The Canadian Investor - When to Sell Stocks and Options Trading

Episode Date: July 25, 2022

In this release of the Canadian Investor Podcast, we cover two main topics that were inspired by listener questions. When to sell a stock that you own The basics of how options trading work Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. I'm Brayden Dennis, as always, joined by the great, magnificent Simon Belanger. And we have a fun episode for you today. As per usual, we are talking about a great listener question about when to sell stocks, our thought process, our framework on that as long-term investors.

When is the right time to actually sell? And Simon, you're going to dig into options, something that we've talked about before, typically used as either what like a hedging strategy or mostly a trading strategy most commonly yeah hedging trading and you can also make a case to generate additional income income right like covered calls yeah exactly get a premium so i'll go into more detail how that works it won't get too complicated we'll look at more of the basics of the two main types of options so So call options and put options. But I know a lot of people have been asking that. So I figure it would be a good episode to talk about it. Right. And it's good to talk about it because like you and

I don't do options trading at all. I mean, maybe I'm speaking. I know I don't. I don't think you do. No, I don't. I'm not saying I will never do it. Maybe there's a point in my life where it may make sense, especially if I'm closer to retirement, there might be some income strategies there, but definitely not right now. Yeah. And so it's for us to explain it. And so you know what it is and then make a decision. And then you might come to a similar conclusion. Well, I don't want to paint any bias into you right away, but I have no intention of trading options whatsoever, but it's good to know what they are so that you can at least know what you want to do. All right. When to sell. So we have an awesome question here

from aware investor, their username. I really want to listen to an episode dedicated to when to sell stocks. Long-term investing is great, but I guess at some point, do you sell for a profit or do you never sell? Thanks in advance. Wonderful question. One that I think about every once in a while that we should probably discuss on the show because it's important and it's hard. It's harder than buying stocks. Selling stocks is way harder than buying stocks. And so this is an opportunity for us to go through that and our framework and the way we think about it. It's not the only way to go about it. Of course, there's a long list of ways to go about it, but this is how I go about it. And Simone, you're going to chime in as well. So this is a fantastic question because like I said, it's way harder than buying.

Psychologically, it's harder. In my opinion, process-wise, it's harder. It's not necessarily as exciting or sexy. And so there are a lot of scenarios of when you might sell stocks just off the top of my head. So let's dive into each one. Okay. So, and Simone, please jump in where necessary, because a lot of this is just like right before we started recording, writing some notes. Number one is you need the money for one reason or another. Many of these lists could triage into a million different trees of decisions to make, but at the end of the day, you need the money for one reason or another. And so this includes divesting and selling stocks in retirement. You need the money for living off your nest egg or you're saving up for something else. This is totally legit. It happens. You don't go

to the grave with it. So you got to spend it somehow. So you're going to pull it out eventually, or at least I think most people should. Don't go to the grave with all your money, live a little. You can agree on that. Yeah, yeah, exactly. And I think point one, I think a lot of people will also use a the term decumulation, right? That's the exactly, especially if you retire, you'll want to decumulation strategy, exactly, where you may not, you know likely i mean i would not recommend selling all your stocks all at once usually you want to have a strategy behind it because you're even if you're into retirement you may still live it's the reverse of dollar cost averaging yeah yeah exactly that's a good way to put it and you may still live 20 30 40 years into retirement so obviously you need to

fund that retirement. So you want to have a good decumulation strategy. Yeah. There's like the 4% rule. There's a long list of strategies there. That's too long of a topic for right now. Number two, your investment thesis is busted. Time to move on. Now I'm going to spend the most time on this one because I think that most people are thinking about this in the context of the question because there's some real decisions to make. Number three, you are, quote unquote, picture me right now, air quotes, taking profits and or trimming a position. This one, I truly avoid at all costs, but I totally get the reasons for why you want

to do this, especially trimming wise, if it's getting to be some gigantic portion of the portfolio. Again, this is a very personal thing based on your conviction in the company, your conviction for risk tolerance, your ability to sustain large drawdowns, because the more concentrated you are, you're going to feel a lot more volatility than the market. And number four, which is another legit one, is you think your capital is served better elsewhere on a forward return basis. And so that happens, that happens, right? You know, I have examples of that where I'm like, okay, I think this company is just better forward return basis. I think it's higher quality. I think the valuation is better.

