# Stock-indexed GIC's



## J Watts (Jul 19, 2012)

With the downfall of Ally as high interest savings, I'm pulling my money back to Scotiabank. It took a lot of energy and convincing the spouse to go with Ally in the first place, so our cash savings is going to stay with Scotiabank and investments will still be between Scotiabank, ING, and TD e-Series.

I know there are some fans of laddered GIC's, but what about stock-indexed GICs? For example:

http://www.scotiabank.com/ca/en/0,,1115,00.html

If they simply track an index and the money is locked in for a set period, why wouldn't I just go with an index fund?

A plain 5-year accelerated rate GIC (http://www.scotiabank.com/ca/en/0,,158,00.html) may be the way to go for a safe 2.29% yield, but I'm looking for a shorter term if possible. Otherwise, I might as well leave the money in Scotia's savings account at 1.2%.


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## gibor365 (Apr 1, 2011)

Before I opened discount brogarage account, I bought in TD 3 years ago, 5 years Security GIC Plus. It linked 50% to TSX Financial index and 50% to TSX Utilities index. The minimum was 1.28% annually, the maximum 4% annually...
Now they offer the same GIC, but minimum got reduced to 1% (maximum the same up to 20% in 5 years).

Also checked stepper GIC....
Year 1 1.00% 
Year 2 1.25%
Year 3 1.50%
Year 4 1.75%
Year 5 5.30%
Do they think that only after 4 years rates will rise?


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## OptsyEagle (Nov 29, 2009)

gibor said:


> Before I opened discount brogarage account, I bought in TD 3 years ago, 5 years Security GIC Plus. It linked 50% to TSX Financial index and 50% to TSX Utilities index. The minimum was 1.28% annually, the maximum 4% annually...
> Now they offer the same GIC, but minimum got reduced to 1% (maximum the same up to 20% in 5 years).
> 
> Also checked stepper GIC....
> ...


Just so you know, that is a 5 year GIC paying 2.15% annually. Compare others to that before you choose. 

Step up GICs are just a shell game. Remember, a 5 year compounded GIC doesn't really pay annual interest. Only upon maturity do you have access to the capital and interest, so how they account for it each year, is completely irrelevant. When you see a step up GIC like that, the easiest thing to do is add up the 5 interest rates and divide by 5 years and you will get very, very close to the annual interest rate.

Keep your eye on the pea. The banks move the shells very quickly but the pea is not always that difficult to find.


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## OptsyEagle (Nov 29, 2009)

J Watts said:


> I know there are some fans of laddered GIC's, but what about stock-indexed GICs? For example:


It is on a very rare occasion that the 5 year indexed GIC, ever pays more then what the 5 year regular compounding GIC would have paid if bought at that time. 

The problem is in the fine print. The banks will use terminology like 60% of the upside in a given year to a maximum of 12% in any year, minus the downside in a given year. (don't use this as how they work, it is just an example. They are all different, so read carefully)

The problem you have is that stock markets rarely go straight up for 5 years in a row. In this case the best you would do is 12% per year, but there is less then a snowballs chance in you know where that you will get that. Stocks tend to move like this: Up 26% in year one, down 14% the following year, flat the next, up 8% the next and down 7% the next. So you would get the max of 12% in year one, lose 14% in year 2, still down 2% in year 3, move ahead 6% in year 4 and lose 7% in year 5 .... so they give you your money back with no interest 5 years later, when the stock market is actually up 8.8% over that time frame. This type of thing will happen 4 out of the 5 years you play this game.


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## humble_pie (Jun 7, 2009)

people can build their own stock-indexed GICs at low cost if they want.

out of $100,000, buy plain GICs. Perhaps 90-95k.

with the remainder, buy march 2015 XIU calls. Or any other broad-based index call that is highly liquid.

in XIU, the tricky part is stalking the mar/15 LEAPs call, because montreal exchange is difficult. However institutions trade heavily in XIU (although not in XIC, which is why XIC options have to be avoided.) So sooner or later, liquidity will appear & the XIU stalker will luck out.


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## gibor365 (Apr 1, 2011)

OptsyEagle said:


> It is on a very rare occasion that the 5 year indexed GIC, ever pays more then what the 5 year regular compounding GIC would have paid if bought at that time.


