% downside risk for a 1-2% premium while missing all the upside gains that would be available if markets rebound (which they have slightly).

– yes I do, but I use a number of strategies for both the active and passive parts of my portfolio, including buying and writing puts and calls, collars, spreads and condors.

Best way to explain a condor really quickly:

1. Take Foster’s put writing – you get to collect the premium.
2. Buy a put for below the strike of the sold put – this limits your loss on the downside of the underlying declines.
3. Do the mirror image with calls – write a call, and then buy a call with a higher strike price. You collect a premium and use part of it up to buy the call option with the higher strike price (which limits your loss on the upside).

You have two net credits, you make the most profit (keeping all the credit) if the underlying stays between the strike prices of the the two innermost options. Profit declines as the stock moves outside these ranges. Works well in a sideways market, but you can tweak it if you want to try to guess the direction of the market, and you can always adjust your position if you see it isn’t working out for you.

Mark Wolfinger trades these almost exclusively if I’m not mistaken… and writes about them often on his blog.

That dude just markets what you can get for free. He doesn’t even follow his own advise, yet preaches it like gospel whenever and where ever he can for free or for exposure. Go on to the Canadian Business discussion board under the Early Retirement sub category and you’ll see a lot more of what people think of this guy and his books.

1) Foster’s idea on put writing are not ‘wrong’ but they are simplistic. If you truly want to buy stocks (and the inherent risk that comes with stock ownership) then writing out of the money puts is a viable strategy.

2) Recent times, and the volatile markets, suggest more conservative strategies. That means selling puts (and/or calls) but also buying protection to limit losses. That protection is a less expense put and/or call.

3) Yes Preet, iron condors are the bulk of my trading. Intro to topic here: http://blog.mdwoptions.com/options_for_rookies/2008/06/recommended-o-3.html

Whether it works or not, ethically, I have a big issue with Foster’s overall approach to what he calls “Money for Nothing”. Part of his original dividend strategy was based on earning just enough to get by while relying on the government to subsidize him as a low income family so he and his wife don’t have to work. In other words, this is a guy who is able to work and yet he’s actively promoting living off the system. Mind you his income from writing books now means he no longer qualifies as a low income family but I still find it really distasteful that he promotes this.

okay you guys are a bit harsh to the Foster. I enjoy reading his first book and wish him the best . He adjusted his investing strategies that’s it , as a dividend growth beliver I guess only time will tell …

I haven’t looked too deep into options, but I take issue with the title of his book… makes it sound easy and risk free.

Perhaps one should give him credit for being a good self-promoter rather than a shrewd investor.

I wonder what the title of the next book is going to be? How to survive in a homeless shelter?

Wow! Tough crowd on Foster. Unfairly in my opinion.

I’ve read books by Warren Buffet, Peter Lynch (ex-Fidelity), David Chilton (Wealthy Barber, etc), etc. etc. etc. You know them all, I know. They were all outstanding books and I learned great lessons from each, that I do try to apply to my financial planning / investment strategies. Foster’s right up there with these guys in my opinion. I gotta say that Derek Foster really opened my eyes to enhanced possibilities through his 2 original books and got me started on a real retirement plan (I am hopeful to be in semi-retirement within a few years in early 40’s). Like everything else in life you have to filter the message and absorb what works for you in your personal situation.

I really enjoyed his book ‘Money For Nothin’. Although I have not moved $500K into cash to execute the selling put options strategy, I can see how adding this kind of strategy as a compliment to my current plan could work under the right circumstances.

I just read it, and liked it, for a couple reasons. Firstly, you make money for nothing, or simply writing the put, as he says, and secondly you get to buy the stock at a cheaper price…maybe.

I am not understanding why some people are posting bad comments about this strategy. You go to walmart and buy things on the shelf for the asking price, what if they paid you to say you would buy the item you wanted at 25% OFF. Makes a lot of sense to take that money, and if they want to sell it to you at a discount BUY IT!

As someone said its a simple strategy, why do people think it has to be more complicated than that? K.I.S.S

Anyway, I’m gonna give this a try. Can’t hurt to get paid to buy what you want at a discount :)

“money cant buy you happiness, but give me a chance to prove that wrong”

The bottom line: He is financially independent. Are you? Isn’t that what we are all trying to accomplish? He gets to do what he wants, when he wants, where he wants, how he wants and with whom he wants. He could have kept all of this info to himself. He chose to share it to everyone. I’ll gladly listen to his financial advice any day.

My question is that if you do his money for nothing strategy, and write a put on a stock you are looking to buy, what happens if the stock continues to go up.
He seems to be writing puts that are a year to expiry which means if the stock does go up he would never be able to buy the stock although he would have a nice fat premium in his pocket.

Any thoughts on this?
I do like his ideas on leveraging although this is nothing new. I also feel that he is not fully explaining the risk involved in writing naked puts.