ERICOPOLY

Five years after each Roth contribution, the amount of the contribution itself can be withdrawn completely tax free and without penalties. So you can perhaps think of every contribution as if it were going to a tax-free fund with a 5 year lockup (subject to 10% penalty for early withdrawal before the 5 year lockup period expires). Still not enough money? Try this: 0) Roll your 401k plan into IRAs 1) convert some (or all) of your Regular IRA to RothIRA -- you pay only the income tax, no penalties here 2) Wait 5 years and then you can withdraw all of the money (without the 10% penalty) that you converted to Roth status in the prior step So I'm trying to tell you that you can completely avoid the 10% penalty if you use the Roth as a tool to accomplish early withdrawal. Then, if that's still not good enough, you can make the "substantially equal periodic payments" deal where you agree to take out a fixed amount each and every year until you are 59.5. On this money you pay only income tax, not penalties. This is referred to as "annuitizing your IRA". You can look that up. Oh, when I was an employee I spent a lot of time daydreaming and researching about how to get out of the company early. I think I figured out a few valuable "tricks" -- really, not too tricky as it's just playing by the rules as they were made.

There is another type of contribution that just rocks if you are planning on not working your entire career at the same company. It's this... I always maxed out the additional after-tax contribution that you are allowed to make to the 401k plan. It amounts to 7% of your pay. So if you make 100k salary, you can contribute another $7,000 after-tax this way. This money is in addition to the $17,500 contribution you make. So you can contribute $7,000 + $17,500 = $24,500 total contribution. Here is why it's so great... on the day you leave your job you can roll your 401k plan to an IRA. The after-tax money goes directly to a RothIRA and the pre-tax money goes directly to a Rollover IRA. You can later convert the Rollover IRA if you choose to RothIRA status, but that's optional. So did you catch that? Upon rollover out of your 401k, all of your after-tax contributions are treated exactly the same. They all go to the Roth, even though the "extra 7% of pay" contribution exceeded the amounts you are normally allowed to contribute to a RothIRA. The only difference between the two is that the earnings/gains on the Roth401k contributions also flow directly to the RothIRA upon rollover, but in the case with the "extra 7% of pay" contributions the earnings/gains on them go to the regular Rollover IRA, because those are taxable gains/earnings. But that distinction doesn't matter too much if you plan on leaving the company relatively early as I did. Anyways, that's what I did. I maxed out everything all of the time. Just bring out the big hickory and whack it.

It shouldn't be too surprising that, with the warrants, the Treasury wanted to design a security that closely mirrored regular common stock ownership. They tax the dividends just like they do with ordinary common stock. And the warrants have some of the advantages of ordinary common stock -- you can take that dividend and reinvest it in the shares. That's what the warrant adjustment accomplishes. Why is at all that surprising that they offer no special Buried Gold of Cortez feature above and beyond that? The shackles they put on you suck, frankly: 1) you are compelled to invest that dividend back into the stock, even if there are better stocks to choose from. 2) You are stuck with the same $13.30 strike on the put the entire time even though you'll want to raise the strike as the years go by 3) The leverage hasn't even been cheap (which it should have been in order to compensate you for these negatives).

Aside from the inheritance and withdrawal rules.... $10,000 contributed to a RothIRA is just as good as having $10,000 in a regular IRA as well as being allowed to contribute another $2,500 to a RothIRA. The guy with the regular IRA still gets $10,000 in a tax-deferred account, but his extra $2,500 is riding in a taxable brokerage account. So you get to pack even more money into non-tax status. That's why the Roth is better!

I was already doing that too. I was maxing everything out that I could. You can contribute only so much, after which you are forced to contribute excess savings to your taxable brokerage account. Settling the tax bill early is like maxing out one more thing. I like to think of paying the tax bill early as a "stealth" RothIRA contribution. It's not technically a contribution, but it's just as valuable as putting that $2,500 in a RothIRA. The difference is that you skip the formality -- instead of putting the $2,500 into an account where it grows tax-free, you just hand it directly over to the Treasury. So really, if you don't settle the tax bill early you are losing out on one more addition way to make a contribution to tax-sheltered account with RothIRA-type tax characteristics. See, I'm a bit weird -- I just explained how I handed tax money directly over to the Treasury and in the same post called this a tax shelter. Some kind of tax shelter! But it is. This IRA tax isn't merely an order of operations thing -- it isn't like 25% tax today is the same as a 25% tax in 50 years. If you can afford to settle the tax bill today with money from your taxable account, it's best to go ahead and do so because your taxable account will not be able to compound at the speed of your tax-deferred accounts. It's that simple.

