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

[Cincydawg]

Yup, options are leveraged to the hilt, generally.

I like ETFs, I mostly own "sector ETFs".  One I like is SCHD, the Schwab dividend fund.  It doesn't seek the highest dividends (which often are risky) but the ones with a record of increasing over time.  I manage my wife's portfolios also, with a more conservative bent, and she owns SCHD.

[FearlessF]

https://www.morningstar.com/financial-advisors/etf-tax-loophole-that-wall-street-is-exploiting

The ETF Tax Loophole That Wall Street Is Exploiting

Section 351 ETF seeding is gaining traction with wealthy investors, but the practice may invite IRS scrutiny.

[medinabuckeye1]

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:

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?

If you basically want to sell anyway then the only downside relative to that is that if the stock price craters you take the loss where if you had just sold you wouldn't.  

Ie, you own the stock currently at $633.  If you sell it you get $633 less tax.  If you sell a call option at a strike of $790 that expires three months out (Saturday, May 16 because it is always the third Saturday of the Month) and you get $56.97 you pocket $56.97 and your assessment of the three possibilities is almost exactly on.  There is a fourth unlikely but possible scenario.  American options (unlike European ones) can be exercised by the holder ANYTIME up until expiration so the stock might go up to $800 and get called then go back down below $790 before the expiration.  This is RARE but it does happen (usually for dividend reasons.  Ie, if the XD date is say May 8 and it is trading at $800 on May 7 I might exercise the call on May 7 to get the dividend on May 8 but the earnings report usually comes out on the XD date so if that is bad news on May 8 the stock might drop to $600.  This would be fine for you since you'd get the $790 and the $56.97 and the only thing you'd miss out on is the May 8 dividend.  

The main three you are spot on:

• Stock closes on May 15 between $633 and $790.  You still own the stock and you have $56.97 (less taxes) that is basically found money.  
• Stock closes on May 15 above $790.  You sell the stock for $790 but it is really $846.97 because you also got the option money as you explained above.  
• Stock closes on May 15 below $633.  You still own the stock and you have $56.97 (less taxes) that is basically found money.  The downside is that you didn't take the $633 when you could have and you STILL own the stock.  Now if it closes above $576.03 you could sell on Monday, May 18 at anything over $576.03 and still be in just as good a position as you would have been in had you sold for $633 today.  However, if it craters and closes at say $233 then you are MUCH worse off than you would have been if you had simply sold the stock for $633 today.  NOTE BELOW

NOTE:  You can insure against this.  If you take the $56.97 and use some of it to buy puts at say $470 that would offset.  Ie, if the stock went down to $233 then you'd pocket the $56.97 that you got for the call and put the stock to someone else at $470. This is a form of a straddle.  

When I do options I usually do straddles.  The advantage of straddles is that you can't possibly lose on both sides of the transaction so it effectively doubles your return while keeping the risk only moderately higher.  

[iahawk15]

Since I don't pay attention to politics, I can't call it anything more than dumb luck that we decided to move from BCBS Gold to Bronze this year, which is now eligible for HSA. So I was quite excited to learn that we can now access one of the best tax-advantaged investment vehicles.

[medinabuckeye1]

Explaining straddles:

I'll use General Motors (GM) as my example because obviously everyone has heard of GM.  The stock currently is at about $72.50 mid-day, March 13.  

A May call at $80 can currently be sold for $1.64.  NOTE:  Volume in options is LOW so the bid/ask spreads can be LARGE.  Right now the bid is $1.64 and the ask is $2.51.  When you trade stocks you don't need to worry about that because there is so much volume that the bid/ask spread is typically nominal.  

A May Put at $65 can currently be sold for $1.48.  The spread is again large, $1.48 vs $2.01.  

This is all just for example because you usually don't actually sell the May options until the March options expire, then the volume picks up.  Anyway, on with the example:

I own 1 share of worth ~$72.50.  I sell an $80 May Call for $1.64 and a $65 May Put for $1.48.  For those less familiar with Options what that means is:

• The $80 Call means that my GM Share can be called away from me for $80 anytime between now and the third Saturday in May.  
• The $65 Put means that another share of GM can be put to me for $65 anytime between now and the third Saturday in May.  