And sometimes that happens. Yeah. The trimming the position, I think to me, the easiest way to do that is just do the sleep test. So if you're losing sleep at night because a position is too big and stressing you out, you probably should trim that position. That's the way I see it. It's a pretty simple approach. The answer won't be the same for everyone. You could have 20% in consolation and the next person will have 45, buddy. Well, 45, there you go. The next person might have 10 and be nervous about it because they want smaller position sizing. So it's really a personal thing.

Again, I think the sleep test for me is the easiest way to know whether it's too big or not for you. I like that. And again, is it scientific? No, of course not. This is a very personal thing. Okay, so off the top of the list of my head, I don't know what English I just said. Off the top of my head, this list is extremely nuanced

and can go a million different ways depending on the business. So I can't get into these millions of nuanced situations, but just off the top of my head, this is the mental framework for why I would exit a stock. And again, Simone, chime in. Number one, if I was just straight up wrong about projections for growth, you know, I'm like, okay, this thing can grow high double digits for a long time, maybe, you know, high single digits. Let me give you some examples. Actually, like I'm thinking of like mid double digits. I'm thinking of like a Visa and MasterCard. I think that it can sustain that for quite a while still, multiple years. I'm looking at Costco and maybe, you know, eight to 12% on the top line, I think is relatively well agreed upon in the investment

community. I agree with that. You know, if it's some high growth software name, if it's a Shopify, you're hoping for like 30% plus top line revenue growth still. And sometimes it just stalls out for a variety of reasons. It happens. And sometimes it just falls flat on its face. And competition can be a big part of that. Some of you didn't foresee enough competition will eventually compete away both growth and margins. So something to consider. I mean, it does happen. The landscape changes. You just got to pay attention to it. Next on the list here, the moat has been disrupted. Nothing is forever in business when you let the efficient machine of capitalism run its course, right? Like nothing is forever. And so you have to continually monitor and just pay

attention if you're owning individual stocks. And that doesn't mean checking quotes every day. That does not mean checking the balance of your portfolio every day. It means, you know, every quarter, every year, just see, you know, is this business still performing as I expected? It's not supposed to be some stressful thing, right? And so Simone, I think of, what was it? The Buffett AGM, they had the list of the 20 largest companies by market cap in the 80s and not one of them is in the top 20 by market cap in the S&P 500 today. Yeah, yeah. It's quite spectacular to show. Yeah, it shows nothing static. No, there's tons of businesses that were once market leaders

and did not evolve properly or they had a mode you know one that comes to mind every single time is a blogbuster so you could tell they had a mode probably some preferential pricing with the various movie studios to be able to lend out and rent out those movies and DVDs. And they did a very robust infrastructure network to yeah, distribution, all these stores, and they did not adapt when Netflix started growing. And eventually Netflix overtook them. Obviously, I think now it's funny because Netflix is facing challenges of their own. But that's an easy example for me. Totally. facing challenges of their own. But that's an easy example for me. Totally. Yeah, it's a good example. And it's one that everyone knows. So it's easy. Maybe not our youngest listeners.

Young. Oh, wow. Maybe. Yeah. Oh, I'm trying to think how old. When was that? Like 20? I mean, they went bankrupt probably around 10 years ago, maybe a bit less. Yeah, I was thinking 2012 was when they are really like, okay, streaming is eating their lunch type of thing. But they weren't dead yet. The writing was on the wall though. Sometimes the writing's on the wall for a while, right? Yeah, exactly. And so that gives you an opportunity to pay attention. Sometimes the writing will be on the wall for quite some time. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense,

and with them you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and

keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of

your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at Airbnb.ca forward slash host. That is Airbnb.ca forward slash host. All right, next one, management changes and the management team being no longer impressive. Now, there are lots of transitions from founder to CEO that just don't work, for example. We're going to have to see on Bezos to Andy Jassy here. I think he's been getting lots of flack on it being a day two at Amazon. You look at what happened with Apple and probably the best transition from founder to CEO of all time to Tim Apple.

