Yes, that's what I am trying to do. I like linked GIC, but banks are generally very vague on the terms (like the MER, etc...), so I want to do it myself.Yeah, at a high-level what you're describing is a do-it-yourself index linked GIC basically.
I'd compare it to an index linked GIC as opposed to the Couch Potato portfolio as the time horizon is different (5 years vs. indefinite) and the risk profile is different as well.
are you nuts!Has anybody tried to do the couch potato using options?
For example, let's say somebody got $100,000. Instead of doing couch potato using the full amount. He put $80,000 in a GIC account earning 4% a year. He buy call options using the other $20,000 to get the leverage. The obvious advantage is that he would have minimum $100,000 after 5 years from the GIC. What other Pro and Cons are there?
What should this be implemented?
Sorry, I am not sure I understand. Let's say I buy SPY's option at strike price of 85. The price was 15.20/share yesterday I think, so I can afford 1300 shares.are you nuts!
The $20k buying call options may be a money throw away and 5-years down the road that $80k GIC may not have the same worth because of inflation & probably under the $100k expected, more like $90k
The $20k is sure gamble if you were to buy options, whether they are LEAPS in which the the time value will kill you if you call it wrong & unless of course you really lucked out, or if you were to continue to buy ATM or OTM short options. Simply buying call options or put options is a pure gamble.
You could consider buying equal amount of calls and puts if you knew for sure that a pop or sink would happen and when to exit the contracts.
The other option is to do calendar spreads
On the $20k if you want to get a close to zero risk and have a return, why not for example buy a Canadian bank stock (BMO as an example) option the stock in a LEAP out of the money, this way you would get some premium option money plus quarterly dividends, then if the stock pops you have an added gain
BMO at todays price is paying approximately 8% dividend, along with that you could sell a CC 2011 LEAP to get you at least an added approx 4% per year in total in the option money
Correct. However, inflation will affect anything. Therefore buy and hold is not superior in this perspective.I suppose -
You said putting $80k into a 4% GIC for 5-years, would this not net you $16k in interest for a total of $96k.
Taking 2%/yr for inflation would that not leave you with something around $90k in real value, even without the tax considerations
Again, that's correct. However, 100 over 3 years is about 5% annual growth, so not unrealistic. As I said, if the price is between 85 and 100, the option would perform worse than buy and hold, but not by much.Using the $20k as gambling money (which I still say is nuts), you proposed buying the SPY $85 call DEC2011 (in $US), assuming the option money is as stated at $15.20, would the stock not need to be at approx $100 at contract expiry date to get you even money?
I also think consideration to the intrinsic value should taken into consideration when buying the long call option
Need to learn more about this, good discussion
I still dont see itAgain, that's correct. However, 100 over 3 years is about 5% annual growth, so not unrealistic. As I said, if the price is between 85 and 100, the option would perform worse than buy and hold, but not by much.
Those are just rough numbers. I think 82193 is the number to reach 100K.I still dont see it
The $80k in a 4% GIC for 5-years grows to only $96k
Using your 'what-if' supposes the $20k spent on buying SPY $85 call (you paid the $15.20 quoted earlier) & assuming the stock does reach $100 mark in 5-years - then you basically have a breakeven by collecting the $15/contract on expiry
Unless I am totally missing this, could you explain how you get 5% per year in this case, does it not work out that the $96k + the $15k = $111k which over 5-years is something less than 2.5% per year return. When you take into account inflation, any tax on the GIC as well as any brokerage fees the net result is somewhere near or below zero return
so instead of buying calls, why not just buy the stock at say $85 & holdThose are just rough numbers. I think 82193 is the number to reach 100K.
I meant that the S&P needs about 5% growth each year to reach 100, which is very realistic. Anything above that, I would be making profits comparing to buy and hold.
Because the downside risk is very great. I am currently in buy and hold mode, I am wondering whether using options will be a better route.so instead of buying calls, why not just buy the stock at say $85 & hold
Or you could buy SPY & sell a long covered call ATM or OTM if you believe the S&P will grow 5% per-year.
If you are just buying the long SPY $85 call ATM, then its likely the time decay factor will kill you if it does not reach $100 or you have no plans to sell the contract prior to expiry should the thing start to start to swing around
For example, as you said up thread, if you bought the $85 call option at $15.20 today and the stock popped within the next 30 -180-days giving rise to the increase in the option value to say $20, then why would you not simply sell the contract to close the position?
what $6500, I thought you said $20k or something close to that?I generally disregard short term positions. What am I going to do with the $6500? I probably would still buy the call option again. I am not trying to time the market
