Mar 132022
 

Just a quick update. It’s been 3 weeks and I’ve made a few trades:

  1. I closed my $24 RIOT covered call for $74 profit
  2. Opened and closed a $21 RIOT covered call for $38 profit
  3. Opened a $20.5 RIOT covered call for $108 credit. It’s currently up $30

I now have $112 in realized profits, but RIOT is down to $15.20. My net loss is ($413). If I wasn’t selling options I would be sitting at ($615). From that perspective the options are helping a lot.

My ETF has continued to drop on account of Russia. I guess I should have waited a few months to start this experiment. Alas here we are:

I’m not too worried about RIOT right now, the call option premiums are still high. Even if RIOT drops a bit further I can continue collecting the premium selling options around $20. I could even collect more premium selling cals around $18, which is closer to my new cost basis.

I’m still counting on another bitcoin rally someday in the future. I plan on collecting these call premiums until that day comes, if ever. The ETF should recover eventually, I’m not worried about it.

Feb 182022
 

It’s been another two weeks of the stock market rollercoaster. At one point I actually reached $6100. I made $100 in unrealized profit! It was a fun 2 hours and by the end of the day I was back under $6000. Today I’m sitting at ~$5,570. Here’s the scoreboard for this weeks check in:

I included the CHANGE column which shows the gain or loss since last update

Surprisingly the index fund lost more than the options plays. I still haven’t made up for that original -22% but it’s getting there.

I only made one trade in the past two weeks. RIOT was nearly at $20 so I decided to roll my $22 call to a later date. I also increased the strike to $24. As a reminder “rolling” means closing one option and opening a new one in a single transaction. I ended up closing the first one for $94 after opening it at $95 for a gain of $1. Unfortunately the commission was $1.63 so I’m calling it a wash. I sold the new, March 18 $24 call for $100:

The new covered call is already up over 50%. Actually I probably should have sold it today. Oh well. I’ll sell on Monday if this holds.

From my own research the markets are struggling with two main issues:

  1. Ukraine – War is not good for the stock market. Well actually it’s uncertainty that’s bad for the market. If Russia officially backs off I’m sure we’ll have a healthy rebound. If Russia invades? My uneducated opinion is that Russia will not invade. But if they do I think we’re in for another dump
  2. Fed Tightening – All the pandemic support is coming to an end. Omicron is wearing down and restrictions are falling all over the place. Interest rates are scheduled to rise this year which will hamper investments and make fixed income like bonds more attractive. Personally I think most of these hikes are already priced in. I’m guessing the day they officially announce a rate hike we’ll see a steep drop with a V shaped recovery in the following days or weeks. They’re planning multiple raises over the next year or two.

I really can’t say where the market is heading now, we seem to get really good days followed by really bad days. It feels like 1 step forward and 3 steps back. I’ll have a +5% day followed by three days of -3%. Nothing to do but continue weathering this stormy market.

Feb 062022
 

Another two weeks has passed since my last update. My holdings have been relatively steady up until Friday, when there was a big jump. I sure hope last week was the bottom.

My index fund is up $53 from last update. It’s still down ($126).

RIOT improved slightly, but that’s mostly since bitcoin rebounded to over $40,000 on Friday. If I wrote this on Thursday I’d still be down around $600. Instead I’m down $413. Hopefully bitcoin continues to trend upwards.

My RIOT option is unchanged from last update despite RIOT trending upwards. That’s a good demonstration of the time value of options. When it was six weeks to expiration and RIOT was trading at $14.66 the option was worth $63. Now it’s four weeks to expiration and with RIOT trading at $17.24 the option is worth $64. The reason is that options further out of the money are worth less, but options with more time till expiration are worth more. In this case the two things cancelled each other out.

On Thursday the option was worth about $34. I could have sold it for a gain of about $62 but I didn’t, thinking RIOT was dropping further. As you can see the Friday jump caused the option to increase in value by 109%. Not good for me, the seller, but at least I’m still in the green. I might end up closing the option for my paltry gain of $31 and open a new one with a later expiration. Stay tuned.

