Sunday, October 31, 2021

Should you invest in ProShares Bitcoin Strategy ETF (ticker: BITO)?

 

Source: https://www.wsj.com/articles/first-bitcoin-futures-etf-rises-in-trading-debut-11634656217

On 18 Oct, when NYSE sounded its opening bell at 9.30am, Bitcoin HODL-ers had another reason to rejoice. The digital coin finally made history by being the first cryptocurrency ETF to list in the stock market. Even hours before the trading debuts, Wall Street could sense the excitement with the Bitcoin futures ETF up 4% during pre-market hours.  

Bitcoin YTD return source: https://www.marketwatch.com/investing/cryptocurrency/btcusd


Today, the crypto craze has subsided a little after the mother of all cryptos (crypto blue chip or crypto pioneer) had inched to an all-time high of $66k USD. Nevertheless, its year-to-date return has been an impressive 110%, after gaining much institutional acceptance, with visionary institutions like Tesla and Square pilling their cash into Bitcoin.

While bitcoin investors are generally getting eye-popping returns so far, it does not come without costs.  Other than experiencing wild swings in prices (the need for diamond hands), Bitcoin investors who buy into the digital currency directly also face the risk of being susceptible to a crypto cyber-attack. The introduction of the Bitcoin ETF may seem to pave a less risky way for retail investors to jump into the crypto bandwagon, enjoying the upside exposure to bitcoin and minimizing the possibility of a hacking incident.

And that was what I exactly thought, until I did a deep dive on the ETF by reading its prospectus and fund fact sheet. It’s important to understand what you are buying before you buy. I admit I am not exactly a Bitcoin or any crypto aficionado; but I will share my thoughts on alternative ways to have a slice of crypto pie.

A Little Bit About BITO

1. Not a Pure Bitcoin Play

Source: https://www.proshares.com/funds/bito.html


After looking through its fund holdings, I felt that the phrase ‘ProShares Bitcoin Strategy ETF (BITO)’ is quite misleading. I hope you feel the same way too…

When one invests in S&P500 ETF, he or she should expect a return roughly similar to the S&P 500 index, as the exchange traded fund aims to mimic the performance of the index. However, the same could not be said of BITO. Although this fund has exposure to Bitcoin futures, almost 30% of its value is tied to Treasury Bills. A treasury bill is a kind of bond issued by the government with a maturity value and pays a periodic coupon. While it is conventionally accepted as a safe investment, an investor will enjoy lesser upside if Bitcoin value appreciates. Moreover, bonds are susceptible to interest rate risk, and with the impending interest rate hikes, investors are faced with an additional layer of credit risk and market risk on top of the Bitcoin price fluctuations.

2. The Risk of Contango

What is Contango?

Let’s say if I am prepared to buy 100kg of silver coins from a seller in three months’ time. With a silver spot price of $768 (Silver Price per kilo), should the seller charge me a lower or higher price than the current spot rate today to ship it to me? The logical answer should be a higher price. The reason is this: in the meantime, the seller will have to incur the (1) costs of storage and the (2) costs of carry. Before the silver reaches me, the merchant may have to cover expenses for insurance, delivery, opportunity costs of getting the funds three months later. The normal market in futures is contango, where the future price of an asset is higher than the current spot price.

From the chart above, we can infer that the further the time to expiration, the higher the price. This is because the seller has to incur a higher holding cost for storing the commodity.

Similarly, in the case of Bitcoin futures, the seller will incur storage risks or platform risks and all these costs are reflected in the costs of rolling future contracts. As this ETF does not invest in Bitcoin directly, but in Bitcoin futures, in a contango situation, the fund manager may end up selling the expiring Bitcoin contracts at a lower price and purchase a longer dated Bitcoin futures at a higher price. It’s also stated in the BITO ETF prospectus that Bitcoin futures have experienced significant periods of contango.

So again, returns on investment in BITO may be lower as compared to buying Bitcoin directly due to a possibility of negative rollover.

3. Relatively High Operating Expenses

One of the hallmarks of investing in an ETF is its low expense ratio. Yet, it’s unfortunate that the opposite is true for Bitcoin ETF, which charges 0.95% in operating expenses. To give you some perspective, Vanguard S&P 500 Index Fund ETF has an expense ratio of 0.03% and even the actively managed Ark Innovation ETF, which is led by star stock picker Cathie Wood, charges an expense ratio of 0.75%.

