Time to be greedy - but how?

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Topic Author
HomeBarista
Posts: 14
Joined: Sat Sep 29, 2018 7:16 pm

Time to be greedy - but how?

Post by HomeBarista » Fri Mar 13, 2020 4:31 am

I'm 35, my AA is 90/10, and wish I had more cash. I think I'll soon go to 100% stocks. If it keeps dropping I would like to go further with leverage, options, etc. I believe in the resiliency of our society and economy.

For those of you in the same boat, what strategies and tactics do you have in mind? How are you preparing?

My thoughts so far are:
1. Axe my emergency fund to 1 month (it's part of the 10%); I'm single.
2. Use leverage - I've opened an Interactive Brokers account (lowest interest for margin accounts, around 3%), I'm learning the intricacies of margin accounts, as well as IB's not so friendly interfaces. I'm contemplating transferring my non-sheltered accounts to them to serve as a collateral.
3. Options - probably 6 month to 2 year calls if I can find reasonable prices - I'm learning the details around options trading, taxation, how they interact with margin accounts, etc.

What are you doing? And do you have any suggestions for me re. how to pull this off in a reasonable way?

raveon
Posts: 195
Joined: Mon Dec 10, 2007 10:32 pm

Re: Time to be greedy - but how?

Post by raveon » Fri Mar 13, 2020 4:41 am

Please don't do it. Margin account trading is very risky.

It is good to have >6 month emergency fund. If you look at the Vanguard site, you can compare the returns/risk for a 70/30, 90/10, 100/0 portfolio. You can capture the majority of a market's return with a 70/30 portfolio with considerably less risk.

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watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Time to be greedy - but how?

Post by watchnerd » Fri Mar 13, 2020 4:57 am

I'm not sure "time to be greedy" should be interpreted as "time to increase my financial fragility."

Most of the moves you're proposing are increasing fragility.

Perhaps not something you want to do if a recession is looming.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

Caduceus
Posts: 2728
Joined: Mon Sep 17, 2012 1:47 am

Re: Time to be greedy - but how?

Post by Caduceus » Fri Mar 13, 2020 6:29 am

I would not personally use a margin account. I don't like the idea of constantly monitoring accounts to see if I'm near a margin call, and the type of financial resources I'd have to keep to make sure I don't get washed out by margin calls means I'm really not as leveraged as I would be anyway.

I had an earlier thread about this, but here's what I have done (just yesterday, actually)

I am a fairly young investor, and a very aggressive saver - I save more than 80% of my income since my boyfriend, who's an investment banker, refuses to let me pay any rent (we're getting married soon so everything that is mine will be his anyway)

Although I'm not excited about the overall prices of the market, even after the 30% drop, I like the prices of some individual stocks at these levels. My way of leveraging up is to buy enough call options to cover the number of shares I would be able to buy at the current price, as my income rolls in for two years. These are longer dated options expiring Jan 2022.

So, for example, I'd be happy to buy $250,000 worth of stock right now at the current price if I could. I entered on Friday to buy call options that together with the premium is only slightly higher than the current price. The total nominal value is $250,000 and my option premium cost around $34,000. As my income rolls in over the months and years, I will adjust the option position downwards.

So I'm not using the options as a short-term speculative bet that the stock I want to buy will rise in price. I don't know if it will. I'm buying the options as a hedge, to lock in the price that I want, and am happy to pay the option premium as the cost of purchasing this insurance. I'm only willing to do this because the current price is a third of what I think the stock is truly worth (its intrinsic value). If the stock were not trading so much lower than its true value, I would never think about executing something like this.

The max I can lose is the $34,000, which I've already paid. So, no margin. No cash flow issues. No nothing. Between now and 2022, if prices of the stock remain low, I'll lose part or all of the $34,000 I've paid, but I'll be able to invest $250,000 into the stock at the price I want, or even lower. If the price of the stock goes up, I'll pay a higher price per share, but the call option profits will reduce my cost basis. Essentially, I've locked in a particular price, and now have the freedom to execute my buy orders as and when I'm paid.

I've been wanting to do this for some time now, but my call options were not filled on Monday when I tried. Yesterday, at the lowest point of the market, for about 15 minutes, the option price suddenly went below my limit order and a counterparty took my bid.

ARoseByAnyOtherName
Posts: 1000
Joined: Wed Apr 26, 2017 12:03 am

Re: Time to be greedy - but how?

Post by ARoseByAnyOtherName » Fri Mar 13, 2020 6:37 am

HomeBarista wrote:
Fri Mar 13, 2020 4:31 am
I'm 35, my AA is 90/10, and wish I had more cash. I think I'll soon go to 100% stocks. If it keeps dropping I would like to go further with leverage, options, etc. I believe in the resiliency of our society and economy.

For those of you in the same boat, what strategies and tactics do you have in mind? How are you preparing?

My thoughts so far are:
1. Axe my emergency fund to 1 month (it's part of the 10%); I'm single.
2. Use leverage - I've opened an Interactive Brokers account (lowest interest for margin accounts, around 3%), I'm learning the intricacies of margin accounts, as well as IB's not so friendly interfaces. I'm contemplating transferring my non-sheltered accounts to them to serve as a collateral.
3. Options - probably 6 month to 2 year calls if I can find reasonable prices - I'm learning the details around options trading, taxation, how they interact with margin accounts, etc.

