Losing Money with Norbert's Gambit
"When you hold units of the DLR/DLR.U (TSX) ETF, you are indirectly holding U.S. dollars cash or cash equivalents. The ETF can be thought of as a container. The container gives you the convenience of holding USD in, say, CAD-denominated accounts that don't normally provide for USD cash balances. The ETF price ($12.33 and $12.12, in your example) simply reflects the CAD price of those USD, and the change is because the currencies moved with respect to each other. And so, necessarily, given how the ETF is made up, when the value of the U.S. dollar declines vs. the Canadian dollar, it follows that the value of your units of DLR declines as quoted in Canadian dollar terms. Currencies move all the time. Similarly, if you held the same amount of value in U.S. dollars, directly, instead of using the ETF, you would still experience a loss when quoted in Canadian dollar terms. In other words, whether or not your U.S. dollars are tied up either in DLR/DLR.U or else sitting in a U.S. dollar cash balance in your brokerage account, there's not much of a difference: You ""lose"" Canadian dollar equivalent when the value of USD declines with respect to CAD. Selling, more quickly, your DLR.U units in a USD-denominated account to yield U.S. dollars that you then directly hold does not insulate you from the same currency risk. What it does is reduce your exposure to other cost/risk factors inherent with ETFs: liquidity, spreads, and fees. However, I doubt that any of those played a significant part in the change of value from $12.33 to $12.12 that you described." There's a possibility to lose money in exchange rate shifts, but just as much chance to gain money (Efficient Market Hypothesis and all that). If you're worried about it, you should buy a stock in Canada and short sell the US version at the same time. Then journal the Canadian stock over to the US stock exchange and use it to settle your short sell. Or you can use derivatives to accomplish the same thing. "Can someone please clarify if Norbert's gambit is the optimal procedure to exchange CAD to USD? I'm not sure I'd call an arbitrage trade the ""optimal procedure,"" because as you point out you're introducing yet another point of risk in to the transaction.  I think buying the foreign currency for an agreed upon price is the ""optimal procedure."" If you must use this arbitrage trade, try with a government bond fund; they're typically very stable."
You own the stock at $29.42 At $40, the stocks is called at $26. You can't add the call premium, as it's already accounted for. The trade is biased towards being bearish on the stock. (I edited and added the graph the evening I answered)  Not the pretiest graph, but you get the idea. With that $29.42 cost, you are in the money till about $30, then go negative until the most you lose is $3.42. "I would change that statement to ""very few people can CONSISTENTLY beat the market "". Successful strategies will get piled into and reduce returns. Markets will pick up inefficiencies, but at the same time they do exists. Tons of interesting reading especially in regards to value. Is there a risk premium that we don't know for value? Or is it a market behavior thing?" An option, by definition, is a guess about the future value of the stock. If you guess too aggressively, you lose the purchase price of the option; if you guess too conservatively, you may not take the option or may not gain as much as you might have. You need to figure out what you expect to happen, and how confident you are about it, against the cost of taking the option -- and be reasonably confident that the change in the stock's value will be at least large enough to cover the cost of buying into the game. Opinion: Unless you're comfortable with expectation values and bell curves around them, it's significantly easier to lose money on options than to profit on them. And I'm not convinced that even statisticians can really do this well. I've always been told that the best use for options is hedging an investment you've already made; treating them as your primary bet is gambling, not investment. By coincidence, I entered this position today. Ignore the stock itself, I am not recommending a particular stock, just looking at a strategy. The covered call.  For this stock trading at $7.47, I am able, by selling an in-the-money call to be out of pocket $5.87/sh, and am obliged to let it go for $7.00 a year from now. A 19% return as long as the stock doesn't drop more than 6% over that time. The chart below shows maximum profit, and my loss starts if the stock trades 21% below current price.  The risk is shifted a bit, but in return, I give up potential higher gains. The guy that paid $1.60 could triple his money if the stocks goes to $12, for example. In a flat market, this strategy can provide relatively high returns compared to holding only stocks. That is absolute rubbish.  Warren Buffet follows simple value and GARP tenants that literally anyone could follow if they had the discipline to do so.  