Not exactly.... I can buy 5 years GIC in TDW now with best rate 2.45%. With Security plus GIC I can get 4% annually in case average of TSX Financial index and Utility index will grow to at least 20% from today until Feb 21, 2018


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## andrewf (Mar 1, 2010)

I think the general consensus is that these index-linked GICs are a bad deal in general. I expect that there are hefty costs embedded in the return calculation. The Banks don't provide these products out of the goodness of their hearts.


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## brad (May 22, 2009)

andrewf said:


> I think the general consensus is that these index-linked GICs are a bad deal in general. I expect that there are hefty costs embedded in the return calculation. The Banks don't provide these products out of the goodness of their hearts.


My guess as well, given how relentlessly the banks flog these products. I bought a five-year fixed rate GIC online the other day and the bank called me today to try to talk me out of it and switch to an indexed GIC instead. I said no thanks.


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## humble_pie (Jun 7, 2009)

here's a possible dirt-cheap DIY index-linked GIC:

1) plan to buy a 2-year GIC for 95,000. Plan only at this stage, don't buy yet.

2) commence stalking the XIU march 2015 $20 LEAPs call on montreal exchange. Right now it's .63-.84, which is not bad. One might reasonably bid .75 to buy, although not likely to be filled at first. Remember, one is just stalking at this early date.

_hint numero uno: do not be discouraged if there is failure to buy on the first day. Cancel order by 2:30-3 pm in order to prevent partial fills. Following day, start again. Keep stalking. Keep cancelling order by 3 pm each day._

3) with this particular option, investor would bid to buy 70 contracts, representing 7000 units of XIU. At .75 per contract, the cost would be roughly equal lto the GIC income to be earned over the life of the structure.

_hint numero due: if broker charges $1.25 per contract, as many do, contact broker & seek to negotiate this commission downwards. It is no more effort for broker to execute order for 70 contracts than for 7 contracts._

in the end, investor will have no money at risk. He will have a leveraged chance of upside if XIU rises above $20 at any time prior to march 2015.

_hint numero tre: if an explosive upward move in broad toronto index should occur at any time, investor should promptly consider whether to sell or hold his profitable XIU 2015 calls, even prior to maturity. This flexibility is another beautiful feature of the DIY indexed GIC._


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## fatcat (Nov 11, 2009)

a variation on what has been offered by others

you can put 95% into a peoples trust 1-year GIC at 2.05 and 5% into XIU or use pie's options strategy

it is beyond me why you would consider locking for 5-years to pick up 29 basis points over a 1-year lock


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## humble_pie (Jun 7, 2009)

one would *never* put 5% into plain old XIU as has indeed been suggested by others here.

one *needs* the leverage offered by the XIU option strategy (never before spelled out in detail here in cmf forum, although one famous blogger has asked me how to write a how-to article about it.)


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## andrewf (Mar 1, 2010)

As a rule of thumb, the more complex and obfuscated the product, the more likely it is to be a bad deal for the person to whom it is being sold. All these market-linked GICs, stepper rate GICs, etc. are designed to get clients to accept a lower yield/lower the bank's cost of debt.


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## james4beach (Nov 15, 2012)

This is true. These stock indexed products and other "guaranteed" market return products (like PPN) come with many caveats.

You can construct your own "guaranteed" stock return. As humble_pie says, you need leverage to do it. The simplest form is a fixed income instrument (GIC) accompanied by some index call options.

Worst case scenario, the index call options expire worthless so you can calculate your "minimum" return. Back when interest rates were higher you could easily earn enough on the GIC to offset the total loss on the call option. And if the market rallies like crazy... you make tons on the index calls, plus you always get your fixed income portion.

I used this strategy (with XIU) back in 2007 with a position that lasted 1.5 years. In that period, XIU went 6% against me and I closed it for net 2% profit... a pretty good deal. This came from $7437 cash + $587 option which turned into $7808 cash + $387 option... showing you that the option (leveraged part) is a very small part of the mix.

Pricing the whole thing is complicated, as you have to graph out the returns you'll get as a function of option premiums and fixed income rates. Under some conditions it's not worth doing at all. I suspect that these days it wouldn't be worth it, as XIU calls are probably expensive and cash rates are very low.


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## james4beach (Nov 15, 2012)

I'll add that if you're pursuing such a strategy (with cash + option) you're better off doing it when the VIX is low. In any case, as an options buyer you want low implied volatility.

You also really have to graph out a curve of your strategy's total return versus index movement. Some of the curves look pretty bad depending on which option you're going to select, ITM, OTM, time to expiry, etc.


