Personal Finance & Money Asked on September 5, 2021
Let’s say that I have $50k in my brokerage account. My broker will let me buy double my account’s value on margin. I can buy 100 shares of TSLA at $820 per share and then sell a one year covered call with a strike price of $850 for $15k of fat premium.
I have a personal loan for $15k. I have been using my trading account to make the monthly payment. What if I withdraw the $15k premium and pay off the loan? By doing so, I would pay the loan off faster, save on the interest and I wouldn’t have the pressure to make money on a weekly or monthly basis for the loan payment and I can just let money sit in TSLA shares until I close the covered call or it expires in a year.
What are the pros and cons of doing this? The stock can drop below my buy price and stay there longer but in that situation the option’s premium would lose its value too. My broker said that I won’t get a margin call as long as I have enough to cover 50% of the shares cost. The worst case scenario is that I might have to add $5-10K more if the stock continues to tank. If stock goes up then I can close the covered call and sell my shares when I break even or even profit.
I know I can always take the money out from my account without doing all this and pay the loan off but I wonder if my plan would work or not. Please let me know your thoughts.
You have two separate issues and you are conflating them. You have a $15k personal loan and you are considering a TSLA covered call. One has nothing to do with the other.
The real questions are:
(1) Whether doing a covered call on TSLA is a good idea
(2) Whether you have sufficient assets to support the margin loan.
The answer to (1) is that you'll know that by the end of the year.
The answer to (2) is a bit tricky because your statement that you confirmed with the broker and I won't get a margin call as long as I have enough to cover 50% of the shares cost is a bit iffy. Reg T long margin is 50% with a maintenance margin requirement (MMR) of 25% (brokers may require more). If your broker is saying that his MMR is 50% then you barely have enough to cover the margin ($35k remains after paying off the loan with a margin purchase of $67k therefore you have a buffer of $1.5k).
Given TSLA's price movement over the course of the past year (share price dropped by more than half), it's definitely not true that Worst case scenario I may have to add $5-10K more if the stock continues to tank.
Another factor is that when you buy on margin, you pay an annual margin interest rate on the borrowed money which would be $32k times the borrow rate which is in the vicinity of 8-10% at the major discount brokers other than IBKR.
Correct answer by Bob Baerker on September 5, 2021
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