I paid $1000 for an Adam Khoo investing course so you don't have to! (Summarized in post)
Lesson one is "stock basics" summarized: (2 videos) for every buyer there's a seller, for every seller there's a buyer, fear and greed drives prices, what fundamental analysis means, what technical analysis means. lesson 2 is ETFs summarized: (video 1) Bull markets are opportunities, bear markets are bigger opportunity's, Bear markets never last, always followed by bull market. (video 2) The market is volatile in the short term in the long term it always goes up, what an ETF is, different types of ETF indexes. (video 3) Expands on the different types of ETFs (bonds, commodities etc). (video 3) A 35min video on dollar cost averaging lol. (Video 5) summarizing the last 4 videos. Lesson 3 is Steps to investing summarized: (video 1) A good business increases value over time, a valuable business has higher sales, earnings and cashflow. (video 2) invest in businesses that are undervalued or fairly valued, stocks trade below its value because investors have negative perception of the company lesson 4 Financials summarized (all 4 videos) where to find financials, how to use a website (Morning Star) to screen stocks, how good is the company at making money, Look for companies that have growing revenue, check growth profit margin and net profit margin of company compared to industry. Lesson 5 Stock Valuation summarized (2 videos) go here: https://tradebrains.in/dcf-calculato and look at what the calculator is asking for, go to Morning Star find the needed numbers that are required, bam you got the intrinsic vale. Lesson 6 Technical Analysis summarized: (all 4 videos) What are candles sticks, what do they mean, support and ceilings, consolidation levels. Lesson 7 The 7 step formula summarized: (3 videos) See what I wrote in lesson 3 and lesson 5. lesson 8 Winning portfolio summarized summarized: (video 1) Diversify, keep portfolio balanced, different sectors (video 2) More sectors, Dividends (video 3) More on sectors, more on dividends, what are different stock caps (large cap, small cap etc) Lesson 9 finding opportunities summarized: (video 1) see lesson 3, (video 2) creating a watch list,monitor news, company announcements, stock price, financials Lesson 10 psychology of success summarized: (2 videos) basically: common sense. Lesson 11 Finding a broker summarized: (1 video) look at fees and commissions, see minimum deposit, check margin rates, make sure it has a good trading platform. I just saved you 18 hours and $1000.
The dollar standard and how the Fed itself created the perfect setup for a stock market crash
Disclaimer: This is neither financial nor trading advice and everyone should trade based on their own risk tolerance. Please leverage yourself accordingly. When you're done, ask yourself: "Am I jacked to the tits?". If the answer is "yes", you're good to go. We're probably experiencing the wildest markets in our lifetime. After doing some research and listening to opinions by several people, I wanted to share my own view on what happened in the market and what could happen in the future. There's no guarantee that the future plays out as I describe it or otherwise I'd become very rich. If you just want tickers and strikes...I don't know if this is going to help you. But anyways, scroll way down to the end. My current position is TLT 171c 8/21, opened on Friday 7/31 when TLT was at 170.50. This is a post trying to describe what it means that we've entered the "dollar standard" decades ago after leaving the gold standard. Furthermore I'll try to explain how the "dollar standard" is the biggest reason behind the 2008 and 2020 financial crisis, stock market crashes and how the Coronavirus pandemic was probably the best catalyst for the global dollar system to blow up.
Tackling the Dollar problem
Throughout the month of July we've seen the "death of the Dollar". At least that's what WSB thinks. It's easy to think that especially since it gets reiterated in most media outlets. I will take the contrarian view. This is a short-term "downturn" in the Dollar and very soon the Dollar will rise a lot against the Euro - supported by the Federal Reserve itself.US dollar Index (DXY)If you zoom out to the 3Y chart you'll see what everyone is being hysterical about. The dollar is dying! It was that low in 2018! This is the end! The Fed has done too much money printing! Zimbabwe and Weimar are coming to the US. There is more to it though. The DXY is dominated by two currency rates and the most important one by far is EURUSD.EURUSD makes up 57.6% of the DXY And we've seen EURUSD rise from 1.14 to 1.18 since July 21st, 2020. Why that date? On that date the European Commission (basically the "government" of the EU) announced that there was an agreement for the historical rescue package for the EU. That showed the markets that the EU seems to be strong and resilient, it seemed to be united (we're not really united, trust me as an European) and therefore there are more chances in the EU, the Euro and more chances taking risks in the EU.Meanwhile the US continued to struggle with the Coronavirus and some states like California went back to restricting public life. The US economy looked weaker and therefore the Euro rose a lot against the USD. From a technical point of view the DXY failed to break the 97.5 resistance in June three times - DXY bulls became exhausted and sellers gained control resulting in a pretty big selloff in the DXY.
Why the DXY is pretty useless
Considering that EURUSD is the dominant force in the DXY I have to say it's pretty useless as a measurement of the US dollar. Why? Well, the economy is a global economy. Global trade is not dominated by trade between the EU and the USA. There are a lot of big exporting nations besides Germany, many of them in Asia. We know about China, Japan, South Korea etc. Depending on the business sector there are a lot of big exporters in so-called "emerging markets". For example, Brazil and India are two of the biggest exporters of beef. Now, what does that mean? It means that we need to look at the US dollar from a broader perspective. Thankfully, the Fed itself provides a more accurate Dollar index. It's called the "Trade Weighted U.S. Dollar Index: Broad, Goods and Services". When you look at that index you will see that it didn't really collapse like the DXY. In fact, it still is as high as it was on March 10, 2020! You know, only two weeks before the stock market bottomed out. How can that be explained?
Global trade, emerging markets and global dollar shortage
Emerging markets are found in countries which have been shifting away from their traditional way of living towards being an industrial nation. Of course, Americans and most of the Europeans don't know how life was 300 years ago.China already completed that transition. Countries like Brazil and India are on its way. The MSCI Emerging Market Index lists 26 countries. Even South Korea is included. However there is a big problem for Emerging Markets: the Coronavirus and US Imports.The good thing about import and export data is that you can't fake it. Those numbers speak the truth. You can see that imports into the US haven't recovered to pre-Corona levels yet. It will be interesting to see the July data coming out on August 5th.Also you can look at exports from Emerging Market economies. Let's take South Korean exports YoY. You can see that South Korean exports are still heavily depressed compared to a year ago. Global trade hasn't really recovered.For July the data still has to be updated that's why you see a "0.0%" change right now.Less US imports mean less US dollars going into foreign countries including Emerging Markets.Those currency pairs are pretty unimpressed by the rising Euro. Let's look at a few examples. Use the 1Y chart to see what I mean. Indian Rupee to USDBrazilian Real to USDSouth Korean Won to USD What do you see if you look at the 1Y chart of those currency pairs? There's no recovery to pre-COVID levels. And this is pretty bad for the global financial system. Why? According to the Bank of International Settlements there is $12.6 trillion of dollar-denominated debt outside of the United States. Now the Coronavirus comes into play where economies around the world are struggling to go back to their previous levels while the currencies of Emerging Markets continue to be WEAK against the US dollar. This is very bad. We've already seen the IMF receiving requests for emergency loans from 80 countries on March 23th. What are we going to see? We know Argentina has defaulted on their debt more than once and make jokes about it. But what happens if we see 5 Argentinas? 10? 20? Even 80? Add to that that global travel is still depressed, especially for US citizens going anywhere. US citizens traveling to other countries is also a situation in which the precious US dollars would enter Emerging Market economies. But it's not happening right now and it won't happen unless we actually get a miracle treatment or the virus simply disappears. This is where the treasury market comes into play. But before that, let's quickly look at what QE (rising Fed balance sheet) does to the USD. Take a look at the Trade-Weighted US dollar Index. Look at it at max timeframe - you'll see what happened in 2008. The dollar went up (shocker).Now let's look at the Fed balance sheet at max timeframe. You will see: as soon as the Fed starts the QE engine, the USD goes UP, not down! September 2008 (Fed first buys MBS), March 2009, March 2020. Is it just a coincidence? No, as I'll explain below. They're correlated and probably even in causation.Oh and in all of those scenarios the stock market crashed...compared to February 2020, the Fed balance sheet grew by ONE TRILLION until March 25th, but the stock market had just finished crashing...can you please prove to me that QE makes stock prices go up? I think I've just proven the opposite correlation.
Bonds, bills, Gold and "inflation"
People laugh at bond bulls or at people buying bonds due to the dropping yields. "Haha you're stupid you're buying an asset which matures in 10 years and yields 5.3% STONKS go up way more!".Let me stop you right there. Why do you buy stocks? Will you hold those stocks until you die so that you regain your initial investment through dividends? No. You buy them because you expect them to go up based on fundamental analysis, news like earnings or other things. Then you sell them when you see your price target reached. The assets appreciated.Why do you buy options? You don't want to hold them until expiration unless they're -90% (what happens most of the time in WSB). You wait until the underlying asset does what you expect it does and then you sell the options to collect the premium. Again, the assets appreciated. It's the exact same thing with treasury securities. The people who've been buying bonds for the past years or even decades didn't want to wait until they mature. Those people want to sell the bonds as they appreciate. Bond prices have an inverse relationship with their yields which is logical when you think about it. Someone who desperately wants and needs the bonds for various reasons will accept to pay a higher price (supply and demand, ya know) and therefore accept a lower yield. By the way, both JP Morgan and Goldmans Sachs posted an unexpected profit this quarter, why? They made a killing trading bonds. US treasury securities are the most liquid asset in the world and they're also the safest asset you can hold. After all, if the US default on their debt you know that the world is doomed. So if US treasuries become worthless anything else has already become worthless. Now why is there so much demand for the safest and most liquid asset in the world? That demand isn't new but it's caused by the situation the global economy is in. Trade and travel are down and probably won't recover anytime soon, emerging markets are struggling both with the virus and their dollar-denominated debt and central banks around the world struggle to find solutions for the problems in the financial markets. How do we now that the markets aren't trusting central banks? Well, bonds tell us that and actually Gold tells us the same! TLT chartGold spot price chart TLT is an ETF which reflects the price of US treasuries with 20 or more years left until maturity. Basically the inverse of the 30 year treasury yield. As you can see from the 5Y chart bonds haven't been doing much from 2016 to mid-2019. Then the repo crisis of September 2019took place and TLT actually rallied in August 2019 before the repo crisis finally occurred!So the bond market signaled that something is wrong in the financial markets and that "something" manifested itself in the repo crisis. After the repo market crisis ended (the Fed didn't really do much to help it, before you ask), bonds again were quiet for three months and started rallying in January (!) while most of the world was sitting on their asses and downplaying the Coronavirus threat. But wait, how does Gold come into play? The Gold chart basically follows the same pattern as the TLT chart. Doing basically nothing from 2016 to mid-2019. From June until August Gold rose a staggering 200 dollars and then again stayed flat until December 2019. After that, Gold had another rally until March when it finally collapsed. Many people think rising Gold prices are a sign of inflation. But where is the inflation? We saw PCE price indices on Friday July 31st and they're at roughly 1%. We've seen CPIs from European countries and the EU itself. France and the EU (July 31st) as a whole had a very slight uptick in CPI while Germany (July 30th), Italy (July 31st) and Spain (July 30th) saw deflationary prints.There is no inflation, nowhere in the world. I'm sorry to burst that bubble. Yet, Gold prices still go up even when the Dollar rallies through the DXY (sadly I have to measure it that way now since the trade-weighted index isn't updated daily) and we know that there is no inflation from a monetary perspective. In fact, Fed chairman JPow, apparently the final boss for all bears, said on Wednesday July 29th that the Coronavirus pandemic is a deflationarydisinflationary event. Someone correct me there, thank you. But deflationary forces are still in place even if JPow wouldn't admit it. To conclude this rather long section: Both bonds and Gold are indicators for an upcoming financial crisis. Bond prices should fall and yields should go up to signal an economic recovery. But the opposite is happening. in that regard heavily rising Gold prices are a very bad signal for the future. Both bonds and Gold are screaming: "The central banks haven't solved the problems". By the way, Gold is also a very liquid asset if you want quick cash, that's why we saw it sell off in March because people needed dollars thanks to repo problems and margin calls.When the deflationary shock happens and another liquidity event occurs there will be another big price drop in precious metals and that's the dip which you could use to load up on metals by the way.
Dismantling the money printer
But the Fed! The M2 money stock is SHOOTING THROUGH THE ROOF! The printers are real!By the way, velocity of M2 was updated on July 30th and saw another sharp decline. If you take a closer look at the M2 stock you see three parts absolutely skyrocketing: savings, demand deposits and institutional money funds. Inflationary? No. So, the printers aren't real. I'm sorry.Quantitative easing (QE) is the biggest part of the Fed's operations to help the economy get back on its feet. What is QE?Upon doing QE the Fed "purchases" treasury and mortgage-backed securities from the commercial banks. The Fed forces the commercial banks to hand over those securities and in return the commercial banks reserve additional bank reserves at an account in the Federal Reserve. This may sound very confusing to everyone so let's make it simple by an analogy.I want to borrow a camera from you, I need it for my road trip. You agree but only if I give you some kind of security - for example 100 bucks as collateral.You keep the 100 bucks safe in your house and wait for me to return safely. You just wait and wait. You can't do anything else in this situation. Maybe my road trip takes a year. Maybe I come back earlier. But as long as I have your camera, the 100 bucks need to stay with you. In this analogy, I am the Fed. You = commercial banks. Camera = treasuries/MBS. 100 bucks = additional bank reserves held at the Fed.
