Trading options in tfsa account
Written by Jin Won Choi on Oct. Last update on Oct. To enter for this year, please follow this link. Note that this is just for my own personal account, not me and my wife's combined. In this episode, I'll explain why I've recently bought some more put options on oil and gas companies, despite the fact that their prices had already fallen. During the same month, the TSX Composite went down by 4.
Given that my portfolio has roughly 3 times as many U. Therefore, I outperformed the benchmark in September. Each Premium Portfolio consist of about a dozen individual stocks. This is different from regular portfolios where the vast majority consist of ETFs. I still have a couple of thousand dollars worth of a penny stock in my TFSA, and the rest is invested in put options. I no longer hold XSB. Because of my penny stocks and put options, my TFSA's performance doesn't perfectly track Premium Portfolio 2, which went down by 2.
I will continue to hold penny stocks and options, but Trading options in tfsa account hold them in my other accounts. Premium Portfolio 2 went down primarily because of its oil and gas stocks. That said, the oil and gas stocks trading options in tfsa account the premium portfolios have been hit harder than others for various reasons, which I don't want to get into right now. But for now, let me just say that I know those reasons and I have good reasons of my own for continuing to hold them.
As an aside, Premium Portfolio 3 fared even worse and went down by 4. As the riskiest model portfolio on this site, we should continue to expect the portfolio to move up and down by greater degree than the overall market. As a value investor, I normally like to buy stocks when they go down in price.
However, in the past month, I bought some more trading options in tfsa account options on oil and gas companies, which basically amounted to betting against them. For an easy explanation on put options, you can see my article on this here. In this article, I will explain why I've been making such a bet that seems contrary to my principles. First, let me explain why I generally like to buy stocks that had fallen in value.
This is why if you're a stock investor, you should pray for hail and locusts on the stock market, not sunshine and rainbows. Or on a more extreme case, let's imagine that this company begins to lose money every single year. In this case, you should avoid the stock no matter the price.
To understand the health of Canadian oil and gas companies, we should first understand what their break-even costs are. When I used to work as an oil and gas analyst, I found that some companies had very high break-even prices.
Normally, investors give low valuations for such highly risky companies. But low stock prices wouldn't sit well with the management of such companies, since a huge portion of their pay is tied to the share price. So in order to legally inflate their share prices, many of them started paying dividends.
These companies continued to pay dividends even through unprofitable periods by borrowing or by issuing more stocks.
By maintaining a consistent dividend, they attracted dividend investors who bid up their share prices. However, this strategy of inflating their share prices only work if their share prices hold up, since it gets much harder to issue new shares when share prices go down.
That's because when a stock price falls, it generally means that there are more sellers of the stock than buyers. If they issue more shares, they would add to the list of sellers, which would make share prices go down even more.
Alternatively, these companies can borrow more money trading options in tfsa account pay their dividends, but that won't work for long in a low oil price environment either. Banks judge an oil and gas company's health on the cash flow to debt ratio. In a low oil price environment, the cash flow would go down, pressuring that ratio. If they were to borrow to pay dividends, it would pressure that ratio even more. Eventually, these companies would bump up against their debt limit and banks would refuse to lend them more.
Thus, if the low oil price environment persists for a sufficient enough time, many of these oil and gas companies will be forced to cut their dividends. In that moment, the reason why investors bought into the stock in the first place i. Such a scenario will crush a company's stock price. Now, oil and gas companies know this very well, so they will try anything to maintain their dividends. Trading options in tfsa account will try to sell assets to raise cash, they will fly to meet big investors to try and convince them to buy stock, etc.
But eventually, unless oil prices recover, they will bump up trading options in tfsa account the limits of these efforts, and they will have to cut their dividends. This, in summary, is why I bought put options trading options in tfsa account certain oil and trading options in tfsa account companies.
I'm not saying that the above scenario will definitely pan out. If oil prices recover soon, there's a good chance it won't. Also, as I wrote beforeI expect oil prices to go higher in the long run.
However, oil prices don't have to stay low for that long for these companies to be forced to cut their dividends. In other words, this is a calculated bet. Lastly, this doesn't mean that I will bet against every dividend paying oil and gas companies. In fact, I hold one such company that currently has a high dividend yield though I first bought it when they didn't pay any dividends.
The important thing to keep in mind is the break-even price that I mentioned before. I will hold companies with low break-even prices, because when the dust clears and their competitors have taken big hits, the survivors will benefit from trading options in tfsa account asset prices.
