The "Buy Signal" Insiders Don't Want You to Know About

Today, I’m going to show you the secret way by which “insiders” make money.

Before I do that, though, you’re probably wondering… what is an insider?

An insider is someone who knows what’s going to happen at a company before anyone else. Most insiders are people like CEOs, CFOs, board members and those who make big decisions for the company. Obviously, to make those big decisions, you have to know all the really important information.

So what is the benefit of being an insider? Just think, if you know all the really important information that matters to the company, you also know all the really important information that matters for the stock. And now you can use that information to time your stock buys and sells to make sure you make money.

For example, the CFO of a company knows if a drug is selling well or poorly. And if you see the CFO dumping shares before the company is about to report its results… you don’t need to be a genius to understand that that is a bad sign. If you knew that sales of a drug were poor, you’d dump your shares too.

Would you give someone who is going to be a VIP a stock option that’s going to lose money? No, you wouldn’t.

Now, you’re probably thinking, “Hey Paul, I know all this already. This is no big deal. This is just regular insider selling and buying.” OK, I say. But you don’t know about this…

Today, I want to show you a little-known signal. This signal takes its name from a secretive exchange rule called Rule 5635(c)(4). And you should know that the 5635(c)(4) rule references a very unusual situation. This situation happens rarely. But when it does happen, you should pay careful attention, because most times, it’s telling you that a stock is about to soar.

Here’s what is happening when a company says it’s going to use Rule 5635(c)(4).

Remember what I told you about insiders. These people are like the VIPs of each company. So they get special treatment.

When a new person becomes an insider, he’s usually given stock options. These are special stock options, because they are set to reward him for becoming an insider. And because of this special purpose, they are referred to as “inducement” stock options.

Just think about this for a second.

Would you give someone who is going to be a VIP a stock option that’s going to lose money? No, you wouldn’t. You know why? Because you just spent months to recruit this person. Or you were referred this person by your Harvard classmate. There’s no way that you want to screw this person over by giving something that’s not going to pay off. Makes sense, right?

Instead, what you do when you issue these VIP options is you make sure that you give the options when you’re confident that the options are going to pay off.

An inside tip that a stock is going to soar.

That’s why I always check the price at which these VIP options are being given out. You know why? Because you know that they’ve been set at a price at which the new incoming VIPs or insiders are going to make money from the stock going up in price.

That’s why I was thrilled to see one of our stocks use Rule 5635(c)(4) recently.

How do you find out about this? You see, Rule 5635(c)(4) requires the company to issue a press release to tell its shareholders what it’s doing. But this press release is so filled with mumbo jumbo that only experts like me can really understand what the company is doing.

On Sept. 9, 2014, this company’s press release informed shareholders that it was going to use Rule 5635(c)(4) and give 10 new company VIPs options entitling them to 57,500 shares.

And then hidden in the press release is the golden nugget, the price at which these VIP options pay off. If you read the press release, you’ll see that the exercise price is set at $30.62. Just so you understand, the exercise price is effectively the price at which the VIPs are getting into the stock. And that’s all you really need to understand from this. Why?

You see, the price that comes from a company using Rule 5635(c)(4) is as close to a guarantee as you’ll get in the stock market that a stock is going to generate a profit soon. Why? Because the company has given these new VIPs these options as a reward for joining the company. And stock options have no value unless the stock goes up. And the company wants to make sure that its new VIPs make money from these options. Otherwise, why bother giving them?

The stock has not fallen below $30.62 since the company used Rule 5635(c)(4).

Just look at this company’s stock price since Sep. 9. Why Sept. 9? That’s the day the company issued its press release announcing that it was using Rule 5635(c)(4):

  • Sept. 9: The stock closes at $31.07
  • Sept. 10: The stock closes at $33.09
  • Sept. 11: The stock closes at $32.55
  • Sept. 12: The stock closes at $32.46
  • Sept. 15: The stock closes at $31.95
  • Sept. 16: The stock closes at $32.41.
  • Sept. 17: The stock closes at $33.69
  • Sept. 18: The stock closes at $34.10
  • Sept 19: The stock closes at $32.87
  • Sept. 22: The stock closes at $32.87

In other words, the stock has never gone below $30.62 after the company used Rule 5635(c)(4).

That’s not coincidence. That’s not chance. That’s the 5635(c)(4) effect.

And from 25 years of being a Wall Street pro and chatting with hundreds of corporate insiders, I can tell you the odds are that this stock is only going to go up from this $30.62 price.

Now, this effect of stocks going up after insiders give themselves options, including those used for the 5635(c)(4) rule, has been documented by experts. Experts studying this issue found that insiders were able to generate extra gains of as much 204% through their stock options. And the reason for that is insiders give options out right before the stock is about to go up.

That’s why I always pay attention to when companies use Rule 5635(c)(4): Because most times, it’s going to mean big gains for the stock.

Regards,

Paul Mampilly
for The Daily Reckoning

P.S. If you’re the type that likes to get these kinds of gains, there is one stock I believe you should buy right now.

Understand that I can’t give away the ticker symbol right here out of deference to my paid readers of Agora Financial’s FDA Trader. However, I sincerely believe that the Rule 5635(c)(4) effect is in operation for the play I’ve selected. This means that the stock is going to start going up soon.

I gave readers of today’s FREE Daily Reckoning email edition a unique opportunity to cash in on this recommendation for themselves. Just one small benefit of being a regular DR reader. Sign up for the Daily Reckoning, for FREE, right here, or risk missing out on the next chance at a big recommendation to come their way.