While Bitcoin Futures may require some active management in hedging of Bitcoin futures contract, paying 0.95% of the fund value yet holding a significant amount of Treasury bills and incurring contango ‘bleed’ is something that I am not comfortable to pay. In my opinion, the total costs of owning this ETF outweigh the ability to buy and sell the ETF easily like a stock.  

Alternative to Gaining Exposure to Cryptocurrency via Stock Exchange

If you are still FOMO-ing over the crypto craze, here’s some other suggestions for you to ponder. Firstly, you need to ascertain if you are (1) bullish on Bitcoin or just (2) cryptocurrencies in general.

1.Bullish on Bitcoin:

Source: https://btcmanager.com/microstrategy-bitcoin-btc-489-million/

Consider investing in MicroStrategy, ticker symbol MSTR. It is a business intelligence company (at face value?), but its assets are closely tied to the value of Bitcoin, with the digital currency making up 80% of its total assets. However, the IT company is funding the purchase of Bitcoin via the issuance of convertible notes, so there’s some form of leveraging effect. As of 30th Sept 2021, it holds approximately 114,402 Bitcoins with an average purchase price of $27,713 USD. Investors could end up with double strokes of luck if Bitcoin mania continues and the company reports strong revenue growth.

Source: Microstrategy’s 10-Q filings 

2. Bullish on Cryptocurrency in General

If you are bullish on cryptocurrency in general, look no further than Coinbase Global. Despite it went public via a direct listing, i.e. Special Purpose Acquisition Vehicle (SPAC) deal, it was already highly profitable prior to its listing. Founded in 2013 with hopes of being a Bitcoin mainstream payment platform, its business has evolved over time. Fast forward today it is now the largest cryptocurrency exchange platform by trading volume. It names SpaceX, and Tesla as clients, with hopes to be the Amazon of Assets.

Today, Coinbase makes money through a variety of ways: trading fees when someone transacts digital assets in its exchange, interchange fees when a user makes a purchase with Coinbase credit card, and lending fees when it lends out funds in customer accounts to other institutions, just to name a few.

Despite having multiple revenue streams, I believe the crypto platform is only barely scratching the surface. Recently, Coinbase announced that it will be launching its non-fungible token (NFT) marketplace, which is a digital marketplace where users can showcase, mint, and sell their NFT. The NFT graze is already gaining momentum, and it will only get bigger when the metaverse world truly materializes. Just last week, Facebook (now called META) announced a partnership with Coinbase for digital wallet Novi.

Many cryptocurrencies have been created in the past few years, yet many have failed and vanished into thin air when investors shunned them due to lack of adoption. Even if Bitcoin ever loses its shine as the ‘store of value’, I believe crypto is here to stay. Hence, investing in Coinbase stock means betting on a positive outlook for retail and institutional adoption of digital currency overall.

Thank you so much for spending time reading my blog and I really appreciate you. If you enjoyed reading my blog, hope you can support me by liking my Facebook page here or sharing my post. You may also follow my Twitter account here, where I post my buy and sell transactions. Currently, I do not earn any fees through any affiliate programme or sponsor. If you have any queries, feel free to post them and I am happy to take questions! :)

The author owns Bitcoin, Ethereum, Solana and shares of Coinbase at the time of publication. This is not a recommendation or advice to readers to buy or sell crypto/ETF/stocks.




Wednesday, October 20, 2021

Portfolio Update (Oct) and & my position in Chinese companies! (average price and total no. of shares)

The recent weeks have somewhat been a roller coaster ride for investors. This is especially true for Chinese tech investors, who had probably seen their stock portfolio continue to nosedive while Nasdaq attempted to make new highs. It was due to regulatory fears dominating the headlines of the mainstream media practically everyday with the intention to spook investors. Just as we thought that it couldn't get any worse, the property giant Evergrande sent another shockwave to the Chinese market, which further crushed tech stocks although it had no fundamental impact on them.

