FIRE'd Up - Year One

The Prologue

The location: Rome, Italy. It's January 27, 2020. I'm standing alone looking at the Alter of the Fatherland. The sunrise lights up the monument with a golden hue. My body freezes to admire its beauty. A strong, free-wheeling surge of emotions runs through my veins. I'm celebrating my 35th birthday devoid of stress and responsbilities. There is a calm in my mind that becomes addictive. I have travelled almost every year for my birthday for a decade, but this moment inspires me differently. There is a new addiction I seek called living and I need more.

Ten days later, my vacation would end and I would head back home to Edmonton, Canada where I worked six days a week, feeling tired and trapped. While I was in Rome, the coronavirus was spreading, and the first cases hit northern Italy. I would arrive in Canada thinking this virus was minor, but four weeks later, Canada closed its borders. The world shut down. By April, both my part-time jobs decided to close up, and for the first time in over a decade, I had no work. Fortunately, I qualified for CERB, Canada's stimulus program as part of their traditional unemployment insurance. I saved every dollar from CERB knowing I might not have work for a while. I also used the time to think about my future and what actions to take going forward. I reminisced about gazing at the Alter of the Fatherland and the positive emotions that accompanied that memory; I firmly decided to 'alter' the trajectory of my life.

The location: Edmonton, Canada. It's June 29, 2020. I love travelling, seeing the world, and experiencing culture, and having that capability at 45 opens more doors than at 65. I needed to re-route my life so that I could expand how often I travelled and how I would come up with those funds, to reduce my work hours so that I could continue actually living. The generation of people before me retired in their 60's; I did not want that. I wanted to retire at 43, which happens to be my lucky number. I knew of an investment strategy that was low maintenance, generated passive income, and can be monitored from anywhere in the world. It was a strategy that I had done for years, but without the urgency nor commitment. I was allured by more risky, aggressive strategies that could be more lucrative. Nah, it didn't work. I had to do it the relatively slow and steady way. I had to focus solely on writing options.

December 31, 2020: My portfolio doubled in value through a combination of investment returns and continuous deposits of disposable income from CERB and my part-time job. It seemed like I was on my way to a better life altered by a job loss and a focus on generating income through other means. I don't often tell people, but 2020 was a major blessing for me, but how do I show excitement and pride when people around you are suffering through job loss and mental illness? You don't. You can't. It is insensitive. I truck along and wait for them to be in a better position, cheering for them on the sidelines while I continue to improve my life.

I decided to share how I got to this point through a series of short blogs offering insight into the strategies and summary of results which I aim to post every year on June 29. There will be three parts to each blog: the process, the progress, and the product. The process will include the thought process of what strategy or structures I must execute for the time period. The progress will show some of the primary trades in the account. The product will be a short summary of any growth I obtained during the calendar year. Can I retire at 43?

I must inform readers that I am a former licensed investment representative in Canada, but left the industry in 2009. I continued trading while holding jobs in the hospitality industry. I also came back to one job and qualified for CERB for several months after due to reduced hours and income. This helped me cover my expenses without needing to access my investment capital.

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The Process

Developing a concrete plan requires knowledge and experience, but even more importantly, understanding your weaknesses or limitations. In the world of trading, these limitations can include lack of capital, lack of knowledge, lack of confidence, and susceptibility to emotions. Fortunately, I have been trading options for my entire adult life (2004 to present) and have become well-experienced in how they perform and react during all kinds of market conditions, but my primary limitation at this juncture was starting-capital - a mere $10,000 CDN in the trading account (excludes assets held in other accounts).

Looking back at my trading history, I could see that my most constitent, profitable trades were covered calls on blue-chip and medium-risk growth stocks. In fact, in 2016, I wrote covered calls on Netflix for eight consecutive weeks which I used to fund my 10-day trip to Tokyo, Japan. It should have been a clue to continue that strategy, but I was allured by other higher payout trades that did not pan out such as credit spreads and buying options. Now, I've also been writing covered calls in my other accounts for a while with very little progress, and the primary reason was because of the stock choices (non-blue chips) and panic-selling to preserve capital during market corrections instead of just holding for the dividend. Silly me. I knew going forward, covered calls and extracting extrinsic value on blue chips was the best route to take. It was easy and less-time consuming (great for when I travel). And when markets fall, hold through, especially if it's a blue-chip. The saying "Time in the market, not timing the market" is vital here.

When I write a covered call, I always choose the weekly ATM (at-the-money) strike, which generally has a return of 1% per calendar week. This is an acceptable return during low-volatile markets. The downside with covered calls is the capped gains, however, if we think about it mathematically, it makes sense to take an expected 52% return a year versus the 10% average through simple buy-and-hold. I can access more income through a hybrid portfolio using both a buy-and-hold mindset with theta decay on the option.

For those that do not know, a covered call trade has an identical risk-to-reward structure as writing a put with all things being equal (strike price, expiry, no dividends, etc.). The benefit of writing a put is that it has fewer trades up-front, thus less fees. I also planned to leverage the capital and a covered call strategy would require borrowed funds, which charges interest. Writing puts eliminated these expenses, automatically enhancing my returns. Therefore, going forward, it was more beneficial to write puts instead of covered calls.

If I forecast that a 50-delta put option has a 50% chance of expiring OTM (out-of-the-money) and 50% ITM (in-the-money), and then assume 50% of the ITM trades will still be profitable by capturing the extrinsic value, then we can conclude that 75% of the trades would generate a realized profit. The 25% of losing trades could be rolled out to capture additional theta and as long as the stock price is consistently around the same range, I can still access about 0.50% weekly theta extraction. In some instances, I could roll down the strike for a small credit. This allows me to have a lower break-even strike on the new contract which means my back-end closing costs are reduced. Choosing quality companies is important because I want a stock that won't suddenly plummet under normal market conditions. If a stock dramatically falls, the credit for rolling out options on puts becomes smaller and that ties up significant capital.

The next step is finding the right stocks. Most people online will suggest high-beta stocks. These are companies that are more volatile than the index and offer higher premiums when writing options. However, the primary issue I have in that concept is that high-beta stocks perform poorly and do not actually offer enough in premium to justify the volatility. As I mentioned earlier, I have sold covered calls for years on high-volatile stocks without any progress but I've made a lot of money writing calls on blue-chips. These companies include financials like Bank of America, Citigroup, etc, or quality tech like Apple, Microsoft, etc., or retail giants like Costco, Wal-mart, etc. I cannot stress enough how important it was to consider only blue-chip and medium-risk growth stocks.

On June 29, 2020, the equity value of the trading account was approximately $10,800 CDN or $8,000 US. I aggressively leverage the portfolio across multiple sectors for some diversification. Since I am writing puts, I must calculate the estimate market value of the account based on the presumption of assignment. That is, if I actually own the shares with a covered call, what is the market value? I would never exceed triple my equity value, that is, at inception, the maximum market value of my strikes would be $8,000 x 3. This was my risk management portion. I could easily absorb a max loss of $24,000 US (minus $8,000 starting capital means I would owe $16,000 US).

I allocated a maximum of $10,000 US to each company in July, and primarily traded two stocks. I chose Square and one financial stock, often rotating between Citgroup, Morgan Stanley, and JPMorgan, as all three were under $100 a share at the time. The reason for the rotation was because as stocks moved up and down, I wanted to be as close to $10,000 as possible so that I did not have idle capital.

Now, the world just survived a market correction in March 2020, but the US Fed intervened. My experience from the 2008 financial crisis taught me that the government intervention would calm markets, and in a low-interest world, with people seeking returns, the money would continue to flow into the stock market. I felt confident and comfortable with the leverage as well. And for readers, risk management is more important than anything else when trading, even more important than returns and ability. You must be prepared for the unpredictable.

With $24,000 US market value, I should expect $240 in extrinsic value each week. Over one month with 2 trades per week, I should expect 4 trades to expire worthless, 2 trades to be closed for any gain, and 2 trades to be rolled out due to a drawdown. I also open all contracts in the final hour of the day on Monday. This is near the closing price and we can compare it to the closing price for the end of the week. So, how did I do?

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The Progress

By the end of the third quarter (September 30), my account value was over $17,700 CDN. This is a combination of gains and depositing disposable income. My equity has grown about 70% quarter-to-quarter. This also allows me to increase the amount of companies I trade, still capping each stock at $10,000 US each. However, shares of Square went from below $110 to $150 in this time, so I decided to maintain Citigroup (primarily) and Square in my account until it grew. My average account allocation starting September is Square ($15,000 US) and Citigroup ($11,000 US).

In early December, I start adding a medium-risk stock, Snapchat, which was around $52 at the time and did 2 contracts. I also add Apple at $123 to the rotation, swapping it with Snapchat if it went too high. I also add Starbucks at $100. My account now is weighted across financials, tech, retail tech, and retail food. By December 31, the account is $23,700 CDN or $19,000 US. This is a gain of 33% quarter-to-quarter. My average account allocation in December is Square ($18,000 US), Citigroup ($11,000 US), Starbucks ($10,000 US), and Apple/Snapchat ($12,000 US) for a total of about $51,000 US. My max leverage is $19,000 x 3 or $57,000, so I am still within my risk management parameters. I would eventually drop Square in January 2021 due to its price.

Below are tables of the progress of Citigroup and Square, which were my two most actively traded. For simplicity, I only included the short strike and net credit on each expiration date. I've also included two different expiring outcomes because when writing puts, our goal is to out perform the stock for that time period, the best outcome being the net credit received was greater than the stock's gain. If I write options that underperform the stock, then we can conclude it is better to buy the stock on margin for that time period and hold until the end of the week. I also assume I have no temptation to take gains early.

