Trades: None
Gut Check:
If you've been following so far, you will know that I have shares of ATPG and BAC.
Values plummetted on the day I was looking at writing Covered Calls, so the option premiums were lower. Now, mere days later, they've rallied quite bit -- enough to shift premiums by over 10 cents for ATPG! 10 cents doesn't sound like much, but multiplied by 600 shares, that's a $60 difference.
This is the part about options I really need to keep a rein on. With options, I've taken my profit already and need to relax and give up future profits with no regret. In any case, I can't exit my options positions now without a substantial loss.
So the Bad News is that I could have made a heck of a lot more money. Maybe next time I'll wait a bit before writing my options -- or put in an order at a target Bid price.
The Good News is that there's a higher likelihood that I'll get assigned, which means slightly less profit on the BAC but substantially more on the ATPG. Either way, I'm back to cash without having sold my stocks at a loss compared to the price I purchased them.
Thursday, December 22, 2011
4 Reasons Not to Get Into Mutual Funds
In my About Me section I talked about my disenchantment with mutual funds. Sure, in the bull market days when funds were trash if they didn't return over 15% a year, I was pretty happy with them, and I think everyone was. But now it's a bear market and recession and all those other scary words. The market's down, so mutual funds are dragged down with them. We even had a couple of scary moments where your portfolio might have dropped 30% or more and you're lucky if you recovered a year later, much less made any money.
When it's the only game in town, there's no point complaining.
But what if it isn't the only game in town. What if you could buy something else?
I talked about League and the Real Estate Investment Trust, which is tied to shopping mall rentals to mega-chain stores like Superstore. That's not tied to the market, but has various other types of risks -- but risks that are not so much at the mercy of the strange whims of the stock market. Because you can get a reliable 8% there (used to be 9% until September 2011) in a manner similar to locking your money into a GIC for 7 years, there's no point being in any investment that doesn't return more than 8% a year no matter what the market conditions.
So here are 4 reasons not to get into mutual funds:
1. Your "Financial Advisor" is probably just a salesman.
Chances are, they don't know any better than you. They get instructions from head office about what to get based on your risk profile and put it together. Then they do the customer service routine to basically lock you in for several years. They don't really have to do anything to your account as long as you keep your money there. They sit back and collect money for having you as a client -- whether you make money or not. Their real job is to retain you as a client.
Even if they do watch and adjust your account, they will probably have to do it with redemption penalties in mind, which further limits their ability to move and react with the market. So if they do a lot of this at all, it will probably be with their best (highest net worth) clients, out of dozens, of not hundreds, of clients.
If you think about it, this setup lets them collect a heck of a lot of passive income. Some companies have their own stable of funds and most of the time the advisors there will recommend their company funds. If the funds do well, no one complains. But really, isn't that a huge conflict of interest right there?
Keep in touch quarterly (shortly after you get a statement) with whoever you're with: The squeaky wheel gets the oil. None of the advisors I've had have ever called me up to adjust my portfolio. (They have, however, called me up to remind me of RRSP contributions).
2. Most funds track the market anyway.
Every year, people talk about this but no one can do anything about it. Mutual funds must invest in a big basket of stocks to reduce your risk -- basically to not roll the dice on just one or a few stocks. There are winners and losers and it starts to look like the major indexes. This is why people buy funds that mindlessly follow an index. But even that is not a solution to getting better performance.
You could roll the dice on one very volatile fund and hope it shoots up, then exit -- Some funds have done almost 20% for the year ending November 2011. Did yours do that for you?
Your financial advisor is supposed to pick good funds that will give better returns. But they always hedge by saying past performance does not guarantee future performance, so who's to really know if they are picking good ones? Even fund ratings companies can't predict performance and if you look at reports from those, most funds swing up and down the rankings every year anyway. And when markets go down and your fund tanks, your financial advisor can just say the market went down so everybody's down; or you're in position to buy low and ride the market rally up.
Basically, they're probably not much better than picking stocks for you. If you have a higher risk profile, they will pick a higher volatility fund and hope it goes up. If it tanks, they tell you your risk profile was high, so it's your fault.
3. You can only make money when the market goes up.
There are no fancy things like shorting stocks or using options in mutual funds. You make money when the underlying stocks go up. Hopefully, most of them go up, and it's more up than down in the entire basket.