So in total I've collected $3.12 which means that if GM shares are trading anywhere between $61.88 and $83.12 on May 14 I'm ahead.  More detail:

• If GM closes above $83.12 it WILL BE called away from me at $80 and I'll be worse off than I would have been if I had just kept the stock and sold it when it got there.  
• If GM closes between $80 and $83.12 it WILL BE called away from me at $80 but I got that $80 plus the $3.12 for the options so I am better off than I would have been selling the stock in this range.  
• If GM closes between $65 and $80 then it will neither be put to me nor called away from me and I'll just pocket the $3.12 as basically "found money".  
• If GM closes between $61.88 and $65 then it WILL BE put to me at $65 but I'll still be better off than I would have been without the options because my effective price is $61.88 ($65 less the $3.12 that I got for selling the options).  
• If GM closes below $61.88 then I am out money because I'll have the share I originally owned plus $3.12 but I'll also have to buy another share at $65 and both shares will be worth <$61.88 each.  

Basically I'm betting against volatility.  

[betarhoalphadelta]

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.

Yeah, I looked at buying OOM puts while selling OOM calls. That limits downside risk because my downside can never be lower than the put, but it's requiring liquidity (eating into the premium I earn on the calls) and that balance against the premium of the call means I'm limiting my upside even further, and not allowing the premium to offset taxes on the upside. And if I sell at the lower price I'm still paying taxes at the sale, which let's say I buy a put at $450 is still roughly $420/share in cap gains, so my effective sale price is actually closer to $345. 

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. 

I don't want to get into naked calls, shorting stocks, or anything like that--at least as a relative newbie. I own the stock so I'd be selling OTM covered calls. And I'm basically (as far as I understand it) not really "using margin" on that. The only possible risks I see:

• Call expires ITM (or goes ITM during the duration of the contract and is called away). Now I've got the premium plus the gain but if the stock absolutely explodes my "risk" is that I haven't captured the upside above the strike price. Given that I might write a call at 790 I'm effectively betting the stock doesn't go above 790. If it does? Ok. I'm just going to have to live with leaving money on the table. I'm still ahead (even less taxes). 
• Stock craters. That's not an options risk... That's a risk of holding any stock. However I don't have to ride it all the way down until the contract expires. As the stock falls, the premium on a 790 call (especially as we're getting closer to expiry) will drop massively as well. So I use some of the premium from the sale to buy out my contract. I give up some premium but I'm now free and clear of the contract so if I decide the stock is going to KEEP falling I can at least exit. 

On an OTM covered call written for a 25% upside strike price, I basically only make the premium if the stock goes up 2%. I mean, on paper my stock is worth 2% more, but that's an unrealized gain so it could go down 2% an hour later. So I don't see how covered calls will have *wild* swings or dramatic risk...

[bayareabadger]

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.

Will be interested how smooth that growth is. Mostly the process of converting investment into paying customers to match said large investment.

It that it won’t end up at that point, but could see some growing pains as that comes together. 

[betarhoalphadelta]

Explaining straddles:

I'll use General Motors (GM) as my example because obviously everyone has heard of GM.  The stock currently is at about $72.50 mid-day, March 13. 

A May call at $80 can currently be sold for $1.64.  NOTE:  Volume in options is LOW so the bid/ask spreads can be LARGE.  Right now the bid is $1.64 and the ask is $2.51.  When you trade stocks you don't need to worry about that because there is so much volume that the bid/ask spread is typically nominal. 

A May Put at $65 can currently be sold for $1.48.  The spread is again large, $1.48 vs $2.01. 

This is all just for example because you usually don't actually sell the May options until the March options expire, then the volume picks up.  Anyway, on with the example:

I own 1 share of worth ~$72.50.  I sell an $80 May Call for $1.64 and a $65 May Put for $1.48.  For those less familiar with Options what that means is:

• The $80 Call means that my GM Share can be called away from me for $80 anytime between now and the third Saturday in May. 
• The $65 Put means that another share of GM can be put to me for $65 anytime between now and the third Saturday in May. 