Fortunately, time heals everything, and things seem to be looking up again with Alibaba closing at $175.8 HKD. However, many investors are predicting that the Chinese internet stocks will have to go through another round of stock decline to form a double bottom before recovering. As for me, I have always been bad at timing the stock market, so dollar cost averaging on Chinese stocks works best for me. Sometimes, I tend to believe that the more people predict something will happen to the stock market, the more likely it won’t happen.

As promised, I will share my profit/loss for my Chinese stocks till the Chinese tech market has made a full recovery.

Starting with  Alibaba...

NYSE:BABA


9988.HK (Alibaba)




NASDAQ:BILI


9626.HK (BiliBili)



1211.HK (BYD)



NASDAQ:JD




2382.HK (Sunny Optical)




700.HK (Tencent Holdings)


1810.HK (Xiaomi)





Transition to a 100% Growth Portfolio



A few weeks back, I made up my mind to close all my positions in dividend stocks for good and to go all in on growth companies. It was not an overnight decision. The past few months, I was a bit hesitant to pull the trigger but the strong desire to achieve F.I.R.E by 40 gave me the courage to go for it. Most of my dividend stocks were in REITS which gave stable dividends. At this current stage of my life, dividend income is not a very meaningful supplement to my income and the total returns may not have what it takes to accelerate my path towards financial freedom. By divesting all my REITs, I could take the proceeds to invest in growth stocks that can deliver exponential growth, like the kind of returns I have achieved from tech stocks during Covid 19 season last year.

I had to admit that it was not the best time to sell my REITs because inflationary fears were hitting hard on high yield shares, but at the same time, tech stocks got battered by it as well. So, I am divesting REITs at depressed levels and on the other hand, buying growth stocks at a better valuation than past months. Also, executing sell trades takes up a lot of my mental energy, especially when I had seen dividends effortlessly credited into my bank account. So instead of worrying about losing out on recovery gains, I thought it would be best to act on it before I get busy with work again and drag my feet around it.

On top of that, I planned to have a more concentrated growth portfolio by trimming my growth stocks to keep the total stock counters to about 20-30. My target is to cut down to 40 stocks by this year's end, and further reduce to 25 stocks by the end of 2022. 

Growth Portfolio



Tesla (NASDAQ:TSLA)

Tesla remains one of my highest conviction stocks and I have plans to add more by buying on dips and dollar cost averaging strategy.

There are fears among investors and analysts that the possibility of the launch of Apple Car to compete with Tesla, and the worry that the latter is facing growing competition from traditional automakers as they launched their version of electric vehicles. I think they are clearly missing the point. A commonly overlooked factor which sets Tesla apart from other legacy automakers is its scalability. Elon Musk once said that "It's relatively easy to make a prototype but extremely difficult to mass manufacture a vehicle reliably at scale. Even for rocket science, it's probably a factor of 10 harder to design a manufacturing system for a rocket than to design the rocket."


Source: https://www.businessinsider.com/elon-musk-says-building-factory-100-times-harder-than-making-car-2019-3


If you have been closely following Tesla’s progress, you would be familiar with Sandy Munro, a veteran automaker expert. According to him, Tesla is 10 years ahead of competition which is attributed to its production speeds. This creates a feedback loop by collecting customer's opinions and making the engineering change to improve its vehicles. Till date, I have yet to see any other traditional automaker mass scaling at Tesla’s rate of production.

I started a small position in Tesla shares late last year but as I read up more on the company and listened to interviews by Elon Musk, my conviction began to grow, and I bought more Tesla shares along the way.

Tesla will be reporting earnings tonight, and I am looking forward to see what’s in the cards. For me, any dip is an opportunity to buy.

Coinbase (NASDAQ:COIN)

Despite the recent stock run-up, the crypto exchange platform is still looking cheap even from a value investor’s perspective. In Q2 2021 alone, it posted a $1bil USD in net income. Assuming the net income stays constant for the remaining quarters, its net income alone is $4bil and with a market cap of $64bil, we are looking at a price to earnings ratio (PE) of only 16X for a fast growth company, with operating margins of 40% and much growth catalyst ahead!

Although it has broken the psychological resistance of $300 USD, I may consider initiating a small position and buy the dip if it drops below $300 USD.

