How Tesla and SpaceX Investors Create Cash Flow Without Selling

[00:00:00]If you hold a significant amount of stocks, Tesla, SpaceX, or what have you, have you ever wondered, is there potentially a way you could generate cash flow without immediately selling your shares? Because one of the biggest problems successful investors in general eventually face is that their wealth becomes trapped inside a concentrated position. Stock goes up, net worth goes up, but cash flow doesn't. And if you sell, you may trigger a massive tax bill. Today, we've got CERN Basher joining us. He's a financial adviser and he'll go over a presentation that explores the tools wealthy investors use to potentially create income while continuing to hold their shares. We'll look at eight potential solutions you might consider like option strategies, securities lending, lines of credit, margin loans, and several other approaches. But here's the important part. These strategies aren't free money. Every solution comes with trade-offs. You might give up upside, increase risk, create tax complexity, or expose yourself to forced liquidation at exactly the wrong time. So, the real question isn't how to generate income.

[00:00:59]The real question is how to generate income without accidentally giving away the very upset that made you wealthy in the first place. CERN is a chartered financial analyst running his own investment advisory firm called Brilliant Advice, providing wealth management services. Welcome, CERN.

[00:01:13]>> Hi, Herbert. This is a situation that most of my clients face.

[00:01:20]I know and I really appreciate you doing this. This is one of the top questions I often get which is, you know, once we're managing um a lot of people love the stocks and rightly so, especially with the AI boom and now with SpaceX and Tesla and where we're headed and then they're wondering now what because I want to take as much money as I have and put into the stock. Well, hold off. Hold on. Let's see what happens. Uh I'm sure you'll tell us uh I have to tell people that this is not financial advice. Uh you know that every person is has a different situation. So we don't know where the which audience segment you belong to. So don't necessarily just listen to this and and take action but you are a financial adviser certain. So go ahead. Yeah, this is certainly not financial advice and also I must say this is not legal or tax advice because we're going to touch on all three areas.

[00:02:14]But we're going to talk I think today in pretty general terms just to kind of touch on these topics. Uh we're going to go into depth on a couple of these items but there is a lot of complexity here and it is absolutely critical that you work with somebody who understands your situation. Um and so just just be careful here. Yeah. So the situation Herbert I think that we want to talk about and use perhaps SpaceX or Tesla as an example. Uh, I think SpaceX is a great one because of the sudden increase in wealth of SpaceX shareholders. This is a chart that shows SpaceX's valuation over time starting at mere 27 million uh back in 2002, late 2002 I think it was.

[00:02:50]Um, and then you know the first Falcon 9 flight company's worth about a billion dollars at that point. Uh, and that's back in 2010 2011 time frame. Uh, Google and Fidelity invested uh about a billion. Um and that that time the company was worth $10 billion and then now it's the hockey stick straight up.

[00:03:09]Uh just last summer uh the valuation of the company was less than 400 billion and now as a public company around around a couple of trillion dollars. So a lot of sudden wealth creation and a lot of investors who may be saying well this is great how can I monetize some of this but I don't really want to you know sell the stock right now and of course they can't right now. they're locked up and most of these strategies actually we're going to talk about would require the shares to be post lockup. So we're maybe a little bit early in terms of discussing this with respect to SpaceX shareholders. But certainly if you are in that camp these are good things to begin thinking about once you receive shares that that are no longer locked up beginning in August.

[00:03:49]>> Well, I appreciate you're putting this together. This is questions um people have been asking. You know, the audience that I have is significant. It's been focused primarily at the Tesla shareholder. And then of course, now that uh uh Elon has made SpaceX public uh when IPO, it is now a Tesla and SpaceX. And eventually they might even acquire each other. We'll see where that goes. But lots of people are investors in these two and of even just the AI boom and they want to know where they're going. So appreciate you putting this together. Uh, in fact, I will uh mention that I'm launching a community now for these investors. It's called Boundless and it's going to help people navigate the AI kind of world that's coming and give them the tools much like what you're doing and introduce themselves to each other but also to experts. So, that is seems to be the top need that I'm hearing.

[00:04:42]>> Yeah. No, that's that's excellent, Herbert. So in terms of SpaceX now, we can look at uh SpaceX trading as a public company and you know it's only been a week and you can see the stock has gone from the IPO price of 135 up to a high of about uh 225 to touch that level and uh closed on Thursday market close at 185. So there's already been quite a bit of volatility, quite a bit of fluctuation here. The key thing to keep in mind with SpaceX is right now there's a very small percentage of the total shares that are freely tradable.

[00:05:13]uh I think about 4% of the stock roughly is is publicly tradable at this point.

[00:05:18]So what you're seeing here is a very still very illquid stock potentially and so you should expect huge fluctuations and fluctuations you know very quickly um until all of the shares become released um at the end of this at the end of this year perhaps in into next year. I understand some people are locked up a little bit longer uh than what what was shown in that perspectus um just because of the funds that they're invested in. Um it's going to take a while for the stock to really kind of settle out in terms of you know sort of more consistent trading. Even then we've seen stocks like Tesla and Nvidia and other massive companies still have a lot of volatility in them. So even when SpaceX becomes highly liquid, it still may be a highly volatile stock.

[00:06:04]So are the solutions you're going to give also apply to people who can't sell not only that they don't want to sell shares that they have in some company but also can't sell and then >> um yes and no depends on on the situation but generally I would say that if they require the shares to not be locked up in order to be able to do certain things with them whether it's option strategies whether it's borrowing against the shares uh you can't do that with shares that are locked up. Okay, >> so here's the here's the problem I think that that most of these investors face is they've got this highly appreciated stock. It's done tremendously well. It's probably created a bit of a concentration in their portfolio and yet they may not want to sell it. They may still believe that the upside is is still there and that there's a long-term future in Tesla and SpaceX and other companies and that's great. But at the same time, the thing that we're often seeing is they need some cash flow. Um, so the challenge is how do you get cash flow while keeping the upside?

[00:07:06]>> For some people, it's how do you get cash flow while reducing the downside?

[00:07:10]That's that's a common challenge. And then the third thing is how do you get cash flow without triggering capital gains? Because if you needed cash flow, you could just simply sell the stock.

[00:07:18]But but a lot of people don't want to do that because a they're trying to maintain the upside and they're trying to avoid paying the capital gains. So these are these are not easy uh there's no no easy solutions to these but there are some things that we can do.

[00:07:31]>> Very interesting. I'm glad that you looking at all different kinds of uh nuance scenarios here. Okay.

[00:07:37]>> So here's here's just a again just rough example. Right. So let's say your portfolio value you've got $5 million of SpaceX 5 million of Tesla some other company and you have a certain annual income need and I did a table here that ranged from $100,000 a year to a million. Okay. on the $5 million portfolio, the $100,000 is 2% on an annualized basis. So, that's not too bad. That feels like that could be doable. And some of the strategies, that's entirely doable to get that kind of income and maybe even up to 200,000 4% and perhaps a little bit higher into the six potentially 8% range. But go beyond that, you're really taking on in most cases probably a lot of risk to get much higher income on a portfolio of that size. And of course, as your portfolio value is higher, then of course getting those annual income needs becomes easier and easier. And relatively speaking, on a percentage basis, it's a much smaller amount. So, for example, on a $25 million portfolio, a million dollars of annual income is only 4%.

[00:08:41]So, there's lots of different strategies that can potentially generate that kind of income fairly comfortable, fairly reliably.

[00:08:48]Whereas, if you're trying to generate a million dollars a year on a $5 million portfolio, that's going to be pretty tough. You're probably taking on a lot of risk to do that.

