Our October 23, 2020 survey asked “How useful is Facebook as an investment tool?” The answer choices were:

1. Very
2. Somewhat
3. Not at all

A thank you to all who responded. The responses were as follows:

“The markets can remain irrational longer than you can remain solvent.” J. M. Keynes in the twenties.

How about: “The markets can remain irrational for long; some investors still make money!”? – our headline today.

Our aggressive retired member made more money before breakfast yesterday morning than she ever did in an entire week during her dental career. Had she waited to the end of the day, she would have made even more.

The Monday Morning Program recommends passive investing. 

There is interest in following up one of our aggressive members who, at the beginning of September, invested $500,000 in Novavax (NVAX) at $174.39 per share to allow her to sell covered calls on the shares.

Soon after, NVAX dropped to $92.90. Her loss, just over $200,000 exceeded the premium she received by a wide margin. However, she bought more NVAX, lowering her per share cost. Each Monday after that, she wrote more covered calls/cash- secured puts on it, receiving between $12,000 to $18,000 premium income each week.

What are her plans now?

First, note that the  Monday Morning Program recommends passive investing — watching grass grow, watching paint dry. What we write about below is NOT passive investing. However, our members with a moderate risk tolerance level have been doing it, often safely and successfully.

According to Morningstar, the shares of vaccine manufacturing companies (Amgen Inc (AMGN), Emergent BioSolutions (EBS), Moderna (MRNA), Novavax (NVAX), Regeneron Pharmaceuticals (REGN) and others are overvalued by amounts ranging from 11% to 71%.

Investors are buying shares in these overvalued companies because they expect them to shoot up in price once their vaccines in development get regulatory clearance.

NVAX is overvalued by 71% – the greatest amount of any of them. Is that because investors have the greatest expectations from this company?

Why do investors (mostly speculators, really) buy calls on a security? (Our members only sell and rarely buy calls and puts.)

To benefit from the growth of a board lot of NVAX (100 shares), investors need about $9,350.00 to buy the shares outright at today’s prices. To benefit from that growth, investors need only about $300 to buy a call option on one board lot. That gives them the right to take advantage of the same growth.

If there is any!

If no growth takes place before the expiry date of the call, investors lose their money entirely.

Note that year-to-date, NVAX has gone up 2,3721% (not a misprint) while the S&P 500 has gone up 6.57%. But over the last 3 months, NVAX has declined 32.84% while the S&P 500 has gone up 6.57%.

When is a good or a bad time to buy any security?

We can only tell with hindsight.

But we immediately can see how good the percentage return on selling derivatives on any security is. Year-to-date, it has been exceptionally high on NVAX.

One of our members committed about $500,000 to NVAX shares to allow her to sell covered calls on it. Doing so, she earned about $18,000 that week!

But the stock price dropped and she lost about $170,000 on the NVAX stock! We wrote about that in our  September 1 post.

Earning about 5% weekly on her investment, she is paring down her loss. The stock price is dropping — what is the outcome for her?

A recent survey which we conducted shows that 88.9% of our members and subscribers are interested in puts and calls. Many of them have sold covered calls on Novavax (NVAX), the exchange-traded fund tracking the S&P 500 (SPY), Moderna Inc. (MRNA) and others, thereby enhancing their investment returns.

In line with the Monday Morning Program approach, they have been selling just out-of-the-money covered calls on a Monday with the expiry date on the Friday on the same week. The two advantages here are that the annualized returns tend to be more generous with closer expiry dates and significant untoward effects are less likely in such a short period.

We know that the market will be higher 20 years from now and 10 years from now and likely 5 years from now, but a week from today, there is a 50-50 chance of the market being either higher or lower.

That means that investors doing this regularly will be assigned half the time. In order to continue selling covered calls on the same security, they will need to buy it at a higher price. Nobody likes that, however…

Last Monday, October 12, some of our members sold covered calls on Novavax (NVAX), strike price $113, expiry date today, October 16. (NVAX C 16OCT20 113.00) They received a premium income of $2.65 per share.

During the week, NVAX dropped to $111.42, so they lost $1.58 per share on the underlying.  Subtracting that loss from the premium income of  $2.65 per share received, our members gained $1.07 per share. ($2.65 minus $1.58 ) They could have done even better, much better! Something like that is possible anytime that the underlying security drops in price. It could still be done today. Here is how.

Lots of numbers here.

To save you time, here is a summary.

The U.S. Endowment Returns Tracker shows the year-to-date, last year, three-year, five-year and 10-year returns of 22 U.S. university endowments.

Of the 22, six have outperformed the Monday Morning Program so far this year. (Circled in the table above.) the Monday Morning Program simply tracks the S&P 500 using an appropriate exchange-traded fund.

Over the last year, three-year, five-year and 10-year timeframes, not a single one, not one, matches the S&P 500, the Monday Morning Program performance.

Our 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. Further, our October 1 survey indicated that 88.9% of our members would like to see posts dealing with puts and calls. This is an update on yesterday’s outcome.

When the market opened yesterday, the actual premium received for writing just out-of-the-money covered calls on NVAX, expiry date this coming Friday, was $2.65 per share. (C 16OCT20 113.00). Just in-the-money cash-secured puts yielded a similar amount.

A week ago on Monday (October 5) the premium for NVAX, puts and calls, expiry date Friday of the same week, was almost twice as high at $5.24 per share. Nevertheless, yesterday’s premium income of $265.00 per $11,300.00 invested works to 2.35% for the week. ($265.00 divided by $11,300.00 multiplied by 100)

This coming Friday, NVAX shares will sell either above or below our strike price. There is a 50% chance that NVAX will either be put to us or called away from us.

Additionally, 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.

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?