[frouzback]

hello,

Sorry I'm replying a bit late.

I'm trying to answer this:

"I am no longer interested in buying options [...]. Selling covered options is, on the contrary, a very defensive strategy and which seems to me to allow you to receive passive income in addition to dividends. The main risk is having to sell your shares [...]

Even though this strategy is not without its flaws and the spreads reduce the premium received, don't you think that it still allows you to do slightly better than simply holding shares, while reducing the volatility of the portfolio?

 

In my opinion, even if you are on a strategy where you own the stock on which you sell a call; you have to ask yourself the question of the relevance of this call sale; which is therefore a short sale. You are "short call". You have to forget for 1 minute that you own the stock that goes behind and just look at this "short call" position.

When you are short call, and you have sold this call at too low a price (this is NECESSARILY the case, since these products are very very margined); the problem is that the premium that you collect will not compensate, on average, the (potentially large) loss that occurs when the stock rises a lot.

Because it is indeed a loss 🙂 Depriving yourself of the strong rise of a stock is a loss, even if it is less painful when you own the stock in addition. My argument therefore does not go further than that. Owning the stock alone is better than owning the stock + shorting a call at a price that is too low.

The premium collected will be on average too low to compensate for the unexpected super increases in the stock. You have to see that being deprived of a real "big increase" that is really unexpected in a stock is perhaps rare; but it can compensate (negatively...) for a huge amount of premiums that you will have collected. So even if you mess up in let's say 10% of cases, there is a chance that these 10% of cases will make you lose money overall, while your strategy was a winner 90% of the time 🙂

For Novartis (I am also positioned on it!) since there has not been a great rise for a few years, it would certainly have been profitable to sell calls. On a few others, it would not have worked well, however, especially in 2020. Afterwards, maybe some investors manage to predict very, very consistently which stocks will rise, but not too quickly 🙂 Novartis could be a good candidate for your strategy; but the problem is that this characteristic (stock that rises very slowly) is generally reflected in the volatility of the stock that is used to price the call. When I was at the bank, I had already noticed that Novartis had one of the lowest 'vol' of all the "blue chips". So if you sell a call on Novartis, you will sell it at a really not very high price, especially with the commercial margin. There you go 🙂

Maybe this argument of the commercial margin is the most convincing in fact. If the guy who sells you this product wins a lot for sure it is because there is a problem. That is why we have an account at IB and we hold shares directly, right? 🙂

There you go, sorry for not coming up with an A+B proof 🙂 I advise to stay away because I think that on average and in the long term we do not get by with these products; but that does not prevent the profile of these trades (selling a call) from being able to make us a winner for a long period, with a very high percentage of winning trades.

[frouzback]

Hi,

I worked for 5 years in investment banking in pricing of equity derivatives… before leaving the world of finance in 2010.

My experience with these products offered to individuals (calls / puts / others) is that it massively enriches the person who sells the product and that it leaves almost no chance for individual investors to achieve a decent performance in the long term. You can of course make a "hit" here and there; but the odds will be against you and in the long term it will end up being felt.

The subtlety (= the scam) in the product you describe (selling a call when you already own the stock) is that the call you sell will be sold for a price that is far too low. You can see this by trying to buy a call instead (and there, strangely, it costs much more than the price at which you are offered to sell it).

To know what a call should be worth, we have to make an assumption about the volatility of the stock. The more volatile the stock, the more expensive the call is, basically. By selling the call at too low a price (which is what the site suggests), we say that you are "selling volatility" too cheaply. It's a bit abstract, but you should know that in finance, you can really trade "volatility" like you would trade tomatoes.

The site is therefore just looking for suckers (sorry for the term 🙂 ) to sell them cheap volatility; knowing that they can resell this volatility to others for much more; so as to win every time. It's a good business for an investment bank; but much less for the client 🙂

So I advise you to move on 🙂 Holding shares for real, directly, and over the long term, and collecting dividends that come from a real profit in the real world, that remains and will remain the solution for the little guy (=us) to avoid being eaten up by finance professionals who are ever more imaginative in their marketing.

 

 

 

[frouzback]

Hi !

Overall I'm not super worried. I kind of expected it to be a mess. I'll ask IB about this 28% thing but I highly doubt they'll go to 12.8% for the next dividends (which are quarterly, for Total).

Indeed, with the DA1, I will recover 12.8% of the dividend, which means that 28% – 12.8% = 15.2% will remain in the pockets of the French tax authorities. To speak in real money, we are talking about 500 shares that pay a total of 2.64 EUR of div each in 1 year, that is to say EUR 1,320 of annual dividend on which the French tax authorities unduly keep 15.2%, that is to say almost exactly EUR 200.

It's enough of an annual amount for me to try to recover it myself with my little hands; but not enough to keep me from sleeping. Besides, I'm not convinced that there are fees if I do the steps alone. I know that IB offers an overpriced service to recover the money; but I plan to do it alone.