Those on mobile may need to rotate their phone to landscape, due to a table error that appears in portrait mode. I apologize for this inconvenience.

Results Table Legend

Expired 1 - Option expired worthless; option outperformed stock - optimal outcome

Expired 2 - Option expired worthless; option underperformed stock

Gain or Loss - Option expired ITM; closed for a net gain

Rolled Out - Option expired ITM; closed for a net loss, included credit for rolling

Assigned - Shares were bought

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Citigroup (C) - 2 contracts - July 20 to Aug 7

Expiration |	Strike	| Credit	| Entry Prc	| Closing Prc	Result
JUL 24, 2020 |	50.00 P	$0.80	$50.14	$51.67	Expired 2
JUL 31, 2020 |	51.00 P	$0.70	$51.29	$50.01	Rolled out - Closed for $1.31
AUG 07, 2020 |	51.00 P	$1.78	$52.12	$50.01	Expired 2

From July 20 to August 7, Citigroup shares gain $1.98 and paid $0.51 dividends; total option premiums received in $1.97. Therefore, during this time period, assuming no early sale of the shares, it was better to own the stock, excluding possible interest charges.

Citigroup (C) - 2 contracts - Aug 17 to Nov 27 - includes short strangles and put assignment

Expiration |	Strike	| Credit	| Entry Prc	| Closing Prc	Result
AUG 28, 2020 |	51.00 P	$0.83	$51.42	$52.28	Expired 2
SEP 04, 2020 |	52.00 C	$0.46	$51.12	$52.52	Rolled Out - Closed for $0.72
SEP 04, 2020 |	51.00 P	$0.56	$51.12	$52.52	Expired 2
SEP 11, 2020 |	51.00 P	$0.80	$51.04	$51.00	Gain - Closed for $0.06
SEP 18, 2020 |	52.00 C	$0.58	$48.15	$44.86	Expired 1
SEP 18, 2020 |	51.00 P	$1.00	$48.15	$44.86	Assigned
SEP 25, 2020 |	44.00 C	$0.55		$42.02	Expired 1
OCT 02, 2020 |	42.00 C	$0.78		$43.70	Rolled Out - Closed for $1.70
OCT 16, 2020 |	43.00 C	$1.97		$43.24	Rolled Out - Closed for $0.24
OCT 23, 2020 |	43.50 C	$0.58		$43.70	Rolled Out - Closed for $0.49
OCT 30, 2020 |	44.00 C	$0.75		$41.42	Expired 1
NOV 06, 2020 |	43.00 C	$0.75		$42.71	Closed for $0.02
NOV 13, 2020 |	46.00 C	$2.20		$48.66	Closed for $3.00
NOV 20, 2020 |	49.00 C	$1.12		$51.65	Closed for $2.55
NOV 27, 2020 |	51.00 C	$1.13		$56.67	Assignment

From August 24 to November 27, I opened up short strangles because the shares were sideways. On Monday September 14, the banking sector fell on news, which triggered an assignment at $51.00. In that time period, Citigroup shares gained $5.25. The total premium recieved opening the strangle and covered call was $5.28. I also wrote covered calls below my book value in exchange for theta. In the end, owning the shares was almost equal to writing options during this phase assuming shares were held to the same date and prices.

Citigroup (C) - 2 contracts - Dec 8 to Dec 31

Expiration |	Strike	| Credit	| Entry Prc	| Closing Prc	Result
DEC 11, 2020 |	57.00 P	$0.28	$58.13	$58.93	Expired 2
DEC 18, 2020 |	59.00 P	$0.78	$58.74	$59.06	Expired 1
DEC 24, 2020 |	61.50 P	$0.76	$61.23	$60.57	Rolled Out - Closed at $1.35
DEC 31, 2020 |	61.50 P	$1.57	$61.66	$61.66	Expired 1

From Dec 8 to Dec 31, Citigroup shares rose $3.53; total option premiums were $2.04. Therefore, it was better to own the stock over writing OTM options. However, if we remove the first trade in this subset of trades, expired 1 was the most common outcome in the final three weeks.

Square (SQ) - 1 contract - June 29 to November 27

Expiration |	Strike	| Credit	| Entry Prc	| Closing Prc	Result
JUL 02, 2020 |	101.00 P	$1.65	$103.68	$113.39	Expired 2
AUG 21, 2020 |	147.00 P	$1.25	$152.48	$155.10	Expired 2
AUG 28, 2020 |	147.00 P	$1.50	$151.79	$155.93	Expired 2
SEP 04, 2020 |	157.50 P	$2.68	$159.56	$146.39	Closed Loss $11.22
Bought shares at net cost $143.80 (manually took assignemnt to capture extra theta)
SEP 18, 2020 |	157.50 C	$3.90		$145.01	Expired 1
SEP 25, 2020 |	147.00 C	$2.07		$147.20	Rolled up; buy at $10.85
SEP 25, 2020 |	157.50 C	$5.60		$157.72	Closed at $0.70
OCT 02, 2020 |	160.00 C	$6.50		$169.61	Closed at $9.10
OCT 09, 2020 |	160.00 C	$10.95		$183.50	Assigned
OCT 09, 2020 |	177.50 P	$1.65	$180.18	$187.28	Expired 2
OCT 16, 2020 |	185.00 P	$1.56	$190.47	$186.35	Expired 1
OCT 23, 2020 |	182.50 P	$2.70	$186.96	$176.77	Assigned
OCT 30, 2020 |	182.50 C	$2.30		$154.58	Expired 1
NOV 06, 2020 |	175.00 C	$1.15		$198.08	Rolled up; buy at $6.00
NOV 13, 2020 |	182.50 C	$5.50		$177.19	Expired 1
NOV 20, 2020 |	182.50 C	$2.42		$195.97	Assigned
NOV 27, 2020 |	200.00 P	$2.35	$207.78	$212.52	Expired 2
DEC 04, 2020 |	200.00 P	$3.65	$210.96	$208.15	Expired 1
DEC 11, 2020 |	200.00 P	$3.65	$210.96	$208.15	Expired 1

During this time, Square shares grew from $103.68 to $208.15. The shares actually doubled. The option premiums received by writing OTM puts never came close to the stock's performance. As you can see, expired 2 is the most common outcome when writing the puts, and buying to close/rolling was the most common outcome when writing calls . Therefore, Square in this period outperformed the theta strategy.

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The Product

The first six months of a strictly theta-collecting strategy has shown positive results. Due to a declining USD/CDN rate from 1.34 to 1.21, the US dollar gains had a smaller positive impact on my net worth/equity. I also own shares of BCE strictly for dividends (which pay off my cell phone bill) which also has a minor impact on net worth.

Month End |	Equity (CDN)	| Return (USD)
June	$10,800
July	$10,126	$892
August	$10,472	$907
September	$17,749	-$1,358
October	$17,030	$2,763
November	$19,841	$2,571
December	$23,773	$1,224

The Epilogue

FIRE (Financial Independence, Retire Early) is a movement by millennials because we value experiences over a lot of other things in life. And in aiming for these goals, we learn a lot about ourselves as individuals. My focus on financial independence has made me more confident, healthier, and mentally stronger. But aside from personal growth, we are also shaped by major events.

The summer of 2020 became one of the best summers in my life. I explored my home province at a new level. I went to Jasper in the Rocky Mountains, headed south to Waterton National Park, visited Drumheller, discovered random waterfalls and lakes including Abraham Lake, and realized how important time is to me.

However, I lost a close friend from covid; he departed our circle in November. This moment weighed heavily as I entered the new year. My goals to retire early and experience the world became more concrete because I realized I could go at any time. I'm an atheist, which means I don't believe in an after life, therefore, the moments between birth and death have to be positive and worthwhile. I knew I could not be idle for too long. As the calendar flipped, I entered with a new sense of pride and energy to keep moving forward with one less comrad on my path, who now journeys with me in my heart.

I hope to post a new blog next year at the same time to show it can be done. If it motivates you to find yourself or seek a new goal or spend more time with those you love, it will be worth it for me to share my story.

Social Similes: Alberta Open For Business

Hi, I'm Jason Kenney, and Alberta is open for business! The grand re-opening of Alberta Co., now under new management, will be featuring new products to fulfil your needs. Our store is easily accessible and located in the heart of downtown Edmonton on 109 street and 97 avenue. Can't make it into Edmonton? We have got you covered. Call our toll free number at 1-800-382-5827 and a sales associate will be available to answer your needs.

In aisle one, we have over 160 public parks to choose from and we're confident we can find one suitable for you. We have a diverse line of parks including campgrounds, rural parks, and some along river valleys. Are you part of a First Nations group? Well, take advantage of the new buyback program. Your entity can buy back land that was previously sold* to the government. Alberta parks now allow the consumption of alcohol, meaning you can turn a quiet and empty park into a mega-fun festival everyday of the year.

In aisle two, we have Alberta Health. Are you in search of a product with an endless client base? Well search no more. We forecast a doctor shortage in the province in the year 2022. This is an opportunity for your business to enter the market with a reformed healthcare brand which is perfect for those providing high-end, luxury medical care.

And that's just the start of our grand opening sale. Over the coming months, we will be offering more products to our line including provincial highways, education, and politicians. Come in now before it's all sold out.

How the Bank of Canada's Rate Hike Affects Canadians

Photo courtesy Chris Wattie of Reuters

On July 12, The Bank of Canada (BOC) raised lending rates for the first time in 7 years; the overnight rate rose 25 basis points to 0.75 per cent. It was a highly anticipated move as futures predicted a greater than 90% chance the hike was coming. Tightening monetary policy has immediate and medium-term effects that touch many aspects of regular life, and we're here to discuss just a few of the impacts it may have on yours.

