OT - Money / Investing Thread (aka financial no stupid questions)

[Cincydawg]

[847badgerfan]

This is a choppy year for the markets. I don't expect any meaningful gains or losses at this point.

[utee94]

I expect continuing significant gains for Tech stocks, especially those most closely associated with AI.  First half will be a bit sketchy, second half will be strong.

There's no stopping that train by the way.  Expect significant growth and signicant improvements to margins and operating income over time.

Yes, that implies, at the expense of workers and jobs.

[847badgerfan]

I expect continuing significant gains for Tech stocks, especially those most closely associated with AI.  First half will be a bit sketchy, second half will be strong.

There's no stopping that train by the way.  Expect significant growth and signicant improvements to margins and operating income over time.

Yes, that impliaes, at the expense of workers and jobs.

I have a lot of mixed thoughts on that front. My advice is to be careful.

[FearlessF]

I'm careful.
I leave it to the professionals that do it for a living

[utee94]

I have a lot of mixed thoughts on that front. My advice is to be careful.

My advice is buy low sell high.

[FearlessF]

I've given that exact advice to the pros working for me

[Cincydawg]

I had "professionals" manage my retirement account for three years.  They did a pretty decent job, I asked a lot of questions and tried to learn from what they did, and didn't do.  They gave me the book by Howard Marks which was ... interesting.  I've been managing on my own for the last decade or so and still doing reasonably well.

I don't get excited about market swings up or down.  Well, actually, I usually do get excited, but temper my enthusiasm with a longer term perspective.

I haven't used options at all of late, Brad reminded me that I had used them in the past, more for insurance than gambling.

[betarhoalphadelta]

So we've talked about these sorts of things in a lot of places on this board, but I think it may make sense to discuss things that we're doing, thinking about doing, are curious about doing, etc wrt to money. 

I.e. a few weeks ago I had the combination of a planned stock sale and the need to buy a new car. I thought "maybe I should just pay cash from the proceeds of the sale" until I realized I could buy the car at 1.9%, right now that cash from the sale is sitting in a MM account making 3.35%, and I'm just waiting to decide what other ways I can put that money to use. 

There are people more savvy by far than I on this board when it comes to financial matters, as well as probably people less savvy than me. So let's have an OT thread to discuss.

I'm going to pull over a few posts from the rankings thread and then kick it off with a riff on what CD said in the latest in that thread...

[Cincydawg]

One phrase I liked was "Get rich slowly."  Another book I really liked way back was "The Only Investment Guide You'll Ever Need" by Andrew Tobias.  He updated it sometime later.  For a starting investor, which i was, I found really good practicable advice in it.

Another tactic I don't use often enough I think is stop loss orders.  You see a stock you like at say $50 and decide to buy it, but you're of course not sure it's a winner, so you put in a stop loss order to sell if it broaches say $40.  If it goes up to $60, you can lock in that stop loss now at $50 and play with "House money".

There are some more complicated tactics with options I use at times, pretty varied, another way to "buy insurance".  

[betarhoalphadelta]

Ok, so my merge didn't work as well as I'd have liked as those posts all predated my intro post... Oops.

But to quote CD:

I haven't used options at all of late, Brad reminded me that I had used them in the past, more for insurance than gambling.

Insurance, gambling, whatever you call it... When doing a covered call (out of the money), it seems that there are three scenarios:

• You write a call, it trades sideways and expires worthless, you pocket the premium: Win, because you kept the premium and still own the stock at the same value 
• You write a call, it gains and expires in the money, you pocket the premium and are forced to sell the stock at the strike price: Win, in the sense that you gained both a premium and stock gains, but a partial loss depending on how far above the strike the stock went--you missed out on the upside
• You write a call, the stock falls in value, you pocket the premium but your principal is lower: Loss overall, but the value of the premium is a hedge as long as the stock didn't completely crater

Now, that's not every scenario. You don't *have* to let a contract go to expiry. If you have a scenario where it's advantageous to buy back your contract and walk away or roll it into a new call with different strike/premium/duration, you can play around with it.  


So I'm sitting on a stock that I've got very large paper gains (cost basis <$32, current price $633). I want to sell that (and my other stock which I can't trade options) over time to diversify my portfolio. But with the very large paper gains, I'd be taking a massive principal haircut in taxes. 