Revisiting 2008 briefly: the true money printers
The true money printers are the commercial banks, not the central banks. The commercial banks give out loans and demand interest payments. Through those interest payments they create money out of thin air! At the end they'll have more money than before giving out the loan. That additional money can be used to give out more loans, buy more treasury/MBS Securities or gain more money through investing and trading. Before the global financial crisis commercial banks were really loose with their policy. You know, the whole "Big Short" story, housing bubble, NINJA loans and so on. The reckless handling of money by the commercial banks led to actual money printing and inflation, until the music suddenly stopped. Bear Stearns went tits up. Lehman went tits up. The banks learned from those years and completely changed, forever. They became very strict with their lending resulting in the Fed and the ECB not being able to raise their rates. By keeping the Fed funds rate low the Federal Reserve wants to encourage commercial banks to give out loans to stimulate the economy. But commercial banks are not playing along. They even accept negative rates in Europe rather than taking risks in the actual economy. The GFC of 2008 completely changed the financial landscape and the central banks have struggled to understand that. The system wasn't working anymore because the main players (the commercial banks) stopped playing with each other. That's also the reason why we see repeated problems in the repo market.
How QE actually decreases liquidity before it's effective
The funny thing about QE is that it achieves the complete opposite of what it's supposed to achieve before actually leading to an economic recovery. What does that mean? Let's go back to my analogy with the camera. Before I take away your camera, you can do several things with it. If you need cash, you can sell it or go to a pawn shop. You can even lend your camera to someone for a daily fee and collect money through that.But then I come along and just take away your camera for a road trip for 100 bucks in collateral. What can you do with those 100 bucks? Basically nothing. You can't buy something else with those. You can't lend the money to someone else. It's basically dead capital. You can just look at it and wait until I come back. And this is what is happening with QE. Commercial banks buy treasuries and MBS due to many reasons, of course they're legally obliged to hold some treasuries, but they also need them to make business.When a commercial bank has a treasury security, they can do the following things with it:- Sell it to get cash- Give out loans against the treasury security- Lend the security to a short seller who wants to short bonds Now the commercial banks received a cash reserve account at the Fed in exchange for their treasury security. What can they do with that?- Give out loans against the reserve account That's it. The bank had to give away a very liquid and flexible asset and received an illiquid asset for it. Well done, Fed. The goal of the Fed is to encourage lending and borrowing through suppressing yields via QE. But it's not happening and we can see that in the H.8 data (assets and liabilities of the commercial banks).There is no recovery to be seen in the credit sector while the commercial banks continue to collect treasury securities and MBS. On one hand, they need to sell a portion of them to the Fed on the other hand they profit off those securities by trading them - remember JPM's earnings. So we see that while the Fed is actually decreasing liquidity in the markets by collecting all the treasuries it has collected in the past, interest rates are still too high. People are scared, and commercial banks don't want to give out loans. This means that as the economic recovery is stalling (another whopping 1.4M jobless claims on Thursday July 30th) the Fed needs to suppress interest rates even more. That means: more QE. that means: the liquidity dries up even more, thanks to the Fed. We heard JPow saying on Wednesday that the Fed will keep their minimum of 120 billion QE per month, but, and this is important, they can increase that amount anytime they see an emergency.And that's exactly what he will do. He will ramp up the QE machine again, removing more bond supply from the market and therefore decreasing the liquidity in financial markets even more. That's his Hail Mary play to force Americans back to taking on debt again.All of that while the government is taking on record debt due to "stimulus" (which is apparently only going to Apple, Amazon and Robinhood). Who pays for the government debt? The taxpayers. The wealthy people. The people who create jobs and opportunities. But in the future they have to pay more taxes to pay down the government debt (or at least pay for the interest). This means that they can't create opportunities right now due to the government going insane with their debt - and of course, there's still the Coronavirus.
"Without the Fed, yields would skyrocket"
This is wrong. The Fed has been keeping their basic level QE of 120 billion per month for months now. But ignoring the fake breakout in the beginning of June (thanks to reopening hopes), yields have been on a steady decline. Let's take a look at the Fed's balance sheet. The Fed has thankfully stayed away from purchasing more treasury bills (short term treasury securities). Bills are important for the repo market as collateral. They're the best collateral you can have and the Fed has already done enough damage by buying those treasury bills in March, destroying even more liquidity than usual. More interesting is the point "notes and bonds, nominal". The Fed added 13.691 billion worth of US treasury notes and bonds to their balance sheet. Luckily for us, the US Department of Treasury releases the results of treasury auctions when they occur. On July 28th there was an auction for the 7 year treasury note. You can find the results under "Note -> Term: 7-year -> Auction Date 07/28/2020 -> Competitive Results PDF". Or here's a link. What do we see? Indirect bidders, which are foreigners by the way, took 28 billion out of the total 44 billion. That's roughly 64% of the entire auction. Primary dealers are the ones which sell the securities to the commercial banks. Direct bidders are domestic buyers of treasuries. The conclusion is: There's insane demand for US treasury notes and bonds by foreigners. Those US treasuries are basically equivalent to US dollars. Now dollar bears should ask themselves this question: If the dollar is close to a collapse and the world wants to get rid fo the US dollar, why do foreigners (i.e. foreign central banks) continue to take 60-70% of every bond auction? They do it because they desperately need dollars and hope to drive prices up, supported by the Federal Reserve itself, in an attempt to have the dollar reserves when the next liquidity event occurs. So foreigners are buying way more treasuries than the Fed does. Final conclusion: the bond market has adjusted to the Fed being a player long time ago. It isn't the first time the Fed has messed around in the bond market.
How market participants are positioned
We know that commercial banks made good money trading bonds and stocks in the past quarter. Besides big tech the stock market is being stagnant, plain and simple. All the stimulus, stimulus#2, vaccinetalksgoingwell.exe, public appearances by Trump, Powell and their friends, the "money printing" (which isn't money printing) by the Fed couldn't push SPY back to ATH which is 339.08 btw. Who can we look at? Several people but let's take Bill Ackman. The one who made a killing with Credit Default Swaps in March and then went LONG (he said it live on TV). Well, there's an update about him:Bill Ackman saying he's effectively 100% longHe says that around the 2 minute mark. Of course, we shouldn't just believe what he says. After all he is a hedge fund manager and wants to make money. But we have to assume that he's long at a significant percentage - it doesn't even make sense to get rid of positions like Hilton when they haven't even recovered yet. Then again, there are sources to get a peek into the positions of hedge funds, let's take Hedgopia.We see: Hedge funds are starting to go long on the 10 year bond. They are very short the 30 year bond. They are very long the Euro, very short on VIX futures and short on the Dollar.
This is the perfect setup for a market meltdown. If hedge funds are really positioned like Ackman and Hedgopia describes, the situation could unwind after a liquidity event:The Fed increases QE to bring down the 30 year yield because the economy isn't recovering yet. We've already seen the correlation of QE and USD and QE and bond prices.That causes a giant short squeeze of hedge funds who are very short the 30 year bond. They need to cover their short positions. But Ackman said they're basically 100% long the stock market and nothing else. So what do they do? They need to sell stocks. Quickly. And what happens when there is a rapid sell-off in stocks? People start to hedge via put options. The VIX rises. But wait, hedge funds are short VIX futures, long Euro and short DXY. To cover their short positions on VIX futures, they need to go long there. VIX continues to go up and the prices of options go suborbital (as far as I can see).Also they need to get rid of Euro futures and cover their short DXY positions. That causes the USD to go up even more. And the Fed will sit there and do their things again: more QE, infinity QE^2, dollar swap lines, repo operations, TARP and whatever. The Fed will be helpless against the forces of the market and have to watch the stock market burn down and they won't even realize that they created the circumstances for it to happen - by their programs to "help the economy" and their talking on TV. Do you remember JPow on 60minutes talking about how they flooded the world with dollars and print it digitally? He wanted us poor people to believe that the Fed is causing hyperinflation and we should take on debt and invest into the stock market. After all, the Fed has it covered. But the Fed hasn't got it covered. And Powell knows it. That's why he's being a bear in the FOMC statements. He knows what's going on. But he can't do anything about it except what's apparently proven to be correct - QE, QE and more QE.
A final note about "stock market is not the economy"
It's true. The stock market doesn't reflect the current state of the economy. The current economy is in complete shambles. But a wise man told me that the stock market is the reflection of the first and second derivatives of the economy. That means: velocity and acceleration of the economy. In retrospect this makes sense. The economy was basically halted all around the world in March. Of course it's easy to have an insane acceleration of the economy when the economy is at 0 and the stock market reflected that. The peak of that accelerating economy ("max velocity" if you want to look at it like that) was in the beginning of June. All countries were reopening, vaccine hopes, JPow injecting confidence into the markets. Since then, SPY is stagnant, IWM/RUT, which is probably the most accurate reflection of the actual economy, has slightly gone down and people have bid up tech stocks in absolute panic mode. Even JPow admitted it. The economic recovery has slowed down and if we look at economic data, the recovery has already stopped completely. The economy is rolling over as we can see in the continued high initial unemployment claims. Another fact to factor into the stock market.
TLDR and positions or ban?
TLDR: global economy bad and dollar shortage. economy not recovering, JPow back to doing QE Infinity. QE Infinity will cause the final squeeze in both the bond and stock market and will force the unwinding of the whole system. Positions: idk. I'll throw in TLT 190c 12/18, SPY 220p 12/18, UUP 26c 12/18.That UUP call had 12.5k volume on Friday 7/31 btw.
Edit about positions and hedge funds
My current positions. You can laugh at my ZEN calls I completely failed with those.I personally will be entering one of the positions mentioned in the end - or similar ones. My personal opinion is that the SPY puts are the weakest try because you have to pay a lot of premium. Also I forgot talking about why hedge funds are shorting the 30 year bond. Someone asked me in the comments and here's my reply: "If you look at treasury yields and stock prices they're pretty much positively correlated. Yields go up, then stocks go up. Yields go down (like in March), then stocks go down. What hedge funds are doing is extremely risky but then again, "hedge funds" is just a name and the hedgies are known for doing extremely risky stuff. They're shorting the 30 year bond because they needs 30y yields to go UP to validate their long positions in the equity market. 30y yields going up means that people are welcoming risk again, taking on debt, spending in the economy. Milton Friedman labeled this the "interest rate fallacy". People usually think that low interest rates mean "easy money" but it's the opposite. Low interest rates mean that money is really tight and hard to get. Rising interest rates on the other hand signal an economic recovery, an increase in economic activity. So hedge funds try to fight the Fed - the Fed is buying the 30 year bonds! - to try to validate their stock market positions. They also short VIX futures to do the same thing. Equity bulls don't want to see VIX higher than 15. They're also short the dollar because it would also validate their position: if the economic recovery happens and the global US dollar cycle gets restored then it will be easy to get dollars and the USD will continue to go down. Then again, they're also fighting against the Fed in this situation because QE and the USD are correlated in my opinion. Another Redditor told me that people who shorted Japanese government bonds completely blew up because the Japanese central bank bought the bonds and the "widow maker trade" was born:https://www.investopedia.com/terms/w/widow-maker.asp"
Since I've mentioned him a lot in the comments, I recommend you check out Steven van Metre's YouTube channel. Especially the bottom passages of my post are based on the knowledge I received from watching his videos. Even if didn't agree with him on the fundamental issues (there are some things like Gold which I view differently than him) I took it as an inspiration to dig deeper. I think he's a great person and even if you're bullish on stocks you can learn something from Steven!
My investing account at RBC DS allows me to borrow against it since it is a margin account. I am considering using those funds to further invest in the market in the fall if we see another downturn as a result of a second wave. I understand that interest is tax deductible, but do you have any additional advice for a strategy like this?
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What dividend stocks do you think still have some upside left at current prices? Most of the stocks in my portfolio are starting to get pretty expensive as the market continues to rally. Any solid dividend payers that are still a bargain right now?