Foreign Exchange

All things being equal, higher interest rates in Canada would raise the value of the Loonie. This is due to the increased demand from foreign investors purchasing Canadian investments, such as government bonds (debt). Since Canada is a net exporting country, this would reduce the overall demand for Canadian products or make it more expensive for our trading partners to buy our resources. A reduction in demand therefore would reduce economic output. However, it is beneficial for residents that flock to the US for vacations. Needless to say, a higher Canadian dollar increases purchasing power for Canadians travelling aboard, but reduces tourism into Canada. Many argue that a low currency is a more effective economic stimulant than government policy.

Better Bank Profitability

If you are an employed in Canada, then you have a direct interest in the profitability of the financial industry. Other than the fact that banks are one of the largest employers in Canada and we rely on their sustainability as a nation, all working Canadians contribute to some form of pension plan, whether it be privately-held at work or through CPP. Most pension plans invest their funds into mutual funds and in Canada, all mutual funds focused on growth, income, blue chip, or index-matching, possess all five big banks in their portfolio. The reduction in profitability for banks hinders share price and dividend growth.

When interest rates rise, it gives banks larger margins on their lending rates. Banks make money by borrowing short and lending long. Borrowing short means they borrow money from their customers and investors through chequeing accounts and GIC's. The interest rate on these are under 1%. Banks then lend long buy purchasing long term bonds in the market or offering mortgages which are typically 5 years. Rates on 5-year bonds and mortgages have an interest rate about 2.5%. This is the yield curve and is the spread that banks attempt to profit off. This dance exists as long as there is demand for short term investment vehicles and use of chequeing accounts.

Inflation

Most people view inflation as the rise in prices of goods, however, it is not the true definition. Inflation is the reduced value of money and as more money is printed, each unit is fractionally reduced increasing the amount of money needed to buy the same good. Rising interest rates slow down the efficiency of an economy and therefore reduces the demand for money and speed at which money decays. For the average person, this means a decelerating pace of inflation. This may be viewed as positive or negative, depending on your needs. If you have investments, you would seek inflation. This increases the value of the investment. Many however seek slow inflation to combat stagnant wages and increase their personal buying power.

Mortgages

We didn't start off with mortgages as our first topic because it was important to understand how mortgage rates are priced. Some people believe that interest rates on mortgages are aligned with lending rates, however, historically speaking, this is actually untrue. Mortgages move in line with longer-term government bonds. This is often why variable rates move prior to central bank decisions, as was the case last week, when RBC raised variable rates 20 basis points. The longer-term bonds were already moving in anticipation of the Bank of Canada's decision. With that said, although there is no direct impact, mortgage rates should theoretically rise if the Bank of Canada implements one more rate hike in 2017, which is highly expected because longer-term bonds will drop in value.

If inflation declines, then this also leads to a reduction in the long-term bond yields of 10 and 30 year notes. Typically, these long-term debentures are in tandem with inflation expectations. If inflation rates do start to decelerate, then it is highly possible for the value of these bonds to rise and their yields to drop. This could potentially reduce variable mortgage rates without intervention from the central bank.

Consumer Spending

If you're a small business owner, then you should expect to see a reduction in consumer spending. However, the Bank of Canada revised their GDP growth from 2.6% to 2.8% which is an encouraging sign. Historically, the idea of raising rates increases the cost of debt. The average Canadian has over $20,000 of debt, excluding mortgages. Now that rates have risen or may start to rise, more people may start to funnel their cash from expenditures to debt. The direction from money out of the economy into savings and vice versa is the true nature and intent of interest rate decisions and monetary policy.

Amazon Effect and Urban Sprawl Killing Retail

Amazon (AMZN) has always been known as a market disruptor. Its unique model two decades ago was unseen by the world and as the Internet expanded across the globe, the ability to shop from one's home went from a luxury to a norm. In 2016, nearly 20% of all retail was done online. The evolution of retail has rapidly changed within a generation and brick and mortar retail outlets are being tormented.

Malls are more vacant and retailers are closing up shop. Stock prices of retailer are down and margins are thinning. There are more self-made millionaires opening up businesses in their homes and using their garages as a warehouse than millionaires making money through traditional retail. 2017 is proving to be the threshold for many companies that find ways to either survive or fade away in history like ESPIRIT.

In the US, Bebe Stores (BEBE) announced in the spring of 2017 that they would be shutting down all worldwide stores and focus solely on providing retail businesses online. It was the first international brand to make the switch. Other American companies are on the brink of bankruptcy or being bought out by private firms who will no doubt alter business models to maintain profitability. American Eagle Outfitters (AEO) recently sparked rumours it would be bought out. Nike shares have come under pressure as sales show lacklustre growth. Foot Locker (FL), Nordstrom (JWN), Michael Kors (KORS), and Target (TGT), just to name a few, have seen shares tumble this calendar year.

In Canada, long-time standing retailers like Sears, Ben Moss, and HMV went through major overhauls. Target's attempt to expand in Canada failed to penetrate market share from Wal-Mart.

But, most of the pain is only coming from American and Canadian stores. LVMH, better known as Louis Vuitton, has seen its shares rise almost double in the last 52 weeks, a stark contrast to its peer. And European retailer are showing little negative effects to online shopping. So, what's the reason?

Canada and the US, with exception to a few pockets of high-density urban areas such as Manhattan, have one major luxury that most nations do not offer: land, a lot of land. During the rise of retail, it was obvious that companies built large shopping centres which offered hundreds upon hundreds of products. The American (and Canadian) market is over-served and ready to correct. Forbes reports that organic growth in retail averages 3% annually, but during retail's expansion in North America, land for retail surged significantly more than 3%. In fact, the USA has more retail space per 1,000 people than any other country.

The US has more than twice as much retail space per capita than Norway, which is second on the list. Yet most people in Europe and Asia do not feel under-served by their choices. Businesses needed to built upwards instead of outwards. Urban sprawl is not as significant a problem in Asia and Europe as it is in North America.

Imagine a 7-Eleven situated underneath a 20-storey condo unit. If each floor contains 25 residents, the 7-Eleven has access to 500 residents living above it alone. However, if this 7-Eleven is located in a suburb or a low-density city such as Edmonton (my home town), 500 residents would take up over 4 square kilometres. That is 40 times more than the average 125 square metres per city block. For many people, a 30-minute walk to the convenience store might not be convenient enough.

Amazon offers something that malls do not and that is the ability to shop for multiple types of brands and products from our couch while also offering discounts on all the total cart and free shipping. Shopping online is so convenient. It has caused such large problems in Canada that inbound items from China sit at the border for months as security needs to screen items. Backlogged by huge shift in consumer spending, Canada Post and Canada Border Services are falling behind.

A correction or collapse in retail is highly needed in North America to find equilibrium. If Norway can maintain a strong retail sector with current space, that means that the US could expect to see a reduction of 60% of stores closing. However, if the happy medium in a post-Amazon ruled world is closer to Germany's size, that would mean 90% of retail space would need to close up in North America.

The love for urban sprawl coupled with online shopping means that most malls may start to look like warehouses for FedEx and UPS. Amazon has done something magical for the world at the cost of brick and mortar retailers, but the gains have been seen by delivery and courier companies. Over the next decade, it is apparent that major consolidation will come about. Amazon's recent purchase of Whole Foods (WFM) indicates that perhaps Jeff Bezos sees the same potential in food as he did with tools, books, and teddy bears.

Why Jordan Eberle Should Remain

A strong sample size of Edmonton Oilers armchair general managers want Jordan Eberle gone. A poor regular season performance coupled with zero goals in 13 playoffs games cannot justify his $6 million salary. He's the whipping boy of the current season. It was formerly Justin Schultz, Shawn Horcoff, and Devan Dubnyk. It is an annual tradition in Edmonton, and probably most major hockey markets, to find the weakest link and trade him. But, he's useless, according to Oilers fans, so what team would want him? In this man's opinion, if the Oilers decide to offer him up at the expansion draft or trade Eberle, there would be a strong list of teams that would be willing to acquire the 6-million dollar man but the list of teams willing to offer fair value for Eberle would be short, extremely short.

In finance, herd mentality offers up big opportunities. When the market is selling, long-term investors can find discounts on strong assets, and this is similar in sports. From the Oilers perspective, Jordan's stock value is low, at least in this city's eye, but what is our junk is going to be another city's treasure. And other GMs know this and will give the team as little as possible because they know everything outlined below.

Jordan Eberle completed his 7th season in the NHL with 51 points in a full campaign. Compared to his professional career, this is definitely below his average. He has 3 seasons with more than 51 points and 3 seasons with fewer than 51 points, but in the worse seasons, Eberle played just 69 games twice and the other season was the NHL lockout. So, on a points-per-game basis, this was his worst.

Jordan Eberle finished 94th in the NHL in points, 88th by forwards, 21st by right wings, and 3rd on the team. There were a total of 888 skaters that recorded one game played in the year. 94th puts him in the top 11% of the league in points-production. And players that finished with 53-49 points include Corey Perry, Taylor Hall, Anze Kopitar, Henrik Sedin, Joe Thornton, and Jason Spezza. Are you surprised to see a list of elite players (subjective) that surround Eberle's name in the standings? Or were you expecting to see the likes of Alex Chiasson, Mike Fisher, and Max Domi? No offense to these players either.

That list of elite players also have one thing in common. They are all paid at least 6 million USD. If Jordan Eberle's poor results do not justify his salary, then that is your opinion. Businesses and NHL GMs need more than just an opinion before making any decision and the facts do not support how poorly a season fans claim.

