SJBenen Advisory, LLC
Sam has been in the investing business since graduating from Princeton in 2007 with a Bachelor’s degree in economics. His career as a trader and portfolio manager in the hedge fund industry, with experience trading a wide range of financial instruments and overseeing complex portfolio strategies, gives him a unique perspective on being an investment adviser. He started SJBenen Advisory, LLC in 2016 with the simple idea to use his accumulated investing experience to help people.
Sam was a top-ranked chess player in the nation growing up, winning 7 individual national chess championships between the ages of 8 and 18. He is an ever-aspiring student of all kinds of strategic games like Scrabble, Boggle, gin rummy, poker, and golf. He is originally from New York City and now lives in Chapel Hill, North Carolina.
BA, Economics, Princeton University
Assets Under Management:
SJBENEN ADVISORY, LLC IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS, OR INVESTMENT STRATEGIES. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN
Sam Benen -- SJBenen Advisory, LLC
Trading options against an existing stock position will not alter your cost basis on the stock. The tax rules on this are specific and complicated. To find out the rules for your exact situation, you need to read Publication 550 on the IRS website in detail. Here is a brief overview I can offer you with two straightforward examples if you bought 100 shares of XYZ a few months ago at $50 per share and your cost basis is $5,000.
1. If you decide to enter into a covered call position by selling one 60-strike call option on XYZ for $5, you receive $500 in cash up front from the call option sale. These are the resulting scenarios:
a) The stock is under $60 at expiration and the call option expires out-of-the-money. This creates a short-term capital gain of $500 on the option expiring at zero.
b) The stock is over $60 at expiration and your 100 shares are assigned away at $60 per share. Your proceeds for tax purposes will be the $60 per share from the assignment plus the $5 in option premium you collected up front. You will have a realized capital gain on the stock of $1,500 per share ($6,500 proceeds minus $5,000 cost).
c) Before expiration, you trade out of the option position. If you buy to cover at a price higher than your cost basis of $5 per contract, you take a short-term capital loss; if you buy to cover below your cost basis of $5 per contract, you take a short-term capital gain.
2. Now consider that instead of selling one 60-strike call option, you buy one 40-strike put option for $5. You lay out $500 in cash up front for the purchase. Here are the scenarios:
a) The stock is over $40 at expiration, in which case you lose your $500. This is a realized short-term capital loss.
b) The stock is under $40 at expiration. You exercise your put option triggering a sale of stock at $40 per share. For tax purposes, your proceeds on the sale will be the $40 exercise price minus the $5 you initially laid out. You will have a realized capital loss on the stock of $1,500 ($3,500 proceeds minus $5,000 cost basis).
c) Before expiration, you trade out of the option position. If you sell to close the option below your cost basis of $5, you will have a realized capital loss; if you sell to close above $5, you will have a realized capital gain.
Lastly, let me leave you with this: I urge you not to speculate with options. Options trading by individual, nonprofessional investors is a losing proposition because the world of options trading is dominated by the smartest sharks in the world. Your odds of coming out a winner in the long haul are almost zero.
I hope this helps.
Options on stocks in the US are American style, i.e. they can be exercised early prior to the stated option expiration date (as opposed to European style, which can only be exercised on the expiration date). Oftentimes with dividend-paying stocks, owners of in-the-money calls will exercise early to take ownership of the stock just in time to be a holder of record for the dividend. By extension, accounts that are short these in-the-money calls on dividend-paying stocks can get their stock called away (assigned) and be forced to sell prior to the ex-dividend date and lose out on the dividend.
Note that all early exercise instructions go through a clearinghouse called Options Clearing Corporation, a.k.a. OCC. When an option is early-exercised, the OCC 'assigns' it at random to counterparty accounts that are short the same option. If some but not all of the open interest in an option is early exercised, then some accounts will get assigned at random but some will be spared from assignment. Early exercise instructions must be submitted by 5pm EST in order to be valid for that trading day. When the option exercise is submitted late in the day, the resulting stock transaction will show up very early in the AM the following morning so that the counterparty knows their stock position coming into the new trading day, but the trade date is considered to be the date on which the instructions were delivered (as long as they were validly delivered prior to 5pm).
Many times on the day before an ex-dividend date, it is optimal to exercise in-the-money call options to capture the dividend. Sometimes you will see some long holders of in-the-money calls 'fall asleep,' not exercise early, and miss out on the dividend (a costly mistake), and because of this some accounts will be spared assignment (a nice windfall). The most astute options traders in the world will know the exact optimal moments to exercise early, but some inexperienced or amateur traders may fall asleep on an early exercise and miss the dividend. When you are short an in-the-money call going into an ex-dividend date, you have no control over what happens and can only hope that some counterparties fall asleep and you get lucky and can keep your stock through the dividend date.
