When she first got involved selling covered calls on NVAX in August last year, our intrepid, fearless investor lost $232,407.50 in the very first week in a $500,000 portfolio on NVAX itself. She bought it at the very top and it soon dropped over 50% on the 1,500 shares that she owned.
She continued to sell just out-of-the-money covered calls every Monday, expiry date on Friday of the same week. NVAX frequently rose above the strike price, her shares were called away and she needed to buy them back at a higher price to stay in the game. Frequently, the value of the shares dropped more than she received in premiums and she had an overall loss on that particular week.
The table below shows her overall position as of last Friday, March 5.
It took 32 weeks for her to come out ahead! There were some painful losses too frequently. The major correct thing she did was that this adventure was in her “fun” portfolio and involved only about 5% of her overall market investments.
She sees her NVAX shares as a money tree which shrinks and grows and shrinks but constantly throws off cash.
What will she do today, Monday, March 8, when the market opens at 9:30 AM?
She owns 1,500 shares of NVAX in her fun portfolio. She plans to sell 15 just out-of-the-money contracts, expiry date this coming Friday, March 12, strike price $175. (NVAX C 12MAR21 175.00).
When the market closed last Friday, March 5, the bid ask spread was $12.60/$13.85.
The figures will be different when the market opens today. However, she can reasonably expect to receive approximately the bid price of $12.60 per share. That will give her a premium income of $18,900 for the week ($12.60 times 1,500) – more than twice as much as she made in any week practising dentistry.
What is the worst that could happen?
The direct relationship between expected return and risk is unavoidable. NVAX, the underlying security, could drop by more than $12.60 per share resulting in an overall loss for the transaction for the week.
Since she got involved selling covered calls on NVAX last August, that has happened with an annoying frequency. She plans to continue, nevertheless.
Please note that selling covered calls and cash-secured puts is something that the Monday Morning program recommends for a “fun” portfolio only. (Only sell and never buy derivatives.) It could interest investors with a moderate risk tolerance.
Investors can do very well without that by practising the habits which the Monday Morning program promotes.
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