Here is the fact: if we look at it on a point-production basis, Jordan Eberle would be a first line right-winger on at least ten teams and a guaranteed second liner on all. Although there are players that make less money and produced more, there is a longer list of players that make more money and produced less.

If Oiler fans feel the need to blame the Oilers failures on Jordan Eberle or criticize his season, go ahead, you have every right. But replacing Jordan Eberle holds very little merit when we consider the data from around the league. In fact, compared to Thornton, Kopitar, and Spezza, Eberle's salary is a steal. If you want him gone and replaced with another right winger, try to find one on the market that has an opportunity to come to Edmonton for cheaper and produce more points. Because right now, the only noise I'm hearing are complaints that do not come with any solutions.

Weed Stocks: A Further Analysis

Photo credit: Drew Angerer — Getty Images

The euphoria that took the Canadian stock market by storm at the end of 2016 has subsided as marijuana stocks have traded essentially flat year-to-date. Investors paid heavy premiums (based on traditional valuation methods) to access the budding industry with the hopes of being part of the next big thing. Muted trading has given the market a breather and provides us a moment to analyze the shares. Are stock prices trading at a premium or a discount? Will investors make money or should they bail at break-even? Will this industry become as large as the rest? Here are some facts which we will use to provide you with both a bullish and bearish case.

In 2016, the state of Colorado reported total revenue of marijuana sales at $1.3 billion US. This equates to a total base of about $225 US per resident. The government projects sales will rise another 25% in 2017 which will generate $250 million in tax revenue for the state. This revenue projection would equate to about $280 US per resident.

National surveys done in the US showed a reduction in teen usage in the state of Colorado compared to the national average and a slight reduction in teen usage year-over-year within the state. Most international surveys also cannot prove or come to the conclusion that the legalization of marijuana increases total usage and some surveys draw the conclusion that total net consumption is reduced.

Canada projects total users (above the age of 15) to exceed 5 million if/when marijuana becomes legal in the country. However, total market consumption is undetermined.

When industries are newly forming and do not earn a profit, one metric used to measure a public company is by the price-to-sales ratio (PSR). This divides the stock price by its revenue per share or alternatively, divides the market capitalization of the company by its total revenue. The industry with the highest PSR is Internet software (6.66) and the lowest is auto parts (0.67). Click here for the full list.

Metrics

If we draw parallels from Colorado and apply it to Canada, and we expect that consumer trends remain similar, the expected size of Canada's weed industry should be $10 billion CDN assuming the average resident consumes $280 of weed per year (note we removed foreign exchange from the calculation as marijuana would most likely be unaffected by foreign exchange or futures markets).

The three most prominent stocks in Canada by market cap are Canopy Growth (WEED), Aphria (APH), and Aurora Cannabis (ACB) with a combined market capitalization of $3.15 billion CDN. Their 2016 revenues were $30.27 million, $15.07 million, and $4.51 million; a combined $49.85 million. This results in a PSR of 63.19.

Bullish Case

The legal weed industry is still in its infancy and the market has discounted its potential value. A $10 billion market could push stock prices higher. With a comparable PSR to tobacco of 5.66 (or 6 for simplified math), this would value the total industry at almost $60 billion in market capitalization, which is about 20 times more than the current value of the three companies mentioned above. Triple-digit growth proves that there is significant growth and it may not peak or plateau for years down the road.

Legalization could also increase tourism and it is estimated that an additional 900,000 Canadians would consider trying it after legalization according to a recent survey. The total market capitalization predictions also exclude the potential for expansion into the US which has a market ten times larger. There is a strong movement for legalizing in the remaining states to boost government tax revenue.

Bearish Case

Bears do not doubt that these businesses will grow, however, their shares may not. Current PSR show that the market is pricing the stocks almost ten times more than the highest industry. Its current PSR of 63 requires growth over 1,000% (or 11-fold) before its PSR matches the tobacco industry. A projected 20-times increase in revenue would only double the stock (at most) and this assumes Canopy, Aphria, and Aurora control more than 99% of the market share. The second assumption is that market capitalization does not grow due to increased float, which means the company issues shares and reduces the amount of ownership per unit.

The most recent quarter showed Canopy posting revenue up 180%, but the shares declined 8% on the news. Premiums are now catching up with fundamentals and the $10 billion projection could be an overstatement due to concentrated data from Colorado. In economics, the law of big numbers indicates that a company growing rapidly cannot maintain that level of growth forever because there are fewer new customers available. If this law applies to weed companies as well, it can be inferred that the following quarter will show less than 180% growth which results in an "asymptote-like" chart; a plateau or peak is an inevitable part of any business.

The $1.3 billion generated in Colorado includes tourism revenue. This is an important fact to dissect because it would provide evidence where revenue can plateau. If legalization hits all 50 states, would revenue specific to marijuana be reduced for Colorado on a resident-based average? The current projections assume $280 spent per individual, but in Canada, only 5 million (or about 15%) of Canada's population would be a regular consumer. This means that in a room of 7 people, the one individual would generate revenue of $2,000 directly to the producer.

When Should You Dump Your Mutual Funds?

The 2016 RRSP deadline is fast approaching; that means large lump sum contributions for many. The majority of that money is allocated into debt (bonds) or a mutual fund. Most employee savings plans and pension plans directly buy mutual funds, but mutual funds are not necessarily the best choice for the average consumer due to their fees. As one's wealth rises, it may be ideal to move away from them, but when should you dump your mutual funds?

Firstly, what is a mutual fund? Essentially, they are professionally managed portfolios. They provide access to the bond and equity markets with minimal capital. In most cases, mutual funds do not charge for transactions. Instead, their earnings are made through a management expense ratio (MER) which is used to pay employee salaries, accountants, lawyers, and other operating expenses. These fees tend to be between 2-3% of the fund's net asset value. Although this amount seems small, these fees add up over time, and we are here to expose how much money is actually lost by retirement.

Let's assume you are contributing equal payments of $10,000 annually for 40 years into a mutual fund with an MER of 2.5%. We will also assume there is zero net growth in the fund to simplify the calculations. This means the fund's value rises equal to the MER and thus shows no growth.

In the first year, the MER paid would be $250 and in the 40th year, the MER paid would be $10,000. If you've forgotten the formula for this kind of arithmetic, it is (first year's MER plus final year's MER)/2 multiplied by number of years. We can see that the total MER paid by you is $205,000. While your retirement account is worth $400,000. The total MER paid is over 33.8% of your total wealth.

Of course, that's not all. Depending on the source, it is measured that in any given year, just one-quarter of all mutual funds will beat their benchmark. Over the long-term, less than 0.1% of funds outpace the index. In 2014, a report by Jeff Sommers, writer for the New York Times, concluded that just 2 funds out of over 2,800 beat the S&P 500 for five consecutive years (2009 to 2013). Both were small-cap funds, and thus, had a higher probability of beating the index. Unfortunately, both funds, in 2014, failed to maintain their run.

There is strong evidence to support that active funds cannot outperform an index, and this information is vital for investors looking to manage their own capital more efficiently. The alternative to mutual funds would be index funds, such as the iShares TSX 60, SPDR S&P 500, or SPDR Diamonds Index. MER's for these ETF trio are roughly 0.10%. Assuming zero net growth, the total MER paid over the same period is $8,200. If the index also grew by 2.5%, you would have an additional $196,800 at retirement, almost 50% more, by reducing your overall fees. These gains exclude potential capital appreciation and dividends, which historically yields 8% on average.

So getting back to the original question, when should you dump your mutual fund? Most self-directed registered accounts at a brokerage will charge up to $125 a year if the total equity is below a certain threshold. And trades on ETFs will run about $10. This translates into an annual cost of $135. Based on all that has been discussed, if your total portfolio exceeds $5,400, then it may be profitable to move your mutual fund into an index fund.

Many investors stick to mutual funds because they lack investment knowledge. Their lack of confidence or education persuades them towards products that are managed professionally, but as we see, spending just an hour a year educating yourself will pay significant dividends down the road. Even by simply making this transition, you will be 50% richer.

Minh Luu is a former Canadian investment representative with a major in finance. All advice and information in this article is opinion-based and is not a recommendation on buying or selling. Always speak to your investment advisor.

Put Options Versus Stock Ownership

Traditional buy and hold strategies have long been proven effective over the long term, especially when investors select quality companies. However, buy and hold is actually the least efficient investing method when it comes to generating returns. Although we have a bias for options, it is important that investors educate themselves on alternatives to just buy and hold because beating the market while driving on the same highway as everyone else is nearly impossible.

Hedge fund managers and professional traders often employ the use options over owning stock. Stock ownership requires significant capital and produces lower returns versus selling options. The advantage of using options is the ability to profit even when the stock falls; stock ownership has no room for error.

Take for example Google shares, now known as Alphabet. Priced at $827, these shares are most likely out of reach for the average investor looking to fulfill a board lot. This would require almost $83,000 just to avoid interest. However, selling a put option just out of the money (820 strike) would require only $17,200 cash. The difference in capital requirements is staggering and can actually limit the demand for companies. The ability for younger or financially strapped investors to buy and hold is often burdening and not possible.

If we take the 2018 LEAPs, you can sell the $820 puts and earn $67 a share. This is immediately paid to you. Regardless of what the shares are valued in a year from now, you keep the $67. This represents a return of almost 39% for the year. To match the same return in percent for a stock owner, the shares would need to climb to $1,150. To match the return in dollar value, shares would need to climb to $894. Now, selling a put does have its own risks as well. If the shares fall, you would be obligated to buy the stock at $820 or close the option. However, if the shares are worth more than $753, you would still be left with a profit. This advantage only lies with an option trader.