OpenDoor (NASDAQ:OPEN)

I have sold a call option at  $24 USD strike price and the shares had closed slightly above it. If it expires in-the-money (ITM) this Friday, I am happy to let go of my shares and will also divest all my remaining OpenDoor shares. The future of iBuying business is bright, and I believe it is out to disrupt the traditional real estate sector. I think its value proposition is helping homeowners to sell their houses fast and easy. Instead of going through the conventional method of selling a house with the home viewing and engaging a lawyer, sellers can quickly complete the property transaction with a cash offer through iBuying platform. It saves the property owner’s time and gets rid of all the hassle of finding a suitable buyer. Next, OpenDoor then does the necessary repairs or renovations and sells it in the open market.

There are many iBuying players listed in the stock exchange, and another two big players are Zillow and RedFin. I chose to invest in OpenDoor because it is a pure play in the iBuying market, and it has been posting strong revenue growth in the past few quarters and still accelerating its growth plans.

Despite my positive outlook on iBuying, I have decided to let it go as an attempt to reduce my total share count, because my conviction level in this company fared lower compared to my other stocks. It’s about opportunity costs and I can use the proceeds to invest in other companies that I believe can generate a higher return. My average price in the company is $21.74 USD and I have been investing since May. So, I am getting an annualized return of about 20% return in a matter of 5 months.


NASDAQ:IBKR

I have received $1k USD worth of IBKR shares for shifting my funds over to the IBKR platform from Standard Chartered. I won’t be updating the fund value in my portfolio but to include it in my cash holdings after I have completely divested all the shares, which can only be sometime nearing 2022 as there is a holding period of one year. 

Dividend Portfolio




Recent Transactions



As you can see from the above, I have sold almost all my dividend shares except Mapletree Industrial Trust (MIT), which I am still queuing at $2.77. It was the first REIT I have bought since my army days, and (still) my favourite REIT of all time because of its reputable sponsor and its unbeatable track record of increasing its DPU every quarter without fail since the start of its listing.

Mapletree Logistic Trust (MLT) (SGX:M44U)

After I have sold 3,500 shares of MLT, I have forgotten to divest the remaining odd lots. So, I am stuck with 15 shares. I will be keeping the shares as it doesn’t make sense to sell considering the exorbitant fees for selling plain odd lot shares. I will do an internal write-off and will remove this counter from my stocks.cafe portfolio.

Champion REIT (2778.HK)

I will be keeping this beaten down REIT till it has recovered to a reasonable valuation of at least $5 HKD. Its extremely low valuation is attributed to a series of unfortunate events, starting with Hong Kong Protests followed by Covid-19, Chinese Tech crackdown and Evergrande saga at the same time. When tourists from China start flocking to the streets of Hong Kong again, the REIT should be able to see a meaningful recovery. 

Inari Amertron Berhad (KLSE:INARI)

This semiconductor maker company is more of a tech company than a dividend stock. Hence, I will be shifting it to my growth portfolio. It is not the type of revolutionary or generational company, but it’s better than letting my Ringgit idling in the bank earning a meagre interest.

Crypto Portfolio



I have transferred my Bitcoin holdings from binance.sg platform to Hodlnaut to earn weekly interest. There is default risk and cyber risk associated with it, and I could potentially lose all my Bitcoin. However, it’s still a good risk to reward ratio considering that Fireblocks, Hodlnaut’s primary custodian, diversifies the crypto holdings into offline cold storage and hot wallets, meaning that the digital assets are never held in the same baskets in the event of a cyber-attack. Moreover, my Bitcoin allocation is only a small percentage relative to my stock portfolio so I am not too worried about it.
Instead of the usual binance.sg to buy Bitcoin and Ethereum monthly, I have switched to Huobi as the fees are more attractive and I could explore other cryptocurrencies as well. Nevertheless, I am keeping my existing Ethereum on Binance.sg platform because the transfer fee is quite costly.