After buying my original 100 RIOT shares I had $261 leftover. Then I made $90 off the first option, and I currently have the $95 in premium from the second option for a total of $446 in cash. (note when you sell an option you immediately get the total value deposited in your account)

I decided to use the leftover money to open a second position. I purchased a LEAPS (Long-Term Equity Anticipation Securities). In short, it’s a call contract that simulates owning 100 shares of the underlying, but it uses leverage to increase your upside potential along with downside risk.

I purchased a $2 call contract expiring January 19, 2024 on NNDM, an early stage 3D printing company. Normally I’d stay away from such an early stage company but apparently they have more cash than the price of all their outstanding shares. I.e. they have around $1.4 billion in cash and all their shares could be bought for about $1.1 billion. So it’s like buying a dollar for $0.78.

It’s already paying off. I purchase the contract for $363 and I’m already up $76.50, which is 21%!

Thanks to NNDM, the small bitcoin rally to $41,000, and my options sales my gambling account is now only down ($215.40), or about -9%, that’s a huge improvement from two weeks ago when I was down over 20%!

The new tracker is below. It shows the return on the original $2397.50 for each category. I’ll share the change from last update as well. This time the gambling account is up $331.60 and investing up $53.

As always, you can use my link to get a referral bonus of up to $1000 in free IBKR stock.

Jan 222022
 

Well there’s no way to sugar coat it. The market is in correction/crash territory. Most stocks are on their way down and that includes basically everything I’m holding.

My VTI has dropped about 7.5%, giving me an unrealized loss of ($179) on my $2,383 investment.

RIOT is a bigger issue. Cryptocurrencies have taken an absolute pounding in the past week and Bitcoin is now down to $35,000 USD. It hasn’t dropped that low in 6 months. RIOT correlates both with tech stocks and bitcoin so my shares are currently down ($668), or about -31`% . Remember when I said no one should copy me? This is why.

Luckily my covered calls have slightly softened the blow. You may recall on my last update I opened a second covered call for a premium of $123. Well I paid $33 to close it this Friday for a realized gain of $90. Adding that to the $31 I made on the first option I’ve now realized $121 in premiums. That takes my total unrealized loss on RIOT down from $668 to $547, or -26%. It’s something!

I “rolled” the option which is buying to close one and selling to open another in the same transaction. The price is listed per-share, so I will get $0.96/share for 100 shares, so $96.

Furthermore I opened a new covered call with a strike of $22 expiring March 4th for a premium of $96. Thanks to the continual dumping of RIOT throughout the rest of the day I’m already up $32.

So what to do now? Well the responsible thing might be to close my position with RIOT, take the L and run. But I’m reasonably sure that bitcoin will come back eventually, even if it takes a couple months. Hopefully I can continue to collect these premiums until then.

All these images came from the mobile app for interactive brokers. If you’re interested in opening an account with them click here for my referral bonus to get up to $1000 in free IBKR stock

Jan 152022
 

Well I’ve decided to go ahead with this experiment despite what that nagging voice is my head is saying. I might stop calling it an experiment because it’s effectively just taking half my TFSA contribution and using it for gambling. Yet here we are so I might as well report what happened this week.

Wednesday, Jan 12th

  • My account setup completed and my $6000 of funds were released.
  • I took my entire $6000 CAD contribution and converted it all to USD. I got $4795 USD, which means each group will have $2,397.50.
  • In the index fund group I bought 10 shares of VTI (Total stock market ETF) for $238.37 each, for a total cost of $2,383.65.
  • In the… other… group I bought 100 shares of RIOT (a bitcoin mining company) for $21.36 each for a total of $2,136, with $261 staying as cash
  • Finally I sold a call option (Jan 21st, $24 strike) against those 100 shares and collected $50

Friday, Jan 14th

  • My call option declined in value to $19 (meaning I was up $31). I decided that bitcoin is likely to stay where it is for the next couple weeks (based on a hunch), so I figured I’d roll my option to a later date to collect a higher premium.
  • I bought back my call option for $19 and realized a gain of $31, and in the same transaction I sold another call (Feb 18th, $25 strike) and collected $123 in premium
I highlighted the premium collected from the first option ($50 – $19 = $31) and the second ($123). If that option expires worthless I’ll collect the entire $123, totaling $193 CAD from both options. For simplicity I’ve omitted the commission fees from the mentions above

Current Standings

RIOT is down to $20.75, so I have an unrealized loss of $62. The new covered call is also down $10 in value for a total unrealized loss of $72. But with the cash premium from the first call option I’m only down $41 in the first three days.