If the stock owner had purchased the shares in 2017 and held them for one year only to see the shares fall to $770, the stock owner would see a paper loss of $57 a share or $5700 per board lot. We however, have seen a profit of $17 a share or $1700. The cost to close the option on expiration date would be $50 but we received $67. This is an example of more efficient investing. Since Alphabet shares do not currently pay a dividend, there is no added benefit on owning the shares with the exception that the stock could be worth more than $1,150 in a year (let's see how it plays out), but this is worthwhile trade-off for option traders. It is very rare for a stock to return 40% a year every year and in the long term, the reality is that the option trader will be better off than an investor with a buy and hold strategy.

Weed Stocks Getting High, Maybe Too High

Share prices of marijuana companies have soared since their debuts. Prices are now at a critical point. New investors are being lured into the world's largest casino - the stock market - and that is a red flag for money managers.

On Wednesday November 16, 2016, six major marijuana stocks tripped circuit breakers on the Toronto Stock Exchange after spiking up at least 10% in five minutes. Circuit breakers were put in place to prevent unusual trading patterns from continuing in either direction. This triggers a halt, which can last as little as a five minutes or as long as the remainder of the day, and allows traders and investors an intermission to re-examine the price movements and prevent panic selling or irrational buying.

However, the major moves seen on Wednesday, with stocks opening as much as 44 per cent higher then losing all of their gains in an hour and continuing to fall further, indicates that support in prices has left the building. We are in a gambler's environment that risk intolerant traders should highly avoid. Although there will always be opportunities to make money, it appears it will be out of luck and not proper timing. A person that purchased shares on Wednesday morning would have lost half their investment before the trading day had ended. The inability of novice investors to understand irrational exuberance cannot be understated. Momentum is a greedy and risky game that always ends up in losses for the last man because the well of buyers eventually dries up.

History often shows that a mass entrance into an asset class coupled with significant volatility may well be the final period of upward momentum - the end of a bubble as they say. In this century, we have seen speculators hop onto the bandwagon of uranium, silver, potash, Bitcoin, and Internet stocks, just to name a few. The prices of most of these assets have broken down from their highs coinciding with similar mainstream euphoria we are currently observing. And major companies like Microsoft took 15 years to re-reach those prices.

Supported by the belief that regulatory bodies in Canada and the US will provide better access to marijuana and increase sales, as valid and factual as that may be, what many novice traders are ignorant of is proper valuation. On Wednesday, for a brief moment in time, Canopy Growth was worth $2 billion, doubling its value from Friday, which was also a record high.

The unicorn of the industry, earned $12 million Canadian in revenue over the last 12 months with a net loss of $3.5 million. Penny stocks are very hard to valuate because their projected growth in revenue are unlimited. In a decade, it is highly possible for this company to be generating over $100 million annually. Once it reaches maturity, to maintain its $1 bilion market cap, it would have to generate at least half a million in revenue per year or offer net income of around $100 to $200 million. Essentially, if you purchased the stock today, the company would need to grow sales more than 40 times to more accurately justify its current price. That's not to say the price won't climb to fresh highs. Growth companies are given heavy premiums, but long-term investors won't be finding any deals in the near future.

The industry itself is growing and the drug is more accepted. Money always trumps morals as some would argue, but governments acknowledge the reality that weed is a money-making machine, and there's a reason why so many gangs and illegal producers have lobbied to prevent and oppose its legalization. The truth is that these companies will make more money than they do today, but with low barriers of entry, the question you must answer is whether the value of a company's stock price will climb with the growth of these businesses and how will increased competition affect overall business?

Money managers, aka the professionals, are staying clear of the trade and will re-examine once euphoria wears off. Valuations are seen as "stupid" and that will prevent many of these stocks to price much higher without investment and price support from billions of dollars. Although we have seen some big bought deals worth at least $35 million, this could bode well, but cuts short-term prices.

To quickly explain, a bought deal is when an investment bank or firm secures shares from the company. However, the investing client is given a discount to the market price and they then attempt to sell shares to their clients or in the stock market. This could lead to a supply glut and undermine current strength.

Not all money managers are as concerned in the short-term. A Jacob Securities money manager believes and predicts "...there is a fundamental business to support here. People want recreational cannabis ... If you have a longer investing horizon then you’ll do fine — these stocks will be trading higher a year from now than where they are trading today."

Disclaimer: the author and its household do not own any nor are short stocks and industry related stocks mentioned in the above article and do not have any derivative positions.

Why Oil Will Never Push $100 Again

Bad news Alberta - stagnant oil prices are potentially here for a long time; multiple forces in play suggest this. Stability and low prices offer relief for consumers and businesses, but oil-dependent parties and organizations will need to adapt to the new reality.

An unofficial meeting between OPEC members on Wednesday September 28, 2016 showed some promise that a supply reduction was on the table, however the cut drops oil production to 32.5 to 33 million barrels per day, from the estimated 33.25 million currently being drilled. Although it is just a hair cut, it triggered a 6 per cent rise in the two sessions following. Prices are now back hovering near $50 a barrel again. That sounds great, right?

Well, these knee-jerk reactions allow non-OPEC members to re-enter the market even momentarily and elevate supply, a concern that plagues the industry. This has and will continue to counter any major bullish move in oil prices for years as long as OPEC maintains its strategy of capturing market share.

Take for example the promising run-up in oil prices in June and July of 2016 which created a pivotal situation. US oil rigs were moving conversely to crude prices. CNBC reported that when oil had reached $50 that spring, US oil rig counts were at their lowest. However, as they started going on line, persuaded and incentivized by higher prices, crude fell again back to $40 due to larger supply.

Unlike most consumer goods, oil and commodities are typically traded through futures and forward contracts. Producers secure prices months or years in advance. So, when oil surged for just one week, dozens of rigs were able to lock in $50-plus oil revenue.

According to the U.S. Energy Information Administration (EIA), in 2015, an estimated 93.88 million barrels of oil are consumed per day and supply amounts to 95.72 million. Even with the reduction by OPEC producers of at most 750,000 barrels per day, there is still more oil being supplied than consumed and nearly an additional 3 billion barrels of oil sitting in inventory as of year-end 2015; this represents 32 days of oil coverage (if all producers closed operations).

OPEC maintains its stance. It wants to capture global market share however it appears its strategy has changed with ministers in Saudi Arabia having been swapped. They are more inclined to support prices at current levels than to allow it to drop back below $30 - a price that still is profitable for OPEC members. We must acknowledge that prices around $70, what many consider the most efficient oil price in America, would be a level that introduces significant competition. The United States is number 2 in oil production and OPEC, to remain consistent with its strategy, must ensure prices do not reach that level for years to come.

Oil is also traded in US dollars and therefore, strength in the currency will reduce the price of oil in relation. Since the US Federal Reserve is looking to increase borrowing rates, which in turn increases the value of American currency, this does not bode well for oil prices. All things being equal, gains in the greenback as a result of interest rate hikes, increases in American investments, or economic growth reduces the price of oil in American dollars.

The current environment and conditions do not favour a sustained bullish move for oil and sweeping changes and renewed sentiment of oil ministers and OPEC will continue to keep prices at bay for many more years. Regardless of the tactics of the speculators that exist in the trading pit for energy derivatives, the reduced interest in oil trading only elevates the accurate pricing of supply and demand. And it appears that $45-50 US is where it will remain.

The Value of Good Hedging

A significant number of investors fail to hedge their portfolios for two reasons: They are unaware of hedging strategies or they implement them poorly. Hedging is a very important strategy that can help increase returns in one's portfolio offering income and protection during market corrections. For example, if you had purchased Netflix on the day of its earnings release last week, you would have seen a 10 per cent hair cut on your share price. However, I made the same purchase and hedged fully and have made gains on the trade. Here's how.

Before I provide you with the trade details, readers must know that my strategy on Netflix is an income generating strategy and not of capital appreciation and therefore the strategy outlined ahead may not be suitable for all investors. My intentions on buying Netflix is to collect the premiums on covered calls while ignoring the daily and weekly oscillations in the stock price. This way of thinking mimics a home owner renting their property to a family as the value of the monthly rent trumps the value of the home. The value of a home could rise or fall, but the rental income is the primary focus on the investment. With that said, here's how I've made money on a losing trade.

Shares of Netflix were purchased for $99.39 a share. Immediately, a married put strategy was implemented selling the July 22 103 call for $3.30 a contract. We also purchased a July 22 95 put for $2.93. As you can see, the premiums received on the calls offset the cost of the put option. The paired trade automatically generated income of $37 a contract regardless of where the stock finished for the week. This represents 0.37 per cent income on investment. The set up above meant that I would be forced to sell my shares at $103 if the stock rose above on Friday. However, if the stock fell below $95, I would have the option to sell at $95. My max profit on the stock was $3.61 a share and my maximum loss was $4.39 a share.

With the shares having fallen to around $86 on the stock's earnings report, the put option was sold for $9.80 instead of selling the stock at $95 because I wanted to continue owning the shares and reduce commission costs. The call option was worthless and we collected the entire $2.93. With the shares below the Bollinger Bands, we knew a rise was imminent, and on Tuesday July 26, the shares rose back above $90. We sold the July 29 93 call for $0.65.

If you add up all the transactions, the net money collected through all options was $10.82 (sale of call and put options minus the cost of the put option) a share dropping our break-even to below $90. If we are forced to sell the shares at $93 before the end of the week, we will have actually made $4.43 a share even though we sold it for $6.39 below our purchase price, as we see in the table below.