Or, you know, Bill Gates to Steve Ballmer. Oh, wow, that was a good one. It's okay. Yeah, that's a perfect example of no longer impressive. Yeah, exactly. And so the business was really struggling. Luckily, they turned it around with Satya, the new CEO. And so you can get a vibe. That's a perfect example, Simone, of how management being unimpressive to impressive. So they went impressive, unimpressive, impressive,

and the stock chart followed it because the business fundamentals followed it. And that had a lot to do with leadership. You look at Tim Cook or what we call Tim Apple, you look at his transition as CEO from not being the founder. Fantastic. Wonderful job. And so it becomes pretty obvious. I think it only really takes a couple quarters, really. Yeah. Yeah. Definitely. Maybe four. For sure. Yeah. And so that's somewhat easy to pay attention to, I think anyways. I have an example of, we actually just recorded this about Enchouse, right? The stock I sold. The management didn't change. Steve Sadler has been at the business since 2000. He's the chairman and CEO, but it was starting to become very unimpressive on the calls. It's like they stopped taking their

morning coffees on the calls, you know? You know what I mean? It's immeasurable. It's hard to really know, but there's something in the air on the, on the, the earnings call that you can just kind of tell. And, you know, I swapped it out for CSU. So that's, it's hitting two things here. Management is unimpressive. And I saw better returns forward on consolation software, but more importantly, the passion from Steve Sadler really fell off, in my opinion. He's done a fantastic job for the company, but the guy's been doing this for over 20 years. He owns like a bajillion, trillion, bajillion dollars in stock. It's actually ridiculous how much of the account he owns,

which is obviously what investors want to see. But it's like, go retire, man. Who am I to say? I mean, some people want to keep working. I get it. I totally get it. You hear the stories that people stop working, their brain stops working, they're miserable. But dude, you got enough cash, right? Go live your life. This company is not that exciting, man. Anyways, number five here on the list, talent drain Go live your life. This company is not that exciting, man. Anyways, number five here on the list, talent drain, especially in tech. This is one that I think is really important to pay attention to right now, Simone, is talent drain. If they're losing skilled technical people, especially the most in-demand person right now, which is

developers, software engineers, that can really hurt the business and especially if the stock is getting absolutely crushed and that's a lot of the compensation structure it can be really quite reflect reflexive reflexive reflexive i think that's the word on the actual business with the stock price and so reflective no it's a reflexive really yeah i thought you were meaning it's a reflection of what's going on. No, there's like some fancy word about circular relationships between cause and effect. Yeah. Okay.

There you go. I'm learning on the fly. So that's something to pay attention to, right? Number six here is the secular environment has changed. I mean, look, the world changes. The biggest companies in the S&P 500 is a revolving door. You know, I think I was asking you on the weekend. I was like, we're hanging.

I was like, what's the biggest market cap company in five, 10 years? And then 10 years, you might argue one that doesn't even exist. One you've never heard of. That's a very real possibility. That's why I had so much trouble answering. Because I couldn't make- Five though, I don't think. It's going to be one you know five maybe not 10 maybe not 15 but there's always going to be you know there's going to be some expected names if you look throughout history but there's always one or two names that come out out of nowhere it may not be at the very

top but will creep up right up there and that's's why I was trying to think, I'm like, what company could I see that's still relatively big, but could really become exponentially big? And I'm still looking for the answer, Brayden. Yeah. Well, I wasn't going to be able to tell you. I was drinking wine out of a box, like a complete degenerate, as you saw firsthand in the flesh. So whatever I said, disregard that. No, but seriously, like look, if you own American Tower or like, you know, some sort of infrastructure connectivity, like data centers, American Tower, you know, Equinix, DLR, those are looked at as high moat infrastructure businesses, pretty safe, you know, blue chipper, paid dividend, they grow, they got some secular trends behind them. This isn't a thing yet, but you could see it being a thing, especially with

what Elon's launching into space, is all of a sudden connectivity is done through a much more effective means from satellites in space. Let's say this new tech gives you instant 5g connectivity at the edge which is why you need this like decentralized type equinix type american tower infrastructure around the world is because you need this at the edge this doesn't exist yet right and so that's why those businesses are so important but what if it does what if it does exist this compromises these infrastructure assets like in a major, major way. And so that's like a secular environment shift, big technology shift. And so, yeah, anything.

