How to use derivatives as a source of added income. July 12, 2021

This is our weekly post dealing with derivatives (calls and puts). Over 80% of our members are interested in the subject. 

Here is how we stand now.

  • Last Tuesday, July 6 (Monday was a market holiday)  Rosi and I bought 1,600 shares of Novavax (NVAX) since the ones we held were called away on Friday, July 2. Book cost was $348,337.99.
  • We then sold 16 just out-of-the-money contracts covered by our ownership of these shares, expiry date Friday, July 9. (C 09JUL21 220.00)
  • We received a premium income of $10,153,95.
  • With NVAX fluctuations, the losses on our shares this year had come to $91,467.99.
  • By July 6, our premium income added up to $68,641.81  so our losses stood at $22,826.18. ($91,467.99 losses combined with gains of  $68,641.81).
  • Unhappily, by Friday, July 9, the market value of our NVAX shares dropped to $301,504.00 for a loss on the week of $46,833.99.
  • Therefore, our combined losses to date, Monday, July 12, stand at $69,660.17. ($22,826.18 plus $46,833.99)

When the market opens at 9:30 AM this morning,

we plan to sell 16 just out-of-the-money covered call contract expiry date Friday, July 16. (C 16JUL21 190.00 )

Based on the premiums available and the closing bell last Friday, July 9, we expect to get around $6 per share for a total of  about $9,600.00. Bird in the hand, money in the bank! I rarely netted that much in a whole week of practising dentistry.

What is the best that can happen?

NVAX market price remains about the same after Friday, July 16, or goes higher.

What is the worst that can happen?

NVAX market price drops significantly below our strike price by Friday, July 16, resulting in losses greater than the premium income received. That has happened annoyingly frequently.

How about our losses so far? The current $69,660.17 loss combined with a gain of $9,600.00 comes to a loss of $60,060.17.

“Fun” portfolio not much fun!

Lessons learned?

100% of the risk of writing covered calls comes from the underlying security.

If the underlying security is as safe as SPY, that risk is low but then, so is the premium income, most of the time.

When the volatility on SPY is high, say 45 or more, investors can earn impressive premium income on a safe security.

To check SPY volatility we can search for CBOE VIX. Last Friday, July 9, it closed at 16.8.

With the habits of the Monday Morning program, luck hardly matters. Selling covered calls on individual securities ignores habit number 3, that is, buy the US market as a whole with no stock picking. What we are doing here does require luck.

Remember what you see below.

  • Resulting from its involvement in derivatives, in 1994, California’s Orange County declared bankruptcy.
  • Resulting from its involvement in derivatives, in 1998, Long Term Capital Management needed a $3.6 billion bailout from 14 financial institutions to prevent market panic and collapse of the entire financial system.
  • Gambling with derivatives, many individual investors keep losing 100% of their money.


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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