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## humble_pie (Jun 7, 2009)

XIU calls are actually dirt cheap & have been for some time. I speak sorrowfully as a longtime holder of XIU & seller of its calls; alas poor yorick they are not worth much these days.

i mentioned the price for an XIU march 2015 $20 call, which was .63-.84 an hour ago, probably could be chased for .75. This is reasonably appealing.

i don't think it's necessary to graph anything, unless an investor is a person who likes to do this. It only took me a couple minutes to check prices & work up my simple plan.

afaik many of the bank products are only offering to return an investor's original capital. So the DIY indexed product plan i posted was constructd to do the same.

it betters the bank products, though, in that 1) its upside potential is unlimited; & 2) the investor can sell his XIU call at any time it rises during the life of the structure, whereas in the commercial product the futures/capital leverage is usually restricted to the window that is in place at the moment the instrument matures.


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## fatcat (Nov 11, 2009)

oh goodness james and pie
what am i to do with you guys ?

you have someone who is considering buying an indexed GIC
and who owns td e-series
and is considering just leaving money in a savings account at 1.2%
and whose wife is clearly a conservative investor

and you tell him to implement an options strategy ?

right ... "honey, forget that GIC ladder, let's go with options"

XIU is an actual alternative as opposed to one that is clearly beyond the comfort and experience level of the op

perhaps i am wrong here james, is it well known that people considering indexed GIC's keep a keen on the VIX ? .... :biggrin::rolleyes2:


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## james4beach (Nov 15, 2012)

Yeah you may be correct that I over-optimized it in my case... I liked graphing and visualizing the returns.

In any case, I agree it's better than the bank's product plus the ability to close it whenever you want.

In fact I have yet to encounter any investment product that I can't do a better job of myself, versus what the banks sell... annuities included


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## humble_pie (Jun 7, 2009)

cat my model each: was constructed to equal a bank indexed GIC which guarantees to return your capital ... although my model was better in some other respects ... whilst being apple-pie smooth n easy at all times ...

out of 100k, 95k was invested in a GIC. Guaranteed. by. the. government. of canada.


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## james4beach (Nov 15, 2012)

fatcat said:


> oh goodness james and pie
> what am i to do with you guys ?
> 
> you have someone who is considering buying an indexed GIC
> ...


Don't do it unless you are familiar with options! Trading options isn't the easiest thing in the world, and there's many caveats e.g. high bid-ask spreads.

And remember that CASH is going to be a huge part of the total investment. The option is a very small part of it... remember that the option may well go to $0, so the key question (your wife will wonder too), what is the worst case scenario if the option becomes $0 ?

Using my own example I gave above. I made a $7,400 cash investment and totally separate, I made a small but high risk stock investment of $587. I knew I could have easily lost the whole $587.


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## HaroldCrump (Jun 10, 2009)

There is another "catch" with these index linked GICs pumped by all of our major banks.
Investor has to check _which_ index is it being linked to - is it the S&P TSX 60? Or the TSX Composite (approx. 250 holdings)?
If the GIC is being pegged against a Financial or Energy index, which one - the S&P TSX Capped Financials?

As we all know, the underlying index will have a big bearing on the performance of the GIC.

Many of these bank sponsored index-linked GICs are *not* pegged to the standard S&P indexes.
Often they are pegged to a custom, home-grown portfolio or index by the bank.

It is not easy to find the underlying index or portfolio - you gotta dig around the website to find it.

For example, this market-linked GIC from the Bank of Montreal is pegged to a custom selected portfolio by the managers of the fund:
http://www.bmo.com/pdf/term/GGICSheet-Eng.pdf

This 3 year GIC by Scotiabank is linked to some custom 7 stock portfolio created by Scotiabank:
http://www.scotiabank.com/ca/en/0,,3189,00.html

And - believe it or not, there are market linked GICs that are pegged to mutual funds created by the same bank.
This GIC from Scotiabank is pegged to a Scotiabank Dividend Fund:
http://www.scotiabank.com/ca/en/0,,3192,00.html

The Scotia Dividend Fund has an MER of 1.71%

Nice, innit?


