The jury is back on TFSA vs margin and new brokers

I did a commission comparison for Interactive Brokers compared to Questrade for strictly option trades.

Questrade is $9.95 for the trade and $1 per option each way. That is $29.90 for a 5 contract trade round trip. Doing 5 of those per day is $149.50 for the day...but that will be a smallish day.

Interactive Brokers charge $0.70 per contract with a $1 per trade minimum. A single contract trade would be $1 in and $1 out. The 5 contract example would cost $7 and the 5 trade cost would be $35.

The difference in costs are $114.50. Substantial, especially if it were a breakeven day without commissions.

Using my spreadsheets with all my data since April 1st to date I ran the trades as if they were using IB commission rates and saw a difference of $4121.29 in commissions that I could put into my pocket as profits...for less than three months trading.

OK, there must be a downside.

Well, no TFSA or RRSP accounts. These guys take options trading seriously and figure that anyone using them are serious or professional traders and will not be trading the retirement money.

They observe the $25,000 minimum levels with regard to pattern daytrading. Anything less and the account cannot be daytraded. Back to serious. No playing about with $10,000.

This all boils down to full taxation on the profits. Well, I ran some numbers comparing TFSA with the limited balance vs using a typical account, again. I set them up a bit differently this time as I noticed a slight error on some references (I was using one balance to apply a return for the following three months... fudged against me so it was fair, I just thought I would correct it).

This time I set the ROI per month to decrease each month by a variable amount (1% - 5%) to reflect the growth of the account and the lowered efficiency of trading a larger account. I set the stop to hold at 9% monthly return once it hit that level.

Running all my numbers of TFSA vs margin account starting the TFSA at $15,000 and the margin at $30,000 has the TFSA outstripping the margin in 3.5 years at the earliest. This assumes identical returns for each, so both Questrade commissions.

Using Questrade vs Interactive Brokers and some loose estimated commission differences I stand to save over $130,000 in commissions in those 3.5 years.

WOW!

Now, the account balances are much higher than I might expect given my trading right now, but they may not be once I really get rolling along later so I won't discount them as possible. Using my fudgyist fudge of a 5% per month decrease in return based on each month's balance I will be down to making an ROI of 8% in a year. That is starting at 50% now. I had 45% last month so that is not out of line. Even at that I show a balance of over $2,000,000.

So, is it worth it to struggle with the TFSA and higher commissions? Not really. After 3 or 4 years I won't complain if my multi million dollar account is not quite up to par with the possible tax savings to be had in the TFSA.

I actually expect that the government will cap the allowable profits once they see people starting to use them as their sole source of income anyway. More likely they will just start taxing the income withdrawn once it reaches a certain point as the intent of the account is not to produce an income and, like those who tried to take advantage of the over contribution loophole, they will find the loophole closed.

Other advantages will be that the IB platform is really nice and fairly intuitive with more selection in order types and a better layout for pre-setting up options for immediate trade executions. They also have a setting for trade value that automatically selects the contract count based on a dollar limit. Nice with my shift to same value over same size.

So, time to start the paperwork to get this going. I only have to wait for my medium term trades to turn the profits, liquidate my TFSA, close the stock trades and pull all my cash together to transfer over in order to start trading the account in July...or perhaps use July profits to pad the account as I don't want to have just $25,000 in the account. A couple of losing trades will sap it enough that it could halt trading for me... that would suck. I see a few in the room that have had that happen to.

Jeff.