Asset Name	Cost Price	Sale Amount
Netflix stock	99.39	93.00
Jul 22 103 call	0.00	3.30
Jul 22 95 put	2.93	9.80
Jul 29 93 call	0.00	0.65
Total	102.32	106.75

I have removed commission costs in the examples above, however, with commissions below $5, they're essentially negligible in this example. If you have comments or questions on hedging strategies, leave us a message or follow my Facebook trading page Moonlight Financial Education.

Disclaimer: I am currently long Netflix shares and short Netflix call options.

What Stocks Poised to Profit From Pokemon Go?

The Pokemon Go app is believed to be generating a million dollars US a day, which puts it on par with top mobile games, such as Candy Crush and Clash of Clans. It's probably too late to buy Nintendo's (JP:7974, US:NTDOY) stock, which trades on the pink sheets in the US and the main exchange in Tokyo, with its significant climb this month, but there are still opportunities to make profits on this craze.

The release of the game occurred in the the third quarter (or second half for European readers) of the calendar in the US and Australia first, which means most earnings reports due this season will not include revenue related to the game. In fact, the game has not yet released in Japan, strangely. With that said, there are at least three industries that may see a pop in Q3 earnings and here's your chance to take advantage.

Telecommunication
Telecom stocks are poised for an earnings surprise in October and probably the biggest beneficiary. Data and roaming revenue will undoubtedly be fractionally higher. Most national carriers refrain from offering unlimited data and summer typically brings new contracts. Customers and parents dishing out the bill may be asked to offer or bundle better data plans. Canadian dollar investors may want to look at Rogers Communications (CA:RCI.B, US:RCI), Telus (CA:T), and BCE (CA:BCE, US:BCE) on the Toronto Stock Exchange. An added benefit: these companies offer attractive dividend yields and have a history of raising dividends every four to six quarters. Even if you end up stuck with these trades, they may turn into great investments for one's portfolio. If you want to stick with American telecommunication companies, consider Dow components Verizon (US:VZ) and AT&T (US:T). Both companies also offer generous dividends.

Historically, telecommunications also outperform the broader market during times of low or negative economic growth as investors seek safety and yield. Sales of battery charging units and portable kits are also expected to rise which boosts profit for companies like Best Buy (US:BBY) and many other electronic companies.

Cellphone Manufacturers
The second industry that will be a beneficiary of this Pokemon craze would have to be phone companies. Software updates on older phones typically stop after a while. The Samsung S3, for example, is unable to play the game, although there are ways around that do allow tech savvy users to catch em all. However, for thr general population, this game may be the catalyst that pushes customers to upgrade their phones which may also offer better battery life and faster game play. Apple (US:AAPL), Google/Alphabet (US:GOOGL), and Samsung (KR:005930) should see some sales boost in the third quarter. These companies also offer phone charging units as sales for these products have seen a jump.

Utilities
Thirdly, one could argue utility stocks could see a boost in demand for power. Charging phones three times or more should provide a small revenue boost. This is also another industry that outperforms during periods of slow economic growth; any boost in power consumption could offer yield hunters some capital appreciation. Transalta (CA:TA) in Canada is a major player and there are nearly a dozen US companies worth over $10 billion in market cap. The top three American stocks in market cap as of 2016 are Duke Energy (US:DUK), NextEra Energy (US:NEE), and Southern Co. (US:SO). If you're looking for a boarder based play, the iShares US Utility Index (US:IDU) offers exposure to an abundance of energy stocks in America.

It must be noted that these companies have not yet released second quarter earnings and if guidance for the third quarter is provided which discusses increased revenue from Pokemon Go, the trade may yield smaller returns. The US stock market is currently at a record high and it is important to be aware that most analysts are bearish at this point. If you are looking for an inexpensive way to play these trades, call option spreads may be a more efficient alternative. Good luck and happy trading.

Disclaimer: At the time of this article, I did not own any stocks or derivatives on the companies mentioned. Household owns BCE.

Happy Canada Day from America

For the first time in my life, I will be celebrating Canada Day outside of my beloved nation. Do not worry fellow Canadians, I am not abandoning us on our day of independence. I assure you, it was purely coincidental. My love for Canada runs deeper than hockey and maple syrup and beavers. It's about waking up every morning with the inhalation of freedom and safety that exists never having to live in war and oppression. I am proud that we have Syrian refugees plotted across Canada to be as far as possible from war, but with a silver lining, also as far as possible away from their home. I like knowing that I was provided with an education that has given me an advantage, skills, and knowledge to fulfill my dreams. I have faith that our healthcare system, which is essentially free and imperfect, will give me doctors and nurses that will do the best they can to fix me. I like that my government actually cares, even if many disagree, because they are formed of Canadians whose intentions are to grow and move this country forward on many social issues, including LGBT rights, minority rights, and environmental protection. I proudly call Canada home.

For the first time in my life, I will be celebrating Independence Day in the United States of America. USA, our biggest ally. I'm sorry, as Canadian as an apology may be, for never attending your birthday until now. I hope you put on a wonderful show for me and my boys. But there are some things that upset me about your country and it's deeper than football and apple pie and bald eagles. I don't like waking up here knowing that there could be a mall in lock-down a few blocks away. I don't like your inability to realize that Syrian refugees are people looking to be plotted across your country in shelter as far as possible from war. I don't like knowing that your country, the richest nation in the world, cannot provide its children with top-notch education and as a result, it has put your people without an advantage over cheap labour, with a lack of skills, and with a lack of knowledge to pursue their own dreams. I do not have faith that if I am injured while on vacation that your healthcare has my interest at heart because I am in a position where it will cost me an arm and a leg to fix my arm and my leg. I don't like that your government has no energy to focus on social issues, including LGBT rights, minority rights, and environmental protection, because you spend most of the debates arguing about gun control. I proudly call Canada home.

To put this into perspective, in Canada, we're currently arguing about the carbon tax issue and why Parliament is wasting time and resources debating over a gender neutral national anthem which was the dying wish of a Member of Parliament. But in America, you continue to have a decade-long argument about gun control which is brought up every time there is a mass shooting, which is literally everyday. Yet, you continue to make little strides in protecting your own citizens. It makes my nation's squabbles and political debates seem so petty. And all Canadians should feel so grateful that our nation is peaceful enough that our debates at all levels of governments are so "meaningless."

Nobody I know talks about going to America to be a doctor or a movie star anymore. Nobody wants to deal with a country that makes people contemplate if they should go to a hospital or save a few thousand dollars. In Canada, I drive to work knowing that the school behind my house won't go into lock-down and the only guns at the gym are the biceps on those buff guys.

And to my American friends that are against gun control, it works. It has worked in your country and it works everywhere else. Ask us, Japan, Australia, Sweden, Norway, England, France, Italy, Hong Kong, China, Germany, Switzerland, Iceland, Cyprus, Finland, and Czech Republic, just to name a few. Because here's the thing, by the end of today, whatever day you have chosen to read this, there probably has been more mass shootings in America than the combined amount of mass shootings in all of the nations I listed above.

I come to visit America because your nation has great cities and monuments, but these are all symbols from your rich past. Those skyscrapers, those cities, those statues were all made decades ago. When I walked into America, I didn't get that same 20th century feel that once existed in the streets. People's eyes do no light up with fire and passion and wanderlust. They walk with sorrow because they have no job and they cannot afford to cure their ailments and their child has just died in a school shooting. This is what has happened to America and it's a complete shame.

Canada, you have continued to rise in my heart and I am grateful for everyone and everything that makes our country so wonderful and the envy of so many. It is not a perfect country and it never will be through the eyes of thirty some odd million, but it's my home. Happy Canada Day, and yes, to our neighbours, with a "u", Happy Independence Day. I truly hope as our biggest friend that you can be the country that once was because it will make the world a whole lot better.

Central Banks Have Made a Mess

Photo from CNBC.

Central banks around the world have been unable to advance economic growth and raise inflation in the last five years despite declining interest rates and added stimulus to their national economies. Their egos fail to recognize that their monetary policies and actions have a smaller impact on real-world economics. Individuals still cannot get loans because poor economic conditions disallow many to qualify. And housing inflation skyrockets as speculators re-enter the market. This has created an environment not unlike 2008 that could lead to another stock market crash in the very near future.

Continued pessimism with regards to the economy is justified by falling corporate earnings and low GDP growth. The US market has now had four consecutive quarters of falling earnings - termed an earnings recession. Just this month, we have seen three behemoth technology stocks that rule the world, Apple, Microsoft, and Google disappoint followed by significant reductions to their market capitalization. Yet, the stock market maintains its current valuations propelled by low interest rates.

Low interest rates has been the culprit for the extension of the bull market. With no other assets to invest in that can yield significant returns, investors are forced to turn to the equity markets where dividend yields are relatively higher than bonds. During a time of significant pessimism, this can be dangerous when smart money pulls the trigger and starts selling the moment the Fed raises rates as it will have to do if inflation starts to rise. This rate hike is predicted for June 2016 unless conditions worsen, a truly lose-lose situations for main street.

In December, the market fell 8 per cent when the US Federal Reserve moved to raise rates a quarter basis points. It was the first rate hike in a decade. It was concluded that the stock market was in a fragile state for a rate hike because of its significant correction, but four months later, the stock market is right back where it was. With little options, as discussed, the flow of money continues to drive the market higher while the Fed remains hesitant on its second move.

The second component of this rally may be corporations buying back stock. Large names like Apple, Starbucks, etc. are borrowing billions of dollars, instead of using their cash deposits, to buy back stock. An interest payment on a bond would be less than the dividend payment owed to investors because yields on the safer bonds are often lower than equities. This creates a situation that may be arbitrage and allows corporations to boost earnings per share without having to increase revenue and net income.

