[Dmoney]

No real hard and fast rule, but I generally write the puts on stocks that I wouldn't mind owning at the strike price.
I aim for 10%+ annualized return based on the premium, but like to get substantially more if the underlying is riskier.
I also try not to chase stocks higher with the puts that I write, so if I look at a stock and say I like it at $60, I try and avoid chasing it upwards.
For example, I've been selling puts on Telus off and on, but if it's overvalued in my opinion, I stop selling.
Unfortunately in the case of Telus, I would have been much better off buying the stock at $29 when it looked like Verizon was coming in. It's now over $37, far more than the upside I realized from selling puts.

But that's life, and my strategy will never be perfect, and is still very much in the early/trial stages.

Overall strategy is sell puts until I get assigned at a price that I like, then sell calls until I get stock called away at price that I like. Some bumps along the way, but hopefully over time it pays off.

 

[james4beach]

I'm still concerned about your personal leverage. Institutional investors gamble like this too, but the difference is that (unlike you) they don't put their own money, nor their homes on the line.

Obviously I'm oversimplifying here as I don't know the equity composition of your investment accounts, but I strongly suggest you model your risk carefully so that you can input 'what if' scenarios of index declines, and see the worst case effect on your portfolio.

Assuming your investments are 100% exposed to the stock index, I calculate that -29% drop in the market and your home would wipe you out and destroy your life. These are feasible numbers for actual declines, in fact 29% decline for both is more optimistic than what actually happened in the USA.

	Current   Stress test:
                  -29% decline

cash	$14,418        $14,418
stocks	$204,837      $145,434
house	$603,000      $428,130
		
debt	-$593,317    -$593,317

Net	$228,938       -$5,335

In the 2007-2009 period, the stock index fell -54%. American home prices fell 35%. Some other countries saw worse declines; home prices in Spain and Ireland fell more like 50%.

At the very least, I think you should build an accurate stress test model using American declines from recent history (stocks -54%, homes -35%). I would hate to see someone with nearly a quarter million$ in net worth, have it all wiped out due to excessive leverage.

 

[Dmoney]

Have to agree with you James. Leverage is extremely high, though my only concern is with the house.
My investment account is pretty well positioned, though a 50% decline across the board would force some assignments and leave me exposed to some margin requirements (nothing excessive, but still concerning).

Despite the significant leverage on the house (mortgage $400K, HELOC $200K), I'm not overly concerned about this debt, as even in the event of a housing crash, as long as I maintain my employment, it is well affordable. Because the cost of debt is so low (just re-fi'd at 2.3%, HELOC at 3%) I have not put much effort into paying down house, and in fact have maxed out leverage on it. However, if it came down to it, in a pinch I could put about $200K down in one shot and $50-60K/year just from savings.

My much bigger overall concern is job security, of which there is very little relatively speaking. If I were to lose my job, payments would be close to covered by portfolio income, and I could cover the rest with any sort of entry level job (<$45K/year). If I were to lose my job at the same time as the market tanks, I would be in a rough position. No doubt the worst case scenario could wipe me out, and as such my focus is to plow all my savings into my investment account, reduce leverage in that account and maximize income from investments so as to counteract the impact of any income loss.

Overall, my approach is to take a bit more risk while young, to hopefully position myself well financially by ~30 yrs of age. Ideally, by 30 I will have either the house close to paid off, or the capacity to do it with a substantial investment portfolio.

Appreciate the concern, and the risk is definitely lingering in my mind.

 

[james4beach]

Dmoney, glad to see you are considering these factors

 

[Dmoney]

Couple other factors that give me a bit of comfort... girlfriend contributes more than a quarter of total monthly housing costs (mortgage+LoC+tax+utilities+maintenance+misc.= <$3,000) and if needed, I could easily rent out the basement, which was originally the intention. All plumbing etc. is present for a rental suite, would need about $5,000 investment to make $800-1,000 monthly rent.

So worst case I still think I scrape by intact and wait for a recovery.

 

[techcrium]

Dmoney, you are doing very well. I thought I was doing well with just under 100k at 26 but you've blown me away.

Can I ask, with your quarter mil networth, how much was principle and how much was gain?

Also, what is your income if I may ask such that you are able to afford a 600K home? It must be in the high five figures for both you and your gf?

 

[Causalien]

Couple other factors that give me a bit of comfort... girlfriend contributes more than a quarter of total monthly housing costs (mortgage+LoC+tax+utilities+maintenance+misc.= <$3,000) and if needed, I could easily rent out the basement, which was originally the intention. All plumbing etc. is present for a rental suite, would need about $5,000 investment to make $800-1,000 monthly rent.