What are you doing? And do you have any suggestions for me re. how to pull this off in a reasonable way?
Using leverage and axing the emergency fund are bad ideas in general, but especially now.

If anything, make sure your emergency fund is sufficient, and beef it up slowly with additional savings if needed.

Do not use margin. The situation is extremely volatile and you could easily suffer severe losses.

Do not experiment with options especially if you are still learning. If you must, extremely small dollar amounts only.

RobLyons
Posts: 736
Joined: Tue Oct 31, 2017 12:55 pm

Re: Time to be greedy - but how?

Post by RobLyons » Fri Mar 13, 2020 6:45 am

I would do none of the above and instead advise you to work on increasing your income, therefore increasing the amount you can contribute to investments. This is my approach. I'm working extra, increasing weekly contributions, and with every 10% drop I buy another $1,000 VTSAX with the extra income.

Disclaimer: I also relocated about 1 month of my EF from my local checking account to my Vanguard Federal Money Market Fund. It remains part of my EF, available if needed in 2-3 business days but also serves as a means to buy more VTSAX sales if I decide to do so!
"Great parenting sets the foundation for a better world"

Topic Author
HomeBarista
Posts: 14
Joined: Sat Sep 29, 2018 7:16 pm

Re: Time to be greedy - but how?

Post by HomeBarista » Fri Mar 13, 2020 2:32 pm

Thank you everyone for the wise suggestions!
Caduceus wrote:
Fri Mar 13, 2020 6:29 am
I would not personally use a margin account. I don't like the idea of constantly monitoring accounts to see if I'm near a margin call, and the type of financial resources I'd have to keep to make sure I don't get washed out by margin calls means I'm really not as leveraged as I would be anyway.

I had an earlier thread about this, but here's what I have done (just yesterday, actually)

I am a fairly young investor, and a very aggressive saver - I save more than 80% of my income since my boyfriend, who's an investment banker, refuses to let me pay any rent (we're getting married soon so everything that is mine will be his anyway)

Although I'm not excited about the overall prices of the market, even after the 30% drop, I like the prices of some individual stocks at these levels. My way of leveraging up is to buy enough call options to cover the number of shares I would be able to buy at the current price, as my income rolls in for two years. These are longer dated options expiring Jan 2022.

So, for example, I'd be happy to buy $250,000 worth of stock right now at the current price if I could. I entered on Friday to buy call options that together with the premium is only slightly higher than the current price. The total nominal value is $250,000 and my option premium cost around $34,000. As my income rolls in over the months and years, I will adjust the option position downwards.

So I'm not using the options as a short-term speculative bet that the stock I want to buy will rise in price. I don't know if it will. I'm buying the options as a hedge, to lock in the price that I want, and am happy to pay the option premium as the cost of purchasing this insurance. I'm only willing to do this because the current price is a third of what I think the stock is truly worth (its intrinsic value). If the stock were not trading so much lower than its true value, I would never think about executing something like this.

The max I can lose is the $34,000, which I've already paid. So, no margin. No cash flow issues. No nothing. Between now and 2022, if prices of the stock remain low, I'll lose part or all of the $34,000 I've paid, but I'll be able to invest $250,000 into the stock at the price I want, or even lower. If the price of the stock goes up, I'll pay a higher price per share, but the call option profits will reduce my cost basis. Essentially, I've locked in a particular price, and now have the freedom to execute my buy orders as and when I'm paid.

I've been wanting to do this for some time now, but my call options were not filled on Monday when I tried. Yesterday, at the lowest point of the market, for about 15 minutes, the option price suddenly went below my limit order and a counterparty took my bid.
Caduceus, what you are suggesting is very helpful. Same I you, I don't have the appetite for a lot of margin risk so long calls up to my earning power for the next 1-2 years may be the approach I take. My only worry is that the slightly out of the money option premiums are rather high in comparison to the stock prices and in comparison to a 3% margin rate. Could you share a little more about what premium/price did you get and for what companies/options? Maybe it would give me some ideas..
RobLyons wrote:
Fri Mar 13, 2020 6:45 am
Disclaimer: I also relocated about 1 month of my EF from my local checking account to my Vanguard Federal Money Market Fund. It remains part of my EF, available if needed in 2-3 business days but also serves as a means to buy more VTSAX sales if I decide to do so!
@RobLyons - depending on your state tax rate, you might want to consider doing this with your almost entire emergency fund, as the federal MM is free from local taxes. This is assuming you still consider FMM to be risk free :).

Re. opportunities to increase my earning power - yes, actively looking into it.

As to the good advice to keep a little more for emergency, yes, I'll probably follow this up to avoid the trap of bad returns in bad times.

BoggledHead2
Posts: 560
Joined: Tue Jun 12, 2018 6:50 pm

Re: Time to be greedy - but how?

Post by BoggledHead2 » Fri Mar 13, 2020 2:37 pm

I’m all about buying this downturn

Even I refuse to go lower than my 6 month emergency fund

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