The conditions created by low interest rates will only cause another fallout. A housing bubble is being created by the few speculators that have access to low-cost money. The UK posted in December 2015 that housing inflation was at 7 per cent, exceeding both inflation and wage inflation. Housing now costs 10 times the earnings of first-time buyers versus 2.5 in the 1990's. As of March 2016, the Canadian housing index is up 7 per cent year-over-year as well, also exceeding the consumer price index average of 1.5-2.0 per cent.

Sweden, one nation with negative interest rates, recently posted a significant growth in its GDP. It is heavily debated whether it is a direct result of negative interest rates, but the main concern now is the significant amount of consumer debt that has been created. Housing has risen 11 per cent as more people take on mortgages fueled by low interest rates and this may be an unhealthy as it creates a bubble.

Central banks do not get it. They have pumped trillions of dollars in international economies over the last half-decade and lowered interest rates to record lows, some nations at negative interest rates, with very little to show. This is because the average individual has not prospered through some trickle down economics. Jobs are still as scarce as ever and housing prices are beyond the affordability of most people. Stability in the market is uncertain and GDP growth in first world nations will not reach 2 per cent for another decade. The law of big numbers, an idea that as a company or entity gets bigger its rate of growth slows down, has now hit world economies. Japan went through a decade of tepid growth and our world is near its peak, but it is still a shining example of innovation and the envy of many.

Perhaps we have entered a new economic environment that does not prosper as it once did, but maintains small growth equal to inflation. All I know is this. Economics and business analysts are concerned. Central banks continue to believe their stimuli will work. They will continue to delay and prolong an interest rate hike and it will allow the stock market to soar, but when they realize it has failed and its decisions are less effective, it will pull the carpet from under investors in the stock market and the average person will see another crash. It is only a matter of time.

Read:Bank of America believes not investing equal to investing in 2016

Stock Markets Decoupled From the Economy?

The stock market wants to crash, or at least correct, but there is something that has not allowed this event to take place. The stock market is supposed to be a barometer for the health of a nation's economy. Its value derives from the expected future earnings of all companies it is comprised, and when we examine the US economy, there has been a major decoupling from wall street and main street; regular folks have not seen the same prosperity.

The bull market rally is now seven years old and has seen equities triple in value. Over the last three quarters, we have seen an earnings recession, that is, year over year returns in the negative. The upcoming earnings season expects companies to see earnings fall 8 per cent from last year's first quarter, but the stock market maintains its valuation. The reason: low interest rates.

We have now entered a global economy where many nations are at zero or negative interest rates, which has never happened in history. And as a result, trillions of dollars invested in low-yielding assets seek better returns in the stock market. This massive demand for higher yielding assets outpaces the selling pressure that traditionally occurs in an earnings recession. Money needs to grow and it needs to grow more than inflation, but dozens of top-tier nations have bond yields that can barely match inflation ten years out. The 10-year Canadian bond rate is 1.23 per cent. The 2015 inflation, according to the CPI, was 1.13 per cent. The Bank of Canada targets inflation of 2 to 3 per cent. In the US, the 10-year bond is yielding 1.69 per cent and its last inflation rate was calculated at 1.00 per cent. The US Fed also aims for about 2-2.5 per cent inflation.

We are days away from Alcoa (AA) earnings, which is traditionally the first day of earnings seasons, but we are just a few short weeks away from the April Fed meeting. Which set of events will impact the stock market more? On days with an FOMC meeting or the release of minutes, the stock market has major volatility in every case. Whether it be dovish or hawkish, the markets rise and fall according to what Yellen and her colleagues do. That is a cause for concern. Whether it be computer traders or money managers, their reactions set a significant tone for the remainder of the week or month. And it also re-affirms the impact an interest rate decision has. The trillions of dollars that have entered the stock market because they cannot make money outside will leave when interest rates rise. And how much of the stock market's value is at a premium because of low interest rates?

The historical price-to-earnings ratio of the S&P 500 is around 17. It is currently estimated at 22.8. If the market were to head to its historical valuation, that would see a market reduction of almost one-quarter. Startling and not unrealistic. We have already seen two corrections in the last 9 months, and unsurprisingly, both corrections recovered within weeks, but if there is a third correction and it is triggered by an interest rate rise, it could be the start of the end of the bull market rally.

Other reasons to support the theory that the market will fail in 2016 comes from its technical patterns. Weakness in many indicators, such as the MACD and OBV, and overbought conditions measured by the RSI, as well as failed attempts at ceilings, could signal the start of another leg down. Cheap option prices have created a great opportunity for investors to protect their necks. The implied volatility of an option rarely favours the long straddler, but we have seen consistently oscillations that make option sellers reluctant to take positions.

On April 6, 2016, an analyst for Bank of America-Merrill Lynch was on CNBC's "Fast Money" and said that the S&P 500 would outperform other benchmarks, which we believe included the STOXX 600, NIKKEI, and other international indices. That's great news for North American investors, however, she also mentioned that their firm believes there is an equal chance that being in cash will outperform the S&P 500.

Let that sink in for a moment. BAC believes that not investing for 2016 could be more profitable than investing. That is not often a phrase said by a firm, especially when firms only make money on transactions. When a firm backs that capital preservation is equal to owning stocks, that raises some red flags. It might just be one rogue analyst whose views don't add up to much when the rest of the industry says otherwise, but it could also be the one rogue analyst who decides it is time to make bolder predictions that do not profit the firm and help the investor.

The truth: we could be wrong. Every trader and doomsday predictor could be wrong. But the idea of selling your stocks if you have owned it through any or all of this extended rally is not wrong. And taking profits is always a good idea when analysts, professionals, money managers, historical trends are all uncertain as to what investment decisions are best for 2016.

Breaking Down the Oilers Last Playoff Push

The return of Connor McDavid and the sudden surge of the Edmonton Oilers since the trade deadline day has re-ignited the dreams of playoff hockey for many fans. Talbot is playing like a man possessed by Broduer and Roy, Eberle has found his scoring touch, Yakupov has paired well with McDavid as expected, and Hall has rediscovered his game as well. Their confidence levels have risen with the acquisitions of strong, role players such as Kassian, Maroon, and Pardy. Sitting in the basement of the West, a playoff game is still mathematically attainable going into tonight's game.

A miraculous winning streak of 15 to finish the season would give the team 87 points in the standings, a huge improvement from years (10 to be exact) past. It was predicted that it would require 95 points to make the playoffs at the start of the year, but with a handful of Western Conference teams failing to meet expectations, it appears that the wild west playoffs may be easier to reach. How much easier?

The Wild currently have collected 72 points in the standings, which is 13 points more than the Oilers lowly 59. The Oilers, as mentioned, can max out at 87 points. It appears that the only other real team in this race, barring a sudden surge by another team near the Oilers in the standings, are the Colorado Avalanche. It can be assumed that one of these two teams will make the playoffs and they hold a .537 point percentage. If their play of hockey remains consistent, one of these two teams will enter the playoffs with 88 points, 1 point more than the Oilers can max out.

There are some key match ups that could help the Oilers. The Wild and Avalanche have one game versus each other on Saturday March 26. Only one team can win, and if the Oilers have made some progress getting out of the basement, that could be a crucial game. The Wild have 15 games remaining with 8 at home. They will host the Oilers on Thursday March 10 before embarking on a four-game eastern road trip against weak teams, which bodes well for the Wild.

Meanwhile, the Avalanche will play against the Oilers on Sunday March 20 in Edmonton. They also have a very difficult schedule as they will be finishing the season with 7 straight games against playoff bound teams and one against the Wild. They face the Blues twice, the Predators twice, the Stars, the Capitals, and the Ducks to finish their campaign. If MacKinnon and company want to make the playoffs, they will need to play like it is a playoff series as they will most likely face one of these teams in the first round, but to be frank, that is a tough hill to climb.

So, can they make the playoffs? It requires a 15-game winning streak, which has not been done this season by any team, but if they can make it happen, I believe they will make the playoffs. It will only take 85 points to make the playoffs for the west this year. And let's not forget that the Wild fired their coach recently because they had only won 3 games in 19 contests. Maybe, just maybe, there's a little light for a Christmas in April after all.

Go Oilers go.

An Opportune Time to Raise Gas Taxes?

This will surely be an unpopular view, but it's time the province of Alberta considered raising taxes on the bargain prices that is gasoline. The low prices have benefited many industries and users, including transportation (airlines, shipping, and rail), agriculture, restaurants, hospitals, first-responders, governments, and vehicle drivers. The shift in profits from mega-corporations to small businesses and families is a welcoming trend. However, sustained crude prices below $45 US a barrel (and today $27) have harmed governments in Alberta and Canada as income taxes, property taxes, and oil revenue has dried up, pun intended.

According to Alberta Energy, the Alberta government's royalty revenue from oil sands in the fiscal year 2014-2015 was $5.0 billion unaudited. Conventional oil royalties was $2.2 billion. The Notley NDP government announced at the end of January 2016 it had made minor changes to the royalty agreements tied to the many industries related to energy, however, it might not be enough to get the province out of a deficit.

The provincial government predicts that deficit to be $6.5 billion this year. Revenue from non-renewable energy may decline almost two-thirds; income tax revenue will also decline. Trying to justify a tax increase to its voters and citizens during economic hardships and recessions can lose a government its power, however, Canada is not in a recession - defined by two consecutive quarters of negative growth. With GDP growth tepid but existent and employment opportunities still abundant, this is a good opportunity to capitalize on low prices coupled with gasoline affordability.