I have never once heard of an investment made by Warren Buffet that wasn't rooted in fundamentals and easy to understand.  The concept is fairly simple as is the math, buying great companies trading at discounts to what they are worth due to market fluctuations, emotionality, or overreactions to key sectors etc.  If I buy ABC corp at $10 knowing it is worth $20, it could go down or trade sideways for FIVE YEARS doing seemingly nothing and then one day catch up with its worth due to any number of factors.  In that case, my 100% return which took five years to actualize accounts for an average 20% return per year.  Also (and this should be obvious), but diversification is a double edged sword.  Every year, hundreds of stocks individually beat the market return.  Owning any one of these stocks as your only holding would mean that YOU beat the market.  As you buy more stocks and diversify your return will get closer and closer to that of an index or mutual fund.  My advice is to stick to fundamentals like value and GARP investing, learn to separate when the market is being silly from when it is responding to a genuine concern, do your own homework and analysis on the stocks you buy, BE PATIENT after buying stock that your analysis gives you confidence in, and don't over diversify.  If you do these things, congrats.  YOU ARE Warren Buffet. Swiss Central bank has a floor of 1.20, the reason why I have this pair is that my downside is limited.  The actual differential is about 20 bps but im leveraged 50:1, which gives me a fun 10% annualized. I bought in at 1.2002, meaning my max downside on an investment of 20K (gives 1mn of exposure), is 200$ and my potential profit is 2000. Creating a risk to return of 10:1. "Yes, of course there have been studies on this.  This is no more than a question about whether the options are properly priced. (If properly priced, then your strategy will not make money on average before transaction costs and will lose once transaction costs are included.  If you could make money using your strategy, on average, then the market should - and generally will - make an adjustment in the option price to compensate.) The most famous studies on this were conducted by Black and Scholes and then by Merton. This work won the Nobel Prize in 1995. Although the Black-Scholes (or Black-Scholes-Merton) equation is so well known now that people may forget it, they didn't just sit down one day and write and equation that they thought was cool. They actually derived the equation based on market factors. Beyond this ""pioneering"" work, you've got at least two branches of study.  Academics have continued to study option pricing, including but not limited to revisions to the original Black-Scholes model, and hedge funds / large trading house have ""quants"" looking at this stuff all of the time.  The former, you could look up if you want. The latter will never see the light of day because it's proprietary. If you want specific references, I think that any textbook for a quantitative finance class would be a fine place to start.  I wouldn't be surprised if you actually find your strategy as part of a homework problem. This is not to say, by the way, that I don't think you can make money with this type of trade, but your strategy will need to include more information than you've outlined here.  Choosing which information and getting your hands on it in a timely manner will be the key." The day trader in the article was engaging in short selling.  Short selling is a technique used to profit when a stock goes down.  The investor borrows shares of a stock from someone else and sells them.  After the stock price goes down, the investor buys the shares back and returns them, pocketing the difference. As the day trader in the article found out, it is a dangerous practice, because there is no limit to the amount of money you can lose. The stock was trading at $2, and the day trader thought the stock was going to go down to $1.  He borrowed and sold 8,400 shares at $2.  He hoped to buy them back at $1 and earn $8,400 profit.  Instead, the stock went up a lot, and he was forced to buy back the shares at $18.50 per share, or about $155,400.  He had had $37,000 with E-Trade, which they took, and he is now over $100,000 in debt. "The stock market is not a zero-sum game.  Some parts are (forex, some option trading), but plain old stock trading is not zero sum. That is to say, if you were to invest ""at random"", you would on average make money.  That's because the market as a whole makes money - it goes up over time (6-10% annually, averaged over time).  That's because you're not just gambling when you buy a stock; you're actually contributing money to a company (directly or indirectly), which it uses to fund activities that (on average) make money.  When you buy Caterpillar stock, you're indirectly funding Caterpillar building tractors, which they then sell for a profit, and thus your stock appreciates in value.  While not every company makes a profit, and thus not every stock appreciates in true value, the average one does. To some extent, buying index funds is pretty close to ""investing at random"".  