In the broader stock market, you can make money no matter how the market's moving with the right strategy. Not without risk of course, but at least you can make money no matter if the market goes up, goes down, or stays flat.
4. You cannot protect yourself from loss.
For most funds, you can't protect your principal. If a fund starts to tank and never recovers, there's nothing you can do. Some science and technology mutual funds that took huge hits in the big crash of 2000 never recovered -- so much for the "invest for the long term and it eventually goes up" line that you are sold by financial advisors.
In the open stock market, if you know what you are doing, you can hedge your risk and buy insurance for stocks. For example, if your risk tolerance is to not see your portfolio drop by 10%, you can spend maybe 5% to buy insurance (such as buying Puts) when some of your stocks have gone up in value. If they suddenly drop in value below your tolerance, you can exercise your Put and sell them at a higher price than the current market price. You cannot buy options on mutual funds.
This said, some funds do allow you to protect your principal but there are hidden costs such as higher fees and more conservative investments resulting in lower returns.
When it's the only game in town, there's no point complaining.
But what if it isn't the only game in town. What if you could buy something else?
I talked about League and the Real Estate Investment Trust, which is tied to shopping mall rentals to mega-chain stores like Superstore. That's not tied to the market, but has various other types of risks -- but risks that are not so much at the mercy of the strange whims of the stock market. Because you can get a reliable 8% there (used to be 9% until September 2011) in a manner similar to locking your money into a GIC for 7 years, there's no point being in any investment that doesn't return more than 8% a year no matter what the market conditions.
So here are 4 reasons not to get into mutual funds:
1. Your "Financial Advisor" is probably just a salesman.
Chances are, they don't know any better than you. They get instructions from head office about what to get based on your risk profile and put it together. Then they do the customer service routine to basically lock you in for several years. They don't really have to do anything to your account as long as you keep your money there. They sit back and collect money for having you as a client -- whether you make money or not. Their real job is to retain you as a client.
Even if they do watch and adjust your account, they will probably have to do it with redemption penalties in mind, which further limits their ability to move and react with the market. So if they do a lot of this at all, it will probably be with their best (highest net worth) clients, out of dozens, of not hundreds, of clients.
If you think about it, this setup lets them collect a heck of a lot of passive income. Some companies have their own stable of funds and most of the time the advisors there will recommend their company funds. If the funds do well, no one complains. But really, isn't that a huge conflict of interest right there?
Keep in touch quarterly (shortly after you get a statement) with whoever you're with: The squeaky wheel gets the oil. None of the advisors I've had have ever called me up to adjust my portfolio. (They have, however, called me up to remind me of RRSP contributions).
2. Most funds track the market anyway.
Every year, people talk about this but no one can do anything about it. Mutual funds must invest in a big basket of stocks to reduce your risk -- basically to not roll the dice on just one or a few stocks. There are winners and losers and it starts to look like the major indexes. This is why people buy funds that mindlessly follow an index. But even that is not a solution to getting better performance.
You could roll the dice on one very volatile fund and hope it shoots up, then exit -- Some funds have done almost 20% for the year ending November 2011. Did yours do that for you?
Your financial advisor is supposed to pick good funds that will give better returns. But they always hedge by saying past performance does not guarantee future performance, so who's to really know if they are picking good ones? Even fund ratings companies can't predict performance and if you look at reports from those, most funds swing up and down the rankings every year anyway. And when markets go down and your fund tanks, your financial advisor can just say the market went down so everybody's down; or you're in position to buy low and ride the market rally up.
Basically, they're probably not much better than picking stocks for you. If you have a higher risk profile, they will pick a higher volatility fund and hope it goes up. If it tanks, they tell you your risk profile was high, so it's your fault.
3. You can only make money when the market goes up.
There are no fancy things like shorting stocks or using options in mutual funds. You make money when the underlying stocks go up. Hopefully, most of them go up, and it's more up than down in the entire basket.
In the broader stock market, you can make money no matter how the market's moving with the right strategy. Not without risk of course, but at least you can make money no matter if the market goes up, goes down, or stays flat.
4. You cannot protect yourself from loss.
For most funds, you can't protect your principal. If a fund starts to tank and never recovers, there's nothing you can do. Some science and technology mutual funds that took huge hits in the big crash of 2000 never recovered -- so much for the "invest for the long term and it eventually goes up" line that you are sold by financial advisors.