Total Portfolio Value

Stocks & Crypto Portfolio: $530,429

Cash on Hand: $122,490

Total Portfolio Value= $652,919 (+$28,090)




Achieved 88.16% of 2023's financial goal

Achieved 16.7% of 2030's F.I.R.E.goal


Thank you so much for spending time to read my blog and I really appreciate you. If you enjoyed reading my blog, hope you can support me by liking my Facebook page here or share my post. You may also follow my Twitter account here, where I post my buy and sell transactions. Currently, I do not earn any fees through any affiliate programme or sponsor. If you have any queries, feel free to post them and I am happy to take questions! :)




Wednesday, October 13, 2021

Covered Call Strategy on Nio

 Lately, I have seen many bloggers and local YouTubers dive into the world of options, so I have decided to join in the fray. The world of options has been my playground for the past few months as I have been learning and doing some paper trading on the Thinkorswim platform. However, nothing could beat putting my chips on the table: the simulated trading experience was incomparable to investing with my own cold hard cash. Because no money was involved in paper trades, I lacked the financial discipline to monitor it on a daily or regular basis; hence, it wasn’t easy to pick up the ropes of option trading.

For me, the biggest hurdle in starting to trade was finding out how to transfer funds into Thinkorswim. I believe it’s the same for new investors who have yet to start trading because picking the right brokerage account and puzzling out the paperwork is sort of a road block. After I intentionally set aside time to figure out how to wire funds and shares to TD Ameritrade, I started my first call option, and the rest was history.

Today, I will share a recent covered call strategy on Nio, which potentially gives a good return on investment. It takes two steps to execute a covered call strategy, by first buying shares of Nio, and selling out of the money call option at a higher strike price. 

This is a 'gamble' with $3,333* on the line: whether or not I succeed in this bid depends on one of two outcomes.

If option expires out-of-the-money (OTM) or at-the-money (ATM) →  I win (Nio shares go below $40 USD )

If the option expires deep-in-the-money  →  I lose. (Nio shares go above $40 USD)

*3.33k was derived by (Nio's share price - premium of the Call option)  .

In my case, I added Nio shares at $36.09 USD and wrote a long-dated call option expiring on Jan 2022 at a strike price of $40 USD for a premium. By selling a call option, the buyer has the right to purchase Nio shares from me at the strike price of $40 USD before expiry. As an option seller, I hope that Nio shares will not shoot past $40 USD so that the option expires worthless and I can keep the premium and repeat the whole process.

I will elaborate on a few scenarios that my option could play out in the subsequent paragraphs.

Why Nio?

Being a loss-making company, Nio probably won’t fit the bill as a great company to own; even growth investors would arguably prefer Tesla. However, when it comes to options investing, great fundamentals are only part of the equation, and there are many other factors to look out for.

High Implied Volatility

There’s an adage among traders: the trend is your friend, until the end when it bends. If you are an option seller, implied volatility (IV) is probably your friend. In short, you get paid a better premium upfront for writing options when the IV is high. 

For Nio, its implied volatility has always been stubbornly high at a 60% range, and at an IV of 64.03 %, its IV percentile is only at 6% , which means it is trading below 64.03% IV only 6% of the time.

IV Percentile is a term used to measure its current implied volatility compared to the IV value in the past. Here’s the formula to determine one year IV percentile

No of trading days below current IV/ Total trading days (250)

For instance, if Nio’s Implied volatility is hovering at 60%, and in 200 out of the 250 days, Nio’s IV has been below 60%, Nio’s IV percentile translates to

200/250= 80%.

Low Cash Outlay

Although Tesla options also trade at high IV, I am not prepared to buy and hold 100 Tesla shares at current prices, which brings us to the next reason why Nio was a better choice for a covered call strategy. To give you some context, one option contract represents 100 shares of an underlying security, and owning 100 Tesla shares cost $79k USD. Comparatively, each share of Nio costs me $36 and only requires a cash outlay of $3,609 USD to own 100 Nio shares.

High Return on Investment (ROI)

Instead of selling a monthly date to expiration (DTE) put option, I wrote an out-of-the-money (OTM) put option, at $40 USD strike price, expiring in Jan 2022. First, I bought Nio shares at USD 36.09, and at the same time, sold a call option for $276 USD.

ROI= 2.76/36.09 = 7.65% in 105 days.

Annualized return= [1.0765^(365/105)-1 ] * 100% = 1.292-1= 29.2%

This is how my profit and loss chart looked like.





Possible Scenarios

  1. If the option expires deep-in-the-money  →  I lose. (Nio shares go above $40 USD)

If the above scenario plays out, I am obligated to sell my Nio shares to the option buyer at $40 USD and keep the option premium.

