With the decision I made based on my last post, to cash in my Optioneer capital to trade my current plans, I ran some numbers to see where best I might use the transferred cash. I had already put all of the option trades into a spreadsheet in order to see what my 3 weeks of trading would produce if I extrapolated the same results forward. I considered that if I only used the three weeks that it accommodates a possible poor fourth week performance and sort of treats it as if the fourth week only broke even...unlikely but possible. I also set this up as if I were following a truly equal weighted trading plan.
I ran six separate "studies" as follows:
Three used a margin account... which does not help with the option trading except that I could start with more cash. The other three use the TFSA account.
Margin:
$20,000 start up, 4, 5 and 6 concurrent trades (basically using three trade sizes, 25%, 20% and 16.7%)
Taxes are deducted at 40% at the end of each year.
Trade size is only adjusted at the end of each month... so monthly instead of daily compounding.
TFSA
$6,000 start up, 4, 5 and 6 concurrent trades (basically using three trade sizes, 25%, 20% and 16.7%)
Taxes are not deducted, none owing.
Trade size is only adjusted at the end of each month... so monthly instead of daily compounding.
Maximum trade size is $10,000.
Results:
Margin:
Balance at year one: 4 trade = $256,892, 5 trade = $248,855, 6 trade = $239,867
Balance at year two: 4 trade = $526,271, 5 trade = $518,264, 6 trade = $509,245
Maximum trade size reached in months June, June and July respectively.
TFSA:
Balance at year one: 4 trade = $352,452 , 5 trade = $322,513, 6 trade = $291,108
Balance at year two: 4 trade = $787,416, 5 trade = $757,457 , 6 trade = $726,072
Maximum trade size reached in months August, September and October respectively.
I thought about bumping the TFSA up $5000 after next January but what would be the point? The income is already flowing well above worrying about that, in fact the maximum trade size is already achieved well ahead of that. I expect that I will be peeling off cash in order to fund other trading that may involve needing margin, or perhaps not.
The long and short is that the TFSA, once again, beats margin hands down... taxes take their toll. It might be different if I were able to leverage the 3:1 margin for these trades but the max trade size is max for reasons of affecting the trades within the group so margin is a secondary issue.
Having said that I will be using margin for the stock trades that we take, we have taken a few, two today in fact, so restricting my study to only options traded is a bit narrow minded. I don't mind that as it skews the results against me, if you can call those two year forecasts "against". I also did not count the other two services that I subscribe to, which are both in the green. I used very little cash to fund these so I expect to turn up the heat on those shortly.
So, I "could have" been that much farther ahead already had I started "all in".
I am waiting for the cash to settle in my TFSA as I type this, request to transfer was placed immediately after trading on Thursday last week. It takes three business days due to the way that they convert and transfer the cash. Had I known I could have done it same day in a different manner....oh well. I will consider April month one and will reset my stats to match this as time progresses.
Jeff.
Questrade, My direct access discount broker.
Showing posts with label taxation. Show all posts
Showing posts with label taxation. Show all posts
Monday, April 5, 2010
Wednesday, September 16, 2009
RRSP, TFSA, Margin and option strategies.
I decided that I want to start selling option contracts so I figured that I better know what I can and cannot do within my various accounts.
MARGIN ACCOUNT:
I can do pretty much anything although the complexity of some of the strategies somewhat restricts my activities only due to the platform being not as options strategy friendly as it could be. I might review the Elite platform and see how it fairs compared to the Pro package.
Level 1
I can buy options with a $1000 account startup and can continue to do so as long as the net worth of the account remains above $250.
Level 2
I can sell covered calls as long as the account balance is $2500. For this I have to already hold the underlying stock so it is a bit of a cash creation strategy only based on a core position. The difference between 2 and 3 are slight but are delineated for the purpose of taxation and registered accounts.
Level 3
Spreads and straddles are allowed, although I can trade a straddle without being "authorized" as it is really just two long trades. I think that perhaps the trades are somehow tied together when done as an official "straddle" as it specifies the simultaneous call and put at the same strike price.