I have a post that I explained how in etoro you don’t own the stock what so ever but u just own a cfd contract even if you don’t use margin In this post I’ll explain a little bit about how etoro pays dividends on your stocks even tho you don’t own them and the dangers of trading on this kind of brokers “””””””””””””””””””” As I said in one of my replay , the underlying asset is a cfd contract (cfd contracts are decaying assets ) , a cfd contract doesn’t grant you any ownership over the real stock. Let me explain again . In one of the legit brokers I use , they have this program that if you subscribe in , you give the broker the permission to lend the stocks in your portfolio to other traders who want to short sell the stock , like I have 5 apple stocks in my portfolio, if I’m signed up to the lending programme in this legit broker , then they can take my 5 apple stocks and lend them to someone who wants to short sell them . 1 - by law I’m not paid dividends on those stocks that they borrowed from me , but the borrower is paid the dividend cause he is the owner now as long as he is borrowing my stocks . 2- said broker will pay me 50% of the interest that he charges the short seller 3- the broker will still give me my dividends equivalent but in a form of capital gain ( etoro does pay u dividends equivalent from the commission that he charges on his platform , but not real dividends, ) This might sound complicated but again this is way a broker like etoro can tell their clients that they are buying the asset which in-fact they are not , it is legal but it is a form of word play , the real danger is if etoro goes bankrupt or for any reason doesn’t wna does his part of cfd contract deal then they tottaly can , they don’t do it upfront , but they can halt trading on a certain stock , just an example , a real legit broker will never halt trading on a stock unless the exchange itself halt trading and no one in the world can buy the stock , in etoro you will find that you can’t sell a certain position or open one , while at the same time other traders on other platforms are happily buying the same stock and selling it , this is one form of etoro saying “ I don’t want to keep up to my words that and exercise the cfd contract “ Somethings I said are a bit complicated but etoro banks on the low experience and innocency of their clients . They actually blocked a popular investor called “harshsmith” because he was allegedly scalping stocks , and he have 2k copiers , so every 1000$ he made is 2 million $ that etoro had to pay to all his copiers , they might not allow scalping and that’s their law but keep in mind , if they are a legit broker they would be happily letting him scalp cause he and his 2k copiers are paying commission, and commission is how they make their profit as they say (big lie , they make it from your losses ) , then why block and profitable popular investor with a lot of copiers paying commission? Cause they are paying him his profit from their pocket and not the real market , I don’t mind them having their own non scalping law , but why have it if your legit ?! More scalping is more commission for the broker right ? Unless it is not a legit broker such as etoro Hope this helps
The Walt Disney Company (NYSE:DIS) es una compañía multinacional estadounidense dedicada principalmente a los medios de comunicación masivos y a la industria del entretenimiento. Su sede está en Burbank, California, EEUU. La compañía cotiza bajo el ticker DIS, en Nueva York, a un precio de US$ 127,44 al 23/8/2020. Goza de un tamaño prominente, teniendo 223 mil empleados y una capitalización de mercado de 230.292M de dólares. Disney integra el índice Dow Jones Industrial Average (DJIA) desde 1991, y también integra el S&P 100 y el S&P 500. Evaluando más en detalle el desempeño de la acción, la acción cotiza US$ 127,44 al 23/8/2020. Hace aproximadamente un año, el 26/8/2019 la acción cotizaba a US$ 137,26 lo que representa una caída aproximada del 7,15% anual (TTM). La caída es mas pronunciada YTD, Disney cotizaba US$ 148,2 a principios de año, por lo que al día de hoy la caída seria del 14%. No obstante, la acción a recuperado bastante valor después de la caída pronunciada que sufrió en Febrero-Marzo, llegando a cerrar a US$ 85,76 el 23/3/20 (habiendo subido un 48% desde entonces). Es para destacar que desde dicha caída se vio un significativo incremento en el volumen operado del papel. Mirando brevemente las medias móviles, vemos que la cotización actual esta por encima del promedio de 30 días (US$ 122,73), del de 90 días (US$ 115,98) y de 200 días (US$ 124,12). Con respecto al mercado, al 25/8, desde comienzo de año Disney se desempeñó por debajo del S&P 500 (5,7%), y del DJIA (-2,15%), con desempeño de -12,42% YTD. La compañía fue fundada en 1923 por los hermanos Walt y Roy Disney. A lo largo de su historia, Disney se consolidó como líder en la industria de animación estadounidense y luego diversificó sus negocios dedicándose a la producción de películas live-action, televisión y parques temáticos. A partir de 1980 Disney creo y adquirió diversas divisiones corporativas, para penetrar en mercados que fueran mas allá de sus marcas insignia orientadas a productos familiares. Disney es conocida por su división de estudios cinematográficos (The Walt Disney Studios), que incluye Walt Disney Pictures, Walt Disney Animation Studios, Pixar, Marvel Studios, Lucasfilm, 20th Century Studios, Searchlight Pictures y Blue Sky Studios. Otras unidades y segmentos de la compañía son Disney Media Networks; Disney Parks, Experiences and Products y Walt Disney Direct-to-Consumer & International. A través de estas unidades, Disney posee y opera canales de televisión como ABC, Disney Channel, ESPN, Freeform, FX y National Geographic, así como también venta de publicidad, merchandising y música. También tiene divisiones de producción teatral (Disney Theatrical Group) y posee un grupo de 14 parques temáticos alrededor del mundo. Es evidente la complejidad de las operaciones de Disney, por lo que vale la pena ir un poco mas a fondo en la composición de los segmentos operativos de Disney, en base al reporte anual de 2019 (mas representativo que el ultimo reporte trimestral en medio de la pandemia), donde encontramos cuatro segmentos relevantes. El primer segmento, denominado “Media Networks”, compuesto principalmente por los canales domésticos de TV, este segmento generó 24.827M US$ de ingresos en 2019 (un 34,7% del total). El segundo segmento es el de “Parks, Experiences and Products”, compuesto por los parques temáticos, resorts y cruceros de las compañías, así como también de las licencias de los nombres, personajes y marcas de la compañía y de los productos de merchandising propios, este segmento reportó 26.225M US$ de ingresos en 2019 (un 36,66% del total, el segmento mas relevante de la compañía). El tercer segmento, es el de “Studio Entertainment” que contiene las operaciones de producción de películas, música y obras de teatro, así como también los servicios de post-produccion. Este segmento reportó 11.127M US$ (un 15,55% del total). El ultimo segmento, quizás el mas interesante es “Direct-to-Consumer & International”, donde además de contener las operaciones internacionales de TV y servicios de distribución de contenido digital como apps y paginas web, se incluyen las unidades de servicios de streaming de Disney, compuestas principalmente por Hulu, ESPN+ y Disney+. Este sector reporto ingresos por 9.349M US$ (un 13,07%, enorme incremento respecto del 5,6% que reportó en 2018). Respecto a la distribución territorial de las operaciones, es notorio el bagaje del mercado doméstico (EEUU y Canadá) donde concentraron en 2019 el 72,6% de las operaciones. Vale destacar también que hubo un incremento significativo interanual de las operaciones en los mercados de Asia-Pacífico (del 9,3% al 11,2%) y en Latinoamérica y otros mercados (del 3,09% al 4,61%). En lo que respecta a la política de dividendos de la compañía, encontré registros de pago constante de dividendos desde al menos 1989. El ultimo dividendo fue el 13/12, habiendo pagado $0,88 y arrojando un dividend yield anual de 1,2%. La compañía decidió omitir el dividendo semestral correspondiente al primer semestre de 2020 por la pandemia del COVID-19. Evaluando un poco la posición financiera de la empresa, a junio de 2020, según el balance presentado, Disney tenia activos corrientes por 41.330M US$ y pasivos corrientes por 30.917M US$, lo que resulta en un working capital (activos corrientes netos, activos corrientes menos pasivos corrientes) de 10.413 US$. El working capital entonces representa el 33,68% de los pasivos corrientes (Con lo cual, el current ratio es de 1,34 apreciándose una mejoría respecto del 0,9 reportado en septiembre 2019). En relación con la deuda de largo plazo, la podemos estimar en 70.052M US$ (borrowings + other long-term liabilities), dado que en septiembre 2019 la cifra era de 51.889M US$, vemos que sufrió un aumento considerable (en el orden del 35%). Respecto a los flujos de efectivo de Disney, vemos que en lo que va del año fiscal (septiembre 2019-junio 2020) Disney reportó flujo de efectivo por operaciones por 5949M US$, casi lo mismo que reportó para todo el año fiscal 2019 (5984M US$). Viendo la evolución de 10 años del CF de operaciones:
CF de operaciones (mill. USD)
Dif. Anual %
Viendo la evolución en 10 años del flujo de efectivo de operaciones, vemos que en 2019 hubo una drástica reversión de la tendencia al alza que se venia reportando (con un 58,14% de caída interanual). Esto se debe en parte a la política de adquisiciones de la empresa, que vemos reflejado en el flujo de efectivo por inversiones, equivalente en 2019 a -15.096M US$ (muy por encima del promedio de 2010-2018, equivalente a -4179,4M US$). En lo relativo a las ganancias de la compañía, para el Q2 2020 Disney reportó pérdidas por 4721M US$ (contra una ganancia de 1760M US$ para el Q2 2019). La situación se atenúa considerando las cifras para los últimos nueve meses (Q4 2019-Q2 2020), donde Disney totalizó perdidas por 1813M US$. No obstante, la situación del COVID-19 distorsiona nuestro análisis a largo plazo, por lo que para analizar la evolución interanual desde los últimos 10 años, utilizare los datos de los reportes anuales (datando el ultimo de septiembre 2019).
Net Income (mill. USD)
Dif. Anual %
Como se puede ver en el cuadro, pese al revés sufrido por las obvias complicaciones de la pandemia, el historial de ganancias de Disney es sólido. La compañía tuvo en los últimos 10 años, 2 años de contracción en las ganancias (2017 y 2019), pero en términos generales, las ganancias crecieron a una tasa promedio del 13,02% los últimos 10 años. Para evaluar el crecimiento general estos 10 años, si tomamos el promedio de los primeros 3 años (2010-2012) y el promedio de los últimos 3 (2017-2019), las ganancias de Disney crecieron un 125,8%. Mirando un poco de ratios, analizaré el EPS (Earnings Per Share) de la acción. Para el Q2 2020, Disney presentó un EPS negativo, de -2,61, contra un 0,98 obtenido en el Q2 2019. Refiriéndonos al desempeño pre-pandemia, el EPS promedio anual de los últimos 5 años fue de 6,3 y el ultimo EPS anual reportado (septiembre 2019) estaba ligeramente por encima, alrededor de 6,68. En lo respectivo al Price/Earning, el P/E (TTM) al valor de la acción del 23/8 es de -208,9. No obstante, si eliminamos la distorsión producto de la pandemia, calculando las ganancias promedio de los últimos 3 años (de acuerdo con los reportes anuales), es de 18,38, lo cual es un valor aceptable dada la coyuntura de los últimos años. En lo que respecta al Price-To-Book (P/B) ratio, el book value a junio 2020, es de 50, por lo que el P/B (siempre al precio del 23/8) es de 2,54, un valor razonable dados los promedios de los sectores en los que Disney tiene incidencia. El ultimo ratio a analizar es Price/Assets (P/E*P/B) que, (usando P/E con promedio de las ganancias de los últimos 3 años) arroja un valor de 46,68. Sobre el soporte institucional de la compañía, Disney tiene un apoyo considerable, calculado en el 66,42% del flotante en manos de instituciones. Los tenedores líderes son Vanguard con el 8,22%; BlackRock (NYSE:BLK) con el 6,32% y State Street Corporation (NYSE:STT) con el 4,19%. Otros tenedores significantes (1-2%) son Bank of America (NYSE:BAC), MorganStanley (NYSE:MS) y Bank of New York Mellon (NYSE:BK). En lo respectivo al management de Disney, la primera consideración importante es respecto al legendario CEO de la compañía, Robert “Bob” Iger, quien, en febrero de este año, después de posponerlo por años, decidió dar un paso al costado como CEO de la compañía, dejando a cargo al director del segmento de Parques y Resorts, Bob Chapek. Esto duró poco, y en abril Iger volvió a tomar las riendas de la compañía. No obstante, es altamente probable que, una vez estabilizado el panorama Iger retome su frustrado plan de dar un paso al costado. En lo relativo a la compensación, Iger cobró 47.525.560 US$, los executive officers una remuneración promedio de 11.319.422 US$ y el empleado promedio de Disney cobró 52.184 US$. Una cosa que llama la atención del balance de Disney (septiembre 2019), es el incremento notorio del goodwill (de 31.269M US$ a 80.293M US$, un aumento del 157%). No obstante, este incremento puede deberse a la política de fusiones y adquisiciones de la compañía. Disney viene llevando en los últimos años una política de adquisiciones relativamente agresiva, ideada por el CEO Bob Iger, de las cuales podemos destacar 4 o 5 operaciones clave, la primera de ellas fue la adquisición de Pixar, la famosa empresa de animación que había despegado bajo la conducción de Steve Jobs y Ed Catmull, en 2006 por 7,4MM US$ (de esa adquisición se beneficiaron sacando películas muy exitosas como Up, Wall-E, Ratatouille, Toy Story 3, etc.). Otra adquisición clave, fue la compra de Marvel en 2009 por 4MM US$ (La última de sus películas Avengers: Endgame, la más taquillera de la historia de Disney, vendió entradas por 3MM US$). En 2012, Disney compró Lucasfilm (histórica productora de Star Wars), por 4,05MM US$, y posteriormente anunció una muy lucrativa tercera trilogía de Star Wars. Por último, en marzo de 2019, Disney concretó la adquisición de 2oth Century Fox, en marzo de 2019, por la extraordinaria cifra de 73MM US$, sus resultados aún están por verse. Analizar la competencia de Disney es algo trabajoso, dado la variedad de sectores en los que se involucra y la falta de compañías que abarquen tantos sectores como Disney. Considero que la compañía que más se aproxima en cuanto a sus operaciones y al volumen de las mismas es Comcast (NASDAQ:CMSCA), si bien Disney compite con numerosas empresas en numerosos sectores, como podrían ser, por ejemplo Cedar Fair (NYSE:FUN) o Six Flags (NYSE:SIX) en el negocio de los parques temáticos; ViacomCBS (NYSE:VIAC) o Discovery Communications (NASDAQ:DISCA) en el negocio mediático; así como Netflix (NASDAQ:NFLX) o Amazon (NASDAQ:AMZN) en el negocio del streaming, sobre los cuales hablare más adelante. También compite con segmentos de negocios de conglomerados grandes como Sony (NYSE: SNE) o AT&T (NYSE:T). Observando a Comcast, el acérrimo rival, vemos que la capitalización bursátil es similar, siendo de 198.301M US$ para Comcast y de 234.538M US$ para Disney, así como los empleados, teniendo 190.000 (CMCSA) y 236.000 (DISN). El desempeño de ambas acciones es parejo, en términos generales Comcast tuvo mejor performance, sobre todo YTD (-3,47% contra -10,26%). En los márgenes y ratios también gana Comcast, supera ampliamente en gross margin (TTM) a Disney, con 56,78% contra 27,95% y en net margin (TTM) con 10,91% frente a un pobre -1,91%. El EPS (TTM) da 2,53 para Comcast contra -0,6 para Disney. Consecuentemente, Comcast pudo mantener un P/E positivo de 17,56. Si bien los números parecen positivos en la comparación para el lado de Comcast, me parece relevante destacar que lo mismo que fue su mayor ventaja comparativa (la composición de sus segmentos operativos), puede ser lo que la haga perder en la comparación a futuro, dada la absoluta supremacía que tiene la operatoria relacionada con la televisión, así como la falta de un segmento de negocios dedicado al streaming de video (sobre el cual también me referiré mas adelante). Para analizar el futuro, creo que es relevante hacer unas breves conclusiones sobre la actualidad. En primer lugar, los segmentos operativos mas afectados fueron el segmento de parques temáticos, resorts, etc. y el segmento de los estudios cinematográficos con lo cual los ingresos de Disney este último trimestre quedaron a cargo, principalmente, de los canales de TV (que sufrieron una breve baja del 2%) y de los servicios de streaming. Empezando por los sectores más afectados, respecto a la producción fílmica (Studio Entertainment), me parece que la situación no es crítica, claramente la situación de la pandemia redujo fuertemente los ingresos del sector (al haberse reducido lógicamente la asistencia a salas de cine). No obstante, el manejo del sector viene siendo exitoso hace años (en los últimos 2 años lanzaron 3 de las 4 películas más taquilleras de la historia de la compañía, Endgame, Infinity War, y el live-action de El Rey León), y no hay indicios de que esto vaya a cambiar en el futuro (hay un esquema de estrenos futuros interesante). En lo que respecta a los parques, las perspectivas no son tan buenas. La caída para el Q2 2020 fue del 85% en relación al Q2 2019. Es evidente que al haber una cuestión sanitaria de por medio, el turismo va a ser uno de los sectores mas afectados, habiendo sufrido una caída increíble en la primera mitad del año.  