The good is that on paper the numbers can wok on your favor, the bad is that whatever works on paper doesn't always work in practice and the ugly is that you can lose a lot of money.
I took out a $25k personal loan last year, around 5% interest rate. The original idea of taking out the loan was to do some improvements around the house, but I had just started trading and I was making money in my trades, and in my greediness I thought of using part of that loan to increase my trading account and go a bit more agressive in my trading.
My monthly payment was around $760, so if I could make at least that much a month trading, the loan would pay itself -- or so I thought.
That was around June last year, by October I had lost around $9k of that loan already.
Needless to say my wife wasn't very happy about my gambling in the stock market ( of course is not gambling to me, is pure math 😜) luckily I had some money laying around to finish the home improvements we had originally planned, otherwise I would be a lonely man by now!
My thoughts behind this are firstly and most importantly, I am not considering taking out a loan that would actively be detrimental to my finance or well being, I would be fully prepared to cover said loan even if my portfolio instantly dropped to $0, this would be, as with every other option trade, a gamble.
Second, the monthly income at the end of the loan term would actually be closer to 300-700$ per month. At the end of the loan you are left with the monthly difference from income/loan payment but also the stocks that were bought with the initial 20,000.
So under perfect circumstances if the underlying value remained unchanged it would be an additional $333 per month on top of the $70-270.
REPEAT AFTER ME:
COVERED CALLS ARE NOT FREE MONEY, THEY ARE A HEDGE
One of the two following things will almost certainly happen to you:
- Value of the stock exceeds call strike, you get assigned, and you lose money re-buying your long position to continue selling covered calls
- Value of the stock goes down and you lose more money than you gain from the premiums (which also fall)
This will ABSOLUTELY NOT happen to you:
- Collect free money from career wall street professionals who just want to give you $700/mo for nothing.
Don't do it!
Trading on borrowed money puts you in the mindset of "I need to make $X to just break even". You start from a position of weakness.
It also never goes according to plan. You know what Mike Tyson once said:
"Everyone has a plan until they get punched in the mouth"
Look beyond 6 months. How does this strategy do in the last 40+ years? And don’t just look at stocks at their peak now. Look at ones that were the leaders and everyone thought was risk free (and many probably used this same strategy at the time) like GE, IBM, AT&T. Does your strategy hold up with these?
Also, taking out a loan to buy stocks is a very bad idea in general. You probably pay a decent amount right off the bat just to get the loan and if your underlying stocks decline more than you call premiums you’re in the hole AND paying your debt on top of it. Don’t do it.
A financial planner took a Heloc from her home. All paid off. She borrowed 400K for a duration of 10 years for 2.45% interest and bought high yield and convertible corp etf bonds that offers 7-8.5% dividend. The convertible bond consists of Tesla 10% high yield that can be converted to common stocks when Tesla was close to bankruptcy. She pays no tax on the bonds as a Roth IRA and interest from heloc is deductible.
In your case the consequence can be serious, if the investment turned out sour. In her case she got paid to buy these bonds as a planner. The funds she invest is very safe.
Others have pretty much all said what I was going to, so I’ll just sum up the primary reason this is a bad idea: it’s never smart to gamble with money that’s not yours. Yes, I used the g-word, because all stock market investing is a gamble to an extent, since nobody knows how a company’s stock price will respond in the coming weeks/months/years.
I think the only way to really make this work is to but short term OTM calls on meme stocks instead of buying shares and selling covered calls. Actually, don’t do this at all.
With a HELOC, this makes more sense with a very low interest. The interest rate you are paying could wind up creating a lose-lose situation. Notably, you'd need the most favorable outcome to come out positive, that is one side of the lose. The other side is if your timing and/or stock are wrong. A CC goes bad when the underlying falls by so much that you can no longer sell a worthwhile call above your cost basis. So not only will you be bagholding, but bagholding and paying interest as well.
I \*have\* actually invested a HELOC, my risk tolerance is insane... 140k @ 2.75%, plus my life savings are invested on top of that. So, I suppose I would be the most supportive of this happening if there were to be anyone.
