As I mentioned in the last post, I use No Lose Stocks (NLS) exclusively for my investing. Here is the setup that I’m currently using.
Traditional IRA at Fidelity
I keep the bulk of my investable funds in a Traditional IRA at Fidelity. I invest that in FDIC insured CDs to earn interest. Using a Traditional IRA has two benefits in this situation.
The first is that it’s a tax deductible deposit, which means I am earning interest with my CDs on money that I normally would have had to pay to the tax man.
The second is that it’s tax deferred, so I don’t have the headache of filing taxes annually on these transactions.
One thing to note here is that the balance of the Traditional IRA never goes down. It’s always at least what it was the last time I looked at it. I can’t really overstate how much of personal happiness benefit this is. It eliminates all of the stress of seeing the balance jump up and down. Looking at this balance is always a fun thing to do.
Roth IRA at ChoiceTrade
I keep a Roth IRA account at ChoiceTrade where I deposit just the amount earned in interest on the Traditional IRA each month. I use money that I would have deposited in the Traditional IRA for this, rather than transferring money from the Traditional IRA to the Roth IRA to avoid having to file a transaction like that on my taxes.
ChoiceTrade has free options trades each month during option expiration week, so that’s when I place my NLS trades each month.
Note that I was told by ChoiceTrade that there is a $30 annual fee for a ChoiceTrade Roth IRA. However I haven’t actually had that fee deducted from my account yet, so I don’t really know if that’s true.
No Lose Stocks Call Options
The original strategy for NLS called for buying a dividend stock and using the expected dividends to purchase a put option that would protect all of the capital used to buy the stock. The problem with this is that the dividends may not get paid. Here’s a recent example of an NLS trade that could have been very painful for me.
On 2009-01-07, I purchased 100 shares of GCI for $863.00 and 1 put contract with a strike price of $10.00 that expired in January of 2011 for $451.00, for a total outlay of $1,314.00. Over the time before the put expired, I expected to collect $320.00 in dividends based on GCI’s dividend paying history to that point.
As it turns out the dividend was cut, and I only collected $32.00 in dividends, a $288.00 shortfall from what I expected. However, by January of 2011 GCI had risen in price to more than $14.00, and I sold my shares for $1,457.12. The put with a strike price of $10.00 expired worthless.
So I paid out $1,314.00, received $32.00 in dividends, and got back $1,457.12. In total, I netted $175.12. Since I invested $1,314.00, that’s a return of 13.3% in 745 days, or 6.5% annualized.
However if the dividend had been cut 100%, and the stock never went above the strike of the put, $10.00, I would have sold the stock for $1,000.00 and netted -$314.00, which would have been a loss of 23.9%. Risking 23.9% for a gain of 13.3% is a bad trade in my opinion. This trade was equivalent to me running across the road blindfolded. Yeah, I made it across alive, but it was stupid to do it in the first place and I’d be stupid to do it again.
To avoid this, I now only buy the call options at the same strike price as the put. The NLS spreadsheets have a column listing the call option, and how much of an interest rate you need to be earning to pay for the call option with interest earned over the life of the call option. Just a reminder, watch out for stocks that are buyout situations. These are easy to spot, since they look like the stock just jumped way up and has been flat-lining.
Note this also means that I don’t pay any commissions on my trades, since I’m only trading during options expiration week, and only purchasing call options (rather than buy 100 shares of stock and a put option).
I setup an email calendar alert to email me when options expiration week is coming up. I set it up as a recurring event that occurs every month on the third Friday of the month. I then have it send me a reminder 1 week before the event. So the Friday before options expiration week, I get an email alerting me that it’s time to start looking at the NLS listings and placing my trades. I generally place the trades over the weekend, and let them execute on the open Monday. I could probably save a few cents/dollars by placing the trades on Monday, but the loss of my time is not worth it to me.
Not all of my trades will get executed, as occasionally the price of the stock’s call option will be above my limit price. If that happens, then I just let the trade go and don’t worry about it. But if the trade gets executed, then I enter a Price Alert for that stock at the call’s strike price in my Fidelity account. This way I don’t even have to watch the stock now. Fidelity will email me if and when that stock gets to the price where I would be making a profit. Before that point, looking at the stock will only show me that it’s not a gain yet. This is again a defense against letting my investing control my emotional state. And it works very well.
Engineered for Happiness
Notice that no where in the above do I check the news, or check the market averages, or really do anything more each month than place a few trades and enter a few price alerts. So I pretty much spend only 20 minutes or less per month on my investing. Leaving the rest of my free time to use as I like. The only time that I might spend more time or pay more attention is when I get a Price Alert email from Fidelity stating that I have a profit in one of my trades. And in that case I don’t mind spending a little time, since seeing a profit is fun.
All of this is setup to allow me to invest without risking what I’m investing for…to be happy. If I’m always worried about losing money, or always checking the market, or always checking my stocks to see if I need to do anything, I’m not really enjoying my life.