Actualmente, la actividad comercial de los parques temáticos está empezando a reanudarse, habiendo reabierto las operaciones en Walt Disney World en Florida, y estando a la espera de reabrir Disneyland en California, dada la incertidumbre de la pandemia. No obstante, la recuperación fue peor de lo esperado y a partir de Septiembre Walt Disney World recortará los horarios de sus parques. Asimismo, comparativamente, el desempeño de Universal Studios (propiedad de Comcast), parece ser mejor que el de Disney en esta reapertura. No obstante, es importante destacar el carácter de líder absoluto de Disney en este sector, con una competencia que difícilmente pueda igualar su posición, con lo cual si bien el desempeño en el corto plazo puede ser inferior al de la competencia, es altamente probable que recupere su posición dominante en el mediano-largo plazo. Es interesante ver, en tercer lugar, el segmento “Media Networks” que consiste principalmente en los canales de TV que Disney posee. Este sector no tuvo una caída significante (solo del 2% para el Q2 2020 en relacion al Q2 2019) en el corto plazo, pero en el largo plazo, es evidente que la tendencia del sector es a desaparecer. Las encuestas y reportes muestran un lento descenso año tras año de la audiencia, tanto de TV en vivo, TV diferida y radio. Con lo cual, a largo plazo, es previsible que este segmento sufra una disminución considerable en su volumen de operaciones. También es previsible (y así lo reflejan las encuestas), que el reemplazo de la TV tradicional sea protagonizado por los servicios de video streaming (VOD), es decir, por las operaciones del cuarto segmento (Direct-to-Consumer). Disney tiene hoy 3 servicios de streaming, Hulu, ESPN+, y Disney+ (ofrece los tres en un bundle que cuesta US$ 12,99). Como ya dijimos, el incremento de los ingresos por estos servicios durante el FY 2019 fue significante. Veamos la evolución de los subscriptores a estos servicios en lo que va del FY 2020 (es decir, Q4 2019, Q1 2020 y Q2 2020).
I really need clarification on how to trade with my cash account, I really appreciate the amiable gesture!
I want to ask a question that may be very simple to many of you here. I have a cash account on fidelity and I had my funds settled before I traded today. I bought and sold a stock today and my "settled funds" is now $1 but my "cash available to trade" is $315. I need clarification if I will receive any violations for buying another stock tomorrow? There is a stock that is about to pay out a dividend and I want to own the stock by tomorrow. I was wondering if I can buy it tomorrow and when I would be allowed to sell it? How does this work? I thank you in advance for the work, it's appreciated!
Investment Thesis: Why investing in POW.TO (Power Corporation of Canada) now is an investment in a future high market cap Wealthsimple IPO
I have seen some posts here wondering about the wisdom of investing in Wealthsimple's parent company, Power Corporation of Canada (POW.TO). I decided to look more into this, decided to post my investment thesis and research on why I, long-term, I have a very bullish view on Wealthsimple (and by extension POW.TO), and why I think this is equal to being an early stage investor in a Wealthsimple IPO.
Ownership: Power Corporation of Canada (POW.TO) (83.2% ownership)
AssetsUnderMangement: $5.4 billion, as of June 30, 2020 (4.9 billion in June 30, 2019)
Wealthsimple Invest (ETF Roboadvisor service), WS was one of the first-movers in this space in Canada and offered robo-advising as part of its initial product in 2015. WS claims to have largest digital investing presence in Canada (70% of the market) (reference).
Wealthsimple Cash, a savings account service
Wealthsimple Trade, a commission free trading app where users can buy and sell ~8,000 stocks and ETFs
Wealthsimple Crypto, a commission free cryptocurrency trading app, currently in beta
SimpleTax.ca, a free tax-return service used by ~1 million Canadians per year, acquired in late 2019
WS has had many successful rounds of funding and a vote of confidence from both its parent POW.TO and other multinationals investing in fintech.
Last year WS received a $100 million dollar investment led by Allianz X, the start up investor arm of German financial services giant Allianz
WS has had 7 total investing rounds, totalling $266.9 million (reference)
WS has been extremely aggressive in targeting growth areas. Wealthsimple’s CEO Mike Katchen has said he wants to position the company as a “full-stack” financial services company. Here are some of their current expansion areas:
UK and USA Expansion - in 2017, they started offering similar investing services in the UK and the US (reference and reference).
Socially Responsible ETFs - WS recently partnered with Mackenzie Investment to offer socially responsible ETFs with a social and environmental focus. Although probably not something that older investors care about, this is particularly important for younger investors who want to make sure their investments are socially responsible
Cryptocurrency - WS is currently testing a beta service of their cryptocurrency app, and offering fee-free cryptocurrency trading, similar to Wealthsimple Trade. Whatever your views of cryptocurrency (I'm of the view that I can in some cases be part of a portfolio to hedge against risk), it's here to stay. Earlier this month, WS was the first company in Canada to register with the Ontario Securities Exchange Commission (reference). My sense is that crypto will face increasing regulations and scrutiny in the coming years, which will be a good thing for WS which is a step ahead of the game (reference). Even Google is starting to look into relaxing its restraints on crypto (reference).
Other full-stack services - WS has been mum on what other services they might offer, but insurance, mortgages, and chequing accounts could be other areas of disruption. (Reference)
WS is run by young guys who have big ambitions and plans for the company. Sometimes there are CEOs with the intangibles that can really drive a company's growth, and from what I can glean, I think the company has a lot of potential here in terms of vision by its leaders. You can read more about the founders here
Michael Katchen, CEO, Background: Led product and marketing at a start up called 1000memories, a Y Combinator startup later acquired by Ancestry.com. Worked for McKinsey & Company.
Brett Huneycutt, COO, Rhodes Scholar... not much else I know about the guy
Quote sfrom CEO: Michael Katchen On being laughed out of the boardroom when he proposed his idea for Wealthsimple:
Within the last month, Wealthsimple has also opened an office in London. Katchen said a push into the European market is “possible” as its “ambitions are global,” but right now the Canadian and U.S. markets are “a lot to chew.” It is a far cry from the company’s early days: Katchen said he was “laughed out of the boardroom” for laying out a global vision for Wealthsimple at a time when they had just $1.9-million in funding and 20 users***.***“It’s a very personal mission of mine since I moved back from California, to inspire more Canadian companies to think big and to think internationally about the businesses that they’re building,” he said. (reference)
On Wealthsimple's growth in the next 10-15 years:
Wealthsimple has more than $5 billion in assets under management and 175,000 customers in Canada, the U.S. and U.K. He sees that reaching $1 trillion 15 years. “We’re just getting started,” he said. “Our plans are to get to millions of clients in the next five years.” (reference)
Brand Value and Design
Out of all the financial services company in Canada, WS probably has the most cohesive and smart design concept across its platforms and products. I see the value in Wealthsimple in not just the assets they have under management, but also the value of the brand itself. I mean, what kind of financial services company makes a blog post about their branding colour scheme and font choices? Also see: Wealthsimple’s advertisement earlier this year capturing 4 million views on Youtube. There also seems to be very strong brand awareness and brand loyalty amongst its users. I think a lot of users find WS refreshing as a financial services company because they cut through the "bullshit" and legalese, and try to simply things for the consumer. They also have their own in house team of designers and creative directors to do branding, design, and advertising, and this kind of vertical integration is generally unheard of in the financial services industry (reference).
Interestingly, the CEO’s ultimate goal is to take the company public. Therefore, I see an investment in POW.TO as being an early stage pre-IPO investor in WS (reference).
The goal is to get Wealthsimple to the size and scale to go public, something that Katchen said he’s “obsessed with.” While admitting that an IPO was still a few years down the road, Katchen already has a target of $20 billion in assets under administration (AUA) as the tipping point (the company recently announced $4.3 billion in AUA as of Q1 2019) (reference)
Ultimately, my sense is that a spun-out Wealthsimple IPO eventually be worth a lot, perhaps even more than POW.TO at some point. Obviously the company is losing money right now, and no where even close to an IPO, and there are still many chances that this company could flop. The best analogy that I can think of is when Yahoo bought an early stake in Alibaba (BABA) back in the early 2000s, and there came a point where their stake in BABA was worth more than Yahoo’s core business. I think an investment in POW.TO now is an early investment in WS before it goes public. (reference)
Expansion problems. In the UK, they reported significant losses and despite increasing users. (reference). The US is also an especially competitive space with lots of similar competitors.
The robo-advising, fintech space is highly competitive now, and the Big Five Banks and other investment/trading companies could easily start offering low-cost or commission free trading
Competitors such as Robinhood could also expand into the Canadian market and take out a huge chunk of WS's userbase
The X Factor
What I find particularly compelling about WS is they have aggressively positioned themselves to be a disruptor in the Canadian financial services industry. This is an area that has traditionally been thought to be a firewall for the Big Five Banks. There is also a generational gap in investing approaches, knowledge, and strategy, and I think WS has positioned itself nicely with first-time investors. My sense is that COVID-19 has also captured a huge amount of young adults with its trading app in the last few months, who will continue to use Wealthsimple products in the future. The average age of its user is around 34. As younger individuals are more comfortable with moving away traditional banking products, I think Wealthsimple’s product offering offers significant advantages over its competitors.
Power Corp is a Good Home
Currently POW.TO is trading at $26.30, down from its 52-week high of $35.15. I see an investment in POW.TO now as fairly low risk, and while WS grows, and there is also the added benefit of a high dividend stock. One of the most confusing things I found about Power Corp was its confusing corporate structure where there were two stocks, Power Financial Corp, and Power Corp of Canada. Fortunately, in Dec 2019, they simplified and consolidated the stocks, which also simplifies the holding structure of WS. I currently see POW.TO has a good stock to hold as well if you're a dividend holder, with a dividend of 6.86%. Also, POW.TO is patient enough to bide its time and let its investment in WS grow, unlike a VC that might want to sell it quick. For example, the reason why WS went with POW.TO instead of the traditional VC route is explained here:
Katchen has directly addressed the question of why he did not go the traditional VC route recently, saying: If you are a business that requires perhaps decades to achieve the vision you have, well, if you’re not going to be able to generate the kind of returns that venture needs is they will force you to sell yourself, they will force you to go public before you’re ready, or they will just forget about you because you’re going to be a write off. And so Katchen essentially flipped Wealthsimple to Power Financial. Power is well known as a conservative, patient, long-term investor. (https://opmwars.substack.com/p/the-wealthsimple-founders-before)
My belief is there is a huge unrecognized potential in POW.TO's massive ownership stake in WS that will be realized maybe 5-10 years down the road. I didn't really dive into the financials of POW.TO in relation to WS's performance, because the earnings reports do no actually say much about WS. I'm aware of the main criticisms that POW.TO is a mature company and dividend stock that has been trading sideways for many years, and the fact that WS is currently not a profitable company. I am not a professional investor, and this is just my amateur research, so I certainly welcome any comments/criticism of this thesis that people on this subreddit might have! (Please be gentle on me!).