So in total I've collected $3.12 which means that if GM shares are trading anywhere between $61.88 and $83.12 on May 14 I'm ahead.  More detail:

• If GM closes above $83.12 it WILL BE called away from me at $80 and I'll be worse off than I would have been if I had just kept the stock and sold it when it got there. 
• If GM closes between $80 and $83.12 it WILL BE called away from me at $80 but I got that $80 plus the $3.12 for the options so I am better off than I would have been selling the stock in this range. 
• If GM closes between $65 and $80 then it will neither be put to me nor called away from me and I'll just pocket the $3.12 as basically "found money". 
• If GM closes between $61.88 and $65 then it WILL BE put to me at $65 but I'll still be better off than I would have been without the options because my effective price is $61.88 ($65 less the $3.12 that I got for selling the options). 
• If GM closes below $61.88 then I am out money because I'll have the share I originally owned plus $3.12 but I'll also have to buy another share at $65 and both shares will be worth <$61.88 each. 

Basically I'm betting against volatility. 

Ahh, so you were selling puts too, not buying them. The problem with that, for me...

100 shares of stock is worth $63,300 right now. If I sell a put at 570, that means that if the put exercises I need $57,500 liquidity for each block. The premium of a 790 call and a 570 put is only 121.97, so I'd earn $12,197 (less taxes) which is far lower than my current liquidity. If I write a put at 570 and a call at 790 against my entire position in that stock, I'd have to sell a significant portion of other holdings to buy if the put exercises. And it's on a concentrated position in a stock I want to diversify away from, so I don't necessarily want to own more of it right now. 

[Cincydawg]

You can of course sell say 10 shares at market price, or put in an order above current market.

There isn't anything magic about 100 shares these days, though there used to be.

[medinabuckeye1]

A one possession game with 2 minutes left is about all you could ask for.

[betarhoalphadelta]

Will be interested how smooth that growth is. Mostly the process of converting investment into paying customers to match said large investment.

It that it won’t end up at that point, but could see some growing pains as that comes together.

Note that one of the key things utee said was tech stocks closely associated with AI... The two holdings I have aren't "AI stocks". We just sell the stuff they need to build out these massive data centers, and their demand FAR outstrips supply. 

I'll use the flash (i.e. SSD) industry as an example. When COVID hit, the WFH craze caused a significant demand for SSDs for PCs, chromebooks, tablets, etc. Suddenly people either needed to buy compute devices they didn't have, or needed to pull in the refresh of compute devices they owned but were a bit old. At the same time, the big cloud companies were expecting tremendous demand growth for their services, so they were buying everything they could for datacenters. The market was flying high. 

Well, then we had a supply chain issue. And in a supply chain issue, if you have the components for 95% of a data center, you can't build 95% of a data center--you build 0% until those critical 5% of components become available. But the big companies... Kept on buying. They kept on buying and building up inventory positions they couldn't deploy, thinking the supply chain issues would work themselves out and they'd need the inventory. This was happening all through 2021...

Well, around the middle of 2022, they pretty much all wised up, right about the same time. And they... Just stopped buying. Demand hit the FLOOR. Prices fell. All the NAND flash makers were losing money. They were reducing what they call "wafer starts". NAND flash I think takes about 6 months from wafer start to having finished product. They needed to reduce supply to get into balance. So they cut back significantly, as the major data center customers digested the inventory positions they had. This led to losses, layoffs, and probably the most depressing time I've seen in my industry since the dot com bubble burst. 

The pain lasted through about the end of 2023. 2024 we started to recover, but as you can imagine, producers were gunshy about ramping up production too quickly in case the pain wasn't over. You know, "Fool me once, shame on me. Fool me--you can't get fooled again." Everything normalized, and 2024 was a return to normal. 