I also don't believe assigning probabilities would be as effective as it's promise. On what information would I come up with numbers like 30% chance of X, or 5% chance of Z? My biases would surely screw it all up. Some people maybe could make use of the technique, but not me. I am a lot less scientific -- after considering a range of outcomes, it's more like I go with what my gut tells me will be the most likely outcome by a country mile.

I thought if I'd make 12% or 15% annualized I'd be doing extremely well. I never tried to wonder what the chances or making 30% annualized were, because I never thought I could do it. Never did I spend a minute thinking I would make 50%, or 75%. I spent a good portion of today wondering if 12% were possible going forward. I just don't have confidence that I've got anything special going on. I go about my days like that, and then something comes along that I get really excited about -- but then I tend to believe it will be the last such investment I'll ever come across, so I make it worthwhile because I'll have to live on that bounty for the next 50 years. I have no belief that I can continue to do any such results. It's just been a strange string of once-in-a-lifetime investments that I never saw coming until they were upon me. There is no reason to believe there will ever be another one. They have to be simple enough for me to understand -- and that's a tough hurdle because I don't have much circle of competence. So this means that I only have the very simple propositions to choose from -- but maybe that's an advantage after all.

Example: You have $10,000 contributed to your RothIRA in January 2003. You paid $2,500 tax bill at that time (25% tax rate). Today it's worth $3,800,000. It grew by roughly 38,000%. Well, it did ;D So... what if instead I had done this in a Regular IRA? Well I would have needed to grow the $2,500 by a similar 38,000%. In my taxable account??? No such luck -- the annual tax drag would not allow it. The difference could be really expensive because when the compounding numbers get high, the tax drag really starts to grind. At 60% compounding the $2,500 would have grown by only 15,000%, to $375,000. That's nowhere near enough to settle the $950,000 tax liability (at 25%). But worse, today the tax rates are 40% if you're taking out that much money at once. The tax rates of just 25% are a dream now. Worse still, the top income tax rate in California (where I now live) is 52% (for a whopping $1,976,000 in tax liability). So by paying the tax early you could say that I grew a $2,500 tax liability into $1,976,000 (at California's rate). That's 79,000%! In just 10.6 years!

For Roth, everything you've already paid taxes on (your after-tax contributions as well as monies converted to a Roth from a regular IRA) can be withdrawn with no penalties after 5 years. But any of the gains withdrawn early in your RothIRA (which would be your investment gains) is at the 10% penalty plus income tax. But that's exactly the same penalty terms as with the regular IRA. They don't let you withdraw any of your gains from the RothIRA until you've withdrawn all of your after-tax and Roth-conversion monies (if you had any) -- but that's nice, because why would you want to withdraw the taxable gains when the already-taxed money could be withdrawn first?

That's a terrific idea. Thanks for sharing.

Presently, there is only a 99 cent difference between the 2014 and 2015 $15 strike puts. The extra year of leverage costs only 7%. I note that 7% plus 50 bps - 120 bps margin interest is cheaper than the annualized 9% rate that's currently in the warrants. And lower risk too, it's a higher strike put! Cheaper and less risk. We'll see if when the 2016s come out the extra year (beyond 2015) is priced at similar rate of only 7% annualized.

Here is my take on the $15 strike 2015. Scenario: You own common and warrants today. Sell the warrants and for every warrant you sell, buy a share of common to replace it with. Then look at your total amount of money borrowed (using portfolio margin), and purchase enough $15 strike puts to fully hedge the margin loan. There won't be margin calls if the stock plunges -- it's portfolio margin, not Reg-T margin. You effectively have a synthetic call (which I find funny to think about because calls are themselves synthetic). The puts cost you 12% annualized if you ride them into the ground. Most likely the cost will be lower when you roll them annually (the first roll will be in just a month or two when the 2016s first become available). Depending on the size of your margin loan, the interest rates will cost you 0.5% to maybe 1.2% at Interactive Brokers. Sometimes when you roll, you might want to overlap your put holding period by a month so that you can sell the older ones for a short-term capital loss (avoid wash sale rules). The advantage to rolling puts along instead of rolling calls along is taxes (write off the puts and margin interest), and certainty that you will collect the dividends from the common no matter what. Whereas with the calls it all just gets added (embedded interest and puts) to the cost basis of the shares when you take delivery. Note that the cost of this leverage is now higher than that embedded in the $13.30 strike warrants, but keep in mind that the strike price is higher too (it's $15, not $13.30). But I think if you just count the delta between the cost of the 2015s and the 2016s as your annual cost of leverage, then it will probably cost no more than the warrants currently cost. And then of course when the stock rises to $20 you won't suffer the cost-of-leverage devaluation that the warrant holders will experience. Or at least, it will be capped at a 12% annualized cost. The movement from here to $20 and $25 is where you want to hit the ball. After that, it will be time to go home and play another sport. You don't want to miss out on that movement by riding with the warrants -- as warrant holders experienced over the past 6 months. Then if it's at $20 and the bank is looking really good and you think the market might give it a higher multiple (like to a $30 stock price), then you can just roll to more puts. They should be extremely cheap by then. Probably 2% annualized which is where the $7 strike puts trade today. The thing about the cost of leverage embedded in options is that it is most expensive when the stock is near the strike price on the option. As the stock moves away from that price (higher or lower), the cost of leverage plunges at a much faster rate than the stock price. There are few exceptions to this -- there were times in the financial crisis when cost of leverage went really high, for example. But that always happened at distressed prices. So if BAC were to drop to $7 per share again, the annual cost of leverage for the $7 strikes would likely go above 20% again, but the annual cost of leverage for the $12 strike would actually plunge from the levels (due to skewness). So really there isn't as much to fear in this regard as what people commonly believe.