It has a far lower risk quotient, of course, since you're not buying a few stocks at random but instead are buying all stocks in an index; but buying stocks from the S&P 500 at random would on average give the same return as VOO (with way more volatility). So for one, you definitely could do worse than 50/50; if you simply sold the market short (sold random stocks short), you would lose money over time on average, above and beyond the transaction cost, since the market will go up over time on average. Secondly, there is the consideration of limited and unlimited gains or losses. Some trades, specifically some option trades, have limited potential gains, and unlimited potential losses. Take for example, a simple call option.  If you sell a naked call option - meaning you sell a call option but don't own the stock - for $100, at a strike price of $20, for 100 shares, you make money as long as the price of that stock is under $21.  You have a potential to make $100, because that's what you sold it for; if the price is under $20, it's not exercised, and you just get that $100, free.   But, on the other hand, if the stock goes up, you could potentially be out any amount of money.  If the stock trades at $24, you're out $400-100 = $300, right?  (Plus transaction costs.)   But what if it trades at $60?  Or $100?  Or $10000?  You're still out 100 * that amount, so in the latter case, $1 million.  It's not likely to trade at that point, but it could. If you were to trade ""at random"", you'd probably run into one of those types of situations.  That's because there are lots of potential trades out there that nobody expects anyone to take - but that doesn't mean that people wouldn't be happy to take your money if you offered it to them.   That's the reason your 16.66 vs 83.33 argument is faulty:  you're absolutely right that if there were a consistently losing line, that the consistently winning line would exist, but that requires someone that is willing to take the losing line.  Trades require two actors, one on each side; if you're willing to be the patsy, there's always someone happy to take advantage of you, but you might not get a patsy." "I read the book, and I'm willing to believe you'd have a good chance of beating the market with this strategy - it is a reasonable, rational, and mechanical investment discipline. I doubt it's overplayed and overused to the point that it won't ever work again. But only IF you stick to it, and doing so would be very hard (behaviorally). Which is probably why it isn't overplayed and overused already. This strategy makes you place trades in companies you often won't have heard of, with volatile prices. The best way to use the strategy would be to try to get it automated somehow and avoid looking at the individual stocks, I bet, to take your behavior out of it. There may well be some risk factors in this strategy that you don't have in an S&P 500 fund, and those could explain some of the higher returns; for example, a basket of sketchier companies could be more vulnerable to economic events. The strategy won't beat the market every year, either, so that can test your behavior. Strategies tend to work and then stop working (as the book even mentions). This is related to  whether other investors are piling in to the strategy and pushing up prices, in part.  But also, outside events can just happen to line up poorly for a given strategy; for example a bunch of the ""fundamental index"" ETFs that looked at dividend yield launched right before all the high-dividend financials cratered. Investing in high-dividend stocks probably is and was a reasonable strategy in general, but it wasn't a great strategy for a couple years there. Anytime you don't buy the whole market, you risk both positive and negative deviations from it. Here's maybe a bigger-picture point, though. I happen to think ""beating the market"" is a big old distraction for individual investors; what you really want is predictable, adequate returns, who cares if the market returns 20% as long as your returns are adequate, and who cares if you beat the market by 5% if the market cratered 40%. So I'm not a huge fan of investment books that are structured around the topic of beating the market. Whether it's index fund advocates saying ""you can't beat the market so buy the index"" or Greenblatt saying ""here's how to beat the market with this strategy,"" it's still all about beating the market. And to me, beating the market is just irrelevant. Nobody ever bought their food in retirement because they did or did not beat the market. To me, beating the market is a game for the kind of actively-managed mutual fund that has a 90%-plus R-squared correlation with the index; often called an ""index hugger,"" these funds are just trying to eke out a little bit better result than the market, and often get a little bit worse result, and overall are a lot of effort with no purpose. Just get the index fund rather than these. If you're getting active management