You may have heard about off-shore tax havens of questionable legality where wealthy people invest their money in legal "grey zones" and don't pay any tax, as featured for example, in Netflix's drama, The Laundromat. The reality is that the Government of Canada offers 100% tax-free investing throughout your life, with unlimited withdrawals of your contributions and profits, and no limits on how much you can make tax-free. There is also nothing to report to the Canada Revenue Agency. Although Britain has a comparable program, Canada is the only country in the world that offers tax-free investing with this level of power and flexibility. Thank you fellow Redditors for the wonderful Gold Award and Today I Learned Award! (Unrelated but Important Note: I put a link at the bottom for my margin account explainer. Many people are interested in margin trading but don't understand the math behind margin accounts and cannot find an explanation. If you want to do margin, but don't know how, click on the link.) As a Gen-Xer, I wrote this post with Millennials in mind, many of whom are getting interested in investing in ETFs, individual stocks, and also my personal favourite, options. Your generation is uniquely positioned to take advantage of this extremely powerful program at a relatively young age. But whether you're in your 20's or your 90's, read on! Are TFSAs important? In 2020 Canadians have almost 1 trillion dollars saved up in their TFSAs, so if that doesn't prove that pennies add up to dollars, I don't know what does. The TFSA truly is the Great Canadian Tax Shelter. I will periodically be checking this and adding issues as they arise, to this post. I really appreciate that people are finding this useful. As this post is now fairly complete from a basic mechanics point of view, and some questions are already answered in this post, please be advised that at this stage I cannot respond to questions that are already covered here. If I do not respond to your post, check this post as I may have added the answer to the FAQs at the bottom.
How to Invest in Stocks
A lot of people get really excited - for good reason - when they discover that the TFSA allows you to invest in stocks, tax free. I get questions about which stocks to buy. I have made some comments about that throughout this post, however; I can't comprehensively answer that question. Having said that, though, if you're interested in picking your own stocks and want to learn how, I recommmend starting with the following videos: The first is by Peter Lynch, a famous American investor in the 80's who wrote some well-respected books for the general public, like "One Up on Wall Street." The advice he gives is always valid, always works, and that never changes, even with 2020's technology, companies and AI: https://www.youtube.com/watch?v=cRMpgaBv-U4&t=2256s The second is a recording of a university lecture given by investment legend Warren Buffett, who expounds on the same principles: https://www.youtube.com/watch?v=2MHIcabnjrA Please note that I have no connection to whomever posted the videos.
TFSAs were introduced in 2009 by Stephen Harper's government, to encourage Canadians to save. The effect of the TFSA is that ordinary Canadians don't pay any income or capital gains tax on their securities investments. Initial uptake was slow as the contribution rules take some getting used to, but over time the program became a smash hit with Canadians. There are about 20 million Canadians with TFSAs, so the uptake is about 70%- 80% (as you have to be the age of majority in your province/territory to open a TFSA).
Eligibility to Open a TFSA
You must be a Canadian resident with a valid Social Insurance Number to open a TFSA. You must be at the voting age in the province in which you reside in order to open a TFSA, however contribution room begins to accumulate from the year in which you turned 18. You do not have to file a tax return to open a TFSA. You do not need to be a Canadian citizen to open and contribute to a TFSA. No minimum balance is required to open a TFSA.
Where you Can Open a TFSA
There are hundreds of financial institutions in Canada that offer the TFSA. There is only one kind of TFSA; however, different institutions offer a different range of financial products. Here are some examples:
The Canadian big 5 bank branches and most other financial institutions offer a TFSA that allows you to buy mutual funds, hold cash, GICs, term deposits, and possibly ETFs. This is a good choice if you want guaranteed returns or diversified investing.
There are a number of on-line banks such as Tangerine, Simplii Financial, Oaken Financial, and many more that offer the TFSA.
The discount DIY brokerage arms of the big 5 banks give you more choices, including stocks, warrants, bonds and options. There are also standalone brokers like IBKR Canada, Questrade, Qtrade, and Virtual Brokers, among others, that offer this.
Some brokerages and financial advisors also offer TFSAs that give you these investment choices, in different formats such as:
Traditional brokerage, where a stockbroker invests your money (BMO Nesbitt Burns, RBC Dominion Securities and others)
Financial advisor who will invest your money according to a plan you put together with the advisor (TSI Network and many others)
"Robo" advisors such as Wealthsimple, RBC InvestEase, BMO SmartFolio, or Wealthbar
BMO's AdviceDirect, which is a semi-directed hybrid between standalone DIY investing and fully-advised investing, where you operate on a DIY basis but have access to a registered investment advisor (a live person) who can give you suggetions and advice.
Your TFSA may be covered by either CIFP or CDIC insuranceor both. Ask your bank or broker for details.
What You Can Trade and Invest In
You can trade the following:
GICS, mutual funds, term deposits
individual common and preferred stocks listed on an "approved exchange" which is the TSX, TSX-V, NASDAQ, NYSE, and about 20 other exchanges worldwide, but not the US OTC pink sheets. Many examples, such as Suncor, Linamar, Apple, any of the big banks, and many thousands of others, when you want to buy into an individual company
stock-like securities like REITS, ETFs and ETNs, including 2x and 3x leveraged
gold and silver certificates
cash of many countries (CAD/USD/EUGBP/AUD/NZD/JPY/CHF and many others)
government bills and bonds of most countries, subsovereigns like Canadian provincial bills and bonds, and most corporations
options that trade on the Montreal Exchange or various options exchanges in the USA and the rest of the word (see FAQ for details)
gold, silver bullion certificates
shares in certain private companies -- but consult your tax advisor on this
What You Cannot Trade
You cannot trade:
commodity futures contracts
option spread positions (see FAQ for details)
anything that requires a margin account, meaning, a special kind of account that allows you to borrow money directly from the broker against the assets you have in your account and the assets you intend to buy.
crypto (although there exist crypto ETNs that you can buy)
Again, if it requires a margin account, it's out. You cannot buy on margin in a TFSA. Nothing stopping you from borrowing money from other sources as long as you stay within your contribution limits, but you can't trade on margin in a TFSA. You can of course trade long puts and calls which give you leverage.
Rules for Contribution Room
Starting at 18 you get a certain amount of contribution room. According to the CRA: You will accumulate TFSA contribution room for each year even if you do not file an Income Tax and Benefit Return or open a TFSA. The annual TFSA dollar limit for the years 2009 to2012 was $5,000. The annual TFSA dollar limit for the years 2013 and 2014 was $5,500. The annual TFSA dollar limit for the year 2015 was $10,000. The annual TFSA dollar limit for the years 2016 to 2018 was $5,500. The annual TFSA dollar limit for the year 2019 is $6,000. The TFSA annual room limit will be indexed to inflation and rounded to the nearest $500. Investment income earned by, and changes in the value of TFSA investments will not affect your TFSA contribution room for the current or future years. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributions.html If you don't use the room, it accumulates indefinitely. Trades you make in a TFSA are truly tax free. But you cannot claim the dividend tax credit and you cannot claim losses in a TFSA against capital gains whether inside or outside of the TFSA. So do make money and don't lose money in a TFSA. You are stuck with the 15% withholding tax on U.S. dividend distributions unlike the RRSP, due to U.S. tax rules, but you do not pay any capital gains on sale of U.S. shares. You can withdraw *both* contributions *and* capital gains, no matter how much, at any time, without penalty. The amount of the withdrawal (contributions+gains) converts into contribution room in the *next* calendar year. So if you put the withdrawn funds back in the same calendar year you take them out, that burns up your total accumulated contribution room to the extent of the amount that you re-contribute in the same calendar year.
E.g. Say you turned 18 in 2016 in Alberta where the age of majority is 18. It is now sometime in 2020. You have never contributed to a TFSA. You now have $5,500+$5,500+$5,500+$6,000+$6,000 = $28,500 of room in 2020. In 2020 you manage to put $20,000 in to your TFSA and you buy Canadian Megacorp common shares. You now have $8,500 of room remaining in 2020. Sometime in 2021 - it doesn't matter when in 2021 - your shares go to $100K due to the success of the Canadian Megacorp. You also have $6,000 worth of room for 2021 as set by the government. You therefore have $8,500 carried over from 2020+$6,000 = $14,500 of room in 2021. In 2021 you sell the shares and pull out the $100K. This amount is tax-free and does not even have to be reported. You can do whatever you want with it. But: if you put it back in 2021 you will over-contribute by $100,000 - $14,500 = $85,500 and incur a penalty. But if you wait until 2022 you will have $14,500 unused contribution room carried forward from 2021, another $6,000 for 2022, and $100,000 carried forward from the withdrawal 2021, so in 2022 you will have $14,500+$6,000+$100,000 = $120,500 of contribution room. This means that if you choose, you can put the $100,000 back in in 2022 tax-free and still have $20,500 left over. If you do not put the money back in 2021, then in 2022 you will have $120,500+$6,000 = $126,500 of contribution room. There is no age limit on how old you can be to contribute, no limit on how much money you can make in the TFSA, and if you do not use the room it keeps carrying forward forever. Just remember the following formula: This year's contribution room = (A) unused contribution room carried forward from last year + (B) contribution room provided by the government for this year + (C) total withdrawals from last year. EXAMPLE 1: Say in 2020 you never contributed to a TFSA but you were 18 in 2009. You have $69,500 of unused room (see above) in 2020 which accumulated from 2009-2020. In 2020 you contribute $50,000, leaving $19,500 contribution room unused for 2020. You buy $50,000 worth of stock. The next day, also in 2020, the stock doubles and it's worth $100,000. Also in 2020 you sell the stock and withdraw $100,000, tax-free. You continue to trade stocks within your TFSA, and hopefully grow your TFSA in 2020, but you make no further contributions or withdrawals in 2020. The question is, How much room will you have in 2021? Answer: In the year 2021, the following applies: (A) Unused contribution room carried forward from last year, 2020: $19,500 (B) Contribution room provided by government for this year, 2021: $6,000 (C) Total withdrawals from last year, 2020: $100,000 Total contribution room for 2021 = $19,500+6,000+100,000 = $125,500. EXAMPLE 2: Say between 2020 and 2021 you decided to buy a tax-free car (well you're still stuck with the GST/PST/HST/QST but you get the picture) so you went to the dealer and spent $25,000 of the $100,000 you withdrew in 2020. You now have a car and $75,000 still burning a hole in your pocket. Say in early 2021 you re-contribute the $75,000 you still have left over, to your TFSA. However, in mid-2021 you suddenly need $75,000 because of an emergency so you pull the $75,000 back out. But then a few weeks later, it turns out that for whatever reason you don't need it after all so you decide to put the $75,000 back into the TFSA, also in 2021. You continue to trade inside your TFSA but make no further withdrawals or contributions. How much room will you have in 2022? Answer: In the year 2022, the following applies: (A) Unused contribution room carried forward from last year, 2021: $125,500 - $75,000 - $75,000 = -$24,500. Already you have a problem. You have over-contributed in 2021. You will be assessed a penalty on the over-contribution! (penalty = 1% a month). But if you waited until 2022 to re-contribute the $75,000 you pulled out for the emergency..... In the year 2022, the following would apply: (A) Unused contribution room carried forward from last year, 2021: $125,500 -$75,000 =$50,500. (B) Contribution room provided by government for this year, 2022: $6,000 (C) Total withdrawals from last year, 2020: $75,000 Total contribution room for 2022 = $50,500 + $6,000 + $75,000 = $131,500. ...And...re-contributing that $75,000 that was left over from your 2021 emergency that didn't materialize, you still have $131,500-$75,000 = $56,500 of contribution room left in 2022. For a more comprehensive discussion, please see the CRA info link below.
FAQs That Have Arisen in the Discussion and Other Potential Questions:
Equity and ETF/ETN Options in a TFSA: can I get leverage? Yes. You can buy puts and calls in your TFSA and you only need to have the cash to pay the premium and broker commissions. Example: if XYZ is trading at $70, and you want to buy the $90 call with 6 months to expiration, and the call is trading at $2.50, you only need to have $250 in your account, per option contract, and if you are dealing with BMO IL for example you need $9.95 + $1.25/contract which is what they charge in commission. Of course, any profits on closing your position are tax-free. You only need the full value of the strike in your account if you want to exercise your option instead of selling it. Please note: this is not meant to be an options tutorial; see the Montreal Exchange's Equity Options Reference Manual if you have questions on how options work.
Equity and ETF/ETN Options in a TFSA: what is ok and not ok? Long puts and calls are allowed. Covered calls are allowed, but cash-secured puts are not allowed. All other option trades are also not allowed. Basically the rule is, if the trade is not a covered call and it either requires being short an option or short the stock, you can't do it in a TFSA.
Live in a province where the voting age is 19 so I can't open a TFSA until I'm 19, when does my contribution room begin? Your contribution room begins to accumulate at 18, so if you live in province where the age of majority is 19, you'll get the room carried forward from the year you turned 18.
