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We have been following the covered calls record of one of our members. In August 2020, she committed about $500,000 to buy Novavax (NVAX) shares at over $174 per share because the premiums on covered calls were attractive! In short order, she lost $232,407.50 on the security itself.
By selling just out-of-the-money covered calls on NVAX every Monday after that, with expiry date on Friday of the same week, she brought her losses from $232,407.50 down to $50,364.45 by Monday, December 21, 2020.
When the market opens at 9:30 AM today, she plans to sell 24 contracts of NVAX out of the money, strike price $135, expiry date, December 31. (NVAX C 31DEC20 135.00) That allows for five dollars of growth if there is any. NVAX has been trending upwards and the trend is your friend (until it isn’t).
At market close last Friday, the bid/ask range on NVAX C 31DEC20 135.00 was $4.85/$5.55 with the largest volume and open interest of any out-of-the-money contracts. Based on that, she should get $12,480.00 ($5.20, which is halfway between $4.85 and $5.55, multiplied by 2,400). That should bring her and losses down to $37,884.45 ($50,364.45 minus $12,480.00) if there is no growth by Friday, December 31, and if there are no losses on the security itself.
If the hoped-for five-dollar growth takes place, she will gain an additional$12,000. That will bring her losses down to $25,884.45 ($37,884.45 minus $12,000).
The above describes active investing. Stockbrokers love it. Keep the following in mind:
“Investing should be like watching grass grow or paint dry.” Nobel laureate economist Paul Samuelson.
“Invested money is like a bar of soap. The more you handle it the less you have.” Nobel laureate economist Eugene Fama.
“The Stock Market is designed to transfer money from the Active to the Patient.” Warren Buffett, one of history’s greatest investors.
“Passive investing consistently outperforms active investing over the long run.” The Monday Morning program.
We have designed the Monday Morning Millionaire Program to offer abstracted investment education. Over the last two decades, the program has outperformed over 90% of portfolios, including professionally managed ones.
The program does not provide any investment advice or endorsements.
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