VTI has also dropped slightly to $235, so I’m down $35.

Index funds: ($35)

Gambling funds: ($41)

Thoughts

Buying RIOT is basically like buying bitcoin, and bitcoin is in a downtrend right now. I could be totally out to lunch on this play, but from listening to people smarter than myself it seems like bitcoin should be on the rise with the next 3-6 months. Hopefully RIOT continues to stay flat so I can continue collecting the covered call premiums. Worst case would be if RIOT continues to drop, since the $123 I collect on the call wouldn’t cover a price drop of more than $1.23. That could never happen right? right??

As long as RIOT stays below $25 by Feb 18th the call will expire worthless. But even if it goes above $25 I get to keep the $123 and sell my shares for $2500. The capital appreciation of $364 can be added to the options premiums for a total gain of $518 on my $2,136 investment, which is a 24% gain. That’s the maximum gain I can get right now. And that’s the downside of covered calls. If RIOT exploded up to say, $30, I would still only make the $518.

The best case scenario is that RIOT closes on Feb 18th just below $25, maybe $24.50. That way I’ll be able to open a new call around ~$29-$30 for about the same premium. I’m not counting on it, but here’s hoping.

Another stock I was considering is CLF, a steel manufacturer with a long track record and similar share price. The options premiums are smaller, but I think the industry is more reliable. If RIOT doesn’t work out I may try them instead.

Since my new option doesn’t expire till mid February I probably won’t post any updates until next month.

And remember – this is not financial advice and I don’t recommend anybody buy anything besides index funds. If you never hear from me again it’s probably because RIOT didn’t work out and I’m too embarrassed to admit it.

Jan 102022
 

Well I made it another year and haven’t lost all my money on foolish investments just yet. I’ve been tracking how my non-index fund investments have been doing and basically the only thing that sort of works is selling options. However one of the problems with trading options is generating taxable events. Most of the options I deal with expire within 45 days or less, resulting in a taxable gain or loss at least every ~45 days. How to deal with this? I’m going to try using that fancy Tax-Free-Savings-Account.

Continue reading »
Sep 042021
 

I haven’t had many ideas for articles lately so I thought I’d just revisit some of the idea’s I’ve shared on this website. Specifically what has been working for me as of mid-2021. Disclaimer that these are my personal results and your mileage may vary. Lets get started in no particular order:

Broad ETFs and Index Funds

Rating: A

Index funds have been my bread and butter, and I’ve tried to keep at least 70-80% of my investments within them. They are simply the easiest way to consistently build up your portfolio. Your returns will never be amazing, but they’ll always be good. And if you string enough good investments together you’ll be doing great. Just look at VFV, one of my earliest ETFs that tracks the S&P 500. It has gained nearly 300% since 2013 with a consistent upward trend. Sure it’s been a bull market nearly that entire time, but even in major downturns the S&P 500 has recovered quickly.

I am completely confident in admitting that, if I had just stuck with broad market ETFs like VGRO or VEQT, I would be ahead of where I am now. Don’t be tempted by the siren call of Wall Street Bets YOLO tech investing.

Blue Chip Dividend Companies

Rating: B

A couple years ago I slowed down my contributions to ETFs and started investing mostly in Canadian blue-chip companies like Bell, Canadian Utilities, Fortis, Manulife, Brookfield, and the major 5 banks. These have largely performed well but have a few disadvantages.