[00:08:57]>> Okay. Again, this is pretty obvious, but I just wanted to put some numbers on a on a page to show that.

[00:09:02]>> Yeah.

[00:09:03]>> The other thing that matters is your income need over time. Is it that you need $100,000, you know, just this year, or do you need it for, in this example, five years for this $5 million portfolio? In that case, you're taking 10% of the current value of your portfolio over this fiveyear period.

[00:09:19]That may not be crazy, but again, if you needed a million dollars that you're taking, you're going to be taking a 100% of your portfolio out over a 5year period. Your portfolio, your investment is going to have to double over that time period to end up with the same amount of capital that you have today.

[00:09:34]Again, that may be possible for companies like Tesla and SpaceX and others, but you have to be very careful.

[00:09:39]Um, and again, same situation. If you are taking out a certain amount of money over 10 years or 25 years for those larger portfolios, it's a similar situation. So, it's not just the amount of income, it's the duration that you need the income for. Again, I think pretty obvious, but worth stating.

[00:09:54]>> Yep. And everybody has different needs.

[00:09:56]And that's why some people need to have an income for the next 10 plus years.

[00:10:01]Okay. Good.

[00:10:04]>> Yeah. Okay. So, here are the potential solutions.

[00:10:08]Now, there's a lot of detail to all of these and right now we're going to just touch on kind of an overview of all of them and we'll go into a bit more discussion about some of the option strategies.

[00:10:22]Again, there's a lot more detail to go into than we're going to cover today, but we'll talk about some in detail. And then another one that we're going to talk about in detail is the margin loan and margin plus income securities.

[00:10:34]That's an area that I find that a lot of people don't understand. or misunderstand or aren't even aware of in terms of what you can do there. I think there's a lot of discussion about option strategies uh but not so much about margin plus other income investments. And then of course there's some other fancier ones in the bottom that we'll just briefly touch on. So option strategies in general, Herbert, you're generally, if you just go back to that that last page, you're generally selling some of your upside for current income. That's generally what you're doing. you're getting an option premium. In order to earn a premium from an option, you have to sell it. You're selling somebody either the right to buy stock from you or the right to sell stock to you. Um, and so that's how you get income from option strategies.

[00:11:23]Um, option strategies too, you need to think about the time frame involved. You could sell options over the course of a day, a week, a month, a year. And so there's a lot of complexity with options and we'll get into more details in a second. There's securities lending. You can rent out the shares to people that want to short sell your stock. And you can imagine at some point with SpaceX, there'll be plenty of people looking to short the stock on the belief that it's overvalued. And so you can rent out the stock to them and receive income for that. The problem with that is that that may not be consistent form of income.

[00:11:59]And then the other thing too, as a shareholder in SpaceX, you might not want somebody to short your shares, right? The short sellers are not Elon's friends necessarily. So this is a one that a lot of people aren't that interested in doing, but I just want to mention it. Now, you can also >> Are you going to explain this a little bit further?

[00:12:18]>> No, I'm just going to touch on it here.

[00:12:19]It's not something too much >> because I thought that um I thought that if you have your money your stock in some broker some of the brokers without you saying anything they just automatically will take that stock and lend it out to to to shorts on their own. Is that not true?

[00:12:35]>> Um generally no. But again it could depend on the brokerage firm. Uh it's something that's worth looking at.

[00:12:42]>> Okay.

[00:12:42]>> Yeah.

[00:12:44]um for some some stocks that are uh much smaller, sometimes the brokerage firms actually will pay you quite a bit of money to to lend those securities out.

[00:12:53]Yeah. So, in terms of then borrowing against your assets, there's two principal ways to do it. One is what you would call a line of credit, um pledged asset line is what some people call it. Basically, where you put the securities in your account and you can use those as collateral and you have an interest rate that's tied to that.

[00:13:11]might be fixed or it might be floating depending on how they structure it. And you can borrow money from your assets.

[00:13:18]And one of the restrictions with this is that you can't turn around and buy more securities. You have to borrow the money, take the money out. Typically, you would do this for maybe a real estate transaction. You're looking to buy or build a house. You need some funds for that. You don't want to sell the stock. So, you can borrow against it, take money out, and buy real estate with it. You could also just spend the money if you wanted to as well. What you end up with there though is again a a amount borrowed that you're going to have to pay back at some point and hopefully the appreciation on the underlying stock more than covers that over a period of time.

[00:13:52]>> Yeah. Is this just the normal line of credit? Like so if you go you have a bank account, you apply for a line of credit and they'll do that based on the assets you have and then that's you know then you have to pay a percentage on it.

[00:14:05]That's basically what this is. Or there is this something more fancier than that?

[00:14:08]>> Well, it's formalized. It's a securities back line of credit pledged asset line.

[00:14:12]There's documents to sign with the the brokerage firm.

[00:14:16]>> Is it a brokerage firm? Because that's different from a margin loan, right?

[00:14:19]>> Yes.

[00:14:20]>> Okay. Yeah, we're cover loan is right that you'll explain that, but that I understand that very easily that you've got stock in a brokerage firm and because they see the stock there, they will allow you to get a loan and then of course if a stock falls then they will they a certain amount they they get they get freaky. They get scared. they'll he'll liquidate your stock so that they can get their money back. But um but a line of credit is that a special thing you go to the bank or you're saying that the >> you can do it through the brokerage firms. Um for example, Schwab has their own bank. So you do it through Schwab Bank. Um other companies offer it as well where it's Morgan Stanley and so on. They they have these the capability to do this. And then you're saying that in this particular scenario, not the line of credit you get with the bank, but the line of credit that's assetbacked or securities backed, you cannot buy more shares.

[00:15:12]>> Correct? That is one of the legal stipulations of this type of loan is you can't borrow, for example, from your stock at Schwab >> and take that money to another brokerage firm and buy securities. That is not allowed >> even from another sec uh brokerage firm.

[00:15:26]Like you can't just create a separate account and go, >> "Yeah." Now, would they know? Perhaps not. But but it is not allowed. It it's not in the terms of the agreement.

[00:15:34]>> Okay. Okay.

[00:15:34]>> Yeah.

[00:15:35]>> So, you be careful with that one.

[00:15:37]>> Um, >> see, I didn't I didn't know about this.

[00:15:40]I mean, I know about line of credit with banks. I know about margin loans, but this idea of a securities backed line of credit specifically, it's >> Yeah. And the reason that this one's attractive is that the rates typically are lower than what is offered on margin.

[00:15:55]>> Mhm. But if you have a large enough uh account, uh the margin rates typically are very attractive and sometimes more attractive than a line of credit rate is.

[00:16:04]>> Yep.

[00:16:04]>> So that's no longer the case generally.

[00:16:07]So a margin loan is very similar. You can borrow money, you can take money out, you can spend it, you could build build or buy a house with it, but you can also take that money and buy more securities. You can leverage your portfolio in a with a margin loan.

[00:16:22]Cannot do that with a line of credit. So that's where it's that's a key difference.

[00:16:27]Okay. Um both of these you run the risk if the collateral goes down enough, you get a call from them saying, "Hey, you need to post more collateral or we're going to sell something." That can happen on both of these lines.

[00:16:40]Okay. Uh margin loans are great, very flexible. For a lot of people, they they no longer hold, you know, a ton of cash outside as like a rainy day fund. They just borrow from from margin if they need something on a short-term basis.

[00:16:53]That's one way to use it. Another way to use it is to borrow on margin and invest in various income securities. And we're going to touch on this a bit more in a minute. So there you're earning some kind of spread. Let's say if you can borrow at 5% and invest at 10, then you can earn a net difference between the two rates of 5%.

