So, I've racked my brain on this one and can't see a scenario where the odds are not in my favour.
Scenario: You own a rental property with a mortgage of 500K. You're currently paying 1800/month. If you renew at a lower rate, you're able to get a mortgage of 550K with monthly payment of 1700/month.
Assuming no penalties to do an early renewal, you're left with 50K to play around with.
Using interactive brokers and only trading XSP.TO , you're able to margin trade with only 30% at rate of 1.59%/year .
This means:
Riskiest play at 30% on margin purchasing power is $150,000.
Medium risk is 50% on margin at $100K, and would need 50K free floating to be 100% safe to avoid margin calls.
Lowest risk play is to not trade on margin at all.
Risks involved:
- interest increases in mortgage rates.
- margin calls.
- massive sell offs (but this would affect your whole portfolio anyway).
How I would use the 50k:
Use 25K in fixed income gic. able to float if nearing margin call.
use 25K at 40 -50% margin, for a buying power of 50-60k.
the 50-60K would be used to strictly trade ATM covered calls, which would yield on average $40/contract. This works out to around 10-12 contracts totaling around $400/month +/- nearing $5000/year. This $5000/year will be rolled into additional shares as well to carry on this strategy.
How the risks are dealt with:
1) Margin call - eliminated due to having the cash on hand to float to this set up.
2) Margin interest rate of 1.59. this is partially offset by the dividend of 1.36 + options premium.
3) Interest rate increases (usually happen at 0.25/quarter). assuming rates increase by 1 % year for the next 3 years.
Annual interest (including the margin interest padded)
Y1 -1.85% is $925.
Y2 - 2.85 is $1425.
Y3 - 3.85 is $1925.
Total: $4275
Y1 of strategy (assuming 9/12 months of selling premium) generates the following:
dividend 1.36% - $680
Options premium - at $40/contract x 10 contracts for only 9 months - $3600.
Total earned after y1: $4280
comments: So in this scenario, after one year of being 75% successful in selling premium, you've already covered 3 years worth of rates increase. However, this is assuming the stock market doesn't tank. In the event of the market tanking where 50% value is lost, this is likely where a margin call will happen and when you deploy the remaining 25K to cover. This is also assuming margin loan rates remain static at 1.59, but can likely change, so you'd be hit on both sides.
Someone tell me why the odds aren't in my favour for this.
Submitted March 21, 2021 at 11:07PM by badtradesguy https://ift.tt/3lCgE8k