Well, starting in 2025, that return to normal went completely the opposite way. To the point where I know people saying that in 35-40+ years in the industry, they've NEVER seen anything like it. ChatGPT changed everything, and now there's absolutely booming demand for GPU, CPU, DRAM, SSD, HDD, networking, land, electricity, physical hardware like data center racks, etc... The capex being spent on data center buildout is enormous. And the industry was NOT ready and didn't build the supply for it. 

So we're in a severe supply shortage across the entire industry. You see this in media if you look at anyone who has tried to build a high performance PC these days... Prices are through the roof. For consumer type equipment, between the 2023 trough and now, prices are at least doubled, but in many cases are 3-4x. The webinar I did a couple weeks back, the company I was doing it with was talking about the prices they'd seen, and 1 year pricing in the enterprise SSD market were up 3x--and prices are still increasing.  

Well, that means that all the companies selling these products are posting revenue, gross margin, earnings, etc numbers that are REALLY good. And it's why my two holdings have 52 week lows of $28.83 and $27.89, while trading at 275.51 and 653.79, respectively, right now. 

Most of the industry doesn't see supply catching up at least through 2027, and possibly through 2028. 

I'm not going to predict the future of these stocks, and nothing I say should be used to do so... I don't know what the future holds. But that's what utee is talking about... Not what the AI stocks themselves are doing, but what's happened to the companies building the stuff they need to continue this massive AI data center buildout. 

[FearlessF]

A one possession game with 2 minutes left is about all you could ask for.

do you have $$$ on this game?

[bayareabadger]

Note that one of the key things utee said was tech stocks closely associated with AI... The two holdings I have aren't "AI stocks". We just sell the stuff they need to build out these massive data centers, and their demand FAR outstrips supply.

I'll use the flash (i.e. SSD) industry as an example. When COVID hit, the WFH craze caused a significant demand for SSDs for PCs, chromebooks, tablets, etc. Suddenly people either needed to buy compute devices they didn't have, or needed to pull in the refresh of compute devices they owned but were a bit old. At the same time, the big cloud companies were expecting tremendous demand growth for their services, so they were buying everything they could for datacenters. The market was flying high.

Well, then we had a supply chain issue. And in a supply chain issue, if you have the components for 95% of a data center, you can't build 95% of a data center--you build 0% until those critical 5% of components become available. But the big companies... Kept on buying. They kept on buying and building up inventory positions they couldn't deploy, thinking the supply chain issues would work themselves out and they'd need the inventory. This was happening all through 2021...

Well, around the middle of 2022, they pretty much all wised up, right about the same time. And they... Just stopped buying. Demand hit the FLOOR. Prices fell. All the NAND flash makers were losing money. They were reducing what they call "wafer starts". NAND flash I think takes about 6 months from wafer start to having finished product. They needed to reduce supply to get into balance. So they cut back significantly, as the major data center customers digested the inventory positions they had. This led to losses, layoffs, and probably the most depressing time I've seen in my industry since the dot com bubble burst.

The pain lasted through about the end of 2023. 2024 we started to recover, but as you can imagine, producers were gunshy about ramping up production too quickly in case the pain wasn't over. You know, "Fool me once, shame on me. Fool me--you can't get fooled again." Everything normalized, and 2024 was a return to normal.

Well, starting in 2025, that return to normal went completely the opposite way. To the point where I know people saying that in 35-40+ years in the industry, they've NEVER seen anything like it. ChatGPT changed everything, and now there's absolutely booming demand for GPU, CPU, DRAM, SSD, HDD, networking, land, electricity, physical hardware like data center racks, etc... The capex being spent on data center buildout is enormous. And the industry was NOT ready and didn't build the supply for it.

So we're in a severe supply shortage across the entire industry. You see this in media if you look at anyone who has tried to build a high performance PC these days... Prices are through the roof. For consumer type equipment, between the 2023 trough and now, prices are at least doubled, but in many cases are 3-4x. The webinar I did a couple weeks back, the company I was doing it with was talking about the prices they'd seen, and 1 year pricing in the enterprise SSD market were up 3x--and prices are still increasing. 