Charging a five cent tax on gasoline as a way to reclaim revenue lost from the decline in oil is fit for this government. Gasoline prices are very inelastic and consumers are more inclined to pay higher prices because it is such a necessity in our economy. In 2014, when gas prices were near record highs, Alberta consumed over 6.5 trillion litres of gasoline and 4.4 trillion litres of diesel at gas stations, the highest rates from 2010 to the present and presumably the highest rates in Canadian history (view statistics here).

This five-cent tax increase by the province of Alberta would generate, using the figures of 2014, more than $500 million in tax revenue at the pump alone. This excludes fuel used in jets, boats, and trains. An aggressive government could tack on 20 cents and yield $2 billion in revenue. Gas prices would soar to 80 cents overnight and could anger Albertans, however, these prices are still the lowest seen this century. Governments could reduce the taxes as oil revenue rose to shift the burden away from vehicle drivers. With many citizens wanting and willing to pay more to get people back to work and governments back in the black, this is a huge opportunity that cannot be ignored.

Falling Loonie May Boost Canadian Earnings

A depreciated loonie could help Canadian companies' bottom lines as we head into earning seasons here up north. Many companies with US exposure are expected to see a boost in its earnings per share projections, such as banks and energy companies. The falling dollar, now valued at 1.37 US, provides a cushion for many corporations who report in Canadian dollars but generate revenue in the US.

How so? Most Canadian companies have expenses in Canadian dollars. All things being equal, if they are now receiving 30 per cent more in Canadian without changing their business models, implementing any new strategies, or growing their brands, there is an automatic hike in revenue after conversion.

Canadian banks exposed to the US include TD and Bank of Nova Scotia. These two have entered the US years ago and may reap the benefits of a falling loonie.

Energy companies have seen oil prices crash over the last year, but the falling dollar has made times a little easier. The spot price of WTI is currently trading around $33 a barrel; this is $45 Canadian. When oil was at its peak, the Canadian dollar was near par. The drop in oil itself has significantly lowered expectations. Suncor has posted earnings today with the stock rising over 1 per cent on news it lost 2 cents per share in this quarter. Other major oil companies include Canadian Oil Sands and Imperial Oil.

Should the Bank of Canada lower interest rates?

JP Morgan mentioned just prior to the Bank of Canada interest rate decision that lowering the lending rate in Canada would indeed help the country's economy. The reduction in the interest rate to below 0.50 per cent in theory would have lowered the Canadian dollar even further, but as an exporting country, this would improve GDP.

The depreciation of the loonie could have helped kick start inflation as well. Canadian inflation rates have meandered below the 2 per cent target for an extended period of time which is often an undesirable situation. Inflation encourages spending and the flow of money as consumers that make purchases are more likely to do it sooner rather than later. If a deflationary economy exists, spending could halt and a recession could be ignited.

Disclaimer: the author of this article has household members that own Bank of Nova Scotia and Canadian Oil Sands. This article is for information purposes and does not make recommendations on buying or selling any of the companies listed. Please review your investment holdings and speak to a professional prior to any decisions.

Simplifying the Iron Condor Investment Strategy

My friend recently became interested in the long iron condor strategy, a technique used by option traders that speculate an asset will remain within a price range at the option's expiration date. There are many websites that explain how a long iron condor can be executed, however, these sites must assume that the reader is knowledgeable enough to understand the terminology. Understandably, these sites would need to use the proper jargon as the strategy is often implemented by sophisticated traders only. It's a sharp learning curve for beginners wanting to understand the complicated technique regardless of their intentions to execute the trade or not. The strategy employs four individual option strategies combined into one large strategy. The trader will buy a call (profit when a stock rises), sell a call (profit when the stock does not rise), buy a put (profit when a stock falls), and sell a put (profit when a stock does not fall). Most of these trades counteract each other; this is the fundamental key in an iron condor as it allows speculators to make larger returns with less risk.

Imagine yourself playing a game with a colleague that carries two 12-sided dice at all times. He whips out his dodecahedrons and plays a game of pure speculation. You decide to start simple..

Your first speculation is that the combined total will be below 13 (which is the half way point). You pay $3. For every number below 13, he will pay you $1. If the roll is 2 (the lowest possible number), you will receive $11. Subtracting your original cost, you will earn $8 profit. This is essentially why a put option is employed in an account. In such a scenario, an investor may own the shares and is concerned the value of the stock will drop. Therefore, the investor pays $3 a share to protect a stock worth $113 a share. Any price drop is equally offset by the increase in the price of the put option.

Your second wager is that the combined total will now be above 13. Much like in the first example, you will receive $1 for every number above 14 to a maximum of 24. This is similar to the purchase of a call option. A trader would purchase a call option for $3 in hopes the underlying asset will rise above a pre-determined value. Investors will make this purchase because it is cheaper to speculate. Instead of purchasing the stock for $100 a share, they can make the same prediction for just a fraction of the stock price.

In the above example, you sacrifice your original $3 investment if you are wrong. Speculators use options because the stock may be un-affordable or the speculator does not feel the need to invest large capital to speculate. If the same profits can be earned with the fraction of the cost, then it may be deemed more effective and efficient. Another note, in the above example, your friend is receiving the money from you in advance. You decide you would like to be the "dealer" but you choose the ranges and he will pay you what he feels is fair value considering its chances of success.

Your third bet, you decide to change it up. You will now be the one paying out to your friend. However, you get to predict the next roll. You inform your friend that you think the roll will be below 20. The odds of success is 15/144. Therefore, your friend will be willing to make that bet, however, he feels he only wants to pay 40 cents. In return if he is right, he will earn up to $4 or 9.6 times his money. This is essentially how a trader sells a call option. A stock may be trading at $113 and he believes that the stock will remain below $120. It would require a stock price to rise over 6 per cent before the option seller loses money. The trader is willing to make this bet because the odds are extremely low and the investor receives an immediate cash return by selling the option to the other investor.

You make a fourth bet and predict the next roll will be above 6. Again, the odds are identical and your friend only wants to pay 40 cents. This is identical to an investor selling a put option. The investor selling the put option is anticipating the stock remains above a certain price. The lower the probability of it being wrong, the less the investor earns.

With additional combinations at your disposal and a willing partner to accept any selection of ranges, you spice up the bets.

Your fifth bet becomes a two-legged bet. Firstly, you speculate the dice roll will be above 13, however, this time, you will receive the $3. You realize you only have $7 in your pocket, so if you're wrong, you won't have enough to pay the $8 max profit. So, you add a second component that speculates the next dice roll will be below 6 and pay 40 cents. The most you can lose is the $7 difference. Since you already received $3 and had to pay 40 cents, you will earn $2.60 immediately and keep it if the roll is over the par line. If you are incorrect, the max loss is $4.40. In fact, in this situation, if the roll is 12, you will return $1, but have made a profit of $1.60. This strategy is similar to a bull put spread. It is bullish (investor thinks it will not fall) and uses two put options. A trader would employ this strategy if they have limited investment capital or would prefer to concentrate their potential. The trader speculates that the stock will either remain flat or rise. This gives the speculator two ways to earn money. As well, by receiving cash in advance, the trader can earn interest on the premiums received.

Your sixth bet is now the reverse of the previous two-legged bet. You bet the dice roll will be below 13 and protect it with a bet that it will be above 20. Again, you will receive $2.60 immediately and earn money if the roll remains below the par line. Again, all the same arithmetic applies. This investment strategy is known as a bear call spread. The bet is bearish (investor thinks the asset will not rise) and uses two call options.

Now, you have mastered the art of dice rolling and do a four-legged bet that employs all four wagers. With all being said and done, you will receive a total of $5.20. Since there is only one roll that provides maximum profit (13), you expect to lose a little bit of the $5.20. You will profit if the stock is between 7 and 19. There are only 30 combinations that will net you a loss. The employment of a bull put and bear call spread is known as the long iron condor strategy. This strategy is popular among sophisticated investors because only one side can be wrong and therefore, the profits are doubled if they are correct without having to deposit or offer any additional margin to the broker.

In reality, the trader would rarely choose the exact middle due to the fact that there are costs and commissions associated. It would also potentially require the trader to close out both sides if the stock is right down the middle to prevent either option from being assigned. A speculator would leave a buffer area of any range. 7 and 13 if they feel the next dice roll, that is, the stock may dip, or 7 and 19, or 15 and 20. Their success will ultimately be determined based on the stock's closing price on the day of expiration, assuming the options are not closed in advance.

The long iron condor is a fantastic and efficient way to capture the time value of an option. As time passes, the odds of any option being correct decrease and therefore, investors looking to purchase these options are willing to pay less. The goal of the option seller is to capture the time value and hope that the stability of the market reduces the value of the options to zero. It is also a more efficient use of capital. A trader employing strategy number three can theoretically lose an infinite amount of money. A stock at $113 does not cap at $124 a would occur in the dice example. It could go to hundreds of dollars. The trader would be responsible for this infinite gain and traders may want to cap their losses by reducing their return. As well, strategy three would typically require 30 per cent of the value of the stock. Therefore, a stock at $113 would require at most $33.90 immediately as margin. However, a spread would only require a deposit equal to the maximum loss.

Using the values above, a trader wanting to earn $3 would require $33.90, which equals a rate of return of 8.8 per cent. The trader of either strategy 5 or 6 would only require $4.40. The trader would return 59 per cent by simply paying that 40 cents. This is how yields are concentrated. The iron condor trader would then apply both sides and receive $5.20 and could net at most 289 per cent return, assuming the dice roll was exactly 13 or the stock closes at exactly $113.

The long iron condor is a tool used by many range traders and is an optimal way to earn large returns for less risk than owning capital. Its implementation requires extreme precision and knowledge of the options market. However, with the education and tolerance for risk, traders can reap huge rewards for simply working minutes a week.