It sounds like Tesla isn't allowed to operate a supercharger in the state of Virginia. It's against the law for a car manufacturer to operate a service business in the state. So the company has to put the superchargers right on the border with neighboring states. Are they a bunch of lefty wingnuts in that state protecting their auto dealership jobs, or do they believe in free markets? Just kidding of course...

Are multiple people sharing your account? Just asking... this isn't the first time you've referred to yourself as "we".

You do need forced air ducts. Also, you will still have a furnace. Sometimes the air-source heat pump gets switched off automatically and the furnace then kicks in... this transition happens when air temperatures drop to the point where it is too inefficient to run the heat pump -- somewhere down near the freezing level. This is the point where the ground-sourced heat pump would still be operating efficiently. http://energy.gov/energysaver/articles/air-source-heat-pumps When outdoor temperatures fall below 40°F, a less-efficient panel of electric resistance coils, similar to those in your toaster, kicks in to provide indoor heating. This is why air-source heat pumps aren't always very efficient for heating in areas with cold winters. Some units now have gas-fired backup furnaces instead of electric resistance coils, allowing them to operate more efficiently.

For some reason the tech threads are less civil.

That's the wild card. Initially we started this discussion with a 13% average annualized cost for the leverage in the warrants. And it was 11% for the leveraged common with puts approach. So there was room for a 2% rise in rates before hitting a 13% cost. Now that the stock has risen, the cost of rolling those $12 strike puts has dropped. Should the stock rise further, it will drop even more. The puts alone for the $7 strike cost less than 2% annualized.... and I believe that too will happen to the $12 puts in a year or two when the stock is at $20 -- so can you imagine 11% margin interest rates when they are presently only about 0.5% at IB (for large loans)? That is certainly a consideration with rolling puts along and paying margin rates -- but on the other hand you don't take the risk of getting hit over the head by a sudden 30% or 50% negative cost of leverage adjustment over just a six month period. That was the black swan that people chose to ignore when they thought the warrants were less risky. (to them it was a black swan, to others it was entirely foreseeable).

His point is that the change in strike price is simply a warrant mechanism that is equivalent to using dividends and repurchasing stock. Thus, if you count the change in strike price, you also need to consider the extra dividends gotten if you had margined and bought puts, and used the dividends to repurchase shares. So, in that case, you can simply ignore the strike price adjustment, as you would have an equivalent number of dividends/repurchased shares in the other strategy. I believe that's right.

This thread has been good for me. The more times I have to explain it, the clearer my thinking about it becomes. Now, I've been able to reduce it to simple explanations such as how the warrants are just a synthesized dividend reinvestment plan, with leverage. One day the TARP warrants will have all expired, but then those of you who held onto them until expiry (in portfolio margin accounts) can just extend the life of the warrants in perpetuity by utilizing puts once you have the underlying common shares in your accounts. You can even move up the strikes, something which I'm sure you would have been longing for by the time these things mature. Plus, you'll no longer have that 4 cent annual dividend drag.

There is also the air-sourced heat pump (like I have at my house). They are far cheaper than GSHP. The question is whether you live in a very cold climate, or not. I live in Santa Barbara region near the ocean. When the daytime high is 65 degrees average in December, why would I even consider the expense of a GSHP? I can take that extra cash and put it in solar panels, and then it's obvious. Plus, there is time-of-use metering to consider. I can generate solar power for 47 cents per kWh between 10am and 6pm when I don't need the heat to be on, and then later run the heat pump at night when the rates drop as low as 9 cents per kWh.