In the open stock market, if you know what you are doing, you can hedge your risk and buy insurance for stocks. For example, if your risk tolerance is to not see your portfolio drop by 10%, you can spend maybe 5% to buy insurance (such as buying Puts) when some of your stocks have gone up in value. If they suddenly drop in value below your tolerance, you can exercise your Put and sell them at a higher price than the current market price. You cannot buy options on mutual funds.
This said, some funds do allow you to protect your principal but there are hidden costs such as higher fees and more conservative investments resulting in lower returns.
Tuesday, December 20, 2011
December Trades, continued
Trades:
Gut Check:
My ATPG Covered Call order got filled! ATPG rallied when I forced myself to stop looking and do other things. Share price is creeping up even higher.
Since hindsight is always 20-20, I now wonder if I shouldn't have set the Limit price to 0.30. But that's hindsight and speculative trading -- which I don't really want to get into. I don't want to keep watching. I really just want to place one trade a month or even a week and hope for early assignment.
Wondering about the BAC Covered Call now and whether I can close the position at break-even or better, and write a Covered Call for the Weekly again. Will have to see how the prices are.
- Sold 6 contracts Covered Call ATPG at Strike 7.50, at $0.27
- ROI 8.00% assigned, 3.39% not assigned
Gut Check:
My ATPG Covered Call order got filled! ATPG rallied when I forced myself to stop looking and do other things. Share price is creeping up even higher.
Since hindsight is always 20-20, I now wonder if I shouldn't have set the Limit price to 0.30. But that's hindsight and speculative trading -- which I don't really want to get into. I don't want to keep watching. I really just want to place one trade a month or even a week and hope for early assignment.
Wondering about the BAC Covered Call now and whether I can close the position at break-even or better, and write a Covered Call for the Weekly again. Will have to see how the prices are.
Monday, December 19, 2011
December Trades
Trade:
As predicted, I didn't get assigned on my ATPG Call. The nearest useful Covered Call I could write was for the Strike 7.50. But the price was still falling on market open. I thought about taking a very low premium, but decided against it. I was panicky about ATPG and thinking of dumping it.
I switched gears to thinking about what to buy. I had thought about REDF but that was looking bleak that morning. If I had gotten into it last Friday there would have been great ROIs to be had. But not this morning. Also, BAC is still technically a DJIA-listed Blue Chip. Plus, it's a bank and surely the US government won't let it go bust.
Looking to BAC, it wasn't volatile enough to give good returns but it had Weeklys. Price was dropping. I bought it hoping for a near rally, but it didn't happen and the price was dipping to $5 and looking like it might go even lower. I wanted to buy more shares but decided not to go into margin too much.
I put in an order to Sell a Strike 5.00 Covered Call at 0.22 for the December 23rd Weekly expiration (they were Bidding at around 0.15 at the time). Things looked so bleak and I was feeling scared. I looked ahead and saw that the monthly option still hadn't really budged for Strike 5.00 even though the Weekly was plumetting. I cancelled the order and went for a safe ~3% and sold a Strike 5.00 Covered Call for the January 20th expiration. I honestly thought BAC was going to really sink below $5.00 and keep going down. At just 2 contracts, a low premium would be eaten up by transaction fees and I wasn't willing to do less than 3% ROI per month.
I went back to ATPG. I could do the same and look far ahead to the February expiration options, but with a month ahead, I decided to see if I could wait this one out by putting in an order to sell a Covered Call. Could have done the same with BAC, but I was more worried about that. I still wanted my 3%+ ROI per month.
I had one helluva shock at this point -- the QuesTrade trading platform said I didn't have enough shares to do the Covered Call. WHAT?! Got onto Online Chat immediately and the final resolution was that it was a rare technical glitch that happens about 1% of the time. I think it has to do with lousy programming that doesn't recognize the previous Covered Call has already expired. Whatever. They tweak it on their end and I put in my order.
I hated the speculative stock-watching part of all this. I never wanted to be a speculator. I wanted to just do my trade and not look back, secure in knowing what the potential returns and losses would be.
Hoping my ATPG Covered Call order gets filled.
- Bought 200 shares BAC at $5.07 -- using $194.20 of margin
- Sold 2 contracts Covered Call BAC at Strike 5.00, at $0.36, expires January 20
- ROI 3.96% assigned, 5.89% not assigned
- Put in an order to Sell 6 contracts Covered Call ATPG at Strike 7.50, at $0.27
- ROI 8.00% assigned, 3.39% not assigned
As predicted, I didn't get assigned on my ATPG Call. The nearest useful Covered Call I could write was for the Strike 7.50. But the price was still falling on market open. I thought about taking a very low premium, but decided against it. I was panicky about ATPG and thinking of dumping it.