Addressing your example: If the account holder were long stock and short in-the-money calls expiring on the 15th of the month (i.e. in a covered call position), and the ex-dividend date was on the 14th, it is likely that the counterparty who was long the calls early exercised the calls late in the day on the 13th in order to take delivery of stock just in time for the ex-div date of the 14th. For the long holder who exercised early, losing out on two days' worth of option value was a tiny price to pay in exchange for getting the dividend. If this is the case, there is no recourse for your account holder and the dividend is, in fact, not due to him. This is simply the nature of being short an American-style call option on a dividend-paying stock and getting assigned early prior to the ex-dividend date.
I see this all the time with covered call positions on dividend-paying stocks. Even though the option has a stated expiration date, if the stock goes up and the call option becomes in-the-money, there is a risk of early assignment on the call. This can be disadvantageous for accounts that have covered call positions because A) they lose out on the dividend and/or B) it can trigger realized capital gains earlier than they had initially hoped for or anticipated.
Note: It is important to consider early exercise / early assignment risk on all American-style options trades, both for buyers and writers of options.
Do the 529 before the whole life. You can consider a whole life policy after a 529 is fully funded. Find out whether your state offers a tax deduction for 529 contributions. If there is a tax deduction, obviously use your state's plan. If no tax deduction, then there's no advantage to using your state's 529 vs. any other and you can choose any state's. For people who live in states where there is no tax deduction, I recommend the New Hampshire plan because it allows you to use the funds for primary school (not just college or grad school) and because you can access ultra-low-fee investments on Fidelity.
I advise you in the strongest possible terms not to put any personal financial information out on the web in an open forum format such as this. Financial planning conversations in which you reveal your holdings should occur with a financial advisor, with the mutual understanding of total privacy. We live in a world where phishing, identity theft, and fraud are rampant. Just last year, Equifax was hacked and all of our Social Security numbers and sensitive credit information were leaked out into the dark web. At 53 and 55, you are still vibrant and have many good years left, but note that financial schemes targeting retirees are rampant. I believe that people who frequently travel internationally are easier targets in many ways (someone reading this would know you are traveling internationally and when you plan to travel). In such a vicious world, there is reason to be ultra-cautious about divulging any personal information to anyone for any reason, much less volunteering it for the entire world to see.
It is clear from your question that you are thinking about financial security for the rest of your life. This cannot happen without complete and total protection of your private data and personal information. I would urge that, before you even consider a financial plan, you do an honest and robust accounting of your personal cybersecurity. One cannot exist without the other. Do you use the same user name and password for multiple financial account logins? Do you use two-factor authentication to access your financial accounts online? Do you monitor your credit frequently to make sure that fraudulent accounts are not being opened in your name? Are sensitive details about your life easily visible on social media?
This may not be the advice you were looking for, but I believe it is the advice you need. While your name is obviously not revealed on this forum, it would not be too difficult for a skilled hacker or identity thief to track down the IP address you used and realize that you are wealthy retirees who plan to travel internationally and are a bit casual about divulging personal information. I apologize for the harsh tone of this response but I believe it is of paramount importance.
All my best to you and congrats on your success and upcoming retirement. And, for what it's worth, the answer to your original question is yes, having four years' worth of cash parked in CDs is more than likely sufficient protection.
You can think of paying down your mortgage as akin to buying a bond or a bond fund. Instead of a traditional bond ownership arrangement in which you buy a bond and get a regular coupon payment, in the mortgage paydown example your 'coupon' is the privilege of not paying the bank each month. Reversing a negative cash flow each month is effectively the same as adding a positive cash flow in equal and opposite amount. In this way, paying down a mortgage is like buying back your own bond, from an asset allocation standpoint.
A traditional portfolio of stocks and bonds consists of roughly 60% stocks and 40% bonds. The 10-year rate from the government is about 3.06% and there are several bond ETFs that yield in the range of 3-3.5%. For example, the Vanguard Total Bond Market ETF yields about 3.3%.
So, as you consider how to deploy the $343k, maybe you can construct a 60-40 stock-bond portfolio by putting 60% of it in the stock market, and instead of allocating the remaining 40% to bonds, you simply pay off your mortgage. In this way, you replace the traditional bond component with mortgage paydown. This is a balanced approach, and you are using the mortgage paydown as a bond investment that is superior to the average bond fund out there right now. Naturally you would never want to buy the Vanguard bond fund at 3.3% or the 10-year treasury at 3.06% when you could simply earn 4% by paying back your own debt.
Then, as you save off of your monthly paychecks and allocate your savings to new investments, you can continue to put 60% towards the stock market and 40% toward "the bond market" i.e. your mortgage principal.
Hope that helps you think about it.