How to Find Peace of Mind in Your TSX Stock Investments

Do this if you are losing money on stocks like Stars Group Inc (TSX:TSGI)(NASDAD:TSG) or Finning International Inc. (TSX:FTT).

| More on:
Simple life style relaxation with Asian working business woman healthy lifestyle take it easy resting in comfort hotel or home living room having free time with peace of mind and self health balance

Image source: Getty Images

Every Canadian TSX investor should know how to sell covered calls to hedge portfolio risk, especially in a bear market like this one. It may sound risky, but the odds are that selling covered calls carries a lot less risk than simply owning the stock.

Selling covered calls also requires little to no effort or experience. It is a reasonably safe method to earn additional returns on investments in increments of 100 shares. The reason it is so safe is due to the time-value of the option, or theta.

Theta is one of the “Greeks,” which traders use to evaluate options. The idea behind theta is that options lose value closer to their expiration date. The loss in value means that you can repurchase the option later for less than for what you sold it.

Options trading volume will be higher for many of the top TSX stocks in banking and energy. Two other stocks you might consider hedging with covered calls are Stars Group (TSX:TSGI)(NASDAD:TSG) and Finning International (TSX:FTT).

The no-dividend stock: Stars Group

Stars Group is a great stock to sell covered calls. First off, for the past week, the shares have been increasing in value. Thus, traders who are willing to buy call options on the Stars Group are eager to pay more than if the stock was falling in value.

If you already own shares in Stars Group, and you suffered capital losses, consider selling a call option on the stock to protect against additional loss in value.

Stars Group offers no dividend. Thus, investors with this stock in their portfolio gain no interest in the investment unless it promises capital gains. Because capital gains are not a sure thing, stocks that don’t offer dividends tend not to be the best investment.

Selling a covered call on Stars Group is one way to generate returns from what might otherwise yield nothing.

The poor earner: Finning International

Finning International is also the perfect stock to sell covered calls. Although this stock has lost 52% of its value in the past year, shareholders should be hesitant about selling such a great dividend payer. The stock gives shareholders a quarterly dividend of $0.205 per share.

A better alternative to accepting a capital loss is to sell a covered call and capitalize on the power of theta. Finning is a great contender for selling a covered call because of its low-profit margin. Currently, at a low-profit margin of 2.6%, the stock qualifies as a poor earner with a levered free cash flow of negative $14.75 million.

If you are unlucky enough to be losing money on shares of Finning, sell a covered call and invest the proceeds in a government-insured certificate with the same expiry date as the call option.

Foolish takeaway

It is unlikely that a call option sold today will be worth more one to two years from now. Call options lose their value over time — and very quickly. A stock would need to see an improbable and rare increase in value to offset the loss in time value. That’s why every TFSA investor should look into hedging their portfolios by selling covered calls.

In a bear market like this one, TFSA investors need to gain more confidence to hedge investments in the stock market with safe short positions like covered calls.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Debra Ray has no position in any of the stocks mentioned.

More on Dividend Stocks

thinking
Dividend Stocks

Should You Buy BCE Stock for its 8.6% Dividend Yield?

Down over 20% from all-time highs, BCE stock offers you a tasty dividend yield in 2024. But is the TSX…

Read more »

grow dividends
Dividend Stocks

How Long Would It Take to Turn $20,000 Into $100,000 With TSX Dividend Stocks?

Here's how high-quality TSX dividend stocks and the power of compound interest can help grow your investments by 400% or…

Read more »

Paper airplanes flying on blue sky with form of growing graph
Dividend Stocks

2 Soaring Stocks I’d Buy Now With No Hesitation

These two stocks may be the most expensive on the market, but they're high for a reason! And I'm still…

Read more »

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Dividend Stocks

Invest $374.50 Each Month to Create Passive Income of $288 in 2024

Investing a specific amount each month to create passive income this year is possible with monthly dividend payers.

Read more »

Happy retirement
Dividend Stocks

2 Stocks to Help Turn $100,000 Into $1 Million

If you want to reach $1 million, $100,000 can certainly get you there. Even if you invest in some low…

Read more »

warning or alert
Dividend Stocks

Income Alert: These Stocks Just Raised Their Dividends

There's no shortage of companies that raised their dividends recently. Here's a trio of options to consider buying now.

Read more »

Business success with growing, rising charts and businessman in background
Dividend Stocks

Don’t Look Now, But These 3 TSX Stocks Look Poised for a Nice Rally 

Three TSX stocks are in a downtrend amid headwinds. 2024 may be rocky for them, but they are poised for…

Read more »

protect, safe, trust
Dividend Stocks

3 Safe Dividend Stocks to Beat Inflation

These three dividend stocks are excellent buys to beat inflation, given their solid underlying businesses and high yields.

Read more »