So worst case I still think I scrape by intact and wait for a recovery.

Just want to point out that it takes time as well.

In my experience and on average, for any new venture targeting about $2000 per month income, it takes 6 months to build. So for a $800~$1000, I'd factor in 3 months of time. Just a rule of thumb used for estimation.

 

[Dmoney]

Can I ask, with your quarter mil networth, how much was principle and how much was gain?

Also, what is your income if I may ask such that you are able to afford a 600K home? It must be in the high five figures for both you and your gf?

I'm not actually sure how much was gain vs. savings. I would have to take a pretty detailed look at all transactions completed over the past three or four years to get a perfect picture.

Looking at what's easily available in my excel file:
~$31,000 from option writing (net - reflects impact of any options I've had to buy back)
~$10,000 from dividends (net - income offset by any margin interest)
~$7,500 capital gains (this one not positive on - didn't look through all transactions)

That's only about $50K which leaves $180K - I think there must be some transactions that I'm not accounting for.

My current income is $125-135K, girlfriend makes ~$45K (I think)
We keep finances mostly separate, with the exception of ~$800/month for rent/expenses that she forks over.
House was bought on just my salary... shows you how willing banks are to lend.

 

[Dmoney]

Just want to point out that it takes time as well.

In my experience and on average, for any new venture targeting about $2000 per month income, it takes 6 months to build. So for a $800~$1000, I'd factor in 3 months of time. Just a rule of thumb used for estimation.

Definitely would figure it would take a few months to get it all set up. Not to mention that it would take a lot out of me to give up my man cave.

 

[Dmoney]

Monthly update:

Three great months in a row!!!! Net worth at $246K, beat my year-end goal of $235K. Up $17K this month as I received my bonus which was a little higher than I had been expecting. +7.5% for the month.


Overall net worth up 7.5% (+$17,229) to $246,168

Assets:
Cash: $6,500 (-$7,900: put nearly full cash balance on mortgage)
Unregistered: $160,000 (+$275, +0.2%: some ups some downs)
TFSA: $31,500 (-$426 - XSR and LIQ down a little)
ESPP: $12,600 (-$576, -4.4%) - the usual $500 contribution but stock down quite a bit
House: $603,000 - (Acquisition cost)

Liabilities:
Mortgage: $567,400 (-$25,875 - had a lot of cash from savings and bonus over the last little while. Decided to pay down a lump sum as I don't have any brilliant investing ideas and I have a lot of cash already sitting idle in brokerage account)

Awesome month, thanks to bonus, but otherwise mostly forgettable. Passed my year-end NW goal of $235K which is awesome, though didn't get any help from the markets. Awful month of divs ($142) due to timing, saved by option income of $1,700+.

Some of my options positions are in the money in December, so I will need to decide what to do (TLM covered calls). I can probably roll the TLM calls down the road, which may be most profitable, or I can allow exercise and sell the puts. Trading at $12.43 and calls are at $12 and $13, so I may yet dodge that bullet. Will probably stay the course for now but monitoring closely.

 

[peterk]

Wow that's awesome! In the future when I get into options I'm going to have to read over your posts very carefully.

Monthly update:
House: $603,000 - (Acquisition cost)

Liabilities:
Mortgage: $567,400 (-$25,875 - had a lot of cash from savings and bonus over the last little while. Decided to pay down a lump sum as I don't have any brilliant investing ideas

Maybe it was explained in an earlier post, but I'm confused by this. It sounds like your mortgages was $593,000 just before the lump sum payment. Did you only have <10k down on a 600k house?? Am I misinterpreting this?

 

[My Own Advisor]

"Awesome month, thanks to bonus, but otherwise mostly forgettable. Passed my year-end NW goal of $235K which is awesome, though didn't get any help from the markets."

You're doing great to have NW >$200k for a young professional. You're well on your way to financial freedom, especially if you keep up that rate.

 

[Dmoney]

Maybe it was explained in an earlier post, but I'm confused by this. It sounds like your mortgages was $593,000 just before the lump sum payment. Did you only have <10k down on a 600k house?? Am I misinterpreting this?

Essentially 0 down :hopelessness:
Was able to use savings/investments as collateral on a line of credit ($200K) which was counted as a downpayment with the balance on a mortgage.
Figured that I was able to do much better investing the downpayment than the 2.1-2.3% interest rate on my mortgage.
So far, so good, but I want to lower risk over time as well, so paying it down a little faster now.