If you enjoyed this article, trading options in tfsa account might be interested in our free newsletter. Enter your email to get free updates. Choi is the founder of MoneyGeek. He has a PhD in financial mathematics, and he worked at a top trading options in tfsa account fund for 2 years. Now, let's get back to our regularly scheduled program.
However, this logic disappears if the company is expected earn a lot less. Something similar to this is happening to Canadian oil stocks at the moment. The Dividend Game To understand the health of Canadian oil and gas companies, we should first understand what their break-even costs are.
But that's not all. When The Music Stops However, this strategy of inflating their share prices only work if their share prices hold up, since it gets much harder to issue new shares when share prices go down.
Playing Probabilities This, in summary, is why I bought put options on certain oil and gas companies. Oil Put Options Short url: Choi's commentary on current financial events All this is available for free. Join others and subscribe using the box below.
Nobody will care about your money as much as you but you need to learn how to invest it properly. I get why people do this as they may not have time, but like anything, if you put the effort in, you get more comfortable and confident over time and hopefully you should outperform these funds. I like to be in charge of my stuff, i want to maximize my investment potential as quickly as possible. You can put up to that amount in per year unless you have more contribution room, it does rollover which is nice.
It essentially reduces your income that you paid tax on and you get a rebate at the end of it. There are exceptions like getting a loan from it for first time home buying and so on, all those details are on the CRA website. When the money comes out, you get taxed at whatever the retirement income per year. The worst part about TFSA is the name, it is actually an investment vehicle and is an extremely useful investment tool to have.
You cannot claim capital losses on it. So if you trading options in tfsa account to blow your account, you are screwed so to speak. This is a huge win. You collect the premium for the contract you sold. Each option is equivalent to shares. If the price of the stock goes up past the and the option gets exercised, shares of my stock are sold against it. It basically limits your upside if the stock runs up big. If the market is bearish then selling calls with elevated volatility is a great strategy if you intend to hold the stock for a long time.
I buy long calls and puts These are simply leverage investment vehicles. With options, you get much more bang for buck. The risk and rewards are much greater. Picking direction in stocks is a tricky business at the best of times and as you have things like theta decay working against you aswell as just the unknowns in a stock. Some people may just use long puts for example as a hedge on the rest of their portfolio. Insurance if you will.
When the vix is low, these are generally very cheap. You are trading options in tfsa account able to sell naked calls or naked puts in a registered account due to the risk involved.
The UK and Australian as above have no withholding tax so these are fine and you do not get taxed on dividends for Canadian equities either. Any money you make on these will have no capital gains which is great. If you blow your account, you cannot claim trading options in tfsa account tax loss on it and you have lost that contribution room for trading options in tfsa account.
I tend to hold big blue chip companies in the RRSP but i will occasionally pile on some big options positions if i am comfortable with a potential move in a stock or the market. This helps to massively accelerate the returns. If i end up being right, i will take a good chunk trading options in tfsa account those profits and feed them right back into dividend stocks.
My aim is to get the compounding trading options in tfsa account on the dividends stocks to take hold as fast as possible. For long-term investments, i just want to keep buying as much of a stock as possible for as cheap as possible. You can often get a discount off the current share price depends on the broker and you trading options in tfsa account not charged commissions when the share repurchase occurs.
This is something other people may or may not do and prefer to accumulate the funds and then pick another stock. I also have a non-registered account which is just your standard broker account, fully taxed and all the trimmings.
I tend to do most of my risky trading there like selling naked options, trading futures and so forth. However, over time they have made trading options in tfsa account effort to improve the website, the trading platform and the support is much better. I just use their IQ Essential platform, there are no costs with trading options in tfsa account, it works in all the browsers.
I want to minimize my costs in every possible fashion. It is too easy to blow money on streaming fees, chart packages and so on. At the end of the day, it all comes down to practise, knowing the markets, not how many indicators you have on your screen or some other funky algorithm for predicting this or that.
Hopefully that has helped anyone if they are thinking about getting started. I increase the risk with my shorter term trading but i am ok with that, it all depends on your circumstances and experience.
I dont hold any UK equities as of the moment, although I have a couple in my shortlist. R2R, thanks for the information, great point. This will compensate for any tax taken from the dividends in my eyes. Leave a Reply Cancel reply.