Sur ce site : https://bofip.impots.gouv.fr/bofip/3243-PGP.html/identifiant%3DBOI-INT-CVB-CHE-10-20-30-20150812

It is marked

 "

To obtain a refund of the excess withholding tax paid in the event of non-application of the conventional rate when paying income, the procedure is as follows.

In the matter of dividends and interest, reimbursement requests (request on plain paper accompanied by the corresponding forms and the beneficiary's bank details) must be made to the Capital Income Unit of the Directorate for Residents Abroad and General Services, whose contact details are as follows:

Directorate of Residents Abroad and General Services

Capital income division

10, Centre Street

TSA 30012

93 165 NOISY LE GRAND CEDEX

 "

I feel like I just have to send them some supporting documents and a bank account for payment and it's done free of charge... If it takes time I don't really care as long as it works and it's pretty simple.

In short, we are talking about steps to be taken next year. So we have time to see it coming!

[frouzback]

Hello !

There you go, the Total dividend is visible on my IB account. From what I see, there was a withholding of 28% on the amount…

Why 28%? I have the impression that this is the withholding rate for legal entities. Except that I am a natural person and should therefore benefit from an advance tax of only 12.8% for the French…

In short, I feel like I should take steps with the French tax authorities to recover the overpaid tax...

 

[frouzback]

In any case, thank you very much for your feedback. I am not 100% convinced that everything is in order on the IB side on French dividends but:

– on the other hand I don’t think that sending them French forms upstream will change much. IB seems to be telling me that in any case, since they are based in the UK, they don’t really consider me as a Swiss resident who receives French div.. Anyway we’ll see what they do

– even if it doesn’t go well and they keep too much money for the French treasury, this money can be recovered by being lazy, which will be painful at first; but I imagine you get used to everything 🙂

Thanks again for your feedback. The next dividend on Total (you guessed it 🙂 ) falls in January 2021 and I will keep you informed: I promise

See you soon

[frouzback]

Well, the Interactive Brokers chat almost made me have some doubts; but they told me to update my W8-ben form; which therefore certifies my residence.

They even have my taxpayer number in the canton of Bern; so apparently they have everything they need to properly pay the 12.8% to the French.

Jerome, you may not have French shares but maybe European shares? Or did you have some? Did IB manage everything well?

Otherwise, how does it work in Japan? I imagine that the Japanese also take a % of your dividends, that Switzerland taxes you on the entirety of your dividend (therefore double taxation) and reimburses you afterwards the amount taken by the Japanese using the DA1 form?

[frouzback]

Hi Jerome,

I am a little reassured by reading this. You tell me that for other countries, IB automatically levies the "correct" tax rate reserved for the country where the dividend-paying company is established.

In your case, if I understand correctly, this means that at no time should you contact the Japanese authorities for your Japanese titles. You manage your taxes with your canton, and that's what we want!

While searching on the France <-> Switzerland agreement I found this:

 

The French administrative instruction of February 25, 2005 (cf. BOI 4 J-1-05) established a simplified procedure for obtaining the conventional rate of withholding tax on dividends (NB: 12.8%, this is what France keeps for itself). This
procedure, open to all residents of States having concluded a convention with France
against double taxation, allows immediate application by paying institutions (NB: for me => Interactive Brokers), of the conventional rate of withholding tax on dividends (NB: 12.8%) , upon simple production by the beneficiary of the distribution of a certificate of residence. To benefit from this procedure, interested parties only have to produce to their account holder (NB: Interactive Brokers), before payment of dividends from French sources, that the certified form 5000 (NB: this is a certificate of residence) without having to file annex form 5001 (NB: atrocious form, so phew!).

 

So to be 100% sure that everything is in order I have an interest in contacting IB to find out if they need a certificate of residence (they normally already have one) and if they can confirm that they will take 'only' 12.8% of the dividend for the frouzes (I have the right to say frouze, I'm French 😉 ); so that I will never have to deal with the French tax authorities to recover an 'overpayment' on their side.

Thanks for the quick response Jerome!

[frouzback]

Hello,

I'm bringing this topic back up in the hope of getting some feedback.

I now have a stock portfolio at IB consisting of:

– Swiss stocks that pay dividends. No worries about that: an advance tax of 35% was withheld by IB on my 2020 dividends, which means that I only received 65% of the theoretical dividends. This is not a problem since the amount withheld will be deducted from my ordinary income tax. Everything is fine.

 

– of a French stock that produces oil and is generous on the dividend. My question concerns the dividends (in EUR) paid by this company:

 

I am domiciled in the canton of Bern, and my broker is IB, as already mentioned. I have not yet received any dividends from this company. The next dividend payment will take place at the beginning of 2021.

 

Reading a bit on the internet, I have the impression that I need to contact myself IB so that the advance tax "reserved for France" is 'only' 12.8%. Concretely, I must send them documents stating the actions that I have before payment of dividends and I have to have these documents signed by the tax administration of the canton of Berne… If I don't do all this; a higher withholding tax will be applied to my French dividends, and I will have to discuss with the French tax administration afterwards to recover what I have to recover.