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## fatcat (Nov 11, 2009)

james4beach said:


> In fact I have yet to encounter any investment product that I can't do a better job of myself, versus what the banks sell... annuities included


i get your point, you probably can ... but you are an experienced highly motivated investor who puts the time and understanding into learning ... many people have neither the interest, time or capacity to do so ... oh, how i wish the average investor was even the average of what we have on this forum .. we are NOT the mean on cmf

pie, yes, i get it, your strategy included 95% of capital guaranteed by our government to be returned

but i am saying that options are complex and simply spending 95% on a gic and the other 5% (plus $9.99 for the trade) on a simple XIU purchase is leagues simpler and thus more likely to be undertaken by the OP, that's all and _can_ also produce a very good result

having said that i admit that your options stragey is perhaps likely to produce better and more predictable returns

how much time have you spent learning options ? ... a lot i venture
i suspect the OP isn't interested in the time required to get the options thing right

i stand to be corrected ..


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## humble_pie (Jun 7, 2009)

james4beach said:


> there's many caveats e.g. high bid-ask spreads


james i addressed the B/A already, as i mentioned it's extremely low & tight for a 2015.

all XIU options are low. They are in the bargain bin. We need the chevalier de la gauchetière to show up here & explain why vega & co are behaving like this. Even then i usually don't go 100% for these theoretical assumptions. I can see wit me own eyes that march 2015 calls are getting near fire sale prices.


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## Beaver101 (Nov 14, 2011)

HaroldCrump said:


> There is another "catch" with these index linked GICs pumped by all of our major banks.
> Investor has to check _which_ index is it being linked to - is it the S&P TSX 60? Or the TSX Composite (approx. 250 holdings)?
> If the GIC is being pegged against a Financial or Energy index, which one - the S&P TSX Capped Financials?
> 
> ...


 ... after all that reading, please keep in mind that these stock-linked/market-linked GICs has a "participation" rate built in (ie. cap) so even the stock-markets soar, your return is limited to that number. And if the stock-markets do poorly, you would only get back your principal or a return based on a consolation interest rate after 2, 3 or 5 years depending on the product's term. I believe these GICs were once nicknamed "GICs with training wheels" of which I was an investor (aka sucker) of one. My return was a big fat "zero" after 3 years - I only got back my principal, not even based on the consolation interest rate. :rolleyes2:


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## humble_pie (Jun 7, 2009)

fatcat said:


> pie, yes, i get it, your strategy included 95% of capital guaranteed by our government to be returned


actually the strategy means 100% of capital would be returned. 

95k would be used to purchase a GIC that would pay, over 2 years, roughly 5k in interest. That 5k was to be used upfront to purchase LEAPs calls in XIU.

at the end of 2 years, if the TSX had flopped continuously throughout that period, the investor would get his 95k - ie 100% of his original investment - back.

easy as apple-pie-n-ice-cream


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## RBull (Jan 20, 2013)

LOL, good one. I laughed because I had the exact same thoughts before getting to your post.


fatcat said:


> oh goodness james and pie
> what am i to do with you guys ?
> 
> you have someone who is considering buying an indexed GIC
> ...


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## fatcat (Nov 11, 2009)

humble_pie said:


> actually the strategy means 100% of capital would be returned.
> 
> 95k would be used to purchase a GIC that would pay, over 2 years, roughly 5k in interest. That 5k was to be used upfront to purchase LEAPs calls in XIU.
> 
> ...


yes, got it ... that's the whole point, 100% is guaranteed to come back ... i remember when i first heard about one of these it was from a BMO guy in a branch, he was selling this idea instead of BMO's indexed GIC's ... i am sure he has been fired by now ... i know that when he explained it to me i found it very appealing, i am conservative and i loved the idea of "being in the market" with "no risk"

i still think it can be a very good strategy for some people especially those with very small savings who are ultra concerned about the downside ... of course i am talking about the self-made option and never the bank product option which is a sucker bet ... on that we all agree


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## andrewf (Mar 1, 2010)

No, the real solution is to forget index-linked GICs and build a balanced portfolio of equity and fixed income, the latter potentially including vanilla GICs.


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## brad (May 22, 2009)

One thing I've encountered is "stepper" GICs where the return averaged over five years is actually a bit higher than the return of a plain-vanilla fixed-rate five-year GIC. I assume what they're doing is pushing down the rate of their fixed-rate GICs so they can offer the stepper at a higher rate and lure more people to it. But what I don't understand is how do the banks benefit from stepper GICs? What's in it for them?


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## HaroldCrump (Jun 10, 2009)

Beaver101 said:


> ... after all that reading, please keep in mind that these stock-linked/market-linked GICs has a "participation" rate built in (ie. cap) so even the stock-markets soar, your return is limited to that number.


Yes, that too.
There are multiple problems with these products.