I mean, there's probably so many to add on this list. Well, I think technology is just an amazing one to look at because you can look at just a telephone, right? How it's evolved over time. And then like there's almost no one to have landlines anymore. It's almost all voice over IP, right? When you look at businesses and cell phones, that's an easy example. Just technology obviously being disrupted by the internet. There's different kinds of things that you could see even a company like an energy producer, like a Brookfield Renewable renewable power if there's a new form

of energy that's like fusion right i think they're still working on that i'm not an expert when it comes to that obviously but if fusion energy becomes a thing and it's controllable you can make a case that a lot of these companies that are generating energy will no longer have a place in our world potential i mean yeah for sure i mean who's to who's to say i think that those hydropower assets are going to operate. I mean, they've been operating for 100 years. I think they're going to operate for another 100 or maybe a couple hundred. But if I'm wrong, hopefully I'm paying attention, right? Yeah, exactly. That's it. That's the point of this segment, right? And so notice how in this segment, I did not mention because the stock's going down. That was not one on the list. Or because I've doubled my money or something like that. And I

get it. If something's gone, I know you did this with Teladoc, something's gone to something that you don't really feel comfortable on a valuation basis. You know, like I've 5X'd in a very short period of time. I don't really know if shares are going to trade like if they're really worth this i'm going to hold some of it but i'm going to trim it like that kind of mentality right yeah yeah well i think that was also i think kind of point two where i trimmed the position because it was yeah big trim it knowing yeah exactly it was just too big for me in terms of how the high devaluation was, how big it became in my portfolio. So for me, it just made sense to trim a decent portion of it.

Got it. So in my opinion, the stock's going down. It's not a legit thesis to sell a stock. But if the stock is going down because the business fundamentals have deteriorated or are deteriorating in front of our eyes. Competition is coming in, crushing them, they're competing on price. Maybe they're not innovating new products or services. Sales and profit are slowing or even worse, like melting ice cube type of thing. Then that's a different story entirely. It's just important to make the distinction between the stock is going down because of sector rotations, a bear market correction like we have

now, or this stuff's just completely out of favor for an extended period of time, which happens all the time. It's something you should come to expect is much different than the actual business fundamentals worsening or deteriorating. So just making that distinction, I think, is important. Yeah, and I think one of the biggest barriers for people to sell, even when the business is clearly not performing as you intended or as you thought, and the premise is completely wrong, and it's clear for pretty much everyone but you usually that's because i think there's this sense of having lost energy and researching the company and this emotional

attachment and sometimes ego in it that you don't want to admit that you were wrong and i think it's important to just be able to have some self-awareness when that happens because, you know. The blinders can go on for sure. Exactly. So just keeping that in mind, I think it probably happens to everyone on some level, but just being able to realize when it's time to sell, when things have completely changed, it's clear, you know, you may have put time and effort into it, but it's better to cut the losses than waiting

for the company to go to zero. Yeah, sure thing. That like permanent loss of capital is really a good way to interrupt compounding. And we do not want to do that. Okay, let's go on to round two. Mark, this is halfway or maybe quite halfway. Let's talk options. I'm going to mostly be listening.