Well, that means that all the companies selling these products are posting revenue, gross margin, earnings, etc numbers that are REALLY good. And it's why my two holdings have 52 week lows of $28.83 and $27.89, while trading at 275.51 and 653.79, respectively, right now.

Most of the industry doesn't see supply catching up at least through 2027, and possibly through 2028.

I'm not going to predict the future of these stocks, and nothing I say should be used to do so... I don't know what the future holds. But that's what utee is talking about... Not what the AI stocks themselves are doing, but what's happened to the companies building the stuff they need to continue this massive AI data center buildout.

I appreciate the long explanation, although I read the top and thought, “Ahhh, he means in a gold rush, don’t just sponsor mining, also invest in picks and shovels.”

That reading makes more sense.

[utee94]

Note that one of the key things utee said was tech stocks closely associated with AI... The two holdings I have aren't "AI stocks". We just sell the stuff they need to build out these massive data centers, and their demand FAR outstrips supply.

I'll use the flash (i.e. SSD) industry as an example. When COVID hit, the WFH craze caused a significant demand for SSDs for PCs, chromebooks, tablets, etc. Suddenly people either needed to buy compute devices they didn't have, or needed to pull in the refresh of compute devices they owned but were a bit old. At the same time, the big cloud companies were expecting tremendous demand growth for their services, so they were buying everything they could for datacenters. The market was flying high.

Well, then we had a supply chain issue. And in a supply chain issue, if you have the components for 95% of a data center, you can't build 95% of a data center--you build 0% until those critical 5% of components become available. But the big companies... Kept on buying. They kept on buying and building up inventory positions they couldn't deploy, thinking the supply chain issues would work themselves out and they'd need the inventory. This was happening all through 2021...

Well, around the middle of 2022, they pretty much all wised up, right about the same time. And they... Just stopped buying. Demand hit the FLOOR. Prices fell. All the NAND flash makers were losing money. They were reducing what they call "wafer starts". NAND flash I think takes about 6 months from wafer start to having finished product. They needed to reduce supply to get into balance. So they cut back significantly, as the major data center customers digested the inventory positions they had. This led to losses, layoffs, and probably the most depressing time I've seen in my industry since the dot com bubble burst.

The pain lasted through about the end of 2023. 2024 we started to recover, but as you can imagine, producers were gunshy about ramping up production too quickly in case the pain wasn't over. You know, "Fool me once, shame on me. Fool me--you can't get fooled again." Everything normalized, and 2024 was a return to normal.

Well, starting in 2025, that return to normal went completely the opposite way. To the point where I know people saying that in 35-40+ years in the industry, they've NEVER seen anything like it. ChatGPT changed everything, and now there's absolutely booming demand for GPU, CPU, DRAM, SSD, HDD, networking, land, electricity, physical hardware like data center racks, etc... The capex being spent on data center buildout is enormous. And the industry was NOT ready and didn't build the supply for it.

So we're in a severe supply shortage across the entire industry. You see this in media if you look at anyone who has tried to build a high performance PC these days... Prices are through the roof. For consumer type equipment, between the 2023 trough and now, prices are at least doubled, but in many cases are 3-4x. The webinar I did a couple weeks back, the company I was doing it with was talking about the prices they'd seen, and 1 year pricing in the enterprise SSD market were up 3x--and prices are still increasing. 

Well, that means that all the companies selling these products are posting revenue, gross margin, earnings, etc numbers that are REALLY good. And it's why my two holdings have 52 week lows of $28.83 and $27.89, while trading at 275.51 and 653.79, respectively, right now.

Most of the industry doesn't see supply catching up at least through 2027, and possibly through 2028.

I'm not going to predict the future of these stocks, and nothing I say should be used to do so... I don't know what the future holds. But that's what utee is talking about... Not what the AI stocks themselves are doing, but what's happened to the companies building the stuff they need to continue this massive AI data center buildout.

As Fonzie would say, correctamundo!  It's like you know me and my thoughts better than I know myself.