[00:17:11]And you can make some money that way. So that's an interesting thing to explore and we'll cover that in much more detail in a minute. There's other things like prepaid variable Ford contracts. where you agree to deliver a certain number of shares maybe five years from now for cash today, right? They're giving you cash up front. You can do whatever you want with it and you are going to you're going to give them the shares five five years from now.

[00:17:38]Okay. So, that's an interesting one.

[00:17:40]It's worth worth considering.

[00:17:41]>> Who's the contract with? Is it the >> typically large brokerage firm is broker dealer?

[00:17:46]>> Gosh, I didn't know any of this existed.

[00:17:48]So there's there's a thing called a prepaid variable forward contract where you're basically saying, "Okay, you're going to give me cash today, but then in the future at a certain date specified, I have to sell you whatever the stock is priced at that moment."

[00:18:01]>> That's right. So it's it could be a variable number of shares. It may not be a set number.

[00:18:05]>> So depending on where the stock is at that point in time, >> it's the amount that's owed plus interest probably.

[00:18:10]>> That's right.

[00:18:12]Why would So you would get cash now, but then you at certain date in the future we we uh I promise or it's like legally I have to sell it at a specific date and get you the cash back.

[00:18:24]>> Okay.

[00:18:24]>> Well, you're you're actually giving them the shares. You're handing over the shares is >> so that they can sell it and get the cash back. Yeah. Yeah.

[00:18:30]>> Okay.

[00:18:31]>> Yeah. In the meantime, they may they may hedge their exposure in the meantime.

[00:18:34]I'm not sure exactly what they do behind.

[00:18:36]>> When would you want this? Let's say if you're retiring 5 years from now or something that or or you retiring now and you want the cash now and you're going okay 5 10 years from now I don't know if I need all that stock anymore I'm willing to >> then this is something I think that if you've got very large amount >> you know you're talking you know $50 million in a concentrated position some of these options become perhaps more appealing because of the financing rates that you can get on those kinds of dollars >> and get cash flow and get cash flow now with a promise of selling a stock but not today but sometime in the future.

[00:19:08]>> Yeah. And there's tax considerations and other things as well. So this this gets complex very quickly.

[00:19:13]>> Gotcha.

[00:19:13]>> Uh there's other things called exchange funds um where you can diversify into a broader divers portfolio of other assets uh without paying immediate taxes. Uh typically though the investments that go in exchange funds are sort of stocks that people no longer want to own, right? You you're not typically typically going to find a lot of Tesla or SpaceX in these kinds of vehicles.

[00:19:36]But again, just for completeness, wanted to add that on here as well. Some of those can be interesting. You do have to watch out for fees and so and so on with those. But it's a way to diversify. It's not so much an income strategy, but just a way to diversify your concentration risk. The ultimate way to deal with the concentration risk is to give it away.

[00:19:56]Again, not necessarily producing income, although some of the charitable funds do allow uh a way to generate income from from these investments.

[00:20:05]So, if you're charitably minded and and or you want income, some of these things can be appealing. Again, there's a whole list of different ways of doing this from charitable remainder trusts to gift annuities, donor advised funds, private foundations, there's all kinds of stuff and there's a lot of complexity there and that's a whole another show to talk about those options. So, the important thing to remember with all this and my little footnote in the bottom now, these uh they're not free income. you're you're there's a set of risks that go with each of these. Um you may be giving up upside, you may be taking on leverage, there's tax complexity, there's counterparty risk on some of these, right? You're doing a deal with a large broker dealer. Now you've got risk of, you know, Morgan Stanley, for example, failing or something like that, right? You've got some credit risk, counterparty risk, and you may uh some of these things may tie you up and you may have reduced flexibility. If you just own the stock, you can sell it whenever you want. But if you enter into some of these agreements, you suddenly have some restrictions.

[00:21:06]>> So, you just need to be very clear on what you want and what you're getting when you're doing this.

[00:21:12]Wall Street is great at creating customized products, but they may not be necessarily the best thing for you.

[00:21:19]>> Mhm.

[00:21:19]>> Okay. Further, let's talk about some potential risks. Um, you know, there's a whole list of them, but forced liquidation, right? certain strategies if you're not careful you may be forced out of your stock.

[00:21:34]Um taxes uh certain uh of these investments whether it's covered calls collars prepaid fors so on there may be some tax surprises if you don't fully understand what you're getting into.

[00:21:48]Okay. Uh the big one is upside regret.

[00:21:53]You know like covered calls for example right? Um, you know, it feels great while you're collecting those premiums week to week and all a sudden the stock goes straight up and you miss out on that upside and suddenly you regret collecting the few dollars that you collected from the covered calls when you missed out on hundreds of thousands or millions of dollars when the stock gets called away from you. Okay. Um, the analogy there is you realize you rented out a rocket ship instead of owning it, right? You're just renting it. uh correlation risks. Some of the things that you may be diversifying into or using as income sources may be actually highly correlated to the underlying investment. So you need to be careful of that. Uh so if there's a market panic, you know, everything goes down at once.

[00:22:36]Um and then of course interest rate risk, liquidity risk. Uh some of the investments are not that liquid that you might go into to generate income. So that's an issue worth thinking about.

[00:22:47]And then uh just estate tax risk. um holding stock until you die, you might get a step up in basis, but you also may create create estate tax issues once your estate becomes large enough and subject to estate taxes.

[00:23:02]So, that's just some of the risks.

[00:23:04]There's there's more, but we could spend all day talking about that, but that's probably enough.

[00:23:09]>> When you say the state is large enough, what what magnitude are we talking here?

[00:23:14]>> Um, it's for individuals. Um, what's the number now? It's like 15 or 16 million per person once your 15 million per person once your estate is beyond that starts to be subject to estate tax >> per person that you're giving money to.

[00:23:27]Yeah.

[00:23:27]>> No, your your own estate in your name assets in your name beyond 15 million.

[00:23:32]>> All right.

[00:23:33]>> Okay.

[00:23:35]>> Okay.

[00:23:36]>> So, yeah, great. That this is huge.

[00:23:38]Obviously, these are massive risk. This force liquidation is the margin loan.

[00:23:42]That's the one people are really are uh sometimes they overestimate or underestimate the potential for something like this.

[00:23:50]>> Yeah.

[00:23:50]>> That's why people say be careful with margin like only have covered margin like where you've got the money in case it falls to be able to top it up. But if you borrow money from margin loan then you go and use it and then stock fall like what happened to Tesla stock. It fell from $400 to $100.

[00:24:07]>> You can be forced liquidated too with covered calls. They get called away from you. So there's all kinds of scenarios that can create that.

[00:24:14]>> Yeah. The other thing I want to mention about margin is uh let's say you have a thousand let's just say a million dollars worth of stock the broker and it's all good times right the stock is good okay solid broker says okay I'll let you borrow 50%. Just 50% then whatever amount up to 50%. But then when the stock starts falling the broker can change their mind and go instead of 50% our new rule is only 20%. Well, the stock has fallen and they changed how much you can borrow to just 20%. Now you owe like that change like you think that oh it's 50% so whatever it is I still have that. No, no, no. It could they can change their mind at any moment. If the stock is falling they get scared >> then they force you to sell. Yeah, >> that's right. You do have to be aware of some of those things that can change.

[00:25:00]Absolutely.

[00:25:01]>> Okay.