 

[Dmoney]

You're doing great to have NW >$200k for a young professional. You're well on your way to financial freedom, especially if you keep up that rate.

Thanks. Got to keep the rate while I still have the energy to make money, and have very few expenses.

 

[techcrium]

Essentially 0 down :hopelessness:
Was able to use savings/investments as collateral on a line of credit ($200K) which was counted as a downpayment with the balance on a mortgage.
Figured that I was able to do much better investing the downpayment than the 2.1-2.3% interest rate on my mortgage.
So far, so good, but I want to lower risk over time as well, so paying it down a little faster now.

DMoney, correct me if I am wrong but

You have a 200K line of credit against your stocks/etfs which probably has interest of 2-3%.

And then you are using that 200K to secure another 400K loan (600K house) which probably has interest of 2.1-2.3%

So your total interest is 4-5% right?

 

[Dmoney]

$200K @ 3.5%
$400K @ 2.3%

Total all-in cost of debt ~3% roughly on ~$600K

The $200K is secured by equity, so the interest rate doesn't stack on that.

The one thing I have to explore is if I can deduct the interest on the LoC. Is it an investment loan? If it's backed by an investment portfolio, would it be considered borrowing to invest?
Could save an extra few thousand a year.

 

[Dmoney]

A few trades to ring in the new year:

Few options expired in the money so I had 2000 FTT called at $25 ($25 purchase price) and 2000 TLM called at $12 ($13 purchase price).

FTT is currently trading at $27.00 - so I gave up $4,000 of profit while holding the stock. However, looking back at all my option income ($6,800) it turns out that the call/put writing came out ahead.
For TLM, I bought at $13 and sold at $12, for a $2000 loss. Total income from TLM put/call writing has been $8,500 to date, though that is on 3,000 shares, of which I still have 1,000.

Overall on these two positions, I seem to have come out slightly ahead of a straight buy/hold approach, but it's still a short timeframe.

Today I sold 20 TLM puts ($12 strike) for $0.35
10 TLM covered call ($13 strike) for $0.40
20 FTT puts ($26 strike) for $0.65
All March strike dates.

Next update to come in 2014. Happy New Year!

 

[Canadian]

The one thing I have to explore is if I can deduct the interest on the LoC. Is it an investment loan? If it's backed by an investment portfolio, would it be considered borrowing to invest?
Could save an extra few thousand a year.

If all your stocks pay dividends then you can deduct the interest charged on funds used to purchase the stocks [direct use]. If only some do then it gets a bit trickier because the question comes down to what stocks were purchased for dividend income vs what stocks were purchased for the purpose of capital appreciation - only the former can have interest deducted against the income produced.

 

[Dmoney]

Monthly update:

Another good month, net worth at $257K, up nearly $11K or 4.4% to wrap up the year.


Overall net worth up 4.4% (+$10,739) to $256,907

Assets:
Cash: $9,800 (+$3,700)
Unregistered: $163,724 (+$3,703, +2.3%, good month for dividends and closed some options positions)
TFSA: $31,749 (+$235 - XSR back up a bit)
ESPP: $15,029 (+$2,454, +19.5%) - Company stock up a good bit, plus the usual $500 contribution
House: $603,000 - (Acquisition cost)

Liabilities:
Mortgage: $566,411 (-$1,030)

New record month for dividends ($1,014) and overall portfolio income was pretty strong ($2,365). Dividends won't be repeating as FTT and TLM contributed over $500 this month and both have been sold.

Total annual dividend income was $5,540 in 2013, option income was $15,930. Total portfolio income was just shy of $21,500.
Nice uptrend in overall portfolio income as time goes on, hopefully I can keep that going.
After TLM and FTT shares got called, I have a substantial cash balance, and dividends will be taking a hit. Over time I think I want to increase dividend income, which may mean allocating part of the portfolio to buy/hold rather than the covered call strategy.
Will wait and see as thus far the options have been working out really well for me.

 

[nobleea]

If all your stocks pay dividends then you can deduct the interest charged on funds used to purchase the stocks [direct use]. If only some do then it gets a bit trickier because the question comes down to what stocks were purchased for dividend income vs what stocks were purchased for the purpose of capital appreciation - only the former can have interest deducted against the income produced.

Not true. There is only the requirement that the stock COULD pay dividends in the future. They don't have to pay it now. So unless the stock structure is set up that it forbids dividend payments, then any stock is eligible.