options trading in IB Canada RRSP and TFSA accounts
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Written by Jin Won Choi on Oct. Last update on Oct. To enter for this year, please follow this link. Note that this is just for my own personal account, not me and my wife's combined. In this episode, I'll explain why I've recently bought some more put options on oil and gas companies, despite the fact that their prices had already fallen. During the same month, the TSX Options trading tfsa account went down by 4. Given that my portfolio has roughly 3 times as many U.
Therefore, I outperformed the benchmark in September. Each Premium Portfolio consist of about a dozen individual stocks. This is different from regular portfolios where the vast majority consist of ETFs. I still have a couple of thousand dollars worth of a penny stock in my TFSA, and the rest is invested in put options. I no longer hold XSB. Because of my penny stocks and put options, my TFSA's performance doesn't perfectly track Premium Portfolio 2, which went down by 2.
I will continue to hold penny stocks and options, but I'll hold them in my other accounts. Premium Portfolio 2 went down primarily because of its oil and gas stocks.
That said, the oil and gas stocks in the premium options trading tfsa account have been hit harder than others for various reasons, which I don't want to get into right now. But for now, let me just say that I know those reasons and I have good reasons of my own for continuing to hold them. As an aside, Premium Portfolio 3 fared even worse and went down by 4. As the riskiest model portfolio on this site, we should continue to expect the portfolio to move up and down by greater degree than the overall market.
As a value investor, I normally like to buy stocks when they go down in price. However, in the past month, I bought some more put options on oil and gas companies, which basically amounted to options trading tfsa account against them.
For an easy explanation on put options, you can see my article on this here. In options trading tfsa account article, I will explain why I've been making such a bet that seems contrary to my principles.
First, let me explain why I generally like to buy stocks that had fallen in value. This is why if you're a stock investor, you should pray for hail and locusts on the options trading tfsa account market, not sunshine and rainbows. Or on a more extreme case, let's imagine that this company begins to lose money every single year. In this case, you should avoid the stock no matter the price.
To understand the health of Canadian oil and gas companies, we should first understand what their break-even costs are. When I used to work as an oil and gas analyst, I found that some companies had very high break-even prices. Normally, investors give low valuations for such highly risky companies.
But low stock prices wouldn't sit well with the management of such companies, since a huge options trading tfsa account of their pay is tied to the share price. So in order to legally inflate their share prices, many of them started paying dividends. These companies continued to pay dividends even through unprofitable periods by borrowing or by issuing more stocks. By maintaining a consistent dividend, they attracted dividend investors who bid up their share prices.
However, this strategy of inflating their share prices only work if their share prices hold up, since it gets much harder to issue new shares when share prices go down. That's because when a stock price falls, it generally means that there are more sellers of the stock than buyers. If they issue more shares, they would add to the list of sellers, which would make share prices go down even more.
Alternatively, these companies can borrow more money to pay their options trading tfsa account, but that won't work for long in a low oil price environment either. Banks judge an oil and gas company's health on the cash flow to debt ratio. In a low oil price environment, the cash flow would go down, pressuring that ratio. If they were to borrow to pay dividends, it would pressure that ratio even more. Eventually, these companies would bump up against their debt limit and banks would refuse to lend them more.
Thus, if the low oil price environment persists for a sufficient enough time, many of these oil and gas companies will be forced to cut their dividends. In that moment, the reason why investors bought into the stock in the first place i.
Such a scenario will crush a company's stock price. Now, oil and gas companies know this very well, so they will try options trading tfsa account to maintain their dividends. They will try to sell assets to raise cash, they will fly to meet big investors to try and convince them to buy stock, etc. But eventually, unless oil prices recover, they will bump up against the limits options trading tfsa account these efforts, and options trading tfsa account will have to cut their dividends.
This, in summary, is why I bought put options on certain oil and gas companies. I'm not saying that the above options trading tfsa account will definitely pan out.
If oil prices recover soon, there's a good chance it won't. Also, as I wrote beforeI expect oil prices to go higher in the long run. However, oil prices don't have to stay low for that long for these companies to be forced to cut their dividends. In other words, this is a calculated bet. Lastly, this doesn't mean that I will bet against every dividend paying oil and gas companies.
In fact, I hold one such company that currently has a high dividend yield though I options trading tfsa account bought it when they didn't pay any dividends. The important thing to keep in mind is the break-even price that I mentioned before. I will options trading tfsa account companies with low break-even prices, because when the dust clears and their competitors have taken big hits, the survivors will benefit from cheap asset prices.
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Now, let's get back to our regularly scheduled program. However, this logic disappears if the company options trading tfsa account expected earn a lot less. Something similar to this is happening to Canadian oil stocks at the moment.
The Dividend Game To understand the health of Canadian oil and gas companies, we should first understand what their break-even costs are. But that's not all. When The Music Stops However, this strategy of inflating their share prices only work if their share prices hold up, since it gets much harder to issue new shares when share prices go down.
Playing Probabilities This, in summary, is why I bought put options on certain oil and gas companies. Oil Put Options Short url: Choi's commentary on current financial events All this is available for free. Join others and subscribe using the box below.