Free Lunch Friday #4: The DIY investing playbook, covered calls and Stratosphere
The barebone basics about investing in 15 minutes, a low-risk option strategy and how to save hours of research when buying stocks.
Howdy financial wizards! This month I’m sharing the only guide you’ll ever need to get started as a DIY investor. We’re also going to learn about a new thing called covered call and a pretty cool research investment platform. If you have any suggestions of topics you would like me to tackle, let me know!
The DIY Investing Playbook
I’ve started investing almost 5 years ago, and while my journey as a DIY investor is somewhat recent, I realized that it’s hard to get started as a beginner, especially with the volume of information available out there.
The amount of research I did was tremendous, so it motivated me to document and simplify my findings to make it easier to digest. I'm far from an expert but I started looking how I can invest by respecting the following guidelines:
I'm decades away from retirement and I want interesting returns while leveraging compound interest
I don't want to spend more than 2 hours per week managing my investments
I want to have the liberty to choose the financial assets I want, with costs I'm comfortable with
These guidelines helped me develop a simple framework to invest my money by myself.
It has a whooping 3400 words and include advices and insights on how to get started as a DIY investor in Canada. This is not financial advice, but hours of research included in an easy-to-read guide. I’m tackling the following subjects:
How to understand your risk tolerance
How to allocate your assets on your portfolio
The different types of DIY investors
Which platforms to use for investing
A step-by-step walkthrough on how to start investing
If you always wanted to get more serious about investing but don't know where to start, this playbook is for you.
Why do you need covered calls?
Covered calls are part of an option and a risk management strategy used to generate income in the form of option premiums.
It’s an advanced strategy that can be useful when trading options to generate profit with higher returns but lower risks than normal investments.
Let’s see how covered calls work:
You buy 100 shares of Bujold Inc. for $100 per share. You believe that the stock market won’t be volatile in the short-term. You also predict that the share price of Bujold Inc. will grow to $105 in the next three months.
To lock up your profits, you sell 1 call option contract with the strike price of $105 that will expire in three months (note that one call option contract consists of 100 shares). The premium on this call option is $3 per share in the contract.
Source: Corporate Finance Institute
After this covered call, three scenarios can happen:
Scenario 1: Stock price remains at $100 per share.
In that case, the buyer will not exercise the call option because it is out-of-money (the strike price exceeds the market price). Since the price don’t change, you will not earn any return from the stock. However, you will earn $3 per share from the call premium. This is an okay scenario to still make money from the status quo.
Scenario 2: Stock price increases to $110.
If a stock price increases to $110 per share after three months, the buyer will exercise the call option. You will receive $105 per share (strike price of the option) and the $3 per share from the call premium. In this covered call scenario, you’ve sacrificed a small portion of potential profit in return for risk protection. This is the best scenario possible for you.
Scenario 3: Stock price decreases to $90.
In such a case, the call option will expire similarly to scenario 1. The stock will lose $10 per share in value, but the call premium of $3 per share will partially offset the loss. Thus, your final loss will be $7 per share. This is the worst scenario for you.
As you can see, covered calls are not perfect, but they can be leverage with ETFs purchased on margins or even index futures. It’s a potential strategy to lean on as you become a seasoned investor.
My watchlist
SHOP | Shopify Inc isn’t at the state that the company was in 2021, but it still a really interesting stock to invest in. They are planning to roll over 100 new products and features by partnering with Apple, Google, Twitter and is looking to dabble into crypto as well. Even if the growth is slow, they are also planning more stock split in 2022, so that’s a ticker to watch.
TIXT | Telus International is different from the blue chip stock that is Telus (T:TSX). It’s a bundle of the different corporation under the bigger umbrella that is Telus International. The company has great numbers and high potential of growth in the future. That’s why I’m keeping it in the old watchlist.
Financial software of the month: Stratosphere*
When investing in the stock market, there’s a crucial element that can help you be successful: research.
However, research is time-consuming and it can really difficult to meddle with financial reports if you don’t know where to look.
Stratosphere can help you achieve that—this all-in-one platform gives you financial data, metrics, graph, reports, and even scores on specific stocks!
It has a free plan that you can use to get an extra layer of research as part of your investing process. However, if you use my special link, you get a 25% discount on checkout of any paid plan.
If you want to take insightful investment decisions and supercharge your research, it’s a no-brainer for your toolbox.
Save 25% today and supercharge your stock research now.
*I’m an affiliate of this product and I might be getting commissions if you register.
That’s all for this month folks! If you learned something, please share with your friends that are interested in investing and personal finances.
Note that I am not an investment professional, and this is not investment advice.