In the most optimistic scenario, I could achieve a max gain of $667 USD, which is derived from Option Premium+ (Strike price minus the price I bought the share at) = 276+ 4000-3609. If this scenario were to happen, I would walk away with $667 USD.

On the other hand, if I wish to buy back Nio shares, I can purchase it directly on the stock exchange or write a cash secured put. Selling the put option obligates me to buy the share at the specific strike price if assigned; however, if it expires OTM, I get to keep the option premium and repeat the cycle, essentially getting paid while I wait.

Another strategy is to roll my options. Before the option expires ITM, I will close my current call option (at a loss or a very small profit) and sell another OTM call at a higher strike price with a longer DTE. Ideally, the new option premium will be able to cover the losses incurred from the previous call option. I will utilize this strategy if I wish to hold on to Nio Shares.

        2. If option expires out-of-the-money (OTM) or at-the-money (ATM) →  I win (Nio shares go below $40 USD )

If Nio trades below $40 USD on 21st Jan 2022, the call option will not be exercised, and $276 USD is mine to keep. This effectively brings down my breakeven price/share to price I bought the share minus option premium ($36.09-0.276) = $33.33 and I am free to write another OTM call option to further drive down my average buy price.

If shares of Nio continue its downtrend, it portends that its shares will trade at or likely below $40 USD and I get to keep the premium. That’s the main objective of an option seller since this strategy forfeits the upside potential of the stock in exchange for an income. By writing a covered call, the investor believes that the stock price is unlikely to go above the strike price in the short term. If Nio prices hover at current levels, I would do another covered call strategy and collect premiums.

Option Risk Graph

Notice that there are two distinct line graphs. The yellow line represents the amount of profit/loss at different share price points on the expiry date. The maximum loss I will incur is $3,333 USD if Nio shares go to 0, and I get to keep the option premium.

Whereas the profit/loss on day 0 is depicted by the blue curved line. The blue line will converge to the yellow line as it approaches the expiration date because the option loses its extrinsic value due to time decay. Its daily implied volatility could also affect the profit and loss curve, but I will leave that for another day. In short, as an option seller, time decay works in my favour.

Here are two more suggested ways to trade option with a lower cash outlay.

Method 1: Bull Put spread


Instead of buying the shares, you are buying a put option to minimize the downside risk if shares drop.

Like covered calls, Bull Put spread involves a two-step strategy.

1. Sell an OTM put option and collects a premium

2. Buy another OTM put option at a lower strike price with the same expiration date and pays a premium

Executing this credit spread should yield a net premium as the profits from selling put options should easily offset the costs of buying the put option. If both options expiry OTM, consider replicating this cycle to collect passive income.

While the method reduces the cash outlay compared to covered calls, investors will have to suffer a real loss if the share price sank below the lower option strike price upon expiry.

Another drawback is that the net premium collected is lesser as compared to covered call since there is a price to pay for buying put option.

 Method 2: Diagonal Spread a.k.a. Poor man’s covered call.


If a poor man has less capital, he can still participate in options trading by using deep ITM and a long dated call option as a collateral. Also, a two step method.

1. buying a deep ITM call option with 6 months or more DTE

2. selling monthly OTM put option

Instead of paying for the hefty price of owning 100 shares, he buys a deep in the money call option with six month’s expiry or more which serves as a collateral. The call option should have a high delta i.e., above 0.7 since it is deep ITM.

Next, you can start selling an OTM put option with one-month DTE and repeat the cycle when put options expire worthless.

Don’t expect high returns for such a strategy, and 1% return a month would be ideal. The last 30 days of a put/call option has the highest rate of time decay, hence one who uses such strategy would be able to earn a premium on the time decay.

However, I wouldn’t recommend this strategy on stock with high volatility as the premium for the deep ITM call option will be quite expensive due to high IV. A few stock suggestions for using a poor man’s covered call would be TLT, Microsoft and Apple.

Thank you so much for spending time to read my blog and I really appreciate you. If you enjoyed reading my blog, hope you can support me by liking my Facebook page here or share my post. You may also follow my Twitter account here, where I post my buy and sell transactions. Currently, I do not earn any fees through any affiliate programme or sponsor. If you have any queries, feel free to post them and I am happy to take questions! :)