(Note for below: options contracts are in 100-share blocks. I'm doing it below in "per share" numbers because it's easier to think about it that way.)

So I'm playing around with the options numbers. Selling a call with a 790 strike and May 15 expiry is currently earning a premium of 56.97/share. If I write that option and it doesn't hit 790, that's just income in my pocket (minus taxes on the premium) for 2 months of doing nothing. And because I will still own the shares, I can write another option contract and do it again. If I got lucky and was able to do this with similar premiums for the rest of the year, it's would be 5 bites at the apple over 10 months meaning almost $300 per share in income--almost a 50% return while not doing anything. Not like I'd get that lucky with such a volatile stock, but that's why the stock trading sideways and pocketing the premiums is such a win. 

If I were to write an option and it reaches that price and gets called away at 790, I'd have $846.97 per share in my pocket. But I'd owe (846.97-31.85)*.243 = $198/share in taxes. Well, 846.97-633 is >$200, so I'd still be in a positive principal position to where I am today. And now I'm still sitting on a ton of cash AFTER paying the taxes, so I'm forced to diversify the position I already wanted to diversify, but doing it in roughly a principal-neutral way.

That seems like the only way to lose on this trade would be a massive crash in the stock price. Which would screw me anyway. But right now if I sold the stock I'd be taking an immediate hit of almost $150/share on taxes anyway... So writing the option and the shares dropping a fair amount doesn't kill me, especially because if it remains a volatile roller coaster I still own the shares and can continue trying to earn premiums on options. 

So... What's the downside here? 

[Cincydawg]

Another variant would be to write put options at say $575 and let'er ride, or buy puts AND write OOM calls.  You have to stay on top of this because one scenario leaves you with naked calls.

And you can write 3 month calls and buy 6 month puts, the famous butterfly straddle.

[medinabuckeye1]

I haven't used options at all of late, Brad reminded me that I had used them in the past, more for insurance than gambling.

I'm more of an options gambler but I'm also a little bit younger so it makes sense for me to have a higher risk/reward strategy.  

I've almost never bought options (the insurance use) but I've sold quite a few.  My advice though is to be VERY careful because there are a few problems including:

• When you sell options you gain and lose equity VERY fast.  Ie, if you just own a stock and it goes up 5% your equity increases 5%.  Conversely if it goes down your equity goes down 5%.  Options are very different.  If the underlying stock (or commodity or whatever) goes up or down 5% your stake could easily go up or down by 90%.  
• There isn't MUCH insider trading because the Feds do a good job of watching that and they HAMMER violators when they catch them (Martha Stewart) but what insider trading there is tends to be done in the Options markets because of what I said in #1.  Ie, if I have inside information that XYZ Drug Company's trial on _____ Drug was successful then I KNOW that XYZ Drug Company's stock price will increase by say 2%.  If I just bought the stock that wouldn't make me much money.  Even if I had a spare $1 Million I'd still only make $20k,  that isn't enough to buy a new car.  Now if I put say $10,000 into call options on XYZ and the price went up 2% I'd probably make enough to buy a brand new Corvette.  This is why people trading on inside information usually trade options.  It happens.  I'll give another example from the fixed income segment.  I've been involved in getting several credit rating upgrades for my municipality and each time I was informed IN ADVANCE by Moody's of what the credit rating adjustment would be.  The reason for this advance notice is that I get an opportunity to protest (in the case of a downgrade, I don't think anyone would protest an upgrade).  Anyway, when I got that advance notice it was VERY limited by Moody's, like literally about an hour and within the email they sent to me they had laid out the Federal Statute prohibiting trading on this information.  Finally, because Moody's keeps the window so short, it would be REALLY easy to prove Insider Trading if I had done it because everything is timestamped.  
• There is an old saying that "The market can stay irrational longer than you can stay solvent."  That is SO VERY TRUE.  I learned it the hard way back in the 2008 credit crash at a cost to me that ran into six figures.  I say this as a warning.  If you sell a bunch of XYZ short because you "just know" that it will go up and then it goes down instead there is a big temptation to just sell MORE short to make even MORE money when it eventually goes back up and that works but only if it actually does go up before the call date AND you can somehow keep your head above water until it moves your direction.  If either of those things fails to happen you can find yourself getting a quarter-million dollar lesson in options and futures trading really quick.  

[FearlessF]