The Spread is buying one option and selling another against it. Buy the 20 strike call and sell the 15 strike put for example. The call is a long position that is the same as holding the stock so that if the put is exercised and you are forced to buy the stock, my call is also exercised to cover this as I buy the stock at the call strike price. In that case the premium I made selling the put goes against the loss off being put the stock and executing the option at the higher strike, creating a loss. The spread is a limited risk scenario without holding stocks as even if the stock hit zero my total loss is fixed.
Level 4
$25,000 minimum account size.
Uncovered writing. Basically I can sell calls and puts without any safety net as I may have them exercised at whatever the going prices are. This is a very risky trade plan and not something I would even consider unless I wanted to sell puts and I didn't care if I ended up owning the stock. Selling naked calls is just plain dumb, in my opinion, as if a call gets exercised I don't end up with anything other than a an uncontrolled loss.
Now, in a registered account, RRSP or TFSA, I know I cannot short stocks so I would expect that level 4 is not an option, uncovered writing. Level 3 might not be because the option trades are setup as a money making venture as opposed to a position protection measure. This I was not certain of but I have confirmed it.
Registered accounts can only trade level 1 or 2.
OK, this puts me at a disadvantage in my plans going forward. I would like to be able to trade a variety of strategies that are not allowed in a tax sheltered account so I will have to accommodate the eventual taxation of a portion of my trading activities.
Jeff.
MARGIN ACCOUNT:
I can do pretty much anything although the complexity of some of the strategies somewhat restricts my activities only due to the platform being not as options strategy friendly as it could be. I might review the Elite platform and see how it fairs compared to the Pro package.
Level 1
I can buy options with a $1000 account startup and can continue to do so as long as the net worth of the account remains above $250.
Level 2
I can sell covered calls as long as the account balance is $2500. For this I have to already hold the underlying stock so it is a bit of a cash creation strategy only based on a core position. The difference between 2 and 3 are slight but are delineated for the purpose of taxation and registered accounts.
Level 3
Spreads and straddles are allowed, although I can trade a straddle without being "authorized" as it is really just two long trades. I think that perhaps the trades are somehow tied together when done as an official "straddle" as it specifies the simultaneous call and put at the same strike price.
The Spread is buying one option and selling another against it. Buy the 20 strike call and sell the 15 strike put for example. The call is a long position that is the same as holding the stock so that if the put is exercised and you are forced to buy the stock, my call is also exercised to cover this as I buy the stock at the call strike price. In that case the premium I made selling the put goes against the loss off being put the stock and executing the option at the higher strike, creating a loss. The spread is a limited risk scenario without holding stocks as even if the stock hit zero my total loss is fixed.
Level 4
$25,000 minimum account size.
Uncovered writing. Basically I can sell calls and puts without any safety net as I may have them exercised at whatever the going prices are. This is a very risky trade plan and not something I would even consider unless I wanted to sell puts and I didn't care if I ended up owning the stock. Selling naked calls is just plain dumb, in my opinion, as if a call gets exercised I don't end up with anything other than a an uncontrolled loss.
Now, in a registered account, RRSP or TFSA, I know I cannot short stocks so I would expect that level 4 is not an option, uncovered writing. Level 3 might not be because the option trades are setup as a money making venture as opposed to a position protection measure. This I was not certain of but I have confirmed it.
Registered accounts can only trade level 1 or 2.
OK, this puts me at a disadvantage in my plans going forward. I would like to be able to trade a variety of strategies that are not allowed in a tax sheltered account so I will have to accommodate the eventual taxation of a portion of my trading activities.
Jeff.
Saturday, February 7, 2009
TFSA and taxation
I finally got around to finishing my investigating the possible taxation of a TFSA. There are no grey areas in this registered account setup...yet.
An excerpt from the applicable page on the CRA website,
"All amounts in the account are not taxable, except in the following cases:
....
If property that is considered to be a prohibited investment or a non-qualified investment is acquired, or if property held in the account becomes such,..."
That severely abridged but the other cases have to do with death, excess contributions, non-residents, closing the TFSA...I have no concerns about these. Here is the link for the complete page so you can read it yourself, Taxation of a TFSA
To expand on "prohibited investments" and "non-qualified investments" for a moment.
Prohibited investments include non-arms length stuff and loans to yourself.