If I turn 18 on December 31, do I get the contribution room just for that day or for the whole year? The whole year.
Do commissions paid on share transactions count as withdrawals? Unfortunately, no. If you contribute $2,000 cash and you buy $1,975 worth of stock and pay $25 in commission, the $25 does not count as a withdrawal. It is the same as if you lost money in the TFSA.
How much room do I have? If your broker records are complete, you can do a spreadsheet. The other thing you can do is call the CRA and they will tell you.
TFSATFSA direct transfer from one institution to another: this has no impact on your contributions or withdrawals as it counts as neither.
More than 1 TFSA: you can have as many as you want but your total contribution room does not increase or decrease depending on how many accounts you have.
Withdrawals that convert into contribution room in the next year. Do they carry forward indefinitely if not used in the next year? Answer :yes.
Do I have to declare my profits, withdrawals and contributions? No. Your bank or broker interfaces directly with the CRA on this. There are no declarations to make.
Risky investments - smart? In a TFSA you want always to make money, because you pay no tax, and you want never to lose money, because you cannot claim the loss against your income from your job. If in year X you have $5,000 of contribution room and put it into a TFSA and buy Canadian Speculative Corp. and due to the failure of the Canadian Speculative Corp. it goes to zero, two things happen. One, you burn up that contribution room and you have to wait until next year for the government to give you more room. Two, you can't claim the $5,000 loss against your employment income or investment income or capital gains like you could in a non-registered account. So remember Buffett's rule #1: Do not lose money. Rule #2 being don't forget the first rule. TFSA's are absolutely tailor-made for Graham-Buffett value investing or for diversified ETF or mutual fund investing, but you don't want to buy a lot of small specs because you don't get the tax loss.
Moving to/from Canada/residency. You must be a resident of Canada and 18 years old with a valid SIN to open a TFSA. Consult your tax advisor on whether your circumstances make you a resident for tax purposes. Since 2009, your TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older and a resident of Canada. Note: If you move to another country, you can STILL trade your TFSA online from your other country and keep making money within the account tax-free. You can withdraw money and Canada will not tax you. But you have to get tax advice in your country as to what they do. There restrictions on contributions for non-residents. See "non residents of Canada:" https://www.canada.ca/content/dam/cra-arc/formspubs/pub/rc4466/rc4466-19e.pdf
The U.S. withholding tax. Dividends paid by U.S.-domiciled companies are subject to a 15% U.S. withholding tax. Your broker does this automatically at the time of the dividend payment. So if your stock pays a $100 USD dividend, you only get $85 USD in your broker account and in your statement the broker will have a note saying 15% U.S. withholding tax. I do not know under what circumstances if any it is possible to get the withheld amount. Normally it is not, but consult a tax professional.
The U.S. withholding tax does not apply to capital gains. So if you buy $5,000 USD worth of Apple and sell it for $7,000 USD, you get the full $2,000 USD gain automatically.
Tax-Free Leverage. Leverage in the TFSA is effectively equal to your tax rate * the capital gains inclusion rate because you're not paying tax. So if you're paying 25% on average in income tax, and the capital gains contribution rate is 50%, the TFSA is like having 12.5%, no margin call leverage costing you 0% and that also doesn't magnify your losses.
Margin accounts. These accounts allow you to borrow money from your broker to buy stocks. TFSAs are not margin accounts. Nothing stopping you from borrowing from other sources (such as borrowing cash against your stocks in an actual margin account, or borrowing cash against your house in a HELOC or borrowing cash against your promise to pay it back as in a personal LOC) to fund a TFSA if that is your decision, bearing in mind the risks, but a TFSA is not a margin account. Consider options if you want leverage that you can use in a TFSA, without borrowing money.
Dividend Tax Credit on Canadian Companies. Remember, dividends paid into the TFSA are not eligible to be claimed for the credit, on the rationale that you already got a tax break.
FX risk. The CRA allows you to contribute and withdraw foreign currency from the TFSA but the contribution/withdrawal accounting is done in CAD. So if you contribute $10,000 USD into your TFSA and withdraw $15,000 USD, and the CAD is trading at 70 cents USD when you contribute and $80 cents USD when you withdraw, the CRA will treat it as if you contributed $14,285.71 CAD and withdrew $18,75.00 CAD.
OTC (over-the-counter stocks). You can only buy stocks if they are listed on an approved exchange ("approved exchange" = TSX, TSX-V, NYSE, NASDAQ and about 25 or so others). The U.S. pink sheets "over-the-counter" market is an example of a place where you can buy stocks, that is not an approved exchange, therefore you can't buy these penny stocks. I have however read that the CRA make an exception for a stock traded over the counter if it has a dual listing on an approved exchange. You should check that with a tax lawyer or accountant though.
The RRSP. This is another great tax shelter. Tax shelters in Canada are either deferrals or in a few cases - such as the TFSA - outright tax breaks, The RRSP is an example of a deferral. The RRSP allows you to deduct your contributions from your income, which the TFSA does not allow. This deduction is a huge advantage if you earn a lot of money. The RRSP has tax consequences for withdrawing money whereas the TFSA does not. Withdrawals from the RRSP are taxable whereas they are obviously not in a TFSA. You probably want to start out with a TFSA and maintain and grow that all your life. It is a good idea to start contributing to an RRSP when you start working because you get the tax deduction, and then you can use the amount of the deduction to contribute to your TFSA. There are certain rules that claw back your annual contribution room into an RRSP if you contribute to a pension. See your tax advisor.
Pensions. If I contribute to a pension does that claw back my TFSA contribution room or otherwise affect my TFSA in any way? Answer: No.
The $10K contribution limit for 2015. This was PM Harper's pledge. In 2015 the Conservative government changed the rules to make the annual government allowance $10,000 per year forever. Note: withdrawals still converted into contribution room in the following year - that did not change. When the Liberals came into power they switched the program back for 2016 to the original Harper rules and have kept the original Harper rules since then. That is why there is the $10,000 anomaly of 2015. The original Harper rules (which, again, are in effect now) called for $500 increments to the annual government allowance as and when required to keep up with inflation, based on the BofC's Consumer Price Index (CPI). Under the new Harper rules, it would have been $10,000 flat forever. Which you prefer depends on your politics but the TFSA program is massively popular with Canadians. Assuming 1.6% annual CPI inflation then the annual contribution room will hit $10,000 in 2052 under the present rules. Note: the Bank of Canada does an excellent and informative job of explaining inflation and the CPI at their website.
Losses in a TFSA - you cannot claim a loss in a TFSA against income. So in a TFSA you always want to make money and never want to lose money. A few ppl here have asked if you are losing money on your position in a TFSA can you transfer it in-kind to a cash account and claim the loss. I would expect no as I cannot see how in view of the fact that TFSA losses can't be claimed, that the adjusted cost base would somehow be the cost paid in the TFSA. But I'm not a tax lawyeaccountant. You should consult a tax professional.
Transfers in-kind to the TFSA and the the superficial loss rule. You can transfer securities (shares etc.) "in-kind," meaning, directly, from an unregistered account to the TFSA. If you do that, the CRA considers that you "disposed" of, meaning, equivalent to having sold, the shares in the unregistered account and then re-purchased them at the same price in the TFSA. The CRA considers that you did this even though the broker transfers the shares directly in the the TFSA. The superficial loss rule, which means that you cannot claim a loss for a security re-purchased within 30 days of sale, applies. So if you buy something for $20 in your unregistered account, and it's trading for $25 when you transfer it in-kind into the TFSA, then you have a deemed disposition with a capital gain of $5. But it doesn't work the other way around due to the superficial loss rule. If you buy it for $20 in the unregistered account, and it's trading at $15 when you transfer it in-kind into the TFSA, the superficial loss rule prevents you from claiming the loss because it is treated as having been sold in the unregistered account and immediately bought back in the TFSA.
Day trading/swing trading. It is possible for the CRA to try to tax your TFSA on the basis of "advantage." The one reported decision I'm aware of (emphasis on I'm aware of) is from B.C. where a woman was doing "swap transactions" in her TFSA which were not explicitly disallowed but the court rules that they were an "advantage" in certain years and liable to taxation. Swaps were subsequently banned. I'm not sure what a swap is exactly but it's not that someone who is simply making contributions according to the above rules would run afoul of. The CRA from what I understand doesn't care how much money you make in the TFSA, they care how you made it. So if you're logged on to your broker 40 hours a week and trading all day every day they might take the position that you found a way to work a job 40 hours a week and not pay any tax on the money you make, which they would argue is an "advantage," although there are arguments against that. This is not legal advice, just information.
The U.S. Roth IRA. This is a U.S. retirement savings tax shelter that is superficially similar to the TFSA but it has a number of limitations, including lack of cumulative contribution room, no ability for withdrawals to convert into contribution room in the following year, complex rules on who is eligible to contribute, limits on how much you can invest based on your income, income cutoffs on whether you can even use the Roth IRA at all, age limits that govern when and to what extent you can use it, and strict restrictions on reasons to withdraw funds prior to retirement (withdrawals prior to retirement can only be used to pay for private medical insurance, unpaid medical bills, adoption/childbirth expenses, certain educational expenses). The TFSA is totally unlike the Roth IRA in that it has none of these restrictions, therefore, the Roth IRA is not in any reasonable sense a valid comparison. The TFSA was modeled after the U.K. Investment Savings Account, which is the only comparable program to the TFSA.
The UK Investment Savings Account. This is what the TFSA was based off of. Main difference is that the UK uses a 20,000 pound annual contribution allowance, use-it-or-lose-it. There are several different flavours of ISA, and some do have a limited recontribution feature but not to the extent of the TFSA.
Is it smart to overcontribute to buy a really hot stock and just pay the 1% a month overcontribution penalty? If the CRA believes you made the overcontribution deliberately the penalty is 100% of the gains on the overcontribution, meaning, you can keep the overcontribution, or the loss, but the CRA takes the profit.
Speculative stocks-- are they ok? There is no such thing as a "speculative stock." That term is not used by the CRA. Either the stock trades on an approved exchange or it doesn't. So if a really blue chip stock, the most stable company in the world, trades on an exchange that is not approved, you can't buy it in a TFSA. If a really speculative gold mining stock in Busang, Indonesia that has gone through the roof due to reports of enormous amounts of gold, but their geologist somehow just mysteriously fell out of a helicopter into the jungle and maybe there's no gold there at all, but it trades on an approved exchange, it is fine to buy it in a TFSA. Of course the risk of whether it turns out to be a good investment or not, is on you.
Remember, you're working for your money anyway, so if you can get free money from the government -- you should take it! Follow the rules because Canadians have ended up with a tax bill for not understanding the TFSA rules. Appreciate the feedback everyone. Glad this basic post has been useful for many. The CRA does a good job of explaining TFSAs in detail at https://www.canada.ca/content/dam/cra-arc/formspubs/pub/rc4466/rc4466-19e.pdf
Unrelated but of Interest: The Margin Account
Note: if you are interested in how margin accounts work, I refer you to my post on margin accounts, where I use a straightforward explanation of the math behind margin accounts to try and give readers the confidence that they understand this powerful leveraging tool.
Assigned early on your short put spread? Send a thank you note...
"I was assigned early, what do I do?" is a common question - first, don't panic. Second, read the below. Third, don't panic. Fourth, ask questions. When selling options, there is always a chance that the option owner can exercise early, leaving the option seller with stock that they weren't anticipating - either 100 long shares if they sold a put, or 100 short shares if they sold a call. This can cause confusion, particularly if one doesn't have the buying power to pay for the shares. In one tragic instance earlier this year, Alexander Kerns took his own life due to the buying power shown on his (misleading) screen after selling spreads. Let's cover what happens if the short leg of a put spread is assigned before expiration and show that it is actually Good news for the option seller. Traditional put spread:
Sell 1 18 Sept AAPL 485 put for 17.35
Buy 1 18 Sept AAPL 480 put for 15.30
Total credit of 2.05
If held to expiration, what can happen?
AAPL finishes > 485, we keep 2.05 for a $205 win.
AAPL finishes <480, we lose 2.95 ($5 is the width of the strikes, minus the $2.05 collected) for a $295 loss
AAPL finishes between 480 and 485 and we are assigned 100 shares of stock at $485.
In scenario 3, we'll have $48,500 debited from our account and have 100 shares of AAPL. We'll still have the 2.05 credit from selling the spread, so our Effective entry price is $482.95 (485-2.05). If AAPL expires >= $482.95, we'll be profitable on our stock position, below $482.95 and we'll be unprofitable on our 100 shares. We will now have an increased potential for loss on Monday, as our long put has expired worthless. Unless one wants to take the 100 shares, it is recommended to close the position before the market closes on expiration to avoid dealing with the stock. Early Assignment While it is somewhat rare, there are times when an option holder may choose to exercise their option early. If a stock is hard to borrow (usually calls), if the remaining extrinsic value is incredibly low, for a dividend (calls) or simply because the put or call holder is inexperienced, we may find that we're holding shares that we weren't expecting prior to expiration. Don't panic Continuing with our example, let's say that AAPL is trading at 460 on September 11th and we find that our short put has been assigned, changing our position to:
Long 480 put
Long 100 shares of AAPL at an entry price of $485
If held to expiration, what can happen?