> of which I was an investor (aka sucker) of one. My return was a big fat "zero" after 3 years


Well, join the club my friend.
I got sucked into this once, but only once, years ago.
Thankfully, back then the going interest rate for even these GICs was 3% I think.


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## andrewf (Mar 1, 2010)

brad said:


> One thing I've encountered is "stepper" GICs where the return averaged over five years is actually a bit higher than the return of a plain-vanilla fixed-rate five-year GIC. I assume what they're doing is pushing down the rate of their fixed-rate GICs so they can offer the stepper at a higher rate and lure more people to it. But what I don't understand is how do the banks benefit from stepper GICs? What's in it for them?


You can't just average. You need to take the geometric mean.... or compound annual growth rate.


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## Eclectic12 (Oct 20, 2010)

Beaver101 said:


> ... I believe these GICs were once nicknamed "GICs with training wheels" of which I was an investor (aka sucker) of one. My return was a big fat "zero" after 3 years - I only got back my principal, not even based on the consolation interest rate. :rolleyes2:





HaroldCrump said:


> Well, join the club my friend.
> I got sucked into this once, but only once, years ago...


Interesting ... the one time I used a three year market linked GIC the simple interest payout was 30%. That was in the early days where my participation rate was 92% and where if one asked the right questions, one could avoid the "max return is 10%" flavour.

Now that I've learned more and have access to more investing possibilities, I'd go the DIY route.


Cheers


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## Dibs (May 26, 2011)

I haven't read all the responses here but I assume most people do not recommend market-linked GICs and I am also of that opinion. I posted something about it on another forum earlier this february too:



Dibs said:


> I have two of these GICs. I bought them in 2009 when the markets were down and so they will likely turn out OK. However if I would I buy them again? Probably not.
> 
> The first reason is that they are doing something that you can do yourself. You essentially lend them money for five years at a low (or 0%) interest rate, they invest in the market, and they keep any excess returns.
> 
> ...


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## brad (May 22, 2009)

andrewf said:


> You can't just average. You need to take the geometric mean.... or compound annual growth rate.


Ah, so sneaky! Here's what they advertise on their website:

1st year: 1.00%
3rd year: 1.50%
5th year: 5.00%
"Average rate": 2.19%

But the geometric mean is actually 1.63%. This is worse than their 5-year fixed rate.


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## james4beach (Nov 15, 2012)

andrewf said:


> No, the real solution is to forget index-linked GICs and build a balanced portfolio of equity and fixed income, the latter potentially including vanilla GICs.


I think this is the best answer.

Synthesizing a stock-indexed GIC is certainly possible, but it doesn't really do anything special that isn't accomplished by fixed income/cash and some stock exposure. It's a neat effect, but it's equivalent to those plain old investments.

If there's one big take-away lesson, it's that you probably need more cash & GICs in your total allocation than you think. The proof of this is that the stock-indexed GIC "feels good", and the reason they feel good is that the big cash portion buffers the volatility of the stock exposure.

The last time I bothered with index options was 6 years ago. Ever since then I've just done simple stock and ETF investment. My total allocation (which is 8% equity and the rest in cash & fixed income) is in fact like one giant stock-indexed GIC.


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## Squash500 (May 16, 2009)

james4beach said:


> I think this is the best answer.
> 
> Synthesizing a stock-indexed GIC is certainly possible, but it doesn't really do anything special that isn't accomplished by fixed income/cash and some stock exposure. It's a neat effect, but it's equivalent to those plain old investments.
> 
> ...


James I studied Options for a couple of months. I find the whole Options market exciting (especially on the U.S side) but in the end I totally chickened out and decided not to open a TDW margin account which is obviously needed if you want to trade options.

Humble Pie's XIU option comment made some sense....but I would really get irritated trading on the Montreal exchange as the spreads and volume IMHO are awful. Often on the Montreal exchange....it's just yourself trading with the marketmaker---LOL.


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## Squash500 (May 16, 2009)

fatcat said:


> i get your point, you probably can ... but you are an experienced highly motivated investor who puts the time and understanding into learning ... many people have neither the interest, time or capacity to do so ... oh, how i wish the average investor was even the average of what we have on this forum .. we are NOT the mean on cmf
> 
> pie, yes, i get it, your strategy included 95% of capital guaranteed by our government to be returned
> 
> ...


FC I totally agree with you that options are very difficult to learn. I know for a fact that at TDW they won't let you trade even level 1 and 2 options without passing a test over the phone with one of their licensed traders. I totally agree with you that putting the other 5% on an XIU purchase is what I would do.