You haven't been paid to learn, you've been paid because you took on more leverage. The shorter the expiration date of the options the more leverage you'll get. This works in 2 directions obviously. Sort of. Getting out of the warrants before they seriously underperformed the common was the first smart move. Getting into something that had a lower cost of leverage than the move in the common was the second smart move. Increasing the total notional exposure was the part you are objecting to -- and I agree, that part was just lucky. The leverage in the LEAPS actually beat the common because the leverage was cheaper (the % move in the common exceeded the cost of leverage). The leverage in the warrants did not beat the common -- because the leverage cost in the warrants turned out to be 30% and the stock appreciated by less than 30%.

His comment isn't necessarily valid if you were long equivalent number of shares (which is what the thread has been about since the beginning). Like if you had 2x leverage in warrants vs 2x leverage in common (with puts to hedge the portfolio margin). The only way it would be in a "world of hurt" is if the leverage cost in the LEAPS were to jump substantially higher than 13% annualized. Keeping in mind that the LEAPS only cost 11% annualized to begin with, and probably less if rolled to 2016s instead of held till expiry. Instead, the warrant holders are the ones in the world of hurt, as their cost of leverage over the first six months jumped to 30%. I mean, think about that. 30%! And this is exactly the risk that I outlined back in March -- a big move up could put a massive drag on the warrants due to skewness, so there should be no reason to take on that risk.

It doesn't change a thing. Buy extra common with margin leverage and hedge the extra common with puts-- use margin for the leverage in a "portfolio margin" account. Take each dividend and reinvest it in the stock -- just enroll the common in a DRIP if you must so that it's automated as with the warrants. Roll the put every 12 months until January 2019. There, you have exactly the same dynamics as with the warrant, except you don't lose 4 cents per year worth of dividend as you do with the warrants. Think again about this -- the warrant adjustments are merely there to simulate a DRIP feature. You get credit for the dividend as well as increased shares (to simulate reinvestment of the dividend into the stock). The difference between the two is solely the cost of leverage. The risks however are different. You can lock in you interest rate at an average annualized 13% rate back in March if you go with the warrants, but if the stock shoots up it could wind up costing you 30% in just 6 months. It could have been far worse -- if the stock were at $18 or $20 already the cost from the warrants decaying would have been far more extreme. Could have cost you 50%. Weight that risk of 30% - 50% possible cost over a 6 month period against say, the risk of having to roll the 2015 options to 2016 options at an annualized cost in excess of the 13% cost that you can lock in with the warrants. Oh boy, maybe for a year you wind up paying an extra couple of percent. Maybe 5% or 7% too much. Versus say taking a 30% to 50% hit? The risk profiles simply don't compare. And in the first place, the period from March 2013 to January 2015 had an annualized cost of leverage of less than 11% at current margin rates. There was room for a 2% rate rise in there. Plus, that would be the rate if the put were rode down to zero. it would likely cost less in actual fact if the 2015's were rolled into 2016s (so that you lose time value decay, and don't suffer the volatility decay).

Not so with options. The shorter duration rates are always higher rates than the longer term rates. There are two components to pricing -- volatility and time value. Volatility is the more expensive of the two. That's why the shorter term options are always the more expensive -- all volatility and little time value. The trouble with how the warrants were priced is that they seemed to either have an enormous volatility premium (far in excess of that embedded in the LEAPS) or enormous annualized time value (far in excess of that embedded in the LEAPS). Besides, the yield curve was extremely flat back in March. How much higher were 3 year rates versus 1 year? How much higher were 5 year rates versus 3 year? It is a good thing to think about, but not applicable in the case of these warrants -- interest rates couldn't explain it.

Maybe the market will teach you one day what path dependency means. Unfortunately that could be an expensive lesson... You didn't just increase exposure, and reduced risk: you also changed the time frame of your bet. Instead of being right by 2019 you need to be right by 2015. That's a huge difference, and that's why there is a pricing difference! Any idea what would happen if BAC is @ 12.00 on Jan 2015? It could be pretty expensive to roll over your options for Jan 2017 ones (because now this strike would be at the money) and also depending on things like div yield and implied volatility. Now you would have less exposure than with your initial warrants investment while spending an equal amount of money and you still have a maturity before that of the warrants. This is why the warrants didn't make sense at a 13% cost of leverage. They should have been much cheaper annualized than the LEAPS, but they weren't. That should have been your tip-off. Go look at any options -- they are always cheaper annualized for the longer dated ones. These warrants were the exception. In other words, the odds were better to go with the LEAPS when considering all of the outcomes. For one thing, the leverage was less than 13% annualized cost getting us to 2015 expiry. Potentially the cost goes higher when rolling to the 2016s.... but... as recent history has now shown the warrants could cost you a full 30% in just 6 months! That was the danger of prepaying for all those years of leverage as such extremely expensive rates. A move upwards in the stock makes the 13.30 strike premiums decay rapidly due to skewness. So the warrant holder really does best versus the LEAPS if the stock never rises. But then, why bother with the stock if you don't expect it to rise?