Making 14% on borrowed capital.

Early on in a post on this blogging site we discussed that one of our early mentors who had been ultra successful told us the only way those of us with less capital to start life like him to make real money was to do it with borrowed capital. As we have pointed out from time to time our hedging activity is done with borrowed capital.  The idea is to do some business that makes enough profit to pay for the cost of borrowed capital and make some money for you as well.  Many of us frankly do this everyday with buying a home. Borrow capital from the bank, buy the home, and then work at a job that allows one to pay back the loan and live as well. Business people do this too when they borrow money to start a business and make enough to pay back the loan and make profits above that cost of borrowing.  Simple free market concept. 

Our hedge fund works on that concept except with a much larger borrowing capacity.  This post is to show how a current hedge we do monthly that nets us 14% profit on the borrowed capital. 

ERF is a stock we have traded for many years. We know the company and except for some political movement that caught us by surprise we understand the stock movement well.  Currently ERF is trading between about $13 and $14.  For this illustration let's make our entry price at $14.  We own 7200 shares of ERF which makes our investment right at $100k.   Each month we are paid a dividend of just over $650 adjusting for the difference between the Canadian dollar in which the dividend is paid and the American dollar in which our dividend is credited.  Every other month we sell a call option for $14 and net out $1800 for the sale.  So between the dividend and the option income we net $18600 annually from this activity. Our borrowing cost is around 4.5% averaged from both our capital providers or about $4500 annually cost of capital.  So we net out about $14000 each year from selling options and the dividend.   A nice 14% profit. 

Now frankly we do not care if the stock ever gets back to our buy in price of $14 since the hedging of the stock here is making us a tidy profit far above anything we could make with any other current investment we know.  Yes there is risk and yes there is contact study here not to get caught not knowing news about the company. But the payoff is nice and one can do all this at home at their computer.