I switched gears to thinking about what to buy. I had thought about REDF but that was looking bleak that morning. If I had gotten into it last Friday there would have been great ROIs to be had. But not this morning. Also, BAC is still technically a DJIA-listed Blue Chip. Plus, it's a bank and surely the US government won't let it go bust.
Looking to BAC, it wasn't volatile enough to give good returns but it had Weeklys. Price was dropping. I bought it hoping for a near rally, but it didn't happen and the price was dipping to $5 and looking like it might go even lower. I wanted to buy more shares but decided not to go into margin too much.
I put in an order to Sell a Strike 5.00 Covered Call at 0.22 for the December 23rd Weekly expiration (they were Bidding at around 0.15 at the time). Things looked so bleak and I was feeling scared. I looked ahead and saw that the monthly option still hadn't really budged for Strike 5.00 even though the Weekly was plumetting. I cancelled the order and went for a safe ~3% and sold a Strike 5.00 Covered Call for the January 20th expiration. I honestly thought BAC was going to really sink below $5.00 and keep going down. At just 2 contracts, a low premium would be eaten up by transaction fees and I wasn't willing to do less than 3% ROI per month.
I went back to ATPG. I could do the same and look far ahead to the February expiration options, but with a month ahead, I decided to see if I could wait this one out by putting in an order to sell a Covered Call. Could have done the same with BAC, but I was more worried about that. I still wanted my 3%+ ROI per month.
I had one helluva shock at this point -- the QuesTrade trading platform said I didn't have enough shares to do the Covered Call. WHAT?! Got onto Online Chat immediately and the final resolution was that it was a rare technical glitch that happens about 1% of the time. I think it has to do with lousy programming that doesn't recognize the previous Covered Call has already expired. Whatever. They tweak it on their end and I put in my order.
I hated the speculative stock-watching part of all this. I never wanted to be a speculator. I wanted to just do my trade and not look back, secure in knowing what the potential returns and losses would be.
Hoping my ATPG Covered Call order gets filled.
Friday, December 16, 2011
Options Expiration Day
Trades: None
Gut Check:
Shit. Not only has the share price dropped but it has dropped far even below my effective cost per share of 6.71 (after factoring in the premium I collected from writing the Covered Call).
I can't write an ITM Call at 6.00 without coming out at a loss if I am assigned. The Strike 7.50 option looks viable and can still get me about 3% ROI for the month, but I'm sure to be holding the stock even longer.
For the leftover funds, I'm looking at BAC for weeklys and REDF.
- ATPG shares have plummeted in value. Doesn't look like I'll be assigned.
Gut Check:
Shit. Not only has the share price dropped but it has dropped far even below my effective cost per share of 6.71 (after factoring in the premium I collected from writing the Covered Call).
I can't write an ITM Call at 6.00 without coming out at a loss if I am assigned. The Strike 7.50 option looks viable and can still get me about 3% ROI for the month, but I'm sure to be holding the stock even longer.
For the leftover funds, I'm looking at BAC for weeklys and REDF.
Thursday, December 1, 2011
My first live trade
Trades:
Gut Check:
Leading up to this I looked for a stock that had 100M+ market cap and some volatility (for higher premiums). As this was my very first trade, I was nervous with the stock price moving around while I was placing my trade, but fortunately it still worked out -- I calculated that whether I got assigned or not, I would come out ahead.
I'm hoping to get assigned so I can be out of the position and back to cash without prolonged exposure to stock volatility.
- Capital Commitment: $5,000 CAD, converted to $4,848.71 USD by QuesTrade.
- Bought 600 shares ATPG at $7.16
- Sold 6 contracts Covered Call ATPG at Strike 7.00, at $0.49
- ROI 3.63% assigned, 5.73% not assigned
Gut Check:
Leading up to this I looked for a stock that had 100M+ market cap and some volatility (for higher premiums). As this was my very first trade, I was nervous with the stock price moving around while I was placing my trade, but fortunately it still worked out -- I calculated that whether I got assigned or not, I would come out ahead.
I'm hoping to get assigned so I can be out of the position and back to cash without prolonged exposure to stock volatility.
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