[00:25:02]>> Okay. And then uh some important caveats on the on the next page. Um so many of these strategies are very complex and they're not suitable for all investors, right? They require, you know, options and margin approval, you know, large enough account size and all these different things and particularly ongoing monitoring. It's not just set it and forget it. Uh tax implications, um margin calls and all kinds of different stuff. Again, I just wanted to put this in here. Sorry, we probably overdone it in talking about the risks, but it's it's very important to be aware of just the raft of of risks and challenges with all these strategies. Um, nothing is is is really a silver bullet. Um, and of course, the markets are constantly changing and evolving. So, you have to be on the outlook for what can take an otherwise beautiful strategy and turn it into something that's suddenly a very high risk. Okay. All right. So, enough of that. Let's get into some option strategies. What I like to do with options is make it visual. And this is called an option uh an option payoff diagram. But here I'm showing a stock.

[00:26:07]If you own a stock Herbert at 100, okay?

[00:26:10]And that's that dotted line intersecting with the the the darker blue and the and the black line right there. That's where you are today. If the stock goes up 20%, you're you're going to make 20% on holding the stock. That's the blue line going up, right?

[00:26:27]and and then likewise down. If the stock goes down 20%, you lose 20%. Everybody, I think, understands that. And that's what it looks like on this chart. It's a line at a 45 degree angle.

[00:26:38]Okay? So, always think about that in terms of options. This is kind of the baseline. If you just held the stock, this is what your profit picture looks like on the upside and the downside.

[00:26:50]Okay. Now, let's introduce the idea of selling a call option.

[00:26:56]When you sell a call option, you receive income. Somebody is paying you some money for the their right to buy the stock potentially at some later point.

[00:27:08]Okay, so now the dotted orange line is if you held the stock. Okay, that's now the baseline. So now we're comparing everything against that. But when you are long a stock and you sell a call or short a call, sell and short are the same thing. you get put on that blue line. So what you can see there is normally you your blue line is slightly above just holding the stock. You've made a little bit more money up to a point.

[00:27:36]There's a ceiling. Suddenly right there you make no more money.

[00:27:41]And so if the stock goes up enough, you can see the difference between that blue line and the dotted orange line widens.

[00:27:48]This is where the stock gets called away from you and you no longer have any upside. Okay? But from that in this example from 120 below you are coming out ahead of just holding the stock. It doesn't mean that you've got downside protection. It just means that you've earned that income and that you're now ahead of that orange line all the way down. Does that make sense, Herbert?

[00:28:08]>> Yeah. I mean, this is just an example, right? You're just saying is an example.

[00:28:12]If the stock price, let's say, is at 100 >> and then you're going to go, "Okay, well, I'm going to go ahead and uh sell a call option." So, you make some money.

[00:28:20]because they're going to give you cash.

[00:28:22]But the part of the whole thing is that you're giving somebody else a the right to buy it. If they see the stock going up and they like it, they'll they'll buy it later. And maybe you might have said, "Oh, you know, I I think it's going to go up, but it won't go up by 20% higher.

[00:28:37]So, I'm willing to do that deal." But then what happens if it does go up to 40% higher, 50% higher or whatever, and then all of a sudden you've lost the upside.

[00:28:46]>> Yeah, >> that's right. The stock gets called away from you and you've lost the upside. So, normally what people do to reduce this risk is number one, not sell call options on all of their underlying stock.

[00:28:58]>> Yeah, >> that's the number one rule is only subject a portion of your stock to being called away from you at any given point in time.

[00:29:05]Another way to do it is to shorten the time frame and maybe sell calls over a shorter time period, like a week, right? And that way the likelihood of the stock going up by more than in this example by more than 20% in a week is less than the stock going up by 20% over a month or six months. So if you shorten the time frame you're chances are you're reducing the likelihood of the stock moving big. Now the problem though with a weekly call is you're not going to get as much premium if you sell a longer term call. So part of all that is sort of how much income do you want from the strategy and how consistent can that be? The problem that you have on selling calls against Tesla or and in the in the future SpaceX the amount of call premium kind of week to week or monthto monthth can be highly variable.

[00:29:57]Okay, depending on what the underlying volatility assumption is in the stock.

[00:30:00]So this can be very interesting. It can be a lot of fun for people. A lot of people do this, particularly with Tesla stock. They can generate income on a weekly basis. Um, but it requires quite a bit of active monitoring and and and work to make sure this is, you know, something you do week in and week out.

[00:30:19]Okay. There may also be certain times when you say, you know what, and you know, in the case of Tesla, the stock tends to move quite a bit around the earnings announcement periods.

[00:30:29]And so maybe you don't want to be a covered call seller during those times because it's more likely to go up or down 20% during that that period of time. So there's different things like that you have to be aware of.

[00:30:42]Okay.

[00:30:44]The next chart Herbert sort of shows what this looks like. If you only sell calls on in this case 30% of your stock, you preserve some of the upside. You haven't given it all away. If if you sold calls on all of your stock, you cap it. But if you only do it on a portion, you still have some upside to higher prices.

[00:31:02]30% of your stock gets called away. Yes, that's gone. But you retain 70% of your stock that has the upside potential in this example.

[00:31:13]Again, not a recommendation that you do it with 30% or whatever. I'm just showing examples.

[00:31:19]>> Okay.

[00:31:21]Now, there's another way to do it where you can preserve the upside kind of one for one, you know, beyond a certain point. So, you can see here on this line, you're capped at 120, but beyond 140 now, you've got the same upside as as if you did own the stock.

[00:31:38]>> Okay?

[00:31:38]>> So, this is a combination of owning the stock, selling a call, but then buying another call option at a higher at a higher price, a higher strike price in order to preserve that upside.

[00:31:51]Okay.

[00:31:52]>> So, you're you're you're you're going to do a couple things then. It's not just one one trade. You're going to buy a short call, but then you're also going to buy a long higher call.

[00:32:00]>> That's right.

[00:32:01]>> Okay.

[00:32:01]>> And that, you know, you've just got now some more moving parts. You just have to be very careful about what you're doing.

[00:32:07]So, you can see you're generating some income. The difference between the dotted line and the blue line on the left side of the chart, it's higher. So, you've generated some income.

[00:32:16]You've got a period of time where you've kept your gains, but then if the stock truly goes up a lot, you then you've got upside to it.

[00:32:24]>> Yep.

[00:32:25]>> Okay. And you have to look at this payoff diagram and say, "Okay, is this what I'm trying to accomplish? Am I happy with this scenario, right? What do I think the likelihood of the stock going up 60% versus going down 40% or whatever the different things that you're thinking about?" But I find that visually this is a good way to look at it. Can you explain why you would then get less cash flow?

[00:32:47]>> You get less cash flow because you've had to buy that other call option to get the upside.

[00:32:52]>> Okay. Just cash out. All right.

[00:32:54]>> When you sell a call, you're receiving cash in >> income. When you're buying a call, you have to pay somebody else the cash. So, you reduce that >> amount that you receive.

[00:33:04]>> Okay.

[00:33:06]>> Now, another way to look at it is to say, well, okay, I'm not so worried about the upside. I'm worried about downside.

[00:33:14]So there's put options for that.

[00:33:17]If you buy a put option, you're capping the downside.

[00:33:22]You think of it as an insurance policy against your stock.

[00:33:26]And the cost of that insurance is the premium that you pay. Just like when you buy auto insurance, you pay a premium, right? Or home insurance.

[00:33:34]Okay? You're not unhappy that your house didn't burn down when you buy home insurance. You're not that unhappy you didn't crash your car when you buy auto insurance. And same thing with this.

[00:33:44]You're not unhappy that the stock didn't go down if you buy puts. But if you if you bought a put and the stock did go down enough, you can see you're capping your losses in this example at 22% or whatever it is.