Non-qualified investments include property that is not a qualified investment for the trust...if your broker let's you buy it, it is qualified as they are administering the trust part.
Investment vehicles that are allowed in a TFSA are the same as allowed in an RRSP, here is the link to the CRA page referring to this, Types of Investments Allowed.
From the self directed RRSP page this little blurb is useful to know, "You do not need to report any transactions for items held in your RRSP.". This basically allows any kind of transactions as long as the transaction is based on a qualified investment, the bold was my emphasis. Timeframe is not a factor. Questrade is very clear that they do not enforce any American rules about pattern daytrading, a month, a week, a day or a minute are the same to them. I might suspect that other brokers may enforce these, high minimum balances, even push settle dates for buying power and in their TFSAs those same rules would apply.
Another page from the CRA site, an Income Tax Interpretation Bulletin that has some pertinent information and clarifies a number of issues.
More reading can be found in the actual Income Tax Act itself, this from the Department of Justice site.
I mentioned timeframe. Nowhere is a timeframe mentioned as a restriction in any registered plans, or even any kind of factor. In a regular non-registered account, timeframe is a factor in determining if a gain is of a capital nature or not as transactions involving "identical properties" from the Captial Gains 2008 Guide. See Page 35 under "Superficial Loss".
What this all boils down to is that if timeframe is not a factor and a stock traded is a qualified property under the plan then there shall be no tax implications on any gains, whether capital, interest, dividend or otherwise in nature.
Happy TFSA trading for any that are doing or planning to do so.
I suppose I should put this bit in...I am not a tax specialist nor do I have any qualifications to advise any one their particular tax situation. Please consult your own knowledgeable source before making any decisions that may affect your tax profile. If nothing else this entry can at least point you in the direction of doing your own research. Everyone should know what they are dealing with without having to rely solely on anyone else's opinion or interpretation.
Jeff.
An excerpt from the applicable page on the CRA website,
"All amounts in the account are not taxable, except in the following cases:
....
If property that is considered to be a prohibited investment or a non-qualified investment is acquired, or if property held in the account becomes such,..."
That severely abridged but the other cases have to do with death, excess contributions, non-residents, closing the TFSA...I have no concerns about these. Here is the link for the complete page so you can read it yourself, Taxation of a TFSA
To expand on "prohibited investments" and "non-qualified investments" for a moment.
Prohibited investments include non-arms length stuff and loans to yourself.
Non-qualified investments include property that is not a qualified investment for the trust...if your broker let's you buy it, it is qualified as they are administering the trust part.
Investment vehicles that are allowed in a TFSA are the same as allowed in an RRSP, here is the link to the CRA page referring to this, Types of Investments Allowed.
From the self directed RRSP page this little blurb is useful to know, "You do not need to report any transactions for items held in your RRSP.". This basically allows any kind of transactions as long as the transaction is based on a qualified investment, the bold was my emphasis. Timeframe is not a factor. Questrade is very clear that they do not enforce any American rules about pattern daytrading, a month, a week, a day or a minute are the same to them. I might suspect that other brokers may enforce these, high minimum balances, even push settle dates for buying power and in their TFSAs those same rules would apply.
Another page from the CRA site, an Income Tax Interpretation Bulletin that has some pertinent information and clarifies a number of issues.
More reading can be found in the actual Income Tax Act itself, this from the Department of Justice site.
I mentioned timeframe. Nowhere is a timeframe mentioned as a restriction in any registered plans, or even any kind of factor. In a regular non-registered account, timeframe is a factor in determining if a gain is of a capital nature or not as transactions involving "identical properties" from the Captial Gains 2008 Guide. See Page 35 under "Superficial Loss".
What this all boils down to is that if timeframe is not a factor and a stock traded is a qualified property under the plan then there shall be no tax implications on any gains, whether capital, interest, dividend or otherwise in nature.
Happy TFSA trading for any that are doing or planning to do so.
I suppose I should put this bit in...I am not a tax specialist nor do I have any qualifications to advise any one their particular tax situation. Please consult your own knowledgeable source before making any decisions that may affect your tax profile. If nothing else this entry can at least point you in the direction of doing your own research. Everyone should know what they are dealing with without having to rely solely on anyone else's opinion or interpretation.
Jeff.
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