Yesterday’s (September 28) post talked about the difficulty of generating income in today’s low-interest environment. We stated that some of our members and subscribers are generating income by selling puts and calls.
Based on Friday’s closing premium bid/ask spread on Novavax (symbol NVAX) puts and calls ($5.25/$6.25), we estimated that investors could (likely) earn $600 per $11,400 safely this week. (About $60,000 per million)
When the market opened yesterday, the actual premium received writing just out-of-the-money covered calls on NVAX, expiry date this coming Friday, was $5.24 per share. (C 02OCT20 115.00)
That produced an income of $524.00 per contract which was priced at $11,500.00. ($52,400.00 per million)
However, the stock closed at $111.18, down $3.82 per share. Overall, investors are ahead $142.00 per contract ($14,200.00 per million) for the day.
Here is how we calculate that.
- The drop of $3.82 per share = $382.00 per contract.
- Per contract income received = $524.00 minus $382.00 = $142.00
There is no way of knowing where the stock will be at expiry date this coming Friday. Investors could easily have a loss on the overall transaction. However, we need to look at this approach as a money tree that grows and withers alternatively. The loss is something that we can ignore. It will recur regularly.
Investors can bank the income received.
Note that the Monday Morning Program recommends passive investing — watching grass grow, watching paint dry. Selling puts and calls is NOT passive investing. However, our members with a moderate risk tolerance level have been doing it, often safely and successfully.
What is the worst that can happen from now until expiration date?