Another problem with trading options....is that it forces you to get a margin account. To go from thinking about buying an index linked GIC to all of a sudden buying XIU call options and dealing with the temptations of a margin account is IMHO just not worth the hassle.


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## humble_pie (Jun 7, 2009)

squash i guess if you "studied" options for 2 months but never opened a margin account for option trading then that must mean you have never traded a single option contract in your life.

which leads one to wonder why. Did tdw perhaps flunk you, for example. Or why would you want to draw attention to this by indulging in what does sound like sour grapes.

the returns from investing that extra 5000 in XIU shares themselves will be insignificant. At today's closing price of 18.31, 5k might purchase perhaps 270 shares.

suppose shares were to rise by $8 over the next 2 years. XIU at 26.31 is not unrealistic. However with 270 shares, one is talking about an appreciation of only $2,160. Meh.

if that same 5000 were to be invested in the above-mentioned 2015 calls, there would be 70 contracts governing 7,000 shares.

an $8 rise in the underlying would push the 2015 $20 call from .75 to $7 or higher, depending on volatility. For the sake of illustration let us assume a conservative $7.10. The XIU calls are now worth $49,700.

in this scenario, there would be a $47,540 advantage to owning the leveraged options vs owning the shares. It's to gain that advantage that many folks bestir themselves to learn a little something. Enough to overcome "chicken" fears of "hassle."


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## 1.5M (Apr 21, 2012)

Squash500 said:


> Another problem with trading options....is that it forces you to get a margin account. To go from thinking about buying an index linked GIC to all of a sudden buying XIU call options and dealing with the temptations of a margin account is IMHO just not worth the hassle.


You can buy options in registered accounts. You can't write options in registered accounts.
However, buying options is usually a speculative investment.


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## humble_pie (Jun 7, 2009)

1.5M said:


> You can buy options in registered accounts. You can't write options in registered accounts.
> However, buying options is usually a speculative investment.


of course one can write options in registered accounts. I write many.


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## james4beach (Nov 15, 2012)

humble_pie: I'm not totally comfortable with how you're representing options there. "there is a $47,540 advantage to owning the leveraged options vs owning the shares" makes it sound way too easy. I know what you're saying, technically, but you're describing the best case scenario. It's just not that easy.

The options speculator has to get several things right: direction AND time frame. That's very hard! People have a hard enough time predicting market direction. Then you add a time limit... even harder. Look if it was this easy, then Manulife & friends would all just be loading up with index call options all the time and be striking it rich in the stock market. Obviously that's not how it works.

I've frequently seen people plow lots of money into call options, hoping for the big windfall like the one you describe, only to (repeatedly) see the options expire worthless. I've seen it too often. So I don't engage in one-sided options bets, and I discourage others from doing it too.

The other thing I've seen from friends who speculate a lot with options is very wild swings in profits & losses. It's a roller coaster ride... a $10k profit here, a $20k loss, maybe a $100k profit and you're euphoric, then a series of losses summing to $120k and their wife is going to kill them... often this happens because the speculator underestimates their risk and overestimates their likelihood of guessing correctly.

humble_pie may be very good at this and s/he may be making excellent profits, but it doesn't mean the rest of us can. Not everyone is a great speculator, and some people do have a better knack than others

Just beware. My advice: if you're dabbling in options, use very small amounts until you have a solid methodology and track record spanning close to a decade.


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## humble_pie (Jun 7, 2009)

looking at that 2015 march $20 call in XIU, there was considerable institutional interest all day. 

at the close, .59-.83. Sizing was 380 x 300.

it's the bidder who wants the 380 contracts that is interesting. He or they are willing to pay, too.


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## 1.5M (Apr 21, 2012)

humble_pie said:


> of course one can write options in registered accounts. I write many.


Covered calls don't count. I was talking about naked calls or puts.


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## andrewf (Mar 1, 2010)

I think it's somewhat odd that one cannot write cash-secured puts in registered accounts.


