stock loan explained for you:

stock loans are loans against a stock. they carry a high ltv ratio and low interest rates for hard money loans. this is because they can be easily taken back by the lender for non performance on the loan. It isn't like in real estate where you need a lawyer and a courthouse process and a lot of paperwork and time waiting around for your collateral. Foreclosure on a stock loan is instant and is triggered instantly. Because the stock market is so liquid, that means the collateral can be sold usually within seconds.

Foreclosure in stock loans can happen as a result of non payment as well as if the stock falls in value to the LTV point. For example if you bought a stock at 10 and got a stock loan on it for 70% LTV, your default point would be 7 dollars a share.

But when you get a stock loan it is customary that the lender stipulates in the agreement that you cannot use the proceeds to go and buy more stock. In fact, they don't even let you reinvest the proceeds into the liquid markets. This is one of the reasons they make a good fit for real estate investors.

Call option sales explained:

When you sell a call option, you are selling the right to buy the stock at a set price and for a set period of time. There are two ways in which an option has value. The first represents the difference in the 'strike price' and the current price. The strike price is the price at which the call can be executed. So in our previous example if you wanted the strike price to be 7$ a share and the value of the stock was 10$ then the value of that option would be 3$ to a buyer based on the inherent value. But there is a second source of value as well. Because the option exists over a period of time, the time also has value. I checked today on the value of a call option on Annaly Capital Management that expired in january of 2013 and it was only a spread of eleven cents, so even though the time value of a stock option is worth something, in this case it was worth less than one percent. Stocks where the time decay portion of the option values are low like this mean generally that the share prices are fairly stable. Time decay values are much higher on high volatility stocks.

Why we choose a certain kind of stock when doing this:

We not just looking for stocks with stable share prices when we look for a stock. We are also looking for a high dividend income . So we have scrutinized our lenders for allowing us to collect dividends during the loan period. Stocks that have very high dividends are known to be risky, but remember we have taken all the risk out of the transaction by pulling our investment back out right away. There is nothing to lose in a transaction that didn't cost anything. If we can get the kind of options that last into fifteen months then great. but the longer the option period, the longer we can collect those dividends.

so lets say we got the loan at 7% and the dividends were at 17% (real spreads are larger) then we would have an interest spread of ten percent profit over the loan. We would keep that income as long as the stock didn't fall past the default price of the stock loan and we made our payments on time. But even if we lost the income, we would still have our capital back. Thats why in the procedure page we call it the first year cash flow bonus.