[00:33:58]Okay? And on the upside, the difference between what the stock did versus that blue line is the premium amount. That's the cost of the insurance.

[00:34:06]Okay. The problem is that buying insurance on stocks is typically very expensive.

[00:34:13]It's not like home insurance or auto insurance. Those are pretty cheap relative to buying insurance on a stock portfolio.

[00:34:20]>> So in this case, it's not generating cash though, right? In this case, you're actually letting go of a potential gain.

[00:34:27]You're actually losing money. It's you're paying premium. You're paying a cash flow to somebody else. But what you're just doing is protecting that it doesn't doesn't crash and you don't lose all your money.

[00:34:38]>> Yeah. So this is the example perhaps of a SpaceX or Tesla investor that has huge embedded gains in their portfolio.

[00:34:44]They're worried about something specific over a certain time period and they're trying to just cap their losses without selling the stock.

[00:34:50]>> I guess one option would be like the biggest risk is keyman risk which is Elon. If something happens to Elon, what would happen to SpaceX or Tesla stock as examples? they would be cutting 50%. And so now if you own a lot of those shares, you might go, gosh, I can't risk that if it falls that much.

[00:35:09]>> Yeah. However, to buy puts on a long-term basis, it would be very expensive.

[00:35:16]>> Yeah.

[00:35:16]>> You're going to be g it's going to be very costly to do that. So with a keyman risk thing, that's that's a challenging one to hedge. If you're worried about maybe something to happen to Elon when he travels, you know, to China or something, maybe you buy a put for that period of time. that otherwise it's going to be too expensive to really hedge out that risk.

[00:35:35]>> Okay.

[00:35:35]>> Yeah.

[00:35:36]>> So then you get into some more fancier ones where this is one called a covered strangle. And you can see that um if the stock goes up 20% or down 20% you're ahead of the game, but if the stock goes up a lot, you're capped. And if the stock goes down a lot, you've got even bigger downside. The blue line there again versus the dotted orange line. So you the point with this is you can customize these strategies to look whatever to look however you want them to look to deal with whatever situation that you're trying to take advantage of or protect against.

[00:36:11]All right, in this case you're generating quite a bit of income if the stock kind of stays in that range between 80 and 120.

[00:36:18]But beyond that, that's where there's consequences.

[00:36:22]So th this is a very sophisticated option strategy. You have to be very careful doing stuff like this.

[00:36:30]Okay.

[00:36:33]Another one, Herbert, is a protective collar.

[00:36:37]In this case, you can generate some income. Again, between 80 and 120, you're ahead of just owning the stock, but you've also got the downside protected. If it goes below 80, you've capped your downside. That's kind of nice. However, the upside is also capped.

[00:36:54]Okay. So, is that a trade-off you're willing to live with? Maybe not. Or maybe, depending on the situation. Or for a portion of the shares, you may say, you know what, I need to make sure that I, you know, I can't lose more than 20% on this portion of my shares, and I'm willing to give up the upside to have that certainty.

[00:37:15]In that case, this may be interesting.

[00:37:18]Okay. Mhm.

[00:37:22]>> Um and again, you know, you again, you can shape these charts any way you want.

[00:37:26]This is a put spread caller.

[00:37:28]>> You're long the stock, you're long a put, you're short a lower cost put, and you're short a call.

[00:37:34]>> Mhm.

[00:37:34]>> Okay. It's easier again just visually to look at it and see where that is. You've got upside capped, your downside is kind of capped for a period of time, and then it's one for one beyond a certain point.

[00:37:47]Okay.

[00:37:50]All right, this is this next one's the last one.

[00:37:54]Ratio caller. And this one looks kind of crazy.

[00:37:59]>> Why would anybody do this? But you've got your downside capped.

[00:38:03]>> Yeah, >> you've got a higher return between 80 and 120. Okay, you've got some extra income there, but beyond 120, the stock's going up and you you're going down. You're losing money. Mhm.

[00:38:15]>> So, you know, you you better be careful you're doing this properly.

[00:38:22]But again, you can construct this any way you want. There's a thousand different ways to construct these charts using options.

[00:38:28]>> Yeah.

[00:38:30]>> Okay. So, my purpose with this was just to share again just broadly what you can do with options. Okay. Now, we're going to shift to this idea of using margin and not just using margin and taking the money out and spending it. That that's fine. That's easy. Many people do that.

[00:38:45]Okay. But there's some possibility now of taking margin and buying an incomeroucing investment.

[00:38:53]And here's an example of STRC. And we'll get into some detail a little bit later on what STRC is and how it's structured, but just as an example, the math here, $5 million portfolio value. Let's say you can borrow at 5 a.5%. In many cases, that's not the default margin rate that a lot of brokerage firms offer. For example, at Schwab, I think their defaults like 11.83%.

[00:39:18]Okay, Fidelity might be 10 something.

[00:39:21]But with a portfolio of 5 million, you should be able to negotiate with them a lower margin rate. And we do that on behalf of our clients. So, let's say it's five and a half. In this example, the STRC dividend rate right now is 11.5. So, you're earning a 6% spread on every dollar that you borrow. Every dollar you borrow on margin, you're earning a net 6%.

[00:39:42]Okay, so here's an example. Then you've got a $5 million portfolio. You borrow 3.25 million on margin. Okay, and you're investing that 3.25 million in STRC.

[00:39:55]So you've got 5 million in your stock.

[00:39:57]You've got 3.25 million in STRC and an offsetting margin balance of 3.25 million.

[00:40:04]That's going to throw off annual income of about $195,000.

[00:40:09]Okay, STRC pays monthly uh coming up in July, they're going to start paying every two weeks. Okay, so regular income. And in this example, that's generating a yield on your original $5 million of close to 4%.

[00:40:24]And as you can see, as you go up in portfolio size, you should expect a lower margin rate. So I modeled out five and a quarter and then 5%. So you're getting income between 3.9 and 4.2%.

[00:40:37]Roughly.

[00:40:40]Okay. So on that $25 million portfolio, you could generate about a million dollars a year of net spread income.

[00:40:49]Again, this is not without risks. We'll talk about that in a minute. But just to show, yeah, from an illustration perspective what this could look like.

[00:40:56]>> Okay. So let let me let me walk you through. Let me understand this. So, uh, you know, you've got $5 million in your bank account in your your in investment and, uh, let's say you invested in whatever stock you want. Uh, of course, in our show, it's Tesla or SpaceX or that's what we like. Okay. So, let's say you got $5 million invested in stock.

[00:41:14]Now, you can borrow from your broker typically depending what the rate is. Go find out. You said some of them 11%, some of them at 5 million, they might give it to you at 5.5%. Okay? That's the rate of you would have to pay per year, per month to borrow money. Now, you're saying you if you borrow 3.2 million out of 5 million, that's a lot of money to borrow. That's a lot. But what you're doing with that money is you're going to buy this uh strategy uh STRC company.

[00:41:47]And when you do that, they give you 11.5% dividend. So that actually covers the 5.5% margin cost >> and you've got a 6% spread. So in fact you're going to get more. So instead of selling that stock and then buying STRC directly um just get margin because you're going to get you're not going to get all 11.5% but at least you'll get 6%. And it's just you know the problem would be that if stock if this Tesla stock falls back to 100 what happens now? They're going to go, "Okay, I need to get my money back, 3.25 million."

[00:42:24]Could you then at that point just sell your SDRC to give them back the money?

[00:42:28]>> Yes, you could. Now, you do need to take into account that if Tesla goes down by 50% or more, then is there something going on in the market that might also affect the price of STRC? That's a possibility.