I'll chime in when necessary, but you know a whole lot more about this category. I've done enough work through experimenting and you doing segments on it to know I have no interest, but I think it's important to know what it is. Yeah. And it could be, we could probably do a few, like three, four episodes on this. This is clearly just the basics. So we decided to do this segment because we actually receive a few like three four episodes on this this is clearly just the basics so we decided to do this segment because we actually receive a few questions about it well the first thing you need to know about options is their derivatives derivatives is just a fancy word to say that something derives or gets its value based on an underlying asset so so from another asset. So in the case of stock options,

or options related to stock, not stock options given necessarily to management or something like that, the stock is the underlying asset, but there could be other options for like commodities and bonds, but for this, we'll be sticking to stocks. And there's two main types of options,

puts and call options. Stock options are contract that give the option to the buyer to either buy or sell stocks depending on the type of contract it is the buyer is not obligated to exercise the option however the seller is obligated to execute the contract if the buyer decides to exercise this option and I'll go into more detail there's two main categories like I said call and puts a few execute the contract if the buyer decides to exercise this option. And I'll go into more detail. There's two main categories, like I said, call and puts. A few important things to note about options. They work in lots of 100. So if you have one option, it will be tied to 100 shares. If you have two, it will be tied to 200 shares. So this means you won't be able to buy an option

tied to only eight shares, for example. So keep that in mind if you're looking into options and you're looking at, you know, options of Constellation Software, for example. If you decide to exercise a call option. A hundred share lot of $2,000 stock. Yeah, it's going to be six digits. That's for sure. So there are two main types of options. Like I said, puts and calls. All options have an expiry date, which means that the time remaining until the option expires can have a significant impact on the value of the option contract. Typically, the last day to trade an option will be the third Friday in the month in which it's expiring. A premium will be paid to the seller

of the option and the strike price that's the term you'll hear a lot is the price at which the option would be exercised basically the break-even price for the option now let's dig into call options and braden feel free to stop me if you have a question here. So a call option will give the buyer of the option the right to buy shares at a predetermined price. Of course, there is a time limit on that, like all options contract. The seller of the option contract must sell the share if the option is exercised.

However, the seller gets a premium in exchange for taking on that risk, which is paid by the buyer. So whenever you're selling an option there's always going to be some risk associated with that now let's use an easy example brayden has 100 shares of microsoft he's been thinking about selling his shares for a while they're currently trading at 250 a share brayden would be happy to sell his shares if he would get $275 for them. But if he doesn't, he's still okay with keeping the shares.

So it actually goes quite well with the segment you just... We actually did this separately, so it's kind of funny. But what Braden decides to do is sell a call option, which will give me, the buyer of the option, the right to buy shares at $275 a share anytime in the next two years. The $275 would be the strike price. The premium that I pay to Braden for that right is $5 a share or $500 total since it's 100 shares. The reason why I would want to buy a call option is because I'm clearly bullish on Microsoft. Brayden, on the other hand, will receive the premium, the $5 that I pay per

share, regardless of what happens. Whether I exercise my option or not, Brayden gets that $5. Now, like I mentioned earlier, options can get really complex. You can get a lot of different things happening, especially if you start reselling. You can get a lot of different things happening, especially if you start reselling options. There's a bunch of different things to do, but let's keep it simple here. There's essentially two main outcomes if we want to keep it at the most basic level. So before we go to the outcomes, let's recap. Okay. So I had 100 shares of Microsoft or stock XYZ. And I am going to, so let's walk through this scenario. I have my 100 shares.

And then what am I doing to you? Just for the listeners to really conceptualize this. I have my 100 shares. What am I doing? Okay, so you come to me, Simo. Are you interesting in having the option to buy my 100 shares of Microsoft at $275 anytime in the next two years. You don't have to do anything. You don't have to buy the 100 shares right now. It wouldn't make sense for you to buy them right now because they're trading at $200.50.

