Getting assigned. Loss of security value

On March 12, 2019, from A… K….. DDS

Question:

You bought ABBV for $122. You are selling covered calls for $78. What if Abbv goes to $82 ++, your calls get assigned. You go into a big material loss don’t you? Particularly in a rising market. What is your objective here? Thank you.

Monday Morning Millionaire Program Answer:

The only way to beat the S&P 500 is to ignore some of the habits of highly effective investors. (See below.)

A little over one year ago, I committed my entire fun portfolio to ABBV  because the premiums on the calls were high. I ignored two habits; the previous sentence shows them both.

Can you spot them? (See below.)

As soon as I bought it (at $122) it proceeded to drop; it went down about 40%. As an aside, note that if a security drops 50%,  it needs to recover 100% just to break even.

So far, so bad.

In the Monday Morning Millionaire Program view, a drop in a security price is a loss whether the investor holds it or sells it. (Admittedly, the tax treatment differs.) Thinking that it is a loss only when it is sold is similar to thinking that we get older on our birthdays but we don’t age between birthdays.

By writing (selling) covered calls, and when I get assigned and am in cash then writing (selling) cash-secured uncovered puts on ABBV each week, I have recovered about half the losses over a year. I will continue to do that.

What are the habits of highly effective investors? What two habits did I ignore? What is the redeeming feature in this sad tale?

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Dr. Milan Somborac

The Monday Morning Millionaire Program supports do-it-yourself (DIY) investors which I have been for over 50 years. About my team and me