  1. Dividends – If you hold these in a taxable account, you’ll be taxed on the dividends every year, which will reduce your overall gains compared to a swap ETF like HXS. Obviously if you hold these in your TFSA or RRSP you will avoid the tax, but any US dividends will be subject to US withholding tax as well. Although ETFs are not immune to these same issues. Also eligible Canadian dividends do have favorable taxation.
  2. Commission Fees – Unlike ETFs, buying an individual stock isn’t free. As a result it’s not worthwhile to purchase small amounts of shares. With ETFs you can buy a single share as soon as you have the funds to do so. In order to make up for the commissions you need to buy the stock in large blocks, normally $1000+, which leads into the next issue.
  3. Diversification Loss – Proper diversification requires you to buy many companies across many industries. As mentioned you’ll need to purchase in large blocks to avoid large commission fees. Thus you’ll need a lot of money to be properly diversified. Furthermore you’ll probably want to keep your money in CAD, so you’ll be buying mostly Canadian companies, and thus you’ll be overexposed to the Canadian market. Nothing can beat the diversification of ETFs. VCN will exposed you to the entire Canadian market and VUN will give you the entire American market and you can get a share of each for about $120 and no commissions.
  4. Complexity – Lets say you now own 20 companies and think you’re diversified enough. Now you have to keep an eye on those 20 companies. Sure, they’re blue chips and shouldn’t need to be watched, but your account will be clogged with many holdings, compared to just a few ETFs, or only one if you go for VGRO.

Conversely, individual stocks tend to have higher dividend payments than ETFs. You will also save on ETF management fees (MER). So is it worth it? Maybe. It’s up to you. It doesn’t hurt to have a few Canadian blue chips for companies you believe in, but if you also own an ETF you’re just increasing your exposure to some specific companies.

One more point about dividends – when a dividend is paid the stock will drop by the exact amount of the dividend (although in practice it’s difficult to see with the normal daily fluctuations). Thus a divided can be thought of as reducing the total share price by the amount of the dividend. If you are trying to build wealth it almost never makes sense to sacrifice share price for income. Especially if you will be taxed on that income in the current year.

Ultimately it’s very satisfying to see a real deposit enter your account, and despite my complaints above I’ll continue to own some dividend stocks.

REITS (Real Estate Investment Trusts)

Rating: C

I used to think REITs were amazing, and I still think they are a good idea in small amounts and specific scenarios. Ultimately they carry a lot of risk and are mainly good for generating income rather than generating wealth. The problem with REIT income is that it’s not subject to the favorable tax rates like eligible dividends from Canadian blue chips. Again, not an issue in your TFSA or RRSP but in a taxable account you shouldn’t even bother.

Furthermore, REITs tend to have very little, if any, capital appreciation. All the value comes out in the dividend, which will then be taxed. And let’s say you were as foolish as I was and you invested in Morguard. They specialize in retail and office space. Not a good industry to be in during a pandemic works and shops from home.

REITs are good for generating income in retirement and getting exposure to different real estate markets, but I would have been better off just buying VGRO.

Buying Stock Options

Rating: F

Yes I admit I dipped my toes in the world of options trading in the style of Wall Street Bets. I would buy put options if I thought a stock was going down and calls if I thought it would go up. I actually had a few successes where I tripled my investment. The problem was that every winner came with two losers.

Lets say that you think a stock will go up. Seems to be a pretty safe bet, stocks normally go up. But if you’re buying an option you need to correctly predict exactly how much it will go up and by when. Say XYZ stock is currently trading at $90 and you think it will reach $100 by next Friday. You purchase a call option for $5. One of three things will ultimately happen after the option expires:

  1. The stock goes up higher than $105 ($100 + the option premium). Congratulations you’ve made money!
  2. The stock just barely goes up and ends at $98. Sucks to be you! Your option slowly decayed and eventually expired worthless. Maybe XYZ stock eventually did go above $100 after your option expired. You were right on the direction but wrong on the timing. Too bad.
  3. The stock goes down to $90. Well that’s not good, your investment just dropped 50% overnight! You can sell at a massive loss, and if you don’t, you’ll likely get a 100% loss.

So if the chances are roughly equal for each of those results (stock goes up, down, or sideways) you’re going to lose 2/3 times. Don’t do it. Don’t listen to Wall Street Bets. Just go to the casino if you feel like gambling.

