As we count down to the end of the Australian Financial year for 2013/14, it is a crucial time for professional investors to add to their edge, and of course overall return.
Every cloud has a silver lining
While originating in 1634, from John Milton’s “Comus”, this expression could not be more relevant to right now. The caveat here on this article is that I am not licensed to provide tax advice and nor am I – check this out with your tax advisor.
Take for example, a stock position that is underwater – worth a lot less than what you paid – let’s say. There may be tax advantages for you (talk to your tax advisor) by realising that loss this year, to offset against other income. The problem is of course, what if NCM (ASX:NCM – Newcrest Mining Limited) bounces and you miss out on the chance to participate in the recovery – disaster – you have been hammered both ways. Not fun!!
So how do you get set for a bounce in the share price?
Traditionalists would suggest rebuying in on July 1st – not something I would recommend – why – because you are tying up your cash for an emotional win, and what’s to say it is going to recover?
As an alternative, how about buying a long dated in the money call option, as a stock replacement?
Long dated to make sure that you have crucial time for any recovery to happen is critical. Trading at the shorter or nearer time end will expose you to massive time decay – most certainly not what we offer in this case. The position would also need to be managed before the short term time decay set in.
Deep in the money – giving you a delta of One so that a $1.00 move in the stock translates to a $1.00 move in the option price. This is critical and while out or at the money options would be cheaper – this one-for-one move is exactly what we are targeting.
Less capital is required – depending on market prices on the day, perhaps as little as 10% of the cost of the shares. That means you have 90% of the cash to invest into an alternative stock (diversification – how about that as a bonus!).
The share price may languish at the current levels. While a long dated option wont be too adversely impacted by this, it is a consideration. Alternatively, the share price could fall – this would impact on the option’s price on a one-for-one basis but is no more risky than the share position. To mitigate part of the cost here, you could sell short dated calls however, this would cap any bounce in the stock.
Confused by this?
If you are, that is understandable. For almost 20 years trading these kinds of instruments has been part of my weekday life. So how about come to one of my live training sessions and learn exactly how you can be doing this kind of thing? We have a series of live events in July – Brisbane, Sydney, Perth and Melbourne and these are the sorts of things we shall be covering – in plain English! REGISTER NOW
But I don’t want a loss
Nobody does, as psychologically, accepting a loss is hard for many a “would be trader”. However, it goes with the turf and even with solid risk management, following your strategy to the letter, there is always the potential for making a loss. The key thing is never what happened but how you handle what happened.
In this case, benefit from the tax loss this year and get the exposure for the upswing on any recovery in the stock makes a lot of sense, assuming you are optimistic about the potential for the share price.
Even losses have their benefits – and this is a classic example of how great advice – even if from 380 years ago, truly can stand the test of time – afterall, even losses come with a silver lining.