[00:42:41]>> Yep.

[00:42:42]>> Okay. And actually right now as as we speak this past week, we've had a bit of a challenge with the STRC price that we'll discuss here in a minute. Um so you do have to be careful with this. Um you mentioned that 3.25 million is a lot of margin. Just remember though that it's backed by 8.25 million in equity.

[00:43:02]So you've got quite a bit of equity in the portfolio. But again 5 million that you started with as well as the 3.25 million that you're buying with STRC.

[00:43:10]>> That's right.

[00:43:11]Okay.

[00:43:12]>> Yeah.

[00:43:12]>> So, it's not like you're just taking that money and then spending it somewhere else. You're putting into another equity. So, but if both fall, you have to pay back the 3.25.

[00:43:21]>> Yeah. Yeah. So, this all has to be considered and factored in. I'm just I'm just just showing an illustration here just in terms of Yeah.

[00:43:27]>> how the math might work.

[00:43:28]>> Okay.

[00:43:29]>> Um certainly the the lower amount that you borrow, the lower the income, the lower the portfolio yield. So, just depending on what your objectives are.

[00:43:37]>> Yes. Yes.

[00:43:37]>> If you've got $25 million, you might not need a million a year of income. You might be happy with 500,000.

[00:43:44]>> In that case, you're not borrowing 16 million. You're borrowing eight.

[00:43:47]>> Yep.

[00:43:48]>> Something like that.

[00:43:49]>> Okay.

[00:43:51]>> So, what is all this? So, let's get into this discussion about preferred stock.

[00:43:58]Preferred stock is actually been around for a really long time. In fact, the it was used to finance the railroads back in the 1800s and early 1900s and it used to be about 20 to 40% of capital structures of companies back then. Okay.

[00:44:15]A preferred stock is equity, but typically it has a high level of income. So, it's kind of bond-like, but think of it as a bond that never needs to be paid back. It's a bond without a maturity date.

[00:44:29]So, it's equity, but it has a high income.

[00:44:33]And so, these days, we're not that familiar with it. The preferred stocks aren't that common, right? We think of bonds and stocks. Everybody knows the differences between those two. This really kind of blurs the lines between them. And the point is, they used to be very prevalent and now they're kind of coming back into into four again. Okay.

[00:44:50]So, one of the companies that's on the forefront of this is a company called Strategy. If you go to the next slide, strategy is the world's largest corporate holder of Bitcoin.

[00:45:04]Okay. Now, in theory, you could do this with any underlying asset. It doesn't have to be Bitcoin. Strategy is doing it with Bitcoin because that's what they feel like is the the most attractive asset to do this with, but look at the numbers on this chart.

[00:45:19]They have 848,000 Bitcoin. substitute there for buildings in Manhattan if you want to or apartments in Manhattan. You could you could do this with any underlying asset, but what they've been doing doing is acquiring more Bitcoin.

[00:45:32]They they think that's the most attractive long-term asset in the world.

[00:45:35]They're trying to acquire as much as possible. Okay?

[00:45:39]In this case, you wouldn't want to buy FTRC if you thought Bitcoin was a Ponzi scheme or Bitcoin was worthless. That would be a terrible thing to do. You want to make sure that you're happy with the underlying asset that they're using.

[00:45:52]Just like if they were doing this with Manhattan real estate, you wouldn't want to buy a preferred stock tied to Manhattan real estate if you thought Manhattan was going to sink under the under the ocean, right? Or people were going to leave and real estate values collapse. So, you have to make sure you're comfortable with the underlying asset. That's number one. And a lot of people aren't, and that's that's fine. Bitcoin has been around a number of years, but a lot of people still aren't comfortable with it.

[00:46:17]Okay, but this is the core engine that allows them to issue preferred stock backed by their Bitcoin holdings to offer this attractive income.

[00:46:28]Okay, on the next page, Herbert is just some metrics on strategy.

[00:46:35]They have been buying on the top left, they've been buying Bitcoin pretty much on a weekly or every two week basis now for quite a while. Uh this tracks the number of days between Bitcoin purchases or their announced purchases. It's between seven and 14 days pretty much.

[00:46:52]So they're a regular buyer of Bitcoin.

[00:46:55]How much they've been buying uh at times as much as 20 30,000 Bitcoin a week depending on their ability to finance that. How much is that in dollars? It's a couple billion dollars sometimes. Um, in the chart in the green on the lower side there, at one point they put 5 billion in in a week and a couple times this year they've invested a couple billion dollars over a week period in Bitcoin. Think about doing that with real estate. If you raised a couple billion dollars, could you buy that much real estate in a week? Pretty tough. So, this is one of the reasons that they like to do it with Bitcoin because it's so liquid and it allows them to move a lot of money really quickly.

[00:47:35]On the chart on the lower right, you can see the Bitcoin price. They've been buying Bitcoin at highs and lows for a few years now, right? It's kind of like this idea of when you have the money, what's the best time to invest? Well, it's when you have the money in your hand. You can't time the markets. Only in hindsight do you know, you know, where the peaks and troughs were. And they're just trying to buy as much Bitcoin as they can, or you could say, as much Manhattan real estate as they can, because over time, the value of Manhattan real estate's gone up.

[00:48:04]Okay.

[00:48:06]And looking back, you know, 10 years from now, looking back, all these prices are probably going to look very attractive. Okay.

[00:48:14]How do they raise this capital?

[00:48:18]Well, various ways. They can do it by selling their stock. That's the orange bars. They can do it by issuing debt.

[00:48:25]That's the red bar, the convertible bonds. They're no longer doing that, but they did. And they can do it by issuing preferred stocks. That's the other colorful bars. But STRC is the one that's in bright green. It was the largest IPO in 2025.

[00:48:44]Couple uh$2.5 billion dollars, 2.4 billion, something like that. Okay.

[00:48:49]Obviously, that's been eclipsed this year by SpaceX.

[00:48:52]But you can see since then, they've also been issuing more STRC. And they've had a couple weeks where it's been a couple billion dollars.

[00:49:00]Okay, so people are attracted to the dividend rate. It allows them to sell more STRC, which allows them to buy more Bitcoin that provides the backing for this going forward.

[00:49:10]Okay, on the next page, Herbert, the preferreds are interesting from a tax perspective.

[00:49:22]Okay, if we look at that table and we work from the bottom up, if you invest in a bond, you receive interest income.

[00:49:32]That's typically ordinary income and it's subject to your whatever your income tax rate is. That could be between, you know, if you're in the higher brackets vector in state income taxes, it could be as high as 55% some states, federal and state.

[00:49:46]Okay.

[00:49:48]Now there are some municipal bonds where you can get you know federal tax exempt and so on but bonds are subject to in to interest income and taxes. One level up is qualified dividends. If you have dividend income from stocks you can get a qualified dividend rate and therefore your tax rate might be 20 to 35%.

[00:50:06]Better but still a hefty chunk.

[00:50:10]It turns out with these preferred stocks you can get return of capital treatment.

[00:50:17]Okay. And what happens is every time they pay you a dividend, your cost basis gets reduced by the amount of the dividend.

[00:50:24]It's not taxed to you in the in the year that you receive it as long as you keep holding the security.

[00:50:30]So you can imagine then in the case of STRC that may be paying you 11 a.5%.

[00:50:35]It's going to take over 9 years before your cost basis is reduced to zero.

[00:50:42]At that point, the dividends would revert to qualified dividends, capital gain treatment. Okay. So, that's an interesting tax benefit from these preferred.