AAPL finishes at 485, our 480 put expires worthless, we sell the stock at close for break even, and keep the 2.05 credit for the initial spread - a $205 win.
AAPL finishes <480, our 480 put expires in the money and we sell our shares at 480. We lose 2.95 - We bought the stock at $485, sold for $480, but received $2.05 in an initial credit. Total loss is $295.
AAPL finishes between 480 and 485. We sell the stock at close, our 480 put expires worthless and we make money if the stock ends above $482.95, lose if it ends below $482.95.
Note that these three scenarios are Very similar to the initial put spread, with one important difference. This time, the first scenario only discusses if AAPL ends at $485. Look what happens if AAPL ends Higher than $485, for example:
AAPL finishes at $490. Our 480 put expires worthless, we sell the stock at close and take in an extra profit of $5/share, for a total win of $705 ($500 on the stock + $205 on the put spread).
Early assignment of puts in short put spreads Helps the option seller Between when we are assigned on the short put and expiration, we have a "free shot" at upside in the underlying name. Our risk hasn't changed. This is too good to be true There are some downsides, namely, you need the capital for the 100 shares. In this case, we've gone from a small margin requirement of less than $500 to needing $48,500 for the shares (for a cash account). If you don't have the cash, you can simply close the position. If you receive a margin call, you will normally have two to five days to fulfill it, giving you a bit of time to see if you get 'lucky' and there is a big recovery on the underlying. You should still proactively close the position, though, as your broker may decide to close other positions to fulfill the margin call. How about calls? The process is the same for a short call spread, but there are a couple of significant differences:
You will pay interest on the short shares. This can be quite expensive if the underlying is volatile and/or hard to borrow.
You will be responsible for dividends. You will have to pay any dividends that occur while you hold the short stock. This is the most common reason you'll be assigned on a short call and you'll need to be aware when selling calls or call spreads anytime there is a dividend prior to expiration.
For both of these reasons, it is generally easier to simply close the position if assigned early. Don't Panic (Yes, I'm reusing this title) When you sell options, you will occasionally be assigned. Once you have a good understanding of how options work, you'll see that there is a Benefit to being assigned early on short puts when they are part of a spread. You will also learn to close calls before they are likely to be assigned or, if assigned, know how to handle it. [Edit: Clarified when options may be assigned early for calls and puts]
I realize most of my posts get down voted into oblivion anyway, but I'm ready to embrace that. Much of the reason for "hate" is that I've done things a little (or a lot) unconventionally. Not because I was being contrarian, but because I was already an early retiree long before I discover there was such a thing as FIRE, JL Collins, MMM, Vicki Robbin, etc. In some ways I'm glad for this, because I might not have been able to retire as early as I did by following the conventional wisdom. In other ways, it would have made things much easier by having all that collective knowledge to draw from. The point of this post isn't only to share it is okay to do things your own way from time to time, but to encourage discussion in the comments about things you do that are not kosher in the FIRE world. My major mistakes that I wish I had a do over on.... 1) When I first began investing in stocks, to my knowledge ETFs didn't exist. This was in the 80s when things were handled by telephone transaction to a shady guy who promised you he knew a lot of secret knowledge. I was young and stupid and let one of these guys handle my investments. To this day I don't know what happened to him or my stocks. My next attempt was in the mid 90s when computers were more common and I could take control of my own stock picks through a new platform called Sharebuilder. I did my best, but I'll never really know for sure how I did compared to an index. I subscribed to the Motley Fool Hidden Gems letter and bought everything they recommended along with my own picks. Some did well, some went to zero, some traded flat. To sum up, my early years of investing in the stock market were pretty much a mess. 2) I didn't take advantage of a free higher education. Between my athletic skill and my high academic scores I had a chance to go to college completely free...and when I say free...I mean the 100% full ride of all school fees, meals, housing, etc. But I also have social anxiety. I had attended one rural school my entire life with people I had known since K. The new environment was so stressful for me I stopped attending classes and dropped out my first year. 3) I was underemployed most of my life when working for others or struggling to start my own business. I ended up with a food service job (high end, for the most part) that I did really well at. I was given all sorts of managerial responsibilities. I never asked for raises or official promotions, so allowed myself to be very under paid for the work I was doing. My priorities were elsewhere at the time as by that time I was in a band...this kind of became a theme for my early adult life. My creative projects were more important than my income. Even my entrepreneurial leanings (of which there were several projects) were all about creativity first, making money second. Not sure I really regret that though. Things I'm glad I did unconventionally.... 1) Started buying houses in cash. (a huge no no to most people!) I cashed out most of those stocks I mentioned above to start buying houses. (what? you're risking your future!) In cash. In a LCOL area, of course. I bought fixer uppers with absolutely no background in real estate. I hired people to do the work...and learned everything I could on my first few projects. Luckily I'm good with numbers, and I also seemed to have a knack to find undervalued houses with good bones that made ridiculous rental returns after being fixed up. This soon funded itself from the rental income and I was able to grow fairly quickly. That wouldn't have happened if I had listened to what I now know is the conventional wisdom. Would I advise others follow that path. No...not unless they had a similar market to invest in. Trying to repeat this in some areas of the country would not only hurt your returns, it could lead to financial suicide. 2) I set out to find the optimal way to invest in the stock market FOR MY SITUATION. The rentals provide me a steady income, so I knew I could take extra risk in my stocks. After tons of research I discovered the optimal return for me would be based on high dividend stocks in combination with leveraged index funds. I know, I know. I know all the arguments about dividends. For the most part they are true during the accumulation phase. What is often not discussed is everything changes during the draw down period. Dividends lessen your sequence of returns risk since you don't have to sell into down markets to still get income. Sometimes a $1 is not $1 when it cripples future potential returns. There are research papers that go into this in detail, but the math is solid. And I also know leverage index ETFs are poison to many. DECAY! Yet the few papers that address this in real back testing rather than theory show leverage outperforms by a significant margin over most market cycles. Long term, this really adds up. Does this mean I advocate for other people to do what I am doing. NO! Don't do it. I wouldn't be doing it if I didn't have secure income to last me well past my death. My stock accounts will be going to fund charities after I die, so I do want them to do well, but if they don't, it won't have any impact on my retirement. While my exact mix does extremely well in back testing, anything can happen. 3) I live an extremely frugal life. I spend only $10k per year for the last several years, which is well below poverty levels. This doesn't mean my life in reality is impoverished...my house is paid for, my cars are paid for, etc...and I've found ways to monetize many things that cost a lot of people money. That doesn't change the fact that I KNOW many people would not be happy living the way I live. They would be miserable. I am not, so it works for me. I enjoy the "game" of frugality and low waste while still living a very fulfilling life. 4) I don't have insurance. I carry only the minimums I'm forced to carry on things. Other than that, I try to self insure. I fully understand why most people think I'm an idiot when it comes to this. My argument is that I can set that money aside and insure myself rather than having huge portions of that go to pay for the infrastructure of the insurance companies. In theory, if I'm a healthy adult with deep pockets paying out of pocket should be cheaper in the long run. If not, insurance companies wouldn't be making money. Same reason I don't buy the extended warranty on electronics or other items. Again...I know the other argument, and it is also valid. I don't want to argue the point in the comments because I have discussed this topic to death elsewhere in other posts. 5) I don't have children and don't plan to have children. You do you. If children bring you joy...well, enjoy! I don't hate children. It is just part of my personal philosophy to not bring more life into this world. Long story, not easily summed up in a post like this, so I'll leave it at that. 6) I invest a substantial amount in a relatively new platform. (Fundrise) My risk tolerance in this sort of investment is high (much like my stock portfolio) and it gives me diversity outside the stock market and my local real estate market. I don't think the platform will fail, but it is technically possible. As with everything else on this list, I don't recommend others do it if it isn't money they can stand to lose. This is another investment that will fund a charity some day. 7) I didn't want to list everything in detail, but there are many other things I do that falls outside of the conventional FIRE wisdom. I'm sure I've touched on some of these in the past, and this post is already long. Very long. IF you made it this far, congrats. So...that is the silly things and maybe a few wise things I do to buck the standard advice. I'd love to hear from others the things they do that don't conform to typical FIRE norms. As always, I'm an open book so feel free to ask questions or tell me how stupid I am!
….even those detractors who question my motives. I wish everyone the best of luck. This is in a separate post to thank all of those who have advanced my education in all things MVIS. That coupled with my normal TA has paid dividends with more to come. Last weekend I came to realize that this forum has mutated into something very different from what I thought was a serious discussion about Microvision. No fault of the moderators. It has become overrun by a new crowd of traders. I guess that’s progress. I made a post to provoke thought about and counter what has become a consensus and almost a guarantee that MVIS will be sold for billions all the way up to 60 billion. I was accused of having the motive of depressing the stock for nefarious purposes. Think about that. I can be criticized for suggesting MVIS hit a short term top and may correct, however, zero criticism about la-la land price projections. Over 90% of the participants here are talking multiple billions and up to 60 billion valuation. Which is more dangerous? When a conversation about stock value becomes one sided, it is often a sign that things are about to change. I have seen posts about what excitement Robinhood trading platform can bring to MVIS. In my career as an investment professional, if I had promoted the extreme use of margin and options trading to unsophisticated investors as Robinhood does, I would have been fired, jailed or possibility both. If congress doesn’t shut them down first, Robinhood will become the poster child of the next stock market bubble. For these reasons among others, I believe my usefulness on this forum has become passe. I say goodbye after 11 years to the ladies and gentlemen I have come to respect. Again,I thank all who have educated me on the technical attributes of LBS. And, I do think the stock goes higher from here. I hope everyone enjoys their mansions, lamborghinis and yachts. ASJ
How to not get ruined with Options - Part 3a of 4 - Simple Strategies
Post 1: Basics: CALL, PUT, exercise, ITM, ATM, OTM Post 2: Basics: Buying and Selling, the Greeks Post 3a: Simple Strategies Post 3b: Advanced Strategies Post 4a: Example of trades (short puts, covered calls, and verticals) Post 4b: Example of trades (calendars and hedges) --- Ok. So I lied. This post was getting way too long, so I had to split in two (3a and 3b) In the previous posts 1 and 2, I explained how to buy and sell options, and how their price is calculated and evolves over time depending on the share price, volatility, and days to expiration. In this post 3a (and the next 3b), I am going to explain in more detail how and when you can use multiple contracts together to create more profitable trades in various market conditions. Just a reminder of the building blocks: You expect that, by expiration, the stock price will … ... go up more than the premium you paid → Buy a call … go down more than the premium you paid → Buy a put ... not go up more than the premium you got paid → Sell a call ... not go down more than the premium you got paid → Sell a put Buying Straight Calls: But why would you buy calls to begin with? Why not just buy the underlying shares? Conversely, why would you buy puts? Why not just short the underlying shares? Let’s take long shares and long calls as an example, but this applies with puts as well. If you were to buy 100 shares of the company ABC currently trading at $20. You would have to spend $2000. Now imagine that the share price goes up to $25, you would now have $2500 worth of shares. Or a 25% profit. If you were convinced that the price would go up, you could instead buy call options ATM or OTM. For example, an ATM call with a strike of $20 might be worth $2 per share, so $200 per contract. You buy 10 contracts for $2000, so the same cost as buying 100 shares. Except that this time, if the share price hits $25 at expiration, each contract is now worth $500, and you now have $5000, for a $3000 gain, or a 150% profit. You could even have bought an OTM call with a strike of $22.50 for a lower premium and an even higher profit. But it is fairly obvious that this method of buying calls is a good way to lose money quickly. When you own shares, the price goes up and down, but as long as the company does not get bankrupt or never recovers, you will always have your shares. Sometimes you just have to be very patient for the shares to come back (buying an index ETF increases your chances there). But by buying $2000 worth of calls, if you are wrong on the direction, the amplitude, or the time, those options become worthless, and it’s a 100% loss, which rarely happens when you buy shares. Now, you could buy only one contract for $200. Except for the premium that you paid, you would have a similar profit curve as buying the shares outright. You have the advantage though that if the stock price dropped to $15, instead of losing $500 by owning the shares, you would only lose the $200 you paid for the premium. However, if you lose these $200 the first month, what about the next month? Are you going to bet $200 again, and again… You can see that buying calls outright is not scalable long term. You need a very strong conviction over a specific period of time. How to buy cheaper shares? Sell Cash Covered Put. Let’s continue on the example above with the company ABC trading at $20. You may think that it is a bit expensive, and you consider that $18 is a more acceptable price for you to own that company. You could sell a put ATM with a $20 strike, for $2. Your break-even point would be $18, i.e. you would start losing money if the share price dropped below $18. But also remember that if you did buy the shares outright, you would have lost more money in case of a price drop, because you did not get a premium to offset that loss. If the price stays above $20, your return for the month will be 11% ($200 / $1800). Note that in this example, we picked the ATM strike of $20, but you could have picked a lower strike for your short put, like an OTM strike of $17.50. Sure, the premium would be lower, maybe $1 per share, but your break-even point would drop from $18 to $16.50 (only 6% return then per month, not too shabby). The option trade will usually be written like this: SELL -1 ABC 100 17 JUL 20 17.5 PUT @ 1.00 This means we sold 1 PUT on ABC, 100 shares per contract, the expiration date is July 17, 2020, and the strike is $17.5, and we sold it for $1 per share (so $100 credit minus fees). With your $20 short put, you will get assigned the shares if the price drops below $20 and you keep it until expiration, however, you will have paid them the equivalent of $18 each (we’ll actually talk more about the assignment later). If your short put expires worthless, you keep the premium, and you may decide to redo the same trade again. The share price may have gone up so much that the new ATM strike does not make you comfortable, and that’s fine as you were not willing to spend more than $18 per share, to begin with, anyway. You will have to wait for some better conditions. This strategy is called a cash covered put. In a taxable account, depending on your broker, you can have it on margin with no cash needed (you will need to have some other positions to provide the buying power). Beware that if you don’t have the cash to cover the shares, it is adding some leverage to your overall position. Make sure you account for all your potential risks at all times. The nice thing about this position is that as long as you are not assigned, you don’t actually need to borrow some money, it won’t cost you anything. In an IRA account, you will need to have the cash available for the assignment (remember in this example, you only need $1800, plus trading fees). Let’s roll! Now one month later, the share price is between $18 and $22, there are few days of expiration left, and you don’t want to be assigned, but you want to continue the same process for next month. You could close the current position, and reopen a new short put, or you could in one single transaction buy back your current short put, and sell another put for next month. Doing one trade instead of two is usually cheaper because you reduce the slippage cost. The closing of the old position and re-opening of a new short position for the next expiration is called rolling the short option (from month to month, but you can also do this with weekly options). The croll can be done a week or even a few days before expiration. Remember to avoid expiration days, and be careful being short an option on ex-dividend dates. When you roll month to month with the same strike, for most cases, you will get some money out of it. However, the farther your strike is from the current share price, the less additional premium you will get (due to the lower extrinsic value on the new option), and it can end up being close to $0. At that point, given the risk incurred, you may prefer to close the trade altogether or just be assigned. During the roll, depending on if the share price moved a bit, you can adjust the roll up or down. For example, you buy back your short put at $18, and you sell a new short put at $17 or $19, or whatever value makes the most sense. Assignment Now, let’s say that the share price finally dropped below $20, and you decided not to roll, or it dropped so much that the roll would not make sense. You ended up getting your shares assigned at a strike price of $18 per share. Note that the assigned share may have a current price much lower than $18 though. If that’s the case, remember that you earned more money than if you bought the shares outright at $20 (at least, you got to keep the $2 premium). And if you rolled multiple times, every premium that you got is additional money in your account. Want to sell at a premium? Sell Covered Calls. You could decide to hold onto the shares that you got at a discount, or you may decide that the stock price is going to go sideways, and you are fine collecting more theta. For example, you could sell a call at a strike of $20, for example for $1 (as it is OTM now given the stock price dropped). SELL -1 ABC 100 17 JUL 20 20 CALL @ 1.00 When close to the expiration time, you can either roll your calls again, the same way that you rolled your puts, as much as you can, or just get assigned if the share price went up. As you get assigned, your shares are called away, and you receive $2000 from the 100 shares at $20 each. Except that you accumulated more money due to all the premiums you got along the way. This sequence of the short put, roll, roll, roll, assignment, the short call, roll, roll, roll, is called the wheel. It is a great strategy to use when the market is trading sideways and volatility is high (like currently). It is a low-risk trade provided that the share you pick is not a risky one (pick a market ETF to start) perfect to get create some income with options. There are two drawbacks though:
If the share dropped too much, you are stuck with it.