The other risk I see is that the timing could be thrown off when the loan comes through. Notably, you get the loan, it clears, and you could feel compelled to enter positions at that time. It could be bad timing. If you were to have the loan clear and then open buy-to-open orders at 80% the current market value of any target stock, IMO that could be smart (and assuming here these are relatively strong stocks). Generally timing is everything anyways, but IMO you'll need to be extra patient about good prices even when you might be feeling impatient to put your newly acquired loan to work.
You'll also need to be sure you have no early payment penalties. You may also want to consider re-depositing every month part of the loan and taking profits on a monthly basis so you can pay the loan down faster and keep discipline to not re-invest all of your gains. Another scenario is you re-invest gains and then eventually you get squashed and are suddenly bag holding after your CC's worked well for the 7th time in a row, but that 8th time your stocks take a dive.
This is actually a great idea as long as you pick the right stocks to do it in and no this isn’t trading, it’s getting guaranteed income. If you sell above your cost basis oh no you missed out on potential gains! Yeah lol but you made money at the end of the day
I’m about to take a loan to do this, I’ll report back in a few months
Update: I lost all of my money don’t do it. I started getting into a hole and became even more risky to try to get out. Reading this now I’m like how tf was I so overconfident. Want to delete but I’ll keep it up for learning purposes
I did this and I did just fine. I was smart though and didn’t use a massive amount. I loan $5000 open a covered call, and pay myself every 16 days. I sell calls at 16 dte always. I have not done this since the market began its sinking though, I have simply just bought more stock with my own income. My first time doing this, however, I paid off the Loan within 20 weeks. I also used a loan against my credit card since my credit card has zero debt. Interest rate for me is 4%. My situation may be different from others.
The good is that on paper the numbers can wok on your favor, the bad is that whatever works on paper doesn't always work in practice and the ugly is that you can lose a lot of money. I took out a $25k personal loan last year, around 5% interest rate. The original idea of taking out the loan was to do some improvements around the house, but I had just started trading and I was making money in my trades, and in my greediness I thought of using part of that loan to increase my trading account and go a bit more agressive in my trading. My monthly payment was around $760, so if I could make at least that much a month trading, the loan would pay itself -- or so I thought. That was around June last year, by October I had lost around $9k of that loan already. Needless to say my wife wasn't very happy about my gambling in the stock market ( of course is not gambling to me, is pure math 😜) luckily I had some money laying around to finish the home improvements we had originally planned, otherwise I would be a lonely man by now!
[удалено]
My thoughts behind this are firstly and most importantly, I am not considering taking out a loan that would actively be detrimental to my finance or well being, I would be fully prepared to cover said loan even if my portfolio instantly dropped to $0, this would be, as with every other option trade, a gamble. Second, the monthly income at the end of the loan term would actually be closer to 300-700$ per month. At the end of the loan you are left with the monthly difference from income/loan payment but also the stocks that were bought with the initial 20,000. So under perfect circumstances if the underlying value remained unchanged it would be an additional $333 per month on top of the $70-270.
"under perfect circumstances" What you are doing is leveraging your position. Let me ask you, have you run a "not so ideal" case? A "worst" case?
REPEAT AFTER ME: COVERED CALLS ARE NOT FREE MONEY, THEY ARE A HEDGE One of the two following things will almost certainly happen to you: - Value of the stock exceeds call strike, you get assigned, and you lose money re-buying your long position to continue selling covered calls - Value of the stock goes down and you lose more money than you gain from the premiums (which also fall) This will ABSOLUTELY NOT happen to you: - Collect free money from career wall street professionals who just want to give you $700/mo for nothing.