But I will give you the option. So that way, if it goes to $350 in the next two years, you can actually buy them from me at $275. But in exchange, you would ask me to pay you $5 per share to have that option. And that's the kicker. That's the kicker, the premium, right? That is the really important piece of the economics here is that there's a premium being paid for the contract to be written. Exactly. I just wanted to kind of double click on that. So we've talked about covered call ETFs in the past. And the reason why they're able to do more yield is because of that premium. So what they'll do compared to their counterparts is they'll sell

call options. They'll get that premium. so they'll be able to have a higher yield but they will also underperform if we're in a bull market because if it's a bull market chances are that these shares will go over that strike price and they'll be forced to sell and then forego some of the returns but they will tend to outperform in the bear market and i actually had an example where the if you don't believe me the qyld versus the qqq so these are the nasdaq etfs the qqq is the regular one the qyld is the covered call you'll notice that the qyld has outperformed the qqq by 10 so far this year because it kind of hedges a little bit the downturn. You get that premium. So therefore, you'll be looking at, you know, a bit better performance

when there's a bear market. But again, on the other hand, when there's a bull market, you're actually capping your potential returns. Caps upside and downside. Exactly. And now the two main outcomes is the shares either perform well or they perform poorly. So if they perform poorly, Braden will collect the $500 premium and keep his shares because it would make no sense for me to exercise the option since I can get the shares cheaper on the open market. The second outcome the shares perform very well and let's say they stay above $300 for an extended period of time. In that situation I decide to exercise the contract and Braden sells me his 100 shares for $275 a piece and keep in mind that Braden also

got the premium so in essence he actually sold them sold them for 280, the 275 plus the $5 premium. And the same would apply for me since I paid that $5 premium, I'm essentially buying them at $280 a piece. Like I mentioned, there's a lot of different outcomes because you can't actually sell the contract if there's still time on them. So the value of the contract, the contract if there's still time on them so the value of the contract once it's written will be very dependent on the strike price compared to the current price of the stock but also the time remaining on the option obviously it's like it's like if you put in a sports bet for some team okay so let's use let's use a good example right now. The Stanley Cup playoffs, as of recording today, when you guys hear this, it'll already be over.

But the Stanley Cup playoffs are 2-1 for the Avalanche right now. There's a good chance, but based on the way that fantastic team looks, maybe I'm wrong. This hindsight will be everything here when you hear this. They win the Stanley Cup. They look fantastic. If you put in that bet at the beginning of the year, there is a cash out available for you today because it's trending on the track that you

were right. And so you can take all the money off the table as the odds skew towards that outcome happening. Is that similar? Yeah. Yeah, that's pretty similar. So options contract will work in a similar fashion. And essentially, you know, there could be various reasons for people to do option trading. I think we outlined them pretty well in general. So if you want to hedge yourself against a potential outcome in the market, if you want to generate income, or I think one last reason is let's say you're on the fence about keeping or selling a company well you can actually sell some call options to generate income and if you're okay with either keeping them or selling them well if you end up selling them good you sell them at a

higher price because call options will always be sold at a higher price than they currently are like the options I gave before. So there is different reasons why people would do that, but those I think are the main ones that come to mind. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people

that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb

or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Let's move on to put options. So put options will give everything there to recap. That was a call option. That was a call option. Exactly. So that's the first type of option. And like I said, you're going to buy a call option typically if you're bullish on the company. Personally, I think, you know, you'll especially,

I mean, I personally just like to hold the shares. And one of the downsides is when you buy an option, you don't own the shares. So keep that in mind if you're bullish, especially on a dividend company, because you won't be receiving the dividend. That's right. But it is a way to collect some additional upside by throwing up a call option on something you are very bullish on. in terms of share price. Like I mentioned earlier, if we're looking at consolation, maybe you can't afford a share. You may be able to get an options contract on it, a call option that's way cheaper than one share. That could be a way to get some exposure to it, but I think I'm stretching it a little bit there.

