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Discussion Starter #1
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?
 

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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.
 

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Discussion Starter #3
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.
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.

Is there a way to extend it to indefinite time horizon? For example, cash the options and then buy more for the next 5 years?

What would be the main risks? Stocks move sideways for 5 years?
 

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I suppose you could keep going with the same strategy every 5 years (or whenever). However, the usual risks associated with options apply.

Be careful to not let the 100k guaranteed in 5 years to cloud your risk tolerance though. Think about your main objective.

- Is this 100k part of the equity in your target asset allocation? Or is your target AA only to have 20k allocated to equities?

- If you're only looking for 20% exposure to equities, buying 20k of call options and buying 20k of an index ETF are really different things

I guess the old saying applies, no risk, no return
 

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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?
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
 

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Discussion Starter #6
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
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.

Here are the scenarios after 5 years:

Price drops to 60. I lose the 20K, but my 80K would grow to 100K, so I don't lose anything. If I had bought SPY, I'd be out 27K.

Price stays at 85. I lose the 20K, so I still end up with 100K, which is the same as if I bought SPY.

Price goes up to 120. The options should be worth $35. I would be up about 45K. If I had bought SPY, I'd be up 41K, about the same.

Therefore, comparing to buy and hold, I avoid the downside danger, but get about the same return on the upside. The only time I will be losing is when the price stays around 85. By my calculation, I would be worse off when the price is between 85 and 100. However, the losses would not be significant (2.5K maximum) and the chances are slim.

Yes, I would be losing the dividends. I didn't think about that. Not much I can do there.

Buying BMO and sell call options (is that what you meant) would make me open to massive downside risks. Dividends can be cut. It also limits my upside potential. It's still a good strategy, but I am not sure it's necessarily better than buy and hold in the long run.
 

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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

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
 

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Discussion Starter #8
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
Correct. However, inflation will affect anything. Therefore buy and hold is not superior in this perspective.

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
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.
 

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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.
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
 

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Discussion Starter #10
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
Those 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.
 

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Those 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.
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?
 

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Discussion Starter #12
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?
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.

I don't think it will kill me. Maximum loss would be $2-3K.

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.
 

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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
what $6500, I thought you said $20k or something close to that?

On timing the market, I dont know too much about that & would like to see how its possible not to lose the initial $20k speculative gambling money, and how you expect to make money just buying the call options?

If you want to buy options that is your decision, however, I still do not see how you'd make money on long calls ATM, unless (the way I see it) you were timing the market and were buying the calls as a trading vehicle or to hopefully acquire SPY at some point during the hold period should it pop way over $100 before you get any benefit.

Othewise it would be a pure speculative gamble in my opionion
 
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