[00:50:54]Yeah. I'll pause there for a second, Herbert. I know I've hit you with a fire hose of stuff. Um, I'll let you digest that we >> No, for sure. So, there's a company called, of course, I know them, strategy, micro strategy. They have their stock called MSTR >> and their goal he switched his company.

[00:51:12]He was used to be just software guy, right?

[00:51:14]>> He was a software company. Now he goes, you know, we're going to just start buying as much Bitcoin as possible.

[00:51:19]>> So if you want to have um exposure to Bitcoin, you can buy MSTR. But now MSTR sells these preferred stock. Was that what they called them?

[00:51:28]>> Yes. Preferred stocks.

[00:51:29]>> Preferred stock to the public. So you can go and buy STRC instead of MSTR and M STRC comes with dividends.

[00:51:40]So if they sell it and you buy it then you can get dividends which is like what is it? Monthly, quarterly >> monthly. And it's about to be paid every two weeks starting in July.

[00:51:50]>> My gosh, that's great. I love monthly monthly dividends means each. So I mean like each month here's if I buy what is the percentage of my dividend? What is the percentage?

[00:52:03]>> 11 and a half% currently on STRC.

[00:52:05]>> Right. That's right. You said it earlier. So if I put in a million dollars into STRC, whatever the number is I'm just trying to come up with a number $100,000 in STRC.

[00:52:15]I get 11% of that per year. So then then figure that out to 1% of that per month or something that whatever the number is.

[00:52:22]>> Yeah. Roughly. Roughly 1% a month. Yep.

[00:52:25]Almost.

[00:52:25]>> Yeah. Yeah.

[00:52:27]>> Yeah.

[00:52:28]>> And that's just I mean 11% is amazing income. That's an amazing dividend.

[00:52:33]That's an amazing dividend. Now, well, but the SCRC price goes up and down because of Bitcoin price.

[00:52:39]>> So, Bitcoin price fell and it's now at 85,000. It used to be 125. Now it's 85 or whatever. That's a huge fall.

[00:52:46]>> 63,000 right now for Bitcoin. Yep.

[00:52:48]>> 63,000. Was that 50% cut?

[00:52:51]>> Yes.

[00:52:51]>> What happened to my STRC? What happened to my MSTR? Does that fall by 50%. So, just that stock alone has fallen and but I am getting my 11%.

[00:53:01]>> Yeah. So, these are all good questions.

[00:53:03]>> But then it can go back up again. I mean just like uh you know some as long as you don't have to sell it. The point is don't sell the stock. find stocks that give you dividends and this is one way and then the 11% is so high that you're even saying you know 20 minutes ago you were saying in fact if it's something so high and you don't have the cash for that you might consider margin because 11% 5% 6% 5% you got 6% >> yeah it's that's getting very that that's depending every I do not give anybody financial advice I have no idea if that's a good thing or not I Yeah.

[00:53:41]>> Yeah. Now, we're just talking about conceptually here that again, you've got a highly concentrated position or highly appreciated position. May not be concentrated. You may have other assets as well, but you want to earn income.

[00:53:52]You don't want to sell them. You don't want to pay capital gains taxes. You want to continue to enjoy that appreciation over over the years ahead.

[00:53:59]How do I get income? This is one potential way that that is really interesting that has some tax advantages. Yeah, if you do it 11% dividend, but the dividends are actually 0% tax.

[00:54:11]>> That's then you, you know, typically let's do 20%. It's actually more than 11%. It's actually 13% income >> on a on an after tax basis. Yes. It's a lot higher. That's right.

[00:54:21]>> Equivalent to what you would have gotten if you got cash flow somewhere else.

[00:54:26]>> Yeah.

[00:54:26]>> Typically cash flow somewhere else. It's treated as income. You'd have to pay income on it. Yeah.

[00:54:30]>> Yeah. As long as you don't sell the asset. As long as you just keep holding STRC, collect those dividends every month, soon to be every two weeks.

[00:54:38]>> What happens when you do decide to sell it? Do you have to owe back taxes for the dividends that you were paid in the >> Yeah, because the cost basis has been reduced, you're going to have a capital gain. Whether it's a short-term or long-term gain depends on your holding period, >> which is higher than what you initially did. It's so then the capital gains is higher. And then you'd have to pay tax on that. Yeah. When you >> Yeah. It basically reverts down to that that second uh box. If if you've held it for more than a year, it's going to be essentially a qualified dividend.

[00:55:03]Long-term dividend >> theoretically long-term dividend, but theoretically, if you don't sell when it's low, but you sell when it's super high, then just like anything else, you made capital gains. You have to pay capital gains tax on it.

[00:55:16]>> Yeah. Yeah. There's no free lunch.

[00:55:17]>> There's no free lunch. It's a tax deferral.

[00:55:21]>> Yeah.

[00:55:22]>> It's a very interesting worth. It's interesting because it's like 0% dividend, high dividend. That's pretty cool. Like typically to get 10% whatever that you need to do bonds.

[00:55:33]>> Yeah. And very risky credit instruments that typically will lock you up. The key with this is you actually have quite a bit of liquidity.

[00:55:40]Now that liquidity comes at a price and we'll we'll discuss that in here in a second because this week there's actually been a a bit of a challenge with STRC. This the price has actually dropped quite a bit.

[00:55:51]>> Yes.

[00:55:51]>> Um but let's first talk about how the dividend structure works. Okay. because they're using STRC as a financing mechanism to buy more Bitcoin for the parent company strategy MSTR.

[00:56:05]Here's what they do. The target range is between 99 and like 101.

[00:56:11]When the stock when STRC trades above 100, they are typically selling more STRC.

[00:56:18]They're raising capital. You buy it at 100, the company is likely selling you that stock.

[00:56:24]Okay? it kind of keeps a lid on the stock price. Do not expect STRC to go above 100 and 105 110. That's not going to happen. They're going to be selling it to keep a lid on the price. That's how they raise money.

[00:56:37]On the downside, if STRC drops, and you can see here, if the weighted uh the volume weighted average price for the month is between 95 and 99, they'll increase the dividend by 25 basis points. If the volume weighted average price for the month is less than $95, they could increase it by 50 basis points.

[00:57:01]>> So this month, for example, we might see the dividend go from 1150 up to 12 because of where the price has been lately.

[00:57:09]Okay? We'll we'll see how this plays out. But if you go to the next page, Herbert, one of the key benefits in addition to the tax benefits is the fact that STRC is liquid.

[00:57:22]Now let's talk about what liquidity means.

[00:57:26]Liquidity means if you look at the left side, STRC is the largest tradable preferred stock in the world uh at this time was 8 and a half billion. I think there's now about 10 billion issued. And you can see that compared to Wells Fargo, Bank of America, Fanny May, Freddy Mack, who had between three and 5 billion of preferred, those were pretty big, too. But if you drop down to the next chart, you can look at STRC's liquidity averaging in the yeah left chart 375 million traded a day whereas only 15 million for that Wells Fargo one. Most preferred stocks are very liquid investments.

[00:58:05]>> Mhm.

[00:58:05]>> You almost need to be invited in order to trade them. STRC sets itself apart because it's highly liquid. Okay. Now, that doesn't mean highly liquid doesn't mean that you always get a price that's at par. SpaceX stock is highly liquid as well. And so is Tesla. It's highly liquid, but that doesn't mean that you always get the price you want. It just means that you can sell it if you want to at whatever the price is in the marketplace. Now, Herbert, earlier you asked what happens when Bitcoin goes down. This is a chart from I think the end of the first quarter where they were showing at that time Bitcoin was down 37% from its peak in October 6th of last year. Okay. And you can see that STRC at that time was flat. Okay. Now, if we look at today, I think Bitcoin is down about 50% from its peak and STRC as it stands right now is down about I think about 13%. So, it's it's down.