involved, I'd rather see a big deviation from the index, and I'd like that deviation to be related to risk control: hedging, or pulling back to cash when valuations get rich, or avoiding companies without a ""moat"" and margin of safety, or whatever kind of risk control, but something. In a fund like this, you aren't trying to beat the market, you're trying to increase the chances of adequate returns - you're optimizing for predictability. I'm not sure the magic formula is the best way to do that, focused as it is on beating the market rather than on risk control. Sorry for the extra digression but I hope I answered the question a bit, too. ;-)" "If the stock is below its purchase price, there is no way to exit the position immediately without taking losses. Since presumably you had Good Reasons for buying that stock that haven't changed overnight, what you should probably do is just hold it and wait for the stock to come back up. Otherwise you're putting yourself into an ongoing pattern of ""buy high, sell low"", which is precisely what you don't want to do. If you actually agree with the market that you made a mistake and believe that the stock will not recover any part of the loss quickly (and indeed will continue going down), you could sell immediately and take your losses rather than waiting and possibly taking more losses. Of course if the stock DOES recover you've made the wrong bet. There are conditions under which the pros will use futures to buffer a swing. But that's essentially a side bet, and what it saves you has to be balanced against what it costs you and how certain you are that you NOW can predict the stock's motion. This whole thing is one of many reasons individuals are encouraged to work with index funds, and to buy-and-hold, rather than playing with individual stocks. It is essentially impossible to reliably ""time the market"", so all you can do is research a stock to death before making a bet on it. Much easier, and safer, to have your money riding on the market as a whole so the behavior of any one stock doesn't throw you into a panic. If you can't deal with the fact that stocks go down as well as up, you probably shouldn't be in the market." "Easiest thing ever. In fact, 99% of people are loosing money. If you perform worse then 10% annually in cash (average over 5-10 years), then you better never even think about trading/investing. Most people are sitting at 0%..-5% annually. They win some, loose some, and are being outrun by inflation and commissions. In fact, fall of market is not a big deal, stock indexes are often jump back in a few months. If you rebalance properly, it is mitigated. Your much bigger enemy is inflation. If you think inflation is small, look at gold price over past 20 years. Some people, Winners at first, grow to +10%, get too relaxed and start to grow already lost position. That one loose trade eats 10% of their portfolio. Only there that people realize they should cut it off, when they already lost their profits. And they start again with +0%. This is hard thing to accept, but most of people are not made for that type of business. Even worse, they think ""if I had bigger budget, I would perform better"", which is kind of self-lie." "This doesn't make sense to me. Writing a covered call gives him a long delta position - the exact opposite of what he wants. And the tax losses won't turn a losing position into a winning one.  Is there something I'm missing?  Edit: Also, doesn't ""shorting against the box"" mean he has to have a long position, and short against that? That means you've got zero net delta, which isn't very useful at all..." If you want to make money while European equities markets are crashing and the Euro itself is devaluing: None of these strategies are to be taken lightly. All involve risk. There are probably numerous ways that you can lose even though it seems like you should win. Transaction fees could eat your profits, especially if you have only a small amount of capital to invest with. The worst part is that they all involve timing. If you think the crash is coming next week, you could, say, buy a bunch of puts. But if the crash doesn't come for another 6 months, all of your puts are going to expire worthless and you've lost all of your capital. Even worse, if you sell short an index ETF this week in advance of next week's impending crash, and some rescue package arrives over the weekend, equity prices could spike at the beginning of the week and you'd be screwed. I assert not so. Even if we assume a zero sum game (which is highly in doubt); the general stock market curves indicate the average player is so bad that you don't have to be very good to have better that 50/50 averages. One example: UP stock nosedived right after some political mess in Russia two years ago. Buy! Profit: half my money in a month. I knew that nosedive was senseless as UP doesn't have to care much about what goes on in Russia. Rising oil price was a reasonable prediction; however this is good for railroads, and most short-term market trends behave as if it is bad.