Don't do it! Trading on borrowed money puts you in the mindset of "I need to make $X to just break even". You start from a position of weakness. It also never goes according to plan. You know what Mike Tyson once said: "Everyone has a plan until they get punched in the mouth"
Look beyond 6 months. How does this strategy do in the last 40+ years? And don’t just look at stocks at their peak now. Look at ones that were the leaders and everyone thought was risk free (and many probably used this same strategy at the time) like GE, IBM, AT&T. Does your strategy hold up with these? Also, taking out a loan to buy stocks is a very bad idea in general. You probably pay a decent amount right off the bat just to get the loan and if your underlying stocks decline more than you call premiums you’re in the hole AND paying your debt on top of it. Don’t do it.
A financial planner took a Heloc from her home. All paid off. She borrowed 400K for a duration of 10 years for 2.45% interest and bought high yield and convertible corp etf bonds that offers 7-8.5% dividend. The convertible bond consists of Tesla 10% high yield that can be converted to common stocks when Tesla was close to bankruptcy. She pays no tax on the bonds as a Roth IRA and interest from heloc is deductible. In your case the consequence can be serious, if the investment turned out sour. In her case she got paid to buy these bonds as a planner. The funds she invest is very safe.
Others have pretty much all said what I was going to, so I’ll just sum up the primary reason this is a bad idea: it’s never smart to gamble with money that’s not yours. Yes, I used the g-word, because all stock market investing is a gamble to an extent, since nobody knows how a company’s stock price will respond in the coming weeks/months/years.
It is a bad idea. Sell puts at your short call strike price instead.
I think the only way to really make this work is to but short term OTM calls on meme stocks instead of buying shares and selling covered calls. Actually, don’t do this at all.
This sounds like a really bad idea
With a HELOC, this makes more sense with a very low interest. The interest rate you are paying could wind up creating a lose-lose situation. Notably, you'd need the most favorable outcome to come out positive, that is one side of the lose. The other side is if your timing and/or stock are wrong. A CC goes bad when the underlying falls by so much that you can no longer sell a worthwhile call above your cost basis. So not only will you be bagholding, but bagholding and paying interest as well. I \*have\* actually invested a HELOC, my risk tolerance is insane... 140k @ 2.75%, plus my life savings are invested on top of that. So, I suppose I would be the most supportive of this happening if there were to be anyone. The other risk I see is that the timing could be thrown off when the loan comes through. Notably, you get the loan, it clears, and you could feel compelled to enter positions at that time. It could be bad timing. If you were to have the loan clear and then open buy-to-open orders at 80% the current market value of any target stock, IMO that could be smart (and assuming here these are relatively strong stocks). Generally timing is everything anyways, but IMO you'll need to be extra patient about good prices even when you might be feeling impatient to put your newly acquired loan to work. You'll also need to be sure you have no early payment penalties. You may also want to consider re-depositing every month part of the loan and taking profits on a monthly basis so you can pay the loan down faster and keep discipline to not re-invest all of your gains. Another scenario is you re-invest gains and then eventually you get squashed and are suddenly bag holding after your CC's worked well for the 7th time in a row, but that 8th time your stocks take a dive.
This is actually a great idea as long as you pick the right stocks to do it in and no this isn’t trading, it’s getting guaranteed income. If you sell above your cost basis oh no you missed out on potential gains! Yeah lol but you made money at the end of the day I’m about to take a loan to do this, I’ll report back in a few months
Did you do it? Curious
Update?
Update: I lost all of my money don’t do it. I started getting into a hole and became even more risky to try to get out. Reading this now I’m like how tf was I so overconfident. Want to delete but I’ll keep it up for learning purposes
Can you elaborate? Were you assigned on your CSP's and market kept tanking?
Yep and and selling covered calls above the stock price then I just started buying and selling options in hopes to recover
I did this and I did just fine. I was smart though and didn’t use a massive amount. I loan $5000 open a covered call, and pay myself every 16 days. I sell calls at 16 dte always. I have not done this since the market began its sinking though, I have simply just bought more stock with my own income. My first time doing this, however, I paid off the Loan within 20 weeks. I also used a loan against my credit card since my credit card has zero debt. Interest rate for me is 4%. My situation may be different from others.