Now, moving on to put options. So put options will give the buyer of the put option the option to sell the shares at a predetermined price. The seller of the put option will be forced to buy the shares if the buyer of the put exercises the option. Now the easiest way to think about put option is to see it almost as an insurance policy on a stock you own. So for example say I own 100 shares of Enbridge which currently trade that's 50 bucks a piece. I decide to buy a put option because I'm not sure about Enbridge and don't want to home the shares if they drop below $45 because I'm already looking at a pretty sweet

profit and even if I sell them at $45 a share I'll still profit nicely. So I decide to buy a put option on my Enbridge shares giving me the right to sell my shares at $45 at any point in the next two years regardless of where the actual market price of Enbridge is. The seller of the option gets a $2 share per share premium in exchange so that same premium we talked earlier meaning that the contract costs for me is a total of two hundred dollars a hundred shares times a two dollar premium now again there's two main outcomes here I won't go into the reselling and all the different kind of strategies that you can do with both call and put options but if in this situation if the shares drop to 30 then i can sell the shares for 45 because i have that put option if the shares go up to 60 on the other hand i can still sell

the shares for 45 but it would make no sense since i can get more on the open market however like we mentioned before the time aspect of the contract is really important because I can still recoup some of the premium I paid for by selling my option to someone else, assuming that there is sufficient time left. So if you buy a put option in this example, and you have a good feeling that you won't be able to use it because the price of Enbridge has been steadily over like $55, $60, and there's a few months left, you may look into selling that contract to someone else. You won't collect the $2 per share, but you may collect $0.50. So instead, you'll recoup some of the money. But the seller of the option collects the premium regardless of the outcome. However,

the seller will need to buy the shares if the option is exercised which mean it will be below the price of $45 so there is risk for the seller of the option since he could end up buying the shares well above market price if they and bridge tanks in this example so if it goes to $30 and it's exercise, then they're buying the shares $15 more expensive than the current market price. Of course, this is an overview of puts and calls, but I think it should give people enough understanding what they mean when they hear about options trading. And if you're more interested, definitely, you know, you can

always let us know. Maybe we can do a bit of a deeper dive on some strategies you can use. But there's tons of books out there. If you're looking into options trading, personally, it can get a bit tricky. So just make sure you're willing to put the time into it if that's something that interests you. And I would still make it just a small portion of my portfolio. Yeah. So that's a good overview. Okay. So now you know what it's about. Again, it's not something that either of us do as long-term investors. Can we just double click on potentially what are the upsides and downsides if you were to summarize them really quickly on using options? What is the upside of potentially rolling out an option strategy if you were to condense it down to one? And then conversely as well, what are the risks that you

need to be aware of? Well, I mean, it depends on which side of the trade you're at. I think the risks and benefits all vary. Obviously, if you're selling the option, there's definitely some more risk. But in exchange, you're getting that premium. Right. So if you're selling, you know, a call option, you're forced to sell those shares if there's a big bull market and they go way above the strike price. So that's where the biggest risk is. Your risk is not obviously unlimited. So that's something good to know when you're specifically talking about a situation where it's covered. So a covered call situation just means you own the share. A naked call is where you would put out options without actually owning them. And I won't go into

more detail about that, but that's the biggest risk. If you're buying the call option, the biggest risk is that you lose your premium. You just lose the premium you paid for. So it's relatively lower risk for that. Obviously, if you start losing premiums left, right and center, it's definitely going to affect your returns. And then the same thing, right? If you look at put option and you're selling the contract. So the biggest risk is you end up having to buy something at a much higher price than the current market value because you're essentially giving someone the right to buy them at a specific price, even if the price is much lower. And again, if you're buying a put option on the other end, again, same thing. Your risk is a premium. So the way I think about this, and I think this just characterizes myself as an

investor, is I don't want to have to be right on some sort of timeframe on share price. And that is what options trading requires. And so just to give you a 10,000 foot view here is that to make money doing this, you have to be right on price action in some set period of time, depending on how long the contract is. And that's not a game I enjoy playing because you and I, we like to buy and hold great businesses and you have to rip them out of our hands in terms of selling them unless something has deteriorated significantly, as mentioned, you got to really rip those shares out of our hands as long-term investors. And in the short term, prices can be absolutely completely volatile. The market is an extremely volatile place. I mean, let's look at a business we interact with on a daily basis, Google or holding company Alphabet. From January until December of