Am I right or am I totally off base?

Feedback from simular experience?

I will find you some links to support my words...

 

See you soon !

 

 

 

 

[frouzback]

And I have not yet thanked the contributors to this site for their work and their welcome, which is a serious mistake.
So Jerome, thank you and all the best too!
Dividinde, if you are reading this: thank you very much!

I might start posting a bit in the comments section of the different analyses :)

[frouzback]

It is always a pleasure to have the opinion of French readers who also live in Switzerland. I have often had the remark of some French people who consider that in their country the financial culture is only very little developed and that therefore the financial skills themselves are lacking. This is apparently not your case. Likewise, you do not seem to me to be a follower of the Welfare State, as there are many in your beautiful country.

No, actually... but my opinions are very marginal in France anyway. In 10 years I have become more pro-Swiss than the Swiss themselves I think. 🙂 especially with regard to Swiss democracy.
The French do not only have faults, however, when it comes to finance: they are generally very economical and savers. But these savings are directed towards the acquisition of a main residence (which is good) and then... towards 'life insurance' type funds (which is much less good). Rarely are shares purchased directly, in fact...

Certain aspects of your intervention remind us, and this is something that I have already mentioned a few times, that achieving a certain financial comfort is one thing, but it is another to be able to translate it into a real improvement in the quality of life, in particular, and perhaps above all, by saving time.

Yes, for me there is a double objective to saving.
– manage to work for less than 100% while maintaining a good level of income that allows more savings. We are counting on the snowball effect of savings, since in our world money generates money.

– be calm at the end of your career to stop working completely or almost completely. My wife and I's pension funds offer a conversion rate of 5% on 2nd pillar assets, which is a big joke when you know that this rate will certainly drop again and that the age to be able to claim it (65 years) will probably increase. The only valid solution I see is to create your own lifelong pension to stop working much earlier (who wants to work until 65? 67 years? ...).
And, the cherry on the cake: the capital saved and its income are passed on to the children (unlike the second pillar capital which – in addition to bringing in epsilon for a potentially short period – disappears upon death). This point is VERY important to me because I want my daughters to have a better life than mine; and I am convinced that income from capital will allow them to be less enslaved by the need to have income from work. In short, they will be able to work less and flourish more.

Okay, I know I'm preaching to the converted here.

Like you, I also have a pessimistic side, which is not part of my personality, but rather my experience in the stock market, due to the fact that I started in 2000. This taught me to become extremely cautious.

The internet bubble was something. My personal 'pessimistic' experience is that I was still working in the trading room in 2007, 2008, 2009. I haven't been there for a long time now and I'm lucky enough to no longer work in the finance sector at all in fact 🙂
But, suddenly, it is clear that I would NEVER invest in a banking giant like UBS, BNP Paribas or whatever. Never. It will be a good choice at times, and a missed opportunity at times…

But my plan is actually very simple: invest in companies that will still be doing the same business serenely in 20 years, that will maintain their dividend and will not resort to capital increases for aggressive acquisitions.

Invest — and once you’ve made the decision — don’t touch anything. No selling. Keep it for life.
I don't intend to worry much about the price movement. I just want a return, not a high one, but a recurring one. If the stocks I buy triple without changing the dividend - that would obviously be news, but on the other hand I couldn't buy more without penalizing my return.
If it loses 50% without a capital increase and a drop in dividends (it will happen...), well I will not consider having made a mistake... (be careful though with regard to the temptation to strengthen).

On the other hand, if the dividend falls, then we can talk about a mistake. I quote Buffet:
“I don’t know when to buy, but I know what to buy”

Buffet is right: I have no idea when to buy. I don't really know what to buy either, but I know what I won't buy. My Interactive Brokers account is open, and I plan to start smoothing out some purchases (buying gradually, every month, for a constant CHF amount), which should reduce the impact of my incompetence on 'when to buy'.
For 'what to buy', we will focus for the moment on

– Switzerland, nothing but Switzerland. Not a definitive choice. The US and Japan are in the range of possibilities. Anything denominated in Euros, on the other hand, no. We will reconsider when the Euro has disappeared 🙂
– The sectors that I consider safe and promising in Switzerland, and in which I am not totally incompetent. Pharma/old, watchmaking/luxury, tourism.

'In there, I really appreciated the analyses on the companies operating ski lifts like Jungfrau, Titlis, Zermatt... I will take a position (to never sell), but I don't know yet if it will be on all of them or just some.
'The watch industry has suffered greatly from fears about China. If there is one thing I am optimistic about in the very long term: it is China. The trade war is in the prices. Trump and his tweets create a lot of noise, but I see this as opportunities. I will gradually take a position. Prices are ultra volatile in the short term, but if we look at the price a little it seems OK to me.
'Swiss pharmas are beautiful. But they are expensive. The other type of business that I would like is things to sell to our Swiss seniors. I had seen analyses on this site, I will reread that...
'And I'm also looking for other Swiss business ideas to buy 'for life'. No cantonal banks though even though I know you like them on this site 🙂

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