You will have to be patient for the share to go back up, but often you can end up with many shares at a loss if the market has been tanking. As a rule of thumb, if I get assigned, I never ever sell a call below my assignment strike minus the premium. In case the market jumps back up, I can get back to my original position, with an additional premium on the way. Market and shares can drop like a stone and bounce back up very quickly (you remember this March and April?), and you really don’t want to lock a loss. Here is a very quick example of something to not do: Assigned at $18, current price is $15, sell a call at $16 for $1, share goes back up to $22. I get assigned at $16. In summary, I bought a share at $18, and sold it at $17 ($16 + $1 premium), I lost $1 between the two assignments. That’s bad.
If the share goes up too fast, you missed some opportunity for gain, potentially big gains.
You will have to find some other companies to do the wheel on. If it softens the blow a bit, your retirement account may be purely long, so you’ll not have totally missed the upside anyway. A short put is a bullish position. A short call is a bearish position. Alternating between the two gives you a strategy looking for a reversion to the mean. Both of these positions are positive theta, and negative vega (see part 2). Now that I explained the advantage of the long calls and puts, and how to use short calls and puts, we can explore a combination of both. Verticals Most option beginners are going to use long calls (or even puts). They are going to gain some money here and there, but for most parts, they will lose money. It is worse if they profited a bit at the beginning, they became confident, bet a bigger amount, and ended up losing a lot. They either buy too much (50% of my account on this call trade that can’t fail), too high of a volatility (got to buy those NKLA calls or puts), or too short / too long of an expiration (I don’t want to lose theta, or I overspent on theta). As we discussed earlier, a straight long call or put is one of the worst positions to be in. You are significantly negative theta and positive vega. But if you take a step back, you will realize that not accounting for the premium, buying a call gives you the upside of stock up to the infinity (and buying a put gives you the upside of the stock going to $0). But in reality, you rarely are betting that the stock will go to infinity (or to $0). You are often just betting that the stock will go up (or down) by X%. Although the stock could go up (or down) by more than X%, you intuitively understand that there is a smaller chance for this to happen. Options are giving you leverage already, you don’t need to target even more gain. More importantly, you probably should not pay for a profit/risk profile that you don’t think is going to happen. Enter verticals. It is a combination of long and short calls (or puts). Say, the company ABC trades at $20, you want to take a bullish position, and the ATM call is $2. You probably would be happy if the stock reaches $25, and you don’t think that it will go much higher than that. You can buy a $20 call for $2, and sell a $25 call for $0.65. You will get the upside from $20 to $25, and you let someone else take the $25 to infinity range (highly improbable). The cost is $1.35 per share ($2.00 - $0.65). BUY +1 VERTICAL ABC 100 17 JUL 20 20/25 CALL @ 1.35 This position is interesting for multiple reasons. First, you still get the most probable range for profitability ($20 to $25). Your cost is $1.35 so 33% cheaper than the long call, and your max profit is $5 - $1.35 = $3.65. So your max gain is 270% of the risked amount, and this is for only a 25% increase in the stock price. This is really good already. You reduced your dependency on theta and vega, because the short side of the vertical is reducing your long side’s. You let someone else pay for it. Another advantage is that it limits your max profit, and it is not a bad thing. Why is it a good thing? Because it is too easy to be greedy and always wanting and hoping for more profit. The share reached $25. What about $30? It reached $30, what about $35? Dang it dropped back to $20, I should have sold everything at the top, now my call expires worthless. But with a vertical, you know the max gain, and you paid a premium for an exact profit/risk profile. As soon as you enter the vertical, you could enter a close order at 90% of the max value (buy at $1.35, sell at $4.50), good till to cancel, and you hope that the trade will eventually be executed. It can only hit 100% profit at expiration, so you have to target a bit less to get out as soon as you can once you have a good enough profit. This way you lock your profit, and you have no risk anymore in case the market drops afterwards. These verticals (also called spreads) can be bullish or bearish and constructed as debit (you pay some money) or credit (you get paid some money). The debit or credit versions are equivalent, the credit version has a bit of a higher chance to get assigned sooner, but as long as you check the extrinsic value, ex-dividend date, and are not too deep ITM you will be fine. I personally prefer getting paid some money, I like having a bigger balance and never have to pay for margin. :) Here are the 4 trades for a $20 share price: CALL BUY 20 ATM / SELL 25 OTM - Bullish spread - Debit CALL BUY 25 OTM / SELL 20 ATM - Bearish spread - Credit PUT BUY 20 ATM / SELL 25 ITM - Bullish spread - Credit PUT BUY 25 ITM / SELL 20 ATM - Bearish spread - Debit Because both bullish trades are equivalent, you will notice that they both have the same profit/risk profile (despite having different debit and credit prices due to the OTM/ITM differences). Same for the bearish trades. Remember that the cost of an ITM option is greater than ATM, which in turn is greater than an OTM. And that relationship is what makes a vertical a credit or a debit. I understand that it can be a lot to take in. Let’s take a step back here. I picked a $20/$25 vertical, but with the share price at $20, I could have a similar $5 spread with $15/$20 (with the same 4 constructs). Or instead of 1 vertical $20/$25, I could have bought 5 verticals $20/$21. This is a $5 range as well, except that it has a higher probability for the share to be above $21. However, it also means that the spread will be more expensive (you’ll have to play with your broker tool to understand this better), and it also increases the trading fees and potentially overall slippage, as you have 5 times more contracts. Or you could even decide to pick OTM $25/$30, which would be even cheaper. In this case, you don’t need the share to reach $30 to get a lot of profit. The contracts will be much cheaper (for example, like $0.40 per share), and if the share price goes up to $25 quickly long before expiration, the vertical could be worth $1.00, and you would have 150% of profit without the share having to reach $30. If you decide to trade these verticals the first few times, look a lot at the numbers before you trade to make sure you are not making a mistake. With a debit vertical, the most you can lose per contract is the premium you paid. With a credit vertical, the most you can lose is the difference between your strikes, minus the premium you received. One last but important note about verticals: If your short side is too deep ITM, you may be assigned. It happens. If you bought some vertical with a high strike value, for example: SELL +20 VERTICAL SPY 100 17 JUL 20 350/351 PUT @ 0.95 Here, not accounting for trading fees and slippage, you paid $0.95 per share for 20 contracts that will be worth $1 per share if SPY is less than $350 by mid-July, which is pretty certain. That’s a 5% return in 4 weeks (in reality, the trading fees are going to reduce most of that). Your actual risk on this trade is $1900 (20 contracts * 100 shares * $0.95) plus trading fees. That’s a small trade, however the underlying instrument you are controlling is much more than that. Let’s see this in more detail: You enter the trade with a $1900 potential max loss, and you get assigned on the short put side (strike of $350) after a few weeks. Someone paid expensive puts and exercised 20 puts with a strike of $350 on their existing SPY shares (2000 of them, 20 contracts * 100 shares). You will suddenly receive 2000 shares on your account, that you paid $350 each. Thus your balance is going to show -$700,000 (you have 2000 shares to balance that). If that happens to you: DON’T PANIC. BREATHE. YOU ARE FINE. You owe $700k to your broker, but you have roughly the same amount in shares anyway. You are STILL protected by your long $351 puts. If the share price goes up by $1, you gain $2000 from the shares, but your long $351 put will lose $2000. Nothing changed. If the share price goes down by $1, you lose $2000 from the shares, but your long $350 put will gain $2000. Nothing changed. Just close your position nicely by selling your shares first, and just after selling your puts. Some brokers can do that in one single trade (put based covered stock). Don’t let the panic set in. Remember that you are hedged. Don’t forget about the slippage, don’t let the market makers take advantage of your panic. Worst case scenario, if you use a quality broker with good customer service, call them, and they will close your position for you, especially if this happens in an IRA. The reason I am insisting so much on this is because of last week’s event. Yes, the RH platform may have shown incorrect numbers for a while, but before you trade options you need to understand the various edge cases. Again if this happens to you, don’t panic, breathe, and please be safe. This concludes my post 3a. We talked about the trade-offs between buying shares, buying calls instead, selling puts to get some premium to buy some shares at a cheaper price, rolling your short puts, getting your puts assigned, selling calls to get some additional money in sideways markets, rolling your short calls, having your calls assigned too. We talked about the wheel, being this whole sequence spanning multiple months. After that, we discussed the concept of verticals, with bullish and bearish spreads that can be either built as a debit or a credit. And if there is one thing you need to learn from this, avoid buying straight calls or puts but use verticals instead, especially if the volatility is very high. And do not ever sell naked calls, again use verticals. The next post will explain more advanced and interesting option strategies. --- Post 1: Basics: CALL, PUT, exercise, ITM, ATM, OTM Post 2: Basics: Buying and Selling, the greeks Post 3a: Simple Strategies Post 3b: Advanced Strategies Post 4a: Example of trades (short puts, covered calls, and verticals) Post 4b: Example of trades (calendars and hedges)
Margin trading involves borrowing funds to buy stocks, bonds or other financial instruments. Like any investment, it involves risks and rewards. The risk is that you might borrow money on a company whose stock price collapses. Financial Rule: Rank stocks by dividend yield. Only stocks trading below their 10 year historical average valuation multiple are eligible for the Top 10. Evidence: The highest yielding quintile of stocks outperformed the lowest yielding quintile of stocks by 1.76% per year from 1928 through 2013. Value stocks are stocks which are trading below their fundamentals (dividends, earnings). However, it's important to understand the risks of these low P/E and high dividend yield stocks as some For this reason, margin trading can be a good consideration for conservative investors if the stock pays a high dividend. Many times, a high dividend from $5,000 worth of stock can exceed the margin interest you have to pay from the $2,500 (50 percent) you borrow from the broker to buy that stock. Margin Calls. If your share price drops below where you bought it, the broker may ask you to deposit more money. This is a margin call. For example, if you buy $10,000 worth of stock on margin and
The Dividend Investing GRIND is MISERABLE! (NEW Dividend Ladder revealed)
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