last year, you made like 70% your money on a large cap like Google or Alphabet. So you made significant amount of money on that. And then now since then, shares are down 25% since that point. And so has the business fundamentally changed that much in that period? Yeah, it has. It's gotten better, right? Like the core search business keeps growing, YouTube keeps growing, the cloud business growing. And so the fundamentals have gotten better, but has the price action completely reflected everything? No, of course not, not in the short term. And that's the one thing that people need to recognize if they're doing a strategy like this versus buying and holding companies and focusing on the fundamentals. They're just different games because it requires price action and time to both be

correct. Those are variables you got to be correct on. Yeah. And I think the one situation that I find, especially put options, very intriguing is especially someone looking at, you know, retirement fairly soon. And maybe they have a couple positions that are a bit more volatile and they just want to basically buy some you know have a bit of insurance on that so i can see you know i can see making the case for that so that's probably one that yeah that makes definitely a bit of sense there and it's why it's why hedge funds run long short strategies yeah exactly and i think in the same vein too i still i'm still reluctant when i'm looking at covered call etfs because that's a whole etf that does it and i think it's

pretty it's not optimal if you put all of your you know all your money in a covered call etf because it will underperform you know history has shown that and we've talked about that about previous episodes like we did compare i look at I'm like, just buy high quality dividends. Yeah. Well, what I'm saying is you could try to boost your income with one or two holdings. So you have a 20 holding portfolio and do some covered calls on those to be try and boost your income. But again, it's it would be only something I would use in very specific situations.

And I would not necessarily recommend for a lot of people to do that. And personally, I would only do it for a couple of my holdings to potentially boost that income that I'm getting. But I wouldn't do on all of the 20 holdings. So I think it could provide value, but it's very nuanced for me. I would not give it like a clean slate. And for the most part, I would agree with your assessment of it. And right now at my stage in my investing journey, I don't really have any interest in doing that. Right. You're going to make your money from great businesses compounding over time,

like most people do. And like how every legendary hall of Fame investor has done, is let compounding of wonderful businesses and the market work for you. Because if you don't make money while you sleep, you'll be working forever. And so that's another Buffett quote, isn't it? I'm pretty sure it is. All right, thanks guys. Thanks so much for listening.

We really appreciate you. To support the show and see our portfolios updated every month, it's coming close to the end of the month here, go to joinTCI.com. Join TCI, it's a place to support the show, as well as stratosphere.io. If you go on there and you're thinking about this episode, you're like, when do the business fundamentals change, like Br Braden was talking about. And maybe, you know, this company, I've lost some money on it. Let me take a look at it.

Have the business fundamentals worsened? And maybe they have, maybe they have not. But it's really an important thing to check the data to see if you can make the proper assessment if the business has changed. Now, how do you do that, Simone? How do I look at a company and know that the business fundamentals have changed? Well, every single company has a few select key point indicators. You track them, I track them, Stratosphere has them for the whole whack load of companies. So go check it out. I was going to say newspaper, but I guess that's not what you're saying huh you don't you check the

newspaper every morning exactly that's right that's where i get my quotes that's where you get all your quotes yeah you don't even know what's happening in the market you don't use technology you're just a newspaper guy right yeah that's good simone does doesn't have internet. He just uses the newspaper. So let's think of an example, okay? A business you're tracking, what are the key fundamentals? I always think of Visa, okay? Visa, total payment volume, cross-border transactions. For the most part, total payment volume is a really good litmus test for how the business is performing from a fundamentals perspective. If total payment volume starts decreasing, there has been a regime shift. Would you agree?

Total payment volume starts decreasing on Visa or MasterCard, there is something happening in the ecosystem. Especially in an inflationary period, that would be very scary. Yeah. And how fast digital payments is growing and like, okay, who's eating their lunch? And so it's important to track those numbers and that's why we track them at stratosphere.io. It is a premium metrics to track, but they're so worth it. And trust me, to track, but they're so worth it. And trust me, it is a grind to get them all in one place. So we're doing that for you. So you can know it's money well spent. Again, that is stratosphere.io. You can use code TCI to get 15% off. Thank you so much for listening. If you're new here,

episodes are Mondays and Thursdays. Take care. We'll see you in a few days. The Canadian Investor podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.