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## humble_pie (Jun 7, 2009)

james u have a good point, i quickly changed that sentence to the conditional tense. If you'd be kind enough to look back you'll see it now reads there "would" be a specific amount, meaning in the scenario which posited XIU at 26.31, a level that is not unreasonable at some point in time over the next 25 months.

there are over 2 years in this option, so the ultra-long time frame turns it from a raw speculation into a common & garden levered instrument being used in a very strict & disciplined context, which was How to Construct a Low-cost DIY Indexed GIC. In a thread whose general topic was slamming the excessive cost of commercial indexed GIC products.

the normal assumption would be that persons participating in such a thread are considering the purchase of an indexed GIC. It's OK to point out that one can construct one's own for a fraction of the cost plus one can capture all of the upside potential for oneself, i believe.

as for your other objections to options, they do seem a bit puritanical. There are several successful options threads in this forum with a pleasant band of players who hang together & support each other. We are known - even to the venerable Options Industry Council in chicago - as one of the nicest & most collegial options trading groups in the whole of north America. Perhaps you'd like to go to these threads & voice your disapprovals?


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## james4beach (Nov 15, 2012)

andrewf said:


> I think it's somewhat odd that one cannot write cash-secured puts in registered accounts.


*EDIT:* I see you said cash-secured puts, not calls. My bad.

You mean writing naked calls, only secured by cash? Since you have potentially unlimited loss possibility, how much cash would be a safe amount of collateral to require?
I'm not surprised it's not allowed.


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## humble_pie (Jun 7, 2009)

1.5M said:


> Covered calls don't count. I was talking about naked calls or puts.


no, you weren't. Here's what you said:



> You can buy options in registered accounts. You can't write options in registered accounts


only a madman would contemplate a registered account containing naked calls & puts. It's the potential for assignment that would radically alter contributions, forced contributions, liquidations, etc. Of course the minister of finance would not allow these. Let's not waste time discussing.


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## james4beach (Nov 15, 2012)

humble_pie said:


> james u have a good point, i quickly changed that sentence to the conditional tense. If you'd be kind enough to look back...


OK fair enough. And I acknowledge that you guys know what you're doing with options; I'm not saying you're bad at it and you're certainly not amateurs.

Yes I may be a bit too puritanical on this topic... I just got concerned when the thread started with low-risk index investing (clearly not the realm of options experts), and then started getting some ideas thrown in there about highly leveraged, large options speculation.


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## humble_pie (Jun 7, 2009)

james he's talking about puts, not calls.

the risk of holding a put long in registered account is that the account holder might suddenly up & exercise it without owning the stock. The reg'd account would then be short the stock, which is not allowed.

i for one am 100% sympathetic to the department of finance & to the community of broker/trustees who need to control the limitations on registered accounts very tightly. I don't know where this flurry of complaints about not being allowed to sell naked options in registered accounts is coming from ... unless the complainers are simply seeking to pick fights ...


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## Squash500 (May 16, 2009)

humble_pie said:


> squash i guess if you "studied" options for 2 months but never opened a margin account for option trading then that must mean you have never traded a single option contract in your life.
> 
> which leads one to wonder why. Did tdw perhaps flunk you, for example. Or why would you want to draw attention to this by indulging in what does sound like sour grapes.
> 
> ...


HP I totally admit that I'm not very good in math. I had to take grade 10 math twice. With that being said....most options investors who buy calls wind up losing their premiums. That's why most option investors want to sell options and collect the premiums.

Also who says the XIU will go up in value in the next two years? It could just as easily go down in value. Look at the investors who bought Apple call options recently....they lost their fricken shirt. Sorry I'm rambling on here---lol. HP you have to admit that the Montreal exchange is a joke. I guess I agree with fatcat that IMHO an option strategy shouldn't be recommended for an investor who is just trying to figure out index linked GICS.

I really enjoy this site and I admit I've never traded an option in my life. However I've read enough financial books to be confident enough to express my opinion that options are a zero sum game and the strategy that your suggesting for the OP is IMHO not suitable for his situation.

I was accepted by TDW to trade level 1 and 2 options but I decided against it. I felt that I didn't have the skills necessary to be a successful options trader so I decided not to open a margin account.


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## humble_pie (Jun 7, 2009)

Squash500 said:


> 1. most options investors who buy calls wind up losing their premiums. That's why most option investors want to sell options and collect the premiums.
> 
> 2. Also who says the XIU will go up in value in the next two years? It could just as easily go down in value.
> 
> ...



ok the responses:

1. over & over we have taught to sell, not buy, options. Recently a newcomer asked here if we day-trade options. Several took the trouble to explain to her elaborately - with links to teaching websites - why we don't buy monodirectional options.

2. in the context, any party contemplating the purchase of an indexed GIC is already believing that there is a chance the index will go up in value. The advantage of a DIY indexed GIC is that the investor is free to sell his option portion at any time he sees that he has a decent profit. In the commercial product, his index-linked return is generally limited to how the picture will look on the maturation day of the structure. 