Selling Stock Options

Rating: B

Options are a zero sum game. For every buyer there is a seller, and for every winner there is a loser. Thus if I’m the loser 2/3 times when I buy options, then maybe I’ll be the winner 2/3 times when I sell options?

On paper, selling options sounds horrible. In the example above, as the seller the maximum I could make is $5/share, but if the stock ran up to $200 I would lose about $100/share. There is a fixed maximum profit, the premium, and near unlimited downside.

In exchange for this crappy deal the odds are in your favor. I normally only trade if the chance of success is above 70%. The winnings are small but consistent. And the losses are normally salvageable.

My options selling strategy is referred to as “the wheel”. I won’t get into it now but it involves selling cash secured puts and covered calls. I’ve been using it for about six months, which is longer than I was buying them. And so far I’ve been earning money on about 4/5 trades and completely made up for my losses from buying options.

“Wow that’s great” you’re thinking. Well not so fast. It’s still playing with options which tends to magnify your gains AND losses. The market has been on a very steady uptrend for the past 5 months, and when it eventually corrects I expect my losses to be magnified. Hopefully the gains I’ve made up to that point will make up for future losses.

I plan on continuing to sell options until someone or something convinces me otherwise. I do NOT recommend this as a casual trading strategy. It’s the most complex strategy I use and it’s difficult to learn. Literally every single person I’ve explained it to has not been able to comprehend it (which is maybe more my fault than theirs). This is not me patting myself on the back, it’s just my experience. If you’re still interested, you can search “the wheel”, “cash secured puts”, “covered calls”, or check out my attempt to explain it.

Conclusion

Just buy index funds. If you want to branch out, get some bank stocks. Maybe telecoms like Bell or Telus. If you’re restless you can look into options with a paper trading account. Don’t be tempted to buy options. Selling covered calls or cash secured puts is more reliable.

Mar 142021
 

In light of the recent Gamestop short squeeze the subreddit Wall Street Bets (WSB) has exploded in popularity. WSB generally focuses on buying options contracts in anticipation of a big move in a particular stock. Essentially a member will guess (educated or otherwise) that a stock will sharply increase or decrease. They’ll purchase an options contract that will reward them for predicting correctly, and due to the leverage of options contracts they can earn much higher returns compared to holding the underlying stock. It’s easy to make a 100% return or more overnight. Conversely it’s easy to lose 100% overnight.

I’ve been dabbling in trading options for nearly a year now and figured I’d report on my results and explain how options work. I’ve broken it down into 3 levels of complexity and detail

Continue reading »
 Posted by at 10:49 am
Dec 272020
 

The Big Short investor, Michael Burry, who predicted the 2008 financial crisis, is now predicting that passively managed ETFs are the next bubble. He’s comparing them to the Collateralized Debt Obligations (CDOs) which were the main cause of the market meltdown of 2008-2009. Should we be worried? Maybe….

How Are ETFs a Bubble Exactly?

Thanks mainly to the followers of this blog and my totally original idea of ETF investing, ETFs and passively managed index funds are exploding in popularity. People are recognizing the value of low cost, diversified investing. Even mutual funds can’t keep up with passively managed index funds.

So what’s the problem? Essentially Burry is saying that investment decisions are no longer based on the underlying stock fundamentals, but rather on their position within an index. In other words, your ETF picks stocks because of their size in the market, not because the business are necessarily profitable. (For clarification, they are picked based on their market cap, not price. Market cap being the value if you multiply the number of outstanding shares by their share price)

To Burry’s credit the situation he’s describing does somewhat resemble the CDOs in 2008. Everyone was buying these CDOs without realizing their contents were utter garbage. Today the garbage is businesses, rather than mortgages in 2008.

Is he right? Sort of, first lets consider the implications if he’s right:

Continue reading »

Oct 052020
 

We all had the pleasure of witnessing a market crash earlier this year. It wasn’t the biggest crash but everything did drop 30-40%. It wasn’t sustained and the market has mostly recovered, but some sectors have lagged behind, including some that I’ve recommended on this blog. Let’s take a look at a few.

Continue reading »