[00:58:56]>> Absolutely. Okay. Um and that that last chart shows the volume. Um the volume again, it's very liquid on any given day, but you definitely get some volume spikes. Most of the volume spikes happen the day or the few days before a a record date for the dividend. People are trying to buy the dividend. Yeah.

[00:59:16]>> So the money floods in and they get the dividend and they might sell it the next day. So that's why you see some fluctuation and that's one of the reasons that they're moving to paying every two weeks instead of every month is to kind of smooth some of that fluctuation out a little bit. This past week we've had a quote unquote price collapse with STRC. You can see before it traded down to maybe low 90s and bounced back. It's happened a few times.

[00:59:39]This time it did that bounced back and now it's gone down into the 80s. I think it hit a low of I think 83 this week and I think it closed at 88. What's going on here? Well, some of what's going on is what I've just been talking about in using STRC with margin. Some people overlever their STRC position. They did too much of a good thing. Okay? Or they had other positions in their portfolio that went down that forced them to now sell STRC. And so it's kind of caused this cascading liquidations of some people, right? But that will sort itself out. the market will will heal. All that selling eventually will will will finish and this STRC will bounce back just like it has previously. Okay, I'll get into why I'm so confident of that in a minute. But first of all, I talked about how STRC is moving from paying once a month to twice a month. Uh here's some charts on that. They're going to pay semionthly.

[01:00:34]Okay. Uh it's designed to stabilize the price a little bit. It's designed to decrease the number of days between the record dates.

[01:00:41]um and give people money sooner. Who wouldn't want to get paid 24 times a year versus just 12.

[01:00:47]Okay, the first record date for this is at the end of June, so in couple weeks and that first payment will be July 15th and then from there, but every essentially every 15 days.

[01:00:59]Okay, but if that's a good idea, why not take it a step further? And so there's a company that's a competitor to strategy.

[01:01:09]It's called Strive. and they have a preferred stock called SATA, SATA, and they're branding themselves now as the daily dividend company.

[01:01:17]>> Mhm.

[01:01:18]>> So instead of getting paid 12 times a year, you can now get paid 250 times a year. Basically, every business day, >> they'll pay you. If you own the stock yesterday, they'll pay you tomorrow.

[01:01:31]>> So, this has been kind of an interesting innovation. They've kind of one uped strategies STRC by going to daily instead of every two weeks. Okay, so very clever. Uh, they're paying 13%.

[01:01:43]Okay, so how do we then look at is SATA more attractive than STRC?

[01:01:51]Which one is better? Is STRC in trouble because we now have SATA paying every business day at 13% which is a higher rate than 11 and a half. How do we evaluate that? So here's one way to do it, Herbert. Kind of on a fundamental basis for these companies. If you go to the next page, if we look at financial strength and so this is a little table that shows a number of Bitcoin that Strive has, 19,15 and a Bitcoin price of 63,000, that's 1.2 billion of Bitcoin on their balance sheet. They also have 141 million of cash. And by the way, they they use some STRC as their reserve, about 44 45 million worth. So they've got a total reserve of almost $1.4 billion. They have no debt and they have annual dividend commitments of just under 100 million.

[01:02:38]>> So their reserve essentially covers dividend payments for the next 14 years.

[01:02:43]>> Okay.

[01:02:44]>> How does that sound?

[01:02:46]>> Pretty good.

[01:02:47]>> Pretty good.

[01:02:48]>> Mhm.

[01:02:48]>> Okay.

[01:02:49]>> Little small 1.4 billion only, but uh >> Yep. Okay.

[01:02:52]>> Small smaller company just getting going.

[01:02:54]>> Yep.

[01:02:55]>> Okay.

[01:02:56]>> Flip to the next page and let's compare them to Strategy.

[01:03:00]>> Same analysis. Strategy has 846 000 Bitcoin.

[01:03:05]>> That's a 53 billion reserve.

[01:03:08]>> It's 44 times higher than >> Strives.

[01:03:11]>> They have 1.1 billion in cash. That's almost eight times more than >> Strives. They don't use any of their STRC in their reserve, right? So there's not nothing there, but their total reserve is about 39 times larger than Strive. Now, they do have some debt.

[01:03:26]Okay, 6.7 billion. If we subtract the debt, we're down to about 47 48 billion of reserve. still 34 times higher than Strive. Their annual dividend commitment is 1.7 billion which is 17 times higher than Strive.

[01:03:40]So the years of dividend coverage is about 28 years which is twice as much as what Strive has.

[01:03:45]>> Yeah.

[01:03:45]>> Okay. And yet for some reason their stock STRC is trading at an 11% discount from PAR whereas Strive is down about 2.3. So this is why I think SDRC is going to bounce back because fundamentally they have 28 years worth of dividends, right? And even if Bitcoin goes down more, they've they've got such a strong financial position, right? And this assumes too that they're they're no longer able to raise any more capital, which is a silly assumption because they've raised billions over the last few months during a Bitcoin bare market.

[01:04:19]So anyway, it it's, you know, I I don't want to spend all the time here defending, you know, a couple of products, but this is an interesting uh type of strategy that a lot of people are just not aware of to generate income using your equities concentrated position at essentially underlying collaterals to to support that. You do have to be careful. There's downsides.

[01:04:42]There's risks associated with it, but it is an interesting tool in the toolkit.

[01:04:46]Now, in addition to using covered calls and those kinds of option strategies that most people use, >> thank you so much, sir. I mean, you you gave a good comprehensive list of potential solutions that people can look at. Some are appropriate for some people and some are not appropriate for some people. We don't know which one is which depending on your scenario, financial scenario, but there's option strategies.

[01:05:07]And then in that one, you went and even even went further and said, "Thank you for educating us." But there's like uh more sophisticated option strategies to get to get some cash flow coming >> and then you can either decide to protect your downside or you know give up potential upside or but just the option strategies there is renting out your shares to let people short it. Uh we didn't spend too much time on that.

[01:05:34]There's a line of credit margin loan.

[01:05:36]Most people know that but you describe what that is. And then what you just want to now is this margin plus income securities. That's what you just covered with STRC and Strive as potential options to consider margin. You borrow money from margin, but then you owe them a monthly some sort of percentage. And then you can but then you can put it to these stocks that then give you dividend and if there's a difference, you make make money, but then you're risking yourself because it's a margin you didn't have to do. But like you say, any of these choices, there's they're not offer income, leverage risk, uh counterparty risk, and le yeah, give up the upside. You can lose more money, but it's a way to potentially earn income that uh a lot of people are certainly looking for when they're overleveraged on stock >> or they're super wealthy. Yeah.

[01:06:25]>> The key thing, Herbert, I think, is understand the problem that you're trying to solve and then you use the right tools. These are a whole list of tools and there's sort of you know variations of on all of them particularly the option strategies.

[01:06:36]There's an infinite number of strategies that you can employ there. It's just a matter of finding the right tool for the task.

[01:06:42]>> Yes. Fantastic. Thank you so much SER as always. So you are a financial adviser.

[01:06:48]Uh so check him out at uh brilliantadvice.net.

[01:06:54]Then if you are uh you know managing 10 million or more in assets and you want to meet other folks in the same kind of category and want to know all more about different ways to help you manage those check out my new community at boundless um I'll be posting that on my description. Thanks everybody. Bye sir.

[01:07:11]>> Thanks Herbert.

[01:07:11]>> I've created a website that is the most comprehensive resource for the Tesla investor. Please check it out. Simply go to my website at herbert.com.