3. because some important options trade only on montreal, the canadian investor has to learn how to trade montreal. There's an art to this. Generally it means sticking to the institutional activity. XIU is an institutional favourite. The particular option i discussed is attractively priced, has a tight spread, is clearly being tracked by one or more institutions. This option is as liquid as anything that can be found in the US of A.

4. threads are not just for an original poster & none but he. Threads, in fact, exist for general discussion & many parties arriving from different angles often benefit.

5. the same can be said of the stock market. The zero-sum game is an oft-repeated pejorative phrase intended to sling mud, perhaps when a speaker cannot think of anything better to say.


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## Squash500 (May 16, 2009)

humble_pie said:


> ok the responses:
> 
> 1. over & over we have taught to sell, not buy, options. Recently a newcomer asked here if we day-trade options. Several took the trouble to explain to her elaborately - with links to teaching websites - why we don't buy monodirectional options.
> 
> ...


HP the last thing I want to do is to get in an argument with you. I'm just trying to learn myself and I totally admit that your a much more knowledgable investor than I am.

With that being said here are some concerns I have: How does an option novice know that the price of .75 is even a good price to pay for 1 contract of the 2015 MAR 20 XIU leap ?. Your also assuming that .75 will be the price that will be paid which is far from a sure thing. The spread you quoted upthread is something like .21 cents?

I also don't think that someone who is contemplating buying an index linked GIC is a very sophisticated investor to begin with.....no offence to the OP---lol....as I failed grade 10 math myself---LMAO. Also as has been mentioned upthread the XIU might not be the index that is used in these index linked gics to begin with. Therefore the XIU might be the wrong benchmark anyway? Maybe the investor who is contemplating investing in an index linked GIC doesn't even know what an index is. That's why each bank makes up their own index based methodology that these 3 and 5 year index based gics are based on.

HP...Just off topic a bit. You have to admit that investors who bought Apple calls from sept 2012 got hammered. Especially the investors who bought the Apple weekly options. Just to repeat myself....these index linked GICS can be based on something like the return of 15 canadian blue chip stocks over 5 years etc. Therefore the XIU might be totally irrelevant to the OP anyway?

Also TDW isn't stupid. They only let you trade level 1 and 2 options to start. In level 1 all you can do is buy calls and puts. Therefore the worst you can do is lose your premium that you paid. TDW realizes that most investors who buy calls and puts come out losing money as the option premiums in most case are priced too high and the novice option investor like myself would have no way of knowing this.

Level 2 are covered calls which means you have to own the stock outright and then you can sell contracts on each 100 shares of the stock that you own if you want to. The problem with covered calls is that it limits your upside.

IMHO the option traders who make the most money consistently are the traders who sell the calls and puts and collect the premiums.

Last thing...IMHO just because the XIU is an institutional favorite means nothing. In a bad market the XIU will still go down in value. I realize that the XIU has 11 billion in assets---lol. I guess what I'm trying to say is that its the options traders who advance to level 3 and level 4 that mostly make all the money.

What your proposing could put the OP in a losing position if the XIU falls dramatically in value and I'm afraid that the OP would panic if this happened....I know that I would. Also there's no way that TDW would ever agree to lower there 1.25 per contract commission. Sorry I'm rambling on here HP.

In conclusion...I decided not to become an options trader mainly because of Apple. A lot of investors thought Apple was going to hit $1000share and bought call options with that goal in mind. Things didn't work out too well for these Apple call investors. 

I realize my thought are all over the place....but hopefully you understand what I'm trying to say. I mean no ill will to yourself or anyone else on this forum. In fact...I've learned a lot from this site. I guess I'm just expressing a difference of opinion. Have a great evening HP!


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## fatcat (Nov 11, 2009)

it seems at least possible that a beginning investor who has heard about index linked gic's could come to cmf and read about the idea of buying a 2-year gic with say 97.8% of their money (which would return 100% of their money in 2 years) and then taking the remaining 2.2 % and buying XIU to be held until the gic matured - this is an easy concept to grasp and to execute whereas your idea pie, is not (easy to understand and execute without a fair bit of work and risk) ... that i think is the difference between the two approaches ... as has been pointed out, the kind of person thinking of buying an index linked gic is unlikely to want to learn how to trade options ... option traders are a subset of this forum which is a subset of investors in general


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## andrewf (Mar 1, 2010)

That's why I said: forget the market linked GICs and build a diversified portfolio with equity and fixed income.


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